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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 17, 1999
REGISTRATION NO. 333-77539
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
ASK JEEVES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 7375 94-3256053
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE) IDENTIFICATION NO.)
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918 PARKER STREET
BERKELEY, CALIFORNIA 94710
(510) 649-8685
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
ROBERT W. WRUBEL
PRESIDENT AND CHIEF EXECUTIVE OFFICER
ASK JEEVES, INC.
918 PARKER STREET
BERKELEY, CALIFORNIA 94710
(510) 649-8685
(NAME, ADDRESS, INCLUDING ZIP CODE, AND
TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE)
COPIES TO:
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ANDREI M. MANOLIU, ESQ. JAMES N. STRAWBRIDGE, ESQ.
MICHAEL L. WEINER, ESQ. JOSE F. MACIAS, ESQ.
COOLEY GODWARD LLP WILSON SONSINI GOODRICH & ROSATI
FIVE PALO ALTO SQUARE PROFESSIONAL CORPORATION
3000 EL CAMINO REAL 650 PAGE MILL ROAD
PALO ALTO, CALIFORNIA 94306 PALO ALTO, CALIFORNIA 94304
(650) 843-5000 (650) 493-9300
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box: [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement number for the same offering: [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
PROSPECTUS (Subject to Completion)
Issued June 17, 1999
3,000,000 Shares
LOGO
COMMON STOCK
-------------------------
ASK JEEVES, INC. IS OFFERING SHARES OF ITS COMMON STOCK. THIS IS OUR INITIAL
PUBLIC OFFERING AND NO PUBLIC MARKET CURRENTLY EXISTS FOR OUR SHARES. WE
ANTICIPATE THAT THE INITIAL PUBLIC OFFERING PRICE WILL BE BETWEEN $9 AND $11 PER
SHARE.
-------------------------
OUR COMMON STOCK HAS BEEN APPROVED FOR QUOTATION ON THE NASDAQ NATIONAL MARKET
UNDER THE SYMBOL "ASKJ."
-------------------------
INVESTING IN THE COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 5.
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PRICE $ A SHARE
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UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS ASK JEEVES
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Per Share.................................................. $ $ $
Total...................................................... $ $ $
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The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities, or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
Ask Jeeves has granted the underwriters the right to purchase up to an
additional 450,000 shares of common stock to cover over-allotments. Morgan
Stanley & Co. Incorporated expects to deliver the shares to purchasers on
, 1999.
-------------------------
MORGAN STANLEY DEAN WITTER
BANCBOSTON ROBERTSON STEPHENS
HAMBRECHT & QUIST
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INTERNET DISTRIBUTION OFFERED BY
DISCOVER BROKERAGE DIRECT
, 1999
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TABLE OF CONTENTS
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PAGE
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Prospectus Summary.................... 3
Risk Factors.......................... 5
Special Note Regarding Forward-Looking
Statements.......................... 17
Use of Proceeds....................... 18
Dividend Policy....................... 18
Capitalization........................ 19
Dilution.............................. 20
Selected Financial Data............... 21
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 22
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PAGE
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Business.............................. 31
Management............................ 48
Certain Transactions.................. 60
Principal Stockholders................ 64
Description of Capital Stock.......... 66
Shares Eligible for Future Sale....... 69
Underwriters.......................... 71
Legal Matters......................... 72
Experts............................... 73
Where You Can Find More Information... 73
Index to Financial Statements......... F-1
</TABLE>
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as to
the date of this prospectus, regardless of the time of delivery of the
prospectus or of any sale of the common stock.
Unless otherwise indicated, all information in this prospectus:
-- has been adjusted to give effect to a 1-for-2 reverse stock split to
be completed prior to this offering;
-- gives effect to the conversion of all outstanding shares of preferred
stock into shares of common stock, which will become effective upon
the closing of this offering;
-- assumes no exercise of the underwriters' over-allotment option;
-- assumes no exercise of outstanding options and warrants to purchase
shares of our common stock after April 30, 1999; and
-- assumes our reincorporation from California to Delaware.
UNTIL , 1999, 25 DAYS AFTER COMMENCEMENT OF THE
OFFERING, ALL DEALERS THAT BUY, SELL OR TRADE SHARES, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS
REQUIREMENT IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
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PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding our company and the common stock being sold in this
offering and our financial statements and notes to our financial statements
appearing elsewhere in this prospectus.
THE COMPANY
Ask Jeeves is a provider of natural-language question answering services on
the Internet for consumers and companies, establishing a new way to interact
with the World Wide Web. Ask Jeeves was first introduced to the public in April
1997 to provide Web users with a more satisfactory and productive experience by
quickly directing users to relevant answers. Our mission is to humanize the
Internet by making it easier and more intuitive for consumers to find the
information, products and services they need, and for companies to better
acquire, retain and maximize the value of their online customers. Our branding
strategy centers on the Jeeves character, a friendly and trusted assistant who
provides help and guidance on the Web. The Ask Jeeves question answering
services allow users ask a question in plain English and receive a response
pointing the user to relevant Internet destinations that provide the answers. We
believe that our question answering services make interaction with the Internet
more intuitive, less frustrating and significantly more productive.
While the growth of the Internet has drawn users at an unprecedented pace,
we believe it has become increasingly difficult for users to effectively
navigate the growing volume of online information. To take full advantage of the
Internet, users must be able to successfully navigate a network of dispersed Web
sites, which are generally not connected in a logical fashion. In addition, once
at the Web site, users are faced with the difficulty of sorting through an
overwhelming amount of information. Users currently rely on Internet search
engines or directories to locate information and make online purchases. These
methods typically require consumers to use keywords and construct complex search
strings that often result in hundreds or thousands of matches. Given the
magnitude of this problem, companies are recognizing the need to provide a means
by which their customers and potential customers can more easily find relevant
information, products and services on company Web sites. We believe that
consumers are frustrated with their online experience, and that companies are
frustrated by their inability to maximize returns on their investments in
Internet strategies. We further believe that this frustration will continue
until navigation on the Internet improves.
Beginning with only 3,000 questions per day in our first month of
operation, Ask Jeeves answered nearly 1 million questions per day in April 1999,
and the number of users has grown from 425,000 in September 1998 to more than
1.9 million in March 1999. Although we have experienced significant growth in
questions asked per day, we have incurred significant net losses in each fiscal
quarter since our inception, and as of March 31, 1999, we had an accumulated
deficit of approximately $9.7 million. Ask Jeeves, at Ask.com, provides users
with relevant answers to a wide range of questions from "Is it raining in
Paris?" to "Where can I comparison shop for cameras?" We believe that our
ability to provide users with a more satisfactory and productive Web experience
will allow us to connect users to providers of products and services in a more
targeted way than other services on the Internet, thereby better unlocking the
power of electronic commerce.
Our Corporate Question Answering Service helps companies provide a higher
quality, human-like online interface for their customers and is designed to
improve customer satisfaction on Web sites, increase the number of browsers on
Web sites that become purchasers and reduce expensive support costs such as
phone calls to call centers. Because we introduced our Corporate Question
Answering Service in December 1998, our revenues from this service have not been
material through March 31, 1999.
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We were incorporated in California in June 1996 and reincorporated in
Delaware in June 1999. Our principal executive offices are located at 918 Parker
Street, Berkeley, CA 94710, and our telephone number is (510) 649-8685. Our
World Wide Web site address is Ask.com. The information in the Web site is not
incorporated by reference into this prospectus.
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THE OFFERING
Common stock offered.................. 3,000,000 shares
Common stock to be outstanding after
the offering.......................... 24,349,424 shares
Over-allotment option................. 450,000 shares
Use of proceeds....................... We intend to use the proceeds for the
marketing and promotion of our
brand and for other
general corporate
purposes, including
working capital. See
"Use of Proceeds."
Proposed Nasdaq National Market
symbol................................ ASKJ
The foregoing information is based upon shares outstanding as of April 30,
1999.
SUMMARY FINANCIAL DATA
The "as adjusted" column below reflects the issuance and the sale of
3,000,000 shares of our common stock at an assumed initial public offering price
of $10.00 per share, and the application of net proceeds from the offering,
after deducting estimated underwriting discounts and commissions and estimated
offering expenses, as set forth under "Use of Proceeds."
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PERIOD FROM
JUNE 13, 1996
(INCEPTION) THREE MONTHS
THROUGH YEAR ENDED DECEMBER 31, ENDED MARCH 31,
DECEMBER 31, ----------------------- -----------------------
1996 1997 1998 1998 1999
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(UNAUDITED)
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STATEMENT OF OPERATIONS DATA:
Revenues....................... $ -- $ -- $ 592,659 $ 14,766 $ 1,131,568
Gross profit (loss)............ -- -- (466,035) (52,904) (390,144)
Operating loss................. (107,797) (451,984) (4,314,005) (339,153) (5,000,353)
Net loss....................... (107,797) (447,777) (4,261,625) (335,355) (4,869,160)
Pro forma basic and diluted net
loss per share............... $ (.48) $ (.29)
Weighted average shares
outstanding used in computing
pro forma basic and diluted
net loss per common share.... 8,828,646 16,730,099
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AS OF MARCH 31, 1999
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ACTUAL AS ADJUSTED
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BALANCE SHEET DATA:
Cash and cash equivalents and short-term investments........ $25,144,341 $51,944,341
Working capital............................................. 22,622,918 49,422,918
Total assets................................................ 31,924,787 58,724,787
Capital lease obligations, less current portion............. 33,606 33,606
Total stockholders' equity.................................. 27,680,649 54,480,649
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RISK FACTORS
You should carefully consider the risks described below, together with all
of the other information included in this prospectus, before making an
investment decision. If any of the following risks actually occurs, our
business, financial condition or operating results could be materially adversely
affected. In such case, the trading price of our common stock could decline, and
you may lose all or part of your investment.
OUR BUSINESS IS EXTREMELY DIFFICULT TO EVALUATE BECAUSE OUR OPERATING HISTORY IS
LIMITED
We were incorporated in June 1996 and launched Ask Jeeves, at Ask.com, our
public Web site, in April 1997. 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. For
example, in the quarter ended March 31, 1999, we restructured our organization
into two business units: the Consumer Question Answering Service and the
Corporate Question Answering Service. Our new operating structure is entirely
untested, and we cannot be sure that this 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
attrition.
Any investment in our company must be considered in light of the problems
frequently encountered by companies in an early stage of development in new and
rapidly evolving markets. To address the risks we face, we must, among other
things:
-- maintain and enhance our brand;
-- expand our product and service offerings;
-- increase the amount of traffic to Ask Jeeves;
-- increase the number and types of businesses that use the products and
services of our question answering services;
-- increase the value of our question answering services to our users,
customers, electronic commerce merchants and advertisers;
-- attract, integrate, retain and motivate qualified personnel; and
-- maintain the leadership and quality of our services.
We cannot be certain that our business strategy will be successful or that
we will successfully address these risks.
WE HAVE A HISTORY OF NET LOSSES AND EXPECT TO CONTINUE TO INCUR NET LOSSES
We have incurred significant net losses in each fiscal quarter since our
inception, including a net loss of approximately $4.9 million in the quarter
ended March 31, 1999. We incurred net losses for the years ended December 31,
1996, 1997 and 1998 of approximately $108,000, $448,000 and $4.3 million,
respectively. As of March 31, 1999, we had an accumulated deficit of
approximately $9.7 million. 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 in 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.
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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. Prior to
the launch of Ask Jeeves, Internet users only had traditional search techniques,
such as search engines, to navigate the Internet. Traditionally, users relied on
methods, such as call centers, chat rooms and e-mail, rather than
difficult-to-navigate corporate Web sites, to obtain information on products and
services. 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
We generated approximately 77%, 20% and 3% of our revenues in 1998 through
Internet advertising, knowledge base licensing fees to three companies that
provide Internet-wide navigation services and sales of our Corporate Question
Answering Service to corporate customers, respectively. Although we have not
generated any revenues through the facilitation of electronic commerce from
inception through March 31, 1999, we expect to generate a portion of our future
revenues through the facilitation of electronic commerce. We facilitate
electronic commerce by directing users who ask a shopping question to electronic
commerce merchants, some of whom compensate us for the referral. These methods
of revenue generation 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. Furthermore, we rely on a third-party advertising serving service,
which is provided by DoubleClick, Inc., to deliver advertisements to our users.
If DoubleClick fails to deliver the advertisements as contracted for, due to
reliability or performance problems, or if advertisements cannot be targeted as
promised to advertisers, our revenues will decrease.
In addition, a portion of our revenues for the foreseeable future are
expected to be derived from the facilitation of electronic commerce
transactions. We have not generated any revenues through the facilitation of
electronic commerce from inception through March 31, 1999. 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. As of March 31, 1999, we had provided customized
solutions to only five companies. In addition, our question answering service
has only been recently implemented onto these 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 business would be materially adversely affected
if we are unsuccessful in increasing the number of corporate customers.
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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. We intend to incur significant
expenditures, approximately $15 million to $20 million in 1999, on these
advertising and promotional programs and activities in the future. 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.
If our brand enhancement strategy is unsuccessful, these expenses may never be
recovered and we may be unable to increase future revenues.
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. If we do not manage
growth effectively, our business would be materially adversely affected.
WE MAY NOT BE ABLE TO EFFECTIVELY COMPETE AGAINST OUR CURRENT AND POTENTIAL
COMPETITORS
We have a number of competitors in both the consumer and the corporate
areas.
CONSUMER QUESTION ANSWERING SERVICE
We face direct competition from companies that provide Internet-wide search
and directory services. For example, we compete with search engines, including
At Home Corporation, Inktomi Corporation and AltaVista Company, for the traffic
generated by Internet users seeking links to third-party content to address
their online information needs. We also compete with directory services, such as
Yahoo! Inc. and LookSmart, Ltd. because they provide alternative ways for users
to obtain the desired information.
CORPORATE QUESTION ANSWERING SERVICE
Our Corporate Question Answering Service competes with a number of
companies that are addressing the same need to improve automated or online
customer service for corporate clients. The companies that
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provide automated online customer products and services against whom we compete
can be categorized as follows:
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CATEGORY FOCUS COMPETITORS
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Web-based Web-site specific search engine, Inktomi Corporation, Primus
"frequently asked questions," self- Telecommunications Group, Inc., Inference
help problem resolution and expert Corporation, Verity, Inc. and WebAnswers,
systems LLC
E-mail Automated response to customer Aptex Software, Inc., Brightware, Inc.,
generated e-mail and automated routing Egain Communications Corp., Kana
of customer e-mail to appropriate Communications, Inc. and Mustang Software,
answer provider Inc.
Phone call Receive, manage and track telephonic Clarify, Inc., Siebel Systems, Inc.,
with customers communications FaceTime Communications, Inc., Vantive
Corporation and Remedy Corporation
</TABLE>
Our ability to compete depends on many factors, many of which are outside
of our control. These factors include: the quality of content, the ease of use
of online services, the timing and market acceptance of new and enhanced online
services, and sales and marketing efforts by us and our 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.
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 due to a number of factors,
including:
-- our ability to obtain new corporate customers, the length of the
development cycle of the question answering service for corporate
customers and the timing of revenue recognition with respect to
contracts with corporate customers;
-- our ability to obtain new advertising contracts, maintain existing
ones, and effectively manage our advertising inventory;
-- the number of questions asked and answered on Ask Jeeves and on the
Web sites of our corporate customers;
-- our ability to attract and retain advertisers and our ability to link
our electronic commerce merchants to potential customers;
-- seasonal and other fluctuations in demand for our electronic commerce
services and for advertising space on Ask Jeeves;
-- our ability to develop and introduce new technology;
-- announcements and new technology introductions by our competitors;
-- our ability to attract and retain key personnel;
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-- costs relating to possible acquisitions and integration of
technologies or businesses;
-- rate changes for advertising on Ask Jeeves; and
-- marketing expenses and technology infrastructure costs as well as
other costs that we may incur as we expand our operations.
We have experienced lower traffic during the year-end holiday season and a
slower rate of growth during the summer months. Given our limited operating
history, user traffic on our Web site is extremely difficult to forecast
accurately. Moreover, obtaining new corporate customers depends on many factors
that we are not able to control, such as the allocation of budgetary resources
by potential customers. The average sales cycle for obtaining new corporate
customers has typically ranged between one and three months. Therefore, it is
difficult to predict the number of corporate customers that we will have in the
future. In particular, we intend to expend significant amounts, approximately
$15 million to $20 million in 1999, to build brand awareness of Ask Jeeves. We
may be unable to adjust spending quickly to offset any unexpected revenue
shortfall. Consequently, as fees are generated from advertising, corporate
customers and, to a lesser extent in the near term, our electronic commerce
service, they will constitute a significant portion of our revenues for the
foreseeable future. As such, our revenues are difficult to accurately predict.
IF WE FAIL TO MEET THE EXPECTATIONS OF PUBLIC MARKET ANALYSTS AND INVESTORS, THE
MARKET PRICE OF OUR COMMON STOCK MAY DECREASE SIGNIFICANTLY
Public market analysts and investors have not been able to develop
consistent financial models for the Internet market because of the unpredictable
rate of growth of Internet users, the rapidly changing models of doing business
on the Internet and the Internet's relatively low barriers to entry. As a
result, and because of the other risks discussed in this prospectus, it is
unlikely that our actual results will meet the expectations of public market
analysts and investors in future periods. If this occurs, the price of our
common stock will likely fall.
OUR CONSUMER QUESTION ANSWERING SERVICE DEPENDS ON THIRD-PARTY CONTENT
Our Consumer Question Answering Service is designed to directly link users
into a page within a third-party Web site that contains the answer to a question
asked. However, when our Consumer Question Answering Service attempts to direct
the user to a page within the Web site, some companies have automatically
redirected users to their home page. If companies prevent us from directly
linking our consumer users to a page within a third-party Web site, and if there
are no comparable alternative Web sites to which we can direct our users, the
utility and attractiveness of our services to consumers may be reduced. If this
occurs, traffic on Ask Jeeves could significantly decrease, which would have an
adverse effect on our business.
Visitors to Ask Jeeves use our Consumer Question Answering Service to
obtain direct access to the information, products and services they need through
the display of a third-party Web page containing the answer to the user's
question. We have little control over the content contained on these third-party
Web sites. If these third-party Web sites do not contain high-quality,
up-to-date and useful information to the user, the utility of our service to the
user will be reduced, which could materially and adversely affect our business.
WE MAY BE LIABLE FOR OUR LINKS TO THIRD PARTY WEB SITES
We could be exposed to liability with respect to the selection of
third-party Web sites that may be accessible through Ask Jeeves. Such claims
might include, among others, that by linking to Web sites operated by third
parties, we may be liable for copyright or trademark infringement or other
unauthorized actions by such third parties through such Web sites. Other claims
may be based on errors or false or misleading information provided on Ask
Jeeves, including information deemed to constitute professional advice such as
legal, medical, financial or investment advice. Other claims may be based on our
links to sexually explicit Web sites and our provision of sexually explicit
advertisements when this content is displayed. Our business could be materially
adversely affected due to the cost of investigating and defending such claims,
even to the extent such claims do not result in liability. Implementing measures
to reduce our exposure to this liability may require us to spend substantial
resources and limit the attractiveness of our service to users.
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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. AltaVista and theglobe.com, inc. accounted for
approximately 14% and 13% of total revenues, respectively, for the year ended
December 31, 1998, and approximately 11% and 21%, respectively, of total
revenues for the quarter ended March 31, 1999. 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.
Most of our customer contracts in the Corporate Question Answering Service
have a term of one year. As a result, if we are unable to offer value to our
customers during the term of these contracts, or if our customers choose a
competitor's service over our service, or if such customers decide to use their
own proprietary technology to develop services similar to ours, such customers
may not renew their contracts. If we do not obtain a sufficient amount of
contract renewals or if such renewal contracts are obtained on terms less
favorable than the original contract, our business could be materially adversely
affected.
OUR DEVELOPMENT CYCLE FOR CORPORATE QUESTION ANSWERING SERVICES IS LONG AND
LABOR INTENSIVE
Because the customization of our Corporate Question Answering Service is
labor intensive, it is difficult to predict the length of the development cycle.
Factors that affect the length of the development cycle include the overall size
and complexity of the Web site, the interaction with the customer and the
dynamic nature of the content. Generally, it takes three to five months to
launch a custom question answering service. However, because we have a limited
number of corporate customers, it is difficult to predict whether the
development cycle will stay in this timeframe. The long development cycle makes
it difficult to predict the delivery time to the customer, realize our revenue
goals and manage our internal hiring needs to meet new projects. In addition, in
order to meet increased demand for custom question answering services, we may
have to hire additional people and train them in advance of orders. If we
outsource development of custom knowledge bases, we will have little control
over the speed and quality of the development. Any decline in the speed or
quality of the implementation of custom knowledge bases could adversely affect
our business.
Our revenue growth is dependent, in part, on our ability to leverage our
customization of knowledge bases. We intend to outsource our knowledge base
creation process to providers of integrated Internet solutions to leverage our
sales efforts. If we are unable to outsource the labor intensive process of
creating customized knowledge bases, our expenses in developing a customized
corporate Web site will continue to be high which may have an adverse effect on
our business.
WE FACE RISKS RELATED TO EXPANDING INTO RELATIVELY NEW SERVICES AND BUSINESS
AREAS, IN PARTICULAR, ELECTRONIC COMMERCE
To increase our revenues, we will need to expand our operations by
promoting new or complementary products and by expanding the breadth and depth
of our services. In particular, our future success will largely depend on our
ability to substantially increase revenues through the facilitation of
electronic commerce transactions. The market for electronic commerce services is
extremely competitive. Because we only recently entered this market and we have
little experience in it, we may have limited success in this market. The
expansion of our electronic commerce services will require additional
development resources. Such expansion may strain our management, financial and
operational resources. Our expansion into new product and service offerings may
not be timely or may not generate sufficient revenues to offset their cost. If
this occurs, our business, operating results and financial condition will be
materially adversely affected.
OUR FUTURE SUCCESS DEPENDS ON OUR ABILITY TO RETAIN OUR PRESIDENT AND CHIEF
EXECUTIVE OFFICER AND OUR CHIEF TECHNOLOGY OFFICER
Our future success depends, in part, on the continued service of Robert
Wrubel, our President and Chief Executive Officer, and David Warthen, our Chief
Technical Officer. Neither Mr. Wrubel nor Mr. Warthen are
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bound by an employment agreement for any specific term. Our relationships with
these officers are at will. Although we are the beneficiary of a key person life
insurance policy on Mr. Wrubel's life, the loss of his services, or the services
of Mr. Warthen, would have a material adverse effect on our business.
OUR FUTURE SUCCESS DEPENDS ON OUR ABILITY TO ATTRACT, RETAIN AND MOTIVATE HIGHLY
SKILLED EMPLOYEES
Our future success also depends on our ability to attract, retain and
motivate highly skilled employees. Competition for employees in our industry is
intense. Additionally, it is often more difficult to attract employees once a
company's stock is publicly traded because the exercise price of equity awards
such as stock options are based on the public market, which is highly volatile.
We may be unable to attract, assimilate or retain other highly qualified
employees in the future. We have from time to time in the past experienced, and
we expect to continue to experience in the future, difficulty in hiring and
retaining highly skilled employees with appropriate qualifications.
WE RECENTLY RECRUITED MOST OF OUR MANAGEMENT TEAM
Many members of our management team have recently been hired, including the
General Managers of both our Consumer Question Answering Service and Corporate
Question Answering Service, as well as our Chief Financial Officer, Senior Vice
President of Business Development, President of Ask Jeeves International and
Corporate Controller. These individuals do not have significant experience
working with us or the rest of our management team. We cannot assure you that
they will be able to successfully work together or manage any growth we
experience. The process of integrating these individuals may detract from the
operation of, and have an adverse effect on, our business.
WE WILL ONLY BE ABLE TO EXECUTE OUR BUSINESS PLAN IF INTERNET USAGE GROWS
Our business would be adversely affected if Internet usage does not
continue to grow or grows at significantly lower rates compared to current
trends. The continued growth of the Internet depends on various factors, many of
which are outside our control. These factors include:
-- the Internet infrastructure may not be able to support the demands
placed on it;
-- performance and reliability of the Internet may decline as usage
grows;
-- security and authentication concerns with respect to the transmission
over the Internet of confidential information, such as credit card
numbers, and attempts by unauthorized computer users, so-called
hackers, to penetrate online security systems; and
-- privacy concerns, including those related to the ability of Web sites
to gather user information without the user's knowledge or consent.
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.
Our question answering service on both Ask Jeeves and our corporate
customer sites have from time to time experienced slower response times and
interruptions in service from interruptions at our hosting facilities and on the
Internet backbone networks, major software upgrades at Ask Jeeves and undetected
software defects. The Ask Jeeves Web site has been interrupted for periods
ranging from a few minutes to three hours. In addition, these Web sites could
also be affected by computer viruses, electronic break-ins or other similar
disruptions. If we experience outages, frequent or persistent system failures or
degraded response times, our reputation and brand could be permanently harmed.
In addition, we could lose advertising revenues during these interruptions and
user satisfaction could be negatively impacted if the service is slow or
unavailable.
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Our users and customers depend on Internet service providers, online
service providers and other Web site operators for access to Ask Jeeves. Each of
these providers has experienced significant outages in the past and could
experience outages, delays and other difficulties due to system failures
unrelated to our systems.
The occurrence of an earthquake or other natural disaster or unanticipated
problems at our leased facility in Berkeley, California or at the servers that
host or back-up our systems could cause interruptions or delays in our business,
loss of data or render us unable to provide question answering services. Our
systems are vulnerable to damage or interruption from fire, flood, power loss,
telecommunications failure, break-ins, earthquake and similar events. Our
general liability insurance policies may not adequately compensate us for losses
that may occur due to interruptions in our service.
WE MAY NOT BE ABLE TO ADAPT TO EVOLVING INTERNET TECHNOLOGIES AND CUSTOMER
DEMANDS
To be successful, we must adapt to rapidly changing Internet technologies
by continually enhancing our products and services and introducing new services
to address our customers' changing needs. We could incur substantial development
or acquisition costs if we need to modify our services or infrastructure to
adapt to changes affecting providers of Internet services. Our business could be
materially adversely affected if we incur significant costs to adapt to these
changes. If we cannot adapt to these changes, or do not sufficiently increase
the features and functionality of our products and services, our customers may
switch to the product and service offerings of our competitors. Furthermore, our
competitors or potential competitors may develop a novel method of Internet
navigation that is equal or superior to our question answering services. As a
result, demand for our question answering services may decrease.
WE MAY FACE POTENTIAL LIABILITY FOR INVASION OF PRIVACY
Although we have a policy against using personal information, current
computing and Internet technology allows us to collect personal information
about our users. We may decide in the future to compile and provide such
information to our corporate customers and electronic commerce merchants. In the
past, the Federal Trade Commission has investigated companies that have taken
such actions without permission or in violation of a stated privacy policy. If
we begin collecting such information without permission or in violation of our
privacy policy, we may face potential liability for invasion of privacy for
compiling and providing information to our corporate customers and electronic
commerce merchants based on questions asked by users and visitors on Ask Jeeves
and corporate sites.
WE NEED TO EXPAND OUR SALES AND SUPPORT ORGANIZATIONS
We will need to substantially expand both our advertising sales and
corporate sales operations and marketing efforts to increase market awareness
and sales of our products and services. We recently expanded our sales forces
and plan to hire additional sales personnel. Competition for highly-qualified
sales personnel is intense, and we may not be able to hire the kind and number
of sales personnel we are targeting. We will need to increase our staff to
support new customers and the expanding needs of our existing customers. Hiring
highly-qualified customer service and support personnel is very competitive in
our industry due to the limited number of people available with the necessary
technical skills and understanding of the Internet.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES COULD HARM OUR BUSINESS
Any new law or regulation pertaining to the Internet, or the application or
interpretation of existing laws, could decrease the demand for our services,
increase our cost of doing business or otherwise have a material adverse effect
on our business. There is, and will likely continue to be, an increasing number
of laws and regulations pertaining to the Internet. These laws or regulations
may relate to liability for information retrieved from or transmitted over the
Internet, online content regulation, user privacy, taxation and the quality of
products and services. Furthermore, the growth and development of electronic
commerce may prompt calls for more stringent consumer protection laws that may
impose additional burdens on electronic commerce companies as well as companies
like us that provide electronic commerce services. Moreover, the applicability
to the Internet of existing laws governing intellectual property ownership and
infringement, copyright,
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trademark, trade secret, obscenity, libel, employment, personal privacy and
other issues is uncertain and developing.
We file tax returns in such states as required by law based on principles
applicable to traditional businesses. However, one or more states could seek to
impose additional income tax obligations or sales tax collection obligations on
out-of-state companies, such as ours, which engage in or facilitate electronic
commerce. A number of proposals have been made at state and local levels that
could impose such taxes on the sale of products and services through the
Internet or the income derived from such sales. Such proposals, if adopted,
could substantially impair the growth of electronic commerce and adversely
affect our opportunity to become profitable.
Legislation limiting the ability of the states to impose taxes on
Internet-based transactions recently has been enacted by the United States
Congress. However, this legislation, known as the Internet Tax Freedom Act,
imposes only a three-year moratorium, which commenced October 1, 1998 and ends
on October 21, 2001, on state and local taxes on electronic commerce, where such
taxes are discriminatory and Internet access, unless such taxes were generally
imposed and actually enforced prior to October 1, 1998. It is possible that the
tax moratorium could fail to be renewed prior to October 21, 2001. Failure to
renew this legislation would allow various states to impose taxes on
Internet-based commerce. The imposition of such taxes could adversely affect our
ability to become profitable.
In addition, we are not certain how our business may be affected by the
application of existing laws governing issues such as property ownership,
copyrights, encryption and other intellectual property issues, taxation, libel,
obscenity and export or import matters. The vast majority of such laws were
adopted prior to the advent of the Internet. As a result, they do not
contemplate or address the unique issues of the Internet and related
technologies. Changes in laws intended to address such issues could create
uncertainty in the Internet market. Such uncertainty could reduce demand for our
services or increase the cost of doing business as a result of litigation costs
or increased service delivery costs.
WE MAY FACE POTENTIAL ELECTRONIC COMMERCE-RELATED LIABILITIES AND EXPENSES
Arrangements with electronic commerce merchants may expose us to legal
risks and uncertainties, including potential liabilities to consumers of such
products and services. Although we carry general liability insurance, our
insurance may not cover potential claims of this type or may not be adequate to
indemnify us for all liability that may be imposed.
Some of the risks that may result from these arrangements with businesses
engaged in electronic commerce include:
-- potential liabilities for illegal activities that may be conducted by
participating merchants;
-- product liability or other tort claims relating to goods or services
sold through third-party commerce sites;
-- consumer fraud and false or deceptive advertising or sales practices;
-- breach of contract claims relating to merchant transactions;
-- claims that materials included in merchant sites or sold by merchants
through these sites infringe third-party patents, copyrights,
trademarks or other intellectual property rights, or are libelous,
defamatory or in breach of third-party confidentiality or privacy
rights; and
-- claims relating to any failure of merchants to appropriately collect
and remit sales or other taxes arising from electronic commerce
transactions.
Even to the extent that such claims do not result in material liability,
investigating and defending such claims could have a material adverse effect on
our business, operating results or financial condition.
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WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS AND WE MAY BE
LIABLE FOR INFRINGING THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS
Third parties may infringe or misappropriate our patents, trademarks or
other proprietary rights, which could have a material adverse effect on our
business. We have applied for a patent on our "Grammar Template Query System"
with the United States Patent and Trademark Office. We have also applied for
registered trademark status for "Ask Jeeves," "Ask.com," "Ask Jeeves Kids," and
"KidsAsk.com" and our logo and service marks in the United States. We have also
applied for registered trademark status of "Ask.com" with the appropriate
offices in Tunisia for international protection. In addition, we do not know
whether we will be able to defend our proprietary rights since the validity,
enforceability and scope of protection of proprietary rights in Internet-related
industries is uncertain and still evolving. Because we are devoting significant
resources to building our brands, primarily "Ask Jeeves" and "Ask.com," through
media advertising campaigns, if we are unable to register the trade and service
marks for which we have applied, or if we are unable to defend our intellectual
property rights, our business may be materially and adversely affected.
Third parties may assert infringement claims against us. From time to time
in the ordinary course of business we have been, and we expect to continue to
be, subject to claims of alleged infringement of the trademarks and other
intellectual property rights of third parties. These claims and any resultant
litigation, should it occur, could subject us to significant liability for
damages. In addition, even if we prevail, litigation could be time-consuming and
expensive to defend, and could result in the diversion of our time and
attention. Any claims from third parties may also result in limitations on our
ability to use the intellectual property subject to these claims unless we are
able to enter into agreements with the third parties making these claims.
WE COULD FACE ADDITIONAL STOCK-BASED COMPENSATION RELATED TO OUR RELATIONSHIP
WITH TRINET
Until May 31, 1999, we used TriNet VCO, an independent professional
employer organization, to provide payroll services and employee benefits for all
our employees. Under the co-employment arrangement, we paid a percentage of
compensation per co-employee, in addition to compensation costs, to TriNet to
cover payroll processing and related taxes and insurance. On March 31, 1999, the
Financial Accounting Standards Board ("FASB") issued an Exposure Draft of a FASB
Interpretation, Accounting for Certain Transactions involving Stock
Compensation -- an interpretation of APB Opinion No. 25. Such FASB Exposure
Draft, if adopted in its current form, could be interpreted to indicate that
employees subject to co-employment arrangements, would not be considered our
employees for purposes of applying APB No. 25. On April 30, 1999, we gave notice
of termination of this co-employment arrangement. If additional clarification
regarding the definition of an employee is not provided in the final
pronouncement, we may be required to establish a new measurement date for stock
options granted after December 15, 1998 to our employees for the purpose of
accounting for stock options under APB No. 25. If a new measurement date is
required to be established, we would recognize deferred stock-based compensation
which would be amortized as stock-based compensation over the remaining vesting
periods of the options. We estimate that this charge could be approximately $7.0
million in the aggregate, which would be amortized beginning with the fourth
quarter of fiscal 1999, the estimated date the final pronouncement will be
effective, and ending in 2003. Such amortization could have a material adverse
effect on our operating results.
WE WOULD LOSE REVENUES AND INCUR SIGNIFICANT COSTS IF OUR SYSTEMS OR MATERIAL
THIRD-PARTY SYSTEMS ARE NOT YEAR 2000 COMPLIANT
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 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. The
failure of our internal systems, or any material third-party systems, to be Year
2000 compliant would have a material adverse effect on our business. Even if our
material systems are Year 2000 compliant, any failure of these third-party
systems to become Year 2000 compliant could adversely affect our systems and
cause disruption in our normal business
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activities. See the "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Year 2000 Compliance" section of this prospectus
for a more detailed discussion.
WE MAY NOT BE ABLE TO SECURE ADDITIONAL FINANCING TO MEET OUR FUTURE CAPITAL
NEEDS
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 eighteen months
following the date of this prospectus. If we are unable to generate sufficient
cash flows from operations to meet our anticipated needs for working capital and
capital expenditures, we will need to raise additional funds after eighteen
months to fund brand promotion, develop new or enhanced services, respond to
competitive pressures or make acquisitions. We may be unable to obtain any
required additional financing on terms favorable to us, if at all. If adequate
funds are not available on acceptable terms, we may be unable to fund our
expansion, successfully promote our brand, develop or enhance services, respond
to competitive pressures or take advantage of acquisition opportunities, any of
which could have a material adverse effect on our business. If we raise
additional funds through the issuance of equity securities, our stockholders may
experience dilution of their ownership interest, and the newly-issued securities
may have rights superior to those of the common stock. If we raise additional
funds by issuing debt, we may be subject to limitations on our operations,
including limitations on the payment of dividends.
SUBSTANTIAL SALES OF COMMON STOCK BY OUR EXISTING STOCKHOLDERS COULD CAUSE OUR
STOCK PRICE TO FALL
The market price of our common stock could decline as a result of sales by
our existing stockholders of shares of common stock in the market after this
offering or the perception that these sales could occur. These sales also might
make it more difficult for us to sell equity securities in the future at a time
and at a price that we deem appropriate. Upon completion of this offering,
assuming the number of outstanding shares as of April 30, 1999 we will have
24,349,424 outstanding shares of common stock, 24,799,424 shares if the
underwriters exercise their over-allotment option in full. Of these shares,
3,000,000 shares, plus an additional 450,000 shares if the underwriters exercise
their over-allotment option in full, of common stock sold in this offering, will
be freely tradeable without restriction or further registration under the
Securities Act. Of the remaining shares, a total of approximately 21,106,168
shares held by our directors, executive officers and our existing stockholders
are subject to lock-up agreements generally providing that these stockholders
will not sell or otherwise dispose of any of their shares for a period of 180
days following the date of the final prospectus for this offering without the
prior written consent of Morgan Stanley & Co. Incorporated. In addition, options
to purchase up to 5,281,833 shares of our common stock are outstanding as of
April 30, 1999 under our 1996 Equity Incentive Plan, our 1999 Equity Incentive
Plan and pursuant to options granted outside of these plans. Following the
offering, we expect to register the shares underlying these options. Subject to
the exercise of these options, shares registered under such registration will be
available for sale in the open market immediately after the 180-day lock-up
period expires. See the "Shares Eligible" section of this prospectus for a more
detailed discussion.
AFTER THIS OFFERING, OUR OFFICERS AND DIRECTORS WILL OWN A LARGE PERCENTAGE OF
OUR OUTSTANDING SHARES AND WILL THEREBY BE ABLE TO CONTROL MATTERS REQUIRING
STOCKHOLDER APPROVAL
Our executive officers and directors will, in the aggregate, beneficially
own approximately 56% of our outstanding common stock following this offering.
These stockholders will be able to exercise control over matters requiring
approval by our stockholders, including the election of directors and the
approval of significant corporate transactions. This concentration of ownership
may also have the effect of delaying or preventing an acquisition or change of
control of Ask Jeeves, which could have a material adverse effect on our stock
price.
OUR SHARES MAY EXPERIENCE EXTREME PRICE AND VOLUME FLUCTUATIONS WHICH COULD
RESULT IN SUBSTANTIAL LOSSES FOR INDIVIDUAL STOCKHOLDERS
Prior to the offering, there has been no public market for our common
stock. The initial public offering price will be determined by negotiations
between the underwriters and us and may not be indicative of the
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market price for our common stock after the offering. We do not know the extent
to which investor interest will lead to the development of an active public
market. As such, investors may not be able to sell our common stock at or above
the initial public offering price. In particular, the market for the stocks of
Internet-related companies has experienced extreme price and volume
fluctuations. Following this offering, investor interest in us may not lead to
the development of an active or liquid trading market. The market price of our
common stock may be volatile and may decline below the initial public offering
price. In the past, securities class action litigation has often been instituted
against companies following periods of volatility in the market price of their
securities. If instituted against us, regardless of the outcome, litigation
could result in substantial costs and a diversion of our management's attention
and resources and have a material adverse effect on our business, results of
operations or financial condition.
PROVISIONS IN DELAWARE LAW AND OUR CHARTER, STOCK OPTION AGREEMENTS AND OFFER
LETTERS TO EXECUTIVE OFFICERS MAY PREVENT OR DELAY A CHANGE OF CONTROL
Upon the closing of this offering, we will be subject to the Delaware
anti-takeover laws regulating corporate takeovers. These anti-takeover laws
prevent Delaware corporations from engaging in a merger or sale of more than 10%
of its assets with any stockholder, including all affiliates and associates of
the stockholder, who owns 15% or more of the corporation's outstanding voting
stock, for three years following the date that the stockholder acquired 15% or
more of the corporation's assets unless:
-- the board of directors approved the transaction where the stockholder
acquired 15% or more of the corporation's assets;
-- after the transaction where the stockholder acquired 15% or more of
the corporation's assets, the stockholder owned at least 85% of the
corporation's outstanding voting stock, excluding shares owned by
directors, officers and employee stock plans in which employee
participants do not have the right to determine confidentially whether
shares held under the plan will be tendered in a tender or exchange
offer; or
-- on or after this date, the merger or sale is approved by the board of
directors and the holders of at least two-thirds of the outstanding
voting stock that is not owned by the stockholder.
A Delaware corporation may opt out of the Delaware anti-takeover laws if
its original certificate of incorporation or amended certificate of
incorporation or bylaws so provide. We have not opted out of the provisions of
the anti-takeover laws. As such, these laws could prohibit or delay mergers or
other takeover or change of control of Ask Jeeves and may discourage attempts by
other companies to acquire us.
Our Amended and Restated Certificate of Incorporation and Bylaws include a
number of provisions that may deter or impede hostile takeovers or changes of
control or management. These provisions include:
-- our board is classified into three classes of directors as nearly
equal in size as possible with staggered three year-terms;
-- the authority of our board to issue up to 5,000,000 shares of
preferred stock and to determine the price, rights, preferences and
privileges of these shares, without stockholder approval;
-- all stockholder actions must be effected at a duly called meeting of
stockholders and not by written consent;
-- special meetings of the stockholders may be called only by the
Chairman of the Board, the Chief Executive Officer or the board; and
-- the elimination of cumulative voting.
These provisions may have the effect of delaying or preventing a change of
control.
Our Amended and Restated Certificate of Incorporation and Bylaws provide
that we will indemnify officers and directors against losses that may incur in
investigations and legal proceedings resulting from their
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services to us, which may include services in connection with takeover defense
measures. These provisions may have the effect of preventing changes in our
management.
In addition, our option agreements under the 1996 Equity Incentive Plan
provide that if a change of control of Ask Jeeves occurs prior to the first
anniversary of the vesting commencement date of an option, then the vesting
which would have occurred by such anniversary shall occur. After the first
anniversary of the date of grant, these option agreements provide that the
vesting of each option shall accelerate by six months upon a change of control.
As of April 30, 1999, there were 4,814,004 unvested shares of common stock
reserved for options granted under this plan. Furthermore, offer letters with
our executive officers provide for the payment of severance and acceleration of
options upon the termination of these executive officers following a change of
control of Ask Jeeves. These provisions in our stock option agreements and offer
letters could have the effect of discouraging potential takeover attempts.
YOU WILL SUFFER IMMEDIATE AND SUBSTANTIAL DILUTION
The initial public offering price per share will significantly exceed the
net tangible book value per share. Accordingly, investors purchasing shares in
this offering will suffer immediate and substantial dilution of their investment
of $7.74 per share.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and elsewhere in this prospectus constitute
forward-looking statements. These statements involve known and unknown risks,
uncertainties and other factors that may cause our actual results, levels of
activity, performance or achievements to be materially different from any future
results, levels of activity, performance or achievements expressed or implied by
such forward-looking statements. Such factors include, among other things, those
listed under "Risk Factors" and elsewhere in this prospectus.
In some cases, you can identify forward-looking statements by terminology
such as "may," "will," "should," "could," "expects," "plans," "intends,"
"anticipates," "believes," "estimates," "predicts," "potential" or "continue" or
the negative of such terms and other comparable terminology.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements.
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USE OF PROCEEDS
The net proceeds to be received by Ask Jeeves from the sale of 3,000,000
shares of common stock in this offering are estimated to be $26.8 million, or
$31.0 million if the underwriters exercise their over-allotment option in full,
at an assumed initial public offering price of $10.00 and after deducting
estimated underwriting discounts and commissions and estimated offering
expenses.
We plan to use $15 million to $20 million of the net proceeds for
advertising and marketing expenditures in 1999 to promote our brand and the
remaining net proceeds from this offering for general corporate purposes,
including working capital, expenditures for the growth and expansion of our
business, building our brand both online and offline, enhancing our product
development and possible acquisitions. We are not currently a party to any
contracts or letters of intent with respect to any acquisitions, and there can
be no assurance that any of our expansion plans will be realized or, if
realized, will prove profitable for us. We have not identified specific uses for
all of such proceeds, and management will have discretion over their use and
investment. We intend to invest the net proceeds from this offering in
short-term, investment grade, interest-bearing securities until they are used.
We reserve the right to increase or decrease the size of this offering and the
price per share of the shares offered hereby.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock. We
presently intend to retain future earnings, if any, to finance the expansion of
our business, and we do not expect to pay any cash dividends in the foreseeable
future.
18
<PAGE> 20
CAPITALIZATION
The following table sets forth our capitalization as of March 31, 1999:
-- on an actual basis;
-- on a pro forma basis to reflect the conversion upon the closing of
this offering of all outstanding shares of preferred stock into
9,485,690 shares of common stock; and
-- on a pro forma basis as adjusted to reflect the sale of the common
stock offered in this offering and the receipt of the net proceeds
from the sale of the common stock at an assumed initial public
offering price of $10.00 and after deducting estimated underwriting
discounts and commissions and estimated offering expenses.
This information should be read in conjunction with the Financial
Statements and related notes thereto included elsewhere in this prospectus.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1999
-----------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
----------- ----------- -----------
<S> <C> <C> <C>
Capital lease obligations, less current portion..... $ 33,606 $ 33,606 $ 33,606
----------- ----------- -----------
Stockholders' equity(1):
Convertible preferred stock; 10,000,000 shares
authorized (actual and pro forma); (5,000,000
pro forma as adjusted); issuable in series:
Series A convertible preferred stock: 3,750,000
shares designated; 3,709,884 shares issued
and outstanding (actual); no shares issued
and outstanding (pro forma and pro forma as
adjusted).................................... 7,581,708 -- --
Series B convertible preferred stock: 6,250,000
shares designated; 5,775,806 shares issued
and outstanding (actual); no shares issued
and outstanding (pro forma and pro forma as
adjusted).................................... 24,961,680 -- --
Common stock: 40,000,000 shares authorized;
11,583,733 shares issued and outstanding
(actual); 150,000,000 shares authorized and
21,069,423 shares issued and outstanding (pro
forma); 150,000,000 shares authorized and
24,069,423 shares issued and outstanding (pro
forma as adjusted)............................. 6,876,194 39,419,582 66,219,582
Deferred stock compensation....................... (2,052,574) (2,052,574) (2,052,574)
Accumulated deficit............................... (9,686,359) (9,686,359) (9,686,359)
----------- ----------- -----------
Total stockholders' equity..................... 27,680,649 27,680,649 54,480,649
----------- ----------- -----------
Total capitalization...................... $27,714,255 $27,714,255 $54,514,255
=========== =========== ===========
</TABLE>
- ---------------
(1) Excludes (a) 4,122,457 shares of common stock issuable upon the exercise of
options outstanding as of March 31, 1999, with a weighted average exercise
price of approximately $.90 per share and (b) 39,000 shares of common stock
issuable upon the exercise of warrants outstanding as of March 31, 1999,
with a weighted average exercise price of approximately $.62 per share.
19
<PAGE> 21
DILUTION
The pro forma net tangible book value of Ask Jeeves at March 31, 1999 was
approximately $27.7 million, or $1.31 per share. Pro forma net tangible book
value per share is determined by dividing our pro forma tangible net worth
(total tangible assets less total liabilities) by the number of outstanding
shares of common stock, after giving effect to the conversion of all outstanding
shares of our convertible preferred stock into 9,485,690 shares of common stock.
Assuming the sale of the 3,000,000 shares of common stock offered hereby at an
assumed initial public offering price of $10.00 per share and after deducting
estimated underwriting discounts and commissions and estimated offering
expenses, the pro forma net tangible book value of Ask Jeeves, Inc. as of March
31, 1999 would have been approximately $54.5 million, or $2.26 per share. This
represents an immediate increase in the pro forma net tangible book value per
share of $0.95 to existing stockholders and an immediate dilution of $7.74 per
share to new investors purchasing shares at the assumed initial public offering
price. If the assumed initial public offering price is higher or lower, the
dilution to new investors will be greater or less, respectively. The following
table illustrates this dilution per share:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $10.00
Pro forma net tangible book value per share as of March
31, 1999.............................................. $1.31
Increase in pro forma tangible book value per share
attributable to new investors......................... 0.95
-----
Pro forma net tangible book value per share after the
offering.................................................. 2.26
------
Dilution per share to new investors......................... $ 7.74
======
</TABLE>
The calculation is based on an assumed initial public offering of $10.00
per share, before deducting the estimated underwriting discounts and commissions
and estimated offering expenses payable.
<TABLE>
<CAPTION>
SHARES PURCHASED(1) TOTAL CONSIDERATION AVERAGE
------------------------ ------------------------- PRICE PER
NUMBER PERCENTAGE AMOUNT PERCENTAGE SHARE
---------- ---------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders............ 21,069,423 87.5% $36,829,538 55.1% $ 1.75
New investors.................... 3,000,000 12.5 $30,000,000 44.9% $10.00
---------- ----- ----------- -----
Total............................ 24,069,423 100.0% $66,829,538 100.0%
========== ===== =========== =====
</TABLE>
- ---------------
(1) Excludes (a) 4,122,457 shares of common stock issuable upon the exercise of
options outstanding as of March 31, 1999, with a weighted average exercise
price of approximately $.90 per share and (b) 39,000 shares of common stock
issuable upon the exercise of warrants outstanding as of March 31, 1999,
with a weighted average exercise price of approximately $.62 per share.
20
<PAGE> 22
SELECTED FINANCIAL DATA
The following selected financial data are qualified by reference to, and
should be read in conjunction with, our Financial Statements and the Notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results Of Operations" appearing elsewhere in this prospectus. The statement of
operations data presented below for the period from inception through December
31, 1996 and for the years ended December 31, 1997 and 1998 and the selected
balance sheet data at December 31, 1997 and 1998 are derived from our financial
statements that have been audited by Ernst & Young LLP, independent auditors,
included elsewhere in this prospectus. The selected statement of operations data
for the three months ended March 31, 1998 and 1999 and the balance sheet data at
March 31, 1999 are derived from our unaudited financial statements included
elsewhere in this prospectus. The unaudited financial statements include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of our financial position and results of operations for these
periods. The financial data for the three months ended March 31, 1999 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1999 or any other future period.
<TABLE>
<CAPTION>
PERIOD FROM YEAR ENDED THREE MONTHS
JUNE 13, 1996 DECEMBER 31, ENDED MARCH 31,
(INCEPTION) THROUGH ----------------------- -----------------------
DECEMBER 31, 1996 1997 1998 1998 1999
------------------- --------- ----------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Consumer..................... $ -- $ -- $ 577,159 $ 14,766 $ 1,059,068
Corporate.................... -- -- 15,500 -- 72,500
--------- --------- ----------- --------- -----------
Total revenues................. -- -- 592,659 14,766 1,131,568
Cost of revenues:
Consumer..................... -- -- 602,716 46,371 699,131
Corporate.................... -- -- 455,978 21,299 822,581
--------- --------- ----------- --------- -----------
Total cost of revenues......... -- -- 1,058,694 67,670 1,521,712
--------- --------- ----------- --------- -----------
Gross profit (loss)............ -- -- (466,035) (52,904) (390,144)
Operating expenses:
Product development.......... 107,797 319,824 1,104,193 127,772 742,166
Sales and marketing.......... -- 17,509 1,613,846 80,872 2,669,165
General and administrative... -- 114,651 1,100,921 77,605 881,830
Amortization of deferred
stock compensation........ -- -- 29,010 -- 317,048
--------- --------- ----------- --------- -----------
Total operating expenses....... 107,797 451,984 3,847,970 286,249 4,610,209
--------- --------- ----------- --------- -----------
Operating loss................. (107,797) (451,984) (4,314,005) (339,153) (5,000,353)
Interest income................ -- 4,207 52,380 3,798 131,193
--------- --------- ----------- --------- -----------
Net loss....................... $(107,797) $(447,777) $(4,261,625) $(335,355) $(4,869,160)
========= ========= =========== ========= ===========
Pro forma basic and diluted net
loss per share............... $ (0.48) $ (0.29)
=========== ===========
Weighted average shares
outstanding used in computing
pro forma basic and diluted
net loss per common share.... 8,828,046 16,730,099
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------------- AS OF
1996 1997 1998 MARCH 31, 1999
------- -------- ---------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents and short-term
investments..................................... $ -- $521,247 $5,587,883 $25,144,341
Working capital................................... -- 476,011 4,776,279 22,622,918
Total assets...................................... -- 608,259 6,808,172 31,924,787
Capital lease obligations, less current portion... -- -- 45,945 33,606
Total stockholders' equity (deficit).............. (6,219) 542,992 5,565,820 27,680,649
</TABLE>
21
<PAGE> 23
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our Financial
Statements and the related notes contained elsewhere in this prospectus.
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. Approximately
79% of the Consumer Question Answering Service revenues for the year ended
December 31, 1998 were derived from advertising contracts. Total revenues from
advertising contracts were approximately $455,000 for the year ended December
31, 1998 and approximately $923,000 for the three months ended March 31, 1999.
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. Revenues for knowledge base
licensing fees totaled approximately $122,000 for the year ended December 31,
1998 and $136,000 for the three months ended March 31, 1999. We expect that
licensing of the knowledge base will not be a significant part of our business
model in the future. In the future, we expect to generate a portion of our
revenues from a third component, the facilitation of electronic commerce. We
will 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 March 31, 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. Revenues from the Corporate Question
Answering Service were $15,500 for the year ended December 31, 1998 and $72,500
for the three months ended March 31, 1999.
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
22
<PAGE> 24
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.
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.
During the year ended December 31, 1998 and the three months ended March
31, 1999, in connection with the grant of certain stock options to employees, we
recorded deferred stock compensation totaling approximately $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 approximately $29,000 and $269,000 for
the year ended December 31, 1998 and the three months ended March 31, 1999,
respectively. At March 31, 1999, we had a total of approximately $1.9 million
remaining to be amortized over the corresponding vesting periods of the options,
generally four years. In April 1999, we recorded additional deferred stock
compensation of approximately $573,000 representing the difference between the
deemed fair value of our common stock on the date such options were granted and
the exercise price. For the years ending December 31, 1999 and 2000, we will
record amortization expense relating to deferred stock compensation totaling
approximately $1,509,000 and $737,000, respectively. 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. See Note 5 of Notes to Financial Statements.
Additionally, for the three months ended March 31, 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 $245,000. 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 approximately $48,000 in the three months ended March 31, 1999.
We have outsourced our payroll processing and other aspects related to our
employee benefits programs under a co-employment arrangement with TriNet VCO, an
independent professional employer organization. On March 31, 1999, the Financial
Accounting Standards Board ("FASB") issued an Exposure Draft of a FASB
Interpretation, Accounting for Certain Transactions involving Stock
Compensation -- an interpretation of APB Opinion No. 25. Such FASB Exposure
Draft, if adopted in its current form, could be interpreted to indicate that
employees subject to co-employment arrangements, would not be considered
employees for purposes of applying APB No. 25. On April 30, 1999, we gave notice
of termination of this co-employment arrangement. If additional clarification
regarding the definition of an employee is not provided in the final
pronouncement, we may be required to establish a new measurement date for stock
options granted after December 15, 1998 to these employees for the purpose of
accounting for stock options under APB No. 25. If a
23
<PAGE> 25
new measurement date is required to be established, we would recognize the
deferred stock-based compensation which would be amortized over the remaining
vesting periods of the options. We estimate that this charge would aggregate
approximately $7.0 million, which would be recognized beginning with the fourth
quarter of fiscal 1999, the estimated date the final pronouncement will be
effective, and ending in 2003. Such amortization could have a material adverse
effect on our operating results.
We have incurred significant net losses and negative cash flows from
operations since our inception, and at March 31, 1999, we had an accumulated
deficit of approximately $9.7 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.
There was no provision for federal or state income taxes for any period
since inception due to our operating losses. At December 31, 1998, we had net
operating loss carryforwards for federal income tax purposes of approximately
$303,000 which will expire in fiscal year 2018 if not utilized. Utilization of
our net operating loss carryforwards may be subject to a substantial annual
limitation due to the ownership change limitations provided by the Internal
Revenue Code and similar state provisions. Such an annual limitation could
result in the expiration of the net operating loss carryforwards before
utilization. A valuation allowance has been established and, accordingly, no
benefit has been recognized for our net operating losses and other deferred tax
assets. The net valuation allowance increased by $978,634 during the year ended
December 31, 1998. We believe that, based on a number of factors, the available
objective evidence creates sufficient uncertainty regarding the realizability of
the deferred tax assets such that a full valuation allowance has been recorded.
These factors include our history of net losses since inception and expected
near-term future losses. We will continue to assess the realizability of the
deferred tax assets based on actual and forecasted operating results. See Note 4
of Notes to Financial Statements.
ANNUAL RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1997
Revenues. Revenues were approximately $593,000 for the year ended December
31, 1998. Prior to this period, we were a development stage company and
generated no revenues. Revenues for the year ended December 31, 1998 consisted
of approximately $577,000 in revenues from the Consumer Question Answering
Service, of which approximately $455,000 was generated from advertising revenues
and approximately $122,000 in knowledge base licensing fees for the year ended
December 31, 1998. Revenues from the Corporate Question Answering Service were
$15,500 for the year ended December 31, 1998.
Cost of Revenues. Cost of revenues for our Consumer Question Answering
Service and Corporate Question Answering Service were approximately $603,000 and
$456,000, respectively, for the year ended December 31, 1998. We had no cost of
revenues for the year ended December 31, 1997 since we generated no revenues
prior to January 1, 1998. The primary reason for the increase in cost of
revenues during the year ended December 31, 1998 related to 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 to costs associated with personnel and
related personnel costs required to provide knowledge base information and
maintenance services to our corporate customers.
Product Development Expenses. Product development expenses increased to
$1.1 million for the year ended December 31, 1998, from $320,000 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.
Sales and Marketing Expenses. Sales and marketing expenses increased to
$1.6 million for the year ended December 31, 1998, from approximately $17,500
for the same period 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.
24
<PAGE> 26
General and Administrative Expenses. General and administrative expenses
increased to approximately $1.1 million for the year ended December 31, 1998,
from $115,000 for the same period a year ago. The dollar increase in general and
administrative expenses was primarily due to increased depreciation, and
increase in the number of personnel to support the growth of our business, and
recruiting costs related to filling key senior executive positions.
ANNUAL RESULTS OF OPERATIONS
INCEPTION TO DECEMBER 31, 1996 AND YEAR ENDED DECEMBER 31, 1997
Because we were a development stage company during 1996 and the year ended
December 31, 1997, we generated no revenues for these periods. Operating
expenses increased to $451,000 in 1997 from $108,000 in the period from June 13,
1996 through December 31, 1996. During 1996, we incurred only product
development expenses as our sole focus was the development of our question
processing technology. In 1997, product development expenses totaled $320,000,
an increase from $108,000 in 1996, which was attributable to the addition of
product development personnel and related costs and consultant fees.
Additionally, in 1997 we began to build our infrastructure and added finance,
information technology, legal, executive management and administrative personnel
and related costs, which amounted to $115,000 for the period ending December 31,
1997. Sales and marketing expenses were not significant in 1997. We believe that
period-to-period comparisons prior to 1998 are less meaningful than an analysis
of recent quarterly operating results. Accordingly, we are providing a
discussion and analysis of our results of operations that is focused on the five
quarters ended March 31, 1999.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth unaudited quarterly statements of operations
results for the five quarters ended March 31, 1999. Prior to December 31, 1997,
Ask Jeeves was a development stage company and, as such, the Company believes
that the quarterly data for this period is not meaningful. We believe that this
information reflects all adjustments, consisting only of normal recurring
adjustments, that we consider necessary for a fair presentation of such
information in accordance with generally accepted accounting principles. The
results for any quarter are not necessarily indicative of results for any future
period.
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1998 1998 1998 1998 1999
--------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues:
Consumer.................. $ 14,766 $ 35,355 $ 105,265 $ 421,773 $ 1,059,068
Corporate................. -- -- 7,500 8,000 72,500
--------- --------- --------- ----------- -----------
Total revenues.............. 14,766 35,355 112,765 429,773 1,131,568
Cost of revenues:
Consumer.................. 46,371 69,734 169,144 317,467 699,131
Corporate................. 21,299 29,408 60,878 344,393 822,581
--------- --------- --------- ----------- -----------
Total cost of revenues...... 67,670 99,142 230,022 661,860 1,521,712
--------- --------- --------- ----------- -----------
Gross loss.................. (52,904) (63,787) (117,257) (232,087) (390,144)
Operating expenses:
Product development....... 127,772 170,463 226,188 579,770 742,166
Sales and marketing....... 80,872 183,343 323,828 1,025,803 2,669,165
General and
administrative......... 77,605 157,354 260,565 605,397 881,830
Amortization of deferred
stock compensation..... -- -- -- 29,010 317,048
--------- --------- --------- ----------- -----------
Total operating expenses.... 286,249 511,160 810,581 2,239,980 4,610,209
--------- --------- --------- ----------- -----------
Operating loss.............. (339,153) (574,947) (927,838) (2,472,067) (5,000,353)
Interest income............. 3,798 1,292 9,643 37,647 131,193
--------- --------- --------- ----------- -----------
Net loss.................... $(335,355) $(573,655) $(918,195) $(2,434,420) $(4,869,160)
========= ========= ========= =========== ===========
</TABLE>
25
<PAGE> 27
Revenues. Revenues increased in each of the five quarters ended March 31,
1999. The increase in revenues in these periods primarily reflected increased
advertising revenues for our Consumer Question Answering Service, related to an
increase in sales personnel and an aggressive marketing campaign that began in
late 1998. To date, a significant portion of our revenues has been attributable
to a limited number of customers. AltaVista and theglobe.com accounted for
approximately 14% and 13% of total revenues, respectively, for the year ended
December 31, 1998, and approximately 11% and 21%, respectively, of total
revenues for the quarter ended March 31, 1999. Because we introduced our
Corporate Question Answering Service in October 1998 and we recognize revenues
relating to these contracts ratably over twelve months, our Corporate Question
Answering Service revenues have not been material over the five quarters ended
March 31, 1999. See Note 1 of "Notes to Financial Statements" for a more
detailed discussion.
Cost of Revenues. Cost of revenues increased in each of the five quarters
ended March 31, 1999. These quarterly increases primarily related to additional
personnel and related costs associated with the content development and
maintenance of Ask Jeeves and personnel required to provide services to new
customers. The significant increases in cost of revenues for the Corporate
Question Answering Service during the quarter ended December 31, 1998 and the
quarter ended March 31, 1999 related primarily to the addition of personnel and
related costs required to implement and support customized knowledge bases for
our corporate customers.
Product Development Expenses. Product development expenses increased in
each of the five quarters ended March 31, 1999. The increases were primarily due
to expenses related to the addition of product development personnel and related
costs and consultant fees.
Sales and Marketing Expenses. Sales and marketing expenses increased in
each of the five quarters ended March 31, 1999. The increases were primarily due
to expenses related to the addition of sales personnel. Furthermore, we embarked
on aggressive marketing campaigns in late 1998, resulting in advertising and
promotional expenses of $748,000 and $1.9 million in the quarter ended December
31, 1998 and the quarter ended March 31, 1999, respectively.
General and Administrative Expenses. General and administrative expenses
increased in each of the five quarters ended March 31, 1999. The increases
primarily reflected the addition of finance, information technology, legal,
executive management and administrative personnel and related costs.
RECENT EVENTS
In April 1999, we entered into an asset purchase agreement and a license
agreement with Lumina Decision Systems, Inc. ("Lumina") for the acquisition of
technology assets of Lumina in exchange for total consideration of $1,538,000
which is comprised of $700,000 in cash, 225,000 shares of our common stock
valued at $3.50 per share and $50,000 in acquisition costs. We allocated
approximately $1,177,000 of the purchase price to core technology and $361,000
to in-process technology. The core technology will be amortized over a three
year period. The in-process technology will be written off as a one-time charge
in the second quarter of 1999. In addition, approximately 107,500 shares of the
shares issued are to be held in escrow for a two year period subject to a right
of repurchase by us.
We acquired Lumina's Personal Decision Engine ("PDE") technology as well as
the right to use Lumina's Analytica and Analytica Decision Engine ("ADE")
technologies. The ADE technologies and a non-configurable version of the PDE
technology have reached technological feasibility and have been classified as
core technology. The configurable PDE technology has yet to reach technological
feasibility and therefore, this product is classified as in-process technology.
This acquisition provides technology and expertise that will complement our
existing technology. Although we believe that the purchased in-process
technology will be successfully developed, there can be no assurance that
commercial viability of these products will be achieved. The estimated cost
incurred to develop the configured PDE prior to the acquisition was $214,000.
The estimated cost to develop the in-process technology is approximately
$226,000, which is expected to be incurred in 1999.
The value of the purchased in-process technology was determined by
estimating the projected net cash flows related to such products, including
costs to complete the development of the technology and the future
26
<PAGE> 28
revenues to be earned upon commercialization of the products. These cash flows
were discounted back to their net present value. The resulting projected net
cash flows from such products were based on our estimates of revenues and
operating profits related to such products. These estimates were based on
several assumptions, including the use of a discount rate of 35% for purchased
in-process technology, which was calculated based on the weighted average cost
of capital, adjusted for the technology risk associated with the purchased
in-process technology, which was considered to be significant due to the rapid
pace of technological change in the Internet industry. For projected cash flows
attributable to existing technology, a discount rate of 25% was used, which
reflects the weighted average cost of capital, adjusted for the technology risk
associated with these technologies. Our analysis considered only future
operating results of the existing and in-process technology on a stand-alone
basis and did not take into consideration any potential increased revenue or
operating efficiency that may occur post-acquisition.
SEASONALITY AND QUARTERLY FLUCTUATIONS IN OPERATING RESULTS
Our operating results may fluctuate significantly in the future as a result
of a variety of factors, many of which are beyond our control. Factors that may
adversely affect our results of operations include:
-- our ability to obtain new corporate customers, the length of the
development cycle of the question answering service for corporate
customers and the timing of revenue recognition with respect to
contracts with corporate customers;
-- our ability to obtain new advertising contracts, maintain existing
ones, and effectively manage our advertising inventory;
-- the number of questions asked and answered on Ask Jeeves and on the
Web sites of our corporate customers;
-- our ability to attract and retain advertisers and our ability to link
our electronic commerce merchants to potential customers;
-- seasonal and other fluctuations in demand for our electronic commerce
services and for advertising space on Ask Jeeves;
-- our ability to develop and introduce new technology;
-- announcements and new technology introductions by our competitors;
-- our ability to attract and retain key personnel;
-- costs relating to possible acquisitions and integration of
technologies or businesses;
-- rate changes for advertising on Ask Jeeves; and
-- marketing expenses and technology infrastructure costs as well as
other costs that we may incur as we expand our operations.
Because of the foregoing factors, we believe that period-to-period
comparisons of our operating results should not be relied upon as an indicator
of our future performance.
As Internet advertising makes the transition from an emerging to a more
developed market, seasonal and cyclical patterns may develop in our industry and
may also affect our revenues. For instance, during 1998 the rate of growth of
our traffic decreased in the summer months and traffic levels on Ask Jeeves
decreased during the year-end vacation and holiday periods. Similar to
traditional media, this may result in our advertising sales being lower during
such periods. In addition, we anticipate that sales from electronic commerce may
increase during the fourth quarter as a result of the holiday season and may
decline during other periods. Seasonality in the retail industry and in Internet
service usage are likely to cause quarterly fluctuations in our results of
operations and could have a material adverse effect on our business, results of
operations and financial condition.
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LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have financed our operations primarily through the
private placement of equity securities. As of March 31, 1999, we had
approximately $28.3 million in cash, cash equivalents and investments. Net cash
used in operating activities was $3.0 million for the year ended December 31,
1998 and $2.6 million for the three months ended March 31, 1999. The net cash
used in operating activities in each period resulted primarily from net losses,
offset by the timing of payable settlements and depreciation and amortization
expense. Net cash used in investing activities was $782,000 for the year ended
December 31, 1998 and $6.4 million for the three months ended March 31, 1999.
Net cash used in investing activities related to purchases of $782,000 of
property and equipment for the year ended December 31, 1998 and $1.2 million for
purchases of property and equipment for the three months ended March 31, 1999.
In addition, in the three months ended March 31, 1999, we purchased $5.2 million
of short-term and long-term investments. Net cash provided by financing
activities was $8.9 million and $26.5 million for the year ended December 31,
1998 and the three months ended March 31, 1999, respectively, and related
primarily to net proceeds from the sale of common and preferred equity
securities.
We have no material commitments or obligations other than capital and
operating leases. See Note 3 of "Notes to Financial Statements."
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 following the date of this prospectus. 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.
DISCLOSURE ABOUT MARKET RISK
Our exposure to market risk is principally confined to our cash and cash
equivalents and available-for-sale securities, which have short maturities and,
therefore, minimal and immaterial market risk.
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 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.
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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 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.
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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.
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BUSINESS
OVERVIEW
Ask Jeeves is a provider of natural-language question answering services on
the Internet for consumers and companies, establishing a new way to interact
with the World Wide Web. Ask Jeeves was first introduced to the public in April
1997 to provide Web users with a more satisfactory and productive experience by
quickly directing users to relevant answers. Our mission is to humanize the
Internet by making it easier and more intuitive for consumers to find the
information, products and services they need, and for companies to better
acquire, retain and maximize the value of their online customers. Our branding
strategy centers on the Jeeves character, a friendly and trusted assistant who
provides help and guidance on the Web. The Ask Jeeves question answering
services allow users to ask questions in plain English and receive a response
pointing the user to relevant Internet destinations that provide the answers. We
believe that our question answering services make interaction with the Internet
more intuitive, less frustrating and significantly more productive.
Our question answering services combine sophisticated, proprietary
technologies with human editorial judgment to create a system that dynamically
responds to questions consumers ask every day. We have two principal businesses
based on the same underlying technology. The core of our Consumer Question
Answering Service, Ask Jeeves, at Ask.com, allows users to obtain answers to
millions of questions online. Our Corporate Question Answering Service helps
companies provide a human-like online interface for their customers. Answering
more than 1.5 million questions per day across our question answering services,
we believe that we handle answers to a broad range of plain English questions.
Beginning with only 3,000 questions per day in our first month of
operation, Ask Jeeves answered nearly 1 million questions per day in April 1999,
and the number of users has grown from 425,000 in September 1998 to more than
1.9 million in March 1999. Although we have experienced significant growth in
questions asked per day, we have incurred significant net losses in each fiscal
quarter since our inception, and as of March 31, 1999, we had an accumulated
deficit of approximately $9.7 million. By leveraging our proprietary tools and
technologies, we have been able to grow the knowledge base supporting Ask Jeeves
from 30,000 answers to more than 7 million answers over the past two years. Ask
Jeeves has grown from answering a small number of reference and Web-related
questions, to answering a wide range of questions from "Is it raining in Paris?"
and "Where can I comparison shop for cameras?" to "How can I improve my golf
game?" and "Am I in love?" We believe that our ability to provide users with a
more satisfactory and productive Web experience will allow us to connect users
to providers of products and services in a more targeted way than other services
on the Internet, thereby better unlocking the power of electronic commerce.
Our Corporate Question Answering Service is designed to improve customer
satisfaction on corporate Web sites, improve conversion rates of browsers to
purchasers and reduce expensive support costs such as phone calls to call
centers. Because we introduced our Corporate Question Answering Service in
December 1998, our revenues from this service have not been material through
March 31, 1999.
INDUSTRY BACKGROUND
The Internet has emerged as a mass-market communications medium, enabling
millions of users to obtain and share information, interact with each other and
conduct business electronically. International Data Corporation ("IDC")
estimates that the number of Internet users will increase from approximately 97
million at the end of 1998 to approximately 320 million by the end of 2002,
representing a compound annual growth rate of approximately 35%. This growth is
being driven by an increasing base of computers in the home and in the
workplace, improvements in network infrastructure, more convenient, faster and
inexpensive Internet access, advances in computer and modem technology,
increased public awareness of benefits of using the Internet and improving user
interfaces. These factors make the Internet accessible to inexperienced users as
well as the technologically sophisticated. In addition to its benefits for
individuals, the ubiquity of the Internet as a global communications tool
provides businesses with a new, attractive vehicle to deliver product
information, market and sell products and services and provide post-sales
support. According to IDC, worldwide electronic commerce revenue is expected to
increase from approximately $32 billion in 1998 to
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more than $425 billion in 2002, representing a compound annual growth rate of
approximately 90%. The market for the facilitation of electronic commerce is
expected to continue to represent only a small portion of the overall electronic
commerce market. We have not generated any revenues through the facilitation of
electronic commerce from inception through March 31, 1999.
EVOLVING USE OF THE INTERNET BY INDIVIDUALS AND COMPANIES
The Internet has evolved from a mere repository of information to a
powerful personal tool for managing important aspects of users' lives. In
addition to searching for information, individuals can, for instance, buy and
sell products, maintain personal calendars and contact information, engage in
personal securities transactions and communicate with others. In the future,
individuals will have the opportunity to conduct more personal and professional
activities through the Internet, creating more opportunities for businesses to
reach users in a direct and focused manner.
As the Internet has grown, many businesses have come to realize the
commercial potential it offers. Businesses are embracing the Internet as an
important vehicle for communicating with customers and changing traditional
business processes and practices. As advertisers have turned to the Internet as
a new way to reach consumers, businesses have developed content-rich Web sites
designed to hold users' attention for extended time periods. More recently, new
technology has enabled commercial transactions to be conducted over the
Internet, creating the opportunity for business-to-consumer and
business-to-business electronic commerce.
We believe that the creation of highly intuitive and intelligent Web sites
designed to manage a company's interactions with its customers is an emerging
market opportunity. Given its pervasiveness, the Internet has the potential to
enable companies to electronically manage the entire customer value chain,
including:
-- attracting or delivering the customer;
-- providing the customer with easy access to requested information;
-- retaining the customer's attention by expanding the scope of the
interaction;
-- enabling the customer transaction;
-- dealing with customer post-sales questions; and
-- improving management of the customer relationship by collecting and
analyzing customer data.
Properly developed, these consumer-friendly Web sites may alter the way
businesses interact with their customers. Nevertheless, significant shortcomings
in the way users interact with the Internet must be overcome for this market
opportunity to be fully realized.
CURRENT INTERNET NAVIGATION
While the growth of the Internet has drawn users at an unprecedented pace,
the volume of online information has made it increasingly difficult for users to
navigate the Internet effectively. According to Forrester Research, 1.5 million
new Web pages are added to the Internet every day. To take full advantage of the
Web, users must be able to successfully navigate a network of dispersed Web
sites, which are generally not connected in a logical fashion.
Users currently rely on Internet search engines or directories of Web sites
and Web pages to locate information and make online purchases. Search engines
typically require consumers to construct keyword or complex search strings that
often result in hundreds or thousands of matches. As directories become larger,
they require users to move through large and complex hierarchies of information.
As the Internet grows, consumers using conventional search and directory
products are finding that locating the information they need is increasingly
difficult and electronic commerce vendors are losing opportunities for sales.
The difficulty of online navigation does not end with finding the desired
Web site. Once there, users are faced with the difficulty of searching an
overwhelming amount of information. According to Forrester
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Research, major corporate Web sites now have thousands of pages, which often
makes finding relevant information a frustrating and time-consuming experience.
Consumers often must click through multiple "frequently asked questions" pages
or navigate long data trees to locate desired information. Unable to find
answers to their questions about a product, service or price, consumers often
delay the buying decision or give up entirely. Compounding the problem,
corporate Web sites are generally not tailored to individual needs. In addition,
we believe that corporate Web sites do not currently have the ability to carry
on an effective dialogue with existing or potential customers.
Further, companies need to provide a means by which their customers and
potential customers can more easily find relevant information about products and
services on their Web site. While online shoppers cite convenience as the reason
for choosing electronic commerce, according to IDC, over 70% abandon their
"shopping carts" because they have problems or questions. According to Forrester
Research, the online conversion rate or the percentage of visitors who complete
a purchase, is 2.7%, similar to that of unsolicited direct mailings through
conventional mail.
We believe that to fulfill the promise of the Internet, access to relevant
information, products and services must become simpler and quicker. Until
navigation on the Internet improves, consumers will become increasingly
frustrated with their online experiences, and companies will be frustrated by
their inability to provide an easy and intuitive user interface and as a result
to maximize returns on their investments in Internet strategies. We believe that
a more direct and personal means of interacting with the Internet will improve
the user's experience and enhance companies' returns from Internet strategies.
This will, in turn, make the Internet more valuable to consumers and companies
alike.
THE ASK JEEVES SOLUTION
We have developed and deployed natural-language question answering
services, creating an easier, more intuitive and more efficient way of finding
answers on the Internet. Our proprietary technologies, including
natural-language parsing software, knowledge base technology and data mining
processes, allow our users to ask questions and find answers without human
intervention. Our editors create new confirming questions on an ongoing basis to
update the Ask Jeeves knowledge base. However, our users' retrieval of
information is entirely automated. Our question answering services make relevant
information, products and services on the Web directly accessible to consumers
and enhance the commercial potential of corporate Web sites. Answering more than
1.5 million questions a day across our question answering services, we believe
that we handle a broad range of plain English questions.
We have two principal businesses based on the same underlying technology.
The core of our Consumer Question Answering Service, Ask Jeeves, at Ask.com,
allows users to obtain answers to millions of questions online. Our Corporate
Question Answering Service helps companies provide a human-like interface for
their customers and is supported by professional services, maintenance and per
answer fees. We generated approximately 77%, 20% and 3% of our revenues in 1998
through Internet advertising, knowledge base licensing fees to three companies
that provide Internet-wide navigation services and sales of our Corporate
Question Answering Service to corporate customers, respectively.
HOW ASK JEEVES WORKS
A user of our question answering services begins by entering a question in
plain English. Our proprietary question processing engine ("QPE") parses the
question for word meaning and grammar and then maps it to a set of questions in
the Ask Jeeves knowledge base. Our interactive system suggests additional
related questions that are likely to be responsive to the user's needs. These
questions create an electronic dialogue with the user that not only helps the
user find the desired information but also educates the user about a range of
related topics and electronic commerce possibilities. After the user chooses
from among these dialogue questions, Ask Jeeves connects the user to a page on a
Web site containing the desired information without requiring any additional
navigation. The user can return to the dialogue questions for other information
and shopping links offered by our question answering services.
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We created the Ask Jeeves question answering services to become smarter in
response to consumer questions and needs. Our system is built on the belief that
a large percentage of the questions asked can be mapped to a manageable number
of answers. The Ask Jeeves technology records all the questions consumers ask
and our editors apply this information to update the knowledge bases.
THE CONSUMER QUESTION ANSWERING SERVICE
Ask Jeeves, at Ask.com, was launched in April 1997 to make finding answers
to questions easier. We believe that Ask Jeeves offers consumers the following
benefits:
Ease of use. Users have access to a human-like, intuitive interface with
the Web and can ask their questions in plain English. Users can spend less time
searching and more time obtaining relevant information.
Relevance. Ask Jeeves parses a user's query for word meaning and grammar.
Our proprietary technology allows us to respond with matching dialogue questions
even if the user asks a question in a different way or uses words different than
used in the question template in our knowledge base.
Precision. Ask Jeeves can answer a wide range of questions, by pointing the
consumer to a small set of relevant answers, avoiding hundreds or thousands of
search results which are often produced by search engines or directory searches.
These answers have been selected by our editors and validated for accuracy and
quality.
Ability to learn. Our technology monitors and analyzes all the questions
asked on Ask Jeeves. Our editors use the information to update the knowledge
base regularly, making Ask Jeeves smarter. Because our knowledge base is built
on past usage by other consumers, we believe it is better adapted to the needs
of future consumers than traditional software-driven search engines.
In addition to being a valuable advertising medium, Ask Jeeves can link
users with electronic commerce merchants who offer relevant products and
services. Approximately 79% and 21% of our revenues attributable to the Consumer
Question Answering Service are derived from Internet advertising and knowledge
base licensing fees, respectively.
THE CORPORATE QUESTION ANSWERING SERVICE
We also deploy our proprietary technologies and editorial tools to
customize our question answering service for a company's Web site to enable
intuitive online interaction between the company and its customers. We believe
visitors to a corporate question answering service-enabled Web site can readily
find desired information through a simple question and answer dialogue. Further,
we believe that our Corporate Question Answering Service provides companies with
the following advantages:
Increased conversion rates. The Corporate Question Answering Service is
designed to provide quick and direct answers, reduce the customer's frustration
level and supply additional product suggestions relevant to the question asked
by the customer or potential customers on a company's Web site. As a result, we
believe that more users will make purchases on these Web sites.
Lowered support costs. The Corporate Question Answering Service is designed
to enable more effective online customer self-service. We believe that
implementation of the Company's technology on our corporate customers' Web
sites, will facilitate their users' access to information, on a self-service
basis, thereby reducing the costs to our corporate customers of phone and e-mail
interactions with their customers.
Improved customer satisfaction and retention. By providing intuitive
interaction and relevant answers, we believe that the Corporate Question
Answering Service makes interacting with a company's Web site faster and easier.
Valuable customer data. By collecting and analyzing questions and customer
preferences, we believe that the Corporate Question Answering Service offers an
efficient and inexpensive means for companies to obtain market data and improve
customer loyalty.
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Outsourced development. By providing a stand-alone, fully outsourced
service, the Corporate Question Answering Service can be easily developed using
existing company Web content and maintained without interference with a
company's other information systems infrastructure.
THE ASK JEEVES STRATEGY
Our strategy is to establish Ask Jeeves as the leading question answering
service provider for information, products and services on the Internet. The key
elements of our strategy are as follows:
Continue to Build the Ask Jeeves Brand. To enhance public awareness of our
question answering services, we are pursuing an aggressive brand development
strategy through mass market and targeted advertising, promotions and public
relations. Our branding strategy centers on the Jeeves character, a friendly and
trusted assistant who provides help and guidance on the Web. We believe that
building our brand will increase traffic to Ask Jeeves and, as a result,
increase revenues from advertising and transactions. We also believe that
enhancing our brand will increase licensing opportunities with corporate
customers.
Unlock Electronic Commerce for Consumers and Corporations. Because Ask
Jeeves' question answering services can intuitively and intelligently connect
users with product and service purchase opportunities, we believe it offers
powerful targeting advantages over other Internet-based alternatives. To further
enhance the electronic commerce potential of our services, we plan to
aggressively devote resources to expanding the scope and breadth of
shopping-related questions. For example, we will continue to leverage our
technology to provide users with access to consumer information, such as product
reviews and pricing data, which empowers the user with enough knowledge to
complete a transaction. For our corporate service customers, we plan to continue
broadening the application of our question answering service beyond customer and
technical support into services specifically geared to guiding customers through
purchases directly on a corporate Web site.
Leverage the Ask Jeeves Brand to Continue Expansion of Our Corporate
Question Answering Service. We believe that the Jeeves brand is attractive to
corporations seeking to improve their online customer interactions. To continue
expanding our corporate question answering service, we are initially focusing on
technology and financial services, both of which are markets with complex
products and services requiring a high level of pre- and post-sales customer
support. We believe that our strategy of focusing on key markets will enhance
our competitive advantage by allowing us to leverage the expertise gained in
building each successive knowledge base.
Outsourced Corporate Question Answering Service Implementation. To enable
us to provide our corporate question answering service to the broadest possible
range of corporate customers, we intend to supplement our direct sales and
implementation capability by licensing tools to selected third-party technology
integration vendors. This outsourcing strategy will allow us to reach the
significant customer base of these strategic partners, while reducing the amount
of direct labor we must apply to implement new Corporate Question Answering
Services. For example, we recently entered into a relationship with USWeb/CKS
under which USWeb will provide outsourced professional services to create,
implement and maintain corporate question answering services.
Make Ask Jeeves Smarter. To maintain our competitive advantage, we must
continue to develop a rich base of questions and related answer links for our
knowledge base. To supplement the ongoing efforts of our editors in increasing
the breadth of our knowledge base, we intend to enter into arrangements with
large content providers to link answers in their content to a base of questions
contained in Ask Jeeves.
PRODUCTS AND SERVICES
The Ask Jeeves question answering services provide users a fast, easy and
intuitive way to find information, products and services on the Internet. We
combine 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. Unlike traditional Web navigation methods
that require keywords or complex search strings, and often generate hundreds or
thousands of responses, our natural-language question answering service
generally provides "two-click" access to relevant Web sites.
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CONSUMER QUESTION ANSWERING SERVICE
Ask Jeeves at Ask.com. Initially introduced to handle general reference and
Web-related questions, Ask Jeeves has become a popular destination site, where
users get answers to a broad range of questions from "Why is the sky blue?" to
"Where can I buy flowers online?" The following table illustrates the breadth of
questions that Ask Jeeves can answer:
<TABLE>
<S> <C>
COMPUTERS MONEY
- --------------------------------------------- ---------------------------------------------
What are Web cookies? How much do I need to save for retirement?
Where can I find computer deals online? What is an annuity?
How do I install a modem? Where can I bank online?
Where can I find anti-virus software? How much life insurance do I need?
How can I create my own Web page? How does the stock market work?
ENTERTAINMENT REFERENCE
- --------------------------------------------- ---------------------------------------------
What parties are happening on New Year's Eve? How many feet are in a mile?
Where can I see a magic trick online? What does my phone number spell?
Are the Rolling Stones on tour? How can I become Miss America?
What's on TV tonight? Why is the sky blue?
What happened on this day in rock and roll Who was the first woman in space?
history?
ROMANCE
FAMILY ---------------------------------------------
- ---------------------------------------------
Am I in love?
How can I help my child with her homework? How do I get out of the doghouse?
How do I train my dog? How do I write a love poem?
Where can I find a good summer camp for kids? What are some good date ideas?
What should I name my baby? How can I prepare a romantic dinner?
How much will it cost to send my child to
college? SHOPPING
---------------------------------------------
GEOGRAPHY
- --------------------------------------------- How can I order a pizza over the Internet?
What is a good anniversary present?
What are the Seven Wonders of the World? What are the latest fashions?
How deep is the ocean? Where can I comparison shop for cameras?
Where can I find a current map of the world? Where can I find recommendations on software?
Where are the deserts of the world?
What is the capital of Malaysia? SPORTS
---------------------------------------------
HEALTH
- --------------------------------------------- Where can I buy a snowboard?
When are the Giants playing next?
How can I cure my headache? Where can I sign up for a fantasy football
Is yawning contagious? league?
How can I get rid of allergies? Who won the first World Series?
Where can I find a good gym? Where can I get my scuba diving
How do antioxidants work? certification?
KIDS TRAVEL
- --------------------------------------------- ---------------------------------------------
Where can I play a game with Elmo? What's the weather in New York?
When do I capitalize a letter? How can I renew my passport?
Where can I get facts on dinosaurs? How can I optimize my frequent flier miles?
What is static electricity? What are good travel tips for going abroad?
Where can I hear the sound a lion makes? Where can I find cheap airline tickets?
</TABLE>
Ask Jeeves was designed to create a more personal interaction with users.
The Jeeves character is intended to be a helpful, trusted assistant for our
users, providing help and guidance when they visit our Web site. We believe that
Jeeves will help us increase awareness and user loyalty to Ask Jeeves.
The Question Answering Process. Visitors to our Web site can type a
question in plain English and click the "Ask" button. Ask Jeeves creates an
interaction with the user by presenting a selection of dialogue questions based
on the word meaning and grammar of the original query. When the user clicks on
the appropriate dialogue question, Ask Jeeves provides a direct link to the page
on a third-party Web site that contains the answer.
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For example, a visitor to Ask Jeeves can enter the question:
[Screen shot of Ask Jeeve's Web site home page with the question "Where can I
find a recipe for creme brulee?"]
LOGO
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Ask Jeeves parses the question for word meaning and grammar and displays a
selection of dialogue questions, which help refine the visitor's query. The
dialogue questions also alert users to related possibilities, including relevant
electronic commerce opportunities. For example, in addition to answering the
question "Where can I find a recipe for creme brulee?" our service gives users
the option to click on the "Shop" question "Where can I buy a book about
cooking?" Ask Jeeves also presents results from several leading search engines
to supplement the Ask Jeeves answers. We believe that the question answering and
"Shop" functionalities provide significant opportunities for existing and new
advertising and electronic commerce partners.
[Screen shot of Ask Jeeve's Web site second page containing a set for dialogue
questions in response to the question "Where can I find a recipe for creme
brulee?"]
LOGO
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<PAGE> 40
After users click on the "Ask" or "Shop" button next to the question that
most clearly represents what they are looking for, Ask Jeeves links users to a
relevant Internet destination containing the answer. We are generally able to
point users directly to the specific page of a third-party Web site that
contains the answer, rather than the home page, thus eliminating several
unnecessary clicks. All answers have been selected by our editors and checked
for credibility, accuracy and relevance.
LOGO
[Screen shot page on a third party Web site containing the answer to the
question "Where can I find a recipe for creme brulee?"]
Features. Ask Jeeves offers a number of features:
- Shopping. We believe that our ability to answer questions and connect
consumers with the relevant providers of goods and services in a
non-intrusive way presents a compelling electronic commerce opportunity.
We direct users to a wide variety of shopping-related information, such
as price comparisons and product reviews. We believe these features will
create loyal users who will use Ask Jeeves as an online personal shopping
assistant.
- Channels. Ask Jeeves has created a series of vertical channels that
present frequently asked questions on specific subjects. We created Ask
Jeeves for Kids, at ajkids.com, and the computer, entertainment, family,
health, money, shopping and travel channels, to reflect the topics most
frequently asked by Web users. These channels allow users to browse
questions which we have answered for other users. These channels offer
highly targeted opportunities for our advertising and electronic commerce
partners. Currently, advertisers directly sponsor our presentation of
these channels.
Ask Jeeves for Kids, at ajkids.com, our flagship channel, is geared to
children, teachers and parents. A special editorial team ensures that all
answers are appropriate for children. Accessed through a link on Ask Jeeves or
at Ask Jeeves for Kids, children can find answers to their questions using the
same question answering service used on Ask Jeeves. A kid-safe meta-search
option is also provided using a filtering system provided by SurfWatch. Ask
Jeeves for Kids received an Editor's Choice Award from PC Magazine in 1998.
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<PAGE> 41
We believe that our ability to offer an easy, safe and credible resource for
children will present corporate partnership opportunities.
- Meta-search. We offer a meta-search capability that provides results
from leading search engines in response to each question. This feature
supplements the information in our knowledge base. We believe that this
functionality increases user satisfaction and loyalty.
- Other Features. Ask Jeeves includes a "Take a Peek" feature to allow
users to see the most recently answered questions, which are refreshed
every 30 seconds. This provides both entertainment and guidance about the
types of questions Ask Jeeves can answer. Visitors can also take
advantage of the "New User Tour" to receive instruction on how to use Ask
Jeeves. Visitors can also click on the "Play a Game" feature to build
familiarity with the capabilities of the site.
We have selectively licensed our Consumer Question Answering Service
knowledge base to enhance the Internet-wide search capabilities of company's Web
sites. We entered into these arrangements to endorse and promote our brand
awareness. We currently license our knowledge base to AltaVista, Infonautics
Corporation and Netscape Communications, Inc. We do not currently anticipate
entering into similar knowledge base licensing arrangements in the future.
CORPORATE QUESTION ANSWERING SERVICE
We provide a custom question answering service for companies to help them
quickly connect their customers with relevant information, products and services
on their Web sites. Our customers use our Corporate Question Answering Service
to increase conversion rates of browsers to purchasers, improve customer
satisfaction on their Web sites, and reduce expensive support costs, such as
those associated with call centers. We currently provide question answering
services to BellSouth Corporation, Compaq Computer Corporation, Datek Online
Holdings Corporation, Dell Computer Corporation, Iomega Corporation, Micron
Technology, Inc., Oxygen Media, Inc., Office Depot, Inc., Toshiba America
Information Systems, Inc. and WebTV, Inc.
Companies can use our question answering service across their entire Web
site or limit it to a specific section or function. For example, a company can
use our question answering service to address only pre-sales or support-related
questions. Companies can also license the knowledge bases that support Ask
Jeeves to provide their visitors access to answers that reside on other Web
sites.
Ask Jeeves provides its custom question answering services on an outsourced
basis with little involvement from the customer's technical personnel. The
development of the service begins with the creation of a customized knowledge
base by our professional services group or, in the future, one of our strategic
implementation partners. The editors creating the knowledge base are trained to
develop dialogue questions and to provide links to content on the company Web
site that provides answers to the questions visitors are most likely to ask. A
typical implementation, which takes approximately three months, requires the
development of question templates that link to the customer's existing Web site
content.
Once the Corporate Question Answering Service is operational, our
proprietary tools are used to collect, analyze and report the questions asked
and overall user behavior patterns. Our customers pay us to maintain their
knowledge bases. In addition, we provide user question data to our customers,
allowing them to improve their Web site content and adjust their marketing,
merchandising and product development strategies.
The following table illustrates the breadth of questions that a corporate
question answering service can answer:
<TABLE>
<CAPTION>
GENERAL INFORMATION PRODUCT INFORMATION
------------------- -------------------
<S> <C>
Where are you located? What is the best printer for digital photos?
Where can I find recent press releases? What are the advantages of online banking?
Are you hiring? How can I upgrade my computer to Windows 98?
Who are your customers? Do you have educational software to help
Where can I get a copy of your annual report? with math?
How can I invest in mutual funds?
</TABLE>
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<PAGE> 42
<TABLE>
<CAPTION>
TRANSACTION SUPPORT
----------- -------
<S> <C>
How much tax do I have to pay in Wisconsin? How do I get rid of the black lines on my
What is your return policy? monitor?
Do you offer any discounts? Where can I find technical support
Will an extra charges be added to my documentation?
purchase? How do I troubleshoot my floppy disk drive?
How quickly can I receive my order? What services are available in my support
plan?
How can I check the status of my order?
</TABLE>
TECHNOLOGY AND OPERATIONS
Ask Jeeves has created a proprietary technology and production system aimed
at creating a unique user experience that emphasizes ease of use, relevance,
precision and ability to learn. The goal of the Ask Jeeves technology is to
combine the strengths of natural-language parsing software, data mining
processes, knowledge base creation and maintenance tools with the cognitive
strengths and capabilities of human editors. Our technology matches our user's
question to a short list of dialogue questions and directs the user to
corresponding answers on the Internet. To do this, we focus on five main areas:
the question processing engine, the knowledge base creation and maintenance
process, the customer data mining process, the editorial process and the
scalable operation of the entire system.
THE QUESTION PROCESSING ENGINE
The Question Processing Engine ("QPE") is an internally-developed
proprietary engine that drives our question answering services. The QPE uses our
natural-language parsing software to tokenize, or identify the terms in, each
user question. The QPE then takes the user's question and analyzes it
syntactically and semantically. The syntactic analysis extracts information
about the role that each word fills in the question, while the semantic analysis
extracts information about the meaning of the words in the question. Then the
question is reorganized into a structure that is compatible with our "question
templates." A question template is a master question to which many natural
language questions are matched. This processing allows the system to match
appropriate question templates to the user's question, even if the user asks the
question in a different way or is using different words than used in the
question templates. For example, if a user asks "Who is the king of Siam?" the
service can correctly tell that this is equivalent to "Who is the head of state
of Thailand?" a question template that is stored in the knowledge base.
The matching question templates are then displayed for the user as dialogue
questions. A dialogue question is a question template customized to respond to a
user query. When the user picks a dialogue question, the QPE then extracts an
"answer template" from the knowledge base that contains the information to link
the user directly to a destination on the Internet, including static and dynamic
Hypertext Markup Language ("HTML") pages. The answer templates have been
editorially selected for relevance, accuracy, credibility and quality of the
answer link. A meta-search, which generates links to answers from several
leading search engines, is included with every response to supplement answer
templates available or to provide answers when there are no matching question
templates.
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<PAGE> 43
The diagram below shows the Ask Jeeves QPE and question answering process:
LOGO
Description of the Diagram depicting the QPE and question answering process:
1) Graphic depicting person at computer
Caption: User visits Ask Jeeves and asks a question
2) Box with heading: Question Processing Engine
a) Box containing word: Tokenize
Box containing question: Where can I buy antique furniture?
Caption: QPE identifies the terms within the question
b) Box containing word: Parse
Box containing question: Where can I buy antique furniture?
Caption: QPE parses the question for word meaning and grammar using
semantic and syntactic analysis
c) Box containing word: Normalize
Box containing question: Where can I buy antique furniture?
Caption: Question is reorganized into a structure that is compatible with
Ask Jeeves question templates
d) Box containing word: Match
Box containing text: Ask Jeeves Knowledge Base; Where can I buy; How much
is; Why is: Who is; How can I find a yellow pages listing for
Caption: Question is matched against question templates
e) Arrow to box outside larger box with text: User Log
Caption: User questions are recorded daily
3) User selects from a set of customized question templates presented as
dialogue questions by the QPE
4) Box depicting Web page frame containing text: Answer
Caption: User is directed to the Internet destination containing the answer
THE KNOWLEDGE BASE
Our knowledge base is a collection of question templates and answer
templates. Each knowledge base for the Consumer and Corporate Question Answering
Services is created and maintained using a set of internally developed
proprietary tools which allow content editors to make efficient editorial
judgments about what questions should be included and which Web pages, databases
or other sources of information on the Internet provide the best answer to a
particular question. These tools facilitate a variety of tasks such as creating
question templates and managing knowledge base content. In addition, these tools
enable editors to automatically map sites for answers and content, making the
integration of new content into a knowledge base more efficient. The tools also
help content editors maintain the knowledge base for accuracy and quality by
frequently checking all links from the knowledge base to the Web to ensure that
links are functioning and that the content is still appropriate for the related
question.
DATA MINING PROCESS
The Ask Jeeves data mining process stores, analyzes and reports on all
queries asked of the Ask Jeeves question answering services. In the process of
responding to user questions, the QPE logs all questions and the selected
dialogue questions to a "user log." This user log tracks whether or not the
user's questions were answered. We carefully analyze this information to
determine patterns in the usage of our question answering services. This data
not only helps editors determine what questions should be answered, but it also
enables corporate customers to identify content gaps on their Web sites. Our
data mining process improves the performance of the underlying system by
automatically discovering terms not previously identified by the system.
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<PAGE> 44
THE EDITORIAL PROCESS
Our editorial process is aimed at taking advantage of the cognitive ability
of individuals to understand the questions people ask and to determine the
quality of the Web sites containing the answers. Our editors focus on conforming
the knowledge base to the questions most frequently asked by our users. As
editors build up a base of questions, answers, terms and phrases in a specific
area of knowledge and interest, the human effort required to add to that
knowledge base diminishes.
The diagram below illustrates our editorial process:
1) Cylinder containing text: User Log LOGO
Caption: User questions are recorded daily
2) Graphic depicting human editors
Caption: Ask Jeeves editor receives regular reports for analysis
3) Box containing text: Tools
Caption: Editor uses proprietary tools to efficiently maintain and grow the
knowledge base
4) Box depicting creation of question templates
Caption: Editor creates question templates based on most frequently asked
questions
5) Box depicting development of answer templates
Caption: Editor develops answer templates, checking Web links for relevance
and credibility
6) Box depicting addition of terms and phrases
Caption: Editor adds terms and phrases previously unidentified
7) Box depicting validation of Web links
Caption: Editor ensures Web links are functional and content is still
relevant
8) Cylinder containing text: Ask Jeeves knowledge base
Caption: Ask Jeeves knowledge base get smarter everyday
SCALABILITY AND OPERATIONS
Our Consumer and Corporate Question Answering Services run on arrays of
Intel-based server systems running Microsoft Windows NT and Internet Information
Server Software. The QPE is written in the C++ computer language and is
optimized to handle high traffic volumes. The Ask Jeeves' knowledge bases are
deployed on these servers as read-only, memory mapped files. To scale our
service as traffic increases, we only need to install our QPE and knowledge base
on additional servers.
The servers hosting Ask Jeeves, and some of our corporate customers' Web
sites, are located at Frontier Global Center in Palo Alto, California. This
hosting center provides routing and communication lines with a variety of major
Internet backbone providers, as well as continuous monitoring and communications
support. It also provides its own power generators and multiple, redundant
backup systems. We maintain significant server over-capacity at Frontier Global
Center so that if certain servers fail, the remaining servers can service our
entire user traffic.
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<PAGE> 45
CUSTOMERS
The following is a list of our ten largest advertisers by revenues in 1999,
and a complete list of our electronic commerce merchants and licensing
customers, as of May 31, 1999:
<TABLE>
<CAPTION>
ADVERTISING ELECTRONIC COMMERCE LICENSING CUSTOMERS
----------- ------------------- -------------------
<S> <C> <C>
theglobe.com Amazon.com AltaVista Company
WebPower BarnesandNoble.com BellSouth Corporation
GoTo.com Bigstar Compaq Computer Corporation
AutoNation, Inc. Big Words Datek Online Holdings Corporation
MSN.com CDNow.com Dell Computer Corporation
Fortunecity CD Universe Iomega Corporation
eBay, Inc. Computer Discount Infonautics Corporation
NetVision, Inc. Warehouse Micron Technology, Inc.
WebShopper Creative Computers Netscape Communications
Finet Holdings Corp. DVD Express Corporation
DVD Wave Office Depot, Inc.
eBay Oxygen Media, Inc.
eToys Toshiba America Information
First Source Systems, Inc.
FTD Florist WebTV, Inc.
Global Electronic
Music Marketplace
Gift Tree
IC-Direct
My Simon
PC Flowers
Powell's
Pro Flowers
Reel.com
911 Gifts
</TABLE>
To date, a significant portion of our revenue has been attributable to a
limited number of customers. AltaVista Company and theglobe.com accounted for
approximately 14% and 13%, respectively, of our total revenues for the year
ended December 31, 1998 and approximately 11% and 21%, respectively, of total
revenues for the period ended March 31, 1999. 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.
SALES AND MARKETING
We have a direct sales force that targets advertisers and electronic
commerce merchants. Advertising sales on Ask Jeeves have been generated
primarily by our internal advertising sales organization. Our internal
advertising sales force maintains close relationships with advertisers by
consulting regularly with them on design and placement of their Internet-based
advertising, by providing them with advertising measurement analysis and by
providing a high level of customer support. We also have agreements with
third-party advertising sales organizations. We allocate a percentage of our
advertising inventory to these third parties to include in their advertising
sales networks. Our direct sales force consists of seven professionals as of
April 30, 1999.
We also employ a team of professionals that sell our question answering
service to companies. The sales cycle for corporate sales takes approximately
one to three months. During such time, our sales force works with customers on
the design and functionality of our question answering service on the customer's
Web site. This direct sales force consists of six professionals as of April 30,
1999.
We believe that an aggressive brand promotion campaign will increase usage
of Ask Jeeves, as well as attract additional advertisers and electronic commerce
partners. Historically, we have relied on word-of-mouth publicity and some
online advertising. Today, we engage a number of marketing tools to reach
consumers, including online and offline advertising, public relations, direct
mail, trade shows and ongoing customer
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<PAGE> 46
communications programs. We recently began media advertising campaigns to build
brand awareness, drive consumers to Ask Jeeves and generate increased awareness
among corporate customers.
COMPETITION
CONSUMER QUESTION ANSWERING SERVICE
We face direct competition from companies that provide Internet-wide search
and directory services. For example, we compete with search engines, including
At Home Corporation, Inktomi and AltaVista, for the traffic generated by
Internet users seeking links to third-party content to address their online
information needs. We also compete with directory services, such as Yahoo and
LookSmart because they provide alternative ways for users to obtain the desired
information.
CORPORATE QUESTION ANSWERING SERVICE
Our Corporate Question Answering Service competes with a number of
companies which are addressing the same need to improve automated or online
customer service for corporate clients. While various companies are addressing
this problem through a range of solutions, none competes directly with our
approach of providing human-like online interfaces for company Web sites. The
companies that provides automated online customer products and services against
whom we compete can be categorized as follows:
<TABLE>
<CAPTION>
CATEGORY FOCUS COMPETITORS
-------- ----- -----------
<S> <C> <C>
Web-based Web-site specific: Inktomi Corporation, Primus
Search engine, "frequently asked Telecommunication Group, Inc., Inference
questions" self-help problem resolution Corporation, Verity, Inc. and Web Answers
and expert systems
E-mail Automated response to customer Aptex Software, Inc., Brightware, Inc.,
generated e-mail and automated routing Egain Communications Corp., Kana
of customer e-mail to appropriate Communications, Inc. and Mustang Software,
answer provider Inc.
Phone call Receive, manage and track telephonic Clarify, Inc., Siebel Systems, Inc.,
with customers communications FaceTime Communications, Inc., Vantive
Corporation and Remedy Corporation
</TABLE>
Our ability to compete depends on many factors, many of which are outside
of our control. These factors include: the quality of content, the ease of use
of online services and the timing and market acceptance of new and enhanced
online services. We believe we compete favorably with respect to each of these
factors.
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 partners. 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.
INTELLECTUAL PROPERTY
Ask Jeeves seeks to protect its proprietary rights, but its actions may be
inadequate to protect its patents, trademarks or other proprietary rights to
prevent others from claiming violations of their proprietary rights. Ask Jeeves
has one patent application on file with the United States Patent and Trademark
Office for its "Grammar Template Query System." The "Grammar Template Query
System" is an essential component of
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<PAGE> 47
our technology, but if we are unable to receive a patent, our business will
unlikely be materially and adversely affected. Ask Jeeves enters into
confidentiality agreements with its employees and consultants and generally
controls access to and distribution of its proprietary information. We also
enter into non-disclosure agreements with third parties to whom we disclose
confidential information. Despite Ask Jeeves' efforts to protect its proprietary
rights from unauthorized use or disclosure, parties may attempt to disclose,
obtain or use its proprietary information. The steps Ask Jeeves has taken may
not prevent misappropriation of its proprietary information. Third parties may
infringe or misappropriate Ask Jeeves' proprietary rights, which could have a
material adverse effect on Ask Jeeves' business, results of operations and
financial condition. The validity, enforceability and scope of protection of
proprietary rights in Internet-related industries is uncertain and still
evolving.
Furthermore, third parties may assert infringement claims against Ask
Jeeves. Claims relating to infringement of the trademarks and other intellectual
property rights of third parties and any resultant litigation, should it occur,
could subject Ask Jeeves to significant liability for damages and could result
in the invalidation of Ask Jeeves' proprietary rights. In addition, even if Ask
Jeeves prevails, any litigation could be time-consuming and expensive to defend,
and could result in the diversion of management's time and attention, any of
which could materially adversely affect Ask Jeeves' business, results of
operations and financial condition. Any claims from third parties may also
result in limitations on Ask Jeeves ability to use the trademarks and other
intellectual property subject to those claims unless Ask Jeeves enters into
agreements with the third parties responsible for those claims, which may be
unavailable on commercially reasonable terms.
To date, we have copyrighted all of our computer code, Web site design and
the knowledgebases by affixing a standard copyright notice in the appropriate
places. We have not registered any copyrights. We have also applied for
registered trademark status for "Ask Jeeves," "Ask.com," "Ask Jeeves Kids," and
"KidsAsk.com" and our logo and service marks in the United States. We have
applied for registered trademark status of "Ask.com" with the appropriate
offices in Tunisia for international protection. We seek to protect our
copyrights, service marks, trademarks, trade dress and trade secrets through a
combination of laws and contractual restrictions, such as confidentiality
agreements. For example, we attempt to register our trademarks and service marks
in the United States and internationally. However, effective trademark, service
mark, copyright and trade secret protection may not be available in every
country in which our services are made available online. Because we are devoting
significant resources to building our brands, primarily "Ask Jeeves" and
"Ask.com," through media advertising campaigns, if we are not granted registered
status for the trade and service marks for which we have applied, or if we are
unable to defend our intellectual property rights, our business may be
materially and adversely affected.
We currently own a number of Internet domain names including Ask.com,
askjeeves.com and ajkids.com. Domain names generally are regulated by Internet
regulatory bodies. The relationship between regulations governing domain names
and laws protecting trademarks and similar proprietary rights is unclear. We,
therefore, could be unable to prevent third parties from acquiring domain names
that infringe or otherwise decrease the value of our trademarks and other
proprietary rights.
NEW AND EXISTING REGULATION ON THE INTERNET
We are subject to the same federal, state and local laws as other companies
conducting business on the Internet. Today there are relatively few laws
specifically directed towards online services. However, due to the increasing
popularity and use of the Internet and online services, it is possible that laws
and regulations will be adopted with respect to the Internet or online services.
These laws and regulations could cover issues such as online contracts, user
privacy, freedom of expression, pricing, fraud, content and quality of products
and services, taxation, advertising, intellectual property rights and
information security. Applicability to the Internet of existing laws governing
issues such as property ownership, copyrights and other intellectual property
issues, taxation, libel, obscenity and personal privacy is uncertain.
Several states have proposed legislation that would limit the uses of
personal user information gathered online or require online services to
establish privacy policies. The Federal Trade Commission also has recently
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<PAGE> 48
started a proceeding with one online service regarding the manner in which
personal information is collected from users and provided to third parties.
Changes to existing laws or the passage of new laws intended to address these
issues could directly affect the way we do business or could create uncertainty
in the marketplace. This could reduce demand for our services or increase the
cost of doing business as a result of litigation costs or increased service
delivery costs, or could otherwise harm our business. In addition, goods to
users worldwide, foreign jurisdictions may claim that we are required to comply
with their laws. In some jurisdictions, we will be required to collect
value-added taxes on our fees. Our failure to comply with foreign laws could
subject it to penalties ranging from fines to bans on our ability to offer our
services.
EMPLOYEES
As of April 30, 1999, we had approximately 200 employees. We have never had
a work stoppage, and no employees are represented under collective bargaining
agreements. We consider our relations with our employees to be good.
FACILITIES
Our headquarters are currently located in a leased facility in Berkeley,
California, consisting of approximately 13,000 square feet of office space that
is under a three-year lease with two years remaining. Our annual rental expense
under this lease during 1998 was approximately $81,000, which is subject to
annual increases. We have entered into a lease agreement to relocate our
headquarters to a new facility located in Emeryville, California in the third
quarter of 1999. The original term of the lease is sixty-one months, with an
option, exercisable by us, to extend the lease for up to two additional
five-year terms. The new facility will consist of approximately 37,500 square
feet and our annual rental expense under this lease during 1999 is expected to
be approximately $1,050,000. We also have an option to lease up to an additional
36,000 square feet in the same facility. We believe that this facility will be
adequate for our current and foreseeable future needs.
LEGAL PROCEEDINGS
We are not a party to any material legal proceedings.
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MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
The following table sets forth information regarding the executive
officers, directors and key employees of Ask Jeeves as of May 31, 1999:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Roger A. Strauch(1)...................... 43 Chairman of the Board
Robert W. Wrubel......................... 38 President, Chief Executive Officer and
Director
David C. Warthen......................... 41 Chief Technical Officer
Edward D. Briscoe III.................... 36 Senior Vice President and General
Manager, Consumer Question Answering
Service
Laurence G. Fishkin...................... 45 Senior Vice President, Business
Development
M. Bruce Nakao........................... 55 Chief Financial Officer
Frank A. Vaculin......................... 41 Senior Vice President and General
Manager, Corporate Question Answering
Service
George Lichter........................... 48 President of Ask Jeeves International
Amy Slater............................... 45 General Counsel and Secretary
Christine M. Davis....................... 41 Controller
A. George Battle(1)(2)................... 55 Director
Garrett Gruener(1)....................... 44 Director
Daniel J. Nova(2)........................ 37 Director
Benjamin M. Rosen........................ 65 Director
Geoffrey Y. Yang(1)...................... 40 Director
</TABLE>
- ---------------
(1) Member of the compensation committee.
(2) Member of the audit committee.
Roger A. Strauch has served as Chairman of the Board of Ask Jeeves since
August 1997. Mr. Strauch was Chief Executive Officer of Ask Jeeves from January
1998 to November 1998. Mr. Strauch has served as Chief Executive Officer and
Chief Financial Officer of Symmetricom, Inc., a manufacturer of mixed signal
integrated circuits and telecommunications hardware, since June 1998 and July
1998, respectively. Since July 1997, Mr. Strauch served as Chairman of the Board
of the Roda Group, a venture development firm based in Berkeley, California.
From 1989 to June 1997, Mr. Strauch served as President, then Chairman of the
Board and Chief Executive Officer of TCSI Corporation, a telecommunications
software company.
Robert W. Wrubel has served as Chief Executive Officer and a director of
Ask Jeeves since November 1998 and has served as President since May 1998. From
February 1993 to May 1998, Mr. Wrubel was employed by Knowledge Adventure, Inc.,
an educational software company, in various capacities, including Chief
Operating Officer from February 1997 to May 1998, Vice President, Product
Development from August 1995 to February 1997 and Executive Producer from
February 1993 to July 1995.
David C. Warthen has served as Chief Technical Officer of Ask Jeeves since
August 1997. Mr. Warthen is a founder of Ask Jeeves and served as a director
from June 1996 to February 1999 and as Chief Executive Officer and Chief
Financial Officer from June 1996 to August 1997. In May 1988, Mr. Warthen
founded Desktop Software, a custom software development firm, where he served as
sole proprietor until June 1996. From 1983 to 1988, Mr. Warthen served as
Director of Engineering at Virtual Microsystems, Inc., a software and hardware
company.
Edward D. Briscoe III has served as Senior Vice President and General
Manager, Consumer Question Answering Service of Ask Jeeves since February 1999.
From January 1995 to January 1999, Mr. Briscoe was employed by Iomega
Corporation, a data storage company, in various capacities including President,
Personal Storage Division from January 1997 to January 1999 and Vice President,
Global Sales from January 1995 to
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December 1996. From May 1993 to December 1994, Mr. Briscoe was Director of Sales
and Marketing for the Personal Interactive Electronics Division of Apple
Computer, Inc., a computer manufacturing company.
Laurence G. Fishkin has served as Senior Vice President, Business
Development of Ask Jeeves since January 1999. From January 1998 to September
1998, Mr. Fishkin served as Vice President of Business Development for Relevance
Technologies, Inc., a knowledge management software company. From September 1996
to June 1997, Mr. Fishkin served as Vice President of Business Development and
Acting General Manager for Yahoo! Marketplace, a joint venture between Yahoo!
Inc., an Internet portal company, and Visa International, Inc., a credit
services provider. From June 1992 to February 1994, Mr. Fishkin served as
Director of Business Development and from February 1994 through August 1996, Mr.
Fishkin served as Vice President of Business Development for Information Access
Company, a database publishing company and a division of Ziff-Davis Publishing.
M. Bruce Nakao has served as Chief Financial Officer of Ask Jeeves since
April 1999. From August 1996 to April 1999, Mr. Nakao served as Senior Vice
President and Chief Financial Officer of Puma Technology, Inc., a software
company. From May 1986 to August 1996, Mr. Nakao served as Senior Vice President
and Chief Financial Officer of Adobe Systems Incorporated, a graphic software
company. Mr. Nakao is a member of The Roda Group advisory board.
Frank A. Vaculin has served as Senior Vice President and General Manager,
Corporate Question Answering Service of Ask Jeeves since January 1999. From
August 1996 to January 1999, Mr. Vaculin served as Vice President of North
American Sales for Softbank Services Group, a leading provider of outsource
services to technology companies. From October 1993 to August 1996, Mr. Vaculin
was employed by Borland International, a software company, in various
capacities, including Senior Vice President and General Manager, Desktop and LAN
Tools, Vice President North American Sales, Technical Support and Service, and
Director of Channel Sales.
George Lichter has served as President of Ask Jeeves International since
May 1999. From January 1997 to May 1999, Mr. Lichter served as Senior Vice
President, Business Development of Havas Interactive/Cendant Software. From 1994
to 1997, Mr. Lichter served as Vice President New Business Development of
Knowledge Adventure. From 1993 to 1994, Mr. Lichter was employed as an attorney
at the law firm of Rosenfeld, Meger & Susman.
Amy Slater has served as General Counsel and Secretary for Ask Jeeves since
November 1997. From January 1996 to November 1997, Ms. Slater was in private law
practice with an emphasis on intellectual property law. From December 1993 to
October 1995, Ms. Slater was employed by Oracle Corporation, a relational
database software company. From October 1990 to June 1993, Ms. Slater was of
counsel at the law firm of Townsend & Townsend & Crew L.L.P. Ms. Slater is
married to Mr. Gruener, a director of the Company.
Christine M. Davis has served as Controller of Ask Jeeves since January
1999. From January 1999 to April 1999, Ms. Davis served as Acting Chief
Financial Officer of the Company. From December 1997 to January 1999, Ms. Davis
served as Corporate Controller of TIBCO Software, Inc., a software company. From
April 1987 to December 1997, Ms. Davis served as Corporate Controller, Assistant
Secretary and Treasurer of TCSI Corporation, a telecommunications software
company.
Skip Battle has served as a director of Ask Jeeves since August 1998. Mr.
Battle retired from Andersen Consulting in June 1995. Mr. Battle joined the firm
in 1968, became a partner in 1978 and held a series of management positions in
the firm including Worldwide Managing Partner Market Development and a member of
the firm's Executive Committee, Global Management Council and Partner Income
Committee. Mr. Battle is a member of the Boards of Directors of PeopleSoft,
Inc., Barra Inc. and Fair, Isaac and Company, Incorporated as well as a director
of Masters Select Equity Fund and Masters Select International, registered
investment companies. He is chairman of The Roda Group advisory board.
Garrett Gruener is a founder of the Company and has served as a director
since June 1996 and Secretary from June 1996 to August 1997. Mr. Gruener is a
founding general partner of Alta Partners, a venture capital firm, which was
formed in February 1996. Since September 1992, Mr. Gruener has been a general
partner of
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<PAGE> 51
Burr, Egan, Deleage & Co., a venture capital firm. Mr. Gruener is married to Ms.
Slater, General Counsel and Secretary of Ask Jeeves.
Daniel J. Nova has served as a director of Ask Jeeves since February 1999.
Since August 1996, Mr. Nova has served as a general partner of Highland Capital
Partners, a venture capital firm. From January 1995 to August 1996, he was a
general partner of CMG@Ventures, a venture capital firm. From June 1991 to
January 1995, he was a Senior Associate at Summit Partners, a venture capital
firm. Mr. Nova is a director of Lycos, Inc., an online portal company, and eToys
Inc., a web-based retailer of toys.
Benjamin M. Rosen has served as a director of Ask Jeeves since January
1999. Mr. Rosen is the Acting Chief Executive Officer and a member of the Office
of the Chief Executive of Compaq Computer Corporation, a computer company and a
global supplier of computer systems. Mr. Rosen has served as Chairman of the
Board of Directors of Compaq since 1983. Mr. Rosen is Vice Chairman of the Board
of Trustees of the California Institute of Technology.
Geoffrey Y. Yang has served as a director of Ask Jeeves since February
1999. Since June 1989, Mr. Yang has been a general partner of Institutional
Venture Partners, a venture capital firm. He is a director of Excite, Inc., an
online portal company, and MMC Networks, Inc., a developer of network
processors.
BOARD COMPOSITION
Upon the closing of this offering, our board will be divided into three
classes designated as Class I, Class II and Class III and our directors will be
assigned to each class by the board. At the first annual meeting of stockholders
following the closing of this offering, the term of office of the Class I
directors will expire and Class I directors will be elected for a full term of
three years. At the second annual meeting of stockholders following the closing
of this offering, the term of office of the Class II directors will expire and
Class II directors will be elected for a full term of three years. At the third
annual meeting of stockholders following the closing of this offering, the term
of office of the Class III directors will expire and Class III directors will be
elected for a full term of three years. At each succeeding annual meeting of
stockholders, directors will be elected for a full term of three years to
succeed the directors of the class whose terms expire at such annual meeting.
The Class I directors are Geoffrey Y. Yang and Daniel J. Nova; the Class II
directors are Skip Battle, Roger A. Strauch and Garrett Gruener; and the Class
III directors are Robert W. Wrubel and Benjamin M. Rosen.
BOARD COMMITTEES
The audit committee of the board consists of Skip Battle and Daniel J.
Nova. The audit committee reviews our financial statements and accounting
practices, makes recommendations to the board regarding the selection of
independent auditors and reviews the results, scope, extent and procedures of
the audit and other services provided by our independent auditors. The
compensation committee of the board consists of Roger A. Strauch, Skip Battle
and Garrett Gruener. The compensation committee makes recommendations to the
board concerning salaries and incentive compensation for our officers and
employees and administers our employee benefit plans.
DIRECTOR COMPENSATION
We do not currently pay any cash compensation to our directors for their
service as members of the board. For his services as Chairman of the Board,
Roger A. Strauch received options to purchase an aggregate of 102,892 shares on
August 31, 1998 and an aggregate of 104,078 shares on December 14, 1998, at a
weighted average exercise price of $.20 per share. Skip Battle, one of our
directors, received options to purchase 30,000 shares on August 31, 1998 and
30,000 shares on December 14, 1998, at a weighted average exercise price of $.63
per share. Our directors are eligible to participate in the 1996 Equity
Incentive Plan and the 1999 Equity Incentive Plan.
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<PAGE> 52
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
As noted above, the compensation committee of the board consists of Messrs.
Strauch, Battle and Gruener. Mr. Strauch was Chief Executive Officer of Ask
Jeeves from April 1998 to November 1998. Mr. Gruener was Secretary of Ask Jeeves
from June 1996 to August 1997 and is married to Amy Slater, General Counsel and
Secretary of Ask Jeeves. None of our executive officers serve as members of the
board of directors or compensation committee of any entity that has one or more
executive officers who serve on our board or compensation committee. See
"Certain Transactions" for information regarding transactions with members of
the compensation committee.
EXECUTIVE COMPENSATION
The following table sets forth information concerning compensation earned
in the fiscal year ended December 31, 1998 for our President and Chief Executive
Officer and our three other most highly compensated executive officers, whose
compensation as defined by the Securities and Exchange Commission exceeded
$100,000. These people are referred to as the "named executive officers." The
information in the table includes salaries, bonuses, stock options granted and
other miscellaneous compensation. Ask Jeeves has not granted stock appreciation
rights or restricted stock awards and has no long-term compensation benefits
other than stock options.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------------------- ------------------
NAME AND 1998 OTHER ANNUAL SECURITIES ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS(1) COMPENSATION(2) UNDERLYING OPTIONS COMPENSATION(3)
------------------ ---- ------- -------- --------------- ------------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Roger A. Strauch......... 1998 $ -- $ -- $ -- 205,485 $79,116
Chairman of the Board
and former Chief
Executive Officer
Robert W. Wrubel......... 1998 96,231 9,844 300 1,050,000 --
President and Chief
Executive Officer
David C. Warthen......... 1998 77,590 -- -- 88,209 40,552
Executive Vice
President and Chief
Technical Officer
Daniel H. Miller......... 1998 -- -- -- 205,485 79,116
Former President and
former Vice President
of Sales
</TABLE>
- ---------------
(1) Represents a relocation assistance allowance.
(2) Represents payments received in lieu of health benefits.
(3) Represents the difference between the fair market value and the exercise
prices of options granted during the year consistent with the Common Stock
and Warrant Purchase Agreement among Ask Jeeves, Roger A. Strauch, Daniel H.
Miller, David C. Warthen and The Roda Group Venture Development Company, LLC
for management services. A description of the agreement is contained in
"Certain Transactions."
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<PAGE> 53
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information concerning the grant of stock
options to each of the named executive officers during the fiscal year ended
December 31, 1998.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------------
% OF TOTAL POTENTIAL REALIZABLE VALUE AT
NUMBER OF OPTIONS ASSUMED ANNUAL RATES OF STOCK
SECURITIES GRANTED TO PRICE APPRECIATION FOR
UNDERLYING EMPLOYEES EXERCISE OPTION TERM(3)
OPTIONS IN FISCAL PRICE EXPIRATION --------------------------------------
NAME GRANTED(1) 1998(2) PER SHARE DATE 0% 5% 10%
---- ---------- ---------- ------------ ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Roger A. Strauch..... 65,028 2.6% $.12 05/29/08 $ 642,477 $ 1,051,434 $ 1,678,855
37,864 1.5 .13 07/30/08 373,718 611,842 977,172
37,500 1.5 .73 12/13/08 347,625 583,460 945,278
18,932 0.8 .13 12/13/08 186,859 305,921 488,586
47,646 1.9 .18 12/13/08 467,884 767,527 1,227,238
Robert W. Wrubel..... 675,000 26.9 .46 05/25/08 6,439,500 10,684,535 17,197,260
375,000 15.0 .73 10/11/08 3,476,250 5,834,603 9,452,784
David C. Warthen..... 9,633 0.4 .12 02/27/08 95,174 155,755 248,699
28,900 1.2 .12 05/29/08 285,532 467,282 746,124
8,413 0.3 .13 06/29/08 83,036 135,945 217,118
8,413 0.3 .13 07/30/08 83,036 135,945 217,118
8,414 0.3 .13 12/13/08 83,046 135,961 217,134
24,434 1.0 .18 12/13/08 239,942 393,606 629,357
Daniel H. Miller..... 65,028 2.6 .12 05/30/08 642,477 1,051,434 1,678,855
37,864 1.5 .13 07/30/08 373,718 611,842 977,172
37,500 1.5 .73 12/13/08 347,625 583,460 945,278
18,932 0.8 .13 12/13/08 186,859 305,921 488,586
47,646 1.9 .18 12/13/08 467,884 767,527 1,227,238
</TABLE>
- ---------------
(1) Options granted during the fiscal year ended December 31, 1998 were granted
under either the 1996 Equity Incentive Plan or pursuant to certain
nonstatutory stock option agreements. All of the options granted to Mr.
Strauch and Mr. Miller are fully vested except the options to purchase
37,500 shares. 6,250 shares under each of these options vested in December
1998 and 31,250 shares under each of these options vest in June 1999. Mr.
Wrubel's options vest over four years with 25% vesting on the first
anniversary of the vesting commencement date of such options and the
remainder vesting monthly over the next three years; provided, however, that
in the event Mr. Wrubel's employment is terminated less than six months
before or less than one year after a change of control, all unvested options
held by Mr. Wrubel shall vest and become immediately exercisable. All of Mr.
Warthen's options are fully vested.
(2) Based on granted options to purchase 2,504,979 shares of common stock during
the period from January 1, 1998 to December 31, 1998.
(3) Potential realizable values are computed by multiplying the number of shares
of common stock subject to a given option by the assumed initial public
offering price of $10.00 per share, assuming that the aggregate stock value
derived from that calculation compounds at the annual 0%, 5% or 10% rate
shown in the table for the entire ten-year term of the option and
subtracting from that result the aggregate option exercise price. The 5% and
10% assumed annual rates of stock appreciation are mandated by the rules of
the SEC and do not reflect our estimate or projection of future stock price
growth.
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<PAGE> 54
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth the number of shares acquired and the value
realized upon the exercise of stock options during the fiscal year ended
December 31, 1998 and the number of shares of common stock subject to
exercisable and unexercisable stock options held as of December 31, 1998 by each
of the named executive officers. Also reported are values of unexercised
in-the-money options, which represent the positive spread between the respective
exercise prices of outstanding stock options and the assumed initial public
offering price of $10.00 per share.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
NUMBER OF OPTIONS IN-THE-MONEY OPTIONS
SHARES AT DECEMBER 31, 1998 AT DECEMBER 31, 1998
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Roger A. Strauch.......... 102,892 $1,016,194 66,578 37,500 $ 654,743 $ 347,625
Robert W. Wrubel.......... -- -- -- 1,050,000 -- 9,915,750
David C. Warthen.......... 25,002 249,930 184,457 -- 1,825,333 --
Daniel H. Miller.......... 102,892 1,016,194 66,578 37,500 654,743 347,625
</TABLE>
- ---------------
(1) Based on the assumed initial public offering price per share of $10.00,
minus the per share exercise price, multiplied by the number of shares
issued upon exercise of the option.
EMPLOYEE BENEFIT PLANS
1996 EQUITY INCENTIVE PLAN
Our 1996 Equity Incentive Plan was adopted by the board and approved by the
stockholders in December 1996. The 1996 Incentive Plan was amended in January
1999 and February 1999. There is currently an aggregate of 5,502,852 shares of
common stock authorized for issuance under the 1996 Incentive Plan. Options
currently outstanding under the 1996 Incentive Plan will continue in full force
and effect under the terms of the 1996 Incentive Plan until they are exercised
or terminated in accordance with their terms.
As of April 30, 1999, we had granted options under the 1996 Incentive Plan
to purchase an aggregate of approximately 5,379,335 shares of common stock, of
which options to purchase approximately 301,960 shares had been exercised,
options to purchase approximately 22,500 shares had been cancelled and options
to purchase approximately 5,054,875 shares at exercise prices ranging from
$.0036 to $9.50 per share remained outstanding. We will not make future grants
under the 1996 Incentive Plan.
The 1996 Incentive Plan provides for the grant of incentive stock options
under the Internal Revenue Code, as amended to employees and nonstatutory stock
options to employees, non-employee directors and consultants. The 1996 Incentive
Plan also provides for the grant of restricted stock awards and stock bonuses
although no such awards were granted prior to the termination of the plan. The
1996 Incentive Plan is administered by the board, or a committee appointed by
the board which determines recipients and types of awards to be granted,
including the exercise price, number of shares subject to the award and the
exercisability thereof. Currently, the 1996 Incentive Plan is being administered
by the compensation committee of the board.
The terms of stock options granted under the 1996 Incentive Plan may not
exceed 10 years. The exercise price of options granted under the 1996 Incentive
Plan is determined by the board or a committee appointed by the board provided
that the exercise price of an incentive stock option cannot be less than 100% of
the fair market value of the common stock on the date of the option grant and
the exercise price of a nonstatutory stock option cannot be less than 85% of the
fair market value of the common stock on the date of the option grant. Options
granted under the 1996 Incentive Plan vest at the rate specified in the
applicable option agreement. No options may be transferred by the optionholder
other than by will or the laws of descent or distribution; provided that, an
optionholder whose employment or other service relationship with us or any
affiliate terminates for any reason other than by death or permanent and total
disability, may exercise vested options in the three-month period following such
cessation, unless such options terminate or expire sooner by
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<PAGE> 55
their terms, or in such longer or shorter period specified in the option
agreement. Vested options may be exercised for up to 12 months after an
optionholder's employment or other service relationship with us or any affiliate
ceases due to death or disability, unless such options terminate or expire
sooner by their terms.
Prior to the termination of the 1996 Incentive Plan, shares subject to
stock options that have expired or otherwise terminated without having been
exercised in full become available again for the grant of awards under the 1996
Incentive Plan.
No incentive stock option may be granted to any person who, at the time of
the grant, owns stock possessing more than 10% of the total combined voting
power of Ask Jeeves or any affiliate of Ask Jeeves, unless the option exercise
price is at least 110% of the fair market value of the stock subject to the
option on the date of grant, and the term of the option does not exceed five
years from the date of grant. The aggregate fair market value, determined at the
time of grant, of the shares of common stock with respect to which incentive
stock options are exercisable for the first time by an optionholder during any
calendar year under all stock option plans of Ask Jeeves and its affiliates may
not exceed $100,000.
The option agreements may provide that we may exercise a right of first
refusal on any proposed transfer of shares exercised. Substantially all of the
option agreements provide that if a change of control of Ask Jeeves occurs prior
to the first anniversary of the vesting commencement date of the option
agreement, then the vesting which would have occurred by such anniversary shall
occur. After the first anniversary of the date of grant, these option agreements
provide that the vesting of each option shall accelerate by six months.
Upon a change of control of Ask Jeeves, each outstanding option shall be
assumed or an equivalent option substituted by the successor corporation or, if
the successor corporation does not assume or substitute for outstanding options,
the vesting provisions of all such options shall accelerate.
1999 EQUITY INCENTIVE PLAN
In April 1999, the board adopted the 1999 Equity Incentive Plan. In May
1999, the board amended and the stockholders approved the 1999 Incentive Plan.
There is currently an aggregate of 2,125,000 shares of common stock authorized
for issuance under the 1999 Incentive Plan; provided, however, that each year on
the date of the annual stockholders meeting, beginning on the date of the annual
meeting in 2000, the share reserve under the 1999 Incentive Plan shall be
increased by the least of the following: (1) 2,250,000 shares, (2) 5% of shares
outstanding or (3) a smaller number of shares as determined by the board.
The 1999 Incentive Plan provides for the grant of incentive stock options,
as defined under the Internal Revenue Code, to employees and nonstatutory stock
options, restricted stock purchase awards and stock bonuses to employees,
non-employee directors, consultants and advisors of Ask Jeeves and its
affiliates. The 1999 Incentive Plan is administered by the board, or a committee
appointed by the board, which determines recipients and types of awards to be
granted, including the exercise price, number of shares subject to the award and
the exercisability thereof. Currently, the 1999 Incentive Plan is administered
by the compensation committee of the board.
The terms of options granted under the 1999 Incentive Plan may not exceed
10 years. The board, or a committee appointed by the board, determines the
exercise price of options granted under the 1999 Incentive Plan. However, the
exercise price for an incentive stock option cannot be less than 100% of the
fair market value of the common stock on the date of the option grant, and the
exercise price for a nonstatutory stock option cannot be less than 85% of the
fair market value of the common stock on the date of the option grant. Options
granted under the 1999 Incentive Plan vest at the rate specified in the option
agreement. Generally, the optionholder may not transfer a stock option other
than by will or the laws of descent or distribution unless the optionholder
holds a nonstatutory stock option that provides for transfer in the stock option
agreement. However, an optionholder may designate a beneficiary who may exercise
the option following the optionholder's death. An optionholder whose employment
or other service relationship with Ask Jeeves or any affiliate ceases for any
reason may exercise vested options for the term provided in the option
agreement.
No incentive stock option may be granted to any person who, at the time of
the grant, owns stock possessing more than 10% of the total combined voting
power of Ask Jeeves or any affiliate of Ask Jeeves,
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<PAGE> 56
unless the option exercise price is at least 110% of the fair market value of
the stock subject to the option on the date of grant and the term of the option
does not exceed five years from the date of grant. In addition, the aggregate
fair market value, determined at the time of grant of the shares of common stock
with respect to which incentive stock options are exercisable for the first time
by an optionholder during any calendar year under all stock plans of Ask Jeeves
and its affiliates, may not exceed $100,000.
Subject to Section 162(m) of the Internal Revenue Code which denies a
deduction to publicly held corporations for certain compensation paid to
specified employees in a taxable year to the extent that the compensation
exceeds $1,000,000, no person may be granted options under the 1999 Incentive
Plan covering more than 500,000 shares of common stock in any calendar year.
Shares subject to stock awards that have expired or otherwise terminated
without having been exercised in full again become available for the grant of
awards under the 1999 Incentive Plan.
Restricted stock purchase awards granted under the 1999 Incentive Plan may
be granted pursuant to a repurchase option in favor of Ask Jeeves in accordance
with a vesting schedule determined by the board or a committee appointed by the
board. The price of a restricted stock purchase award under the 1999 Incentive
Plan cannot be less than 85% of the fair market value of the stock subject to
the award on the date of grant. Stock bonuses may be awarded in consideration of
past services without a purchase payment. Unless otherwise specified, rights
under a stock bonus or restricted stock bonus agreement generally may not be
transferred other than by will or the laws of descent and distribution during
such period as the stock awarded pursuant to such an agreement remains subject
to the agreement.
If there is any sale, lease or other disposition of all or substantially
all of Ask Jeeves' assets, any merger, reverse merger or any consolidation in
which Ask Jeeves is not the surviving corporation, then all outstanding awards
under the 1999 Incentive Plan either will be assumed or substituted for by any
surviving entity. If the surviving entity determines not to assume or substitute
for such awards, the vesting provisions of such stock awards held by persons
whose continuous service with Ask Jeeves has not terminated will be accelerated
and the awards terminated if not exercised prior to such transaction.
As of April 30, 1999, no options to purchase shares of common stock, stock
bonuses or restricted stock grants have been granted under the 1999 Incentive
Plan. The 1999 Incentive Plan will terminate on April 15, 2009 unless sooner
terminated by the board, or a committee appointed by the board.
OPTIONS GRANTED OUTSIDE THE PLANS
From time to time through March 1999, Ask Jeeves granted options to
purchase common stock of Ask Jeeves to employees and consultants outside of the
1996 Incentive Plan and the 1999 Incentive Plan. Such options have exercise
prices which were below 85% of the fair market value of the common stock of Ask
Jeeves on the date of grant. Since inception, Ask Jeeves issued options to
purchase an aggregate of 1,050,518 shares of common stock at a weighted average
exercise price of $.26 per share outside of the 1996 Incentive Plan and the 1999
Incentive Plan. Of these options, options to purchase 823,561 shares have been
exercised.
EMPLOYEE STOCK PURCHASE PLAN
In April 1999, the board adopted the Employee Stock Purchase Plan covering
an aggregate of 125,000 shares of common stock. In May 1999, the board amended
and the stockholders approved the Purchase Plan to increase the number of shares
reserved under the Purchase Plan to 400,000 shares of common stock and to
provide that each year on the date of the annual stockholders meeting, beginning
in 2000, the share reserve under the Purchase Plan shall be increased by the
least of the following (1) 300,000 shares, (2) 0.5% of shares outstanding or (3)
a smaller number of shares as determined by the board. The Purchase Plan will
become effective on the effective date of the initial public offering. The
Purchase Plan is intended to qualify as an "employee stock purchase plan" within
the meaning of Section 423 of the Internal Revenue Code. Under the Purchase
Plan, the board may authorize participation by eligible employees, including
officers, in periodic
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<PAGE> 57
offerings following the adoption of the Purchase Plan. The offering period for
any offering will be no longer than 27 months.
The Purchase Plan provides a means by which employees of Ask Jeeves and
designated affiliates may purchase common stock of Ask Jeeves through payroll
deductions. The Purchase Plan is implemented by offerings of rights to eligible
employees. Under the Purchase Plan, Ask Jeeves may specify offerings with a
duration of not more than 27 months and may specify shorter purchase periods
within each offering. The first offering will begin on the effective date of the
initial public offering and will end on July 31, 2001. Purchases will occur on
January 31, 2000, July 31, 2000 and each subsequent January 31 and July 31
thereafter. Unless otherwise determined by the board, common stock is purchased
for accounts of employees participating in the Purchase Plan at a price per
share equal to the lower of (1) 85% of the fair market value of a share of
common stock on the date of commencement of participation in the offering or (2)
85% of the fair market value of a share of common stock on the date of purchase.
Generally, all regular employees, including executive officers, who work at
least 20 hours per week and are customarily employed by Ask Jeeves or by an
affiliate of Ask Jeeves for at least five months per calendar year may
participate in the Purchase Plan and may authorize payroll deductions of up to
15% of their base compensation for the purchase of stock under the Purchase
Plan.
Eligible employees may be granted rights only if the rights together with
any other rights granted under employee stock purchase plans do not permit such
employee's rights to purchase stock of Ask Jeeves to accrue at a rate that
exceeds $25,000 of fair market value of such stock for each calendar year in
which such rights are outstanding. No employee shall be eligible for the grant
of any rights under the Purchase Plan if immediately after such rights are
granted, such employee has voting power of more than 5% of the outstanding
capital stock of Ask Jeeves.
As of April 30, 1999, no shares of common stock had been purchased under
the Purchase Plan.
In the event of certain changes of control, the board has discretion to
provide that each right to purchase common stock will be assumed or an
equivalent right substituted by the successor corporation, or the board may
shorten the offering period and provide for all sums collected by payroll
deductions to be applied to purchase stock immediately prior to the change in
control. The Purchase Plan will terminate at the direction of the board or when
all of the shares reserved for issuance have been purchased.
401(k) PLAN
Effective January 1, 1999, the board adopted a tax-qualified employee
savings and retirement plan covering all employees. Pursuant to the 401(k) Plan,
employees may elect to reduce their current compensation by up to the lesser of
25%, decreased by amounts contributed in the form of a matching contribution, if
any, of eligible compensation, or $10,000, the statutorily prescribed annual
limit in 1999, and have the amount of reduction contributed to the 401(k) Plan.
The trustee under the 401(k) Plan, at the direction of each participant, invests
the assets of the 401(k) Plan in any of eight investment options. The 401(k)
Plan is intended to qualify under Section 401(a) of the Internal Revenue Code so
that contributions by employees to the 401(k) Plan, and income earned on plan
contributions, are not taxable to employees until withdrawn, and so that we can
deduct the contributions by employees when made. We may make matching or
additional contributions to the 401(k) Plan, in amounts to be determined
annually by the board. We do not expect to make matching or additional
contributions to the 401(k) Plan in 1999.
COMPENSATION ARRANGEMENTS
Mr. Wrubel's employment letter of May 22, 1998 with Ask Jeeves provides for
an initial annual base salary of $180,000. Pursuant to the offer letter, Mr.
Wrubel received a loan of $75,000 for 90 days with an annual interest rate of
7.5%. The loan was repaid in full in February 1999. In May 1998, Mr. Wrubel was
granted an option to purchase 675,000 shares of common stock at an exercise
price of $.46 per share. Based on an assumed initial public offering price of
$10.00 per share and assuming the full vesting of such option, this option will
have an aggregate value of $6,439,500. Pursuant to the offer letter, upon his
promotion to Chief Executive Officer in November 1998, Mr. Wrubel received an
additional option to purchase 375,000 shares of common stock at an exercise
price of $.73 per share. Based on an assumed initial public offering price of
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<PAGE> 58
$10.00 per share and assuming the full vesting of such option, this option will
have an aggregate value of $3,476,250. The options vest over four years;
provided however, that in the event Mr. Wrubel's employment is terminated less
than six months before or less than one year after a change of control, all
unvested options held by Mr. Wrubel shall vest and become immediately
exercisable. In addition, Ask Jeeves paid $9,844 in relocation expenses for Mr.
Wrubel. On June 1, 1999, Mr. Wrubel's offer letter was revised to provide for
the grant to Mr. Wrubel of an additional 200,000 options at $10.00 per share,
equal to the assumed initial public offering price, and to provide that, in the
event Mr. Wrubel's employment is terminated for any reason other than cause, he
will receive six months base salary and the equivalent of six months expected
bonus, with a total of expected bonus and salary cost not to exceed $200,000.
Mr. Briscoe's employment offer letter of January 18, 1999 with Ask Jeeves
provides for an initial annual base salary of $170,000, approximately $156,000
of which he has elected to defer until February 2000, a bonus of $30,000 payable
on January 20, 2000 and a potential performance-based bonus of $100,000 payable
on January 20, 2000. Mr. Briscoe was granted an option to purchase 400,000
shares of common stock at an exercise price of $.73 per share. Based on the
assumed initial public offering price of $10.00 per share and assuming the full
vesting of such option, this option will have an aggregate value of $3,708,000.
The option vests over a period of four years with 100,000 shares vesting in
January 2000 and 8,333 shares vesting at the end of each month thereafter. The
offer letter also provided Mr. Briscoe with the right to purchase 231,032 shares
of Series B Preferred Stock at a price of $4.33 per share in our March 1999
financing. These shares all automatically convert into common stock on a
one-for-one basis upon the completion of this offering. Based on the assumed
initial public offering price of $10.00 per share, these shares have an
aggregate value of $2,310,320. Mr. Briscoe also received a relocation allowance
of up to $150,000. Mr. Briscoe's offer letter was revised on June 1, 1999 to
increase his annual base salary to $175,000 and to provide that in the event Mr.
Briscoe's employment is terminated without cause he will receive six months base
salary and the equivalent of six months expected bonus, with the total payment
not to exceed $150,000. In addition, if Mr. Briscoe's employment is terminated
due to a change of control, in addition to any accelerated vesting contained in
his option agreement, six months of vesting under the option shall become
immediately exercisable.
Mr. Nakao's employment offer letter of April 16, 1999 with Ask Jeeves
provides for an initial annual base salary of $175,000. It also provides that,
in the event Mr. Nakao's employment is terminated for any reason other than
cause, he will receive six months salary. Mr. Nakao was also granted an option
to purchase 250,000 shares of common stock at an exercise price of $9.50 per
share. Based on the assumed initial public offering price of $10.00 per share
and assuming the full vesting of such option, this option will have an aggregate
value of $125,000. The option vests over a period of four years, with 62,500
shares vesting in April 2000 and 5,208 shares vesting at the end of each month
thereafter; provided, however, that in the event Mr. Nakao's employment is
terminated without cause, (i) prior to April 19, 2000, 100,000 of the shares
will become immediately exercisable or (ii) after April 19, 2000, 37,500 of the
shares will become immediately exercisable. However, if Mr. Nakao resigns and a
transition to a successor Chief Financial Officer approved by the board has been
accomplished, Mr. Nakao will receive the same vesting acceleration as if he was
terminated without cause.
Mr. Fishkin's employment offer letter of January 11, 1999 with Ask Jeeves
provides for an initial annual base salary of $130,000 and an initial bonus of
$50,000. It also provides that, in the event Mr. Fishkin's employment is
terminated due to a change of control, he will receive six months base salary.
Mr. Fishkin was also granted an option to purchase 225,000 shares of common
stock at an exercise price of $.73 per share. Based on the assumed initial
public offering price of $10.00 per share and assuming the full vesting of such
option, this option will have an aggregate value of $2,085,750. The option vests
over four years, with 56,250 shares vesting in January 2000 and 4,687 shares
vesting at the end of each month thereafter; provided, however, that in the
event of a change of control, in addition to any acceleration of vesting
contained in his option agreement, 12 months of vesting under the options shall
become immediately exercisable.
Mr. Vaculin's employment offer letter of January 5, 1999 with Ask Jeeves
provides for an initial annual base salary of $175,000 and quarterly
performance-based bonuses based upon achievement of recognized revenues. It also
provides that in the event Mr. Vaculin's employment is terminated for any reason
other than
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<PAGE> 59
cause, he will receive six months base salary and the equivalent of six months
expected bonus, with a total of expected bonus and salary not to exceed
$150,000. Mr. Vaculin was also granted an option to purchase 300,000 shares of
common stock at an exercise price of $.73 per share. Based on the assumed
initial public offering price of $10.00 per share and assuming the full vesting
of such option, this option will have an aggregate value of $2,781,000. The
option vests over four years, with 75,000 shares vesting in January 2000 and
6,250 shares vesting at the end of each month thereafter; provided, however, in
the event Mr. Vaculin's employment is terminated due to a change of control of
Ask Jeeves, in addition to any acceleration of vesting contained in his option
agreement, six months of vesting under the option shall become immediately
exercisable.
Mr. Lichter's employment offer letter of May 19, 1999 with Ask Jeeves
provides for an initial annual base salary of $150,000 and an initial annual
bonus of $50,000 paid on the first anniversary of his start date. Mr. Lichter
was also granted an option to purchase 100,000 shares of common stock at an
exercise price of $10.00 per share, equal to the assumed initial public offering
price. The option vests over four years, with 25,000 shares vesting in May 2000
and 2,083 shares vesting at the end of each month thereafter; provided, however,
in the event of a change of control, in addition to any vested options, six
months of vesting under the option shall become immediately exercisable. The
offer letter also provides that, in the event Mr. Lichter's employment is
terminated without cause, he will receive six months base salary and, in
addition to any vested options, six months of vesting under the options shall
become immediately exercisable.
As described under "Certain Transactions," Mr. Warthen's employment
agreement contained in the Common Stock and Warrant to Purchase Common Stock
Purchase Agreement dated August 20, 1997 provides for an initial annual base
salary of $80,000 and the grant of immediately exercisable nonstatutory stock
options at an exercise price equal to 25% of the fair market value of the common
stock on the date of grant. Pursuant to this provision, we granted Mr. Warthen
options to purchase an aggregate of 184,458 shares of common stock at a weighted
average exercise price of $.10 per share. This provision has expired and the
Company will not grant any further options under this provision. To date, Mr.
Warthen has not exercised such options. Based on the assumed initial public
offering price of $10.00 per share, these options will have an aggregate value
of $1,826,134. If Mr. Warthen voluntarily terminates his employment with us
prior to August 20, 1999, we have the right to repurchase a portion of the total
number of our shares held by him.
INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS AND LIMITATION OF LIABILITY
Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's board of directors to grant indemnity to directors and
officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities, including reimbursement for expenses
incurred, arising under the Securities Act.
As permitted by Delaware Law, our Amended and Restated Certificate of
Incorporation, which will become effective upon the closing of this offering,
includes a provision that eliminates the personal liability of its directors for
monetary damages for breach of fiduciary duty as a director, except for
liability:
- for any breach of the director's duty of loyalty to us or our
stockholders;
- for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
- under Section 174 of the Delaware Law regarding unlawful dividends and
stock purchases; or
- for any transaction from which the director derived an improper personal
benefit.
As permitted by Delaware Law, our Amended and Restated Certificate of
Incorporation and/or our Bylaws, which will become effective upon the closing of
this offering, provide that:
- we are required to indemnify our directors and officers to the fullest
extent permitted by Delaware Law, so long as such person acted in good
faith and in a manner the person reasonably believed to be in or not
opposed to the best interests of Ask Jeeves, and with respect to any
criminal action or proceeding, had no reasonable cause to believe the
person's conduct was unlawful.
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<PAGE> 60
- we are permitted to indemnify our other employees to the extent that we
indemnify our officers and directors, unless otherwise required by law,
our Amended and Restated Certificate of Incorporation, our Bylaws or
agreements;
- we are required to advance expenses, as incurred, to our directors and
officers in connection with a legal proceeding to the fullest extent
permitted by Delaware Law, subject to certain very limited exceptions;
and
- the rights conferred in our Bylaws are not exclusive.
Prior to the closing of this offering, we intend to enter into Indemnity
Agreements with each of our current directors and officers to give such
directors and officers additional contractual assurances regarding the scope of
the indemnification set forth in our Amended and Restated Certificate of
Incorporation and our Bylaws and to provide additional procedural protections.
At present, there is no pending litigation or proceeding involving any of our
directors, officers or employees regarding which indemnification is sought, nor
are we aware of any threatened litigation that may result in claims for
indemnification.
We expect to obtain directors' and officers' liability insurance prior to
the offering.
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<PAGE> 61
CERTAIN TRANSACTIONS
COMMON STOCK FINANCINGS
We issued 1,083,498 shares of common stock at a purchase price of $.23 per
share and warrants to purchase 541,749 shares of common stock with an exercise
price of $.23 to each of Roger A. Strauch, our Chairman of the Board, and Daniel
H. Miller, a 5% stockholder and our former officer and director, pursuant to the
Common Stock and Warrant to Purchase Common Stock Purchase Agreement dated
August 20, 1997 among Ask Jeeves, Roger A. Strauch, Daniel H. Miller, The Roda
Group Venture Development Company, LLC ("The Roda Group") and David C. Warthen
(the "Purchase Agreement"). Mr. Strauch and Mr. Miller are managing members of
The Roda Group. As a condition of the Purchase Agreement, The Roda Group agreed
to lease us 1,700 square feet of office space at 918 Parker Street, Berkeley,
California, 94710 through December 31, 1998. We paid a total of $4,157 in lease
payments to The Roda Group during such term. As a further condition of the
Purchase Agreement, Mr. Strauch and Mr. Miller agreed to provide us with
management services through December 31, 1998 for which they each received
nonstatutory stock options at an exercise price equal to 25% of the fair market
value of the common stock on the date of grant. Pursuant to such provision, Mr.
Strauch and Mr. Miller each received options to purchase an aggregate of 169,470
shares of common stock at a weighted average exercise price of $.14 per share.
This provision has expired and we will not grant any further options under it.
As a further condition of the Purchase Agreement, Mr. Warthen agreed to act as
our Executive Vice President and Chief Technical Officer, for which he received
an annual salary of $80,000 and nonstatutory stock options at an exercise price
equal to 25% of the fair market value of the common stock on the date of grant.
Pursuant to this provision, we granted Mr. Warthen options to purchase an
aggregate of 184,458 shares of common stock at a weighted average price of $.10
per share. This provision has expired and we will not grant any further options
under it. If Mr. Warthen voluntarily terminates his employment with us prior to
August 20, 1999, we have the right to repurchase a portion of the total number
of our shares held by him at the original issuance price.
In June 1998, we sold an aggregate of 2,148,805 shares of common stock at a
purchase price of $.53 per share. The following executive officers, directors,
holders of more than 5% of our securities and members of such persons' immediate
families purchased shares of common stock:
<TABLE>
<CAPTION>
AGGREGATE
SHARES OF PURCHASE VALUE OF
PURCHASER COMMON STOCK PRICE SHARES(1)
--------- ------------ --------- -------------
<S> <C> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS
Roger A. Strauch...................... 94,661 $ 50,170 $ 946,610
Daniel H. Miller...................... 94,661 50,170 946,610
M. Bruce Nakao........................ 47,330 25,085 473,300
Skip Battle........................... 47,330 25,085 473,300
Garrett Gruener....................... 94,661 50,170 946,610
Benjamin M. Rosen..................... 141,991 75,255 1,417,910
5% STOCKHOLDERS
Leavitt Family Trust.................. 236,653 $125,426 $ 2,366,530
</TABLE>
- ---------------
(1) Based on the assumed initial public offering price per share of $10.00.
See the notes to the table on beneficial ownership in "Principal
Stockholders" for information relating to the beneficial ownership of such
shares.
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<PAGE> 62
In September 1998, we sold an aggregate of 1,855,415 shares of common stock
at a purchase price of $.73 per share. The following executive officers,
directors, holders of more than 5% of our securities and members of such
persons' immediate families purchased shares of Common Stock:
<TABLE>
<CAPTION>
SHARES OF AGGREGATE
COMMON PURCHASE VALUE OF
PURCHASER STOCK PRICE SHARES(1)
--------- ------------ --------- -------------
<S> <C> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS
Roger A. Strauch...................... 137,438 $100,330 $ 1,374,380
Daniel H. Miller...................... 137,438 100,330 1,374,380
Garrett Gruener....................... 137,438 100,330 1,374,380
Benjamin M. Rosen..................... 584,112 426,402 5,841,120
5% STOCKHOLDERS
Leavitt Family Trust.................. 103,078 $ 75,247 $ 1,030,780
</TABLE>
- ---------------
(1) Based on the assumed initial public offering per share of $10.00.
See the notes to the table on beneficial ownership in "Principal
Stockholders" for information relating to the beneficial ownership of such
shares.
PREFERRED STOCK FINANCINGS
In November 1998 and January 1999, we sold an aggregate of 3,709,884 shares
of Series A preferred stock at a purchase price of $2.06 per share. Upon the
closing of this offering, all outstanding shares of Series A preferred stock
will automatically convert into shares of common stock on a one-for-one basis.
The following executive officers, directors, holders of more than 5% of our
securities and members of such persons' immediate families purchased shares of
Series A preferred stock.
<TABLE>
<CAPTION>
SHARES OF AGGREGATE
SERIES A PURCHASE VALUE OF
PURCHASER PREFERRED STOCK PRICE SHARES(1)
--------- --------------- ---------- --------------
<S> <C> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS
Roger A. Strauch.................... 106,125 $ 218,618 $ 1,061,250
M. Bruce Nakao...................... 4,847 9,985 48,470
Amy Slater.......................... 4,847 9,985 48,470
Daniel H. Miller.................... 106,125 218,618 1,061,250
Garrett Gruener..................... 92,595 190,746 925,950
Benjamin M. Rosen................... 519,544 1,070,261 5,195,440
5% STOCKHOLDERS
CPQ Holdings, Inc. ................. 2,480,765 $5,110,376 $ 24,807,650
Leavitt Family Trust................ 42,248 87,031 422,480
</TABLE>
- ---------------
(1) Based on the assumed initial public offering per share of $10.00.
In February and March 1999, we sold an aggregate of 5,775,806 shares of
Series B preferred stock at a purchase price of $4.33 per share. Upon the
closing of this offering, all outstanding shares of Series B preferred stock
will automatically convert into shares of common stock on a one-for-one basis.
The following executive
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<PAGE> 63
officers, directors, holders of more than 5% of our securities and members of
such persons' immediate families purchased shares of Series B preferred stock.
<TABLE>
<CAPTION>
SHARES OF AGGREGATE
SERIES B PURCHASE VALUE OF
PURCHASER PREFERRED STOCK PRICE SHARES(1)
--------- --------------- ----------- -----------------
<S> <C> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS
Edward D. Briscoe III............... 231,032 $ 1,000,368 $ 2,310,320
M. Bruce Nakao...................... 8,645 37,433 86,450
Amy Slater.......................... 8,520 36,892 85,200
Skip Battle......................... 13,458 58,273 134,580
Garrett Gruener..................... 57,758 250,092 577,580
Benjamin M. Rosen................... 172,776 748,120 1,727,760
5% STOCKHOLDERS
CPQ Holdings, Inc................... 344,091 $ 1,489,914 $ 3,440,910
Entities affiliated with Highland
Capital........................... 2,310,322 10,003,694 23,103,220
Entities affiliated with
Institutional Venture Partners.... 1,386,193 $ 6,002,216 $ 13,861,930
Leavitt Family Trust................ 128,136 554,829 1,281,360
Roda Group Investment Fund I, LLC... 856,732 3,709,650 8,567,320
</TABLE>
- ---------------
(1) Based on the assumed initial public offering price per share of $10.00.
See the notes to the table on beneficial ownership in "Principal
Stockholders" for information relating to the beneficial ownership of such
shares.
VOTING AGREEMENT
In connection with our Series B preferred stock financing, we entered into
the Amended and Restated Voting Agreement dated February 24, 1999 with the
holders of the Series A preferred stock, the holders of the Series B preferred
stock and certain of our common stockholders to provide for the future voting of
such holders' shares. Under the Voting Agreement, the preferred stockholders
agreed to vote their shares in connection with any class or series vote pursuant
to our Amended and Restated Certificate of Incorporation, Bylaws or the law in
the same proportion as the overall vote of the eligible stock of Ask Jeeves. In
addition, these holders agreed to elect one individual nominated by entities
affiliated with Highland Capital to our board, so long as entities affiliated
with Highland Capital hold at least 5% of our outstanding common stock. The
Voting Agreement terminates on the closing date of this offering.
INVESTOR RIGHTS AGREEMENT
In connection with our Series B preferred stock financing, we entered into
the Amended and Restated Investor Rights Agreement dated February 24, 1999 with
the holders of Series A and Series B preferred stock. The Investor Rights
Agreement provided these stockholders rights relating to the registration of
their stock with the Securities and Exchange Commission. These rights have been
waived as to this offering by the holders of the Series A and Series B preferred
stock. In addition, the Investors Rights Agreement granted these investors a
right of first refusal to participate in future issuances of equity securities
by Ask Jeeves. This offering is not covered by this right of first refusal and
it terminates on the closing date of this offering. The other registration
rights will survive this offering and will terminate no later than three years
after the closing date of this offering.
CO-SALE AGREEMENT
In connection with our Series B preferred stock financing, we entered into
a Co-Sale Rights Agreement on February 24, 1999 with each holder of more than
1,000,000 shares of our capital stock. The Co-Sale Agreement provides that each
holder has a right to participate on a pro rata basis in the sale of any shares
of
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<PAGE> 64
our capital stock by any other party to the Co-Sale Agreement unless such
proposed sale is a sale between parties, a sale or series of sales that amounts
to less than 15% of the shares of capital stock held by a party or a transfer
for estate planning purposes. The Co-Sale Agreement terminates on the closing
date of this offering.
CONSULTING AGREEMENT
The Consulting Agreement with The Roda Group dated December 14, 1998
provides for cash payments and the grant of nonstatutory stock options to
purchase a total of 37,500 shares of common stock with an exercise price of $.73
per share to each of Roger A. Strauch and Daniel H. Miller, one-sixth of the
options vest each month. Roger A. Strauch, our Chairman of the Board, and Daniel
H. Miller, our former director and Vice President of Sales, are managing members
of The Roda Group.
OPTIONS TO EXECUTIVE OFFICERS
In March 1999, the Board of Directors granted David Warthen, our Chief
Technical Officer, an option to purchase 100,000 shares of common stock at an
exercise price of $3.50 per share. In May 1999, the Board of Directors granted
Robert Wrubel, our President and Chief Executive Officer, an option to purchase
200,000 shares of common stock as at exercise price of $10.00 per share. Both
options vest over four years. The exercise prices of these options were equal to
the fair market value of our common stock on the date of grant, as determined by
the board.
DIRECTED SHARES TO EXECUTIVE OFFICERS
At our request, the underwriters have reserved up to 300,000 shares of
common stock to be issued by us and offered hereby for sale, at the initial
public offering price, to directors, officers, employees, business associates
and persons related to us, including M. Bruce Nakao, Chief Financial Officer,
and George Lichter, President of Ask Jeeves International, who are each
purchasing 10,000 shares.
PERSONAL GUARANTEES BY EXECUTIVE OFFICERS
During 1998, Roger A. Strauch, the Chairman of the Board, and Daniel H.
Miller, our former director and President, personally guaranteed obligations by
us to make payments in the aggregate of approximately $77,000 in connection with
certain equipment leases.
ASSUMPTION OF LEASE OBLIGATIONS
In January 1999, The Roda Group assigned its leases for office space at 918
Parker Street, Berkeley, California 94710, Suites A-11, A-12 and A-14 to us, and
we assumed all of The Roda Group's obligations under these leases. Our rental
payments under these leases total approximately $519,000 over the remaining
terms of the leases. Roger A. Strauch, our Chairman of the Board, and Daniel H.
Miller, our former director and Vice President of Sales, are managing members of
The Roda Group.
We believe that the foregoing transactions were on terms no less favorable
to us than could be obtained from unaffiliated third parties.
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<PAGE> 65
PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to beneficial
ownership of our common stock as of April 30, 1999 and as adjusted to reflect
the sale of common stock in this offering for:
- each person or entity known by us to beneficially own more than 5% of our
outstanding common stock;
- each of our directors;
- each of the named executive officers listed in the Summary Compensation
Table; and
- all of our directors and executive officers as a group.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
NUMBER OF BENEFICIALLY OWNED
SHARES -------------------------
BENEFICIALLY BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED(1) OFFERING(1) OFFERING(2)
------------------------------------ ------------ ----------- -----------
<S> <C> <C> <C>
CPQ Holdings, Inc.(3).............................. 2,824,856 13.23% 11.60%
529 Bryant Street
Palo Alto, CA 94301
Entities affiliated with Highland Capital Partners,
Inc.(4).......................................... 2,310,322 10.82 9.49
Two International Place
Boston, MA 02110
Entities affiliated with Institutional Venture
Partners(5)...................................... 1,386,193 6.49 5.69
3000 Sand Hill Road
Building Two, Suite 290
Menlo Park, CA 94025
Roda Group Investment Fund I, L.L.C.(6)............ 856,732 4.01 3.51
918 Parker Street
Berkeley, CA 94710
Roger A. Strauch(7)................................ 3,078,340 14.40 12.63
Skip Battle(8)..................................... 140,125 * *
Garrett Gruener(9)................................. 2,820,881 13.21 11.59
Daniel J. Nova(4).................................. 2,310,322 10.82 9.49
Benjamin M. Rosen.................................. 1,413,802 6.62 5.81
Geoffrey Y. Yang(5)................................ 1,386,193 6.49 5.69
Robert W. Wrubel(10)............................... 189,424 * *
Daniel H. Miller(11)............................... 2,954,456 13.83 12.13
David C. Warthen(12)............................... 1,034,457 4.80 4.21
All executive officers and directors as a group
(14 persons)(13)................................. 13,934,551 63.94 56.21
</TABLE>
- ---------------
* Represents beneficial ownership of less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes voting or investment power
with respect to the securities. Common stock subject to options or warrants
that are currently exercisable or exercisable within 60 days of April 30,
1999 are deemed to be outstanding and to be beneficially owned by the
person holding such options or warrants for the purpose of computing the
percentage ownership of such person but are not treated as outstanding for
the purpose of computing the percentage ownership of any other person.
Unless otherwise indicated, the address for each of the individuals listed
in the table is care of Ask Jeeves, 918 Parker Street, Berkeley, CA 94710.
Unless otherwise indicated by footnote, the persons named in the table have
sole voting and sole investment power with respect to all shares of common
stock shown as beneficially owned by them, subject to applicable community
property laws. Percentage of beneficial ownership is based on 21,349,424
shares of common stock outstanding as of April 30, 1999, after giving
effect to the conversion of the preferred stock and 24,349,424 shares of
common stock issued and outstanding after completion of this offering.
(2) Assumes no exercise of the underwriters' over-allotment option.
(3) Benjamin M. Rosen is Chairman of the Board of Compaq Computer Corporation,
of which CPQ Holdings, Inc. is a wholly-owned subsidiary.
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<PAGE> 66
(4) Highland Capital Partners, Inc. manages Highland Capital Partners IV
Limited Partnership ("HCP IV") and Highland Entrepreneurs' Fund IV Limited
Partnership ("HEF IV", and together with HCP IV, the "Highland Entities").
Includes 2,217,910 shares of common stock owned by HCP IV and 92,413 shares
of common stock owned by HEF IV. Daniel J. Nova, a director of Ask Jeeves,
is a general partner of the Highland Entities and can be deemed to be a
beneficial owner of the shares held by the Highland Entities as he has
shared voting and investment power in connection with his role as general
partner.
(5) Institutional Venture Partners manages Institutional Venture Partners VIII,
L.P. ("IVP") and IVP Institutional Investment Fund III, LLC ("IIF", and
together with IVP, the "Institutional Entities"). Includes 1,365,400 shares
of common stock owned by IVP and 20,793 shares of common stock owned by
IIF. Geoffrey Y. Yang, a director of Ask Jeeves, is a general partner of
the Institutional Entities and can be deemed to be a beneficial owner of
the shares held by the Institutional Entities as he has shared voting and
investment power in connection with his role as general partner.
(6) Roger A. Strauch and Daniel H. Miller are managing members, and Garrett
Gruener is a beneficiary of, The Roda Group Investment Fund I, L.L.C.
(7) Includes 2,036,921 shares held by the Strauch Kulhanjian Family Trust UAD
December 3, 1992. Includes 856,732 shares held by The Roda Group Investment
Fund I, L.L.C., of which Mr. Strauch is a managing member, and as to which
Mr. Strauch disclaims beneficial ownership except to the extent of his pro
rata interest in such shares. Also includes 1,500 shares held by Benno S.M.
Kling Educational Trust, Roger A. Strauch, Trustee, 1,500 shares held by
Samuel J.M. Kling Educational Trust, Roger A. Strauch, Trustee, 1,500
shares held by Jesse Kling Educational Trust, Roger A. Strauch, Trustee,
1,500 shares held by Rebecca A. Miller Educational Trust, Roger A. Strauch,
Trustee, 1,500 shares held by Sarah Miller Educational Trust, Roger A.
Strauch, Trustee, 1,500 shares held by Julia F. Dan Educational Trust,
Roger A. Strauch, Trustee, 1,500 shares held by Kalden Gonsar Educational
Trust, Roger A. Strauch, Trustee, 1,500 shares held by Fletcher Kennamer
Educational Trust, Roger A. Strauch, Trustee, 1,500 shares held by Aidan
Clements Educational Trust, Roger A. Strauch, Trustee, 15,000 shares held
by Cooper Ogden Miller Educational Trust, Roger A. Strauch, Trustee, 45,813
shares held by Roger Strauch as Custodian Under CUTMA for Alexan K.
Strauch, 45,812 shares held by Roger Strauch as Custodian Under CUTMA for
Paul K. Strauch and 45,812 shares held by Roger Strauch as Custodian Under
CUTMA for Nairi S. Strauch, as to which Mr. Strauch disclaims beneficial
ownership. Includes 18,750 shares issuable pursuant to options exercisable
within 60 days.
(8) Includes 96,431 shares held by Mr. Battle, 6,847 shares held by A. George
Battle Custodian Emily Taylor Battle UTMA IL, 4,847 shares held by A.
George Battle TTEE UA Daniel Kurt Webster Battle Trust and 2,000 shares
held by Daniel Kurt Webster Battle, as to which Mr. Battle disclaims
beneficial ownership. Includes 30,000 shares issuable pursuant to options
exercisable within 60 days.
(9) Includes 1,885,383 shares held by Mr. Gruener, 78,766 shares held by Amy
Slater, General Counsel and Secretary of Ask Jeeves, and 856,732 shares
held by The Roda Group Investment Fund I, L.L.C. Amy Slater is the spouse
of Mr. Gruener. Mr. Gruener, a director of Ask Jeeves is a beneficiary of
The Roda Group Investments Fund I, L.L.C and disclaims beneficial ownership
of the shares held by such entity.
(10) Includes 182,812 shares issuable pursuant to options exercisable within 60
days.
(11) Includes 2,063,974 shares held by Mr. Miller. Includes 856,732 shares held
by The Roda Group Investment Fund I, L.L.C., of which he is a managing
member, as to which Mr. Miller disclaims beneficial ownership except to the
extent of his pro rata interest in such shares. Also includes 15,000 shares
held by Cooper Ogden Miller Educational Trust, Roger A. Strauch, Trustee,
as to which Mr. Miller disclaims beneficial ownership. Includes 18,750
shares issuable pursuant to options exercisable within 60 days.
(12) Includes 184,457 shares issuable pursuant to options exercisable within 60
days.
(13) Represents 13,493,532 shares and options to purchase 441,019 shares that
are currently exercisable or exercisable within 60 days.
65
<PAGE> 67
DESCRIPTION OF CAPITAL STOCK
GENERAL
Immediately following the closing of this offering, our authorized capital
stock will consist of 150,000,000 shares of common stock, $.001 par value per
share, and 5,000,000 shares of preferred stock, $.001 par value per share. Upon
completion of this offering, based on the number of shares, options and warrants
outstanding as of April 30, 1999, there will be 24,349,424 outstanding shares of
common stock, outstanding options to purchase 5,281,833 shares of common stock
and outstanding warrants to purchase 24,000 shares of common stock.
COMMON STOCK
Subject to preferences that may apply to shares of preferred stock
outstanding at the time, the holders of outstanding shares of common stock are
entitled to receive dividends out of assets legally available at such time and
in such amounts as the board of directors may from time to time determine. Each
stockholder is entitled to vote each share of common stock on all matters
submitted to a vote of stockholders. Cumulative voting for the election of
directors is not provided for in our Amended and Restated Certificate of
Incorporation, which means that the holders of a majority of the shares voted
can elect all of the directors then standing for election. The common stock is
not entitled to preemptive rights and is not subject to conversion or
redemption. Upon the occurrence of a liquidation, dissolution or winding-up, the
holders of shares of common stock would be entitled to share ratably in the
distribution of all our assets remaining available for distribution after
satisfaction of all of our liabilities and the payment of the liquidation
preference of any outstanding preferred stock. Each outstanding share of common
stock is, and all shares of common stock to be outstanding upon completion of
this offering will be, fully paid and nonassessable.
PREFERRED STOCK
The board of directors has the authority, within the limitations and
restrictions stated in the Amended and Restated Certificate of Incorporation, to
authorize the issuance of shares of preferred stock, in one or more classes or
series, and to fix the rights, preferences, privileges and restrictions thereof,
including dividend rights, conversion rights, voting rights, terms of
redemption, liquidation preferences and the number of shares constituting any
series or the designation of such series. The issuance of preferred stock could
have the effect of decreasing the market price of the common stock and could
adversely affect the voting and other rights of the holders of common stock.
WARRANTS
As of April 30, 1999, we had outstanding warrants to purchase 21,500 shares
of common stock at an exercise price of $.53 per share and 2,500 shares of
common stock at an exercise price of $4.33 per share.
ANTI-TAKEOVER PROVISIONS
DELAWARE LAW
Upon the closing of this offering, we will be subject to the provisions of
Section 203 of the Delaware General Corporation Law (the "Anti-Takeover Law")
regulating corporate takeovers. The Anti-Takeover Law prevents Delaware
corporations, including those that are listed on the Nasdaq National Market,
from engaging, under certain circumstances, in a "business combination," which
includes a merger or sale of more than 10% of the corporation's assets, with any
"interested stockholder," that is, a stockholder who owns 15% or more of the
corporation's outstanding voting stock, as well as affiliates and associates of
any such person, for three years following the date that such stockholder became
an "interested stockholder" unless:
-- the transaction that resulted in the stockholder becoming an
"interested stockholder" was approved by the board of directors prior
to the date the "interested stockholder" attained such status;
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<PAGE> 68
-- upon consummation of the transaction that resulted in the stockholder
becoming an "interested stockholder," the "interested stockholder"
owned at least 85% of the voting stock of the corporation outstanding
at the time the transaction commenced, excluding those shares owned by
(i) persons who are directors as well as officers and (ii) employee
stock plans in which employee participants do not have the right to
determine confidentially whether shares held subject to the plan will
be tendered in a tender or exchange offer; or
-- on or subsequent to such date, the "business combination" is approved
by the board of directors and authorized at an annual or special
meeting of stockholders by the affirmative vote of at least two-thirds
of the outstanding voting stock that is not owned by the "interested
stockholder."
A Delaware corporation may "opt out" of the Anti-Takeover Law with an
express provision in its original certificate of incorporation or an express
provision in its certificate of incorporation or bylaws resulting from a
stockholders' amendment approved by at least a majority of the outstanding
voting shares. We have not "opted out" of the provisions of the Anti-Takeover
Law. This statute could prohibit or delay mergers or other takeover or
change-of-control attempts with respect to Ask Jeeves and, accordingly, may
discourage attempts to acquire us.
CHARTER AND BYLAW PROVISIONS
Our Amended and Restated Certificate of Incorporation and Bylaws include a
number of provisions that may have the effect of deterring or impeding hostile
takeovers or changes of control or management. These provisions include:
-- our board of directors is classified into three classes of directors
as nearly equal in size as possible with staggered three year terms;
-- the authority of our board to issue up to 5,000,000 shares of
preferred stock and to determine the price and the rights preferences
and privileges of these shares, without stockholder approval;
-- all stockholder action must be effected at a duly called meeting of
stockholders and not by written consent;
-- special meetings of the stockholders may be called only by the
Chairman of the Board, the Chief Executive Officer or the board;
-- the elimination of cumulative voting;
Such provisions may have the effect of delaying or preventing a change of
control.
Our Amended and Restated Certificate of Incorporation and Bylaws provide
that we will indemnify officers and directors against losses that they may incur
in investigations and legal proceedings resulting from their services to Ask
Jeeves, which may include services in connection with takeover defense measures.
Such provisions may have the effect of preventing changes in our management.
AGREEMENTS
In addition, our option agreements under the 1996 Equity Incentive Plan
provide that if a change of control of Ask Jeeves occurs prior to the first
anniversary of the vesting commencement date of an option, then the vesting
which would have occurred by such anniversary shall occur. After the first
anniversary of the date of grant, these option agreements provide that the
vesting of each option shall accelerate by six months upon a change of control.
As of April 30, 1999 there were 4,814,004 unvested shares of common stock
reserved pursuant to options granted under this plan. Furthermore, offer letters
with our executive officers provide for the payment of severance and
acceleration of options upon the termination of these executive officers upon a
change of control of Ask Jeeves. These provisions in our stock option agreements
and offer letters could have the effect of discouraging potential takeover
attempts.
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<PAGE> 69
REGISTRATION RIGHTS
We entered into the Amended and Restated Investor Rights Agreement with the
purchasers of our Series A and Series B preferred stock. Under this agreement,
these purchasers are entitled to rights relating to the registration of their
shares with the Securities and Exchange Commission. These rights have been
waived as to this offering by the holders of preferred stock. The registration
rights will survive this offering and terminate no later than three years after
the closing date of this offering.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for our common stock is Boston EquiServe,
N.A.
LISTING
We have applied for quotation of our common stock on the Nasdaq National
Market under the trading symbol "ASKJ."
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<PAGE> 70
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our common stock, and
there can be no assurance that a significant public market for our common stock
will develop or be sustained after this offering. Future sales of substantial
amounts of common stock, including shares issued upon exercise of outstanding
options and warrants, in the public market after this offering could adversely
affect market prices prevailing from time to time and could impair our ability
to raise capital through the sale of our equity securities. Sales of substantial
amounts of our common stock in the public market could adversely affect the
prevailing market price and our ability to raise equity capital in the future.
Upon completion of this offering, based on the number of shares outstanding
on April 30, 1999, we will have 24,349,424 outstanding shares of common stock,
24,799,424 shares if the underwriters exercise their over-allotment option in
full, assuming no exercise of outstanding warrants and options. Of these shares,
3,000,000 shares, plus an additional 450,000 shares if the underwriters exercise
their over-allotment option in full, of common stock sold in this offering will
be freely tradable without restriction or further registration under the
Securities Act unless purchased by our affiliates.
Of the remaining shares, a total of approximately 21,106,168 shares held by
our directors, executive officers and our existing stockholders are subject to
"lock-up" agreements generally providing that, these stockholders will not (1)
offer, pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase, lend, file a registration statement, or otherwise transfer or dispose
of, directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock or (2) enter
into any swap or other arrangement that transfers to another, in whole or in
part, any of the economic consequences of ownership of the common stock, whether
any of these transactions described in (1) or (2) are to be settled by delivery
of common stock or such other securities, in cash or otherwise, for a period of
180 days following the date of the final prospectus for this offering without
the prior written consent of Morgan Stanley & Co. Incorporated. The restrictions
described in this paragraph do not apply to:
-- the sale of shares to the underwriters;
-- the issuance by us of shares of common stock upon the exercise of an
option or a warrant or the conversion of a security outstanding on the
date of this prospectus of which the underwriters have been advised in
writing;
-- transactions by any person other than us relating to shares of common
stock or other securities acquired in open market transactions after
the completion of the offering of the shares; or
-- transfers by gift or distributions by a partnership to its partners,
so long as, in any such instance, such transferee executes a lock-up
agreement with terms identical to those described in this paragraph.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person or persons whose shares are aggregated,
who has beneficially owned restricted shares for at least one year, including
the holding period of any prior owner except an affiliate, would be entitled to
sell within any three-month period a number of shares that does not exceed the
greater of (1) 1% of the number of shares of common stock then outstanding,
which will equal approximately 243,494 shares immediately after this offering or
(2) the average weekly trading volume of the common stock during the four
calendar weeks preceding the filing of a Form 144 with respect to such sale.
Sales under Rule 144 also are subject to certain manner of sale provisions and
notice requirements and to the availability of current public information about
us. Under Rule 144(k), a person who is not deemed to have been an affiliate of
Ask Jeeves at any time during the three months preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner except an affiliate, is entitled
to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144.
Rule 701 permits resales of shares in reliance upon Rule 144 but without
compliance with certain restrictions, including the holding period requirement,
of Rule 144. Any employee, officer or director of or
69
<PAGE> 71
consultant to Ask Jeeves who purchased his or her shares pursuant to a written
compensatory plan or contract may be entitled to rely on the resale provisions
of Rule 701. Rule 701 permits affiliates to sell their Rule 701 shares under
Rule 144 without complying with the holding period requirements of Rule 144.
Rule 701 further provides that non-affiliates may sell such shares in reliance
on Rule 144 without having to comply with the holding period, public
information, volume limitation or notice provisions of Rule 144. All holders of
Rule 701 shares are required to wait until 90 days after the date of this
prospectus before selling such shares.
Following the closing of this offering, we intend to file a registration
statement on Form S-8 under the Securities Act covering shares of common stock
subject to (1) outstanding options under the 1996 Incentive Plan, 1999 Incentive
Plan and nonstatutory stock option agreements which are outside of either of
these plans and (2) rights outstanding under the Purchase Plan. Based on the
number of shares subject to outstanding options as of April 30, 1999 and
currently reserved for issuance under all such plans and agreements, such
registration statement would cover approximately 5,200,892 shares. Such
registration statement will automatically become effective upon filing.
Accordingly, subject to the exercise of such options, shares registered under
such registration statement will be available for sale in the open market
immediately after the 180-day lock-up period expires.
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<PAGE> 72
UNDERWRITERS
Under the terms and subject to the conditions contained in the underwriting
agreement dated the date of this prospectus, the underwriters named below, for
whom Morgan Stanley & Co. Incorporated, BancBoston Robertson Stephens Inc. and
Hambrecht & Quist LLC are acting as representatives, have severally agreed to
purchase, and we have agreed to sell to them, severally, the respective number
of shares of common stock set forth opposite the names of the underwriters
below:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- ---------
<S> <C>
Morgan Stanley & Co. Incorporated...........................
BancBoston Robertson Stephens Inc. .........................
Hambrecht & Quist LLC.......................................
--------
Total............................................. 3,000,000
========
</TABLE>
The underwriters are offering the shares subject to their acceptance of the
shares from us and subject to prior sale. The underwriting agreement provides
that the obligations of the several underwriters to pay for and accept delivery
of the shares of common stock offered hereby are subject to the approval of
certain legal matters by their counsel and to certain other conditions. The
underwriters are obligated to take and pay for all of the shares of common stock
offered by this prospectus, other than those covered by the over-allotment
option described below, if any such shares are taken. Discover Brokerage Direct,
Inc., an affiliate of Morgan Stanley & Co. Incorporated and facilitator of
Internet distribution, is acting as a selected dealer in connection with the
offering.
The underwriters initially propose to offer part of the shares of common
stock directly to the public at the initial public offering price set forth on
the cover page hereof and part to certain dealers at a price that represents a
concession not in excess of $ a share under the public offering price.
Any underwriter may allow, and such dealers may reallow, a concession not in
excess of $ a share to other underwriters or to certain other dealers.
After the initial offering of the shares of common stock, the offering price and
other selling terms may from time to time be varied by the representatives of
the underwriters.
We have granted to the underwriters an option, exercisable for 30 days from
the date of this prospectus, to purchase up to an aggregate of 450,000
additional shares of common stock at the initial public offering price set forth
on the cover page hereof, less underwriting discounts and commissions. The
underwriters may exercise this option solely for the purpose of covering
over-allotments, if any, made in connection with this offering of common stock.
To the extent this option is exercised, each underwriter will become obligated,
subject to certain conditions, to purchase approximately the same percentage of
additional shares of common stock as the number set forth next to such
underwriter's name in the preceding table bears to the total number of shares of
common stock set forth next to the names of all underwriters in the preceding
table.
At our request, the underwriters have reserved up to 300,000 shares of
common stock to be issued by us and offered hereby for sale, at the initial
public offering price, to directors, officers, employees, business associates
and persons related to us. The number of shares of common stock available for
sale to the general public will be reduced to the extent these individuals
purchase such reserved shares. Any reserved shares that are not so purchased
will be offered by the underwriters to the general public on the same basis as
the other shares offered by this prospectus.
The underwriters have informed us that they do not intend sales to
discretionary accounts to exceed five percent of the total number of shares of
common stock offered by them.
Each of Ask Jeeves and the holders of approximately 21,106,168 shares has
agreed that, without the prior written consent of Morgan Stanley & Co.
Incorporated on behalf of the underwriters, it will not, during the period
ending 180 days after the date of this prospectus (1) offer, pledge, sell,
contract to sell, sell any option
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<PAGE> 73
or contract to purchase, purchase any option or contract to sell, grant any
option, right or warrant to purchase, lend or otherwise transfer or dispose of
directly or indirectly, any shares of common stock or any securities convertible
into or exercisable or exchangeable for common stock or (2) enter into any swap
or other arrangement that transfers to another, in whole or in part, any of the
economic consequences of ownership of the common stock, whether any of these
transactions are to be settled by delivery of common stock or such other
securities, in cash or otherwise. The restrictions described in this paragraph
do not apply to:
-- the sale of shares to the underwriters;
-- the issuance by us of shares of common stock upon the exercise of an
option or a warrant or the conversion of a security outstanding on the
date of this prospectus of which the underwriters have been advised in
writing;
-- transactions by any person other than us relating to shares of common
stock or other securities acquired in open market transactions after
the completion of the offering of the shares; or
-- transfers by gift or distributions by a partnership to its partners,
so long as, in any such instance, such transferee executes a lock-up
agreement with terms identical to those described in this paragraph.
In order to facilitate the offering of the common stock, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the common stock. Specifically, the underwriters may over-allot in
connection with the offering, creating a short position in the common stock for
their own account. In addition, to cover over-allotments or to stabilize the
price of the common stock, the underwriters may bid for, and purchase, shares of
common stock in the open market. Finally, the underwriting syndicate may reclaim
selling concessions allowed to an underwriter or a dealer for distributing the
common stock in the offering, if the syndicate repurchases previously
distributed common stock in transactions to cover syndicate short positions, in
stabilization transactions or otherwise. Any of these activities may stabilize
or maintain the market price of the common stock above independent market
levels. The underwriters are not required to engage in these activities and may
end any of these activities at any time.
Ask Jeeves and the underwriters have agreed to indemnify each other against
certain liabilities, including liabilities under the Securities Act.
PRICING OF THE OFFERING
Prior to this offering, there has been no public market for the common
stock. The initial public offering price will be determined by negotiations
between us and the representatives of the underwriters. Among the factors to be
considered in determining the initial public offering price will be our future
prospects and our industry in general, sales, earnings and certain other
financial and operating information of Ask Jeeves in recent periods, and the
price-earnings ratios, price-sales ratios, market prices of securities and
certain financial and operating information of companies engaged in activities
similar to those of Ask Jeeves. The estimated initial public offering price
range set forth on the cover page of this preliminary prospectus is subject to
change as a result of market conditions and other factors.
LEGAL MATTERS
The validity of the issuance of the shares of common stock offered hereby
and certain other matters will be passed upon for us by Cooley Godward LLP, Palo
Alto, California. An investment partnership of Cooley Godward attorneys
beneficially own an aggregate of 27,598 shares of our common stock. Legal
matters relating to this offering will be passed upon for the underwriters by
Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto,
California. Wilson Sonsini Goodrich & Rosati attorneys and an entity affiliated
with Wilson Sonsini Goodrich & Rosati beneficially own an aggregate of 273,773
shares of our common stock.
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<PAGE> 74
EXPERTS
Ernst & Young LLP, independent auditors, have audited our financial
statements at December 31, 1997 and 1998, for the period from June 13, 1996
(inception) through December 31, 1996, and for each of the years in the two-year
period ended December 31, 1998 as set forth in their report. We have included
our financial statements in the prospectus and elsewhere in the registration
statement in reliance on Ernst & Young LLP's report, given upon the authority of
such firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 with respect to the shares of common stock offered by this
prospectus. This prospectus, which constitutes a part of the registration
statement, does not contain all of the information set forth in the registration
statement or the exhibits and schedules which are part of the registration
statement. For further information with respect to us and our common stock, see
the registration statement and the exhibits thereto. Statements contained in
this prospectus regarding the contents of any contract or any other document to
which reference is made are not necessarily complete, and, in each instance
where a copy of such contract or other document has been filed as an exhibit to
the registration statement, reference is made to the copy so filed, each such
statement being qualified in all respects by such reference. Any document we
file may be read and copied at the Public Reference Room of the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. The public may
obtain information on the operation of the Public Reference Room by calling the
Commission at 1-800-SEC-0330. Our filings with the Commission are also available
to the public from the Commission's Web site (http://www.sec.gov).
Upon completion of this offering, we will become subject to the information
and periodic reporting requirements of the Securities Exchange Act and,
accordingly, will file periodic reports, proxy statements and other information
with the Commission. Such periodic reports, proxy statements and other
information will be available for inspection and copying at the Commission's
public reference rooms, and the Web site of the Commission referred to above.
Our principal executive offices are located at 918 Parker Street, Berkeley,
California 94710 and our telephone number is (510) 649-8685. Our fiscal year
ends on December 31. We maintain a worldwide web site at http://www.ask.com. The
reference to our worldwide web address does not constitute incorporation by
reference of the information contained at this site.
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<PAGE> 75
ASK JEEVES, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young, LLP Independent Auditors........... F-2
Balance Sheets.............................................. F-3
Statements of Operations.................................... F-4
Statements of Stockholders' Equity (Deficit)................ F-5
Statements of Cash Flows.................................... F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE> 76
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Ask Jeeves, Inc.
We have audited the accompanying balance sheets of Ask Jeeves, Inc. as of
December 31, 1997 and 1998, and the related statements of operations,
stockholders' equity (deficit), and cash flows for the period from June 13, 1996
(inception) through December 31, 1996 and for each of the two years ended
December 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Ask Jeeves, Inc. at December
31, 1997 and 1998, and the results of its operations and its cash flows for the
period from June 13, 1996 (inception) through December 31, 1996 and for each of
the two years ended December 31, 1998 in conformity with generally accepted
accounting principles.
Walnut Creek, California
March 10, 1999, except for Note 7,
as to which the date is June , 1999
- --------------------------------------------------------------------------------
The foregoing report is in the form that will be signed upon the completion
of the reincorporation in Delaware and 1 for 2 reverse stock split as described
in Note 7 to the financial statements.
/s/ ERNST & YOUNG LLP
Walnut Creek, California
June 15, 1999
F-2
<PAGE> 77
ASK JEEVES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
DECEMBER 31, EQUITY AT
------------------------- MARCH 31, MARCH 31,
1997 1998 1999 1999
---------- ----------- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 521,247 $ 5,587,883 $23,125,357
Short-term investments................................... -- -- 2,018,984
Restricted cash.......................................... -- 45,000 545,000
Accounts receivable, net of allowance for doubtful
accounts of none at December 31, 1997 and $85,000 at
December 31, 1998 and March 31, 1999................... 20,031 236,258 1,056,491
Prepaid expenses and other current assets................ -- 103,545 87,618
---------- ----------- -----------
Total current assets.............................. 541,278 5,972,686 26,833,450
---------- ----------- -----------
Property and equipment, net................................ 66,981 835,486 1,941,337
Investments................................................ -- -- 3,150,000
---------- ----------- -----------
Total assets...................................... $ 608,259 $ 6,808,172 $31,924,787
========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................... $ -- $ 605,283 $ 1,299,012
Accrued compensation and related expenses................ 33,665 253,062 626,769
Accrued marketing expenses............................... -- -- 1,134,000
Other accrued liabilities................................ 18,602 160,000 343,804
Deferred revenue......................................... 13,000 149,842 776,083
Current portion of capital lease obligations............. -- 28,220 30,864
---------- ----------- -----------
Total current liabilities......................... 65,267 1,196,407 4,210,532
Capital lease obligations, less current portion............ -- 45,945 33,606
Commitments
Stockholders' equity:
Convertible preferred stock, no par value; 10,000,000
shares authorized at March 31, 1999 (5,000,000 pro
forma); issuable in series:
Series A convertible preferred stock, no par value;
3,750,000 shares designated at March 31, 1999 (none
pro forma), 2,970,655 and 3,709,884 shares issued and
outstanding at December 31, 1998 and March 31, 1999,
respectively (none pro forma); aggregate liquidation
preference of $7,653,337 at March 31, 1999 (none pro
forma)............................................... -- 6,088,222 7,581,708 --
Series B convertible preferred stock, no par value;
6,250,000 shares designated at March 31, 1999 (none
pro forma); 5,775,806 shares issued and outstanding
at March 31, 1999 (none pro forma); aggregate
liquidation preference of $25,000,000 at March 31,
1999 (none pro forma)................................ -- -- 24,961,680 --
Common stock, no par value; 40,000,000 shares authorized
(150,000,000 pro forma); 5,912,519, 11,358,077 and
11,583,733 shares issued and outstanding at December
31, 1997 and 1998 and March 31, 1999, respectively,
(21,069,423 pro forma)................................. 1,098,566 4,771,781 6,876,194 39,419,582
Deferred stock compensation.............................. -- (476,984) (2,052,574) (2,052,574)
Accumulated deficit...................................... (555,574) (4,817,199) (9,686,359) (9,686,359)
---------- ----------- ----------- -----------
Total stockholders' equity........................ 542,992 5,565,820 27,680,649 $27,680,649
---------- ----------- ----------- ===========
Total liabilities and stockholders' equity........ $ 608,259 $ 6,808,172 $31,924,787
========== =========== ===========
</TABLE>
See accompanying notes.
F-3
<PAGE> 78
ASK JEEVES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM THREE MONTHS ENDED
JUNE 13, 1996 YEAR ENDED DECEMBER 31, MARCH 31,
(INCEPTION) THROUGH ------------------------ ------------------------
DECEMBER 31, 1996 1997 1998 1998 1999
------------------- ---------- ----------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Consumer........................ $ -- $ -- $ 577,159 $ 14,766 $ 1,059,068
Corporate....................... -- -- 15,500 -- 72,500
---------- ---------- ----------- ---------- -----------
Total revenues.......... -- -- 592,659 14,766 1,131,568
Cost of revenues:
Consumer........................ -- -- 602,716 46,371 699,131
Corporate....................... -- -- 455,978 21,299 822,581
---------- ---------- ----------- ---------- -----------
Total cost of
revenues.............. -- -- 1,058,694 67,670 1,521,712
---------- ---------- ----------- ---------- -----------
Gross profit (loss)............... -- -- (466,035) (52,904) (390,144)
Operating expenses:
Product development............. 107,797 319,824 1,104,193 127,772 742,166
Sales and marketing............. -- 17,509 1,613,846 80,872 2,669,165
General and administrative...... -- 114,651 1,100,921 77,605 881,830
Amortization of deferred stock
compensation................. -- -- 29,010 -- 317,048
---------- ---------- ----------- ---------- -----------
Total operating
expenses.............. 107,797 451,984 3,847,970 286,249 4,610,209
---------- ---------- ----------- ---------- -----------
Operating loss.................... (107,797) (451,984) (4,314,005) (339,153) (5,000,353)
Interest income................... -- 4,207 52,380 3,798 131,193
---------- ---------- ----------- ---------- -----------
Net loss.......................... $ (107,797) $ (447,777) $(4,261,625) $ (335,355) $(4,869,160)
========== ========== =========== ========== ===========
Basic and diluted net loss per
share........................... $ (.08) $ (.13) $ (.51) $ (.06) $ (.43)
========== ========== =========== ========== ===========
Weighted average shares
outstanding used in computing
basic and diluted net loss per
share........................... 1,295,342 3,319,187 8,413,568 5,912,519 11,388,164
========== ========== =========== ========== ===========
Pro forma basic and diluted net
loss per share.................. $ (.48) $ (.29)
=========== ===========
Weighted average shares
outstanding used in computing
pro forma basic and diluted net
loss per common share........... 8,828,646 16,730,099
=========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE> 79
ASK JEEVES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
SERIES A CONVERTIBLE SERIES B CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
---------------------- ----------------------- -----------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- ---------- --------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock to founders for
assets of Cameo Technology, Inc. and
contributed services at inception, June 13,
1996......................................... -- $ -- -- $ -- 2,400,000 $ 53,333
Contribution of capital by founders.......... -- -- -- -- -- 48,245
Net loss and comprehensive loss.............. -- -- -- -- -- --
--------- ---------- --------- ----------- ---------- ----------
Balances at December 31, 1996................. -- -- -- -- 2,400,000 101,578
Contribution of capital by founders.......... -- -- -- -- -- 86,536
Contribution of services by stockholders..... -- -- -- -- -- 105,000
Issuance of common stock for cash, net of
issuance costs............................. -- -- -- -- 2,937,521 771,169
Issuance of common stock upon exercise of
stock options.............................. -- -- -- -- 574,998 2,108
Issuance of stock options to consultants..... -- -- -- -- -- 15,510
Compensation charge related to grants of
stock options.............................. -- -- -- -- -- 16,665
Net loss and comprehensive loss.............. -- -- -- -- -- --
--------- ---------- --------- ----------- ---------- ----------
Balances at December 31, 1997................. -- -- -- -- 5,912,519 1,098,566
Issuance of preferred stock for cash, net of
issuance costs............................. 2,970,655 6,088,222 -- -- -- --
Issuance of common stock options to
stockholders in exchange for services...... -- -- -- -- -- 300,000
Issuance of common stock for cash............ -- -- -- -- 5,141,892 2,747,500
Issuance of common stock upon exercise of
stock options.............................. -- -- -- -- 287,366 31,765
Issuance of common stock to consultants...... -- -- -- -- 16,300 7,521
Issuance of common stock warrants to
consultants................................ -- -- -- -- -- 23,780
Compensation charge related to grants of
stock options.............................. -- -- -- -- -- 56,655
Deferred stock compensation.................. -- -- -- -- -- 505,994
Amortization of deferred stock
compensation............................... -- -- -- -- -- --
Net loss and comprehensive loss.............. -- -- -- -- -- --
--------- ---------- --------- ----------- ---------- ----------
Balances at December 31, 1998................. 2,970,655 6,088,222 -- -- 11,358,077 4,771,781
Issuance of preferred stock for cash, net of
issuance costs (unaudited)................. 739,229 1,493,486 5,775,806 24,961,680 -- --
Issuance of common stock upon exercise of
stock options (unaudited).................. -- -- -- -- 225,656 28,525
Issuance of common stock warrants to
consultants (unaudited).................... -- -- -- -- -- 8,750
Compensation charge related to grants of
stock options (unaudited).................. -- -- -- -- -- 174,500
Deferred stock compensation (unaudited)...... -- -- -- -- -- 1,892,638
Amortization of deferred stock compensation
(unaudited)................................ -- -- -- -- -- --
Net loss and comprehensive loss
(unaudited)................................ -- -- -- -- -- --
--------- ---------- --------- ----------- ---------- ----------
Balances at March 31, 1999 (unaudited)........ 3,709,884 $7,581,708 5,775,806 $24,961,680 11,583,733 $6,876,194
========= ========== ========= =========== ========== ==========
<CAPTION>
TOTAL
DEFERRED STOCKHOLDERS'
STOCK ACCUMULATED EQUITY
COMPENSATION DEFICIT (DEFICIT)
------------ ----------- -------------
<S> <C> <C> <C>
Issuance of common stock to founders for
assets of Cameo Technology, Inc. and
contributed services at inception, June 13,
1996......................................... $ -- $ -- $ 53,333
Contribution of capital by founders.......... -- -- 48,245
Net loss and comprehensive loss.............. -- (107,797) (107,797)
----------- ----------- -----------
Balances at December 31, 1996................. -- (107,797) (6,219)
Contribution of capital by founders.......... -- -- 86,536
Contribution of services by stockholders..... -- -- 105,000
Issuance of common stock for cash, net of
issuance costs............................. -- -- 771,169
Issuance of common stock upon exercise of
stock options.............................. -- -- 2,108
Issuance of stock options to consultants..... -- -- 15,510
Compensation charge related to grants of
stock options.............................. -- -- 16,665
Net loss and comprehensive loss.............. -- (447,777) (447,777)
----------- ----------- -----------
Balances at December 31, 1997................. -- (555,574) 542,992
Issuance of preferred stock for cash, net of
issuance costs............................. -- -- 6,088,222
Issuance of common stock options to
stockholders in exchange for services...... -- -- 300,000
Issuance of common stock for cash............ -- -- 2,747,500
Issuance of common stock upon exercise of
stock options.............................. -- -- 31,765
Issuance of common stock to consultants...... -- -- 7,521
Issuance of common stock warrants to
consultants................................ -- -- 23,780
Compensation charge related to grants of
stock options.............................. -- -- 56,655
Deferred stock compensation.................. (505,994) -- --
Amortization of deferred stock
compensation............................... 29,010 -- 29,010
Net loss and comprehensive loss.............. -- (4,261,625) (4,261,625)
----------- ----------- -----------
Balances at December 31, 1998................. (476,984) (4,817,199) 5,565,820
Issuance of preferred stock for cash, net of
issuance costs (unaudited)................. -- -- 26,455,166
Issuance of common stock upon exercise of
stock options (unaudited).................. -- -- 28,525
Issuance of common stock warrants to
consultants (unaudited).................... -- -- 8,750
Compensation charge related to grants of
stock options (unaudited).................. -- -- 174,500
Deferred stock compensation (unaudited)...... (1,892,638) -- --
Amortization of deferred stock compensation
(unaudited)................................ 317,048 -- 317,048
Net loss and comprehensive loss
(unaudited)................................ -- (4,869,160) (4,869,160)
----------- ----------- -----------
Balances at March 31, 1999 (unaudited)........ $(2,052,574) $(9,686,359) $27,680,649
=========== =========== ===========
</TABLE>
See accompanying notes.
F-5
<PAGE> 80
ASK JEEVES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM THREE MONTHS ENDED
JUNE 13, 1996 YEAR ENDED DECEMBER 31, MARCH 31,
(INCEPTION) THROUGH ----------------------- -----------------------
DECEMBER 31, 1996 1997 1998 1998 1999
------------------- --------- ----------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss................................. $(107,797) $(447,777) $(4,261,625) $(335,355) $(4,869,160)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization.......... -- 4,098 102,214 8,245 103,344
Issuance of stock options to
consultants......................... -- 15,510 -- -- --
Issuance of common stock to
consultants......................... -- -- 7,521 -- --
Issuance of common stock warrants to
consultants......................... -- -- 23,780 5,996 8,750
Contribution of assets and services by
stockholders........................ 53,333 105,000 300,000 75,000 --
Compensation charge related to grants
of stock options.................... -- 16,665 56,655 3,333 174,500
Amortization of deferred stock
compensation........................ -- -- 29,010 -- 317,048
Changes in operating assets and
liabilities:
Restricted cash..................... -- -- (45,000) -- (500,000)
Accounts receivable................. -- (20,031) (216,227) 13,031 (820,233)
Prepaids and other current assets... -- -- (103,545) -- 15,927
Accounts payable.................... -- -- 605,283 -- 693,729
Accrued compensation and related
expenses.......................... 6,219 27,446 219,397 (16,934) 373,707
Accrued marketing expenses.......... -- -- -- 1,110 1,134,000
Other accrued liabilities........... -- 18,602 141,398 30,983 183,804
Deferred revenue.................... -- 13,000 136,842 -- 626,241
--------- --------- ----------- --------- -----------
Net cash used in operating activities.... (48,245) (267,487) (3,004,297) (214,591) (2,558,343)
INVESTING ACTIVITIES
Purchases of property and equipment...... -- (71,079) (781,543) (55,588) (1,209,195)
Purchases of investments................. -- -- -- -- (5,168,984)
--------- --------- ----------- --------- -----------
Net cash used in investing activities.... -- (71,079) (781,543) (55,588) (6,378,179)
FINANCING ACTIVITIES
Issuance of common stock for cash........ -- 773,277 2,747,500 -- --
Issuance of common stock upon exercise of
stock options.......................... -- -- 31,765 -- 28,525
Issuance of preferred stock for cash, net
of issuance costs...................... -- -- 6,088,222 -- 26,455,166
Contribution of capital by founders...... 48,245 86,536 -- -- --
Repayment of capital lease obligations... -- -- (15,011) -- (9,695)
--------- --------- ----------- --------- -----------
Net cash provided by financing
activities............................. 48,245 859,813 8,852,476 -- 26,473,996
--------- --------- ----------- --------- -----------
Increase (decrease) in cash and cash
equivalents............................ -- 521,247 5,066,636 (270,179) 17,537,474
Cash and cash equivalents at beginning of
period................................. -- -- 521,247 521,247 5,587,883
--------- --------- ----------- --------- -----------
Cash and cash equivalents at end of
period................................. $ -- $ 521,247 $ 5,587,883 $ 251,068 $23,125,357
========= ========= =========== ========= ===========
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Capital lease obligations incurred..... $ -- $ -- $ 89,176 $ -- $ --
========= ========= =========== ========= ===========
</TABLE>
See accompanying notes.
F-6
<PAGE> 81
ASK JEEVES, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1998 AND MARCH 31, 1999 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
Ask Jeeves, Inc. ("Ask Jeeves" or the "Company") develops and deploys
natural-language question answering services on the Internet for consumers and
companies. The Company was incorporated in the State of California on June 13,
1996. The Company was in the development stage in 1996 and 1997.
Unaudited Interim Financial Information
The accompanying financial statements at March 31, 1999 and for the three
months ended March 31, 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 March 31, 1999 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.
Cash Equivalents, Short-Term Investments, and Long-Term Investments
The Company invests its excess cash in money market accounts and debt
instruments and considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents. Investments
with an original maturity at the time of purchase of over three months but less
than a year are classified as short-term investments. Investments with an
original maturity at the time of purchase of greater than a year are classified
as long-term investments. Management determines the appropriate classification
of investments at the time of purchase and reevaluates such designation at the
end of each period.
At March 31, 1999, all of the Company's investments were classified as
available-for-sale and consisted of obligations of domestic municipalities or
corporate commercial paper. The amortized cost of cash equivalents, short-term
investments and long-term investments at December 31, 1997 and 1998 and March
31, 1999 approximated fair value and the amount of unrealized gains or losses
was not significant. The estimated fair values of cash equivalents and
short-term investments are based on quoted market prices. The amount of realized
gains or losses for the years ended December 31, 1997 and 1998 and three months
ended March 31, 1998 and 1999 were not significant.
Restricted Cash
Restricted cash consists of two certificates of deposit required under
standby letters of credit for certain advertising and other obligations which
expire in 1999. The certificates of deposit are held by a domestic financial
institution.
Concentrations of Credit Risk and Credit Risk Evaluations
Financial instruments which subject the Company to concentrations of credit
risk consist primarily of cash and cash equivalents, investments and accounts
receivable. Cash and cash equivalents consist principally
F-7
<PAGE> 82
ASK JEEVES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1998 AND MARCH 31, 1999 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
of demand deposit and money market accounts held with domestic financial
institutions with high credit standing. Investments consist primarily of debt
securities of domestic municipalities and corporations with strong credit
ratings. The Company has not experienced any significant losses on its cash and
cash equivalents or investments.
The Company conducts business with companies in various industries
primarily in the United States. The Company performs ongoing credit evaluations
of its customers and generally does not require collateral. Allowances are
maintained for potential credit issues, and such losses to date have been within
management's expectations.
Property and Equipment
Property and equipment is stated at cost and depreciated using the
straight-line method over three to five years. Leasehold improvements are
amortized over the shorter of the useful life or the remaining lease term.
Software Development Costs
The Company accounts for software development costs in accordance with
Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of
Computer Software to be Sold, Leased, or Otherwise Marketed" ("FAS 86") under
which certain software development costs incurred subsequent to the
establishment of technological feasibility are capitalized and amortized over
the estimated lives of the related products. Technological feasibility is
established upon completion of a working model. To date, costs incurred
subsequent to the establishment of technological feasibility have not been
significant, and all software development costs have been charged to product
development expense in the accompanying statements of operations.
Revenue Recognition
The Company currently conducts business within two business units, the
Consumer Question Answering Service and the Corporate Question Answering
Service. The Consumer Question Answering Service, Ask Jeeves, at Ask.com, allows
users to obtain answers to the most frequently asked questions online. The
Corporate Question Answering Service helps companies provide a high quality,
human-like online interface for their customers.
Revenues from the Consumer Question Answering Service consist primarily of
advertising revenues that are derived from short-term advertising contracts.
Under these contracts, the Company delivers impressions to users over a
specified period of time. Advertising rates, measured on a cost per thousand
impressions ("CPMs") basis, are dependent on whether the impressions are for
general rotation throughout the Company's Web site or for targeted audiences and
properties within specific areas of Ask Jeeves such as the computer,
entertainment, family, health, money, shopping and travel channels. The Company
recognizes revenues based upon actual impressions delivered. Substantially all
of the Company's revenues for the year ended December 31, 1998 were derived from
Ask Jeeves advertising contracts.
Revenues from the Corporate Question Answering Service consist of three
components: (1) knowledge base customization; (2) maintenance and information
service fees; and (3) per-answer fees. The Company recognizes knowledge base
customization and maintenance fees ratably over the contractual term, generally
twelve months. The Company recognizes 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 delivery of the knowledge
base, information and maintenance services are recorded as deferred revenues
F-8
<PAGE> 83
ASK JEEVES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1998 AND MARCH 31, 1999 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
and are recognized ratably over the contractual term. To date, revenues from the
Corporate Question Answering Service have not been material.
Significant Customers
Revenues from two customers accounted for 14% and 13%, respectively, of
total revenues for the year ended December 31, 1998 and 11% and 21%,
respectively, of total revenues for the three months ended March 31, 1999.
Receivables from these same two customers were none and $80,000, respectively at
December 31, 1998 and none and $147,555, respectively as of March 31, 1999.
Accounting for Stock-Based Compensation
The Company accounts for employee stock options using the intrinsic value
method in accordance with Accounting Principles Board Opinion No. 25 ("APB 25")
and makes the pro forma disclosures required by Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("FAS
123").
Advertising Costs
The Company expenses the costs of advertising as incurred. Advertising
expense for the years ended December 31, 1997 and 1998 was $12,512 and $960,735,
respectively.
Income Taxes
The Company uses the liability method to account for income taxes as
required by Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes" ("FAS 109"). Under this method, deferred tax assets and
liabilities are determined based on differences between financial reporting and
tax bases of assets and liabilities. Deferred tax assets and liabilities are
measured using enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
Prior to the issuance of Series A convertible preferred stock on November
10, 1998, the Company's shareholders elected to be treated as an S Corporation
for federal and state income tax purposes. Accordingly, the accompanying
financial statements for the periods prior to that date do not include a
provision for federal or state income taxes. Subsequent to November 10, 1998,
the Company became a C Corporation subject to federal and state statutory income
tax rates.
Net Loss Per Share
Basic net loss per share is computed by dividing net loss by the weighted
average number of common shares outstanding for the period. Diluted earnings per
share reflects the potential dilution of securities by adding other common stock
equivalents, including stock options, warrants and convertible preferred stock,
in the weighted average number of common shares outstanding for a period, if
dilutive. Potentially dilutive securities have been excluded from the
computation as their effect is antidilutive.
Pro Forma Net Loss Per Share
Pro forma net loss per share has been computed as described above and also
gives effect, under Securities and Exchange Commission guidance, to the
conversion of preferred shares not included above that will
F-9
<PAGE> 84
ASK JEEVES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1998 AND MARCH 31, 1999 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
automatically convert upon completion of the Company's initial public offering,
using the as if-converted method.
The calculation of historical and pro forma basic and diluted net loss per
share is as follows:
<TABLE>
<CAPTION>
PERIOD FROM THREE MONTHS ENDED
JUNE 13, 1996 YEAR ENDED DECEMBER 31, MARCH 31,
(INCEPTION) THROUGH ------------------------ ------------------------
DECEMBER 31, 1996 1997 1998 1998 1999
------------------- ---------- ----------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Historical:
Net loss.................... $(107,797) $ (447,777) $(4,261,625) $ (335,355) $(4,869,160)
========= ========== =========== ========== ===========
Weighted average shares of
common stock outstanding
used in computing basic
and diluted net per loss
share.................... 1,295,342 3,319,187 8,413,568 5,912,519 11,388,164
========= ========== =========== ========== ===========
Basic and diluted net loss
per share................ $ (.08) $ (.13) $ (.51) $ (.06) $ (.43)
========= ========== =========== ========== ===========
Pro forma:
Net loss.................... $(4,261,625) $(4,869,160)
=========== ===========
Weighted average shares of
common stock used in
computing basic and
diluted net loss per
share (from above)....... 8,413,568 11,388,164
Adjustment to reflect the
effect of the assumed
conversion of preferred
stock from the date of
issuance................. 415,078 5,544,803
=========== ===========
Weighted average shares
outstanding used in
computing pro forma basic
and diluted net loss per
share.................... 8,828,646 16,730,099
=========== ===========
Pro forma basic and diluted
net loss per share....... $ (.48) $ (.29)
=========== ===========
</TABLE>
Other Comprehensive Income
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, "Reportable Comprehensive
Income" ("FAS 130") which establishes standards for reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. There is no difference in the Company's historical net
losses as reported and the comprehensive net losses under the provisions of FAS
130 for all periods presented. Accordingly, the adoption of FAS 130 had no
effect on the Company's reported results of operations.
F-10
<PAGE> 85
ASK JEEVES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1998 AND MARCH 31, 1999 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Business Segments
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
("FAS 131") which establishes standards for reporting information about
operating segments in annual financial statements. It also establishes standards
for related disclosures about products and services, geographic areas and major
customers. For management purposes, the Company is divided into two business
units, the Consumer Question Answering Service and the Corporate Question
Answering Service. Each of these groups has a vice president who reports
directly to the Chief Executive Officer ("CEO"), who is the Chief Operating
Decision Maker as defined by FAS 131. Results of operations for these business
units which are provided to the CEO include only revenue and gross profit (loss)
information which is disclosed in the statement of operations in accordance with
FAS 131. The majority of the Company's operating expenses are not allocated to
the business units, but instead are treated as corporate expenses.
Computer Software
In March 1998, the American Institute of Certified Public Accountants
issued SOP 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 requires that entities
capitalize certain costs related to internal use software once certain criteria
have been met. The Company is required to implement SOP 98-1 for the year ending
December 31, 1999. Adoption of SOP 98-1 is expected to have no material impact
on the Company's financial condition or results of operations.
Reclassifications
Certain prior year balances have been restated to conform with current year
presentation.
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- MARCH 31,
1997 1998 1999
------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Equipment......................................... $71,079 $ 813,381 $1,968,488
Furniture and fixtures............................ -- 18,289 54,796
Leasehold improvements............................ -- 110,128 127,709
------- --------- ----------
71,079 941,798 2,150,993
Less accumulated depreciation and amortization.... (4,098) (106,312) (209,656)
------- --------- ----------
Property and equipment, net....................... $66,981 $ 835,486 $1,941,337
======= ========= ==========
</TABLE>
Cost and accumulated amortization related to assets under capital lease
obligations at December 31, 1998 were $89,176 and $16,801, respectively, and at
March 31, 1999 (unaudited) were $89,176 and $24,232, respectively. No assets
were acquired under capital lease arrangements in 1997.
3. LEASE COMMITMENTS
The Company has entered into operating and capital leases for certain
office space and equipment which contain certain renewal options.
F-11
<PAGE> 86
ASK JEEVES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1998 AND MARCH 31, 1999 IS UNAUDITED)
3. LEASE COMMITMENTS (CONTINUED)
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 future minimum lease payments under all noncancellable leases with
terms in excess of one year are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
Years ending December 31:
1999...................................................... $36,939 $259,326
2000...................................................... 36,939 248,628
2001...................................................... 10,651 126,791
------- --------
Total minimum lease payments................................ 84,529 $634,745
========
Less interest............................................... 10,364
-------
Present value of minimum lease payments..................... 74,165
Less current portion of capital lease obligations........... 28,220
-------
Capital lease obligations, less current portion............. $45,945
=======
</TABLE>
Rent expense was none, $4,157 and $80,916 for the period from June 13, 1996
(inception) through December 31, 1996 and the years ended December 31, 1997 and
1998, respectively.
4. INCOME TAXES
Subsequent to the issuance of Series A convertible preferred stock in
November 1998, the Company was no longer eligible for S Corporation status and
became a C Corporation subject to statutory federal and state income tax rates.
There has been no provision for U.S. federal or state income taxes for any
period as the Company has incurred operating losses in all periods.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1998
--------- ---------
<S> <C> <C>
Net operating loss carryforwards............................ $ -- $ 121,295
Capitalized research and development costs.................. -- 478,751
Accrued expenses............................................ -- 352,638
Other....................................................... -- 25,950
--------- ---------
Total deferred tax assets................................... -- 978,634
Valuation allowance......................................... -- (978,634)
--------- ---------
Net deferred tax assets..................................... $ -- $ --
========= =========
</TABLE>
A valuation allowance has been established and, accordingly, no benefit has
been recognized for the Company's net operating losses and other deferred tax
assets. The net valuation allowance increased by $978,634 during the year ended
December 31, 1998. The Company believes that, based on a number of factors, the
available objective evidence creates sufficient uncertainty regarding the
realizability of the
F-12
<PAGE> 87
ASK JEEVES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1998 AND MARCH 31, 1999 IS UNAUDITED)
4. INCOME TAXES (CONTINUED)
deferred tax assets such that a full valuation allowance has been recorded.
These factors include the Company's history of net losses since its inception
and expected near-term future losses. The Company will continue to assess the
realizability of the deferred tax assets based on actual and forecasted
operating results. There was no valuation allowance at December 31, 1997 because
the Company was a S corporation for federal and state income tax purposes.
At December 31, 1998, the Company has net operating loss carryforwards for
federal income tax purposes of approximately $303,000 which expire in the year
2018.
Utilization of the Company's net operating loss may be subject to a
substantial annual limitation due to the ownership change limitations provided
by the Internal Revenue Code and similar state provisions. Such an annual
limitation could result in the expiration of the net operating loss before
utilization.
5. STOCKHOLDERS' EQUITY
Convertible Preferred Stock
Preferred Stock at December 31, 1997 and 1998 and March 31, 1999 is as
follows by series:
<TABLE>
<CAPTION>
SHARES ISSUED AND OUTSTANDING
--------------------------------
DECEMBER 31,
DESIGNATED ----------------- MARCH 31,
SERIES SHARES 1997 1998 1999
------ ---------- ---- --------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
A Convertible....................... 3,750,000 -- 2,970,655 3,709,884
B Convertible....................... 6,250,000 -- -- 5,775,806
---------- -- --------- ---------
10,000,000 -- 2,970,655 9,485,690
========== == ========= =========
</TABLE>
Subject to certain anti-dilutive provisions, each share of Series A and B
convertible preferred stock is convertible at the option of the holder into the
same number of shares of common stock. The Series A and B convertible preferred
stock will be automatically converted into common stock in the event of an
affirmative election of the holders of at least a majority of the outstanding
shares of preferred stock, voting as separate classes, or a public offering,
with gross proceeds of at least $7,500,000 and a per share offering price of at
least $5.00.
The holders of the Series A and B convertible preferred stock are entitled
to receive noncumulative dividends when and if declared by the Board of
Directors. These dividends are in preference to any declaration or payment of
any dividend on the common stock of the Company. As of December 31, 1998, no
dividends have been declared.
In the event of any liquidation, the holders of the Series A and B
convertible preferred stock have a liquidation preference over holders of common
stock equal to the original issuance price of $2.06 and $4.33 per share, plus
any declared and unpaid dividends. The remaining assets will be distributed to
the common and preferred stockholders on an as-if-converted basis.
Stock Compensation
The Company recorded a compensation charge of $16,665 and $56,655 during
the years ended December 31, 1997 and 1998 for the difference between the
exercise price and the deemed fair value of certain stock options granted by the
Company. These amounts were expensed immediately as the options vested at the
grant date.
F-13
<PAGE> 88
ASK JEEVES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1998 AND MARCH 31, 1999 IS UNAUDITED)
5. STOCKHOLDERS' EQUITY (CONTINUED)
In April 1998, the Company issued 16,300 shares of common stock to an
independent contractor for services performed. The Company imputed a value for
the services of $13,221, of which $5,700 was paid in cash, and the remainder was
allocated to the shares issued.
The Company recorded deferred stock compensation of $505,994 during the
year ended December 31, 1998 and $1,892,638 during the three months ended March
31, 1999 representing the difference between the exercise price and the deemed
fair value of certain of the Company's stock options granted to employees. These
amounts are being amortized by charges to operations on a graded vesting method
over the vesting periods of the individual stock options. Such amortization
amounted to $29,010 for the year ended December 31, 1998 and $317,048 for the
three months ended March 31, 1999.
Warrants
In connection with the issuances of common stock in August, September and
October 1997, the Company issued to purchasers of common stock a warrant
exercisable into one share of common stock for each two shares of common stock
purchased. In total, the Company issued warrants exercisable into 1,137,672
shares of common stock at a per share exercise price of $.24. In April and June
1998, all of the Company's outstanding warrants were exercised and the Company
issued 1,137,672 shares of common stock for cash proceeds of $262,500.
In May, June, July and December 1998, the Company issued warrants
exercisable into 39,000 shares of common stock to various contractors for
services performed. The warrants are exercisable at any time into shares of
common stock at per share exercise prices ranging from $.53 to $.73. The
warrants expire on various dates between May and December 2003. The Company
determined the fair value of the warrants to be $.53 to $1.65 per share or
$23,780 in total using the Black Scholes valuation model and recorded a charge
to operations over the consulting period, which concluded in 1998.
Options Issued to Consultants
The Company granted options to purchase 70,500 shares of common stock to
consultants at an exercise price of $.01 in September 1997. These options were
granted in exchange for consulting services provided. The Company valued these
options using the Black Scholes valuation model. Amounts recorded totaling
$15,510 were charged to operations over the consulting period, which concluded
in 1997.
Under the Company's 1996 Equity Incentive Plan ("1996 Plan"), 3,000,000
shares of common stock are reserved for the issuance of incentive stock options
("ISOs") or non-statutory stock options ("NSOs") to employees, officers,
directors, and consultants. The ISOs may be granted at a price per share not
less than the fair market value on the date of the grant. The NSOs may be
granted at a price per share not less than 85% of the fair market value at the
date of grant. Options granted under the 1996 Plan are exercisable over a
maximum term of 10 years from the date of grant and generally vest over periods
of up to 4 years. Options granted under the 1996 plan contain an accelerated
vesting feature based upon a change in control of the Company.
F-14
<PAGE> 89
ASK JEEVES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1998 AND MARCH 31, 1999 IS UNAUDITED)
5. STOCKHOLDERS' EQUITY (CONTINUED)
Stock Option Activity
A summary of stock option activity is set forth below:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-----------------------------
WEIGHTED-AVERAGE
EXERCISE PRICE
SHARES PER SHARE
--------- ----------------
<S> <C> <C>
Granted.................................................. 780,000 $ .02
--------- -----
Outstanding at December 31, 1996......................... 780,000 .02
Granted................................................ 256,748 .10
Exercised.............................................. (574,998) .02
--------- -----
Outstanding at December 31, 1997......................... 461,750 .06
Granted................................................ 2,504,979 .50
Canceled............................................... (22,500) .60
Exercised.............................................. (287,366) .12
--------- -----
Outstanding at December 31, 1998......................... 2,656,863 .46
Granted (unaudited).................................... 1,691,250 1.46
Exercised (unaudited).................................. (225,656) .12
--------- -----
Outstanding at March 31, 1999 (unaudited)................ 4,122,457 $ .90
========= =====
Vested and exercisable at December 31, 1998.............. 547,168 $ .12
========= =====
Vested and exercisable at March 31, 1999 (unaudited)..... 376,251 $ .44
========= =====
</TABLE>
The weighted-average remaining contractual life of options outstanding at
December 31, 1997 and 1998 was 9.4 years and 9.5 years, respectively.
Pro Forma Disclosures of the Effect of Stock-Based Compensation
Pro forma information regarding the results of operations and net loss per
share is required by FAS 123, which also requires that the information be
determined as if the Company had accounted for its employee stock options using
the fair value method of FAS 123. The fair value of each option granted is
estimated on the date of grant using the Black Scholes valuation model. The
risk-free interest rate for 1997 and 1998 was 6.0% and 6.5%, respectively. The
expected life of options granted in the years ended December 31, 1997 and 1998
was 5 years. No dividend and a near zero volatility factor were used.
The Company has elected to follow APB 25 and related interpretations in
accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FAS 123 requires the use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, when the exercise price of the Company's employee
stock options equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized.
The option valuations models were developed for use in estimating the fair
value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected life of the option. Because the
Company's employee stock options have characteristics significantly different
from those of traded options and because changes in the subjective input
assumptions can materially affect the fair value of estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
F-15
<PAGE> 90
ASK JEEVES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1998 AND MARCH 31, 1999 IS UNAUDITED)
5. STOCKHOLDERS' EQUITY (CONTINUED)
Had compensation cost for the Company's stock-based compensation plans been
determined using the fair value at the grant dates for awards under those plans
calculated using the minimum value method of FAS 123, the Company's net loss and
basic and diluted net loss per share would have been increased to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1997 1998
--------- -----------
<S> <C> <C>
Pro forma net loss......................................... $(456,864) $(4,295,512)
Pro forma basic and diluted net loss per share............. $ (.14) $ (.51)
</TABLE>
The weighted-average grant-date fair value of options granted, which is the
value assigned to the options under FAS 123, was $0.08 and $0.16 for grants made
during years ended December 31, 1997 and 1998, respectively.
The pro forma impact of options on the net loss for the years ended
December 31, 1997 and 1998 is not representative of the effects on net income
(loss) for future years, as future years will include the effects of additional
years of stock option grants.
6. RELATED PARTY TRANSACTIONS
Certain members of the Company's Board of Directors are also owners of a
related entity to which the Company paid facilities fees for rent, utilities,
and administrative services of approximately $4,000 and $109,000 for the years
ended December 31, 1997 and 1998. For the years ended December 31, 1997 and
1998, these directors served in management positions of the Company and received
common stock options as compensation. The Company determined the fair value of
the services contributed to be $105,000 and $300,000 for the years ended
December 31, 1997 and 1998, respectively.
All of the employees of the Company were paid from the Company's inception
until August 1997 by a separate related entity. The contributions provided by
this entity have been recorded as a capital contribution and as a charge to
operations of $86,536 in the year ended December 31, 1997. In 1997, the Company
also purchased approximately $22,000 of computer and office equipment and
furniture from this related entity. In 1998, the related entity paid certain
expenses totaling $80,440 on the Company's behalf. The Company reimbursed the
related entity for all amounts paid on its behalf during 1998.
7. SUBSEQUENT EVENTS (UNAUDITED)
Sale of Preferred Stock
In January 1999, the Company issued to new and existing investors 739,229
shares of Series A convertible preferred stock at $2.06 per share resulting in
net proceeds of $1,493,485. Series A convertible preferred shares are
convertible into common stock at a one-to-one ratio.
In February and March 1999, the Company issued to new and existing
investors 5,775,806 shares of Series B convertible preferred stock at $4.33 per
share resulting in net proceeds of $24,961,680. Series B convertible preferred
shares are convertible into common stock at a one-to-one ratio.
Defined Contribution Plan
Effective January 1, 1999, the Company adopted a defined contribution
retirement plan under Section 401(k) of the Internal Revenue Code which covers
substantially all employees. Eligible employees may
F-16
<PAGE> 91
ASK JEEVES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1998 AND MARCH 31, 1999 IS UNAUDITED)
7. SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED)
contribute amounts to the plan, via payroll withholding, subject to certain
limitations. The Company does not match contributions by plan participants.
Proposed Public Offering of Common Stock
On April 16, 1999, the Board of Directors authorized the Company to proceed
with an initial public offering of its common stock. If the offering is
consummated as presently anticipated, all of the outstanding preferred stock
will automatically convert into common stock. The unaudited pro forma
stockholders' equity (deficit) at March 31, 1999 gives effect to the conversion
of all outstanding shares of convertible preferred stock at March 31, 1999 into
9,485,690 shares of common stock upon completion of the offering. The Board also
approved, subject to stockholder approval, the reincorporation of the Company in
the State of Delaware and a change in the total number of shares which the
Company is authorized to issue to 155,000,000 shares, of which 150,000,000 will
be common stock and 5,000,000 will be preferred stock.
Stock Split
On April 16, 1999, the Board of Directors approved, subject to stockholder
approval, a 1 for 2 reverse stock split of issued and outstanding common and
preferred stock. All common and preferred share and per share amounts in the
accompanying financial statements have been retroactively adjusted to reflect
the stock split.
1999 Employee Stock Purchase Plan
The Company's amended 1999 Employee Stock Purchase Plan was adopted by the
Board of Directors and approved by the stockholders in May 1999 to be effective
upon the completion of the Company's initial public offering of its common
stock. The Company has reserved a total of 400,000 shares of common stock for
issuance under the plan. Eligible employees may purchase common stock at 85% of
the lesser of the fair market value of the Company's common stock on the first
day of the applicable one year offering period or the last day of the applicable
six month purchase period.
1999 Equity Incentive Plan
In April 1999, the Board of Directors adopted the 1999 Equity Incentive
Plan which will become effective upon stockholder approval. The Company has
reserved a total of 2,125,000 shares of common stock for the issuance of ISOs or
NSOs to employees, officers, directors, or consultants under the 1999 plan.
Asset Purchase
In April 1999, the Company entered into an asset purchase agreement and a
license agreement with Lumina Decision Systems, Inc. for the acquisition of
certain technology of Lumina in exchange for total consideration of $1,537,500
which is comprised of cash of $700,000, 225,000 shares of the Company's common
stock valued at $3.50 per share and $50,000 in acquisition costs. The Company
allocated $1,176,803 of the purchase price to core technology and $360,697 to
in-process technology. The core technology will be amortized over a three year
period. The in-process technology will be written off as a one-time charge in
the second quarter of 1999. In addition, approximately 107,500 shares of the
shares issued are to be held in escrow for a two year period.
The Company acquired Lumina's Personal Decision Engine ("PDE") technology
as well as the right to use Lumina's Analytica and Analytica Decision Engine
("ADE") technologies. The ADE technologies and a
F-17
<PAGE> 92
ASK JEEVES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1998 AND MARCH 31, 1999 IS UNAUDITED)
7. SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED)
non-configurable version of the PDE technology had reached technological
feasibility and have been classified as core technology. The configurable PDE
technology had yet to reach technological feasibility and therefore, this
product was classified as in-process technology. The value of the purchased
in-process technology was determined by estimating the projected net cash flows
related to such products, including costs to complete the development of the
technology and the future revenues to be earned upon commercialization of the
products. These cash flows were discounted back to their net present value. The
resulting projected net cash from such projects were based on the Company's
estimates of revenues and operating profits related to such projects. These
estimates were based on several assumptions, including those summarized below.
Revenues and operating profit attributable to the in-process research and
development were estimated over a three-year projection period, beginning in
fiscal 1999. The resulting projected net cash flows were discounted to their
present value using a discount rate of 35%, which was calculated based on the
weighted average cost of capital, adjusted for the technology risk associated
with the purchased in-process technology, which was considered to be significant
due to the rapid pace of technological change in the internet industry. For
projected cash flows attributable to existing technology, a discount rate of 25%
was used, which reflects the weighted average cost of capital, adjusted for the
technology risk associated with these technologies. The Company's analysis
considered only future operating results of the existing and in-process
technology on a stand-alone basis and did not take into consideration any
potential increased revenue or operating efficiency that may occur
post-acquisition.
F-18
<PAGE> 93
EDGAR COLORWORK DESCRIPTIONS:
INSIDE FRONT COVER OF PROSPECTUS:
TITLE: Got a question? Ask Jeeves
Introducing Jeeves, the world's first Internet butler. Always at your service,
Jeeves makes it easy for you to get things done online. Just type a question in
your own words and Jeeves promptly takes you to the answer.
SCREEN SHOT OF ASK JEEVES HOME PAGE WITH QUESTION: How can I rent a flat in
Paris?
CAPTIONS UNDER SCREEN SHOT:
Ask Jeeves unlocks the potential for electronic commerce by connecting
consumers with answers through its Consumer Question Answering Service at
Ask.com and through the Web sites of companies that subscribe to its Corporate
Question Answering Service.
WORDS ALONG BOTTOM: Fast, trusted, easy, relevant
INSIDE GATEFOLD
TITLE: Transforming consumer interaction on the Web
DESCRIPTION OF LEFT SIDE OF GATEFOLD:
CAPTION 1: Consumer Question Answering Service
1) Ask Jeeves at Ask.com has become a popular destination site for
users to obtain answers to millions of questions.
SCREEN SHOT OF ASK JEEVES HOME PAGE WITH QUESTIONS: How can I rent a flat in
Paris?
CAPTION 2: Jeeves makes it easy
1) Type a question in plain English and click Ask!
SCREEN SHOT OF ASK JEEVES SECOND PAGE OF DIALOGUE QUESTIONS IN RESPONSE TO
QUESTION "HOW CAN I RENT A FLAT IN PARIS?"
CAPTION 3: Jeeves educates
1) Jeeves creates a dialogue to confirm your query and to suggest
related questions. Simply click on the dialogue question that
matches what you want to know.
THE FOLLOWING TEXT DESCRIBES THE CAPTIONS HIGHLIGHTING DIFFERENT ASPECTS OF THE
SCREEN SHOT
1) Highly targeted advertising opportunities
2) Dialogue questions present additional opportunities to connect
consumers to businesses
3) Qualified leads are sent to electronic commerce merchants
4) Additional answers create a richer consumer experience
SCREEN SHOT OF WEB PAGE THAT CONTAINS THE ANSWER TO THE QUESTION, "HOW CAN I
RENT A FLAT IN PARIS?"
CAPTION 4: Jeeves delivers answers
1) Jeeves sends you to a third party Web page that answers your
question. The answers are selected by our editors for accuracy,
relevance and credibility.
DESCRIPTION OF RIGHT SIDE OF GATEFOLD:
CAPTION 1: Corporate Question Answering Service
<PAGE> 94
The simple question and answer format of our custom question answering services
is designed to allow companies to increase the number of visitors to their web
sites who buy products or services, lower customer support costs, improve
customer satisfaction and deliver valuable information. As of May 31, 1999, the
Corporate Question Answering Service was available to the public on the web
sites of six of our customers. Revenues for these implementations through March
31, 1999 have not been material. Examples of three Corporate Question Answering
Service implementations are shown below.
CUSTOMER SCREEN SHOT WITH "POWERED BY ASK JEEVES" QUESTION BOX:
CAPTION 2: Compaq selected the Ask Jeeves Corporate Question Answering Service
to help fulfill its electronic commerce strategy.
CUSTOMER SCREEN SHOT WITH "POWERED BY ASK JEEVES" QUESTION BOX WITH CAPTION:
CAPTION 3: "Ask Dudley" allows Dell customers to type in technical support
questions in plain English and quickly find useful information, thereby reducing
expensive offline support costs.
CUSTOMER SCREEN SHOT WITH "POWERED BY ASK JEEVES" QUESTION BOX WITH CAPTION:
CAPTION 4: "Ask IRIS," Toshiba's Instant Response Information Service, provides
customers with easily accessible online technical support and general
information about Toshiba products.
<PAGE> 95
INSIDE BACK COVER OF PROSPECTUS:
LIST OF QUESTIONS:
Why do I never see baby pigeons?
How much is my car worth?
What are the latest fashions?
Where can I comparison shop for cameras?
How do I install a modem?
Where can I buy a snowboard?
What is a good anniversary present?
Where can I get driving directions?
Where can I get my scuba diving certification?
Jeeves is asked millions of questions a day. What's yours?
How many feet are in a mile?
How much do I need to save for retirement?
What's the weather in New York?
What are some good date ideas?
How can I create my own Web page?
How much life insurance do I need?
How can I cure my headache?
What is my IQ?
How does the stock market work?
Where can I find computer deals on line?
Where can I find cheap airline tickets?
Company LOGO
OUTSIDE BACK COVER OF PROSPECTUS:
Company logo
<PAGE> 96
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by us in connection with the
sale of common stock being registered. All amounts are estimates.
<TABLE>
<S> <C>
SEC registration fee........................................ $ 11,510
NASD Filing fee............................................. 4,640
Nasdaq National Market listing fee.......................... 95,000
Printing and engraving expenses............................. 200,000
Legal fees and expenses..................................... 400,000
Accounting fees and expenses................................ 350,000
Blue sky fees and expenses.................................. 10,000
Transfer agent fees......................................... 10,000
Miscellaneous fees and expenses............................. 18,850
----------
Total............................................. $1,100,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law (the "DGCL") authorizes
a court to award, or a corporation's board of directors to grant indemnity to
directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities, including
reimbursement for expenses incurred, arising under the Securities Act.
As permitted by the DGCL, our Amended and Restated Certificate of
Incorporation, which will become effective upon the closing of this offering,
includes a provision that eliminates the personal liability of its directors for
monetary damages for breach of fiduciary duty as a director, except for
liability (1) for any breach of the director's duty of loyalty to us or our
stockholders; (2) for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law; (3) under Section 174 of
the DGCL regarding unlawful dividends and stock purchases; or (4) for any
transaction from which the director derived an improper personal benefit.
As permitted by the DGCL, our Amended and Restated Certificate of
Incorporation and/or our Bylaws, which will become effective upon the closing of
this offering, provide that (1) we are required to indemnify our directors and
officers to the fullest extent permitted by the DGCL, subject to certain very
limited exceptions; (2) we are permitted to indemnify our other employees to the
extent that we indemnify our officers and directors, unless otherwise required
by law, our Amended and Restated Certificate of Incorporation, our Bylaws or
agreements; (3) we are required to advance expenses, as incurred, to our
directors and officers in connection with a legal proceeding to the fullest
extent permitted by the DGCL, subject to certain very limited exceptions; and
(4) the rights conferred in our Bylaws are not exclusive.
Prior to the closing of this offering, we intend to enter into Indemnity
Agreements with each of our current directors and officers to give such
directors and officers additional contractual assurances regarding the scope of
the indemnification set forth in our Amended and Restated Certificate of
Incorporation and our Bylaws and to provide additional procedural protections.
At present, there is no pending litigation or proceeding involving a director,
officer or employee of the Company regarding which indemnification is sought,
nor are we aware of any threatened litigation that may result in claims for
indemnification.
With approval by the Board, we expect to obtain directors' and officers'
liability insurance. Reference is made to the Underwriting Agreement contained
in Exhibit 1.1 hereto, which contains provisions indemnifying our officers and
directors against certain liabilities.
II-1
<PAGE> 97
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since the Company's inception on June 13, 1996, the Company has issued and
sold the following unregistered securities:
1. Prior to the completion of this offering, the Company intends to effect
a one-for-two reverse stock split of its outstanding common stock in
which each two outstanding shares of common stock will be split into
one share of common stock.
2. On June 17, 1996, the Company issued 1,500,000 shares of its common
stock to Garrett Gruener in consideration of the assets of Cameo
Technology, Inc. a company owned by Garrett Gruener, with a value of
$13,333 and $20,000 pursuant to the Asset Purchase Agreement and Plan
of Reorganization by and between the Company and Cameo Technology, Inc.
This sale was made in reliance on Section 4(2).
3. On June 17, 1996, the Company issued 900,000 shares of its common stock
to David Warthen in consideration of $20,000. This sale was made in
reliance on Section 4(2).
4. From inception through April 30, 1999, the Company granted options to
purchase 5,379,335 shares of common stock at a weighted average
exercise price of $2.40 per share to employees, consultants, directors
and other service providers pursuant to its 1996 Equity Incentive Plan
and issued an aggregate of 301,960 shares of its common stock to
employees, consultants, directors and other service providers for
aggregate consideration of approximately $89,602 pursuant to exercises
of options granted under the 1996 Equity Incentive Plan. These grants
were made in reliance on Rule 701.
5. From inception through April 30, 1999, the Company granted options to
purchase 1,050,518 shares of common stock at a weighted average
exercise price of $0.26 per share to employees and consultants pursuant
to option agreements outside of the 1996 Equity Incentive Plan and
issued an aggregate of 823,561 shares of its common stock to employees
and consultants for aggregate consideration of approximately $41,353
pursuant to exercises of options granted outside of the 1996 Equity
Incentive Plan. These grants were made in reliance on Rule 701.
6. In August 1997, the Company issued 1,083,498 shares of common stock at
a purchase price of $0.23 and warrants to purchase 541,749 shares of
common stock to Roger A. Strauch, and Daniel H. Miller. The warrants
have a per share exercise price of $0.23 per share. These sales were
made in reliance on Section 4(2).
7. In November 1997, the Company issued 12,000 shares of common stock at
$0.23 per share to Albert J. Janschewitz in exchange for assets related
to the domain name "AJ.com." This sale was made in reliance on Section
4(2).
8. In December 1997, the Company issued 541,829 shares of common stock for
an aggregate purchase price of $249,241 or $0.46 per share to the
Leavitt Family Trust. This sale was made in reliance on Section 4(2).
9. In April 1998, the Company issued 16,300 shares of common stock to
Soren Jacobsen in exchange for assets related to the domain name
"ask.com". The Company imputed a value for the services of $13,221, of
which $5,700 was paid in cash, and the remainder was allocated to the
shares issued. This sale was made in reliance on Section 4(2).
10. In May, June and July 1998, the Company issued warrants exercisable
into 21,500 shares of common stock to Antenna Group PR, for public
relations services performed with a value of $11,005. The warrants are
exercisable into shares of common stock at a per share exercise price
of $.53. This sale was made in reliance on Section 4(2).
11. In June 1998, the Company issued and sold an aggregate of 2,148,807
shares of its common stock for an aggregate purchase price of
approximately $1,138,868 or $0.53 per share to 16 investors including
II-2
<PAGE> 98
Roger A. Strauch, Daniel H. Miller, M. Bruce Nakao, A. George Battle,
Garrett Gruener, Benjamin M. Rosen and the Leavitt Family Trust. This
sale was made in reliance on Section 4(2).
12. In September 1998, the Company issued and sold 1,855,415 shares of its
common stock for an aggregate purchase price of approximately $983,370
or $0.73 per share to 11 investors including Roger A. Strauch, Daniel
H. Miller, Garrett Gruener, Benjamin M. Rosen and the Leavitt Family
Trust. This sale was made in reliance on Section 4(2).
13. In November 1998 and January 1999, the Company issued and sold
3,709,884 shares of its Series A preferred stock for an aggregate
purchase price of approximately $7,642,361 or $2.06 per share to 25
investors including Roger A. Strauch, M. Bruce Nakao, Amy Slater,
Daniel H. Miller, Garrett Gruener, Benjamin M. Rosen, CPQ Holdings,
Inc. and the Leavitt Family Trust. These sales were made in reliance on
Rule 506 of Regulation D.
14. In December 1998, the Company issued a warrant to purchase 17,500
shares of common stock at an exercise price of $0.73 per share to
Michael Goldin, our landlord, in consideration for improved lease terms
valued at $12,775. The warrant was exercised in April 1999.
15. In February and March 1999, the Company issued and sold 5,775,806
shares of its Series B preferred stock for an aggregate purchase price
of approximately $25,009,239, or $4.33 per share to 44 investors
including Roger A. Strauch, M. Bruce Nakao, Amy Slater, Daniel H.
Miller, Garrett Gruener, Benjamin M. Rosen, CPQ Holdings, Inc. and the
Leavitt Family Trust. These sales were made in reliance on Rule 506 of
Regulation D.
16. In March 1999, the Company issued a warrant exercisable into 2,500
shares of common stock to, Marco Sorensen, consultant in consideration
for graphic design services performed. The warrant is exercisable into
shares of common stock at a per share exercise price of $4.33. The
issuance was made in reliance on Section 4(2).
17. On April 16, 1999, the Company issued 225,000 shares of common stock
with a value of $3.50 per share along with $700,000 in cash in
consideration for assets of Lumina Decision Systems, Inc. valued at
$1,538,000. The assets were related to the Personal Decision Engine
technology and the Analytica and Analytica Decision Engine
technologies. The sale was made in reliance on Section 4(2).
The sale of the above securities was deemed to be exempt from registration
under the Securities Act in reliance upon Section 4(2) of the Securities Act or
Regulation D promulgated thereunder, or Rule 701 promulgated under Section 3(b)
of the Securities Act as transactions by an issuer not involving any public
offering or transactions pursuant to compensation benefit plans and contracts
relating to compensation as provided under Rule 701. The recipients of
securities in each such transaction represented their intentions to acquire the
securities for investment only and not with a view to or for sale in connection
with any distribution thereof, and appropriate legends were affixed to the share
certificates issued in such transactions. All recipients had adequate access,
through their relationships with us, to information about Ask Jeeves.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1* Form of Certificate of Incorporation of the Registrant.
3.2* Certificate of Merger to be filed with the Secretary of
State of the State of Delaware on ,
1999.
3.3* Form of Certificate of Incorporation of the registrant to be
filed on the closing of the offering made hereby.
</TABLE>
II-3
<PAGE> 99
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
3.4* Bylaws of the Registrant.
4.1* Reference is made to Exhibits 3.1, 3.2 and 3.3 hereof.
4.2* Specimen Certificate for Registrant's Common Stock.
4.3* Warrant to purchase 15,000 shares of Common Stock granted by
the Registrant to Antenna Group PR dated as of June 30,
1998.
4.4* Warrant to purchase 20,000 shares of Common Stock granted by
the Registrant to Antenna Group PR dated as of July 31,
1998.
4.5* Warrant to purchase 8,000 shares of Common Stock granted by
the Registrant to Antenna Group PR dated as of May 31, 1998.
4.6* Warrant to purchase 5,000 shares of Common Stock granted by
the Registrant to Soren Jacobsen dated as of March 10, 1999.
4.7 Amended and Restated Investor Rights Agreement by and
between the Registrant and certain investors of the
Registrant dated as of February 24, 1999.
5.1* Opinion of Cooley Godward LLP.
10.1* Amended and Restated 1996 Equity Incentive Plan.
10.2* Form of Option Agreement for the Amended and Restated 1996
Equity Incentive Plan.
10.3.1* 1999 Equity Incentive Plan.
10.3.2* 1999 Equity Incentive Plan, as amended.
10.4* Form of Option Agreement for the 1999 Equity Incentive Plan.
10.5.1* 1999 Employee Stock Purchase Plan.
10.5.2* 1999 Employee Stock Purchase Plan, as amended.
10.6* Commercial Office Lease by and between Eat/Work Development,
L.P. and the Roda Group Venture Development Company dated as
of August 20, 1997.
10.7* Commercial Office Lease by and between Eat/Work Development,
L.P. and the Roda Development Company dated as of August 14,
1998.
10.8* Commercial Office Lease by and between Eat/Work Development,
L.P. and the Roda Development Company dated as of November
15, 1998.
10.9* Commercial Office Lease by and between Eat/Work Development,
L.P. and the Registrant dated as of May 15, 1998.
10.10* Lease Agreement by and between Parker Associates and the
Registrant dated as of January 26, 1999.
10.11* Assignment and Assumption of Standard Commercial Office
Lease for Eat/Work Development by and between The Roda Group
Venture Development Company, L.L.C. and the Registrant dated
as of January 1, 1999 (relating to 918 Parker Street, Suite
A-14, Berkeley, California).
10.12* Assignment and Assumption of Standard Commercial Office
Lease for Eat/Work Development by and between The Roda Group
Venture Development Company, L.L.C. and the Registrant dated
as of January 1, 1999 (relating to 918 Parker Street, Suite
A-1-1 and A-1-2, Berkeley, California).
10.13+* License Agreement between the Registrant and Compaq Computer
Corporation dated as of October 2, 1998.
10.14+* License and Development Agreement between the Registrant and
Compaq Computer Corporation dated as of March 31, 1999.
</TABLE>
II-4
<PAGE> 100
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
10.15* Consulting Services Agreement by and between the Registrant
and The Roda Development. Group dated as of December 14,
1998.
10.16* Offer letter by and between the Company and M. Bruce Nakao
dated as of April 16, 1999.
10.17* Offer letter by and between the Registrant and Laurence
Fishkin dated as of January 11, 1999.
10.18.1* Offer letter by and between the Registrant and Edward
Briscoe III dated as of January 18, 1999.
10.18.2* Offer letter by and between the Registrant and Edward Brisco
III, as amended, dated as of June 1, 1999.
10.19* Offer letter by and between the Registrant and Frank Vaculin
dated as of January 5, 1999.
10.20.1* Offer letter by and between the Registrant and Robert W.
Wrubel dated as of May 22, 1998.
10.20.2 Offer letter by and between the Registrant and Robert W.
Wrubel, as amended, dated as of June 1, 1999.
10.21* Common Stock and Warrant Purchase Agreement by and between
the Registrant, and each of Daniel H. Miller, Roger A.
Strauch, David C. Warthen and The Roda Group Venture
Development Company, LLC dated as of August 20, 1997.
10.22* Common Stock Subscription Agreement, by and between the
Registrant and certain investors of the Registrant dated as
of June 26, 1998.
10.23* Common Stock Subscription Agreement, by and between the
Registrant and certain investors of the Registrant dated as
of August 31, 1998.
10.24* Series A Preferred Stock Purchase Agreement by and between
the Registrant and certain investors of the Registrant dated
as of November 13, 1998.
10.25* Series B Preferred Stock Purchase Agreement by and between
the Registrant and certain investors of the Registrant dated
as of February 24, 1999.
10.26+* Asset Purchase Agreement by and between the Registrant and
Lumina Decision Systems, Inc. dated as of April 16, 1999.
10.27* Form of Indemnity Agreement by and between the Registrant
and each of its directors and executive officers.
10.28* Office Lease by and between Emery Station Associates, L.L.C.
and the Registrant dated as of April 29, 1999.
10.29 Offer Letter by and between the Registrant and George
Lichter dated as of May 27, 1999.
23.1 Consent of Ernst & Young LLP.
23.2* Consent of Cooley Godward LLP. Reference is made to Exhibit
5.1.
24.1* Power of attorney. Reference is made to Page II-6.
27.1* Financial Data Schedule.
</TABLE>
- ---------------
+ Certain portions of this document have been omitted pursuant to a
confidential treatment request.
* Previously filed.
(b) FINANCIAL STATEMENT SCHEDULES.
All schedules have been omitted because the information required to be set
forth therein is not applicable or is shown in the combined financial statements
or notes thereto.
II-5
<PAGE> 101
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreement, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon rule 430A and contained in a
form of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) of
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purposes of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-6
<PAGE> 102
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 3 to the Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Berkeley, State of California, on June 16, 1999.
ASK JEEVES, INC.
By: /s/ ROBERT W. WRUBEL
------------------------------------
Robert W. Wrubel
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
PRINCIPAL EXECUTIVE OFFICER:
/s/ ROBERT W. WRUBEL President, Chief Executive June 16, 1999
- ----------------------------------------------------- Officer and Director
Robert W. Wrubel
PRINCIPAL FINANCIAL OFFICER:
/s/ M. BRUCE NAKAO Chief Financial Officer June 16, 1999
- -----------------------------------------------------
M. Bruce Nakao
PRINCIPAL ACCOUNTING OFFICER:
/s/ CHRISTINE M. DAVIS Controller June 16, 1999
- -----------------------------------------------------
Christine M. Davis
ADDITIONAL DIRECTORS:
* Chairman of the Board of June 16, 1999
- ----------------------------------------------------- Directors
Roger A. Strauch
* Director June 16, 1999
- -----------------------------------------------------
A. George Battle
* Director June 16, 1999
- -----------------------------------------------------
Benjamin M. Rosen
* Director June 16, 1999
- -----------------------------------------------------
Daniel J. Nova
* Director June 16, 1999
- -----------------------------------------------------
Geoffrey Y. Yang
* Director June 16, 1999
- -----------------------------------------------------
Garrett Gruener
</TABLE>
*By: /s/ ROBERT W. WRUBEL
-------------------------------
Robert W. Wrubel
Attorney-in-Fact
II-7
<PAGE> 103
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1* Form of Certificate of Incorporation of the Registrant.
3.2* Certificate of Merger to be filed with the Secretary of
State of the State of Delaware on ,
1999.
3.3* Form of Certificate of Incorporation of the registrant to be
filed on the closing of the offering made hereby.
3.4* Bylaws of the Registrant.
4.1* Reference is made to Exhibits 3.1, 3.2 and 3.3 hereof.
4.2* Specimen Certificate for Registrant's Common Stock.
4.3* Warrant to purchase 15,000 shares of Common Stock granted by
the Registrant to Antenna Group PR dated as of June 30,
1998.
4.4* Warrant to purchase 20,000 shares of Common Stock granted by
the Registrant to Antenna Group PR dated as of July 31,
1998.
4.5* Warrant to purchase 8,000 shares of Common Stock granted by
the Registrant to Antenna Group PR dated as of May 31, 1998.
4.6* Warrant to purchase 5,000 shares of Common Stock granted by
the Registrant to Soren Jacobsen dated as of March 10, 1999.
4.7 Amended and Restated Investor Rights Agreement by and
between the Registrant and certain investors of the
Registrant dated as of February 24, 1999.
5.1* Opinion of Cooley Godward LLP.
10.1* Amended and Restated 1996 Equity Incentive Plan.
10.2* Form of Option Agreement for the Amended and Restated 1996
Equity Incentive Plan.
10.3.1* 1999 Equity Incentive Plan.
10.3.2* 1999 Equity Incentive Plan, as amended.
10.4* Form of Option Agreement for the 1999 Equity Incentive Plan.
10.5.1* 1999 Employee Stock Purchase Plan.
10.5.2* 1999 Employee Stock Purchase Plan, as amended.
10.6* Commercial Office Lease by and between Eat/Work Development,
L.P. and the Roda Group Venture Development Company dated as
of August 20, 1997.
10.7* Commercial Office Lease by and between Eat/Work Development,
L.P. and the Roda Development Company dated as of August 14,
1998.
10.8* Commercial Office Lease by and between Eat/Work Development,
L.P. and the Roda Development Company dated as of November
15, 1998.
10.9* Commercial Office Lease by and between Eat/Work Development,
L.P. and the Registrant dated as of May 15, 1998.
10.10* Lease Agreement by and between Parker Associates and the
Registrant dated as of January 26, 1999.
10.11* Assignment and Assumption of Standard Commercial Office
Lease for Eat/Work Development by and between The Roda Group
Venture Development Company, L.L.C. and the Registrant dated
as of January 1, 1999 (relating to 918 Parker Street, Suite
A-14, Berkeley, California).
</TABLE>
<PAGE> 104
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
10.12* Assignment and Assumption of Standard Commercial Office
Lease for Eat/Work Development by and between The Roda Group
Venture Development Company, L.L.C. and the Registrant dated
as of January 1, 1999 (relating to 918 Parker Street, Suite
A-1-1 and A-1-2, Berkeley, California).
10.13+* License Agreement between the Registrant and Compaq Computer
Corporation dated as of October 2, 1998.
10.14+* License and Development Agreement between the Registrant and
Compaq Computer Corporation dated as of March 31, 1999.
10.15* Consulting Services Agreement by and between the Registrant
and The Roda Development. Group dated as of December 14,
1998.
10.16* Offer letter by and between the Company and M. Bruce Nakao
dated as of April 16, 1999.
10.17* Offer letter by and between the Registrant and Laurence
Fishkin dated as of January 11, 1999.
10.18.1* Offer letter by and between the Registrant and Edward
Briscoe III dated as of January 18, 1999.
10.18.2* Offer letter by and between the Registrant and Edward Brisco
III, as amended, dated as of June 1, 1999.
10.19* Offer letter by and between the Registrant and Frank Vaculin
dated as of January 5, 1999.
10.20.1* Offer letter by and between the Registrant and Robert W.
Wrubel dated as of May 22, 1998.
10.20.2* Offer letter by and between the Registrant and Robert W.
Wrubel, as amended, dated as of June 1, 1999.
10.21* Common Stock and Warrant Purchase Agreement by and between
the Registrant, and each of Daniel H. Miller, Roger A.
Strauch, David C. Warthen and The Roda Group Venture
Development Company, LLC dated as of August 20, 1997.
10.22* Common Stock Subscription Agreement, by and between the
Registrant and certain investors of the Registrant dated as
of June 26, 1998.
10.23* Common Stock Subscription Agreement, by and between the
Registrant and certain investors of the Registrant dated as
of August 31, 1998.
10.24* Series A Preferred Stock Purchase Agreement by and between
the Registrant and certain investors of the Registrant dated
as of November 13, 1998.
10.25* Series B Preferred Stock Purchase Agreement by and between
the Registrant and certain investors of the Registrant dated
as of February 24, 1999.
10.26+* Asset Purchase Agreement by and between the Registrant and
Lumina Decision Systems, Inc. dated as of April 16, 1999.
10.27* Form of Indemnity Agreement by and between the Registrant
and each of its directors and executive officers.
10.28* Office Lease by and between Emery Station Associates, L.L.C.
and the Registrant dated as of April 29, 1999.
10.29* Offer Letter by and between the Registrant and George
Lichter dated as of May 27, 1999.
23.1 Consent of Ernst & Young LLP.
23.2* Consent of Cooley Godward LLP. Reference is made to Exhibit
5.1.
24.1* Power of attorney. Reference is made to Page II-6.
27.1* Financial Data Schedule.
</TABLE>
- ---------------
+ Certain portions of this document have been omitted pursuant to a
confidential treatment request.
* Previously filed.
<PAGE> 1
EXHIBIT 4.7
ASK JEEVES, INC.
AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
SECTION 1. GENERAL..........................................................................1
1.1 Definitions...................................................................1
SECTION 2. REGISTRATION; RESTRICTIONS ON TRANSFER...........................................3
2.1 Restrictions on Transfer......................................................3
2.2 Demand Registration...........................................................4
2.3 Piggyback Registrations.......................................................5
2.4 Form S-3 Registration.........................................................7
2.5 Expenses of Registration......................................................8
2.6 Obligations of the Company....................................................8
2.7 Termination of Registration Rights............................................9
2.8 Delay of Registration; Furnishing Information................................10
2.9 Indemnification..............................................................10
2.10 Assignment of Registration Rights............................................12
2.11 Amendment of Registration Rights.............................................13
2.12 Limitation on Subsequent Registration Rights.................................13
2.13 "Market Stand-Off" Agreement; Agreement to Furnish Information...............13
2.14 Rule 144 Reporting...........................................................13
SECTION 3. COVENANTS OF THE COMPANY........................................................14
3.1 Basic Financial Information and Reporting....................................14
3.2 Confidentiality of Records...................................................15
3.3 Reservation of Common Stock..................................................15
3.4 Indemnification..............................................................15
3.6 Meetings of the Board of Directors...........................................15
3.7 Dealings with Affiliates.....................................................15
3.8 Stock Options................................................................16
3.9 Use of Proceeds..............................................................16
3.10 Board Nomination.............................................................16
3.11 Issuance of Series A Stock and Series B. Stock...............................16
3.12 Termination of Covenants.....................................................16
</TABLE>
i
<PAGE> 3
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
SECTION 4. RIGHTS OF FIRST REFUSAL.........................................................16
4.1 Subsequent Offerings.........................................................16
4.2 Exercise of Rights...........................................................17
4.3 Issuance of Equity Securities to Other Persons...............................17
4.4 Termination and Waiver of Rights of First Refusal............................17
4.5 Transfer of Rights of First Refusal..........................................17
4.6 Excluded Securities..........................................................17
SECTION 5. MISCELLANEOUS...................................................................18
5.1 Governing Law................................................................18
5.2 Survival.....................................................................18
5.3 Successors and Assigns.......................................................18
5.4 Entire Agreement.............................................................19
5.5 Severability.................................................................19
5.6 Amendment and Waiver.........................................................19
5.7 Delays or Omissions..........................................................19
5.8 Notices......................................................................20
5.9 Attorneys' Fees..............................................................20
5.10 Titles and Subtitles.........................................................20
5.11 Counterparts.................................................................20
</TABLE>
ii
<PAGE> 4
ASK JEEVES, INC.
AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
THIS AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT (the "Agreement") is
entered into as of the 24th day of February 1999, by and among ASK JEEVES, INC.,
a California corporation (the "Company") the holders of Series A Preferred Stock
("Series A Stock") and the purchasers of the Company's Series B Preferred Stock
("Series B Stock") set forth on Exhibit A of that certain Series B Preferred
Stock Purchase Agreement of even date herewith (the "Purchase Agreement") and
Exhibit A hereto. The holders of the Series A Stock and the purchasers of the
Series B Stock shall be referred to hereinafter as the "Investors" and each
individually as an "Investor."
RECITALS
WHEREAS, the Company and the holders of Series A Stock are parties to
that certain Investors Rights Agreement dated November 13, 1998 (the "Prior
Agreement") pursuant to which the Company granted the holders of Series A Stock
certain participation, registration and information rights;
WHEREAS, the Company proposes to sell and issue up to eleven million one
hundred seventy-eight thousand one hundred eighty (11,508,395) shares of its
Series B Stock pursuant to the Purchase Agreement;
WHEREAS, as a condition of entering into the Purchase Agreement, the
Investors have requested that the Company extend to them registration rights,
information rights and other rights as set forth below; and
WHEREAS, the Company and the Investors intend that this Agreement shall
supersede the Prior Agreement, and that the Prior Agreement shall terminate upon
the Closing of the sale and issuance of the Series B Stock to the purchasers of
Series B Stock.
NOW, THEREFORE, in consideration of the mutual promises,
representations, warranties, covenants and conditions set forth in this
Agreement and in the Purchase Agreement, the parties mutually agree as follows:
SECTION 1. GENERAL
1.1 DEFINITIONS. As used in this Agreement the following terms
shall have the following respective meanings:
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
1.
<PAGE> 5
"FORM S-3" means such form under the Securities Act as in effect
on the date hereof or any successor registration form under the Securities Act
subsequently adopted by the SEC which permits inclusion or incorporation of
substantial information by reference to other documents filed by the Company
with the SEC.
"HOLDER" means any person owning of record Registrable Securities
that have not been sold to the public or any assignee of record of such
Registrable Securities in accordance with Section 2.10 hereof.
"INITIAL OFFERING" means the Company's first firm commitment
underwritten public offering of its Common Stock registered under the Securities
Act.
"QUALIFIED PUBLIC OFFERING" means the Company's firmly
underwritten public offering of its Common Stock registered under the Securities
Act covering the offer and sale of Common Stock for the account of the Company
in which (i) the per share price is at least $3.30 if such event occurs within
twelve (12) months after the original issue date of the Series Stock, or $4.40
thereafter (as adjusted for stock splits, dividends, recapitalization, and the
like), and (ii) the gross proceeds to the Company (after deduction of
underwriting discounts, commissions, and fees) are at least $10,000,000.
"REGISTER," "REGISTERED," and "REGISTRATION" refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act, and the declaration or ordering of
effectiveness of such registration statement or document.
"REGISTRABLE SECURITIES" means (a) Common Stock of the Company
issued or issuable upon conversion of the Shares; and (b) any Common Stock of
the Company issued as (or issuable upon the conversion or exercise of any
warrant, right or other security which is issued as) a dividend or other
distribution with respect to, or in exchange for or in replacement of the
Shares. Notwithstanding the foregoing, Registrable Securities shall not include
any securities sold by a person to the public either pursuant to a registration
statement or Rule 144 or sold in a private transaction in which the transferor's
rights under Section 2 of this Agreement are not assigned.
"REGISTRABLE SECURITIES THEN OUTSTANDING" shall be the number of
shares determined by calculating the total number of shares of the Company's
Common Stock that are Registrable Securities and are then issuable upon
conversion of the then issued and outstanding Shares.
"REGISTRATION EXPENSES" shall mean all expenses incurred by the
Company in complying with Sections 2.2, 2.3, 2.4 and 2.6 hereof, including,
without limitation, all registration and filing fees, printing expenses, fees
and disbursements of counsel for the Company, reasonable fees and disbursements
not to exceed fifteen thousand dollars ($15,000) of a single special counsel for
the Holders, blue sky fees and expenses and the expense of any special audits
incident to or required by any such registration (but excluding the compensation
of regular employees of the Company which shall be paid in any event by the
Company).
2.
<PAGE> 6
"SEC" or "COMMISSION" means the Securities and Exchange
Commission.
"SECURITIES ACT" shall mean the Securities Act of 1933, as
amended.
"SELLING EXPENSES" shall mean all underwriting discounts and
selling commissions applicable to the sale.
"SHARES" shall mean the (i) Company's Series A Stock issued
pursuant to the Series A Preferred Stock Purchase Agreement dated November 10,
1998 and (ii) the Company's Series B Stock issued pursuant to the Purchase
Agreement.
SECTION 2. REGISTRATION; RESTRICTIONS ON TRANSFER
2.1 RESTRICTIONS ON TRANSFER.
(a) Each Holder agrees not to make any disposition of all
or any portion of the Shares or Registrable Securities unless and until:
(i) There is then in effect a registration
statement under the Securities Act covering such proposed disposition and such
disposition is made in accordance with such registration statement; or
(ii) (A) The transferee, if it acquires any
registrable Securities or any Shares, has agreed in writing to be bound by the
terms of this Agreement, (B) such Holder shall have notified the Company of the
proposed disposition and shall have furnished the Company with a description of
the circumstances surrounding the proposed disposition, (C) the Company has
consented to the transfer, if the transferee's primary business is Internet
based; and (D) if reasonably requested by the Company, such Holder shall have
furnished the Company with an opinion of counsel, reasonably satisfactory to the
Company, that such disposition will not require registration of such shares
under the Securities Act. It is agreed that the Company will not require
opinions of counsel for transactions made pursuant to Rule 144 except in unusual
circumstances.
(iii) Notwithstanding the provisions of paragraphs
(i) and (ii) above, no such registration statement or opinion of counsel shall
be necessary for a transfer by a Holder which is (A) a partnership to its
partners or former partners in accordance with partnership interests, (B) a
limited liability company to its members or former members in accordance with
their interest in the limited liability company, (C) a company to its parent or
its subsidiaries; or (D) to the Holder's family member or trust for the benefit
of an individual Holder; provided that in each case the transferee will be
subject to the terms of this Agreement to the same extent as if he were an
original Holder hereunder; provided, however, that a Holder shall not transfer
to an above affiliate whose primary business is Internet based without the
consent of the Company.
3.
<PAGE> 7
(b) Each certificate representing Shares or Registrable
Securities shall (unless otherwise permitted by the provisions of the Agreement)
be stamped or otherwise imprinted with a legend substantially similar to the
following (in addition to any legend required under applicable state securities
laws):
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 (THE "ACT") AND MAY NOT
BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, ASSIGNED,
PLEDGED OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER
THE ACT OR UNLESS THE COMPANY HAS RECEIVED AN OPINION OF
COUNSEL SATISFACTORY TO THE COMPANY AND ITS COUNSEL THAT
SUCH REGISTRATION IS NOT REQUIRED.
(c) The Company shall be obligated to reissue promptly
unlegended certificates at the request of any holder thereof if the holder shall
have obtained an opinion of counsel (which counsel may be counsel to the
Company) reasonably acceptable to the Company to the effect that the securities
proposed to be disposed of may lawfully be so disposed of without registration,
qualification or legend.
(d) Any legend endorsed on an instrument pursuant to
applicable state securities laws and the stop-transfer instructions with respect
to such securities shall be removed upon receipt by the Company of an order of
the appropriate blue sky authority authorizing such removal.
2.2 DEMAND REGISTRATION.
(a) Subject to the conditions of this Section 2.2, if the
Company shall receive a written request from the Holder(s) of a majority of the
Registrable Securities then outstanding (the "Initiating Holders") that the
Company file a registration statement under the Securities Act covering
Registrable Securities having an aggregate offering price to the public of not
less than $5,000,000, then the Company shall, within twenty (20) days of the
receipt thereof, give written notice of such request to all Holders, and subject
to the limitations of this Section 2.2, use its best efforts to effect, as soon
as practicable, the registration under the Securities Act of all Registrable
Securities that the Holders request to be registered.
(b) If the Initiating Holders intend to distribute the
Registrable Securities covered by their request by means of an underwriting,
they shall so advise the Company as a part of their request made pursuant to
this Section 2.2 or any request pursuant to Section 2.4 and the Company shall
include such information in the written notice referred to in Section 2.2(a) or
Section 2.4(a), as applicable. In such event, the right of any Holder to include
its Registrable Securities in such registration shall be conditioned upon such
Holder's participation in such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting to the extent provided herein. All
Holders proposing to distribute their
4.
<PAGE> 8
securities through such underwriting shall enter into an underwriting agreement
in customary form with the underwriter or underwriters selected for such
underwriting by a majority in interest of the Initiating Holders (which
underwriter or underwriters shall be reasonably acceptable to the Company).
Notwithstanding any other provision of this Section 2.2 or Section 2.4, if the
underwriter advises the Company that marketing factors require a limitation of
the number of Registrable Securities to be underwritten, then the Company shall
so advise all Holders of Registrable Securities which would otherwise be
underwritten pursuant hereto, and the number of shares that may be included in
the underwriting shall be allocated to the Holders of such Registrable
Securities on a pro rata basis based on the number of Registrable Securities
held by all such Holders (including the Initiating Holders). If as a result of
such cutback, the Company is able to register more securities of the Company
than the Holders in such registration, then such registration shall be deemed to
be a piggyback registration pursuant to Section 2.3 and shall not count as a
demand registration pursuant to this Section 2.2. Any Registrable Securities
excluded or withdrawn from such underwriting shall be withdrawn from the
registration.
(c) The Company shall not be required to effect a
registration pursuant to this Section 2.2:
(i) prior to one hundred eighty (180) days
following the effective date of the registration statement pertaining to the
Initial Offering;
(ii) after the Company has effected two (2)
registrations pursuant to this Section 2.2, and such registrations have been
declared or ordered effective;
(iii) during the period starting with the date of
filing of, and ending on the date one hundred eighty (180) days following the
effective date of the registration statement pertaining to a public offering;
provided that the Company makes reasonable good faith efforts to cause such
registration statement to become effective;
(iv) if the Initiating Holders do not hold fifty
percent (50%) of the Registrable Securities originally purchased under the
Purchase Agreement;
(v) if within thirty (30) days of receipt of a
written request from Initiating Holders pursuant to Section 2.2(a), the Company
gives notice to the Holders of the Company's intention to file a Registration
Statement on Form S-1 or on Form S-3 within thirty (30) days; or
(vi) if the Company shall furnish to Holders
requesting a registration statement pursuant to this Section 2.2, a certificate
signed by the Chairman of the Board stating that in the good faith judgment of
the Board of Directors of the Company, it would be seriously detrimental to the
Company and its shareholders for such registration statement to be effected at
such time, in which event the Company shall have the right to defer such filing
for a period of not more than sixty (60) days after receipt of the request of
the Initiating Holders; provided that such right to delay a request shall be
exercised by the Company not more than once in any twelve (12) month period.
5.
<PAGE> 9
2.3 PIGGYBACK REGISTRATIONS. The Company shall notify all Holders
of Registrable Securities in writing at least fifteen (15) days prior to the
filing of any registration statement under the Securities Act for purposes of a
public offering of securities of the Company (including, but not limited to,
registration statements relating to secondary offerings of securities of the
Company, but excluding registration statements relating to employee benefit
plans or with respect to corporate reorganizations or other transactions under
Rule 145 of the Securities Act) and will afford each such Holder an opportunity
to include in such registration statement all or part of such Registrable
Securities held by such Holder. Each Holder desiring to include in any such
registration statement all or any part of the Registrable Securities held by it
shall, within fifteen (15) days after the above-described notice from the
Company, so notify the Company in writing, including whether such participation
is conditioned upon the Registrable Securities being sold at or above a certain
price. Such notice shall state the intended method of disposition of the
Registrable Securities by such Holder. If a Holder decides not to include all of
its Registrable Securities in any registration statement thereafter filed by the
Company, such Holder shall nevertheless continue to have the right to include
any Registrable Securities in any subsequent registration statement or
registration statements as may be filed by the Company with respect to offerings
of its securities, all upon the terms and conditions set forth herein.
(a) UNDERWRITING. If the registration statement under
which the Company gives notice under this Section 2.3 is for an underwritten
offering, the Company shall so advise the Holders of Registrable Securities. In
such event, the right of any such Holder to be included in a registration
pursuant to this Section 2.3 shall be conditioned upon such Holder's
participation in such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting to the extent provided herein. All
Holders proposing to distribute their Registrable Securities through such
underwriting shall enter into an underwriting agreement in customary form with
the underwriter or underwriters selected for such underwriting by the Company.
Notwithstanding any other provision of the Agreement, if the Company and the
underwriter(s) determine in good faith that market conditions require a
limitation of the number of shares to be underwritten, the number of shares that
may be included in the underwriting shall be allocated, first, to the Company;
second, to the Holders on a pro rata basis based on the total number of
Registrable Securities held by the Holders; and third, to any shareholder of the
Company (other than a Holder) on a pro rata basis. No such reduction shall
reduce the securities being offered by the Company for its own account to be
included in the registration and underwriting. If any Holder disapproves of the
terms of any such underwriting, such Holder may elect to withdraw therefrom by
written notice to the Company and the underwriter, including the proposed sale
price, delivered at least five (5) business days prior to the effective date of
the registration statement. In addition, any Registrable Securities whose
inclusion is conditioned upon whether such Registrable Securities are sold at or
above a certain price shall be automatically excluded from such underwriting if
the gross proceeds from such underwriting would be less than such price, unless
prior to the effective date of the Registration Statement, the condition of
attaining a certain price is removed by such Holder. Any Registrable Securities
excluded or withdrawn from such underwriting shall be excluded and withdrawn
from the registration. For any Holder which is a partnership or corporation, the
partners, retired partners and shareholders of such Holder, or the estates and
family members of any such partners and
6.
<PAGE> 10
retired partners and any trusts for the benefit of any of the foregoing person
shall be deemed to be a single "Holder", and any pro rata reduction with respect
to such "Holder" shall be based upon the aggregate amount of shares carrying
registration rights owned by all entities and individuals included in such
"Holder," as defined in this sentence.
(b) RIGHT TO TERMINATE REGISTRATION. The Company shall
have the right to terminate or withdraw any registration initiated by it under
this Section 2.3 prior to the effectiveness of such registration whether or not
any Holder has elected to include securities in such registration. The
Registration Expenses of such withdrawn registration shall be borne by the
Company in accordance with Section 2.5 hereof.
2.4 FORM S-3 REGISTRATION. In case the Company shall receive from
any Holder or Holders of Registrable Securities a written request or requests
that the Company effect a registration on Form S-3 (or any successor to Form
S-3) or any similar short-form registration statement and any related
qualification or compliance with respect to all or a part of the Registrable
Securities owned by such Holder or Holders, the Company will:
(a) promptly give written notice of the proposed
registration, and any related qualification or compliance, to all other Holders
of Registrable Securities; and
(b) as soon as practicable, effect such registration and
all such qualifications and compliances as may be so requested and as would
permit or facilitate the sale and distribution of all or such portion of such
Holder's or Holders' Registrable Securities as are specified in such request,
together with all or such portion of the Registrable Securities of any other
Holder or Holders joining in such request as are specified in a written request
given within fifteen (15) days after receipt of such written notice from the
Company; provided, however, that the Company shall not be obligated to effect
any such registration, qualification or compliance pursuant to this Section 2.4:
(i) if Form S-3 (or any successor or similar form)
is not available for such offering by the Holders, or
(ii) if the Holders, together with the holders of
any other securities of the Company entitled to inclusion in such registration,
propose to sell Registrable Securities and such other securities (if any) at an
aggregate price to the public of less than one million dollars ($1,000,000), or
(iii) if within thirty (30) days of receipt of a
written request from Initiating Holders pursuant to Section 2.2(a), the Company
gives notice to the Holders of the Company's intention to make a public offering
within sixty (60) days;
(iv) if the Company shall furnish to the Holders a
certificate signed by the Chairman of the Board of Directors of the Company
stating that in the good faith judgment of the Board of Directors of the
Company, it would be seriously detrimental to the Company and its shareholders
for such Form S-3 registration to be effected at such time, in
7.
<PAGE> 11
which event the Company shall have the right to defer the filing of the Form S-3
registration statement for a period of not more than sixty (60) days after
receipt of the request of the Holder or Holders under this Section 2.4;
provided, that such right to delay a request shall be exercised by the Company
not more than once in any twelve (12) month period, or
(v) if the Company has already effected two (2)
registrations on Form S-3 for the Holders pursuant to this Section 2.4, or
(vi) in any particular jurisdiction in which the
Company would be required to qualify to do business or to execute a general
consent to service of process in effecting such registration, qualification or
compliance.
(c) Subject to the foregoing, the Company shall file a
Form S-3 registration statement covering the Registrable Securities and other
securities so requested to be registered as soon as practicable after receipt of
the request or requests of the Holders. Registrations effected pursuant to this
Section 2.4 shall not be counted as demands for registration or registrations
effected pursuant to Sections 2.2 or 2.3, respectively.
2.5 EXPENSES OF REGISTRATION. Except as specifically provided
herein, all Registration Expenses incurred in connection with any registration,
qualification or compliance pursuant to Section 2.2, Section 2.3 or Section 2.4
herein shall be borne by the Company. All Selling Expenses incurred in
connection with any registrations hereunder shall be borne by the holders of the
securities so registered based on the Selling Expenses relating to the number of
shares sold by them. The Company shall not, however, be required to pay for
expenses of any registration proceeding begun pursuant to Section 2.2 or 2.4,
the request of which has been subsequently withdrawn by the Initiating Holders
unless (a) the withdrawal is based upon material adverse information concerning
the Company of which the Initiating Holders were not aware at the time of such
request or (b) the Holders of a majority of Registrable Securities agree to
forfeit their right to one requested registration pursuant to Section 2.2 or
Section 2.4, as applicable, in which event such right shall be forfeited by all
Holders. If the Holders are required to pay the Registration Expenses, such
expenses shall be borne by the holders of securities (including Registrable
Securities) requesting such registration in proportion to the number of shares
for which registration was requested. If the Company is required to pay the
Registration Expenses of a withdrawn offering, pursuant to clause (a) above,
then the Holders shall not forfeit their rights pursuant to Section 2.2 or
Section 2.4 to a demand registration.
2.6 OBLIGATIONS OF THE COMPANY. Whenever required to effect the
registration of any Registrable Securities, the Company shall, as expeditiously
as reasonably possible:
(a) Prepare and file with the SEC a registration statement
with respect to such Registrable Securities and use its best efforts to cause
such registration statement to become effective, and, upon the request of the
Holders of a majority of the Registrable Securities registered thereunder, keep
such registration statement effective for up to one hundred eighty (180) days
or, if earlier, until the Holder or Holders have completed the distribution
related
8.
<PAGE> 12
thereto. The Company shall not be required to file, cause to become effective or
maintain the effectiveness of any registration statement that contemplates a
distribution of securities on a delayed or continuous basis pursuant to Rule 415
under the Securities Act.
(b) Prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in connection
with such registration statement as may be necessary to comply with the
provisions of the Securities Act with respect to the disposition of all
securities covered by such registration statement for the period set forth in
paragraph (a) above.
(c) Furnish to the Holders such number of copies of a
prospectus, including a preliminary prospectus, in conformity with the
requirements of the Securities Act, and such other documents as they may
reasonably request in order to facilitate the disposition of Registrable
Securities owned by them.
(d) Use its best efforts to register and qualify the
securities covered by such registration statement under such other securities or
Blue Sky laws of such jurisdictions as shall be reasonably requested by the
Holders; provided that the Company shall not be required in connection therewith
or as a condition thereto to qualify to do business or to file a general consent
to service of process in any such states or jurisdictions.
(e) In the event of any underwritten public offering,
enter into and perform its obligations under an underwriting agreement, in usual
and customary form, with the managing underwriter(s) of such offering. Each
Holder participating in such underwriting shall also enter into and perform its
obligations under such an agreement.
(f) Notify each Holder of Registrable Securities covered
by such registration statement at any time when a prospectus relating thereto is
required to be delivered under the Securities Act of the happening of any event
as a result of which the prospectus included in such registration statement, as
then in effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances then
existing.
(g) Use its best efforts to furnish, on the date that such
Registrable Securities are delivered to the underwriters for sale, if such
securities are being sold through underwriters, (i) an opinion, dated as of such
date, of the counsel representing the Company for the purposes of such
registration, in form and substance as is customarily given to underwriters in
an underwritten public offering, addressed to the underwriters, if any, and (ii)
a letter dated as of such date, from the independent certified public
accountants of the Company, in form and substance as is customarily given by
independent certified public accountants to underwriters in an underwritten
public offering addressed to the underwriters.
2.7 TERMINATION OF REGISTRATION RIGHTS. All registration rights
granted under this Section 2 shall terminate and be of no further force and
effect three (3) years after the date of the Company's Initial Offering. In
addition, a Holder's registration rights shall expire if:
9.
<PAGE> 13
(i) all Registrable Securities held by and issuable to such Holder (and its
affiliates, partners, former partners, members and former members) may be sold
under Rule 144 (including Rule 144(k)) during any ninety (90) day period, (ii)
such Holder (together with its affiliates, partners, former partners, members
and former members) holds less than one (1%) percent of the Company's
outstanding Common Stock (treating all shares of Preferred Stock on an as
converted basis), and (iii) Form S-3 (or a successor form) is available for the
resale of outstanding Common Stock by shareholders of the Company.
2.8 DELAY OF REGISTRATION; FURNISHING INFORMATION.
(a) No Holder shall have any right to obtain or seek an
injunction restraining or otherwise delaying any such registration as the result
of any controversy that might arise with respect to the interpretation or
implementation of this Section 2.
(b) It shall be a condition precedent to the obligations
of the Company to take any action pursuant to Section 2.2, 2.3 or 2.4 that the
selling Holders shall furnish to the Company such information regarding
themselves, the Registrable Securities held by them and the intended method of
disposition of such securities as shall be required to effect the registration
of their Registrable Securities.
(c) The Company shall have no obligation with respect to
any registration requested pursuant to Section 2.2 or Section 2.4 if, due to the
operation of subsection 2.2(b), the number of shares or the anticipated
aggregate offering price of the Registrable Securities to be included in the
registration does not equal or exceed the number of shares or the anticipated
aggregate offering price required to originally trigger the Company's obligation
to initiate such registration as specified in Section 2.2 or Section 2.4,
whichever is applicable.
2.9 INDEMNIFICATION. In the event any Registrable Securities are
included in a registration statement under Sections 2.2, 2.3 or 2.4:
(a) To the extent permitted by law, the Company will
indemnify and hold harmless each Holder, the partners, officers and directors of
each Holder, any underwriter (as defined in the Securities Act) for such Holder
and each person, if any, who controls such Holder or underwriter within the
meaning of the Securities Act or the Exchange Act, against any losses, claims,
damages, or liabilities (joint or several) to which they may become subject
under the Securities Act, the Exchange Act or other federal or state law,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon any of the following statements,
omissions or violations (collectively a "Violation") by the Company: (i) any
untrue statement or alleged untrue statement of a material fact contained in
such registration statement, including any preliminary prospectus or final
prospectus contained therein or any amendments or supplements thereto, (ii) the
omission or alleged omission to state therein a material fact required to be
stated therein, or necessary to make the statements therein not misleading, or
(iii) any violation or alleged violation by the Company of the Securities Act,
the Exchange Act, any state securities law or any rule or regulation promulgated
under the Securities Act, the Exchange Act or any state securities law in
connection with the offering covered by such
10.
<PAGE> 14
registration statement; and the Company will pay as incurred to each such
Holder, partner, officer, director, underwriter or controlling person for any
legal or other expenses reasonably incurred by them in connection with
investigating or defending any such loss, claim, damage, liability or action;
provided however, that the indemnity agreement contained in this Section 2.9(a)
shall not apply to amounts paid in settlement of any such loss, claim, damage,
liability or action if such settlement is effected without the consent of the
Company, which consent shall not be unreasonably withheld, nor shall the Company
be liable in any such case for any such loss, claim, damage, liability or action
to the extent that it arises out of or is based upon a Violation which occurs in
reliance upon and in conformity with written information furnished expressly for
use in connection with such registration by such Holder, partner, officer,
director, underwriter or controlling person of such Holder.
(b) To the extent permitted by law, each Holder will, if
Registrable Securities held by such Holder are included in the securities as to
which such registration qualifications or compliance is being effected,
indemnify and hold harmless the Company, each of its directors, its officers and
each person, if any, who controls the Company within the meaning of the
Securities Act, any underwriter and any other Holder selling securities under
such registration statement or any of such other Holder's partners, directors or
officers or any person who controls such Holder, against any losses, claims,
damages or liabilities (joint or several) to which they may become subject under
the Securities Act, the Exchange Act or other federal or state law, insofar as
such losses, claims, damages or liabilities (or actions in respect thereto)
arise out of or are based upon any Violation, in each case to the extent (and
only to the extent) that such Violation occurs in reliance upon and in
conformity with written information furnished by such Holder under an instrument
duly executed by such Holder and stated to be specifically for use in connection
with such registration; and each such Holder will pay as incurred any legal or
other expenses reasonably incurred by the Company or any such director, officer,
controlling person, underwriter or other Holder, or partner, officer, director
or controlling person of such other Holder in connection with investigating or
defending any such loss, claim, damage, liability or action if it is judicially
determined in a final, non-appealable decision that there was such a Violation;
provided, however, that the indemnity agreement contained in this Section 2.9(b)
shall not apply to amounts paid in settlement of any such loss, claim, damage,
liability or action if such settlement is effected without the consent of the
Holder, which consent shall not be unreasonably withheld; provided further, that
in no event shall any indemnity under this Section 2.9 exceed the net proceeds
from the offering received by such Holder.
(c) Promptly after receipt by an indemnified party under
this Section 2.9 of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in respect thereof
is to be made against any indemnifying party under this Section 2.9, deliver to
the indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to both the indemnifying party and the indemnified party; provided,
however, that an indemnified party shall have the right to retain its own
counsel, with the fees and expenses to be paid by the indemnifying party, if
11.
<PAGE> 15
representation of such indemnified party by the counsel retained by the
indemnifying party would be inappropriate due to actual or potential differing
interests between such indemnified party and any other party represented by such
counsel in such proceeding. The failure to deliver written notice to the
indemnifying party within a reasonable time of the commencement of any such
action, if materially prejudicial to its ability to defend such action, shall
relieve such indemnifying party of any liability to the indemnified party under
this Section 2.9, but the omission so to deliver written notice to the
indemnifying party will not relieve it of any liability that it may have to any
indemnified party otherwise than under this Section 2.9.
(d) If the indemnification provided for in this Section
2.9 is held by a court of competent jurisdiction to be unavailable to an
indemnified party with respect to any losses, claims, damages or liabilities
referred to herein, the indemnifying party, in lieu of indemnifying such
indemnified party thereunder, shall to the extent permitted by applicable law
contribute to the amount paid or payable by such indemnified party as a result
of such loss, claim, damage or liability in such proportion as is appropriate to
reflect the relative fault of the indemnifying party on the one hand and of the
indemnified party on the other in connection with the Violation(s) that resulted
in such loss, claim, damage or liability, as well as any other relevant
equitable considerations. The relative fault of the indemnifying party and of
the indemnified party shall be determined by a court of law by reference to,
among other things, whether the untrue or alleged untrue statement of a material
fact or the omission to state a material fact relates to information supplied by
the indemnifying party or by the indemnified party and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission; provided, that in no event shall any contribution by
a Holder hereunder exceed the net proceeds from the offering received by such
Holder.
(e) The obligations of the Company and Holders under this
Section 2.9 shall survive completion of any offering of Registrable Securities
in a registration statement and the termination of this agreement. No
Indemnifying Party, in the defense of any such claim or litigation, shall,
except with the consent of each Indemnified Party, consent to entry of any
judgment or enter into any settlement which does not include as an unconditional
term thereof the giving by the claimant or plaintiff to such Indemnified Party
of a release from all liability in respect to such claim or litigation.
2.10 ASSIGNMENT OF REGISTRATION RIGHTS. The rights to cause the
Company to register Registrable Securities pursuant to this Section 2 may be
assigned by a Holder to a transferee or assignee of Registrable Securities which
(a) is a subsidiary, parent, general partner, limited partner, retired partner,
member or retired member of a Holder, (b) is a Holder's family member or trust
for the benefit of an individual Holder, (c) is a Holder of Registrable
Securities or (d) acquires at least two hundred fifty thousand (250,000) shares
of Registrable Securities (as adjusted for stock splits and combinations);
provided, however, (i) the transferor shall, within ten (10) days after such
transfer, furnish to the Company written notice of the name and address of such
transferee or assignee and the securities with respect to which such
registration rights are being assigned and (ii) such transferee shall agree to
be subject to all restrictions set forth in this
12.
<PAGE> 16
Agreement; and provided further, that the prior consent of the Company shall be
required for an assignment to a transferee whose primary business is Internet
based.
2.11 AMENDMENT OF REGISTRATION RIGHTS. Any provision of this
Section 2 may be amended and the observance thereof may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and the Holders of
at least a majority of the Registrable Securities then outstanding. Any
amendment or waiver effected in accordance with this Section 2.11 shall be
binding upon each Holder and the Company; provided, however, that no such
amendment or waiver shall disproportionately affect a Holder adversely without
such Holder's consent. By acceptance of any benefits under this Section 2,
Holders hereby agree to be bound by the provisions hereunder.
2.12 LIMITATION ON SUBSEQUENT REGISTRATION RIGHTS. After the date
of this Agreement, the Company shall not, without the prior written consent of
the Holders of a majority of the Registrable Securities then outstanding, enter
into any agreement with any holder or prospective holder of any securities of
the Company that would grant such holder registration rights senior to those
granted to the Holders hereunder.
2.13 "MARKET STAND-OFF" AGREEMENT; AGREEMENT TO FURNISH
INFORMATION. Each Holder hereby agrees that such Holder shall not sell or
otherwise transfer or dispose of any Common Stock (or other securities) of the
Company held by such Holder (other than those included in the registration) for
a period specified by the representative of the underwriters of Common Stock (or
other securities) of the Company not to exceed one hundred eighty (180) days
following the effective date of a registration statement of the Company filed
under the Securities Act; provided that all officers and directors of the
Company and holders of at least two percent (2%) of the Company's voting
securities enter into similar agreements.
Each Holder agrees to execute and deliver such other agreements as may
be reasonably requested by the Company or the underwriter which are consistent
with the foregoing or which are necessary to give further effect thereto. In
addition, if requested by the Company or the representative of the underwriters
of Common Stock (or other securities) of the Company, each Holder shall provide,
within ten (10) days of such request, such information as may be required by the
Company or such representative in connection with the completion of any public
offering of the Company's securities pursuant to a registration statement filed
under the Securities Act. The obligations described in this Section 2.13 shall
not apply to a registration relating solely to employee benefit plans on Form
S-1 or Form S-8 or similar forms that may be promulgated in the future, or a
registration relating solely to a Commission Rule 145 transaction on Form S-4 or
similar forms that may be promulgated in the future. The Company may impose
stop-transfer instructions with respect to the shares of Common Stock (or other
securities) subject to the foregoing restriction until the end of said one
hundred eighty (180) day period.
2.14 RULE 144 REPORTING. With a view to making available to the
Holders the benefits of certain rules and regulations of the SEC which may
permit the sale of the Registrable Securities to the public without
registration, the Company agrees to:
13.
<PAGE> 17
(a) Make and keep public information available, as those
terms are understood and defined in SEC Rule 144 or any similar or analogous
rule promulgated under the Securities Act, at all times after the effective date
of the first registration filed by the Company for an offering of its securities
to the general public;
(b) File with the SEC, in a timely manner, all reports and
other documents required of the Company under the Exchange Act; and
(c) So long as a Holder owns any Registrable Securities,
furnish to such Holder forthwith upon request: a written statement by the
Company as to its compliance with the reporting requirements of said Rule 144 of
the Securities Act, and of the Exchange Act (at any time after it has become
subject to such reporting requirements); a copy of the most recent annual or
quarterly report of the Company; and such other reports and documents as a
Holder may reasonably request in availing itself of any rule or regulation of
the SEC allowing it to sell any such securities without registration.
SECTION 3. COVENANTS OF THE COMPANY
3.1 BASIC FINANCIAL INFORMATION AND REPORTING.
(a) The Company will maintain true books and records of
account in which full and correct entries will be made of all its business
transactions pursuant to a system of accounting established and administered in
accordance with generally accepted accounting principles consistently applied,
and will set aside on its books all such proper accruals and reserves as shall
be required under generally accepted accounting principles consistently applied.
(b) As soon as practicable after the end of each fiscal
year of the Company, and in any event within one hundred twenty (120) days
thereafter, the Company will furnish each Investor an audited balance sheet of
the Company, as at the end of such fiscal year, and an audited statement of
income and an audited statement of cash flows of the Company, for such year, all
prepared in accordance with generally accepted accounting principles
consistently applied and setting forth in each case in comparative form the
figures for the previous fiscal year, all in reasonable detail. Such financial
statements shall be accompanied by a report and opinion thereon by independent
public accountants of national standing selected by the Company's Board of
Directors.
(c) So long as an Investor (with its affiliates) shall own
not less than fifty thousand (50,000) shares of Registrable Securities (adjusted
for stock splits and combinations), the Company will furnish each Investor, as
soon as practicable after the end of the first, second and third quarterly
accounting periods in each fiscal year of the Company, and in any event within
forty-five (45) days thereafter, a balance sheet of the Company as of the end of
each such quarterly period, and a statement of income and a statement of cash
flows of the Company for such period and for the current fiscal year to date,
prepared in accordance with generally accepted accounting principles, with the
exception that no notes need be attached to such statements and year-end audit
adjustments may not have been made.
14.
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(d) If the Company prepares monthly financial statements
in the ordinary course of business and so long as an Investor (with its
affiliates) shall own not less than one hundred (100,000) shares of Registrable
Securities (as adjusted for stock splits and combinations), the Company will
furnish each such Investor as soon as practicable after the end of each month,
and in any event within thirty (30) days thereafter, a balance sheet of the
Company as of the end of each such month, and a statement of income and a
statement of cash flows of the Company for such month and for the current fiscal
year to date, including a comparison to plan figures for such period, prepared
in accordance with generally accepted accounting principles consistently
applied, with the exception that no notes need be attached to such statements
and year-end audit adjustments may not have been made.
3.2 CONFIDENTIALITY OF RECORDS. Each Investor agrees to use, and
to use its best efforts to insure that its authorized representatives use, the
same degree of care as such Investor uses to protect its own confidential
information to keep confidential any information furnished to it which the
Company identifies as being confidential or proprietary (so long as such
information is not in the public domain), except that such Investor may disclose
such proprietary or confidential information to any partner, subsidiary or
parent of such Investor for the purpose of evaluating its investment in the
Company as long as such partner, subsidiary or parent is advised of the
confidentiality provisions of this Section 3.3.
3.3 RESERVATION OF COMMON STOCK. The Company will at all times
reserve and keep available, solely for issuance and delivery upon the conversion
of the Preferred Stock, all Common Stock issuable from time to time upon such
conversion.
3.4 INDEMNIFICATION. The Company will indemnify members of the
Board of Directors to the broadest extent permitted by applicable law and will
indemnify each Investor for any claims brought against the Investors by any
third party (including any other shareholder of the Company) resulting from its
ownership of Shares or Registrable Securities.
3.5 KEY MAN INSURANCE. Subject to the approval of the Board of
Directors, the Company will use its best efforts to obtain and maintain in full
force and effect term life insurance in the amount of one million ($1,000,000)
dollars on the life of Robert Wrubel; naming the Company as beneficiary.
3.6 MEETINGS OF THE BOARD OF DIRECTORS. The Directors shall
schedule regular meetings not less frequently than once every quarter. The
Company shall reimburse non-employee directors for all reasonable out-of-pocket
expenses incurred by them in the performance of their duties as directors of the
Company, including those incurred to attend board meetings.
3.7 DEALINGS WITH AFFILIATES. The Company will not enter into any
transaction including, without limitation, any loans or extensions of credit or
royalty agreements with any officer or director of the Company or any member of
their respective immediate families or any corporation or other entity directly
or indirectly controlled by one or more of such
15.
<PAGE> 19
officers or directors or members of their immediate families, except for
transactions approved in advance by a majority of the disinterested members of
the Company's Board of Directors.
3.8 STOCK OPTIONS. Without the prior consent of a majority in
interest of the Holders, the Company will not grant any options to its
employees, directors or consultants to purchase capital stock of the Company
other than options granted as of the date hereof and options granted under plans
in effect as of the date hereof (including any increase in shares eligible for
grant thereunder).
3.9 USE OF PROCEEDS. The Company will apply the proceeds from the
issuance and sale of the Series B Stock for general working capital and general
corporate purposes (including product development) consistent with financial
budgets approved from time to time by the Company's Board of Directors and to
pay all fees, costs and expenses incurred by the Company in connection with the
transactions contemplated by the Purchase Agreement. The Company will not use
any of the proceeds from the sale of the Series B Stock for (i) the repayment of
any third party indebtedness, except repayment in the ordinary course to trade
creditors; or (ii) the payment of any dividend or distribution to its
shareholders.
3.10 BOARD NOMINATION. The Company shall nominate a
representative of Highland Capital Partners for election as a director of the
Company at the first annual meeting of shareholders of the Company following a
Qualified Public Offering.
3.11 ISSUANCE OF SERIES A STOCK. The Company shall not issue and
sell any additional shares of Series A Stock above the authorized amount of
Series A Stock in the Amended and Restated Articles of Incorporation filed with
the California Secretary of State on February 9, 1999.
3.12 TERMINATION OF COVENANTS. All covenants of the Company
contained in Section 3 of this Agreement except Sections 3.2, 3.4 and 3.10 shall
expire and terminate as to each Investor upon the earlier of (i) the effective
date of the registration statement pertaining to a Qualified Public Initial
Offering or (ii) upon (a) the acquisition of all or substantially all of the
assets of the Company or (b) an acquisition of the Company by another
corporation or entity by consolidation, merger or other reorganization in which
the holders of the Company's outstanding voting stock immediately prior to such
transaction own, immediately after such transaction, securities representing
less than fifty percent (50%) of the voting power of the corporation or other
entity surviving such transaction (a "Change in Control").
SECTION 4. RIGHTS OF FIRST REFUSAL
4.1 SUBSEQUENT OFFERINGS. Each Investor shall have a right of
first refusal to purchase its pro rata share of all Equity Securities, as
defined below, that the Company may, from time to time, propose to sell and
issue after the date of this Agreement, other than the Equity Securities
excluded by Section 4.6 hereof. Each Investor's pro rata share is equal to the
ratio of (a) the number of shares of the Company's Common Stock (including all
shares of Common Stock issued or issuable upon conversion of the Shares) which
such Investor is deemed
16.
<PAGE> 20
to be a holder immediately prior to the issuance of such Equity Securities to
(b) the total number of shares of the Company's outstanding Common Stock
(including all shares of Common Stock issued or issuable upon conversion of the
Shares or upon the exercise of any outstanding warrants or options) immediately
prior to the issuance of the Equity Securities. The term "Equity Securities"
shall mean (i) any Common Stock, Preferred Stock or other security of the
Company, (ii) any security convertible, with or without consideration, into any
Common Stock, Preferred Stock or other security (including any option to
purchase such a convertible security), (iii) any security carrying any warrant
or right to subscribe to or purchase any Common Stock, Preferred Stock or other
security or (iv) any such warrant or right.
4.2 EXERCISE OF RIGHTS. If the Company proposes to issue any
Equity Securities, it shall give each Investor written notice of its intention,
describing the Equity Securities, the price and the terms and conditions upon
which the Company proposes to issue the same. Each Investor shall have fifteen
(15) days from the giving of such notice to agree to purchase its pro rata share
of the Equity Securities for the price and upon the terms and conditions
specified in the notice by giving written notice to the Company and stating
therein the quantity of Equity Securities to be purchased. Notwithstanding the
foregoing, the Company shall not be required to offer or sell such Equity
Securities to any Investor who would cause the Company to be in violation of
applicable federal securities laws by virtue of such offer or sale.
4.3 ISSUANCE OF EQUITY SECURITIES TO OTHER PERSONS. If the
Investors fail to exercise in full the rights of first refusal, the Company
shall have ninety (90) days thereafter to sell the Equity Securities in respect
of which the Investor's rights were not exercised, at a price and upon terms and
conditions no more favorable to the purchasers thereof than specified in the
Company's notice to the Investors pursuant to Section 4.2 hereof. If the Company
has not sold such Equity Securities within ninety (90) days of the notice
provided pursuant to Section 4.2, the Company shall not thereafter issue or sell
any Equity Securities, without first offering such securities to the Investors
in the manner provided above.
4.4 TERMINATION AND WAIVER OF RIGHTS OF FIRST REFUSAL. The rights
of first refusal established by this Section 4 shall terminate upon the earlier
of (i) effective date of the registration statement pertaining to the Company's
Initial Public Offering or (ii) a Change in Control. The rights of first refusal
established by this Section 4 may be amended, or any provision waived with the
written consent of Investors holding a majority of the Registrable Securities
held by all Investors, or as permitted by Section 5.6.
4.5 TRANSFER OF RIGHTS OF FIRST REFUSAL. The rights of first
refusal of each Investor under this Section 4 may be transferred to the same
parties, subject to the same restrictions as any transfer of registration rights
pursuant to Section 2.10.
4.6 EXCLUDED SECURITIES. The rights of first refusal established
by this Section 4 shall have no application to any of the following Equity
Securities:
(a) shares of Common Stock (and/or options, warrants or
other Common Stock purchase rights issued pursuant to such options, warrants or
other rights) issued
17.
<PAGE> 21
or to be issued to employees, officers or directors of, or consultants or
advisors to the Company or any subsidiary in consideration for services,
pursuant to stock purchase or stock option plans or other arrangements that are
approved by the Board of Directors;
(b) stock issued pursuant to any rights or agreements
outstanding as of the date of this Agreement, options and warrants outstanding
as of the date of this Agreement; and stock issued pursuant to any such rights
or agreements granted after the date of this Agreement; provided that the rights
of first refusal established by this Section 4 applied with respect to the
initial sale or grant by the Company of such rights or agreements;
(c) any Equity Securities issued for consideration other
than cash pursuant to a merger, consolidation, acquisition or similar business
combination;
(d) shares of Common Stock issued in connection with any
stock split, stock dividend or recapitalization by the Company;
(e) shares of Common Stock issued upon conversion of the
Shares;
(f) any Equity Securities issued pursuant to any equipment
leasing arrangement, or debt financing from a bank or similar financial
institution in which the equity coverage is 50% or less of the debt financing
amount;
(g) any Equity Securities that are issued by the Company
pursuant to a registration statement filed under the Securities Act; and
(h) shares of the Company's Common Stock or Preferred
Stock issued at or above the fair market value of such stock (as determined in
good faith by the Board of Directors) in connection with strategic transactions
involving the Company and other entities, including, without limitation, (i)
joint ventures, marketing or licensing arrangements or (ii) technology transfer
or long term supply agreements arrangements; provided that such strategic
transaction(s) and the issuance of shares therein, has been approved by the
Company's Board of Directors and provided, further that such strategic
transaction(s) includes a material commercial component such as a license, a
long term supply agreement or the like which is entered into at the same time as
the issuance of the Equity Securities.
SECTION 5. MISCELLANEOUS
5.1 GOVERNING LAW. This Agreement shall be governed by and
construed under the laws of the State of California as applied to agreements
among California residents entered into and to be performed entirely within
California.
5.2 SURVIVAL. The representations, warranties, covenants, and
agreements made herein shall survive any investigation made by any Holder and
the closing of the transactions contemplated hereby. All statements as to
factual matters contained in any certificate or other instrument delivered by or
on behalf of the Company pursuant hereto in
18.
<PAGE> 22
connection with the transactions contemplated hereby shall be deemed to be
representations and warranties by the Company hereunder solely as of the date of
such certificate or instrument.
5.3 SUCCESSORS AND ASSIGNS. Except as otherwise expressly
provided herein, the provisions hereof shall inure to the benefit of, and be
binding upon, the successors, assigns, heirs, executors, and administrators of
the parties hereto and shall inure to the benefit of and be enforceable by each
person who shall be a holder of Registrable Securities from time to time;
provided, however, that prior to the receipt by the Company of adequate written
notice of the transfer of any Registrable Securities specifying the full name
and address of the transferee, the Company may deem and treat the person listed
as the holder of such shares in its records as the absolute owner and holder of
such shares for all purposes, including the payment of dividends or any
redemption price.
5.4 ENTIRE AGREEMENT. This Agreement, the Exhibits and Schedules
hereto, the Purchase Agreement and the other documents delivered pursuant
thereto constitute the full and entire understanding and agreement between the
parties with regard to the subjects hereof and no party shall be liable or bound
to any other in any manner by any representations, warranties, covenants and
agreements except as specifically set forth herein and therein.
5.5 SEVERABILITY. In case any provision of the Agreement shall be
invalid, illegal, or unenforceable, the validity, legality, and enforceability
of the remaining provisions shall not in any way be affected or impaired
thereby.
5.6 AMENDMENT AND WAIVER.
(a) Except as otherwise expressly provided, this Agreement
may be amended or modified only upon the written consent of the Company and the
holders of at least a majority of the Registrable Securities.
(b) Except as otherwise expressly provided, the
obligations of the Company and the rights of the Holders under this Agreement
may be waived only with the written consent of the holders of at least a
majority of the Registrable Securities.
(c) Notwithstanding anything to the contrary contained
herein, if the Company shall issue additional shares of its Series B Preferred
Stock pursuant to the Purchase Agreement, any purchaser of such shares of Series
B Preferred Stock shall become a party to this Agreement by executing and
delivering an additional counterpart signature page to this Agreement and shall
be deemed a "HOLDER," and an "INVESTOR" hereunder.
5.7 DELAYS OR OMISSIONS. It is agreed that no delay or omission
to exercise any right, power, or remedy accruing to any Holder, upon any breach,
default or noncompliance of the Company under this Agreement shall impair any
such right, power, or remedy, nor shall it be construed to be a waiver of any
such breach, default or noncompliance, or any acquiescence therein, or of any
similar breach, default or noncompliance thereafter occurring. It is further
agreed that any waiver, permit, consent, or approval of any kind or character on
any Holder's
19.
<PAGE> 23
part of any breach, default or noncompliance under the Agreement or any waiver
on such Holder's part of any provisions or conditions of this Agreement must be
in writing and shall be effective only to the extent specifically set forth in
such writing. All remedies, either under this Agreement, by law, or otherwise
afforded to Holders, shall be cumulative and not alternative.
5.8 NOTICES. All notices required or permitted hereunder shall be
in writing and shall be deemed effectively given: (a) upon personal delivery to
the party to be notified, (b) when sent by confirmed telex or facsimile if sent
during normal business hours of the recipient; if not, then on the next business
day, (c) five (5) days after having been sent by registered or certified mail,
return receipt requested, postage prepaid, or (d) one (1) day after deposit with
a nationally recognized overnight courier, specifying next day delivery, with
written verification of receipt. All communications shall be sent to the party
to be notified at the address as set forth on the signature pages hereof or
Exhibit A hereto or at such other address as such party may designate by ten
(10) days advance written notice to the other parties hereto.
5.9 ATTORNEYS' FEES. In the event that any dispute among the
parties to this Agreement should result in litigation, the prevailing party in
such dispute shall be entitled to recover from the losing party all fees, costs
and expenses of enforcing any right of such prevailing party under or with
respect to this Agreement, including without limitation, such reasonable fees
and expenses of attorneys and accountants, which shall include, without
limitation, all fees, costs and expenses of appeals.
5.10 TITLES AND SUBTITLES. The titles of the sections and
subsections of this Agreement are for convenience of reference only and are not
to be considered in construing this Agreement.
5.11 COUNTERPARTS. This Agreement may be executed in any number
of counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
20.
<PAGE> 24
IN WITNESS WHEREOF, the parties hereto have executed this AMENDED AND
RESTATED INVESTOR RIGHTS AGREEMENT as of the date set forth in the first
paragraph hereof.
COMPANY: INVESTORS:
ASK JEEVES, INC.
By: /s/ Robert W. Wrubel By: /s/ See Investors Listed on Exhibit A
------------------------------- -------------------------------------
Its: Chief Financial Officer Its:_____________________________________
Title:_____________________________ Title:___________________________________
AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
SIGNATURE PAGE
<PAGE> 25
EXHIBIT A
SCHEDULE OF INVESTORS
HIGHLAND CAPITAL PARTNERS IV LIMITED PARTNERSHIP
HIGHLAND ENTREPRENEURS' FUND IV LIMITED PARTNERSHIP
CPQ HOLDINGS, INC.
INSTITUTIONAL VENTURE PARTNERS VIII, L.P.
IVM INVESTMENT FUND VIII, LLC
AMY SLATER
RODA GROUP INVESTMENT FUND I, L.L.C.
GARRETT GRUENER
BENJAMIN M. ROSEN
LEAVITT FAMILY TRUST U/T/D APRIL 20, 1989
ANGEL INVESTORS, L.P.
LJ SEVIN
RONALD & GAYLE CONWAY AS TRUSTEES OF THE CONWAY FAMILY TRUST DATED 9/25/96
MELODY KEAN HALLER
DAVID ALLEN HOFFMAN AND JOAN E. SARNAT LIVING TRUST DATED 12/15/95
KEVIN D. SCHON AND SUZANNE C. SCHON REVOCABLE TRUST DATED 7/29/94
GEORGE J. STILL, JR.
RUSSELL HOLDSTEIN, TRUSTEE FOR THE HOLDSTEIN REVOCABLE TRUST U/T/D 6/12/83
P. KIRK HOBBS
A. GEORGE BATTLE
M. BRUCE NAKAO 1994 TRUST
AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
<PAGE> 26
J. THOMAS BENTLEY
MARGARET L. TAYLOR
GERALD K. AND VERA LEO REVOCABLE TRUST DATED 8/14/89
CHARLES FINNIE
GC&H INVESTMENTS
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the references to our firm under the captions "Selected
Financial Data" and "Experts" and to the use of our report dated March 10,
1999, except for Note 7, as to which the date is June __, 1999, in Amendment
No. 3 to the Registration Statement (Form S-1) and related Prospectus of Ask
Jeeves, Inc. for the registration of 3,450,000 shares of its common stock.
Walnut Creek, California
June __, 1999
- --------------------------------------------------------------------------------
The foregoing consent is in the form that will be signed upon the
completion of the reincorporation in Delaware and 1 for 2 reverse stock split
as described in Note 7 to the financial statements.
/s/ ERNST & YOUNG LLP
Walnut Creek, California
June 15, 1999
