<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 8-K/A
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report: January 20, 2000
Date of earliest event reported: November 19, 1999
ASK JEEVES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation)
000-26521 94-3334199
(Commission File No.) (IRS Employer Identification No.)
5858 HORTON ST., SUITE 350, EMERYVILLE, CA 94608
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (510) 985-7400
-------------------
<PAGE>
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
The undersigned registrant, Ask Jeeves, Inc., hereby amends the
following items, financial statements, exhibits or other portions of the current
report on Form 8-K filed on December 2, 1999 related to Ask Jeeves, Inc.'s
acquisition of Net Effect Systems, Inc. on November 19, 1999 by means of a
merger among Ask Jeeves, Inc., Net Effect Systems, Inc. and Neutral Acquisition
Corp., a wholly owned subsidiary of Parent.
ITEM 5. OTHER EVENTS
Risk Factors that may Affect Results of Operations and Financial Condition.
OUR ACQUISITION OF NET EFFECT SYSTEMS, INC. MAY BE DIFFICULT TO INTEGRATE,
DISRUPT OUR BUSINESS, DILUTE STOCKHOLDER VALUE OR DIVERT MANAGEMENT ATTENTION
We merged with Net Effect Systems, Inc. effective November 19, 1999. We
may encounter risks to our business, associated with the assimilation of Net
Effect Systems, Inc., including:
- - difficulties in assimilation of acquired personnel, operations,
technologies or products;
- - unanticipated costs associated with the acquisition;
- - diversion of management's attention from other business concerns;
- - adverse effects on our existing business relationships with our or Net
Effect Systems' customers; and
- - inability to retain employees of Net Effect Systems.
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
acquisition of Net Effect Systems 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 acquisition of Net Effect Systems, and any
future acquisitions, even if successfully completed, may not generate any
additional revenue or provide any benefit to our business.
WE MAY NOT ACHIEVE ANTICIPATED ADDITIONAL REVENUES OR BENEFITS AS A RESULT OF
OUR ACQUISITION OF NET EFFECT SYSTEMS, INC.
With the acquisition of Net Effect Systems, Inc. we seek to extend our
ability to provide a live-help service that enables real-time, text-based
communication between a company and its online customers. If we are unable to
successfully integrate Net Effect Systems, Inc. or create new or enhanced
services, we may not achieve the anticipated benefits from our merger with Net
Effect Systems, Inc. If we fail to achieve the anticipated benefits from the
acquisition, 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 Systems, Inc.
employees fail to remain employed with us, we may experience difficulties in
achieving the expected benefits of the acquisition.
<PAGE>
ITEM 7: FINANCIAL STATEMENTS AND EXHIBITS.
(a) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED
See Exhibit 99.1 for audited financial statements of Net Effect Systems,
Inc.
(b) PRO FORMA CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)
The following unaudited pro forma condensed consolidated financial
statements give effect to the merger of Ask Jeeves, Inc. with Net Effect
Systems, Inc., which was accounted for as a pooling of interests. The unaudited
pro forma condensed consolidated balance sheet presents the combined financial
position of Ask Jeeves, Inc. and Net Effect Systems, Inc. as of September 30,
1999, assuming that the merger had occurred as of September 30, 1999. Such pro
forma information is based upon the historical balance sheet data of Ask Jeeves,
Inc. and Net Effect Systems, Inc. as of that date. The unaudited pro forma
condensed consolidated statement of operations gives effect to the merger of Ask
Jeeves, Inc. and Net Effect Systems, Inc. by combining the results of operations
of Ask Jeeves, Inc. and Net Effect Systems, Inc. for the two years ended
December 31, 1998 and the nine months ended September 30, 1998 and 1999, on a
pooling of interests basis. These unaudited pro forma consolidated financial
statements should be read in conjunction with the historical financial
statements and notes thereto of Ask Jeeves, Inc. included in the Company's
Registration Statement on Form S-1 filed April 30, 1999, as amended and
effective June 30, 1999, and its June 30, 1999 and September 30, 1999 quarterly
10Q filings with the Securities and Exchange Commission, and the historical
financial statements and notes thereto of Net Effect Systems, Inc. included as
exhibits herein.
The unaudited pro forma information is presented for illustrative purposes
only and is not necessarily indicative of the operating results or financial
position that would have occurred if the mergers had been consummated at the
beginning of the periods presented, nor is it necessarily indicative of future
operating results or financial position.
<PAGE>
ASK JEEVES, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
-----------------------------------------------------
PRO FORMA
ASK JEEVES NET EFFECT COMBINED
--------------- -------------- ------------
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents .................................... $ 32,516,473 $ 6,128,073 $ 38,644,546
Short-term investments ....................................... 22,279,913 -- 22,279,913
Accounts receivable, net ..................................... 6,748,847 147,385 6,896,232
Prepaid expenses and other current assets .................... 2,198,559 184,174 2,382,733
--------------- -------------- -------------
Total current assets ............................................ 63,743,792 6,459,632 70,203,424
Property and equipment, net ..................................... 5,395,390 418,324 5,813,714
Investments ..................................................... 1,997,913 -- 1,997,913
Other assets .................................................... 1,260,457 115,307 1,375,764
--------------- -------------- -------------
Total assets .................................................... $ 72,397,552 $ 6,993,263 $ 79,390,815
--------------- -------------- -------------
--------------- -------------- -------------
Liabilities and Stockholders' Equity Current liabilities:
Accounts payable .............................................. $ 2,054,989 $ 200,594 $ 2,255,583
Accrued compensation and related expenses ..................... 3,571,741 465,127 4,036,868
Other accrued liabilities ..................................... 3,403,098 599,084 4,002,182
Deferred revenue .............................................. 2,647,823 126,270 2,774,093
Current portion of capital lease obligations .................. 660,609 -- 660,609
--------------- -------------- -------------
Total current liabilities ....................................... 12,338,260 1,391,075 13,729,335
Capital lease obligations, less current portion ................. 2,196,462 -- 2,196,462
Commitments
Stockholders' equity
Preferred stock ............................................... -- 12,981,038 12,981,038
Common stock .................................................. 88,596,152 449,831 89,045,983
Deferred stock compensation ................................... (1,737,376) -- (1,737,376)
Accumulated deficit ........................................... (28,995,946) (7,828,681) (36,824,627)
--------------- -------------- -------------
Total stockholders' equity ...................................... 57,862,830 5,602,188 63,465,018
--------------- -------------- -------------
Total liabilities and stockholders' equity ...................... $ 72,397,552 $ 6,993,263 $ 79,390,815
--------------- -------------- -------------
--------------- -------------- -------------
</TABLE>
See accompanying notes to the pro forma
condensed consolidated financial information.
<PAGE>
ASK JEEVES, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1999
--------------------------------------------------
PRO FORMA
ASK JEEVES NET EFFECT COMBINED
--------------- ---------------- ---------------
<S> <C> <C> <C>
Revenue
Consumer ........................................... $ 7,201,116 $ -- $ 7,201,116
Corporate .......................................... 3,100,329 823,407 3,923,736
--------------- ---------------- ---------------
Total Revenues ........................................ 10,301,445 823,407 11,124,852
Cost of Revenue
Consumer ........................................... 3,664,856 -- 3,664,856
Corporate .......................................... 3,695,118 957,818 4,652,936
--------------- ---------------- ---------------
Total cost of revenues ................................ 7,359,974 957,818 8,317,792
--------------- ---------------- ---------------
Gross profit (loss) ................................... 2,941,471 (134,411) 2,807,060
Operating expenses:
Product development ................................ 3,460,618 1,852,341 5,312,959
Sales and marketing ................................ 19,269,005 2,065,607 21,334,612
General and administrative ......................... 3,678,456 1,135,926 4,814,382
Amortization of deferred stock compensation ........ 1,470,558 -- 1,470,558
Write-off of in-process technology acquired ......... 360,697 -- 360,697
--------------- ---------------- ---------------
Total operating expenses .............................. 28,239,334 5,053,874 33,293,208
--------------- ---------------- ---------------
Operating loss ........................................ (25,297,863) (5,188,285) (30,486,148)
Interest income ....................................... 1,119,116 182,820 1,301,936
--------------- ---------------- ---------------
Net loss before provision for income tax .............. (24,178,747) (5,005,465) (29,184,212)
Provision for income taxes ............................ -- 1,616 1,616
--------------- ---------------- ---------------
Net loss .............................................. $(24,178,747) $ (5,007,081) $(29,185,828)
--------------- ---------------- ---------------
--------------- ---------------- ---------------
Basic and diluted net loss per share .................. $ (1.49) (3.54) (1.65)
--------------- ---------------- ---------------
--------------- ---------------- ---------------
Weighted average shares outstanding used in
computing basic and diluted net loss per share ...... 16,244,563 1,415,312 17,659,875
--------------- ---------------- ---------------
--------------- ---------------- ---------------
</TABLE>
See accompanying notes to the pro forma
condensed consolidated financial information.
<PAGE>
ASK JEEVES, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1998
--------------------------------------------------
PRO FORMA
ASK JEEVES NET EFFECT COMBINED
--------------- ---------------- ---------------
<S> <C> <C> <C>
Revenue
Consumer ..................................................... $ 155,386 $ -- $ 155,386
Corporate .................................................... 7,500 75,550 83,050
--------------- ---------------- ---------------
Total Revenues .................................................. 162,886 75,550 238,436
Cost of Revenue
Consumer ..................................................... 285,249 -- 285,249
Corporate .................................................... 111,585 52,133 163,718
--------------- ---------------- ---------------
Total cost of revenues .......................................... 396,834 52,133 448,967
--------------- ---------------- ---------------
Gross profit/(loss) ............................................. (233,948) 23,417 (210,531)
Operating expenses:
Product development .......................................... 524,423 358,347 882,770
Sales and marketing .......................................... 588,043 365,080 953,123
General and administrative ................................... 495,524 644,402 1,139,926
--------------- ---------------- ---------------
Total operating expenses ........................................ 1,607,990 1,367,829 2,975,819
--------------- ---------------- ---------------
Operating loss .................................................. (1,841,938) (1,344,412) (3,186,350)
Interest Income ................................................. 14,733 66,255 80,988
--------------- ---------------- ---------------
Net loss before provision for income tax ........................ (1,827,205) (1,278,157) (3,105,362)
Provision for income taxes ...................................... -- 800 800
--------------- ---------------- ---------------
Net loss ........................................................ $(1,827,205) $(1,278,957) $(3,106,162)
--------------- ---------------- ---------------
--------------- ---------------- ---------------
Basic and diluted net loss per share ............................ $ (.24) $ (2.31) $ (.39)
--------------- ---------------- ---------------
--------------- ---------------- ---------------
Weighted average shares outstanding used in computing basic
and diluted net loss per share .................................. 7,468,860 552,666 8,021,526
--------------- ---------------- ---------------
--------------- ---------------- ---------------
</TABLE>
See accompanying notes to the pro forma
condensed consolidated financial information.
<PAGE>
ASK JEEVES, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
--------------------------------------------------
PRO FORMA
ASK JEEVES NET EFFECT COMBINED
--------------- ---------------- ---------------
<S> <C> <C> <C>
Revenue
Consumer ........................................... $ 577,159 $ -- $ 577,159
Corporate .......................................... 15,500 207,739 223,239
--------------- ---------------- ---------------
Total Revenues ........................................ 592,659 207,739 800,398
Cost of Revenue
Consumer ........................................... 602,716 -- 602,716
Corporate .......................................... 455,978 340,698 796,676
--------------- ---------------- ---------------
Total cost of revenues ................................ 1,058,694 340,698 1,399,392
--------------- ---------------- ---------------
Gross profit/(loss) ................................... (466,035) (132,959) (598,994)
Operating expenses:
Product development ................................ 1,104,193 608,273 1,712,466
Sales and marketing ................................ 1,613,846 687,262 2,301,108
General and administrative ......................... 1,100,921 1,223,063 2,323,984
Amortization of deferred stock compensation ........ 29,010 -- 29,010
--------------- ---------------- ---------------
Total operating expenses .............................. 3,847,970 2,518,598 6,366,568
--------------- ---------------- ---------------
Operating loss ........................................ (4,314,005) (2,651,557) (6,965,562)
Interest Income ....................................... 52,380 107,623 160,003
--------------- ---------------- ---------------
Net loss before provision for income tax .............. (4,261,625) (2,543,934) (6,805,559)
Provision for income taxes ............................ -- 800 800
--------------- ---------------- ---------------
Net loss .............................................. $(4,261,625) $(2,544,734) $(6,806,359)
--------------- ---------------- ---------------
--------------- ---------------- ---------------
Basic and diluted net loss per share .................. $ (.48) $ (3.40) $ (.71)
--------------- ---------------- ---------------
--------------- ---------------- ---------------
Weighted average shares outstanding used in
computing basic and diluted net loss per share ...... 8,828,046 749,055 9,577,101
--------------- ---------------- ---------------
--------------- ---------------- ---------------
</TABLE>
See accompanying notes to the pro forma
condensed consolidated financial information.
<PAGE>
ASK JEEVES, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
--------------------------------------------------
PRO FORMA
ASK JEEVES NET EFFECT COMBINED
--------------- ---------------- ---------------
<S> <C> <C> <C>
Revenue
Consumer ........................................... $ -- $ -- $ --
Corporate .......................................... -- 22,603 22,603
--------------- ---------------- ---------------
Total Revenues ........................................ -- 22,603 22,603
Cost of Revenue
Consumer ........................................... -- -- --
Corporate .......................................... -- -- --
--------------- ---------------- ---------------
Total cost of revenues ................................ -- -- --
--------------- ---------------- ---------------
Gross profit .......................................... -- 22,603 22,603
Operating expenses:
Product development ................................ 319,824 120,916 440,740
Sales and marketing ................................ 17,509 76,705 94,214
General and administrative ......................... 114,651 102,372 217,023
--------------- ---------------- ---------------
Total operating expenses .............................. 451,984 299,993 751,977
--------------- ---------------- ---------------
--------------- ---------------- ---------------
Operating loss ........................................ (451,984) (277,390) (729,374)
Interest Income ....................................... 4,207 1,328 5,535
--------------- ---------------- ---------------
Net loss before provision for income tax .............. (447,777) (276,062) (723,839)
Provision for income taxes ............................ -- 800 800
--------------- ---------------- ---------------
Net loss .............................................. $ (447,777) $ (276,862) $ (724,639)
--------------- ---------------- ---------------
--------------- ---------------- ---------------
Basic and diluted net loss per share .................. $ (.13) $ (3.68) $ (.21)
--------------- ---------------- ---------------
--------------- ---------------- ---------------
Weighted average shares outstanding used in
computing basic and diluted net loss per share ...... 3,319,187 75,210 3,394,397
--------------- ---------------- ---------------
--------------- ---------------- ---------------
</TABLE>
See accompanying notes to the pro forma
condensed consolidated financial information.
<PAGE>
ASK JEEVES, INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
PRO FORMA BASIS OF PRESENTATION
The unaudited pro forma condensed consolidated financial statements of
Ask Jeeves, Inc. and Net Effect Systems, Inc. gives retroactive effect to
the merger, which is being accounted for as a pooling of interests and, as
a result, the unaudited pro forma condensed combined balance sheets and
statements of operations are presented as if Ask Jeeves, Inc. and Net
Effect Systems, Inc. had been combined for all periods presented.
The pro forma condensed consolidated financial statements reflect the
issuance of a total of 1,631,880 shares of Ask Jeeves, Inc. common stock
for all of the outstanding shares of Net Effect. In addition, options to
purchase Net Effect Systems, Inc. Common Stock were converted into options
to purchase 497,342 shares of Ask Jeeves, Inc. Common Stock.
2. MERGER TRANSACTION COSTS
Ask Jeeves, Inc. and Net Effect System, Inc. incurred transaction
costs of approximately $6.1 million associated with the merger, including
approximately $5.0 million for banker fee and expenses, $330,000 for audit
fees and $488,000 for legal fees. There can be no assurance that Ask
Jeeves, Inc. will not incur additional charges in subsequent quarters to
reflect costs associated with the merger or that management will be
successful in their efforts to integrate the operations of the respective
companies.
3. PRO FORMA NET LOSS PER SHARE
The pro forma consolidated basic and diluted net loss per share is
based on the combined weighted average number of common shares of Ask
Jeeves, Inc. Common Stock and Net Effect Systems, Inc. Common Stock
outstanding for each period using the relevant exchange ratios based on the
issuance of 2,129,222 shares of Ask Jeeves, Inc. Common Stock for all of
the outstanding shares of Net Effect Systems, Inc. All convertible
preferred stock, warrants and employee stock options have been
included in the computation of pro forma combined diluted net income
per share using the treasury stock method to the extent such instruments
are dilutive for the periods presented.
<PAGE>
(C) EXHIBITS
The following Exhibit is filed as part of this report:
2.1 Agreement and Plan of Merger and Reorganization, dated
November 14, 1999, by and among Ask Jeeves, Inc., a Delaware
corporation, Neutral Acquisition Corp., a Delaware
corporation, and Net Effect Systems, Inc., a Delaware
corporation (included as Exhibit 2.1 to Parent's Current
Report on Form 8-K (File No.000-26521) filed with the
Commission on November 14, 1999)
99.1 Supplementary Financial Statements of Net Effect Systems, Inc.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
ASK JEEVES, INC.
Dated: January 20, 2000 By: /s/ Amy Slater
-------------------------
AMY SLATER
GENERAL COUNSEL AND SECRETARY
<PAGE>
INDEX TO EXHIBITS
2.1 Agreement and Plan of Merger and Reorganization, dated
November 14, 1999, by and among Ask Jeeves, Inc., a
Delaware corporation, Neutral Acquisition Corp., a
Delaware corporation, and Net Effect Systems, Inc., a
Delaware corporation (included as Exhibit 2.1 to Parent's
Current Report on Form 8-K (File No. 000-26521) filed with
the Commission on November 14, 1999)
99.1 Supplementary Financial Statements of Net Effect Systems,
Inc.
<PAGE>
EXHIBIT 99.1
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Shareholders
Net Effect Systems, Inc. (Formerly Extratis Corporation)
In our opinion, the accompanying balance sheets and the related statements of
operations, changes in shareholders' equity and cash flows present fairly, in
all material respects, the financial position of Net Effect Systems, Inc.,
formerly Extratis Corporation, (the "Company"), at December 31, 1997 and 1998,
and the results of its operations and its cash flows for the years then ended,
in conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Woodland Hills, California
March 22, 1999, except for note 9,
as to which the date is November 19, 1999.
<PAGE>
NET EFFECT SYSTEMS, INC.
(FORMERLY EXTRATIS CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31 SEPTEMBER 30,
------------------------------- ---------------
1997 1998 1999
------------ ------------- --------------
(UNAUDITED)
<S> <C> <C> <C>
Assets:
Cash ................................................... $ 62,229 $ 2,877,968 $ 6,128,073
Accounts receivable .................................... 4,667 57,682 147,385
Prepaid and other current assets ....................... 3,500 6,447 184,174
------------ ------------- --------------
Total current assets ....................... 70,396 2,942,097 6,459,632
Property and equipment, net ............................ -- 43,444 418,324
Other assets ........................................... -- 139,698 115,307
------------ ------------- --------------
Total assets ............................... $ 70,396 $ 3,125,239 $ 6,993,263
------------ ------------- --------------
------------ ------------- --------------
Liabilities and Stockholders' Equity:
Accounts payable ....................................... $ -- $ 222,807 $ 200,594
Accrued liabilities .................................... 45,591 147,810 799,211
Accrued marketing expenses ............................. -- -- 265,000
Deferred revenue ....................................... -- 29,286 126,270
------------ ------------- --------------
Total current liabilities ................. 45,591 399,903 1,391,075
Commitments and contingencies(Note 6)
Shareholders' equity:
Series A convertible preferred stock, $.01 par
value, noncumulative 1,000,000 shares
authorized, 440,000 issued and outstanding ........... 4,400 4,400 4,400
Series B convertible preferred stock, $0.01 par
value, noncumulative 6,750,000 shares
authorized, 6,371,360 issued and outstanding ......... -- 63,714 63,714
Series C convertible preferred stock, $0.01 per
value, noncumulative 4,594,595 shares
authorized, 4,198,920 issued and outstanding ......... -- -- 41,989
Common stock, $0.01 par value, 10,000,000
shares authorized, 2,000,000 and 1,850,000 and
1,908,685 shares issued and outstanding at
December 31, 1997, 1998 and September 30, 1999 ....... 20,000 18,500 19,087
Additional paid-in capital ............................. 277,267 5,463,813 13,301,679
Accumulated deficit .................................... (276,862) (2,825,091) (7,828,681)
------------ ------------- --------------
Total stockholders' equity ............... 24,805 2,725,336 5,602,188
------------ ------------- --------------
Total liabilities and stockholders'
equity .................................. $ 70,396 $ 3,125,239 $ 6,993,263
------------ ------------- --------------
------------ ------------- --------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
NET EFFECT SYSTEMS, INC.
(FORMERLY EXTRATIS CORPORATION
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------ ---------------------------------
1997 1998 1998 1999
------------- --------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenue .......................... $ 22,603 $ 207,739 $ 75,550 $ 823,407
Cost of revenues: ................ -- 340,698 52,133 957,818
------------- --------------- ------------ ------------
Gross profit (loss) .............. 22,603 (132,959) 23,417 (134,411)
Operating expenses:
Product development .............. 120,916 608,273 358,347 1,852,341
Sales and marketing .............. 76,705 687,262 365,080 2,065,607
General and administrative ....... 102,372 1,223,063 644,402 1,135,926
------------- --------------- ------------ ------------
Total operating expenses .......... 299,993 2,518,598 1,367,829 5,053,874
------------- --------------- ------------ ------------
Operating loss .................... (277,390) (2,651,557) (1,344,412) (5,188,285)
Interest income .................. 1,328 107,623 66,255 182,820
------------- --------------- ------------ ------------
Loss before provision for (5,005,465)
income tax ...................... (276,062) (2,543,934) (1,278,157)
Provision for income tax .......... 800 800 800 1,616
------------- --------------- ------------ ------------
Net loss .......................... $ (276,862) $(2,544,734) $(1,278,957) $(5,007,081)
------------- --------------- ------------ ------------
------------- --------------- ------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
NET EFFECT SYSTEMS, INC.
(FORMERLY EXTRATIS CORPORATION)
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C
CONVERTIBLE PREFERRED CONVERTIBLE PREFERRED
CONVERTIBLE PREFERRED STOCK STOCK COMMON STOCK
----------------------- --------------------- --------------------- -------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
----------- ----------- ----------- --------- --------- ---------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of shares........... 440,000 $ 4,400 2,000,000 $20,000
Net loss.....................
----------- ----------- ----------- --------- --------- ---------- ----------- --------
Balance at December 31, 1997. 440,000 $ 4,400 -- $ -- -- $ -- 2,000,000 $20,000
----------- ----------- ----------- --------- --------- ---------- ----------- --------
Redemption of common stock... (150,000) $(1,500)
Issuance of shares........... 6,371,360 $ 63,714
Net loss.....................
----------- ----------- ----------- --------- --------- ---------- ----------- --------
Balance at December 31, 1998. 440,000 $ 4,400 6,371,360 $ 63,714 -- $ -- 1,850,000 $18,500
----------- ----------- ----------- --------- --------- ---------- ----------- --------
Issuance of shares (unaudited) 4,198,920 $41,989 20,560 $ 206
Net loss (unaudited).........
Exercise of stock options
(unaudited).................. 38,125 $ 381
Recognition of compensatory
stock options expense
(unaudited)..................
Settlement of legal fees
(unaudited)..................
----------- ----------- ----------- --------- --------- ---------- ----------- --------
Balance at September 30, 1999
(unaudited).................. 440,000 $ 4,400 6,371,360 $ 63,714 4,198,920 $ 41,989 1,908,685 $19,087
----------- ----------- ----------- --------- --------- ---------- ----------- --------
----------- ----------- ----------- --------- --------- ---------- ----------- --------
ADDITIONAL TOTAL
PAID-IN ACCUMULATED SHAREHOLDERS'
CAPITAL DEFICIT EQUITY
------------- ------------ --------------
<S> <C> <C> <C>
Issuance of shares........... $ 277,267 $ 301,667
Net loss..................... $ (276,862) $ (276,862)
----------- ------------ ------------
Balance at December 31, 1997. $ 277,267 $ (276,862) $ 24,805
----------- ------------ ------------
Redemption of common stock... $ (3,495) $ (4,995)
Issuance of shares........... $ 5,186,546 $ 5,250,260
Net loss..................... $(2,544,734) $(2,544,734)
----------- ------------ ------------
Balance at December 31, 1998. $ 5,463,813 $(2,825,091) $ 2,725,336
------------ ------------ ------------
Issuance of shares (unaudited) $ 7,744,310 $ 7,786,505
Net loss (unaudited)......... $(5,007,081) $(5,007,081)
Exercise of stock options
(unaudited).................. $ 3,464 $ 3,845
Misc. reclass adjustment
(unaudited).................. $ (3,491) $ 3,491
Recognition of compensatory
stock options expense
(unaudited).................. $ 134,667 $ 134,667
Settlement of legal fees
(unaudited).................. $ (41,084) $ (41,084)
------------ ------------ ------------
Balance at September 30, 1999
(unaudited).................. $13,301,679 $(7,828,681) $ 5,602,188
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
NET EFFECT SYSTEMS, INC.
(FORMERLY EXTRATIS CORPORATION)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER
YEAR ENDED DECEMBER 31, 30,
------------------------------- ------------------------------
1997 1998 1998 1999
------------- ------------ ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss ........................................... $ (276,862) $(2,544,734) $(1,278,957) $(5,007,081)
Adjustments to reconcile net income to net
Cash used in operating activities:
Depreciation and amortization ...................... -- 12,573 3,329 35,862
Increase in accounts receivable .................. (4,667) (53,015) (119,820) (89,703)
Increase in prepaid and other current
Assets ......................................... (3,500) (2,947) (7,619) (127,727)
Increase/Decrease in other assets ................ -- (139,698) (22,617) 24,391
Increase in accounts payable ..................... -- 222,807 103,840 (22,213)
Increase/Decrease in accrued liabilities
and other ....................................... 45,591 102,219 (30,561) 916,401
Increase in deferred revenue and customer
Deposits ....................................... -- 29,286 106,650 96,984
------------- ------------ ----------- ------------
Net cash used in operating activities .................. (239,438) (2,373,509) (1,245,755) (4,173,086)
------------- ------------ ----------- ------------
Cash flows from investing activities:
Issuance of note receivable .......................... -- -- -- (50,000)
Purchases of property and equipment .................. -- (170,649) (125,716) (410,742)
Sale of property and equipment ....................... -- 114,632 -- --
------------- ------------ ----------- ------------
Net cash used in investing activities .................. -- (56,017) (125,716) (460,742)
------------- ------------ ----------- ------------
Cash flows from financing activities:
Proceeds from the issuance of common stock ......... 81,667 -- -- 18,504
Proceeds from the issuance of Series A
Convertible preferred stock ..................... 220,000 -- -- --
Proceeds from the issuance of Series B
Convertible preferred stock ..................... -- 5,250,260 5,250,260 --
Proceeds from the issuance of Series C
Convertible preferred stock ..................... -- -- -- 7,768,001
Proceeds from stock options exercised .............. -- -- -- 3,845
Settlement of legal fees ........................... -- -- -- (41,084)
Noncash compensatory stock option expense .......... -- -- -- 134,667
Redemption of common stock ......................... -- (4,995) (4,995) --
------------- ------------ ----------- ------------
Net cash provided by financing activities ............. 301,667 5,245,265 5,245,265 7,883,933
------------- ------------ ----------- ------------
Net increase in cash and cash equivalents ............. 62,229 2,815,739 3,873,794 3,250,105
Cash at beginning of period ........................... -- 62,229 62,229 2,877,968
Cash at end of period ................................. $ 62,229 $ 2,877,968 $ 3,936,023 $ 6,128,073
------------- ------------ ----------- ------------
------------- ------------ ----------- ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
NET EFFECT SYSTEMS, INC.
(FORMERLY EXTRATIS CORPORATION)
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND ORGANIZATION:
Net Effect Systems, Inc. (formerly Extratis Corporation) (the
"Company") designs, develops, markets and supports innovative
enterprise-wide, scalable on line customer support software. The
Company's software enables the user to harness the power of the
Internet to provide real-time, text based customer support with
one-to-one interaction and one-to-many capabilities to maximize the
productivity of customer support functions within an organization.
Extratis Corporation was incorporated on April 28, 1997 under the laws
of the State of California. On September 25, 1998, Extratis Corporation
completed its re-incorporation in the State of Delaware and merger with
its newly created subsidiary Net Effect Systems, Inc.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Use of Estimates
In the normal course of preparing financial statements in conformity
with generally accepted accounting principles, management is required
to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period.
Accordingly, actual results could differ from those estimates.
Unaudited Interim Financial Information
The accompanying interim financial statements as of September 30, 1999
and for the nine months ended September 30, 1998 and 1999, are
unaudited. The unaudited interim financial statements have been
prepared on the same basis as the annual financial statements, and in
the opinion of management, reflect all adjustments, which include only
normal recurring adjustments, necessary to present fairly the Company's
financial position at September 30, 1999, its results of operations and
cash flows for the nine months then ended September 30, 1998 and 1999.
The financial data and other information disclosed in these notes to
the financial statements related to this period is unaudited. The
results for the nine months ended September 30, 1999 and are not
necessarily indicative of the results to be expected for the year
ending December 31, 1999.
Cash and Cash Equivalents
The Company considers highly liquid investments with an original
maturity of three months or less to be cash equivalents. Such
investments are valued at cost, which approximates market value.
<PAGE>
Revenue Recognition and Deferred Revenue
The Company recognizes revenue from the sale of its software upon
receipt of an executed sales agreement and shipment to the customer
provided there are no vendor obligations to be fulfilled and
collectibility is probable. Services revenue includes support,
education and consulting services. The Company provides software
support and product upgrades to its customer through separately priced
agreements. These support revenues are deferred and recognized on a
straight-line basis over the term of the contract. Revenues from
technical training and consulting services are recognized as these
services are provided to customers.
Product Development
Product development costs are expensed as incurred. Statement of
Financial Accounting Standards No. 86, "Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed," requires
capitalization of certain software development costs subsequent to the
establishment of technological feasibility. Based upon the Company's
product development process, technological feasibility is established
upon completion of a working model. Costs incurred by the Company
between completion of the working model and the point at which the
product is ready for general release have been insignificant.
Income Taxes
The Company utilizes the liability method of accounting for income
taxes. Under this method, deferred tax liabilities and assets are
determined based on the difference between the financial statement and
the tax basis of assets and liabilities using enacted tax rates in
effect for the period in which the differences are expected to reverse.
Valuation allowances are established, when necessary, to reduce
deferred tax assets to the amount expected to be realized.
Stock-based Compensation
The Company accounts for stock-based employee compensation arrangements
in accordance with the provisions of Accounting Principles Board
("APB") No. 25, "Accounting for Stock Issued to Employees," and
complies with the disclosure requirements of SFAS No. 123, "Accounting
for Stock-Based Compensation." Under APB No. 25, compensation cost, if
any, is recognized over the respective vesting period based on the
difference, on the date of grant, between the fair value of the
Company's common stock and the grant price.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This statement establishes standards for the reporting and
display of comprehensive income and its components in a full set of
general-purpose financial statements. Comprehensive income generally
represents all changes in shareholders' equity during the period except
those resulting from investments by, or distributions to, shareholders.
SFAS No. 130 is effective for fiscal years beginning after December 15,
1997 and requires restatement of earlier periods presented. SFAS No.
130 has no impact on the company's financial statements as the Company
has no other elements of comprehensive income other than net income.
<PAGE>
3. CONCENTRATIONS OF CREDIT RISK:
Financial instruments, which subject the Company to concentrations of
credit risk, consist primarily of cash and cash equivalents, and trade
accounts receivable. The Company maintains cash and cash equivalents
with various domestic financial institutions. The Company performs
periodic evaluations of the relative credit standing of these
institutions. From time to time, the Company's cash balances with any
one financial institution may exceed Federal Deposit Insurance
Corporation insurance limits.
The Company's revenue for 1997, 1998 and the nine months ended
September 30, 1999 was from software sales, consulting and support
services to two, four and twelve customers, respectively.
4. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED,
--------------------------- -------------
1997 1998 SEPTEMBER 30,
------------ ---------- -------------
<S> <C> <C> <C>
Computer equipment ....................... $ -- $ 31,017 $ 303,670
Furniture and equipment .................. -- 25,000 40,363
Leasehold improvements ................... -- -- 122,726
Less accumulated depreciation and
Amortization ......................... -- (12,573) (48,435)
------------ ---------- -------------
Total .............................. $ -- $ 43,444 $ 418,324
------------ ---------- -------------
------------ ---------- -------------
</TABLE>
5. INCOME TAXES:
The primary component of temporary differences, which give rise to
deferred tax assets, is related to net operating loss carryforward. The
gross deferred tax assets were $110,758 and $1,016,428 at 1997 and
1998, respectively. Due to the limited operating history of the Company
and the losses incurred to date, management believes a full valuation
allowance for the deferred tax assets are necessary. The valuation
allowance increased by $905,670 during 1998.
At December 31, 1997 and 1998, the Company had Federal taxable net
operating loss of $276,862 and $2,544,734, respectively.
The Federal net operating loss carry forwards will begin to expire in
December 31, 2017.
As a result of the Company's operating losses, the provision for income
taxes in the accompanying financial statements reflects the current
minimum California State franchise tax liability of $800 for each year
ending 1997 and 1998.
<PAGE>
6. COMMITMENTS AND CONTINGENCIES:
LEASES
The Company leases its facility, certain computer and office equipment
under non-cancelable operating leases with terms ranging up to six
years. The future minimum lease obligations under non-cancelable
operating leases at December 31, 1998 are as follows:
<TABLE>
<S> <C>
1999 $193,514
2000 740,359
2001 492,255
2002 448,709
2003 448,709
Thereafter 224,355
---------
$2,547,901
</TABLE>
Lease expense for the nine months ended September 30, 1998 and 1999
amounted to $51,113 and $256,478, respectively. Lease expense for the
years ended December 31, 1997 and 1998 amounted to $6,049 and $47,115,
respectively.
EMPLOYMENT AGREEMENTS
The Company maintains employment agreements with certain executive
officers of the Company. The employment agreements provide for minimum
salary levels, incentive compensation and severance benefits, among
other items.
7. SHAREHOLDER'S EQUITY:
SERIES A CONVERTIBLE PREFERRED STOCK
Series A Convertible Preferred Stock has the same voting and dividend
participation rights as common stock, and has a preference in
liquidation over common stock. Under the terms of stock agreements, all
Series A Preferred Stock maybe converted to common stock upon the
consummation of an initial public offering in accordance with their
terms or if the holders of such preferred shares approve the
conversion.
SERIES B CONVERTIBLE PREFERRED STOCK
In June 1998, the Company issued 6,371,360 shares of Series B
Convertible Preferred Stock for $5,250,260 or $0.824 per share to raise
capital for further expansion. The Series B Convertible Preferred Stock
has the same voting and dividend participation rights as common stock,
and has a preference in liquidation over common stock.
SERIES C CONVERTIBLE PREFERRED STOCK
In April 1999, the Company issued 3,928,650 shares of Series C
Convertible Preferred Stock. In May 1999, the Company issued an
additional 270,270 shares of Series C Convertible Preferred Stock. A
total of 4,198,920 shares were issued at $1.85 per share, raising a
total of $7,768,002 for further expansion. The Series C Convertible
Preferred Stock has the same voting and dividend participation rights
as common stock, and has a preference in liquidation over common stock.
COMMON STOCK OPTIONS
The Company's Stock Option Plan, adopted in February 1998, and amended
in June 1998, authorized the granting of incentive and nonqualified
stock options. The Board of Directors approved and the shareholders
ratified up to an aggregate of 4,553,000 shares for issuance under this
plan. Options granted under the Plan may be Incentive Stock Options or
Non-statutory
<PAGE>
Stock Options, as determined by the Administrator at the
time of grant. Stock Purchase Rights may also be granted under the
Plan. Options granted as Incentive Stock Options shall have an exercise
price no less than 100% of the Fair Market Value on date of grant.
Options granted as Non-statutory Stock Options shall have an exercise
price of no less than 85% of Fair Market Value on the date of grant. As
of December 31, 1998, no options granted pursuant to the Plan have been
exercised.
The following is a summary of stock option activity during fiscal 1998
and during the nine-months ended September 30, 1999:
<TABLE>
<CAPTION>
RANGE OF EXERCISE
SHARES PRICE
----------- -----------------
<S> <C> <C>
Outstanding, December 31, 1997 .................. -- --
----------- -----------------
Granted ...................................... 3,787,154 $0.10 to $0.25
Canceled ..................................... -- --
Exercised .................................... -- --
-----------
Outstanding, December 31, 1998 .................. 3,787,154 $0.10 to $0.25
-----------
Granted ...................................... 779,032 $0.25 to $0.90
Canceled ..................................... (878,710) $0.10 to $0.90
Exercised .................................... (38,125) $0.10 to $0.15
-----------
Outstanding, September 30, 1999 ................. 3,649,351 $0.10 to $0.90
-----------
-----------
Options exercisable at September 30, 1999 ....... 976,188 $0.10 to $0.20
Options available for future grant .............. 865,524 --
</TABLE>
8. CONVERTIBLE NOTES:
In January 1998, the Company entered into three convertible notes
payable agreements in exchange for $250,000 in cash. As part of these
agreements, the note holders had the right to convert the notes payable
into a predetermined number of shares of preferred stock during the
next round of financing and in addition were issued warrants expiring
on January 28, 2003 allowing the note holders to purchase up to 303,398
additional shares of Series B Convertible Preferred Stock at $0.824 per
share (see Note 7). The notes became due and payable on June 15, 1998
and were converted into 303,398 shares of Series B Convertible
Preferred Stock with the same rights as the other Series B Convertible
Preferred Stock holders as noted above.
9. SUBSEQUENT EVENT (UNAUDITED):
In April 1999, the Company authorized the sale and issuance of
4,594,595 shares of Series C Preferred Stock at $1.85 per share. The
Company received approximately $7,300,000 related to this financing.
On November 19, 1999, Ask Jeeves, Inc. Inc. entered into an Agreement
and Plan of Merger ("Agreement") with Net Effect Systems, Inc. Pursuant
to the Agreement, all outstanding shares of Net Effect Systems, Inc.
were converted into 1,631,880 million shares of Ask Jeeves, Inc. Common
Stock, and options to purchase Net Effect Systems, Inc. Common Stock
were converted into options to purchase 497,342 shares of Ask Jeeves,
Inc. Common Stock. The merger will be accounted for as a pooling of
interests.
