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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
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/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 000-26521
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ASK JEEVES, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 94-3334199
(State or other jurisdiction of (IRS Employer Identification No.)
Incorporation or organization)
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5858 HORTON ST., SUITE 350, EMERYVILLE, CA 94608
(Address of principal executive offices, including zip code)
(510) 985-7400
(Registrant's telephone number, including area code)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
/X/ Yes / / No
The number of shares outstanding of the registrant's Common Stock as of
April 30, 2000 was 35,625,620.
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ASK JEEVES, INC.
TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION
Item 1. Unaudited Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets March 31, 2000 and
December 31, 1999......................................... 3
Condensed Consolidated Statements of Operations three months
ended March 31, 2000 and 1999............................. 4
Condensed Consolidated Statements of Cash Flows three months
ended March 31, 2000 and 1999............................. 5
Notes to Condensed Consolidated Financial Statements........ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 12
Item 3. Quantitative and Qualitative Disclosure About Market Risk... 29
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 30
Item 2. Change in Securities........................................ 30
Item 3. Defaults Upon Senior Securities............................. 30
Item 4. Submission of Matters to a Vote of Securities Holders....... 30
Item 5. Other Information........................................... 30
Item 6. Exhibits and Reports on Form 8-K............................ 30
Signature........................................................................... 31
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2
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PART I. FINANCIAL INFORMATION
ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
ASK JEEVES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
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MARCH 31, DECEMBER 31,
2000 1999
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ASSETS
Current assets:
Cash and cash equivalents................................. $ 139,801 $ 17,420
Short-term investments.................................... 12,473 34,110
Accounts receivable, net.................................. 16,037 8,459
Prepaid expenses and other current assets................. 7,181 6,415
--------- --------
Total current assets.................................. 175,492 66,404
Property and equipment, net................................. 11,962 7,416
Intangibles, net and other long-term assets................. 467,354 2,344
--------- --------
Total assets.......................................... $ 654,808 $ 76,164
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 5,647 $ 4,717
Accrued compensation and related expenses................. 7,274 5,049
Accrued marketing expenses................................ 11,239 2,983
Accrued merger costs...................................... 2,548 5,280
Other accrued liabilities................................. 9,831 4,453
Deferred revenue.......................................... 9,364 7,347
Current portion of long-term liabilities.................. 1,004 818
--------- --------
Total current liabilities............................. 46,907 30,647
Capital lease obligations, less current portion............. 1,966 2,351
Other liabilities........................................... 1,315 1,315
--------- --------
Total liabilities..................................... 50,188 34,313
Commitments
Stockholders' equity:
Common stock, $.001 par value; 150,000,000 shares
authorized; 35,498,055 and 28,472,883 shares issued and
outstanding at March 31, 2000 and December 31, 1999,
respectively.............................................. 714,255 107,636
Deferred stock compensation................................. (1,842) (5,175)
Accumulated deficit......................................... (107,767) (60,568)
Accumulated other comprehensive income...................... (26) (42)
--------- --------
Total stockholders' equity............................ 604,620 41,851
--------- --------
Total liabilities and stockholders' equity............ $ 654,808 $ 76,164
========= ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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ASK JEEVES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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THREE MONTHS ENDED
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MARCH 31, 2000 MARCH 31, 1999
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Revenues:
Web Properties and Syndication............................ $ 12,567 $ 1,059
Corporate Services........................................ 5,190 444
-------- -------
Total revenues.............................................. 17,757 1,503
Cost of revenues:
Web Properties and Syndication............................ 4,150 699
Corporate Services........................................ 3,792 1,177
-------- -------
Total cost of revenues...................................... 7,942 1,876
Gross profit/(loss)......................................... 9,815 (373)
Operating expenses:
Product development....................................... 5,462 1,175
Sales and marketing....................................... 19,503 3,047
General and administrative................................ 5,042 1,140
Amortization of deferred stock compensation............... 854 317
Amortization of goodwill.................................. 15,025 --
Write-off of in-process technology........................ 11,652 --
-------- -------
Total operating expenses.................................... 57,538 5,679
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Operating loss.............................................. (47,723) (6,052)
Interest income............................................. 826 164
Interest and other expense.................................. (302) (11)
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Net loss.................................................... $(47,199) $(5,899)
======== =======
Basic and diluted net loss per share........................ $ (1.48) $ (0.33)
======== =======
Weighted average shares outstanding used in computing basic
and diluted net loss per share............................ 31,932 17,798
======== =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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ASK JEEVES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
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THREE MONTHS ENDED
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MARCH 31, 2000 MARCH 31, 1999
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OPERATING ACTIVITIES
Net loss.................................................... $(47,199) $(5,899)
Adjustment to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................. 957 106
Compensation charge related to grants of stock options.... -- 175
Amortization of deferred stock compensation............... 854 317
Amortization of intangibles............................... 16,122 --
Write-off of in-process technology........................ 11,652 --
Changes in operating assets and liabilities:
Accounts receivable..................................... (6,497) (1,071)
Prepaids and other current assets....................... 479 (235)
Other assets............................................ -- 140
Accounts payable........................................ (1,217) 734
Accrued compensation and related expenses............... 1,946 423
Accrued marketing expenses.............................. 7,075 1,134
Accrued merger costs.................................... (13,386) --
Other accrued liabilities............................... 4,631 119
Deferred revenue........................................ 1,634 659
Other liabilities....................................... -- 500
-------- -------
Net cash used in operating activities....................... (22,949) (2,898)
INVESTING ACTIVITIES
Purchases of property and equipment......................... (2,915) (1,258)
Purchases of investments.................................... (10,335) (5,169)
Proceeds from redemption of investments..................... 21,652 --
Cash acquired from subsidiaries............................. 12,646 --
-------- -------
Net cash provided by (used in) investing activities......... 21,048 (6,427)
FINANCING ACTIVITIES
Issuance of common stock.................................... 124,480 29
Issuance of preferred stock................................. -- 26,455
Repayment of capital lease obligations...................... (198) (10)
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Net cash provided by financing activities................... 124,282 26,474
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Increase in cash and cash equivalents....................... 122,381 17,149
Cash and cash equivalents at beginning of period............ 17,420 8,511
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Cash and cash equivalents at end of period.................. $139,801 $25,660
======== =======
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING
ACTIVITIES
Deferred stock compensation in connection with common stock
options issued to stockholders in exchange for services... $ 245 $ --
======== =======
Common stock issued in connection with acquisitions......... $484,619 $ --
======== =======
Interest paid............................................... $ 103 $ 10
======== =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
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ASK JEEVES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Ask Jeeves, Inc. ("Ask Jeeves" or the "Company") provides online personal
service infrastructure for companies seeking to target, acquire, convert and
retain customers online. The online personal service infrastructure allows
companies to connect users to information through automated search, natural
language question answering, decision advisory support and interaction with live
customer care representatives. The Company was incorporated in the State of
California in June 1996, then subsequently reincorporated in the State of
Delaware in June 1999.
BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements at March 31,
2000 and for the three months ended March 31, 2000 and 1999 are unaudited but
include all adjustments (consisting of normal recurring adjustments) which, in
the opinion of management, are necessary for a fair presentation 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, 2000 and
March 31, 1999 are not necessarily indicative of results for the entire fiscal
year or future periods. These condensed consolidated financial statements should
be read in conjunction with the consolidated financial statements and the notes
thereto included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1999.
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.
REVENUE RECOGNITION
We are currently aware of a Staff Accounting Bulletin entitled SAB 101
"Revenue Recognition in Financial Statements," which was issued in December 1999
by the Securities and Exchange Commission. Due to complications surrounding the
implementation of SAB 101, the SEC in March 2000 deferred the implementation
date of certain provisions of SAB 101 until the quarter ended June 30, 2000,
with retroactive application to transactions entered into during the quarter
ended March 31, 2000. We believe that based on the current guidelines, our
revenue recognition policy is in accordance with generally accepted accounting
principles.
COMPUTATION OF 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.
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ASK JEEVES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The following table sets forth the computation of net loss per share (in
thousands, except share data):
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THREE MONTHS ENDED
-------------------------------
MARCH 31, 2000 MARCH 31, 1999
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(UNAUDITED)
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Basic and Diluted net loss per share
Numerator: Net loss............................ $ (47,199) $ (5,899)
=========== ===========
Denominator: Weighted-average shares outstanding
basic and diluted.............................. 31,932,408 17,798,002
=========== ===========
Basic and diluted net loss per share............. $ (1.48) $ (0.33)
=========== ===========
</TABLE>
COMMITMENTS AND CONTINGENCIES
In February 2000, the Company entered into a lease agreement for additional
facilities in Oakland, California. The Company will occupy approximately 60,000
square feet commencing in May 2000. The total lease obligation over the six-year
term will be approximately $11.2 million.
Capital lease obligations for equipment represent the present value of
future lease payments under the agreements. The Company has options to purchase
the leased assets at the end of the lease terms.
The Company is subject to various legal proceedings, claims, and litigation
arising in the ordinary course of business. The Company's management does not
expect that the ultimate costs to resolve these matters, including the matters
discussed in the following paragraph, will have a material adverse effect on the
Company's consolidated financial position, results of operations, or cash flows.
In July 1999, IP Learn LLC filed a complaint against the Company in the
United States District Court for the Northern District of California. The
complaint, which was amended by the plaintiff, alleges that aspects of the
Company's technology infringes upon three patents alleged to be held by the
plaintiff. The Company has answered the complaint and discovery has begun.
Additionally, in December 1999, Patrick H. Winston and Boris Katz filed a
complaint against the Company in the United States District Court for the
District of Massachusetts. The complaint alleges that the Company's technology
infringes two patents alleged to be held by the plaintiffs. The Company has
answered the complaint, but discovery has not yet begun. The Company intends to
vigorously defend against the allegations asserted in these complaints and
believes it has meritorious defenses to the claims. However, the outcome of
litigation is difficult to predict and could result in a judgment against the
Company which could significantly affect the Company's consolidated financial
position, results of operations or cash flows.
2. BUSINESS SEGMENTS
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("FAS 131") establishes
standards for reporting information about operating segments financial
statements. For management purposes, the Company is divided into two business
groups, the Web Properties and Syndication Group and the Corporate Services
Group. Results of operations for these business groups include revenues, cost of
revenues, gross profit (loss) and sales and
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ASK JEEVES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
2. BUSINESS SEGMENTS (CONTINUED)
marketing expense information as provided below in accordance with FAS 131.
Summarized financial information by segment for the first quarter of 2000 and
1999, as taken from the internal management information system is as follows (in
thousands):
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THREE MONTHS ENDED
-------------------------------
MARCH 31, 2000 MARCH 31, 1999
-------------- --------------
(UNAUDITED)
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WEB PROPERTIES AND SYNDICATION:
Revenues....................................... $12,567 $1,059
Cost of revenues............................... 4,150 699
Gross profit (loss)............................ 8,417 360
Sales and marketing expense.................... 14,977 2,395
CORPORATE SERVICES:
Revenues....................................... $ 5,190 $ 444
Cost of revenues............................... 3,792 1,177
Gross profit (loss)............................ 1,398 (733)
Sales and marketing expense.................... 4,526 652
</TABLE>
3. COMPREHENSIVE INCOME
The components of comprehensive income are as follows (in thousands):
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THREE MONTHS ENDED
-------------------------------
MARCH 31, 2000 MARCH 31, 1999
-------------- --------------
(UNAUDITED)
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Net loss......................................... $(47,199) $(5,899)
Other comprehensive income:
Change in unrealized loss on investments, net
of tax benefit of none....................... 16 --
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Total comprehensive loss..................... $(47,183) $(5,899)
======== =======
</TABLE>
4. BUSINESS COMBINATIONS
PURCHASE COMBINATIONS
During the three months ended March 31, 2000, the Company made the business
and technology acquisitions described in the paragraphs that follow, each of
which has been accounted for as a purchase. The consolidated financial
statements include the operating results of each business from the date of
acquisition.
The amounts allocated to purchased research and development were determined
through established valuation techniques in the high technology Internet
industry and were expensed upon acquisition, because technological feasibility
had not been established and no future alternative uses existed. The values
assigned to purchased in-process technology were determined by identifying the
on-going research projects for which technological feasibility had not been
achieved and assessing the state of completion of the
8
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ASK JEEVES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
4. BUSINESS COMBINATIONS (CONTINUED)
research and development effort. The state of completion was determined by
estimating the costs and time incurred to date relative to those costs and time
to be incurred to develop the purchased in-process technology into commercially
viable products, estimating the resulting net cash flows only from the
percentage of research and development efforts complete at the date of
acquisition, and discounting the net cash flows back to their present value. The
discount rate included a factor that took into account the uncertainty
surrounding the successful development of the purchased in-process technology
projects.
To determine the values of purchased technology, the expected future cash
flows of the existing developed technologies were discounted taking into account
the characteristics and applications of the product, the size of existing
markets, growth rates of existing and future markets as well as an evaluation of
past and anticipated product lifecycles.
To determine the values of the acquired workforce, employees were identified
who would require significant cost to replace and train. Then each employee's
partially burdened cost (salary, benefits, facilities), the cost to train the
employee, and the recruiting costs (locating, interviewing, and hiring) were
estimated. These costs were then aggregated and tax-affected to estimate the
value of the assembled workforce.
Amounts allocated to purchased technology, goodwill and other intangible
assets for the business acquisitions that follow are being amortized on a
straight-line basis over periods of three to four years.
THE EVERGREEN PROJECT, INC.
In January 2000, the Company acquired all the assets and liabilities of The
Evergreen Project, Inc. ("Evergreen"), which produces Internet-based video
programs in life science, geography and environmental economics that are found
in over 8,000 schools nationwide. The purchase consideration consisted of 18,896
shares of common stock with a value of $1.95 million, $1.95 million in cash,
liabilities assumed of $529,000, and approximately $30,000 in acquisition costs.
3,779 shares were placed into an escrow account that will be released upon the
expiration of certain indemnification obligations. The purchase consideration of
the acquired assets and assumed liabilities were allocated based on fair values
as follows (in thousands):
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Purchased in-process research and development charged to
operations................................................ $ 404
Assets acquired............................................. 374
Purchased technology........................................ 455
Acquired workforce.......................................... 200
Goodwill.................................................... 3,026
------
Total purchase consideration................................ $4,459
======
</TABLE>
The pro forma results of operations for the three months ended March 31, 2000
and 1999, as if the acquisition of Evergreen had occurred on January 1, 2000 and
1999, were not significant.
9
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ASK JEEVES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
4. BUSINESS COMBINATIONS (CONTINUED)
DIRECT HIT TECHNOLOGIES, INC.
In February 2000, the Company acquired Direct Hit Technologies, Inc.
("Direct Hit"), a provider of search and navigation services on the Internet.
The purchase consideration consisted of 4,751,878 shares of common stock with a
value of $456.0 million, 331,596 shares to be issued upon the exercise of
outstanding Direct Hit options assumed as part of the merger with a value of
$25.8 million, liabilities assumed of $10.2 million and $11.2 million in
acquisition costs. 475,188 shares are held in escrow and will be released upon
the expiration of certain indemnification obligations. The purchase
consideration of the acquired assets and assumed liabilities were allocated
based on fair values as follows (in thousands):
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Tangible assets acquired.................................... $ 16,890
Equipment acquired.......................................... 2,455
Developed technology acquired............................... 3,172
Core technology acquired.................................... 15,114
In-Process technology acquired.............................. 10,259
Patents and other assets acquired........................... 2,300
Goodwill.................................................... 453,140
--------
Total purchase consideration................................ $503,330
========
</TABLE>
The following unaudited pro forma summary reflects the consolidated results
of operations for the three months ended March 2000 and 1999, as if the
acquisition of Direct Hit had occurred on January 1, 2000 and 1999, and is not
intended to be indicative of future results (in thousands):
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THREE MONTHS ENDED
-------------------------------
MARCH 31, 2000 MARCH 31, 1999
-------------- --------------
(UNAUDITED)
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Pro forma total revenues......................... $ 18,230 $ 1,727
Pro forma net loss............................... $(56,702) $(6,398)
Pro forma basic and diluted net loss per share... $ (1.70) $ (0.31)
Weighted average shares outstanding used in
computing pro forma basic and diluted net loss
per share...................................... 33,395 20,486
</TABLE>
The pro forma consolidated results of operations include historical
operations of the Company and Direct Hit adjusted to reflect certain pro forma
adjustments, including amortization of goodwill and other intangible assets
arising from the acquisition. These results do not purport to be indicative of
what would have occurred had the acquisition been made as of that date or the
consolidated results of operations which may occur in future periods.
NET EFFECT SYSTEMS, INC.
In November 1999, the Company merged with Net Effect Systems, Inc. (Net
Effect) in a stock-for-stock transaction that was accounted for as a pooling of
interests. As the merger was accounted for as a pooling of interests, all prior
periods have been restated to combine the results of the Company
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ASK JEEVES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
4. BUSINESS COMBINATIONS (CONTINUED)
with the results of Net Effect. The following table shows the historical results
of the Company and Net Effect for the three months ended March 31, 1999 (in
thousands):
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NET EFFECT ASK JEEVES TOTAL
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Revenues........................................ $ 372 $ 1,131 $ 1,503
Net Loss........................................ $(1,030) $(4,869) $(5,899)
</TABLE>
TECHNOLOGY OBSOLESCENCE
As a result of the acquisition of Direct Hit, the Company determined that
the technology acquired from Excellerate LLC ("Excellerate") was obsolete and
had no future benefit. Accordingly, in the three months ended March 31, 2000,
the Company recorded a charge to operations of $989,000 of acquired core
technology.
5. COMMON STOCK OFFERINGS
In March 2000, the Company completed a follow-on offering of 1,715,000
shares of common stock at a purchase price per share of $76.00, which includes
underwriter's exercise of an option to purchase an additional 315,000 shares.
Net proceeds to the Company aggregated approximately $123 million (net of
underwriters' commission and offering expenses of approximately $1.02 million).
In March 2000, the Company filed two registration statements for the
issuance of a total of 4,564,671 shares of common stock. All of the shares were
issued to the selling stockholders in connection with the acquisition of Direct
Hit and Evergreen and the purchase of assets from Excellerate. The Company did
not sell any shares of its common stock and will not receive any of the proceeds
from the sale of shares by the selling shareholders.
11
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Except for the historical information contained herein, this overview and
the following discussion contain forward-looking statements that involve risks
and uncertainties. Our actual results could differ materially from those
discussed here. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in our Registration Statements
on Form S-1 filed March 30, 2000 and Annual Report on Form 10-K filed March 30,
2000. The following discussion should be read in conjunction with the unaudited
condensed consolidated financial statements and notes included elsewhere herein.
OVERVIEW
We introduced Ask Jeeves on Ask.com in 1997 to provide Web users with a more
satisfying and productive experience and to help companies target and acquire
customers. Since that time, we have launched customized services for corporate
Web sites to help companies better convert and retain customers. In
November 1999, we acquired Net Effect Systems, Inc., a provider of a live help
service that enables real-time, text-based communication between a company and
its online customers. In February 2000, we acquired Direct Hit
Technologies, Inc., a leading provider of technology that aggregates and
organizes online content to enable users to quickly find relevant and accurate
information, products and services. We deliver our services through our Web
Properties and Syndication Group and our Corporate Services Group.
Revenues associated with our Web Properties and Syndication Group consist
primarily of three components:
- advertising revenues;
- syndication fees; and
- electronic commerce transaction fees.
We earn advertising revenues from short-term advertising contracts by
delivering impressions to users over a specified period of time for a fixed fee.
Advertising rates, measured on a cost per thousand impressions, or CPM basis,
are dependent on whether the impressions are displayed in general rotation
throughout our Web sites or are directed to targeted visitors to Ask.com and
DirectHit.com, such as the computer, entertainment, family, health, money,
shopping and travel channels. Revenues are based upon actual impressions
delivered as measured by our third-party advertising delivery provider,
DoubleClick, Inc. We earn syndication fees from contractual arrangements with
companies that provide Internet-wide navigation services. Syndication fees
consist of a fixed fee that is recognized ratably over the contractual term,
generally a twelve-month period. We have acquired a number of syndication
relationships as a result of our acquisition of Direct Hit under which revenues
are earned on a fixed fee or revenue sharing basis, generally over a
twelve-month term. As of March 31, 2000, there are a total of 30 syndication
relationships. We also generate revenues from a third component, the
facilitation of electronic commerce. Revenues from electronic commerce are
generated when a user clicks on the answer that links to an electronic commerce
merchant's Web site on a cost per click, or CPC basis. Electronic commerce
transaction fees are derived from short-term electronic commerce merchant
contracts, generally over a three-to-six month period.
Revenues from our Corporate Services Group consist of two components:
- customization; and
- maintenance and information service fees.
Since its introduction in October 1998, our Corporate Services have been
adopted by approximately 78 corporate customers. We are targeting accounts in
the vertical markets of e-tailing, financial services,
12
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technology and healthcare. We recognize customization, maintenance and
information service fees ratably over the contractual term, generally twelve to
fifteen months. Payments received prior to delivering the knowledge base or
providing maintenance and information services are recorded as deferred revenue
and recognized ratably over the contractual term.
Cost of revenues for our Web Properties and Syndication Group consists
primarily of salaries and related personnel costs associated with the content
development, data analysis, testing and maintenance of our Web sites.
Additionally, cost of revenues includes revenue sharing expenses associated with
distribution relationships. Cost of revenues for our Corporate Services Group
consists primarily of salaries and related personnel costs and other direct
costs to provide customization, information and maintenance services to our
corporate customers. Cost of revenues also includes amortization charges related
to assets acquired from Lumina Design Systems, Inc., Excellerate, LLC, Evergreen
and Direct Hit. 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 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 the future.
Sales and marketing expenses consist primarily of salaries, commissions and
related personnel expenses as well as advertising and promotional expenditures.
We have a direct sales force dedicated to selling our services, which is
supplemented by a number of strategic relationships with sales and
implementation companies, such as USWeb/CKS, AppNet and People Support Inc. We
plan to increase our investments in sales, marketing, infrastructure and product
development in an effort to capture market share faster.
General and administrative expenses consist primarily of salaries and
related personnel costs and other related costs for general corporate functions,
including executive management, business development, finance, facilities
administration, legal, recruiting and fees for other professional services. We
expect general and administrative expenses to increase in the future as we add
personnel and incur additional costs related to the growth of our business.
Interest income includes income on our cash and short-term investments.
Interest expense relates to interest due on our financing obligations.
For the three months ended March 31, 2000, we recorded amortization of
deferred stock compensation expense of $854,000. Additionally, the deferred
compensation liability was reduced by approximately $2.5 million to revalue
unvested options previously granted to consultants as well as record the release
of unvested options granted to a consultant whose services have terminated. At
March 31, 2000, we had a total of approximately $1.8 million remaining to be
amortized over the corresponding vesting periods of the options, generally four
years. Due to the graded vesting method of amortization, most of the deferred
compensation charge will be incurred over the first two years of the vesting of
the options.
Write-off of in-process technology and acquisition costs relate to costs
incurred in connection with our purchases of Evergreen in January 2000 and
Direct Hit in February 2000. As a result of the acquisition of Direct Hit, we
determined that the technology we acquired from Excellerate in November 1999 was
obsolete, and had no future benefit to us. Accordingly, we have recorded a
charge of $989,000 to operations which was included in the write-off of
in-process technology and acquisition costs.
We have incurred significant net losses and negative cash flows from
operations since our inception, and at March 31, 2000, we had an accumulated
deficit of approximately $107.8 million. These losses have been funded primarily
through the issuance of preferred and common equity securities, including our
initial public offering in July 1999 and our follow-on offering in March 2000.
We believe that we will
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continue to incur operating and net losses and negative cash flows from
operations for the foreseeable future and that the rate at which we will incur
such losses may increase from current levels.
RESULTS OF OPERATIONS
REVENUES
Revenues were $17.8 million for the three months ended March 31, 2000, and
$1.5 million for the three months ended March 31, 1999. Web Properties and
Syndication revenues were $12.6 million or 70.8% of total revenues for the three
months ended March 31, 2000 and $1.1 million or 70.5% of total revenues for the
three months ended March 31, 1999. These revenues consisted of $9.1 million in
advertising revenues for the three months ended March 31, 2000, and $957,000 for
the three months ended March 31, 1999. Syndication fees were $1.6 million for
the three months ended March 31, 2000, and $102,000 for the three months ended
March 31, 1999. Electronic commerce revenues were $1.8 million for the three
months ended March 31, 2000. There were no electronic commerce revenues for the
three months ended March 31, 1999. Corporate Services revenues were
$5.2 million or 29.2% of total revenues for the three months ended March 31,
2000, and $444,000 or 29.5% of total revenues for the three months ended
March 31, 1999. These revenues consisted of $3.1 million in customization fees
for the three months ended March 31, 2000, and $61,000 in customization fees for
the three months ended March 31, 1999. Maintenance and information services
revenues were $2.1 million for the three months ended March 31, 2000 and
$383,000 for the three months ended March 31, 1999. Revenues from Ask Jeeves
International totaled $252,000 for the three months ended March 31, 2000. There
were no Ask Jeeves International revenues for the three-month period ending
March 31, 1999. Our reach increased to 11 million unique users in
February 2000, representing approximately 108% growth over the 5.3 million
unique users for December 1999. Ask.com ranked as the 15th most visited Web site
in the February 2000 Media Metrix Internet Web properties listing.
COST OF REVENUES
Cost of revenues for Web Properties and Syndication was $4.2 million for the
three months ended March 31, 2000 and $699,000 for the three months ended
March 31, 1999. The increase in cost of revenues is attributed to increased
third-party advertising management fees, revenue sharing costs, hosting costs,
and additional personnel and related personnel costs associated with developing,
maintaining, analyzing and testing of Ask.com to support the growth in traffic
and the resulting revenues. Cost of revenues for Corporate Services was
$3.8 million for the three months ended March 31, 2000 and $1.2 million for the
three months ended March 31, 1999. The increase in cost of revenues is
attributed to personnel and related personnel costs associated with providing
customization, information and maintenance services to our customers. Cost of
revenues also includes amortization charges related to assets acquired from
Lumina, Evergreen and Direct Hit. We expect our hosting, third party advertising
management fees, content development and Web site costs will continue to
increase to meet the demands for Web services and to provide additional services
to users of our services.
PRODUCT DEVELOPMENT EXPENSES
Product development expenses were $5.5 million for the three months ended
March 31, 2000, and $1.2 million for the three months ended March 31, 1999. The
increase in expenses resulted from the hiring of additional personnel and
related personnel costs, consultant fees, expenses related to the design,
development, testing and enhancement of our technology and services. We believe
the development of additional features and tools are vital for us to remain
competitive in our industry. We anticipate that we will continue to devote
substantial resources to product development. As a result, these costs are
expected to continue to increase in future periods.
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SALES AND MARKETING EXPENSE
Sales and marketing expenses were $19.5 million for the three months ended
March 31, 2000, and $3.0 million for the three months ended March 31, 1999. The
increase in expenses are attributed to advertising expenses related to our
branding campaign, the hiring of additional direct sales and marketing personnel
and sales commissions associated with the increase in revenues. We intend to
continue pursuing an aggressive brand-enhancement strategy, which will include
mass market and multimedia advertising, promotional programs and public
relations activities. These costs are expected to continue to increase in future
periods.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were $5.0 million for the three months
ended March 31, 2000, and $1.1 million for the three months ended March 31,
1999. The increase in expenses is attributed to hiring of additional personnel
and related personnel costs for finance, legal, business development and
internal information systems development and support that has accompanied the
growth of our business, recruiting costs associated with filling key executive
positions and depreciation expense associated with adding property and
equipment.
AMORTIZATION OF DEFERRED STOCK COMPENSATION
For the three months ended March 31, 2000 and 1999, we recorded $854,000 and
$317,000 respectively, in amortization of deferred stock compensation in
connection with the grant of stock options to employees and consultants. The
increase in amortization is due to the significant increase in grants to
employees and consultants in 1999 versus 1998 and the differences between the
deemed fair value of our common stock and the exercise price of options in 1999.
AMORTIZATION OF GOODWILL. Amortization of goodwill was $15.0 million for
the three months ended March 31, 2000. There was no amortization of goodwill in
the three months ended March 31, 1999. The increase was due to our acquisitions
of The Evergreen Project, Inc. in January 2000 and Direct Hit Technologies, Inc.
in February 2000.
IN-PROCESS RESEARCH AND DEVELOPMENT
For the three months ended March 31, 2000, we recorded purchased in-process
research and development costs of $11.7 million in connection with the
acquisition of certain technology from Evergreen and Direct Hit. There were no
similar acquisitions during the three months ended March 31, 1999.
INTEREST INCOME AND INTEREST AND OTHER EXPENSE
Interest income was $826,000 for the three months ended March 31, 2000, and
$164,000 for the three months ended March 31, 1999. The increase in interest
income is attributed to the interest on proceeds from our equity financings.
Interest expense was $302,000 for the three months ended March 31, 2000, and
$11,000 for the three months ended March 31, 1999. The increase in interest and
other expense is attributable to the interest charges incurred on additional
capital lease obligations as well as a loss on the sale of securities of
$196,000.
RECENT EVENTS
In January 2000, we acquired The Evergreen Project, Inc. for $1.95 million
in cash and 18,896 shares of our common stock.
In February 2000, we acquired Direct Hit Technologies, Inc. All outstanding
shares were converted into 4,751,878 million shares of our common stock. Also
included were options to purchase Direct Hit common stock which converted into
options to purchase 331,596 shares of our common stock.
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In March 2000, the Company completed a follow-on offering of 1,715,000
shares of common stock at a purchase price per share of $76.00, which includes
underwriter's exercise of an option to purchase an additional 315,000 shares.
Net proceeds to the Company aggregated approximately $123 million (net of
underwriters' commission and offering expenses of approximately $1.02 million).
We are currently aware of a Staff Accounting Bulletin entitled SAB 101
"Revenue Recognition in Financial Statements," which was issued in
December 1999 by the Securities and Exchange Commission. Due to complications
surrounding the implementation of SAB 101, the SEC in March 2000 deferred the
implementation date of certain provisions of SAB 101 until the quarter ended
June 30, 2000, with retroactive application to transactions entered into during
the quarter ended March 31, 2000. We believe that based on the current
guidelines, our revenue recognition policy is in accordance with generally
accepted accounting principles.
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 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.com and DirectHit.com
and on the Web sites of our corporate customers;
- our ability to attract and retain advertisers and our ability to link our
electronic commerce partners to potential customers;
- seasonal and other fluctuations in demand for our electronic commerce
services and for advertising space on Ask.com and DirectHit.com;
- 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.com and DirectHit.com; 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
that may also affect our revenues. For instance, during 1999 and 1998 traffic
levels on Ask Jeeves fluctuated during the summer and year-end vacation and
holiday periods. Similar to traditional media, this may result in our
advertising sales being lower during these periods. In addition, we believe that
sales from electronic commerce will increase during the fourth quarter as a
result of the holiday season and will fluctuate during other periods.
Seasonality in the retail industry and in Internet service usage is likely to
cause quarterly fluctuations in our results of operations and could harm our
business.
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LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have financed our operations primarily through the
private placement of equity securities and our initial public offering and our
follow-on offering. As of March 31, 2000, we had $152.3 million in cash and cash
equivalents and short-term investments. Net cash used in operating activities
was $22.9 million for the three months ended March 31, 2000, and $2.9 million
for the three months ended March 31, 1999. Net cash used in operating activities
resulted primarily from net losses adjusted for non-cash operating activities
and increases in accounts receivable, accrued merger costs and the timing of
accounts payable settlements, partially offset by the timing of accrued
compensation and related expenses, accrued marketing expenses, deferred revenue
and other accrued liabilities. Net cash provided by investing activities was
$21.0 million for the three months ended March 31, 2000, compared to net cash
used of $6.4 million for the three months ended March 31, 1999. Net cash
provided by investing activities related to the redemption of investments of
$21.6 million and cash acquired by subsidiaries of $12.6 million, partially
offset by purchases of investments of $10.3 million and property and equipment
for $2.9 million for the three months ended March 31, 2000. Net cash provided by
financing activities was $124.2 million for the three months ended March 31,
2000, and $26.5 million for the three months ended March 31, 1999. For the three
months ended March 31, 2000, net cash provided by financing activities related
primarily to net proceeds of $123 million from the sale of common equity
securities in our follow-on offering.
We have no material commitments or obligations other than those under
capital and operating leases.
Our capital requirements depend on numerous factors, including market
acceptance of our 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 believe that our available cash resources will be sufficient to
meet our anticipated needs for working capital and capital expenditures for at
least the next twelve months. 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 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 an adverse
impact 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.
YEAR 2000
We have not experienced any problems with our computer systems relating to
such systems being unable to recognize appropriate dates related to the year
2000. We are also not aware of any material problems with our clients or
vendors. Accordingly, we do not anticipate incurring material expenses or
experiencing any material operational disruptions as a result of any Year 2000
issues.
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BUSINESS RISKS
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 is unproven and our business model is constantly evolving.
Because the Internet is constantly changing, we may need to change our business
model to adapt to those changes.
In November 1999, we acquired Net Effect Systems, Inc., a provider of a live
help service that enables real-time, text-based communication between a company
and its online customers. In February 2000, we acquired Direct Hit
Technologies, Inc., a leading provider of technology that aggregates and
organizes online content to enable users to quickly find relevant and accurate
information, products and services. These acquisitions and future acquisitions
and the resulting changes in organizational structure could impose significant
burdens on our management and our employees and could result in loss of
productivity or increase 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.com and DirectHit.com;
- increase the number and types of businesses that use our online personal
service infrastructure;
- increase the value of our online personal service infrastructure to our
users, customers, electronic commerce merchants and advertisers; and
- attract, integrate, retain and motivate qualified personnel.
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 expect to have increasing net losses and negative cash flows for the
foreseeable future. The size of these net losses will depend, in part, on the
rate of growth of our revenues from our advertisers, corporate customers and
electronic commerce merchants and on our expenses. It is critical to our success
that we continue to expend financial and management resources to develop our
brand loyalty through marketing and promotion, enhancement of our online
personal service infrastructure and expansion of our other services. As a
result, we expect that our operating expenses will increase significantly for
the foreseeable future. With increased expenses, we will need to generate
significant additional revenues to achieve profitability. Consequently, it is
possible that we may never achieve profitability, and even if we do achieve
profitability, we may not sustain or increase profitability on a quarterly or
annual basis in the future. If we do not achieve or sustain profitability in the
future, then we will be unable to continue our operations.
OUR ONLINE PERSONAL SERVICE INFRASTRUCTURE IS NOVEL AND UNPROVEN
We will be successful only if Internet users adopt our natural-language
services and popularity-based searches as their primary method of navigating the
Internet. Internet users have a variety of search techniques, such as search
engines, available to them to navigate the Internet. Users can also rely on
methods, such as call centers, chat rooms and e-mail, rather than
difficult-to-navigate corporate Web sites,
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to obtain information on products and services. It is difficult to predict the
extent and rate of user adoption of our online personal service infrastructure.
We cannot assure you that widespread acceptance of our services has occurred or
will occur. Visitors to our online personal service infrastructure may use it
once or twice and then revert to traditional search techniques to navigate the
Internet or choose new search techniques.
OUR METHODS OF GENERATING REVENUE ARE RELATIVELY NEW AND LARGELY UNTESTED
We generated approximately 51.7%, 29.2%, 10.1% and 9.0% of our revenues for
the three months ended March 31, 2000 through Internet advertising, licensing to
corporate customers, electronic commerce transaction fees and syndication fees
for providing Internet-wide navigation services, respectively. 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 seriously harmed 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 service, 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.
Furthermore, we expect sales to corporate customers to constitute a growing
percentage of our revenues. Our online personal service infrastructure has only
been recently implemented onto corporate Web sites. As such, we cannot yet
determine the effectiveness of our services compared to traditional methods of
customer relationship management. If we cannot demonstrate to corporate
customers that our services increase 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.
In addition, a portion of our revenues for the foreseeable future are
expected to be derived from the facilitation of electronic commerce
transactions. The market for Internet products and services has only recently
begun to develop and is rapidly changing. Therefore, the success of our business
depends upon the adoption of the Internet as a medium for commerce by a broad
base of customers. If this market fails to develop or develops more slowly than
expected, or if our electronic commerce services do not achieve market
acceptance, our business may suffer.
OUR ACQUISITIONS OF NET EFFECT SYSTEMS, INC., THE EVERGREEN PROJECT, INC. AND
DIRECT HIT TECHNOLOGIES, INC. AND ANY FUTURE ACQUISITIONS MAY BE DIFFICULT TO
INTEGRATE, DISRUPT OUR BUSINESS, DILUTE STOCKHOLDER VALUE OR DIVERT MANAGEMENT
ATTENTION.
We acquired Net Effect Systems, Inc. in November 1999, The Evergreen
Project Inc. in January 2000 and Direct Hit Technologies, Inc. in
February 2000. We may encounter problems associated with the assimilation of Net
Effect, Evergreen and Direct Hit including:
- difficulties in assimilation of acquired personnel, operations,
technologies or products;
- unanticipated costs associated with the acquisitions;
- diversion of management's attention from other business concerns;
- adverse effects on our existing business relationships with our, Net
Effect, Evergreen and Direct Hit customers; and
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- inability to retain employees of Net Effect, Evergreen and Direct Hit.
If we are unable to successfully integrate Net Effect, Evergreen and Direct
Hit or to create new or enhanced services, we may not achieve the anticipated
benefits from our acquisitions of Net Effect, Evergreen and Direct Hit. If we
fail to achieve the anticipated benefits from the acquisitions, we may incur
increased expenses, experience a shortfall in our anticipated revenues and we
may not obtain a satisfactory return on our investment. In addition, if any
significant number of Net Effect, Evergreen or Direct Hit employees fail to
remain employed with us, we may experience difficulties in achieving the
expected benefits of the acquisitions.
As part of our business strategy, we may in the future seek to acquire or
invest in additional businesses, products or technologies that we believe could
complement or expand our business, augment our market coverage, enhance our
technical capabilities or that may otherwise offer growth opportunities. These
future acquisitions could pose the same risks to our business posed by the
acquisitions described above. In addition, with future acquisitions, we could
use substantial portions of our available cash as all or a portion of the
purchase price. We could also issue additional securities as consideration for
these acquisitions, which could cause our stockholders to suffer significant
dilution.
OUR GROWTH WILL DEPEND ON OUR ABILITY TO DEVELOP OUR BRAND
We believe that broader brand recognition and a favorable consumer
perception of the Ask Jeeves brand are essential to our future success.
Accordingly, we intend to continue pursuing an aggressive brand-enhancement
strategy, which will include mass market and multimedia advertising, promotional
programs and public relations activities. These expenditures may not result in a
sufficient increase in revenues to cover such advertising and promotional
expenses. In addition, even if brand recognition increases, the number of new
users may not increase. Further, even if the number of new users increases, the
amount of traffic on Ask Jeeves and the number of corporate customers may not
increase sufficiently to justify the expenditures.
TO MANAGE OUR GROWTH, WE NEED TO IMPROVE OUR SYSTEMS, CONTROLS AND PROCEDURES
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. 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, as well as train and manage, our workforce. We cannot be assured 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 seriously harmed.
WE MAY NOT BE ABLE TO EFFECTIVELY COMPETE AGAINST OUR CURRENT AND POTENTIAL
COMPETITORS
We have a number of competitors for our online personal service
infrastructure.
CORPORATE SERVICES GROUP
We compete with a number of companies that are addressing the same need to
improve automated or online customer service for corporate customers. For
example, we compete with companies that provide shopping advisors, such as
Active Research Inc.; automated e-mail response and live interaction, such as
Kana Communications, Inc.; search technology, such as Inktomi Corporation; and
customer relationship management, such as Siebel Systems, Inc.
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WEB PROPERTIES AND SYNDICATION GROUP
We face direct competition from companies that provide Internet-wide search
and directory services. For example, we compete with search engines, including
Excite@Home Corporation, Inktomi Corporation, Google Inc. 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., Goto.com, Inc. and LookSmart, Ltd. because they
provide alternative ways for users to obtain the desired information.
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 our competitors and by us.
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 in 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 corporate customers, advertisers, syndicators and electronic commerce
merchants. Our competitors may develop products and services that are equal to,
or superior to, our products and services, or 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 RECENTLY FORMED INTERNATIONAL SUBSIDIARY MAY NOT BE SUCCESSFUL
In the fourth quarter of 1999, we formed a wholly owned subsidiary, Ask
Jeeves International, Inc., or AJI, for the purpose of marketing our online
personal services infrastructure outside of the United States. AJI recently
entered into a joint venture to provide our services in the United Kingdom. This
expansion into international markets will require substantial management
attention and financial resources. We cannot be certain that our investment in
AJI and in establishing operations in other countries will produce the desired
levels of revenue. In addition, AJI is subject to other inherent risks and
problems, including:
- the impact of recessions in economies outside the United States;
- greater difficulty in accounts receivable collections;
- unexpected changes in regulatory requirements;
- difficulties and costs of staffing and managing foreign operations;
- reduced protection for intellectual property rights in some countries;
- political and economic instability;
- the introduction of the euro;
- fluctuations in currency exchange rates; and
- difficulty in maintaining effective communications due to distance,
language and cultural barriers.
Some or all of the above factors could seriously harm the results of our
operations.
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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 time needed
to customize our online personal services infrastructure 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 users of Ask.com, DirectHit.com, Web sites syndicating our
services and 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.com and DirectHit.com;
- 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.com and DirectHit.com;
- marketing expenses and technology infrastructure costs as well as other
costs that we may incur as we expand our operations; and
- the timing of charges related to the acquisitions and any amortization of
expenses related to the acquisitions.
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 from two to four months. Therefore, it is
difficult to predict the number of corporate customers that we will have in the
future. We may be unable to adjust spending to compensate for an unexpected
shortfall in our revenues. In addition we expect our operating expenses to
increase as we expand our engineering, sales and marketing operations, broaden
our customer support capabilities, develop new strategic alliances, fund
increased levels of research and development and build our operational
infrastructure. As a result, if we experience an unexpected shortfall in
revenues, or if our revenues do not grow faster than the increase in these
expenses, we could experience significant variations in the operating results
from quarter to quarter.
IF WE FAIL TO MEET THE EXPECTATIONS OF THE 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 use, 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 may be likely
that our actual results will not meet
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the expectations of public market analysts and investors in future periods. If
this occurs, the price of our common stock will likely fall.
FAILURE TO ADD OR RETAIN CORPORATE CUSTOMERS MAY HAVE AN ADVERSE EFFECT ON OUR
REVENUES.
In the coming year we expect that revenues associated with corporate
customers will be dependent on a limited number of customers, comprised
primarily of corporations with large, difficult-to-navigate Web sites. If we do
not complete sales to a sufficient number of customers, our future revenues will
be adversely affected.
Most of our corporate customer contracts have a term of one year following
the implementation of our services. 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 number
of contract renewals or if such renewal contracts are obtained on terms less
favorable than the original contract, our business could be adversely affected.
CUSTOMIZING OUR SERVICES FOR OUR CORPORATE CUSTOMERS IS LABOR INTENSIVE.
Because the customization of our services 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 four months to launch a customized version
of our services. 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 by corporate customers, we may have to hire additional people and train
them in advance of orders. When 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 our
custom services could seriously harm our business.
WE DEPEND ON THIRD-PARTY CONTENT.
Ask.com is designed to directly link users to a page within a third-party
Web site that contains the answer to a question asked. However, when Ask.com
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 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.com could significantly decrease, which would seriously
harm our business.
Visitors to Ask.com use it 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 seriously harm
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.com and DirectHit.com.
These 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 these third-party Web sites. Other claims may be
based on errors or false or misleading information provided on Ask.com,
including information deemed to constitute professional advice such as legal,
medical, financial or investment advice. Other claims may be based on our links
to
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sexually explicit Web sites and our provision of sexually explicit
advertisements when this content is displayed. Our business could be seriously
harmed due to the cost of investigating and defending these claims, even to the
extent these 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.
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 breath 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. In January 2000,
we expanded our pilot electronic commerce program. The expansion of our
electronic commerce services 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
seriously harmed.
OUR FUTURE SUCCESS DEPENDS ON OUR ABILITY TO RETAIN OUR CHIEF EXECUTIVE OFFICER.
Our future success depends, in part, on the continued service of Robert
Wrubel, our Chief Executive Officer. Mr. Wrubel is not bound by an employment
agreement for any specific term. Our relationship with Mr. Wrubel is at will.
Although we are the beneficiaries of a key person life insurance policy on
Mr. Wrubel's life, the loss of his services would seriously harm 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 experienced, and we expect to continue to
experience in the future, difficulty in hiring and retaining highly skilled
employees with appropriate qualifications.
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 performance concerns due to hackers 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.
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<PAGE>
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 be assured that the back-up servers will not fail or cause
an interruption in our service.
We have experienced slower response times and interruptions in service due
to malfunction at our hosting facilities and on the Internet backbone networks,
major software upgrades at Ask Jeeves and undetected software defects. Ask.com
and DirectHit.com have had partial interruptions for periods ranging from a few
minutes to three hours. In addition, Ask.com and DirectHit.com 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.
Our users and customers depend on Internet service providers, online service
providers and other Web site operators for access to Ask.com and DirectHit.com.
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 principal facilities or at the servers that host or back-up our
systems could cause interruptions or delays in our interactive network or a loss
of data. 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 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
seriously harmed 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 those we offer. As a result, demand for our online
personal service infrastructure may decrease.
WE MAY FACE POTENTIAL LIABILITY FOR INVASION OF PRIVACY.
We have a policy against using personally identifiable information obtained
from users of our online personal service infrastructure without the user's
permission. In the past, the Federal Trade Commission has investigated companies
that have used personally identifiable information without permission or in
violation of a stated privacy policy. If we use this information without
permission or in violation of our policy, we may face potential liability for
invasion of privacy for compiling and providing information to our corporate
customers and electronic commerce merchants.
WE NEED TO EXPAND OUR SALES AND SUPPORT ORGANIZATIONS.
We will continue to expand our advertising sales, syndication and corporate
sales operations and marketing efforts to increase market awareness and sales of
our products and services. We will need to
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<PAGE>
increase our staff to support new customers and the expanding needs of our
existing customers. 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. Hiring highly qualified customer service and account management
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 seriously harm 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.
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 seriously harm
our profitability.
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 seriously harm 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 the products
and services offered by these electronic commerce merchants. 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;
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- 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 seriously harm our business.
WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS AND WE MAY BE
LIABLE FOR INFRINGING UPON 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 obtained registered
trademark status for "Ask Jeeves" in the United States, Tunisia and Norway. We
have also applied for registered trademark status for "Ask.com," "Ask Jeeves for
Kids," and our logo and service marks in the United States and various foreign
countries. Additionally, in connection with our acquisition of Direct Hit, we
received an assignment of one United States patent issued to Gary Culliss,
Direct Hit's co-founder, Chief Technology Officer and Chairman, covering aspects
of Direct Hit's technology, and three U.S. patent applications covering other
aspects of Direct Hit's technology. 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 are 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 seriously harmed.
In July 1999, IP Learn LLC filed a complaint against us in the United States
District Court for the Northern District of California, which was amended by the
plaintiff, which alleges that aspects of the Ask Jeeves technology infringe one
or more patents alleged to be held by the plaintiff. We have answered the
complaint and discovery has begun. Additionally, in December 1999, Patrick H.
Winston and Boris Katz filed a complaint against us in the United States
District Court for the District of Massachusetts. The complaint alleges that our
technology infringes two patents alleged to be held by the plaintiffs. We have
answered the complaint, but discovery has not begun. We intend to vigorously
defend against the allegations asserted in these complaints and we believe we
have meritorious defenses to the claims. The results of any litigation matter
are inherently uncertain. In the event of an adverse result in either of these
lawsuits, or in any other litigation with third parties that could arise in the
future with respect to intellectual property rights relevant to our products or
services, we could be required to pay substantial damages, including treble
damages if we are held to have willfully infringed, to cease the use of
infringing products or services, to expend significant resources to develop
non-infringing technology or to attempt to obtain licenses to the infringing
technology on commercially reasonable terms, if at all. In addition, litigation
frequently involves substantial expenditures and can require significant
management attention, even if we ultimately prevail. Accordingly, we cannot
assure you that these lawsuits will not seriously harm our business.
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
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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 MAY NOT BE ABLE TO SECURE ADDITIONAL FINANCING TO MEET OUR FUTURE CAPITAL
NEEDS.
We currently anticipate that our available cash resources will be sufficient
to meet our anticipated needs for working capital and capital expenditures for
at least twelve months. 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 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 seriously harm 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 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.
PROVISIONS IN DELAWARE LAW AND OUR CHARTER, STOCK OPTION AGREEMENTS AND OFFER
LETTERS TO EXECUTIVE OFFICERS MAY PREVENT OR DELAY A CHANGE OF CONTROL.
We are 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
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.
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Our 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
- no cumulative voting.
These provisions may have the effect of delaying or preventing a change of
control.
Our 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 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 Stock Option 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 March 31, 2000,
there were 3,222,941 shares of common stock reserved for unvested 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's exposure to market risk for interest rate changes relates
primarily to its investment portfolio. The Company had no derivative financial
instruments as of March 31, 2000 or December 31, 1999. The Company places its
investment portfolio in high credit quality instruments and the amount of credit
exposure to any one issue, issuer and type of instrument is limited. The Company
does not expect any material loss with respect to its investment portfolio.
The Company's investments are principally confined to our cash and cash
equivalents and available-for-sale securities, which have short maturities and,
therefore, minimal market risk.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In July 1999, IP Learn LLC filed a complaint against the Company in the
United States District Court for the Northern District of California. The
complaint, which was amended by the plaintiff, alleges that aspects of the
Company's technology infringes upon three patents alleged to be held by the
plaintiff. The Company has answered the complaint and discovery has begun.
Additionally, in December 1999, Patrick H. Winston and Boris Katz filed a
complaint against the Company in the United States District Court for the
District of Massachusetts. The complaint alleges that the Company's technology
infringes two patents alleged to be held by the plaintiffs. The Company has
answered the complaint, but discovery has not yet begun. The Company intends to
vigorously defend against the allegations asserted in these complaints and
believes it has meritorious defenses to the claims. However, the outcome of
litigation is difficult to predict and could result in a judgment against the
Company which could significantly affect the Company's consolidated financial
position, results of operations or cash flows.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UNDER SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) EXHIBIT
27.1 Financial Data Schedule
b) REPORTS ON FORM 8-K.
We filed an amendment dated January 20, 2000 to our Current Report on 8-K
dated December 2, 1999 to include the Supplemental Consolidated Financial
Statements required under the report for our acquisition of Net Effect
Systems, Inc. We filed a Current Report on Form 8-K dated February 14, 2000 to
report under Item 2 thereof the acquisition of Direct Hit Technologies, Inc.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
<TABLE>
<CAPTION>
<S> <C> <C>
ASK JEEVES, INC.
May 12, 2000 By: /s/ ROBERT W. WRUBEL
------------------------------------------
Robert W. Wrubel
CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)
May 12, 2000 By: /s/ THOMAS E. LOW
------------------------------------------
Thomas E. Low
CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL OFFICER)
May 12, 2000 By: /s/ CHRISTINE M. DAVIS
------------------------------------------
Christine M. Davis
VICE PRESIDENT AND CORPORATE CONTROLLER
(PRINCIPAL ACCOUNTING OFFICER)
</TABLE>
31
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EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
- --------------------- --------------------
<C> <S>
27.1 Financial Data Schedule
</TABLE>
32
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS YEAR YEAR YEAR
<FISCAL-YEAR-END> DEC-31-2000 DEC-31-1999 DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-2000 JAN-01-1999 JAN-01-1998 JAN-01-1997
<PERIOD-END> MAR-31-2000 DEC-31-1999 DEC-31-1998 DEC-31-1997
<CASH> 139,801 17,420 8,511 0
<SECURITIES> 12,473 34,110 0 0
<RECEIVABLES> 16,037 9,627 379 0
<ALLOWANCES> 0 1,168 85 0
<INVENTORY> 0 0 0 0
<CURRENT-ASSETS> 175,492 66,404 8,915 0
<PP&E> 11,962 8,769 998 0
<DEPRECIATION> 0 (1,353) 119 0
<TOTAL-ASSETS> 654,808 76,164 9,933 0
<CURRENT-LIABILITIES> 46,907 30,647 1,596 0
<BONDS> 0 0 0 0
0 0 0 0
0 0 11,558 0
<COMMON> 714,255 107,636 4,848 0
<OTHER-SE> (109,635) (65,785) (8,116) 0
<TOTAL-LIABILITY-AND-EQUITY> 654,808 41,851 9,933 0
<SALES> 0 0 0 0
<TOTAL-REVENUES> 17,757 22,027 800 23
<CGS> 0 0 0 0
<TOTAL-COSTS> 7,942 14,084 1,399 0
<OTHER-EXPENSES> 57,538 62,850 6,367 753
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 302 187 6 0
<INCOME-PRETAX> (47,199) (52,929) (6,806) (725)
<INCOME-TAX> 0 0 0 0
<INCOME-CONTINUING> (47,199) (52,929) (6,806) (725)
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 47,199 (52,929) (6,806) (725)
<EPS-BASIC> (1.48) (2.64) (.74) (.21)
<EPS-DILUTED> (1.48) (2.64) (.74) (.21)
</TABLE>
