<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 28, 2000
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------------
ASK JEEVES, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 7375 94-3334199
<S> <C> <C>
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification
incorporation or organization) Classification Code Number) No.)
</TABLE>
--------------------------
5858 HORTON STREET, SUITE 350
EMERYVILLE, CALIFORNIA 94608
(510) 985-7400
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
------------------------------
ROBERT W. WRUBEL
PRESIDENT AND CHIEF EXECUTIVE OFFICER
ASK JEEVES, INC.
5858 HORTON STREET, SUITE 350
EMERYVILLE, CALIFORNIA 94608
(510) 985-7400
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------
COPIES TO:
ANDREI M. MANOLIU, ESQ.
MICHAEL L. WEINER, ESQ.
COOLEY GODWARD LLP
3000 EL CAMINO REAL
PALO ALTO, CALIFORNIA 94306-2155
(650) 843-5000
------------------------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
FROM TIME TO TIME AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
------------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. /X/
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
It this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. / /
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM
AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
TITLE OF SECURITIES TO BE REGISTERED REGISTERED(1) SHARE(2) PRICE(2) REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, $.001 par value.......... 1,631,864(1) $99.3125 $162,064,494 $42,785
</TABLE>
(1) Estimated solely for the purpose of calculating the amount of the
registration fee and based upon the average of the high and low sale price
of Common Stock of the Registrant on the Nasdaq National Market on
January 21, 2000.
--------------------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment that specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
PROSPECTUS
ASK JEEVES, INC.
1,631,864 SHARES
COMMON STOCK
The selling stockholders identified in this prospectus are selling 1,631,864
shares of our common stock. All of the shares being offered in this prospectus
were issued to the selling stockholders in connection with the acquisition of
Net Effect Systems, Inc. We are not selling any shares of our common stock under
this prospectus and will not receive any of the proceeds from the sale of shares
by the selling stockholders.
Our common stock is traded on the Nasdaq National Market under the symbol
"ASKJ". On January 27, 2000, the last reported sales price for our common stock
was $110.75 per share.
The selling stockholders may sell the shares of common stock described in
this prospectus in a number of different ways and at varying prices. We provide
more information about how the selling stockholders may sell their shares in the
section titled "Plan of Distribution" on page 64.
Investing in our our common stock involves a high degree of risk. See "Risk
Factors" beginning on page 6 to read about risks that you should consider before
buying shares of our common stock.
The shares offered or sold under this prospectus have not been approved by
the Securities and Exchange Commission or any state securities commission nor
have any of these organizations determined that this prospectus is accurate or
complete. Any representation to the contrary is a criminal offense.
THE DATE OF THIS PROSPECTUS IS JANUARY 28, 2000
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TABLE OF CONTENTS
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PAGE
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<S> <C>
Summary..................................................... 4
Risk Factors................................................ 6
Special Note Regarding Forward-Looking Statements...........
Use of Proceeds.............................................
Dividend Policy.............................................
Price Range of Common Stock.................................
Selected Financial Data.....................................
Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................
Business....................................................
Management..................................................
Certain Transactions........................................
Principal and Selling Stockholders..........................
Description of Capital Stock................................
Plan of Distribution........................................
Legal Matters...............................................
Experts.....................................................
Where You Can Find More Information.........................
Incorporation by Reference..................................
Index to Financial Statements...............................
</TABLE>
------------------------
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of our common stock only in those jurisdictions where offers and
sales are permitted. The information contained in this prospectus is accurate
only as of the date of this prospectus, regardless of the time of delivery of
this prospectus or of any sale of our common stock.
3
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PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION, INCLUDING "RISK FACTORS" AND THE CONSOLIDATED FINANCIAL STATEMENTS
AND NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. THE DISCUSSION IN
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISK AND
UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED
HEREIN. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT
ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS," "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS" AS
WELL AS THOSE DISCUSSED ELSEWHERE IN THIS PROSPECTUS.
THE COMPANY
Ask Jeeves has developed and deployed a natural language question answering
network on the Internet for companies and consumers, establishing a new way to
interact with the World Wide Web. Ask Jeeves was first introduced to the public
in April 1997 to provide Web users with a more satisfactory and productive
experience by quickly directing users to relevant answers. Our mission is to
humanize the Internet by making it easier and more intuitive for consumers to
find the information, products and services they need, and for companies to
better acquire, retain and maximize the value of their online customers. Our
branding strategy centers on the Jeeves character, a friendly and trusted
assistant who provides help and guidance on the Web. The Ask Jeeves question
answering network let's users ask a question in plain English and receive a
response that points to relevant Internet destinations to provide the answers.
Our two principal businesses are based on the same underlying technology. The
Consumer Service allows users to obtain answers to frequently asked questions on
the Internet. The Corporate Service helps companies provide a human-like online
interface for their customers. We believe that our Corporate and Consumer
services make interaction with the Internet more intuitive, less frustrating and
significantly more productive.
While the growth of the Internet has drawn users at an unprecedented pace,
the volume of online information has made it increasingly difficult for users to
navigate effectively. To take full advantage of the Internet, users must be able
to successfully navigate a network of dispersed Web sites, which are generally
not connected in a logical fashion. In addition, once at the Web site, users are
faced with the difficulty of sorting through an overwhelming amount of
information. Users currently rely on Internet search engines or directories to
locate information and make online purchases. These methods typically require
consumers to construct keyword or complex search strings that often result in
hundreds or thousands of irrelevant results. Given the magnitude of this
problem, companies are recognizing the need to provide a means by which their
customers and potential customers can more easily find relevant information,
products and services on their Web sites. We believe that until navigation on
the Internet improves, consumers will remain frustrated with their online
experiences, and companies will be frustrated by their inability to provide an
easy, intuitive and intelligent user interface, and as a result, to maximize
returns on their investments in Internet strategies.
Beginning with only 3,000 questions a day in its first month of operation,
Ask Jeeves answered over 1.7 million questions a day in September 1999, and the
number of users has grown from 425,000 in September 1998 to more than
4.1 million in September 1999. Ask Jeeves, at Ask.com, provides users with
relevant answers to a wide range of questions from "Is it raining in Paris?" to
"Where can I comparison shop for cameras?" Our Corporate Service is designed to
improve customer satisfaction on Web sites, improve conversion rates of browsers
to purchasers and reduce expensive support costs such as call centers. 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 January 2000, we entered into an agreement to acquire
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.
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Our principal executive offices are located at 5858 Horton Street, Suite
350, Emeryville, California 94608, and our telephone number is (510) 985-7400.
Our World Wide Web site address is www.Ask.com. The information in the Web site
is not incorporated by reference into this prospectus.
THE OFFERING
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Common Stock offered by us.................................. 0 shares
Common Stock offered by Selling Stockholders................ 1,631,864 shares
Common Stock to be outstanding after the offering........... 28,472,883 shares
Use of Proceeds............................................. We will not receive any
proceeds from the sale of
common stock by the selling
stockholders
Nasdaq National Market symbol............................... ASKJ
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The foregoing information is based upon shares outstanding as of
December 31, 1999.
SUMMARY CONSOLIDATED FINANCIAL DATA
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<CAPTION>
PERIOD FROM
JUNE 13,
1996
(INCEPTION) YEAR ENDED NINE MONTHS ENDED
THROUGH DECEMBER 31, SEPTEMBER 30,
DECEMBER 31, -------------------------- ----------------------------
1996 1997 1998 1998 1999
------------ ------------ ----------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Consolidated Statement of Operations Data:
Total revenues.................................... $ -- $ 22,603 $ 800,398 $ 238,436 $ 11,124,852
Gross profit (loss)............................... -- 22,603 (598,994) (210,531) 2,807,060
Operating loss.................................... (107,797) (730,174) (6,966,362) (3,187,150) (30,487,764)
Net loss.......................................... $(107,797) $ (724,639) $(6,806,359) $(3,106,162) $(29,185,828)
Basic and diluted net loss per share.............. $ (.08) $ (.21) $ (.74) $ (.39) $ (1.65)
Weighted average shares........................... 1,295,342 3,394,397 9,162,624 8,021,526 17,659,875
</TABLE>
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<CAPTION>
AS OF
SEPTEMBER 30, 1999
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Consolidated Balance Sheet Data:
Cash and cash equivalents and short-term and long-term
investments............................................... $62,922,372
Working capital............................................. 56,474,089
Total assets................................................ 79,390,815
Capital leases, less current portion........................ 2,196,462
Total stockholders' equity.................................. 63,465,018
</TABLE>
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RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW, TOGETHER WITH ALL
OF THE OTHER INFORMATION INCLUDED IN THIS PROSPECTUS, BEFORE MAKING AN
INVESTMENT DECISION. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCURS, OUR
BUSINESS, FINANCIAL CONDITION OR OPERATING RESULTS COULD BE MATERIALLY ADVERSELY
AFFECTED. IN SUCH CASE, THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE, AND
YOU MAY LOSE ALL OR PART OF YOUR INVESTMENT.
OUR BUSINESS IS EXTREMELY DIFFICULT TO EVALUATE BECAUSE OUR OPERATING HISTORY IS
LIMITED
We were incorporated in June 1996 and launched Ask Jeeves, at Ask.com, our
public Web site, in April 1997. Because of our limited operating history, it is
extremely difficult to evaluate our business and prospects. Our revenue and
income potential is unproven and our business model is constantly evolving. For
example, in the quarter ended March 31, 1999, we restructured our organization
into two business units: the Consumer Service and the Corporate Service. Because
the Internet is constantly changing, we may need to change our business model
again to adapt to those changes. Frequent changes in organizational structure
could impose significant burdens on our management and our employees and could
result in loss of productivity or even increased attrition.
Any investment in our company must be considered in light of the problems
frequently encountered by companies in an early stage of development in new and
rapidly evolving markets. To address the risks we face, we must, among other
things:
- maintain and enhance our brand
- expand our product and service offerings
- increase the amount of traffic to Ask Jeeves
- increase the number and types of businesses that use the products and
services of our Corporate and Consumer Service
- increase the value of our Corporate and Consumer Service to our users,
customers, electronic commerce merchants and advertisers
- attract, integrate, retain and motivate qualified personnel; and
- maintain the leadership and quality of our services.
We cannot be certain that our business strategy will be successful or that
we will successfully address these risks.
WE HAVE A HISTORY OF NET LOSSES AND EXPECT TO CONTINUE TO INCUR NET LOSSES
We have incurred significant net losses in each fiscal quarter since our
inception, including a net loss of approximately $29.2 million for the nine
months ended September 30, 1999, and as of September 30, 1999 we had an
accumulated deficit of approximately $36.8 million. We expect to have increasing
net losses and negative cash flows for the foreseeable future. The size of these
net losses will depend, in part, on the revenue growth 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 Corporate and Consumer Service 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 we will be unable to continue our operations.
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OUR CORPORATE AND CONSUMER SERVICES ARE NOVEL AND UNPROVEN
Our Corporate and Consumer services are novel and unproven. We will be
successful only if Internet users adopt our natural-language services on Ask
Jeeves and on the Web sites of our corporate customers. Prior to the launch of
Ask Jeeves, Internet users only had traditional search techniques, such as
search engines, to navigate the Internet. Traditionally, users relied on
methods, such as call centers, chat rooms and e-mail, rather than
difficult-to-navigate corporate Web sites, to obtain information on products and
services. It is difficult to predict the extent and rate of user adoption of our
Corporate and Consumer services. We cannot assure you that widespread acceptance
of our services will occur. Visitors to our service may use it once or twice and
then revert to traditional search techniques to navigate the Internet.
OUR METHODS OF GENERATING REVENUE ARE RELATIVELY NEW AND LARGELY UNTESTED
We generated approximately 65%, 31% and 4% of our revenues for the nine
months ended September 30, 1999 through Internet advertising, licensing of our
Corporate Service to corporate customers and knowledge base licensing fees that
provide Internet-wide navigation services, respectively. We facilitate
electronic commerce by directing users who ask a shopping question to electronic
commerce merchants, some of whom compensate us for the referral. These methods
of revenue generation are relatively new and largely untested and revenues to
date have not been material.
Revenues from Internet advertising will make up a significant amount of our
revenues for the foreseeable future. Since the Internet advertising market is
new and rapidly evolving, we cannot yet gauge its effectiveness as compared to
traditional advertising media. Advertisers that have traditionally relied on
other advertising media may be reluctant to advertise on the Internet believing
that Internet advertising is less effective than traditional advertising media
for promoting their products and services. Consequently, they may allocate only
limited portions of their advertising budgets to Internet advertising. Our
business could be materially adversely affected if Internet advertising does not
continue to grow or if we are unsuccessful in increasing our advertising
revenues. Furthermore, we rely on a third-party advertising 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.
In addition, a portion of our revenues for the foreseeable future is
expected to be derived from the facilitation of electronic commerce
transactions. The market for Internet products and services has only recently
begun to develop and is rapidly changing. Therefore, the success of our business
depends upon the adoption of the Internet as a medium for commerce by a broad
base of customers. If this market fails to develop or develops more slowly than
expected, or if our electronic commerce services do not achieve market
acceptance, our business may suffer.
Furthermore, we expect sales to corporate customers to constitute a growing
percentage of our revenues. As of September 30, 1999, we had provided customized
solutions to approximately 26 companies. In addition, our Corporate Service has
only been recently implemented onto these corporate Web sites. As such, we
cannot yet determine the effectiveness of our Corporate Service compared to
traditional methods of customer relationship management. If we cannot
demonstrate to corporate customers that our Corporate Service increases the rate
at which browsers become purchasers, improves customer satisfaction on their Web
sites and reduces expensive support costs, such as those associated with call
centers, our ability to attract and retain corporate customers may be impaired.
Our business would be materially adversely affected if we are unsuccessful in
increasing the number of corporate customers.
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 is 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
7
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and public relations activities. We intend to continue to incur significant
expenditures, approximately $40 to $50 million in the year 2000, on these
advertising and promotional programs and 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. If our
brand enhancement strategy is unsuccessful, these expenses may never be
recovered and we may be unable to increase future revenues.
TO MANAGE OUR GROWTH, WE NEED TO IMPROVE OUR SYSTEMS, CONTROLS AND PROCEDURES
AND COORDINATE OUR CORPORATE AND CONSUMER SERVICES
We have experienced and may continue to experience rapid growth, which has
placed, and could continue to place, a significant strain on our managerial,
financial and operational resources. This growth will place a significant strain
on our personnel, management systems and resources. We expect that the number of
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 must also
maintain close coordination between our Corporate and Consumer Services, as well
as our technical, accounting, finance, marketing, sales and editorial
organizations. 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 materially adversely affected.
OUR ACQUISITION OF NET EFFECT SYSTEMS, 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., effective November 19, 1999 and we
entered into an agreement on January 25, 2000 to acquire Direct Hit
Technologies, Inc. We may encounter risks to our business associated with the
assimilation of Net Effect 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 and Direct Hit customers; and
- inability to retain employees of Net Effect and Direct Hit.
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.
If we are unable to successfully integrate Net Effect and Direct Hit or to
create new or enhanced services, we may not achieve the anticipated benefits
from our mergers with Net Effect 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
8
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investment. In addition, if any significant number of Net Effect or Direct Hit
employees fail to remain employed with us, we may experience difficulties in
achieving the expected benefits of the acquisition.
WE MAY NOT BE ABLE TO EFFECTIVELY COMPETE AGAINST OUR CURRENT AND POTENTIAL
COMPETITORS
We have a number of competitors in both the Consumer and Corporate services
businesses.
CONSUMER SERVICE
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 and LookSmart, Ltd. because they provide
alternative ways for users to obtain the desired information.
CORPORATE SERVICE
Our Corporate Service competes with a number of companies that are
addressing the same need to improve automated or online customer service for
corporate clients. The companies that provide automated online customer products
and services against which we compete can be categorized as follows:
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CATEGORY FOCUS COMPETITORS
- ----------------------------- ----------------------------- -----------------------------
<S> <C> <C>
Web-based.................... Web-site specific search Inktomi Corporation, Primus
engine, "frequently asked Telecommunications Group,
questions," self-help problem Inc. and WebAnswers, LLC
resolution and expert systems
E-mail....................... Automated response to Aptex Software, Inc.,
customer generated e-mail and Brightware, Inc., Egain
automated routing of customer Communications Corp., Kana
e-mail to appropriate answer Communications, Inc. and
provider Mustang Software, Inc.
Phone call with customers.... Receive, manage and track Clarify, Inc., Siebel
telephonic communications Systems, Inc., Face Time
Communications, Inc., Vantive
Corporation and Remedy
Corporation
</TABLE>
Our ability to compete depends on many factors, many of which are outside of
our control. These factors include: the quality of content, the ease of use of
online services, the timing and market acceptance of new and enhanced online
services, and sales and marketing efforts by our competitors and 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 employees, partners, advertisers and electronic commerce merchants.
Our competitors may develop products and services that are equal to, or superior
to, our products and services, or achieves 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
9
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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., for the purpose of marketing Ask Jeeves' services
outside of the United States. This expansion into international markets will
require substantial management attention and financial resources. At this time,
we have recorded no sales from international operation. We cannot be certain
that our investment in establishing operations in other countries will produce
the desired levels of revenue. In addition, international operations are 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 have a material adverse effect on the
results of our operations.
OUR OPERATING RESULTS ARE VOLATILE AND DIFFICULT TO PREDICT
You should not rely on our results of operations during any particular
quarter as an indication of our future results for a full year or any other
quarter. Our quarterly revenues and operating results have varied significantly
in the past and may vary significantly in the future due to a number of factors,
including:
- our ability to obtain new corporate customers, the length of the
development cycle of the Corporate Service for corporate customers and the
timing of revenue recognition with respect to contracts with corporate
customers;
- our ability to obtain new advertising contracts, maintain existing ones,
and effectively manage our advertising inventory;
- the number of questions asked and answered on Ask Jeeves and on the Web
sites of our corporate customers;
- our ability to attract and retain advertisers and our ability to link our
electronic commerce merchants to potential customers;
- seasonal and other fluctuations in demand for our electronic commerce
services and for advertising space on Ask Jeeves;
- our ability to develop and introduce new technology;
- announcements and new technology introductions by our competitors;
- our ability to attract and retain key personnel;
- costs relating to possible acquisitions and integration of technologies or
businesses;
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- rate changes for advertising on Ask Jeeves; and
- marketing expenses and technology infrastructure costs as well as other
costs that we may incur as we expand our operations.
We have experienced lower traffic during the year-end holiday season and a
slower rate of growth during the summer months. Given our limited operating
history, user traffic on our Web site is extremely difficult to forecast
accurately. Moreover, obtaining new corporate customers depends on many factors
that we are not able to control, such as the allocation of budgetary resources
by potential customers. The average sales cycle for obtaining new corporate
customers has typically ranged 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 expend 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
revenue, 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 PUBLIC MARKET ANALYSTS AND INVESTORS, THE
MARKET PRICE OF OUR COMMON STOCK MAY DECREASE SIGNIFICANTLY
Public market analysts and investors have not been able to develop
consistent financial models for the Internet market because of the unpredictable
rate of growth of Internet users, the rapidly changing models of doing business
on the Internet and the Internet's relatively low barriers to entry. As a
result, and because of the other risks discussed in this prospectus, it may be
likely that our actual results will not meet the expectations of public market
analysts and investors in future periods. If this occurs, the price of our
common stock will likely fall.
OUR CONSUMER SERVICE DEPENDS ON THIRD-PARTY CONTENT
Our Consumer Service is designed to directly link users into a page within a
third-party Web site that contains the answer to a question asked. However, when
our Consumer Service attempts to direct the user to a page within the Web site,
some companies have automatically redirected users to their home page. If
companies prevent us from directly linking our consumer users to a page within a
third-party Web site, and if there are no comparable alternative Web sites to
which we can direct our users, the utility and attractiveness of our services to
consumers may be reduced. If this occurs, traffic on Ask Jeeves could
significantly decrease, which would have a material adverse effect on our
business.
Visitors to Ask Jeeves use our Consumer Service to obtain direct access to
the information, products and services they need through the display of a
third-party Web page containing the answer to the user's question. We have
little control over the content contained on these third-party Web sites. If
these third-party Web sites do not contain high-quality, up-to-date and useful
information to the user, the utility of our service to the user will be reduced,
which could materially and adversely affect our business.
WE MAY BE LIABLE FOR OUR LINKS TO THIRD-PARTY WEB SITES
We could be exposed to liability with respect to the selection of
third-party Web sites that may be accessible through Ask Jeeves. Such claims
might include, among others, that by linking to Web sites operated by third
parties, we may be liable for copyright or trademark infringement or other
unauthorized actions by such third parties through such Web sites. Other claims
may be based on errors or false or misleading information provided on Ask
Jeeves, including information deemed to constitute professional advice such as
legal, medical, financial or investment advice. Other claims may be based on our
links to sexually explicit Web sites and our provision of sexually explicit
advertisements when this content is displayed. Our business could be materially
adversely affected due to the cost of investigating and
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defending such claims, even to the extent such claims do not result in
liability. Implementing measures to reduce our exposure to this liability may
require us to spend substantial resources and limit the attractiveness of our
service to users.
FAILURE TO RETAIN CUSTOMERS OR ADD NEW CUSTOMERS TO OUR CORPORATE SERVICE MAY
HAVE AN ADVERSE EFFECT ON OUR REVENUES
For the nine months ended September 30, 1999 no customer accounted for more
than ten percent of our total revenues. AltaVista and theglobe.com, inc.
accounted for approximately 10% and 10% of total revenues, respectively, for the
year ended December 31, 1998. In addition, in the coming year we expect that
revenues associated with our Corporate Service will be heavily dependent on a
limited number of customers, comprised primarily of corporations with large,
difficult-to-navigate Web sites. As a result, if we do not complete our sales to
a sufficient number of customers, our future revenues will be adversely
affected.
Most of our customer contracts in the Corporate Service have a term of one
year. As a result, if we are unable to offer value to our customers during the
term of these contracts, or if our customers choose a competitor's service over
our service, or if such customers decide to use their own proprietary technology
to develop services similar to ours, such customers may not renew their
contracts. If we do not obtain a sufficient amount of contract renewals or if
such renewal contracts are obtained on terms less favorable than the original
contract, our business could be materially adversely affected.
OUR DEVELOPMENT CYCLE FOR OUR CORPORATE SERVICE IS LONG AND LABOR INTENSIVE
Because the customization of our Corporate Service is labor intensive, it is
difficult to predict the length of the development cycle. Factors that affect
the length of the development cycle include the overall size and complexity of
the Web site, the interaction with the customer and the dynamic nature of the
content. Generally, it takes three to four months to launch a customized
Corporate Service. However, because we have a limited number of corporate
customers, it is difficult to predict whether the development cycle will stay in
this timeframe. The long development cycle makes it difficult to predict the
delivery time to the customer, realize our revenue goals and manage our internal
hiring needs to meet new projects. In addition, in order to meet increased
demand for custom Corporate Service, 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 custom
knowledge bases could adversely affect our business.
Our revenue growth is dependent, in part, on our ability to leverage our
customization of knowledge bases. We have outsourced our knowledge base creation
process to providers of integrated Internet solutions to leverage our sales
efforts. If we are unable to continue to outsource the labor intensive process
of creating customized knowledge bases, our expenses in developing a customized
corporate Web site will continue to be high, which may have an adverse effect on
our business.
WE FACE RISKS RELATED TO EXPANDING INTO RELATIVELY NEW SERVICES AND BUSINESS
AREAS, IN PARTICULAR, ELECTRONIC COMMERCE
To increase our revenues, we will need to expand our operations by promoting
new or complementary products and by expanding the 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. Such expansion may
strain our management, financial and operational resources. Our expansion into
new product and service offerings may not be timely or may not generate
sufficient revenues to offset
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their cost. If this occurs, our business, operating results and financial
condition will be materially adversely affected.
OUR FUTURE SUCCESS DEPENDS ON OUR ABILITY TO RETAIN OUR PRESIDENT AND CHIEF
EXECUTIVE OFFICER
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 have a material adverse
effect on our business.
OUR FUTURE SUCCESS DEPENDS ON OUR ABILITY TO ATTRACT, RETAIN AND MOTIVATE HIGHLY
SKILLED EMPLOYEES
Our future success also depends on our ability to attract, retain and
motivate highly skilled employees. Competition for employees in our industry is
intense. Additionally, it is often more difficult to attract employees once a
company's stock is publicly traded because the exercise price of equity awards
such as stock options are based on the public market, which is highly volatile.
We may be unable to attract, assimilate or retain other highly qualified
employees in the future. We have from time to time in the past experienced, and
we expect to continue to experience in the future, difficulty in hiring and
retaining highly skilled employees with appropriate qualifications.
WE WILL ONLY BE ABLE TO EXECUTE OUR BUSINESS PLAN IF INTERNET USAGE GROWS
Our business would be adversely affected if Internet usage does not continue
to grow or grows at significantly lower rates compared to current trends. The
continued growth of the Internet depends on various factors, many of which are
outside our control. These factors include:
- the Internet infrastructure may not be able to support the demands placed
on it;
- performance and reliability of the Internet may decline as usage grows;
- security and authentication concerns with respect to the transmission over
the Internet of confidential information, such as credit card numbers, and
attempts by unauthorized computer users, so-called hackers, to penetrate
online security systems; and
- privacy concerns, including those related to the ability of Web sites to
gather user information without the user's knowledge or consent.
THE OPERATING PERFORMANCE OF OUR SYSTEMS AND SERVERS IS CRITICAL TO OUR BUSINESS
AND REPUTATION
Any system failure, including network, software or hardware failure, that
causes an interruption in our service or a decrease in responsiveness of Ask
Jeeves could result in reduced user traffic on Ask Jeeves and reduced revenues.
Our network and server equipment is located at Frontier Global Center in Palo
Alto, California and Exodus Communications in Sunnyvale, California. Although we
believe that our current back-up methods are adequate, we cannot assure you that
the back-up servers will not fail or cause an interruption in our service.
Our services on both Ask Jeeves and our Corporate Service customer sites
have from time to time 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. The Ask Jeeves Web site has been interrupted for periods ranging from a
few minutes to three hours. In addition, these Web sites could also be affected
by computer viruses, electronic break-ins or other similar disruptions. If we
experience outages, frequent or persistent system failures or degraded response
times, our reputation and brand could be permanently harmed. In addition, we
could lose advertising revenues during these interruptions and user satisfaction
could be negatively impacted if the service is slow or unavailable.
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Our users and customers depend on Internet service providers, online service
providers and other Web site operators for access to Ask Jeeves. Each of these
providers has experienced significant outages in the past and could experience
outages, delays and other difficulties due to system failures unrelated to our
systems.
The occurrence of an earthquake or other natural disaster or unanticipated
problems at our leased headquarters in Emeryville, California or at the servers
that host or back-up our systems could cause interruptions or delays in our
business, loss of data or render us unable to provide Corporate and Consumer
Services. Our systems are vulnerable to damage or interruption from fire, flood,
power loss, telecommunications failure, break-ins, earthquake and similar
events. Our general liability insurance policies may not adequately compensate
us for losses that may occur due to interruptions in our service.
WE MAY NOT BE ABLE TO ADAPT TO EVOLVING INTERNET TECHNOLOGIES AND CUSTOMER
DEMANDS
To be successful, we must adapt to rapidly changing Internet technologies by
continually enhancing our products and services and introducing new services to
address our customers' changing needs. We could incur substantial development or
acquisition costs if we need to modify our services or infrastructure to adapt
to changes affecting providers of Internet services. Our business could be
materially adversely affected if we incur significant costs to adapt to these
changes. If we cannot adapt to these changes, or do not sufficiently increase
the features and functionality of our products and services, our customers may
switch to the product and service offerings of our competitors. Furthermore, our
competitors or potential competitors may develop a novel method of Internet
navigation that is equal or superior to our Corporate and Consumer Service. As a
result, demand for our Corporate and Consumer Service may decrease.
WE MAY FACE POTENTIAL LIABILITY FOR INVASION OF PRIVACY
Although we have a policy against using personal information, current
computing and Internet technology allows us to collect personal information
about our users. We may decide in the future to compile and provide such
information to our Corporate customers and electronic commerce merchants. In the
past, the Federal Trade Commission has investigated companies that have taken
such actions without permission or in violation of a stated privacy policy. If
we begin collecting such information without permission or in violation of our
privacy policy, we may face potential liability for invasion of privacy for
compiling and providing information to our corporate customers and electronic
commerce merchants based on questions asked by users and visitors on Ask Jeeves
and corporate sites.
WE NEED TO EXPAND OUR SALES AND SUPPORT ORGANIZATIONS
We will continue to expand both our advertising sales and corporate sales
operations and marketing efforts to increase market awareness and sales of our
products and services. We recently expanded our sales forces and plan to hire
additional sales personnel. Competition for highly-qualified sales personnel is
intense, and we may not be able to hire the kind and number of sales personnel
we are targeting. We will need to increase our staff to support new customers
and the expanding needs of our existing customers. Hiring highly-qualified
customer service and 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 have a material adverse effect
on our business. There is, and will likely continue to be, an increasing number
of laws and regulations pertaining to the Internet. These laws or regulations
may relate to liability for information retrieved from or transmitted over the
Internet, online content regulation, user privacy,
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taxation and the quality of products and services. Furthermore, the growth and
development of electronic commerce may prompt calls for more stringent consumer
protection laws that may impose additional burdens on electronic commerce
companies as well as companies like us that provide electronic commerce
services. Moreover, the applicability to the Internet of existing laws governing
intellectual property ownership and infringement, copyright, trademark, trade
secret, obscenity, libel, employment, personal privacy and other issues is
uncertain and developing.
We file tax returns in such states as required by law based on principles
applicable to traditional businesses. However, one or more states could seek to
impose additional income tax obligations or sales tax collection obligations on
out-of-state companies, such as ours, which engage in or facilitate electronic
commerce. A number of proposals have been made at state and local levels that
could impose such taxes on the sale of products and services through the
Internet or the income derived from such sales. Such proposals, if adopted,
could substantially impair the growth of electronic commerce and adversely
affect our 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 adversely affect our
ability to become profitable.
In addition, we are not certain how our business may be affected by the
application of existing laws governing issues such as property ownership,
copyrights, encryption and other intellectual property issues, taxation, libel,
obscenity and export or import matters. The vast majority of such laws were
adopted prior to the advent of the Internet. As a result, they do not
contemplate or address the unique issues of the Internet and related
technologies. Changes in laws intended to address such issues could create
uncertainty in the Internet market. Such uncertainty could reduce demand for our
services or increase the cost of doing business as a result of litigation costs
or increased service delivery costs.
WE MAY FACE POTENTIAL ELECTRONIC COMMERCE-RELATED LIABILITIES AND EXPENSES
Arrangements with electronic commerce merchants may expose us to legal risks
and uncertainties, including potential liabilities to consumers of such products
and services. Although we carry general liability insurance, our insurance may
not cover potential claims of this type or may not be adequate to indemnify us
for all liability that may be imposed.
Some of the risks that may result from these arrangements with businesses
engaged in electronic commerce include:
- potential liabilities for illegal activities that may be conducted by
participating merchants;
- product liability or other tort claims relating to goods or services sold
through third-party commerce sites;
- consumer fraud and false or deceptive advertising or sales practices;
- breach of contract claims relating to merchant transactions;
- claims that materials included in merchant sites or sold by merchants
through these sites infringe third-party patents, copyrights, trademarks
or other intellectual property rights, or are libelous, defamatory or in
breach of third-party confidentiality or privacy rights; and
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- claims relating to any failure of merchants to appropriately collect and
remit sales or other taxes arising from electronic commerce transactions.
Even to the extent that such claims do not result in material liability,
investigating and defending such claims could have a material adverse effect on
our business, operating results or financial condition.
WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS AND WE MAY BE
LIABLE FOR INFRINGING THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS
Third parties may infringe or misappropriate our patents, trademarks or
other proprietary rights, which could have a material adverse effect on our
business. We have applied for a patent on our "Grammar Template Query System"
with the United States Patent and Trademark Office. We have obtained registered
trademark status for "Ask Jeeves" in the United States. 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. In
addition, we do not know whether we will be able to defend our proprietary
rights since the validity, enforceability and scope of protection of proprietary
rights in Internet-related industries 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
materially and adversely affected.
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 the
Company's technology infringes two patents alleged to be held by the plaintiffs.
We have has not yet answered the complaint. We do not believe that either
lawsuit is meritorious and is vigorously defending each of the cases. However,
the outcome of litigation is difficult to predict and could result in a judgment
against us.
Third parties may assert infringement claims against us. From time to time
in the ordinary course of business we have been, and we expect to continue to
be, subject to claims of alleged infringement of the trademarks and other
intellectual property rights of third parties. These claims and any resultant
litigation, should it occur, could subject us to significant liability for
damages. In addition, even if we prevail, litigation could be time-consuming and
expensive to defend, and could result in the diversion of our time and
attention. Any claims from third parties may also result in limitations on our
ability to use the intellectual property subject to these claims unless we are
able to enter into agreements with the third parties making these claims.
WE COULD FACE ADDITIONAL STOCK-BASED COMPENSATION RELATED TO OUR RELATIONSHIP
WITH TRINET
Until May 31, 1999, we used TriNet VCO, an independent professional employer
organization, to provide payroll services and employee benefits for all our
employees. Under the co-employment arrangement, we paid a percentage of
compensation per co-employee, in addition to compensation costs, to TriNet to
cover payroll processing and related taxes and insurance. On December 31, 1998,
the Financial Accounting Standards Board or FASB issued an Exposure Draft of a
FASB Interpretation, Accounting for Certain Transactions involving Stock
Compensation--interpretation of APB Opinion No. 25. Such FASB Exposure Draft, if
adopted, could be interpreted to indicate that employees subject to
co-employment arrangements, would not be considered our employees for purposes
of applying APB No. 25. On April 30, 1999, we gave notice of termination of this
co-employment arrangement. If additional clarification regarding the definition
of an employee is not provided in the final pronouncement, we may be required to
establish a new measurement date for stock options granted after December 15,
1998 to our employees for
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the purpose of accounting for stock options under APB No. 25. If a new
measurement date is required to be established, we would recognize deferred
stock-based compensation which would be amortized as stock-based compensation
over the remaining vesting periods of the options. We estimate that this charge
could be approximately $5.2 million in the aggregate, which would be amortized
beginning with the first quarter of fiscal 2000, and ending in 2003. Such
amortization could have a material adverse effect on our operating results.
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 following the date of this prospectus. If we are unable
to generate sufficient cash flows from operations to meet our anticipated needs
for working capital and capital expenditures, we will need to raise additional
funds after eighteen months to fund brand promotion, develop new or enhanced
services, respond to competitive pressures or make acquisitions. We may be
unable to obtain any required additional financing on terms favorable to us, if
at all. If adequate funds are not available on acceptable terms, we may be
unable to fund our expansion, successfully promote our brand, develop or enhance
services, respond to competitive pressures or take advantage of acquisition
opportunities, any of which could have a material adverse effect on our
business. If we raise additional funds through the issuance of equity
securities, our stockholders may experience dilution of their ownership
interest, and the newly-issued securities may have rights superior to those of
the common stock. If we raise additional funds by issuing debt, we may be
subject to limitations on our operations, including limitations on the payment
of dividends.
OUR SHARES MAY EXPERIENCE EXTREME PRICE AND VOLUME FLUCTUATIONS WHICH COULD
RESULT IN SUBSTANTIAL LOSSES FOR INDIVIDUAL STOCKHOLDERS
If our stockholders sell substantial amounts of our common stock, including
shares issued upon the exercise of outstanding options, in the public market
following this offering, the market price of our common stock could fall. Such
sales also might make it more difficult for us to sell equity or equity related
securities in the future at a time and 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
- on or after this date, the merger or sale is approved by the board of
directors and the holders of at least two-thirds of the outstanding voting
stock that is not owned by the stockholder.
A Delaware corporation may opt out of the Delaware anti-takeover laws if its
original certificate of incorporation or amended certificate of incorporation or
bylaws so provide. We have not opted out of the
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provisions of the anti-takeover laws. As such, these laws could prohibit or
delay mergers or other takeover or change of control of Ask Jeeves and may
discourage attempts by other companies to acquire us.
Our Amended and Restated Certificate of Incorporation and Bylaws include a
number of provisions that may deter or impede hostile takeovers or changes of
control or management. These provisions include:
- our board is classified into three classes of directors as nearly equal in
size as possible with staggered three year-terms
- the authority of our board to issue up to 5,000,000 shares of preferred
stock and to determine the price, rights, preferences and privileges of
these shares, without stockholder approval
- all stockholder actions must be effected at a duly called meeting of
stockholders and not by written consent
- special meetings of the stockholders may be called only by the Chairman of
the Board, the Chief Executive Officer or the board; and
- the elimination of cumulative voting.
These provisions may have the effect of delaying or preventing a change of
control.
Our Amended and Restated Certificate of Incorporation and Bylaws provide
that we will indemnify officers and directors against losses that may incur in
investigations and legal proceedings resulting from their services to us, which
may include services in connection with takeover defense measures. These
provisions may have the effect of preventing changes in our management.
In addition, our option agreements under the 1996 Equity Incentive Plan
provide that if a change of control of Ask Jeeves occurs prior to the first
anniversary of the vesting commencement date of an option, then the vesting
which would have occurred by such anniversary shall occur. After the first
anniversary of the date of grant, these option agreements provide that the
vesting of each option shall accelerate by six months upon a change of control.
As of September 30, 1999, there were 6,584,426 unvested shares of common stock
reserved for options granted under this plan. Furthermore, offer letters with
our executive officers provide for the payment of severance and acceleration of
options upon the termination of these executive officers following a change of
control of Ask Jeeves. These provisions in our stock option agreements and offer
letters could have the effect of discouraging potential takeover attempts.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and elsewhere in this prospectus constitute
forward-looking statements. These statements involve known and unknown risks,
uncertainties and other factors that may cause our actual results, levels of
activity, performance or achievements to be materially different from any future
results, levels of activity, performance or achievements expressed or implied by
such forward-looking statements. Such factors include, among other things, those
listed under "Risk Factors" and elsewhere in this prospectus.
In some cases, you can identify forward-looking statements by terminology
such as "may," "will," "should," "could," "expects," "plans," "intends,"
"anticipates," "believes," "estimates," "predicts," "potential" or "continue" or
the negative of such terms and other comparable terminology.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements.
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USE OF PROCEEDS
We will not receive any proceeds from sales, if any, of our common stock by
the selling stockholders. The purpose of this offering is to register our common
stock for resale by the selling stockholders.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock. We
presently intend to retain future earnings, if any, to finance the expansion of
our business, and we do not expect to pay any cash dividends in the foreseeable
future.
PRICE RANGE OF COMMON STOCK
Our common stock has been traded on the Nasdaq National Market under the
symbol "ASKJ" since our initial public offering on July 1, 1999. The following
table sets forth, for the periods indicated, the high and low sales prices for
our common stock as reported by the Nasdaq National Market:
<TABLE>
<CAPTION>
SALE PRICES
-------------------
HIGH LOW
-------- --------
<S> <C> <C>
1999
First Quarter............................................. -- --
Second Quarter............................................ -- --
Third Quarter............................................. $ 77.82 $ 24.00
Fourth Quarter............................................ $190.50 $ 31.00
2000
First Quarter (through January 27, 2000).................. $139.75 $85.375
</TABLE>
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SELECTED SUPPLEMENTAL CONSOLIDATED FINANCIAL DATA
The following selected supplemental consolidated financial data are
qualified by reference to, and should be read in conjunction with, our
Supplemental Consolidated Financial Statements and the Notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere in this prospectus. The selected supplemental
consolidated statement of operations data from June 13, 1996 (inception) through
December 31, 1996 and for each of the two years ended December 31, 1997 and 1998
and the nine months ended September 30, 1998 and 1999, and the selected
supplemental consolidated balance sheet data at December 31, 1996, 1997, 1998
and September 30, 1999 are derived from, and are qualified by reference to, our
supplemental consolidated financial statements included elsewhere in this
prospectus. The unaudited financial statements include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of our financial position and results of operations for these
periods. The financial data for the nine months ended September 30, 1999 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1999 or any other future period. We merged with Net Effect Systems,
Inc. in November 1999 in a transaction accounted for as a pooling of interests.
The historical financial statements have been restated to include the financial
position and results of operations of Net Effect.
<TABLE>
<CAPTION>
PERIOD FROM YEAR ENDED NINE MONTHS
JUNE 13, 1996 DECEMBER 31, ENDED SEPTEMBER 30,
(INCEPTION) THROUGH ----------------------- --------------------------
DECEMBER 31, 1996 1997 1998 1998 1999
------------------- --------- ----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
SUPPLEMENTAL CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues:
Consumer.................................. $ -- $ -- $ 577,159 $ 155,386 $ 7,201,116
Corporate................................. -- 22,603 223,239 83,050 3,923,736
----------- --------- ----------- ----------- ------------
Total revenues........................ -- 22,603 800,398 238,436 11,124,852
Cost of revenues:
Consumer.................................. -- -- 602,716 285,249 3,664,856
Corporate................................. -- -- 796,676 163,718 4,652,936
----------- --------- ----------- ----------- ------------
Total cost of revenues................ -- -- 1,399,392 448,967 8,317,792
Gross profit (loss)......................... 22,603 (598,994) (210,531) 2,807,060
Operating expenses:
Product development....................... 107,797 440,740 1,712,466 882,770 5,312,959
Sales and marketing....................... -- 94,214 2,301,108 953,123 21,334,612
General and administrative................ -- 217,823 2,324,784 1,140,726 4,681,332
Amortization of deferred stock
compensation.............................. -- -- 29,010 -- 1,605,224
Write-off of in-process technology........ -- -- -- -- 360,697
----------- --------- ----------- ----------- ------------
Total operating expenses.............. 107,797 752,777 6,367,368 2,976,619 33,294,824
----------- --------- ----------- ----------- ------------
Operating loss.............................. (107,797) (730,174) (6,966,362) (3,187,150) (30,487,764)
Interest income............................. -- 5,535 165,741 86,726 1,381,806
Interest expense............................ -- -- (5,738) (5,738) (79,870)
----------- --------- ----------- ----------- ------------
Net loss.................................... $ (107,797) $(724,639) $(6,806,359) $(3,106,162) $(29,185,828)
=========== ========= =========== =========== ============
Basic and diluted net loss per share........ $ (.08) $ (.21) $ (.74) $ (.39) $ (1.65)
=========== ========= =========== =========== ============
Weighted average shares outstanding used in
computing basic and diluted net loss per
share..................................... 1,295,342 3,394,397 9,162,624 8,021,526 17,659,875
=========== ========= =========== =========== ============
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------------- AS OF SEPTEMBER
1996 1997 1998 30, 1999
-------- -------- ---------- ------------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Supplemental Consolidated Balance Sheet Data:
Cash, cash equivalents and short-term and long-term
investments............................................... $ -- $583,476 $8,465,851 $69,922,372
Working capital............................................. -- 500,816 7,318,469 56,474,089
Total assets................................................ -- 678,655 9,933,411 79,390,815
Capital leases, less current Portion........................ -- -- 45,945 1,966,462
Stockholders' equity........................................ $(6,219) $567,797 $8,291,152 $63,465,018
</TABLE>
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH OUR FINANCIAL
STATEMENTS AND THE RELATED NOTES CONTAINED ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
We have two principal businesses based on the same underlying technology.
The Consumer Service allows users to obtain answers to frequently asked
questions on the Internet. The Corporate Service helps companies provide a
human-like online interface for their customers.
Revenues from the Consumer Service consist primarily of three components:
- advertising revenues;
- knowledge base licensing 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. Advertising
rates, measured on a cost per thousand impressions (CPM) basis, are dependent on
whether the impressions are displayed in general rotation throughout our Web
site or are directed to targeted audiences or channels within Ask Jeeves, such
as the computer, entertainment, family, health, money, shopping and travel
channels. Revenues are based upon actual impressions delivered as measured by
our third-party advertising delivery provider, DoubleClick, Inc. We currently
license the Ask Jeeves knowledge base to four companies that provide
Internet-wide navigation services. These companies are Netscape Communications,
Oxygen Media Inc., AltaVista Company, and Infonautics Corporation. Knowledge
base licensing fees consist of a fixed fee that is recognized ratably over the
contract term, generally a twelve month period. In the future, we expect that
licensing of the knowledge base will not be a significant percentage of our
revenues. We also expect to generate a portion of our revenues from a third
component, the facilitation of electronic commerce. We are currently in a pilot
phase of our electronic commerce program and revenues from the facilitation of
electronic commerce from inception through September 30, 1999 have not been
significant. Typically, we receive payment only if the user clicks on the answer
that links to such electronic commerce merchant's Web sites on a cost per click
(CPC) basis.
Revenues from the Corporate Service consist of two components:
- knowledge base customization; and
- maintenance and information service fees.
Since its introduction in October 1998, our Corporate Service has been
adopted by several companies including Compaq, Dell, Toshiba, WebTV, Iomega, US
Web, Hewlett Packard, Intel, F5 Networks, Martha Stewart, My Points, Microsoft,
IDG, Micron, E*trade, Williams-Sonoma, Bell South, Datek, Oxygen Media, Office
Depot, etown, PCY2000, American Express, OneNetNow, and Adam.com. We recognize
knowledge base customization, maintenance, and information service fees ratably
over the contract term, generally twelve months. Payments received prior to
delivering the knowledge base or providing maintenance and information services
are recorded as deferred revenues and are recognized ratably over the contract
term.
Cost of revenues for our Consumer Service consists primarily of salaries and
personnel costs associated with the content development and maintenance of Ask
Jeeves and providing data analysis and testing. Cost of revenues for our
Corporate Service consists primarily of salaries and related personnel costs and
other direct costs to provide knowledge base information and maintenance
services to corporate customers. Cost of revenues also includes amortization
charges from the acquisition of assets from Lumina Design Systems, Inc. We
believe that ongoing content development is required to remain competitive, and
21
<PAGE>
we expect that our production and content expenses will continue to increase in
absolute dollars in the future.
Product development expenses consist primarily of salaries and related
personnel costs, consultant fees and expenses related to the design,
development, testing and enhancement of our technology and services. To date all
software development costs have been expensed as incurred. We believe that
continued investment in product development is critical to attaining our
strategic product objectives and, as a result, we expect these expenses to
increase in absolute dollars in the future.
Sales and marketing expenses consist primarily of salaries, commissions and
related personnel expenses as well as advertising and promotional expenditures.
The demand for our Corporate Service is greater than previously anticipated and
we believe we must be more aggressive in capturing significant market share in
the near-term. As a result, we plan to increase our investments in sales,
marketing, infrastructure, and product development in an effort to capture
market share faster and create greater long-term value for our shareholders.
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 absolute dollars in
the future as we add personnel and incur additional costs related to the growth
of our business and our operation as a public company.
Interest income and expense includes income on our cash and short-term
investments net of expenses related to the Company's financing obligations.
For the nine months ended September 30, 1999, in connection with the grant
of certain stock options to employees and consultants, we recorded deferred
stock compensation totaling $2.9 million representing the difference between the
deemed fair value of our common stock on the date such options were granted and
the exercise price. Such amount is included as a reduction of stockholders'
equity and is being amortized by charges to operations on a graded vesting
method. We recorded amortization of deferred stock compensation expense of
$1.6 million for the nine months ended September 30, 1999. At September 30,
1999, we had a total of $1.7 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.
We have incurred significant net losses and negative cash flows from
operations since our inception, and at September 30, 1999, we had an accumulated
deficit of approximately $36.8 million. These losses have been funded primarily
through the issuance of preferred and common equity securities. We believe that
we will continue to incur operating and net losses and negative cash flows from
operations for the foreseeable future and that the rate at which we will incur
such losses may increase from current levels.
There was no provision for federal or state income taxes for any period
since inception due to our operating losses. At December 31, 1998, we had net
operating loss carryforwards for federal income tax purposes of approximately
$2.8 million, which will expire in fiscal year 2018 if not utilized. Utilization
of our net operating loss carryforwards may be subject to a substantial annual
limitation due to the ownership change limitations provided by the Internal
Revenue Code and similar state provisions. Such an annual limitation could
result in the expiration of the net operating loss carryforwards before
utilization. A valuation allowance has been established and, accordingly, no
benefit has been recognized for our net operating losses and other deferred tax
assets. The net valuation allowance increased by $1,884,000 during the year
ended December 31, 1998. We believe that, based on a number of factors, the
available objective evidence creates sufficient uncertainty regarding the
realizability of the deferred tax assets such that a full valuation allowance
has been recorded. These factors include our history of net losses since
inception and expected near-term future losses. We will continue to assess the
realizability of the deferred tax assets based on actual and forecasted
operating results. See Note 5 of Notes to Supplemental Consolidated Financial
Statements.
22
<PAGE>
ANNUAL RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997 AND DECEMBER 31, 1998
REVENUES. Revenues were approximately $23,000 and $800,000 for the years
ended December 31, 1997 and 1998. Revenues for the year ended December 31, 1998
consisted of approximately $577,000 in revenues from the Consumer Service, of
which approximately $455,000 was generated from advertising revenues and
approximately $122,000 in knowledge base licensing fees. Revenues from the
Corporate Service were approximately $23,000 and $223,000 for the years ended
December 31, 1997 and 1998.
COST OF REVENUES. Cost of revenues for our Consumer Service and Corporate
Service were approximately $603,000 and $797,000, respectively, for the year
ended December 31, 1998. We had no cost of revenues for the year ended
December 31, 1997 since we generated minimal revenues prior to January 1, 1998.
The primary reason for the increase in cost of revenues during the year ended
December 31, 1998 related to the hiring of personnel and related personnel costs
associated with development of our public site, specifically in the areas of
content development, maintenance, data analysis, and testing, in addition to
costs associated with personnel and related personnel costs required to provide
knowledge base information and maintenance services to our corporate customers.
PRODUCT DEVELOPMENT EXPENSES. Product development expenses increased to
approximately $1.7 million for the year ended December 31, 1998, from $441,000
for the year ended December 31, 1997. The primary reasons for the dollar
increase was the hiring of additional personnel and related personnel costs and
consultant fees and expenses related to the design, development, testing and
enhancement of our technology and services.
SALES AND MARKETING EXPENSES. Sales and marketing expenses increased to
$2.3 million for the year ended December 31, 1998, from approximately $94,000
for the year ended December 31, 1997. The dollar increase was primarily due to
increases in advertising expenses related to our branding campaign, the hiring
of additional sales and marketing personnel and commissions needed to support
the increase in revenues.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased to approximately $2.3 million for the year ended December 31, 1998,
from $217,500 for the year ended December 31, 1997. The dollar increase in
general and administrative expenses was primarily due to increased depreciation,
and increase in the number of personnel to support the growth of our business,
and recruiting costs related to filling key senior executive positions.
ANNUAL RESULTS OF OPERATIONS
INCEPTION TO DECEMBER 31, 1996 AND YEAR ENDED DECEMBER 31, 1997
During 1997 we generated total revenues of $23,000, and we were a
development stage company during 1996, generating no revenues for this period.
Operating expenses increased to $753,000 in 1997 from $108,000 in the period
from June 13, 1996 (inception) through December 31, 1996. During 1996, we
incurred only product development expenses as our sole focus was the development
of our question processing technology. In 1997, product development expenses
totaled $440,000, an increase from $108,000 in 1996, which was attributable to
the addition of product development personnel and related costs and consultant
fees. Additionally, in 1997 we began to build our infrastructure and added
finance, information technology, legal, executive management and administrative
personnel and related costs, which amounted to $218,000 for the year ended
December 31, 1997. Sales and marketing expenses were not significant in 1997. We
believe that period-to-period comparisons prior to 1998 are less meaningful than
an analysis of recent quarterly operating results. Accordingly, we are providing
a discussion and analysis of our results of operations that is focused on the
four quarters ended September 30, 1999.
23
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth unaudited quarterly consolidated statements
of operations results for the four quarters ended September 30, 1999. We believe
that this information reflects all adjustments, consisting only of normal
recurring adjustments, that we consider necessary for a fair presentation of
such information in accordance with generally accepted accounting principles.
The results for any quarter are not necessarily indicative of results for any
future period.
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------------------
DEC. 31, 1998 MAR. 31, 1999 JUNE 30, 1999 SEPT. 30, 1999
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Revenues:
Consumer............................... $ 421,773 $ 1,059,068 $ 1,898,817 $ 4,243,231
Corporate.............................. 140,189 444,198 920,992 2,558,546
----------- ----------- ------------ ------------
Total revenues........................... 561,962 1,503,266 2,819,809 6,801,777
Cost of revenues:
Consumer............................... 317,467 699,131 1,162,199 1,803,526
Corporate.............................. 632,958 1,176,525 1,389,377 2,087,034
----------- ----------- ------------ ------------
Total cost of revenues................... 950,425 1,875,656 2,551,576 3,890,560
----------- ----------- ------------ ------------
Gross profit (loss)...................... (388,463) (372,390) 268,233 2,911,217
Operating expenses:
Product development.................... 829,696 1,174,894 1,790,566 2,347,499
Sales and marketing.................... 1,347,985 3,047,465 7,896,673 10,390,474
General and administrative............. 1,184,061 1,140,299 1,463,939 2,077,092
Amortization of deferred stock
compensation........................... 29,010 317,049 592,194 695,983
Write-off of in-process
technology........................... 0 0 360,697 0
----------- ----------- ------------ ------------
Total operating expenses................. 3,390,752 5,679,707 12,104,069 15,511,048
----------- ----------- ------------ ------------
Operating loss........................... (3,779,215) (6,052,097) (11,835,836) (12,599,831)
Interest income.......................... 79,015 152,650 371,952 777,334
----------- ----------- ------------ ------------
Net loss................................. $(3,700,200) $(5,899,447) $(11,463,884) $(11,822,497)
=========== =========== ============ ============
</TABLE>
REVENUES. Total revenues increased in each of the four quarters ended
September 30, 1999. The revenue growth over each respective prior quarter is
primarily attributable to increased advertising revenue due to increased use of
the Internet by consumers and acceptance of the Internet as an advertising and
commerce medium, increased viewer traffic on our web-sites (Ask.com and
AJKids.com), and the continued growth of our Corporate Service. For the quarter
ended September 30, 1999, Ask Jeeves received 134 million questions,
representing an increase of 46 percent from 92 million questions for the quarter
ended June 30, 1999. Revenue per thousand page views, or RPMs, increased to
$10.07 for the quarter ended September 30, 1999, representing a 34 percent
increase from the quarter ended June 30, 1999. The increases reflect our
performance in connecting advertisers with targeted customers. The network of
companies that subscribe to our Corporate Service increased from fourteen to
twenty-six during the quarter ended September 30, 1999 as Ask Jeeves signed new
business in targeted technology, financial services and e-tail vertical markets.
The questions we handled for our Corporate Service customers during the quarter
ended September 30, 1999 grew to 2.5 million, representing a 59 percent increase
from the quarter ended June 30, 1999 of 1.6 million questions.
COST OF REVENUES. Cost of revenues increased in each of the four quarters
ended September 30, 1999. The increase in cost of revenues during these periods
is related to increased third-party advertising
24
<PAGE>
management fees, hosting costs, and additional personnel and related personnel
costs associated with development of our public site to support the increase in
revenues, specifically in the areas of content development, maintenance, data
analysis, and testing. We also incurred higher costs associated with personnel
and related personnel costs required to provide knowledge base information and
maintenance services to our Corporate Service customers. Cost of revenues for
the quarter ended September 30, 1999 includes $109,000 of amortization charges
related to the acquisition of assets from Lumina Design Systems, Inc. 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 Consumer Service and our
Corporate Service customers.
PRODUCT DEVELOPMENT EXPENSES. Product development increased in each of four
quarters ended September 30, 1999. The primary reasons for the increases were
the hiring of additional personnel and related personnel costs and consultant
fees and expenses related to the design, development, testing and enhancement of
our technology and services. We believe the development of additional features
and tools are vital for us to remain competitive in our industry. We anticipate
that we will continue to devote substantial resources to product development.
These costs are expected to continue to increase in dollar amount in future
periods.
SALES AND MARKETING EXPENSES. Sales and marketing expenses increased in
each of the four quarters ended September 30, 1999. The increase was primarily
due to increases in advertising expenses related to our branding campaign, the
hiring of additional sales and marketing personnel and commissions paid to
support the increase in revenues. We intend to continue pursuing and aggressive
brand-enhancement strategy, which will include mass market and multimedia
advertising, promotional programs and public relations activities. Consequently,
these costs are expected to continue to increase in dollar amount in future
periods. We intend to continue to incur significant expenditures, approximately
$40 million to $50 million in the year 2000, on these advertising and
promotional programs and activities.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased in each of the four quarters ended September 30, 1999. The increases
primarily reflected the addition of finance, information technology, legal,
executive management and administrative personnel and related costs.
RECENT EVENTS
On November 17, 1999, we acquired assets related to the search technology of
Excellerate, LLC, for cash in the amount of $625,000 and 5,875 shares of our
common stock.
On November 19, 1999, we acquired Net Effect Systems, Inc., in a
stock-for-stock transaction accounted for as a pooling of interests. All
outstanding shares of Net Effect were converted into 1,631,864 shares of our
common stock, and options to purchase Net Effect common stock were converted
into options to purchase 497,342 shares of our common stock.
On December 6, 1999, we announced a joint venture to create Ask Jeeves, U.K.
We partnered with Carlton Communications Plc and Granada Media Group, the two
largest commercial television companies in the United Kingdom. Carlton and
Granada will each contribute $31.25 million in cash and advertising to fund the
Web site, which is expected to be launched in February 2000.
On January 25, 2000, we entered into an agreement to acquire Direct Hit
Technologies, Inc., in a stock-for-transaction to be accounted for as a
purchase. At the closing, all outstanding shares of Direct Hit and all options
to purchase shares of Direct will be converted into approximately 5.1 million
shares of our common stock.
On January 26, 2000 we acquired Evergreen Project, LLC, for $1.95 million in
cash and approximately 18,890 shares of our common stock.
25
<PAGE>
SEASONALITY AND QUARTERLY FLUCTUATIONS IN OPERATING RESULTS
Our operating results may fluctuate significantly in the future as a result
of a variety of factors, many of which are beyond our control. Factors that may
adversely affect our results of operations include:
- our ability to obtain new corporate customers, the length of the
development cycle of the Corporate Service for corporate customers and the
timing of revenue recognition with respect to contracts with corporate
customers;
- our ability to obtain new advertising contracts, maintain existing ones,
and effectively manage our advertising inventory;
- the number of questions asked and answered on Ask Jeeves and on the Web
sites of our corporate customers;
- our ability to attract and retain advertisers and our ability to link our
electronic commerce partners to potential customers;
- seasonal and other fluctuations in demand for our electronic commerce
services and for advertising space on Ask Jeeves;
- our ability to develop and introduce new technology;
- announcements and new technology introductions by our competitors;
- our ability to attract and retain key personnel;
- costs relating to possible acquisitions and integration of technologies or
businesses;
- rate changes for advertising on Ask Jeeves; and
- marketing expenses and technology infrastructure costs as well as other
costs that we may incur as we expand our operations.
Because of the foregoing factors, we believe that period-to-period
comparisons of our operating results should not be relied upon as an indicator
of our future performance.
As Internet advertising makes the transition from an emerging to a more
developed market, seasonal and cyclical patterns may develop in our industry
that may also affect our revenues. For instance, during 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 such periods. In addition, we anticipate that sales from
electronic commerce may increase during the fourth quarter as a result of the
holiday season and may decline during other periods. Seasonality in the retail
industry and in Internet service usage are likely to cause quarterly
fluctuations in our results of operations and could have a material adverse
effect on our business, results of operations and financial condition.
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. As of
September 30, 1999, we had $62.9 million in cash, cash equivalents and
investments. Net cash used in operating activities was $5.2 million for the year
ended December 31, 1998 and $23.0 million for the nine months ended
September 30, 1999, respectively. The net cash used in operating activities
resulted primarily from net losses adjusted for non-cash operating activities
and increases in accounts receivable and prepaid expenses, partially offset by
the timing of accounts payable settlements, accrued compensation and related
expenses, deferred revenue, and other accrued liabilities. Net cash used in
investing activities was $977,000 for the year ended December 31, 1998 and
$30.0 million for the nine months ended September 30, 1999, respectively. Net
cash used in investing activities related to purchases of $4.7 million of
property and equipment and $24.3 million of short-term
26
<PAGE>
and long-term investments for the nine months ended September 30, 1999. Net cash
provided by financing activities was $14.1 million for the year ended
December 31, 1998 and $83.2 million for the nine months ended September 30,
1999, respectively. For the year ended December 31, 1998 net cash provided by
financing activities was primarily from the sale of common and preferred equity
securities. For the nine months ended September 30, 1999, net cash provided from
financing activities related primarily to net proceeds from the sale of
preferred equity securities of $34.2 million, net proceeds from our initial
public offering of $43.0 million and net proceeds from capital lease financing
of $1.8 million.
We have no material commitments or obligations other than those under
capital and operating leases. In June 1999, we entered into a leasing agreement
with Comdisco, Inc. to finance equipment and software purchases up to a maximum
amount of $3.5 million. As of September 30, 1999, we had used approximately
$3.0 million of the available credit line. 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 anticipate 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. At the end of such period, we will need to
generate sufficient cash flow from operations to meet our anticipated needs for
working capital and capital expenditures, or we will need to raise additional
capital. However, if during that twelve month period or thereafter, we are not
successful in generating sufficient cash flow from operations or in raising
additional capital when required in sufficient amounts and on terms acceptable
to us, these failures could have a material adverse effect on our business,
results of operations and financial condition. If we raise additional funds
through the issuance of equity or convertible debt securities, the percentage
ownership of our existing stockholders will be reduced.
DISCLOSURE ABOUT MARKET RISK
Our exposure to market risk is principally confined to our cash and cash
equivalents and available-for-sale securities, which have short maturates and,
therefore, minimal and immaterial market risks.
27
<PAGE>
BUSINESS
OVERVIEW
Ask Jeeves has developed and deployed a natural language question answering
network on the Internet for consumers and companies, establishing a new way to
interact with the World Wide Web. Ask Jeeves was first introduced to the public
in April 1997 to provide Web users with a more satisfactory and productive
experience by quickly directing users to relevant answers to questions posed.
Our mission is to humanize the Internet by making it easier and more intuitive
for consumers to find the information, products and services they need and for
companies to better acquire, retain and maximize the value of their online
customers. Our branding strategy centers on the Jeeves character, a friendly and
trusted assistant who provides help and guidance on the Web. The Ask Jeeves
services let users ask a question in plain English and receive a response that
points to relevant Internet destinations to provide the answers. We believe that
our question answering Service makes interaction with the Internet more
intuitive, less frustrating and significantly more productive.
Our Corporate and Consumer services combine sophisticated, proprietary
technologies with human editorial judgment to create a system that gets smarter
by dynamically responding to questions consumers ask every day. We have two
principal businesses based on the same underlying technology. The core of our
Consumer Service, Ask Jeeves, at Ask.com, allows users to obtain answers to
millions of questions online. Our Corporate Service helps companies provide a
high quality, human-like online interface for their customers.
Beginning with only 3,000 questions a day in its first month of operation,
Ask Jeeves answered over 1.7 million questions a day in September 1999, and has
grown its unique user base from 425,000 in September 1998 to more than
4.1 million in September 1999. Ask Jeeves has grown from answering a small
number of reference and Web-related questions, to answering a wide range of
questions from "Is it raining in Paris?" and "Where can I comparison shop for
cameras?" to "How can I improve my golf game?" and "Am I in love?" We believe
that our ability to provide users with a more satisfactory and productive Web
experience will allow us to connect users with providers of products and
services in a more targeted way than other services on the Internet, thereby
better unlocking the power of electronic commerce.
Our Corporate Service is designed to improve customer satisfaction on their
Web sites, improve conversion rates of browsers to purchasers and reduce
expensive support costs such as phone calls to call centers. Since its
introduction in October 1998, our Corporate Service has been adopted by industry
leaders including Compaq, Dell, Toshiba, WebTV, Iomega, US Web, Hewlett Packard,
Intel, F5 Networks, Martha Stewart, My Points, Microsoft, IDG, Micron, E*trade,
Williams-Sonoma, Bell South, Datek, Oxygen Media, Office Depot, etown, PCY2000,
American Express, OneNetNow, and Adam.com.
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 January 2000, we entered into an agreement to
acquire 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.
INDUSTRY BACKGROUND
The Internet has emerged as a mass-market communications medium, enabling
millions of users to obtain and share information, interact and conduct business
electronically. International Data Corporation (IDC) estimates that the number
of Internet users will increase from approximately 97 million at the end of 1998
to approximately 320 million by the end of 2002, representing a compound annual
growth rate of approximately 35%. This growth is being driven by an increasing
base of computers in the home and in the workplace, improvements in network
infrastructure, more convenient, faster and inexpensive Internet access,
advances in computer and modem technology, increased public awareness of
benefits of using the
28
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Internet and improving user interfaces. These factors make the Internet
accessible to inexperienced users as well as the technologically sophisticated.
In addition to its benefits for individuals, the ubiquity of the Internet as a
global communications tool provides businesses with a new attractive vehicle to
deliver product information, market and sell products and services and provide
post-sales support. According to IDC, worldwide electronic commerce revenue is
expected to increase from approximately $32 billion in 1998 to more than
$425 billion in 2002, representing a compound annual growth rate of
approximately 90%.
EVOLVING USE OF THE INTERNET BY INDIVIDUALS AND COMPANIES
The Internet has evolved from a mere repository of information to a powerful
personal tool for managing important aspects of users' lives. In addition to
searching for information, individuals can, for instance, buy and sell products,
maintain personal calendars and contact information, engage in personal
securities transactions and communicate with others. In the future, individuals
will have the opportunity to conduct more personal and professional activities
through the Internet, creating more opportunities for businesses to reach users
in a direct and focused manner.
As the Internet has grown, many businesses have come to realize the
commercial potential it offers. Businesses are embracing the Internet as an
important vehicle for communicating with customers and changing traditional
business processes and practices. As advertisers have turned to the Internet as
a new way to reach consumers, businesses have developed content-rich Web sites
designed to hold users' attention for extended time periods. More recently, new
technology has enabled commercial transactions to be conducted over the
Internet, creating the opportunity for business-to-consumer and
business-to-business electronic commerce.
We believe that the creation of highly intuitive and intelligent Web sites
designed to manage a company's interactions with its customers is an emerging
market opportunity. Given its pervasiveness, the Internet has the potential to
enable companies to electronically manage the entire customer value chain,
including:
- attracting or delivering the customer;
- providing the customer with easy access to requested information;
- retaining the customer's attention by expanding the scope of the
interaction;
- enabling the customer transaction;
- dealing with customer post-sales questions; and
- improving management of the customer relationship by collecting and
analyzing customer data.
Properly developed, these consumer-friendly Web sites may alter the way
businesses interact with their customers. Nevertheless, significant shortcomings
in the way users interact with the Internet must be overcome for this market
opportunity to be fully realized.
CURRENT INTERNET NAVIGATION
While the growth of the Internet has drawn users at an unprecedented pace,
the volume of online information has made it increasingly difficult for users to
navigate effectively. According to Forrester Research, 1.5 million new Web pages
are added to the Internet every day. To take full advantage of the Web, users
must be able to successfully navigate a network of dispersed Web sites, which
are generally not connected in a logical fashion.
Users currently rely on Internet search engines or directories of Web sites
and Web pages to locate information and make online purchases. Search engines
typically require consumers to construct keyword or complex search strings that
often result in hundreds or thousands of irrelevant results. As directories
29
<PAGE>
become larger, they require users to move through large and complex hierarchies
of information. As the Internet grows, consumers using conventional search and
directory products are finding that locating the information they need is
increasingly difficult and electronic commerce vendors are losing opportunities
for sales.
The difficulty of online navigation does not end with finding the desired
Web site. Once there, users are faced with the difficulty of searching an
overwhelming amount of information. According to Forrester Research, major
corporate Web sites now have thousands of pages, which often makes finding
relevant information a frustrating and time-consuming experience. Consumers
often must click through multiple "frequently asked questions" pages or navigate
long data trees to locate desired information. Unable to find answers to their
questions about a product, service or price, consumers often delay the buying
decision or give up entirely. Compounding the problem, corporate Web sites are
generally not tailored to individual needs. In addition, we believe that
corporate Web sites do not currently have the ability to carry on an effective
dialogue with existing or potential customers.
Further, companies need to provide a means by which their customers and
potential customers can more easily find relevant information about products and
services on their Web site. While online shoppers cite convenience as the reason
for choosing electronic commerce, according to IDC, over 70% abandon their
"shopping carts" because they have problems or questions. The online conversion
rate (the percentage of visitors who complete a purchase) is 2.7%, according to
Forrester Research, similar to that of unsolicited direct mailings through
conventional mail.
We believe that to fulfill the promise of the Internet, access to relevant
information, products and services must become simpler and quicker. Until
navigation on the Internet improves, consumers will become increasingly
frustrated with their online experiences, and companies will be frustrated by
their inability to provide an easy, intuitive and intelligent user interface and
as a result to maximize returns on their investments in Internet strategies. We
believe that a more direct and personal means of interacting with the Internet
will improve the user's experience and enhance companies' returns from Internet
strategies. This will, in turn, make the Internet more valuable to consumers and
companies alike.
THE ASK JEEVES SOLUTION
We have developed and deployed natural-language question answering services,
creating an easier, more intuitive and more efficient way of finding answers on
the Internet. We combine proprietary technologies, including natural language
parsing software, knowledge base technology and data mining processes, with
human editorial judgment to create services that become smarter over time. Our
Corporate and Consumer services make relevant information, products and services
on the Web directly accessible to consumers and enhance the commercial potential
of corporate Web sites.
HOW ASK JEEVES WORKS
A user of our Corporate Service or Consumer Service begins by entering a
question in plain English. Our proprietary Question Processing Engine (QPE)
parses the question for word meaning and grammar and then maps it to a set of
questions in the Ask Jeeves knowledge base. Our interactive system suggests
additional related questions that are likely to be responsive to the user's
needs. These questions create an electronic dialogue with the user that not only
helps the user find the desired information but also educates the user about a
range of related topics and electronic commerce possibilities. After the user
chooses from among these dialogue questions, Ask Jeeves connects the user to a
page on a Web site containing the desired information without requiring any
additional navigation. The user can return to the dialogue questions for other
information and shopping links offered by our services.
We created the Ask Jeeves services to become smarter in response to consumer
questions and needs. Our system is built on the belief that a large percentage
of the questions asked can be mapped to a
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manageable number of answers. The Ask Jeeves technology records all of the
questions consumers ask and our editors apply this information to update the
knowledge bases.
THE CONSUMER SERVICE
Ask Jeeves, at Ask.com, was launched in April 1997 to make finding answers
to questions easier. We believe that Ask Jeeves offers consumers the following
benefits:
EASE OF USE. Users have access to a human-like, intuitive interface with
the Web and can ask their questions in plain English. Users can spend less time
searching and more time obtaining relevant information.
RELEVANCE. Ask Jeeves parses a user's query for word meaning and grammar.
Our proprietary technology allows us to respond with matching dialogue questions
even if the user asks a question in a different way or uses words different than
used in the question template in our knowledge base.
PRECISION. Ask Jeeves can answer a wide range of questions, by pointing the
consumer to a small set of relevant answers, avoiding the hundreds or thousands
of search results often produced by search engines or directory searches. These
answers have been selected by our editors and validated for accuracy and
quality.
ABILITY TO LEARN. Our technology monitors and analyzes all the questions
that are asked on Ask Jeeves. Our editors use the information to update the
knowledge base regularly, making Ask Jeeves smarter. Because our knowledge base
is built on past usage by other consumers, we believe it is better adapted to
the needs of future consumers than traditional software-driven search engines.
In addition to being a valuable advertising medium, Ask Jeeves can link
users with electronic commerce partners who offer relevant products and
services.
THE CORPORATE SERVICE
We also deploy our proprietary technologies and editorial tools to customize
our Corporate Service for a company's Web site to enable intuitive online
interaction between the company and its customers. We believe visitors to a
Corporate Service-enabled Web site can readily find desired information through
a simple question and answer dialogue. Further, we believe that our Corporate
Service provides companies with the following advantages:
INCREASED CONVERSION RATES. The Corporate Service is designed to provide
quick and direct answers, reduce the customer's frustration level and supply
additional product suggestions relevant to the question asked by the customer or
potential customers on a company's Web site. As a result, we believe that more
users will make purchases on these Web sites.
LOWERED SUPPORT COSTS. The Corporate Question Answering Service is designed
to enable more effective online customer self-service. We believe that
implementation of our technology on our corporate customers' Web sites, will
facilitate their users' access to information, on a self-service basis, thereby
reducing the costs to our corporate customers of phone and e-mail interactions
with their customers.
IMPROVED CUSTOMER SATISFACTION AND RETENTION. By providing intuitive
interaction and relevant answers, we believe that the Corporate Question
Answering Service makes interacting with a company's Web site faster and easier.
VALUABLE CUSTOMER DATA. By collecting and analyzing questions and customer
preferences, we believe that the Corporate Service offers an efficient and
inexpensive means for companies to obtain market data and improve customer
loyalty.
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OUTSOURCED DEVELOPMENT. By providing a stand-alone, fully outsourced
service, the Corporate Service can be easily developed using existing company
Web content and maintained without interference with a company's other
information systems infrastructure.
THE ASK JEEVES STRATEGY
Our strategy is to establish Ask Jeeves as the leading natural language
question answering network for information, products and services on the
Internet. The key elements of our strategy are as follows:
CONTINUE TO BUILD THE ASK JEEVES BRAND. To enhance public awareness of our
Corporate and Consumer services, we are pursuing an aggressive brand development
strategy through mass market and targeted advertising, promotions and public
relations. Our branding strategy centers on the Jeeves character, a friendly and
trusted assistant who provides help and guidance on the Web. We believe that
building our brand will increase traffic to Ask Jeeves and, as a result,
increase revenues from advertising and transactions. We also believe that
enhancing our brand will increase sales to corporate customers.
UNLOCK ELECTRONIC COMMERCE FOR CONSUMERS AND CORPORATIONS. Because Ask
Jeeves' Corporate and Consumer services can intuitively and intelligently
connect users with product and service purchase opportunities, we believe it
offers powerful targeting advantages over other Internet-based alternatives. To
further enhance the electronic commerce potential of our services, we plan to
aggressively devote resources to expanding the scope and breadth of
shopping-related questions. For example, we will continue to leverage our
technology to provide users with access to consumer information, such as product
reviews and pricing data, which empowers the user with enough knowledge to
complete a transaction. For our corporate service customers, we plan to continue
broadening the application of our Corporate Service beyond customer and
technical support into services specifically geared to guiding customers through
purchases directly on a corporate Web site.
LEVERAGE THE ASK JEEVES BRAND TO CONTINUE EXPANSION OF OUR CORPORATE
SERVICE. We believe that the Jeeves brand is attractive to corporations seeking
to improve their online customer interactions. Since October 1998, our Corporate
Service has been adopted by several companies including Compaq, Dell, Toshiba,
WebTV, Iomega, US Web, Hewlett Packard, Intel, F5 Networks, Martha Stewart, My
Points, Microsoft, IDG, Micron, E*trade, Williams-Sonoma, Bell South, Datek,
Oxygen Media, Office Depot, etown, PCY2000, American Express, OneNetNow, and
Adam.com. To continue expanding our Corporate Service, we are initially focusing
on technology and financial services, both of which are markets with complex
products and services requiring a high level of pre and post-sales customer
support. We believe that our strategy of focusing on key markets will enhance
our competitive advantage by allowing us to leverage the expertise gained in
building each successive knowledge base.
OUTSOURCED CORPORATE SERVICE IMPLEMENTATION. To enable us to provide our
Corporate Service to the broadest possible range of corporate customers, we
supplement our direct sales and implementation capability by licensing tools to
selected third-party technology integration vendors. This outsourcing strategy
allows us to reach the significant customer base of these strategic partners
while reducing the amount of direct labor we must apply to implement new
Corporate Services.
MAKE ASK JEEVES SMARTER. To maintain our competitive advantage, we must
continue to develop a rich base of questions and related answer links for our
knowledge base. To supplement the ongoing efforts of our editors in increasing
the breadth of our knowledge base, we intend to enter into arrangements with
large content providers to link answers in their content to a base of questions
contained in Ask Jeeves.
PRODUCTS AND SERVICE
The Ask Jeeves Corporate and Consumer Service provides users a fast, easy
and intuitive way to find information, products and services on the Internet. We
combine proprietary tools and technologies with editorial judgment to let users
ask questions in plain English and to direct them to a small selection of
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relevant destinations on the Internet. Unlike traditional Web navigation methods
that require keyword searching or complex search strings, and often generate
hundreds or thousands of responses, our natural-language question answering
service generally provides "two-click" access to relevant Web sites.
CONSUMER SERVICE
ASK JEEVES AT ASK.COM. Initially introduced to handle general reference and
Web-related questions, Ask Jeeves has become a popular destination site, where
users get answers to a broad range of questions from "Why is the sky blue?" to
"Where can I buy flowers online?" Ask Jeeves was designed to create a more
personal interaction with users. The Jeeves character is intended to be a
helpful, trusted assistant for our users, providing help and guidance when they
visit our Web site. We believe that Jeeves will help us increase awareness and
user loyalty to Ask Jeeves.
Visitors to our Web site can type a question in plain English and click the
"Ask" button. Ask Jeeves creates an interaction with the user by presenting a
selection of dialogue questions based on the word meaning and grammar of the
original query. When the user clicks on the appropriate dialogue question, Ask
Jeeves provides a direct link to the page on a third-party Web site that
contains the answer.
Ask Jeeves parses the question for word meaning and grammar and displays a
selection of dialogue questions, which help refine the visitor's query. The
dialogue questions also alert users to related possibilities, including relevant
electronic commerce opportunities. For example, in addition to answering the
question "Where can I find a recipe for creme brulee?" our service gives users
the option to click on the "Shop" question "Where can I buy a book about
cooking?" Ask Jeeves also presents results from several leading search engines
to supplement the Ask Jeeves answers. We believe that the question answering and
"Shop" functionality, provides significant opportunities for existing and new
advertising and electronic commerce partners.
After users click on the "Ask" or "Shop" button next to the question that
most clearly represents what they are looking for, Ask Jeeves links users to a
relevant Internet destination containing the answer. We are generally able to
point users directly to the specific page of a third-party Web site that
contains the answer, rather than the home page, thus eliminating several
unnecessary clicks. Answers are routinely selected by our editors and checked
for credibility, accuracy and relevance.
Ask Jeeves offers a number of features:
- SHOPPING. We believe that our ability to answer questions and connect
consumers with the relevant providers of goods and services in a
non-intrusive way presents a compelling electronic commerce opportunity.
We direct users to a wide variety of shopping-related information, such as
price comparisons and product reviews. We believe these features will
create loyal users who will use Ask Jeeves as an online personal shopping
assistant.
- CHANNELS. Ask Jeeves has created a series of vertical channels that
present frequently asked questions on specific subjects. We created Ask
Jeeves for Kids, at AJKIDS.COM, and the computer, entertainment, family,
health, money, shopping and travel channels, to reflect the topics most
frequently asked by Web users. These channels allow users to browse
questions which we have answered for other users. These channels offer
highly targeted opportunities for our advertising and electronic commerce
partners. Currently, advertisers directly sponsor our presentation of
these channels.
Ask Jeeves for Kids, at AJKIDS.COM, our flagship channel, is geared to
children, teachers and parents. A special editorial team ensures that
answers are appropriate for children. Accessed through a link on Ask
Jeeves or at Ask Jeeves for Kids, children can find answers to their
questions using the same Consumer Service used on Ask Jeeves. Ask Jeeves
for Kids received an Editor's Choice Award from PC Magazine in 1998. We
believe that our ability to offer an easy, safe and credible resource for
children will present corporate partnership opportunities.
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- META-SEARCH. We offer a meta-search capability that provides results from
leading search engines in response to each question. This feature
supplements the information in our knowledge base. We believe that this
functionality increases user satisfaction and loyalty.
- OTHER FEATURES. Ask Jeeves includes a "Take a Peek" feature to allow
users to see the most recently answered questions, which are refreshed
every 30 seconds. This provides both entertainment and guidance about the
types of questions Ask Jeeves can answer. Visitors can also take advantage
of the "New User Tour" to receive instruction on how to use Ask Jeeves.
Visitors can also click on the "Play a Game" feature to build familiarity
with the capabilities of the site.
We also selectively license our Consumer Service knowledge base to enhance
the Internet-wide search capabilities of company's Web sites. We entered into
these arrangements to endorse and promote our brand awareness. We currently
license our knowledge base to Netscape, Oxygen Media, AltaVista and Infonautics.
We do not currently anticipate entering into similar knowledge base licensing
arrangements in the future.
CORPORATE SERVICE
Our Corporate Service provides service for companies to help them quickly
connect their customers with relevant information, products and services on
their Web sites. Our customers use our Corporate Service to increase conversion
rates of browsers to purchasers, improve customer satisfaction on their Web
sites, and reduce expensive support costs, such as those associated with call
centers. Since its introduction in October 1998, our Corporate Service has been
adopted by industry leaders including Compaq, Dell, Toshiba, WebTV, Iomega, US
Web, Hewlett Packard, Intel, F5 Networks, Martha Stewart, My Points, Microsoft,
IDG, Micron, E*trade, Williams-Sonoma, Bell South, Datek, Oxygen Media, Office
Depot, etown, PCY2000, American Express, OneNetNow, and Adam.com.
Companies can use our Corporate Service across their entire Web site or
limit it to a specific section or function. For example, a company can use our
Corporate Service to address only pre-sales or support-related questions.
Companies can also license the knowledge bases that support Ask Jeeves to
provide their visitors access to answers that reside on other Web sites.
Ask Jeeves provides its customers with the Corporate Service on an out
sourced basis with little involvement from the customer's technical personnel.
The development of the service begins with the creation of a customized
knowledge base by our professional services group [or, one of our strategic
implementation partners.] The editors creating the knowledge base are trained to
develop dialogue questions and to provide links to content on the company Web
site that provides answers to the questions visitors are most likely to ask. A
typical implementation, which takes approximately four months, requires the
development of question templates that link to the customer's existing Web site
content.
Once the Corporate Service is operational, our proprietary tools are used to
collect, analyze and report the questions asked and overall user behavior
patterns. Our customers pay us to maintain their knowledge bases. In addition,
we provide user question data to our customers, allowing them to improve their
Web site content and adjust their marketing, merchandising and product
development strategies.
TECHNOLOGY AND OPERATIONS
Ask Jeeves has created a proprietary technology and production system aimed
at creating a unique user experience that emphasizes ease of use, relevance,
precision and ability to learn. The goal of the Ask Jeeves technology is to
combine the strengths of natural-language parsing software, data mining
processes, knowledge base creation and maintenance tools with the cognitive
strengths and capabilities of human editors. Our technology matches our users
question to a short list of dialogue questions and directs the user to
corresponding answers on the Internet. To do this, we focus on five main areas:
the question
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processing engine, the knowledge base creation and maintenance process, the
customer data mining process, the editorial process and finally the scalable
operation of the entire system.
THE QUESTION PROCESSING ENGINE
The Question Processing Engine ("QPE") is an internally-developed
proprietary engine that drives our question answering Service. The QPE uses our
natural-language parsing software to tokenize, or identify the terms in, each
user question. The QPE then takes the users question and analyzes it
syntactically and semantically. The syntactic analysis extracts information
about the role that each word fills in the question, while the semantic analysis
extracts information about the meaning of the words in the question. Then the
question is reorganized into a structure that is compatible with our "question
templates." A question template is a master question to which many natural
language questions are matched. This processing allows the system to match
appropriate question templates to the user's question, even if the user asks the
question in a different way or using different words than used in the question
templates. For example, if a user asks "Who is the king of Siam?" the service
can correctly tell that this is equivalent to "Who is the head of state of
Thailand?" a question template that is stored in the knowledge base.
The matching question templates are then displayed for the user as dialogue
questions. A dialogue question is a question template customized to respond to a
user query. When the user picks a dialogue question, the QPE then extracts an
"answer template" from the knowledge base that contains the information to link
the user directly to a destination on the Internet, including static and dynamic
Hypertext Markup Language ("HTML") pages. The answer templates have been
editorially selected for relevance, accuracy, credibility and quality of the
answer link. A meta-search, which generates links to answers from several
leading search engines, is included with every response to supplement answer
templates available or to provide answers when there are no matching question
templates.
THE KNOWLEDGE BASE
Our knowledge base is a collection of question templates and answer
templates. Each knowledge base for the Consumer and Corporate services is
created and maintained using a set of internally developed proprietary tools
which allow content editors to make efficient editorial judgments about what
questions should be included and which Web pages, databases or other sources of
information on the Internet provide the best answer to a particular question.
These tools facilitate a variety of tasks such as creating question templates
and managing knowledge base content. In addition, these tools enable editors to
automatically map sites for answers and content, making the integration of new
content into a knowledge base more efficient. The tools also help content
editors maintain the knowledge base for accuracy and quality by frequently
checking all links from the knowledge base to the Web to ensure that links are
functioning and that the content is still appropriate for the related question.
DATA MINING PROCESS
The Ask Jeeves data mining process stores, analyzes and reports on all
queries asked of the Ask Jeeves Corporate and Consumer services. In the process
of responding to user questions, the QPE logs all questions and the selected
dialogue questions to a "user log." This user log tracks whether or not the
user's questions were answered. We carefully analyze this information to
determine patterns in the usage of our Corporate and Consumer services. This
data not only helps editors determine what questions should be answered, but it
also enables corporate customers to identify content gaps on their Web sites.
Our data mining process improves the performance of the underlying system by
automatically discovering terms not previously identified by the system.
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THE EDITORIAL PROCESS
Our editorial process is aimed at taking advantage of the cognitive ability
of individuals to understand the questions people ask and to determine the
quality of the Web sites containing the answers. Our editors focus on conforming
the knowledge base to the questions most frequently asked by our users. As
editors build up a base of questions, answers, terms and phrases in a specific
area of knowledge and interest, the human effort required to add to that
knowledge base diminishes.
SCALABILITY AND OPERATIONS
Our Corporate and Consumer services run on arrays of Intel-based server
systems running Microsoft Windows NT and Internet Information Server Software.
The QPE is written in the C++ computer language and is optimized to handle high
traffic volumes. The Ask Jeeves knowledge bases are deployed on these servers as
read-only, memory mapped files. To scale our service as traffic increases, we
only need to install our QPE and knowledge base on additional servers.
The servers hosting Ask Jeeves and some of our corporate customers' Web
sites are located at Frontier Global Center in Palo Alto, California and Exodus
Communications in Sunnyvale, California. These hosting centers provide routing
and communication lines with a variety of major Internet backbone providers, as
well as continuous monitoring and communications support. They also provide
their own power generators and multiple, redundant backup systems. We maintain
significant server over-capacity at each site so that if one hosting facility
fails, the other site can service our entire user traffic.
CUSTOMERS
The following is a list of our ten largest advertisers by revenue in 1999,
and a complete list of our electronic commerce merchants and licensing customers
as of May 31, 1999:
<TABLE>
<CAPTION>
ELECTRONIC
ADVERTISING COMMERCE LICENSING CUSTOMERS
- ----------------------- ------------------------ -----------------------------------
<S> <C> <C>
Theglobe.com Amazon.com Adam's Health
WebPower BarnesandNoble.com Airtouch
GoTo.com Bigstar AltaVista Company
AutoNation, Inc. Big Words Corporation American Express
MSN.com CDNow.com CD Universe ellSouth Corporation
Fortunecity Computer Discount Compaq Computer
eBay, Inc. Warehouse Datek Online Holdings
NetVision, Inc. Creative Computers Dell Computer Corporation
WebShopper DVD Express E*Trade
Finet Holdings Corp. DVD Wave e-Town
EBay F5 Networks
eToys Health EMD
First Source Hewlett Packard
FTD Florist IDG
Global Electronic Iomega Corporation
Music Marketplace Infonautics Corporation
Gift Tree Martha Stewart
IC-Direct Micron Technology, Inc.
My Simon Microsoft
PC Flowers MyPoint
Powell's Netscape Communications Corporation
Pro Flowers Network Solutions
Reel.com Nike
911 Gifts Office Depot, Inc.
Deja.com Dell OneNetNow
</TABLE>
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<TABLE>
<CAPTION>
ELECTRONIC
ADVERTISING COMMERCE LICENSING CUSTOMERS
- ----------------------- ------------------------ -----------------------------------
<S> <C> <C>
Finderhut Oxygen Media, Inc.
Furniture.com Toshiba America Information
Hasbro Systems, Inc.
Petsmart US West
Priceline WebTV, Inc.
Sony Williams Sonoma
Value America
Eddie Bauer
Wine.com
Garden.com
Iomega
Petstore.com
Spiegel
Ubid
Office Depot
Macy's
</TABLE>
For the nine months ended September 30, 1999 no customer accounted for more
than ten percent of our total revenues. AltaVista and theglobe.com, inc.
accounted for approximately 10% and 10% of total revenues, respectively, for the
year ended December 31, 1998. In addition, in 2000 we expect that revenues
associated with the Corporate Service will be heavily dependent on a limited
number of customers.
SALES AND MARKETING
We have a direct sales force that targets advertisers and electronic
commerce merchants. Advertising sales on Ask Jeeves have been generated
primarily by our internal advertising sales organization. Our internal
advertising sales force maintains close relationships with advertisers by
consulting regularly with them on design and placement of their Internet-based
advertising, by providing them with advertising measurement analysis and by
providing a high level of customer support. We also have agreements with certain
third-party advertising sales organizations. We allocate a percentage of our
advertising inventory to these third parties to include in their advertising
sales networks. Our direct sales force consists of seven professionals as of
September 30, 1999.
We also employ a team of professionals that sell our Corporate Service to
companies. The sales cycle for Corporate Service sales takes approximately two
to four months. During such time, our sales force works with customers on the
design and functionality of our Corporate Service on the customer's Web site.
This direct sales force consists of six professionals as of September 30, 1999.
We believe that an aggressive brand promotion campaign will increase usage
of Ask Jeeves, as well as attract additional advertisers and electronic commerce
partners. Historically, we have relied on word-of-mouth publicity and some
online advertising. Today, we engage a number of marketing tools to reach
consumers, including online and offline advertising, public relations, direct
mail, trade shows and ongoing customer communications programs. We recently
began consumer public relations campaigns to build brand awareness, drive
consumers to Ask Jeeves and generate increased awareness among corporate
customers.
COMPETITION
CONSUMER SERVICE
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 Alta Vista
Company, for the traffic generated by Internet users seeking links to third-
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party content to address their online information needs. We also compete with
directory services, such as Yahoo! Inc., Goto.com and LookSmart, Ltd. because
they provide alternative ways for users to obtain the desired information.
CORPORATE SERVICE
Our Corporate Service competes with a number of companies that are
addressing the same need to improve automated or online customer service for
corporate clients. While various companies are addressing this problem through a
range of solutions, none competes directly with our approach of providing
human-like online interfaces for company Web sites.
The companies that provide automated online customer products and services
against whom we compete can be categorized as follows:
<TABLE>
<CAPTION>
CATEGORY FOCUS COMPETITORS
- ------------------------ ------------------------ ------------------------
<S> <C> <C>
Web-based Web-site specific search Inktomi Corporation,
engine, "frequently Primus
asked questions," Telecommunications
self-help problem Group, Inc. and
resolution and expert WebAnswers, LLC
systems
E-mail Automated response to Aptex Software, Inc.,
customer generated Brightware, Inc., Egain
e-mail and automated Communications Corp.,
routing of customer Kana Communications,
e-mail to appropriate Inc. and Mustang
answer provider Software, Inc.
Phone call with Receive, manage and Clarify, Inc., Siebel
customers track telephonic Systems, Inc., FaceTime
communications Communications, Inc.,
Vantive Corporation and
Remedy Corporation
</TABLE>
Our ability to compete depends on many factors, many of which are outside of
our control. These factors include: the quality of content, the ease of use of
online services and the timing and market acceptance of new and enhanced online
services. We believe we compete favorably with respect to each of these factors.
Many of our existing competitors, as well as potential new competitors, have
longer operating histories, greater name recognition, larger customer bases and
significantly greater financial, technical and marketing resources than we do.
This may allow them to devote greater resources than we can to the development
and promotion of their services. Many of these competitors offer a wider range
of services than we do. These services may attract users to our competitors'
sites and, consequently, result in a decrease of traffic to our site. These
competitors may also engage in more extensive research and development, adopt
more aggressive pricing policies and make more attractive offers to existing and
potential employees, partners, advertisers and electronic commerce partners. Our
competitors may develop products and services that are equal or superior to ours
or that achieve greater market acceptance. In addition, current and potential
competitors have established or may establish cooperative relationships among
themselves or with third parties to better address the needs of advertisers and
businesses engaged in electronic commerce. As a result, it is possible that new
competitors may emerge and rapidly acquire significant market share.
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INTELLECTUAL PROPERTY
Ask Jeeves seeks to protect its proprietary rights, but its actions may be
inadequate to protect its patents, trademarks or other proprietary rights to
prevent others from claiming violations of their proprietary rights. Ask Jeeves
has one patent application on file with the United States Patent and Trademark
Office for its "Grammar Template Query System". Ask Jeeves has obtained
registered trademark status for "Ask Jeeves" and has applied for registered
trademark status for "Ask.com", "Ask Jeeves for Kids", and the Ask Jeeves logo
and service marks in the United States and various foreign countries. Ask Jeeves
enters into confidentiality agreements with its employees, consultants and
strategic partners, and generally controls access to and distribution of its
proprietary information. Despite Ask Jeeves' efforts to protect its proprietary
rights from unauthorized use or disclosure, parties may attempt to disclose,
obtain or use its proprietary information. The steps Ask Jeeves has taken may
not prevent misappropriation of its proprietary information. Third parties may
infringe or misappropriate Ask Jeeves' proprietary rights, which could have a
material adverse effect on Ask Jeeves' business, results of operations and
financial condition. The validity, enforceability and scope of protection of
proprietary rights in Internet-related industries are uncertain and still
evolving.
Furthermore, third parties may assert infringement claims against Ask
Jeeves. Claims relating to infringement of the trademarks and other intellectual
property rights of third parties and any resultant litigation, should it occur,
could subject Ask Jeeves to significant liability for damages and could result
in the invalidation of Ask Jeeves' proprietary rights. In addition, even if Ask
Jeeves prevails, any litigation could be time-consuming and expensive to defend,
and could result in the diversion of management's time and attention, any of
which could materially adversely affect Ask Jeeves' business, results of
operations and financial condition. Any claims from third parties may also
result in limitations on Ask Jeeves ability to use the trademarks and other
intellectual property subject to those claims unless Ask Jeeves enters into
agreements with the third parties responsible for those claims, which may be
unavailable on commercially reasonable terms.
Specifically, 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 certain aspects of the Ask Jeeves
technology infringe one or more patents alleged to be held by the plaintiff. We
have has 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 the Company's technology infringes two patents alleged to
be held by the plaintiffs. We have not yet answered the complaint. We do not
believe that either lawsuit is meritorious and is vigorously defending each of
the cases. However, the outcome of litigation is difficult to predict and could
result in a judgment against us.
We seek to protect our copyrights, service marks, trademarks, trade dress
and trade secrets through a combination of laws and contractual restrictions,
such as confidentiality agreements. For example, we attempt to register our
trademarks and service marks in the United States and internationally. However,
effective trademark, service mark, copyright and trade secret protection may not
be available in every country in which our services are made available online.
We have registered a number of Internet domain names including Ask.com, Ask
Jeeves.com and AJkids.com. Domain names generally are regulated by Internet
regulatory bodies. The relationship between regulations governing domain names
and laws protecting trademarks and similar proprietary rights is unclear. We,
therefore, could be unable to prevent third parties from acquiring domain names
that infringes or otherwise decreases the value of our trademarks and other
proprietary rights.
NEW AND EXISTING REGULATION ON THE INTERNET
We are subject to the same federal, state and local laws as other companies
conducting business on the Internet. Today there are relatively few laws
specifically directed towards online services. However, due to
39
<PAGE>
the increasing popularity and use of the Internet and online services, it is
possible that laws and regulations will be adopted with respect to the Internet
or online services. These laws and regulations could cover issues such as online
contracts, user privacy, freedom of expression, pricing, fraud, content and
quality of products and services, taxation, advertising, intellectual property
rights and information security. Applicability to the Internet of existing laws
governing issues such as property ownership, copyrights and other intellectual
property issues, taxation, libel, obscenity and personal privacy is uncertain.
Several states have proposed legislation that would limit the uses of
personal user information gathered online or require online services to
establish privacy policies. The Federal Trade Commission also has recently
started a proceeding with one online service regarding the manner in which
personal information is collected from users and provided to third parties.
Changes to existing laws or the passage of new laws intended to address these
issues could directly affect the way we do business or could create uncertainty
in the marketplace. This could reduce demand for our services or increase the
cost of doing business as a result of litigation costs or increased service
delivery costs, or could otherwise harm our business. In addition, goods to
users worldwide, foreign jurisdictions may claim that we are required to comply
with their laws. In some jurisdictions, we will be required to collect
value-added taxes on our fees. Our failure to comply with foreign laws could
subject it to penalties ranging from fines to bans on our ability to offer our
services.
EMPLOYEES
As of September 30, 1999, we had approximately 350 employees. We have never
had a work stoppage, and no employees are represented under collective
bargaining agreements. We consider our relations with our employees to be good.
FACILITIES
Our headquarter are currently located in a leased facility in Emeryville,
California, on April 30, 1999 the facility consists of 67,711 square feet with
an option to lease an additional 12,788. Our annual rent expense under the lease
is $1.9 million. We believe that this facility will be adequate for our current
and foreseeable future.
LEGAL PROCEEDINGS
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 certain aspects of the Ask Jeeves technology
infringe one or more patents alleged to be held by the plaintiff. We have has
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 the Company's technology infringes two patents alleged to be held by the
plaintiffs. We have not yet answered the complaint. We do not believe that
either lawsuit is meritorious and is vigorously defending each of the cases.
However, the outcome of litigation is difficult to predict and could result in a
judgment against us.
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<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
Set forth below is certain information regarding our executive officers,
directors and key employees as of December 31, 1999.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- -------- ------------------------------------------
<S> <C> <C>
Roger A. Strauch(1)(3).................... 43 Chairman of the Board
Robert W. Wrubel.......................... 38 President, Chief Executive Officer and
Director
David C. Warthen.......................... 41 Chief Technical Officer
Enrique Salem............................. 34 Senior Vice President of Engineering and
Operations
Edward D. Briscoe III..................... 36 Senior Vice President and General Manager,
Consumer Service
Laurence G. Fishkin....................... 47 Senior Vice President, Business
Development
M. Bruce Nakao............................ 56 Chief Financial Officer
Frank A. Vaculin.......................... 41 Senior Vice President and General Manager,
Corporate Service
Amy Slater................................ 45 General Counsel and Secretary
Christine M. Davis........................ 42 Vice President and Controller
A. George ("Skip") Battle(1)(2)........... 55 Director
Garrett Gruener(1)........................ 44 Director
Daniel J. Nova(2)(3)...................... 37 Director
Benjamin M. Rosen......................... 65 Director
Geoffrey Y. Yang(3)....................... 40 Director
</TABLE>
- ------------------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
(3) Member of the Strategic Opportunities Committee.
ROGER A. STRAUCH has served as Chairman of the Board of Ask Jeeves since
August 1997. Mr. Strauch was Chief Executive Officer of Ask Jeeves from
April 1998 to November 1998. Mr. Strauch has served as Chief Executive Officer
and Chief Financial Officer of Symmetricom, Inc., a manufacturer of mixed signal
integrated circuits and telecommunications hardware, since June 1998 and
July 1998, respectively. Since July 1997, Mr. Strauch has been Chairman of the
Board of the Roda Group, a venture development firm based in Berkeley,
California. From 1989 to June 1997, Mr. Strauch served as Chairman of the Board
and Chief Executive Officer of TCSI Corporation, a telecommunications software
company.
ROBERT W. WRUBEL has served as Chief Executive Officer and a director of
Ask Jeeves since November 1998 and has served as President since May 1998. From
February 1993 to May 1998, Mr. Wrubel was employed by Knowledge
Adventure, Inc., an educational software company, in various capacities,
including Chief Operating Officer from February 1997 to May 1998, Vice
President, Product Development from August 1995 to February 1997 and Executive
Producer from February 1993 to July 1995.
41
<PAGE>
DAVID C. WARTHEN has served as Chief Technical Officer of Ask Jeeves since
August 1997. Mr. Warthen is a founder of Ask Jeeves and served as a director
from June 1996 to February 1999 and as Chief Executive Officer and Chief
Financial Officer from June 1996 to August 1997. In May 1988, he founded Desktop
Software, a custom software development firm, where he served as sole proprietor
until June 1996. From 1983 to 1988 he served as Director of Engineering at
Virtual Microsystems, Inc., a software and hardware company.
ENRIQUE SALEM joined Ask Jeeves as Senior Vice President of Engineering and
Operations in October 1999. Mr. Salem served as Symantec Corporation's Chief
Technical Officer for the Security and Assistance Business Unit responsible for
research and development and product management for products such as Norton
Utilities, and Norton AntiVirus. Prior to joining Symantic in 1990, Mr. Salem
served as Vice President for Security Pacific Merchant Bank responsible for the
development of real time trading systems.
EDWARD D. BRISCOE III joined Ask Jeeves as Senior Vice President and
General Manager, Consumer Service in February 1999. From January 1995 to
January 1999, Mr. Briscoe was employed by Iomega Corporation, a data storage
company, in various capacities including President, Personal Storage Division
from January 1997 to January 1999 and Vice President, Global Sales from
January 1995 to December 1996. From May 1993 to December 1994, Mr. Briscoe was
Director of Sales and Marketing for the Personal Interactive Electronics
Division of Apple Computer, Inc., a computer manufacturing company.
LAURENCE G. FISHKIN joined Ask Jeeves as Senior Vice President, Business
Development in January 1999. From January 1998 to September 1998, Mr. Fishkin
served as Vice President of Business Development for Relevance
Technologies, Inc., a knowledge management software company. From
September 1996 to June 1997, Mr. Fishkin served as Vice President of Business
Development and Acting General Manager for Yahoo! Marketplace, a joint venture
between Yahoo! Inc., an Internet portal company, and Visa International, Inc., a
credit services provider. From June 1992 to February 1994, Mr. Fishkin served as
Director of Business Development and from February 1994 through August 1996,
Mr. Fishkin served as Vice President of Business Development for Information
Access Company, a database publishing company and a division of Ziff-Davis
Publishing.
M. BRUCE NAKAO joined Ask Jeeves as Chief Financial Officer in April 1999.
From August 1996 to April 1999, Mr. Nakao served as Senior Vice President and
Chief Financial Officer of Puma Technology, Inc., a software company. From
May 1986 to August 1996, Mr. Nakao served as Senior Vice President and Chief
Financial Officer of Adobe Systems Incorporated, a graphic software company.
Mr. Nakao is a member of the Roda Group advisory board.
FRANK A. VACULIN joined Ask Jeeves as Senior Vice President and General
Manager, Corporate Service in January 1999. From August 1996 to January 1999,
Mr. Vaculin served as Vice President of North American Sales for Softbank
Services Group, a leading provider of outsource services to technology
companies. From October 1993 to August 1996, Mr. Vaculin was employed by Borland
International, a software company, in various capacities, including Senior Vice
President and General Manager, Desktop and LAN Tools, Vice President North
American Sales, Technical Support and Service and Director of Channel Sales.
AMY SLATER has served as General Counsel and Secretary for Ask Jeeves since
November 1997. From January 1996 to November 1997, Ms. Slater was in private law
practice with an emphasis on intellectual property law. From December 1993 to
October 1995, Ms. Slater worked for Oracle Corporation, a relational database
software company. From October 1990 to June 1993, Ms. Slater was of counsel at
the law firm of Townsend & Townsend & Crew L.L.P. Ms. Slater is married to
Mr. Gruener, a director of the Company.
42
<PAGE>
CHRISTINE M. DAVIS has served as Controller of Ask Jeeves since
January 1999 and was promoted to Vice President and Corporate Controller in
November 1999. From January 1999 until April 1999, Ms. Davis also served as
Acting Chief Financial Officer of the Company. From December 1997 to
January 1999, she served as corporate Controller of TIBCO Software, Inc., a
software company. From April 1987 to December 1997, Ms. Davis served as
Corporate Controller, Assistant Secretary and Treasurer of TCSI Corporation, a
telecommunications software company.
A. GEORGE ("SKIP") BATTLE has served as a director of Ask Jeeves since
August 1998. Mr. Battle retired from Andersen Consulting in June 1995.
Mr. Battle joined the firm in 1968, became a partner in 1978 and held a series
of management positions in the firm including Worldwide Managing Partner Market
Development and a member of the firm's Executive Committee, Global Management
Council and Partner Income Committee. Mr. Battle is a member of the Boards of
Directors of PeopleSoft, Inc., Barra Inc. and Fair, Isaac and Company,
Incorporated as well as a director of Masters Select Equity Fund and Masters
Select International, registered investment companies.
GARRETT GRUENER is a founder of Ask Jeeves and has served as a director of
Ask Jeeves since June 1996 and served as Secretary of the Company from
June 1996 to August 1997. Mr. Gruener is a founding general partner of Alta
Partners, a venture capital firm, which was formed in February 1996. Since
September 1992, Mr. Gruener has been a general partner of Burr, Egan, Deleage &
Co., a venture capital firm. Mr. Gruener is on the board of Be Incorporated,
CyberGold, Inc. and ImageX.com, Inc. Mr. Gruener is married to Ms. Slater,
General Counsel and Secretary of Ask Jeeves.
DANIEL J. NOVA has served as a director of Ask Jeeves since February 1999.
Since August 1996, Mr. Nova has served as a general partner of Highland Capital
Partners, a venture capital firm. From January 1995 to August 1996, he was a
general partner of CMG@Ventures, a venture capital firm. From June 1991 to
January 1995, he was a Senior Associate at Summit Partners, a venture capital
firm. Mr. Nova is a director of Lycos, Inc., Be Free, Inc. and eToys Inc.
BENJAMIN M. ROSEN has served as a director of Ask Jeeves since
January 1999. Mr. Rosen has served as Chairman of the Board of Directors of
Compaq Computer Corporation, a computer company and a global supplier of
computer systems since 1983. From April 1999 to July 1999 Mr. Rosen served as
Acting Chief Executive Officer and a member of the Office of the Chief Executive
of Compaq. Mr. Rosen is Vice Chairman of the Board of Trustees of the California
Institute of Technology.
GEOFFREY Y. YANG has served as a director of Ask Jeeves since
February 1999. Since August 1999 Mr. Yang has been a partner of Redpoint
Ventures. Since June 1989, Mr. Yang has been a general partner of Institutional
Venture Partners, a venture capital firm. He is a director of Excite, Inc.,
Tivo, Inc. and MMC Networks, Inc.
BOARD COMPOSITION
Our Board of Directors (the "Board") is divided into three classes
designated as Class I, Class II and Class III, respectively, and will be
assigned to each class by the Board. At the first annual meeting of stockholders
following the closing of this offering, the term of office of the Class I
directors will expire and Class I directors will be elected for a full term of
three years. At the second annual meeting of stockholders following the closing
of this offering, the term of office of the Class II directors will expire and
Class II directors will be elected for a full term of three years. At the third
annual meeting of stockholders following the closing of this offering, the term
of office of the Class III directors will expire and Class III directors will be
elected for a full term of three years. At each succeeding annual meeting of
stockholders, directors will be elected for a full term of three years to
succeed the directors of the class whose terms expire at such annual meeting.
The Class I directors are Geoffrey Y. Yang and Daniel J. Nova; the Class II
directors are A. George ("Skip") Battle, Roger A. Strauch and Garrett Gruener;
and the Class III directors are Robert W. Wrubel and Benjamin M. Rosen.
43
<PAGE>
BOARD COMMITTEES
The Audit Committee of the Board consists of A. George ("Skip") Battle and
Daniel J. Nova. The Audit Committee reviews our financial statements and
accounting practices, makes recommendations to the Board regarding the selection
of independent auditors and reviews the results, scope, extent and procedures of
the audit and other services provided by our independent auditors. The
Compensation Committee of the Board consists of Robert A. Strauch, A. George
("Skip") Battle and Garrett Gruener. The Compensation Committee makes
recommendations to the Board concerning salaries and incentive compensation for
our officers and employees and administers our employee benefit plans.
The Strategic Opportunities Committee consists of Daniel J. Nova, Geoffery
Y. Yang and Robert W. Wrubel. The Strategic Opportunities Committee analyzes
prospective business opportunities and proposals and presents their findings and
recommendations to the board.
DIRECTORS' COMPENSATION
We do not currently pay any cash compensation to our directors for their
service as members of the Board. For his services as Chairman of the Board,
Roger W. Strauch received an option to purchase an aggregate of 169,470 shares
of our common stock at a weighted average exercise price of $.14 per share.
A. George ("Skip") Battle, one of our directors, received options to purchase an
aggregate of 60,000 shares of our common stock at a weighted average exercise
price of $.63 per share.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
As noted above, the Compensation Committee of the Board consists of
Messrs. Strauch, Battle and Gruener. Mr. Strauch was Chief Executive Officer of
Ask Jeeves from April 1998 to November 1998. Mr. Gruener was Secretary of Ask
Jeeves from June 1996 to August 1997 and is married to Amy Slater, General
Counsel and Secretary of Ask Jeeves. None of our executive officers serve as
members of the board of directors or compensation committee of any entity that
has one or more executive officers who serve on our Board or Compensation
Committee. See "Certain Transactions" for information regarding transactions
with members of the Compensation Committee.
44
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth information concerning compensation earned in
the fiscal year ended December 1998 for our President and Chief Executive
Officer and our three other most highly compensated executive officers, whose
compensation as defined by the Securities and Exchange Commission exceeded
$100,000. These people are referred to as the "Named Executive Officers." The
information in the table includes salaries, bonuses, stock options granted and
other miscellaneous compensation. Ask Jeeves has not granted stock appreciation
rights or restricted stock awards and has no long-term compensation benefits
other than stock options.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION ------------
------------------------------------------------ SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND 1998 PRINCIPAL POSITION YEAR SALARY BONUS(1) COMPENSATION(2) OPTIONS COMPENSATION(3)
- -------------------------------- -------- -------- -------- --------------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Roger A. Strauch ............ 1998 $ -- $ -- $ -- 205,485 $79,116
Chairman of the Board
and former Chief
Executive Officer
Robert W. Wrubel ............ 1998 96,231 9,844 300 1,050,000 --
President and Chief
Executive Officer
David C. Warthen ............ 1998 77,590 -- -- 88,209 40,552
Executive Vice
President and Chief
Technical Officer
Daniel H. Miller ............ 1998 -- -- -- 205,485 79,116
Former President and
former Vice President
of Sales
</TABLE>
- ------------------------
(1) Represents a relocation assistance allowance.
(2) Represents payments received in lieu of health benefits.
(3) Represents the difference between the fair market value and the exercise
prices of options granted during the year consistent with the Common Stock
and Warrant Purchase Agreement among Ask Jeeves, Roger A. Strauch,
Daniel H. Miller, David C. Warthen and The Roda Group Venture Development
Company, LLC for management services. A description of the agreement is
contained in "Certain Transactions."
45
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information concerning the grant of stock
options to each of the Named Executive Officers during the fiscal year ended
December 31, 1998.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
- ------------------------------------------------------------------------
% OF TOTAL
NUMBER OF OPTIONS REALIZABLE VALUE AT ASSUMED
SECURITIES GRANTED TO ANNUAL RATES OF STOCK PRICE
UNDERLYING EMPLOYEES EXERCISE APPRECIATION FOR OPTION TERM(3)
OPTIONS IN FISCAL PRICE PER DATE OF --------------------------------------
NAME GRANTED(1) 1999(2) SHARE(3) EXPIRATION 0% 5% 10%
- ---- ---------- ---------- --------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Roger A. Strauch..... 65,028 2.6% $.12 05/29/08 $ 902,589 $ 1,475,513 $ 2,353,519
37,864 1.5 .13 07/30/08 525,174 858,548 1,370,010
37,500 1.5 .73 12/13/08 497,625 827,794 1,161,000
18,932 0.8 .13 12/13/08 262,587 429,274 685,005
47,646 1.9 .18 12/13/08 658,468 1,077,968 1,721,564
Robert W. Wrubel..... 675,000 26.9 .46 05/25/08 9,139,500 15,082,549 24,200,364
375,000 15.0 .73 10/11/08 4,976,250 8,277,944 13,343,397
David C. Warthen..... 9,633 0.4 .12 02/27/08 133,706 218,520 348,641
28,900 1.2 .12 05/29/08 401,132 655,583 1,045,960
8,413 0.3 .13 06/29/08 116,688 190,761 304,402
8,413 0.3 .13 07/30/08 116,688 190,761 304,402
8,414 0.3 .13 12/13/08 116,702 190,784 304,438
24,434 1.0 .18 12/13/08 337,678 552,807 882,859
Daniel H. Miller..... 65,028 2.6 .12 05/30/08 902,589 1,475,513 2,353,519
37,864 1.5 .13 07/30/08 252,174 585,548 1,370,010
37,500 1.5 .73 12/13/08 497,625 827,794 1,334,340
18,932 0.8 .13 12/13/08 262,587 429,274 685,005
47,646 1.9 .18 12/13/08 658,468 1,077,968 1,721,564
</TABLE>
- ------------------------
(1) Options granted during the fiscal year ended December 31, 1998 were granted
under either the 1996 Equity Incentive Plan or pursuant to certain
nonstatutory stock option agreements. All of the options granted to Mr.
Strauch and Mr. Miller are fully vested except the options to purchase
37,500 shares. 6,250 shares under each of these options vested in December
1998 and 31,250 shares under each of these options vest in June 1999.
Mr. Wrubel's options vest over four years with 25% vesting on the first
anniversary of the vesting commencement date of such options and the
remainder vesting monthly over the next three years; provided, however, that
in the event Mr. Wrubel's employment is terminated less than six months
before or less than one year after a change of control, all unvested options
held by Mr. Wrubel shall vest and become immediately exercisable. All of
Mr. Warthen's options are fully vested.
(2) Based on granted options to purchase 2,504,979 shares of common stock during
the period from January 1, 1998 to December 31, 1998.
(3) Potential realizable values are computed by multiplying the number of shares
of common stock subject to a given option by the initial public offering
price of $14.00 per share, assuming that the aggregate stock value derived
from that calculation compounds at the annual 0%, 5% or 10% rate shown in
the table for the entire ten-year term of the option and subtracting from
that result the aggregate option exercise price. The 5% and 10% assumed
annual rates of stock appreciation are mandated by the rules of the SEC and
do not reflect our estimate or projection of future stock price growth.
46
<PAGE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth the number of shares acquired and the value
realized upon the exercise of stock options during the fiscal year ended
December 31, 1998 and the number of shares of common stock subject to
exercisable and unexercisable stock options held as of December 31, 1998 by each
of the Named Executive Officers. Also reported are values of unexercised
in-the-money options, which represent the positive spread between the respective
exercise prices of outstanding stock options and the the initial public offering
price of $14.00 per share.
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
SHARES AT DECEMBER 31, 1998 AT SEPTEMBER 30, 1999
ACQUIRED VALUE --------------------------- ---------------------------
NAME IN EXERCISE REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Roger A. Strauch....... 102,892 $1,427,986 66,578 37,500 $ 920,921 $ 497,715
Robert W. Wrubel....... -- -- -- 1,050,000 -- 14,115,705
David C. Warthen....... 25,002 349,938 184,457 -- 2,563,508 --
Daniel H. Miller....... 102,892 1,427,986 66,578 37,500 920,921 497,715
</TABLE>
- ------------------------
(1) Based on the initial public offering price per share of $14.00, minus the
per share exercise price, multiplied by the number of shares issued upon
exercise of the option.
EMPLOYEE BENEFIT PLANS
1996 EQUITY INCENTIVE PLAN
Our 1996 Equity Incentive Plan (the "1996 Incentive Plan") was adopted by
the Board and approved by the stockholders in December 1996. The 1996 Incentive
Plan was amended in January 1999 and February 1999. There is currently an
aggregate of 5,502,852 shares of common stock authorized for issuance under the
1996 Incentive Plan. Options currently outstanding under the 1996 Incentive Plan
will continue in full force and effect under the terms of the 1996 Incentive
Plan until they are exercised or terminated in accordance with their terms.
As of September 30, 1999, we had granted options under the 1996 Incentive
Plan to purchase an aggregate of approximately 5,397,299 shares of common stock,
of which options to purchase approximately 2,318,033 shares had been exercised,
options to purchase approximately 216,688 shares had been cancelled and options
to purchase approximately 2,862,578 shares at exercise prices ranging from
$0.034 to $11.00 per share remained outstanding. We will not make future grants
under the 1996 Incentive Plan.
The 1996 Incentive Plan provides for the grant of incentive stock options
under the Internal Revenue Code, as amended to employees and non-statutory stock
options to employees, non-employee directors and consultants. The 1996 Incentive
Plan also provides for the grant of restricted stock awards and stock bonuses
although no such awards were granted prior to the termination of the plan. The
1996 Incentive Plan is administered by the board, or a committee appointed by
the board which determines recipients and types of awards to be granted,
including the exercise price, number of shares subject to the award and the
exercisability thereof. Currently, the 1996 Incentive Plan is being administered
by the compensation committee of the board.
The terms of stock options granted under the 1996 Incentive Plan may not
exceed 10 years. The exercise price of options granted under the 1996 Incentive
Plan is determined by the Board or a committee appointed by the Board provided
that the exercise price of an incentive stock option cannot be less than 100% of
the fair market value of the common stock on the date of the option grant and
the exercise price of a non-statutory stock option cannot be less than 85% of
the fair market value of the common stock on the date of the option grant.
Options granted under the 1996 Incentive Plan vest at the rate specified in the
applicable option agreement. No options may be transferred by the option holder
other than by will or the
47
<PAGE>
laws of descent or distribution; provided that, an option holder whose
employment or other service relationship with us or any affiliate terminates for
any reason other than by death or permanent and total disability, may exercise
vested options in the three-month period following such cessation, unless such
options terminate or expire sooner by their terms, or in such longer or shorter
period specified in the option agreement. Vested options may be exercised for up
to 12 months after an option holder's employment or other service relationship
with us or any affiliate ceases due to death or disability, unless such options
terminate or expire sooner by their terms.
Prior to the termination of the 1996 Incentive Plan, shares subject to stock
options that have expired or otherwise terminated without having been exercised
in full become available again for the grant of awards under the 1996 Incentive
Plan.
No incentive stock option may be granted to any person who, at the time of
the grant, owns stock possessing more than 10% of the total combined voting
power of Ask Jeeves or any affiliate of Ask Jeeves, unless the option exercise
price is at least 110% of the fair market value of the stock subject to the
option on the date of grant, and the term of the option does not exceed five
years from the date of grant. The aggregate fair market value, determined at the
time of grant, of the shares of common stock with respect to which incentive
stock options are exercisable for the first time by an option holder during any
calendar year under all stock option plans of Ask Jeeves and its affiliates may
not exceed $100,000.
The option agreements may provide that we may exercise a right of first
refusal on any proposed transfer of shares exercised. Substantially all of the
option agreements provide that if a change of control of Ask Jeeves occurs prior
to the first anniversary of the vesting commencement date of the option
agreement, then the vesting which would have occurred by such anniversary shall
occur. After the first anniversary of the date of grant, these option agreements
provide that the vesting of each option shall accelerate by six months.
Upon a change of control of Ask Jeeves, each outstanding option shall be
assumed or an equivalent option substituted by the successor corporation or, if
the successor corporation does not assume or substitute for outstanding options,
the vesting provisions of all such options shall accelerate.
1999 EQUITY INCENTIVE PLAN
In April 1999, the Board adopted the 1999 Equity Incentive Plan (the "1999
Incentive Plan"), which will become effective upon stockholder approval. There
is currently an aggregate of 2,125,000 shares of common stock authorized for
issuance under the 1999 Incentive Plan; provided, however, that each year on
January 1, beginning January 1, 2000, the share reserve under the 1999 Incentive
Plan shall be increased by the lesser of the following: (1) 1,750,000 shares,
(2) 5% of shares outstanding or (3) such smaller number of shares as determined
by the Board.
The 1999 Incentive Plan provides for the grant of incentive stock options,
as defined under the Code, to employees (including officers and
employee-directors) and non-statutory stock options, restricted stock purchase
awards and stock bonuses to employees (including officers and
employee-directors), directors (including non-employee directors), consultants
and advisors of Ask Jeeves and its affiliates. The 1999 Incentive Plan is
administered by the Board (or a committee appointed by the Board) which
determines recipients and types of awards to be granted, including the exercise
price, number of shares subject to the award and the exercisability thereof.
Currently, the 1999 Incentive Plan is administered by the Compensation
Committee.
The terms of options granted under the 1999 Incentive Plan may not exceed
10 years. The Board (or committee) determines the exercise price of options
granted under the 1999 Incentive Plan. However, the exercise price for an
incentive stock option cannot be less than 100% of the fair market value of the
common stock on the date of the option grant, and the exercise price for a
non-statutory stock option cannot be less than 85% of the fair market value of
the common stock on the date of the option grant.
48
<PAGE>
Options granted under the 1999 Incentive Plan vest at the rate specified in the
option agreement. Generally, the option holder may not transfer a stock option
other than by will or the laws of descent or distribution unless the option
holder holds a non-statutory stock option that provides for transfer in the
stock option agreement. However, an option holder may designate a beneficiary
who may exercise the option following the option holder's death. An option
holder whose employment or other service relationship with Ask Jeeves or any
affiliate ceases for any reason may exercise vested options for the term
provided in the option agreement.
No incentive stock option may be granted to any person who, at the time of
the grant, owns (or is deemed to own) stock possessing more than 10% of the
total combined voting power of Ask Jeeves or any affiliate of Ask Jeeves, unless
the option exercise price is at least 110% of the fair market value of the stock
subject to the option on the date of grant and the term of the option does not
exceed five years from the date of grant. In addition, the aggregate fair market
value, determined at the time of grant, of the shares of common stock with
respect to which incentive stock options are exercisable for the first time by
an option holder during any calendar year (under the 1999 Incentive Plan and all
other stock plans of Ask Jeeves and its affiliates) may not exceed $100,000.
Subject to Section 162(m) of the Code (which denies a deduction to publicly
held corporations for certain compensation paid to specified employees in a
taxable year to the extent that the compensation exceeds $1,000,000), no person
may be granted options under the 1999 Incentive Plan covering more than 500,000
shares of common stock in any calendar year.
Shares subject to stock awards that have expired or otherwise terminated
without having been exercised in full again become available for the grant of
awards under the 1999 Incentive Plan.
Restricted stock purchase awards granted under the 1999 Incentive Plan may
be granted pursuant to a repurchase option in favor of Ask Jeeves in accordance
with a vesting schedule determined by the Board (or committee). The price of a
restricted stock purchase award under the 1999 Incentive Plan can not be less
than 85% of the fair market value of the stock subject to the award on the date
of grant. Stock bonuses may be awarded in consideration of past services without
a purchase payment. Unless otherwise specified, rights under a stock bonus or
restricted stock bonus agreement generally may not be transferred other than by
will or the laws of descent and distribution during such period as the stock
awarded pursuant to such an agreement remains subject to the agreement.
If there is any sale, lease or other disposition of all or substantially all
of Ask Jeeves' assets, any merger, reverse merger or any consolidation in which
Ask Jeeves is not the surviving corporation, then all outstanding awards under
the 1999 Incentive Plan either will be assumed or substituted for by any
surviving entity. If the surviving entity determines not to assume or substitute
for such awards, the vesting provisions of such stock awards held by persons
whose continuous service with Ask Jeeves has not terminated will be accelerated
and the awards terminated if not exercised prior to such transaction.
As of September 30, 1999, 2,266,572 options to purchase shares of common
stock, stock bonuses or restricted stock grants have been granted under the 1999
Incentive Plan, of which option to purchase 104,403 shares have been exercised,
options to purchase 214,500 shares have been cancelled and options to purchase
1,947,669 shares with exercise prices ranging from $.3638 to $68.3125 remain
outstanding. The 1999 Incentive Plan will terminate on April 15, 2009 unless
sooner terminated by the Board (or committee).
1999 NON-OFFICER EQUITY INCENTIVE PLAN
In October 1999, the Board adopted the 1999 Non-Officer Equity Incentive
Plan. There is currently an aggregate of 2,000,000 shares of common stock
authorized for issuance under the 1999 Non-Officer Incentive Plan.
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<PAGE>
The 1999 Non-Officer Equity Incentive Plan provides for the grant of
non-statutory stock options, restricted stock purchase awards and stock bonuses
to employees and consultants of Ask Jeeves and its affiliates who are not
officers or member of the Board of Directors of Ask Jeeves or any of its
affiliates. The 1999 Non-Officer Equity Incentive Plan is administered by the
board, or a committee appointed by the board, which determines recipients and
types of awards to be granted, including the exercise price, number of shares
subject to the award and the exercisability thereof. Currently, the 1999
Non-Officer Equity Incentive Plan is administered by the stock option committee
of the board.
The terms of options granted under the 1999 Non-Officer Equity Incentive
Plan may not exceed 10 years. The board, or a committee appointed by the board,
determines the exercise price of options granted under the 1999 Non-Officer
Equity Incentive Plan. However, the exercise price for a non-statutory stock
option cannot be less than 85% of the fair market value of the common stock on
the date of the option grant. Options granted under the 1999 Non-Officer Equity
Incentive Plan vest at the rate specified in the option agreement. Generally,
the option holder may not transfer a stock option other than by will or the laws
of descent or distribution unless the option holder holds a non-statutory stock
option that provides for transfer in the stock option agreement. However, an
option holder may designate a beneficiary who may exercise the option following
the option holder's death. An option holder whose employment or other service
relationship with Ask Jeeves or any affiliate ceases for any reason may exercise
vested options for the term provided in the option agreement.
Subject to Section 162(m) of the Internal Revenue Code which denies a
deduction to publicly held corporations for certain compensation paid to
specified employees in a taxable year to the extent that the compensation
exceeds $1,000,000, no person may be granted options under the 1999 Non-Officer
Equity Incentive Plan covering more than 500,000 shares of common stock in any
calendar year.
Shares subject to stock awards that have expired or otherwise terminated
without having been exercised in full again become available for the grant of
awards under the 1999 Non-Officer Equity Incentive Plan.
Restricted stock purchase awards granted under the 1999 Non-Officer Equity
Incentive Plan may be granted pursuant to a repurchase option in favor of Ask
Jeeves in accordance with a vesting schedule determined by the board or a
committee appointed by the board. The price of a restricted stock purchase award
under the 1999 Non-Officer Equity Incentive Plan cannot be less than 85% of the
fair market value of the stock subject to the award on the date of grant. Stock
bonuses may be awarded in consideration of past services without a purchase
payment. Unless otherwise specified, rights under a stock bonus or restricted
stock bonus agreement generally may not be transferred other than by will or the
laws of descent and distribution during such period as the stock awarded
pursuant to such an agreement remains subject to the agreement.
If there is any sale, lease or other disposition of all or substantially all
of Ask Jeeves' assets, any merger, reverse merger or any consolidation in which
Ask Jeeves is not the surviving corporation, then all outstanding awards under
the 1999 Non-Officer Equity Incentive Plan either will be assumed or substituted
for by any surviving entity. If the surviving entity determines not to assume or
substitute for such awards, the vesting provisions of such stock awards held by
persons whose continuous service with Ask Jeeves has not terminated will be
accelerated and the awards terminated if not exercised prior to such
transaction.
As of September 30, 1999, 816,840 options to purchase shares of common stock
been granted under the 1999 Non-Officer Equity Incentive Plan. To date there
have been no exercises, options to purchase 9,100 shares have been cancelled and
options to purchase 807,740 shares with exercise prices ranging from $60.50 to
$131.0625 remain outstanding under this plan. The 1999 Non-Officer Equity
Incentive Plan will terminate on October 14, 2009 unless sooner terminated by
the board, or a committee appointed by the board.
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1997 STOCK PLAN OF NET EFFECT SYSTEMS, INC.
Pursuant to our acquisition of Net Effect, we assumed the 1997 Stock Plan of
Net Effect. As of December 31, 1999, there were options to purchase 497,353
shares of our common stock outstanding with exercise prices ranging from $0.81
to $103 under this plan.
EMPLOYEE STOCK PURCHASE PLAN
In April 1999, the Board adopted and the stockholders approved the Employee
Stock Purchase Plan (the "Purchase Plan") covering an aggregate of 125,000
shares of common stock. The Purchase Plan became effective on the effective on
July 1, 1999 The Purchase Plan is intended to qualify as an "employee stock
purchase plan" within the meaning of Section 423 of the Code. Under the Purchase
Plan, the Board may authorize participation by eligible employees, including
officers, in periodic offerings following the adoption of the Purchase Plan. The
offering period for any offering will be no longer than 27 months.
The Purchase Plan provides a means by which employees of Ask Jeeves and
designated affiliates may purchase common stock of Ask Jeeves through payroll
deductions. The Purchase Plan is implemented by offerings of rights to eligible
employees. Under the Plan, Ask Jeeves may specify offerings with a duration of
not more than 27 months, and may specify shorter purchase periods within each
offering. The first offering will begin on the effective date of the initial
public offering of Ask Jeeves' common stock and will end on July 31, 2001.
Purchases will occur on January 31, 2000, July 31, 2000 and each subsequent
January 31 and July 31 thereafter. Unless otherwise determined by the Board,
common stock is purchased for accounts of employees participating in the
Purchase Plan at a price per share equal to the lower of (1) 85% of the fair
market value of a share of common stock on the date of commencement of
participation in the offering or (2) 85% of the fair market value of a share of
common stock on the date of purchase. Generally, all regular employees,
including executive officers, who work at least 20 hours per week and are
customarily employed by Ask Jeeves or by an affiliate of Ask Jeeves for at least
five months per calendar year may participate in the Purchase Plan and may
authorize payroll deductions of up to 15% of their base compensation for the
purchase of stock under the Purchase Plan.
Eligible employees may be granted rights only if the rights together with
any other rights granted under employee stock purchase plans do not permit such
employee's rights to purchase stock of Ask Jeeves to accrue at a rate which
exceeds $25,000 of fair market value of such stock for each calendar year in
which such rights are outstanding. No employee shall be eligible for the grant
of any rights under the Purchase Plan if immediately after such rights are
granted, such employee has voting power over 5% or more of Ask Jeeves'
outstanding capital stock. As of September 30, 1999, no shares of common stock
had been purchased under the Purchase Plan.
In the event of certain changes of control, the Board has discretion to
provide that each right to purchase common stock will be assumed or an
equivalent right substituted by the successor corporation, or the Board may
shorten the offering period and provide for all sums collected by payroll
deductions to be applied to purchase stock immediately prior to the change in
control. The Purchase Plan will terminate at the direction of the Board or when
all of the shares reserved for issuance have been purchased.
401(K) PLAN
Effective January 1, 1999, Ask Jeeves adopted a tax-qualified employee
savings and retirement plan (the "401(k) Plan") covering all employees. Pursuant
to the 401(k) Plan, employees may elect to reduce their current compensation by
up to the lesser of 25% (decreased by amounts contributed in the form of a
matching contribution, if any) of eligible compensation or the statutorily
prescribed annual limit ($10,000 in 1999) and have the amount of reduction
contributed to the 401(k) Plan. The trustee under the 401(k) Plan, at the
direction of each participant, invests the assets of the 401(k) Plan in any of
eight investment options. The 401(k) Plan is intended to qualify under
Section 401(a) of the Code so that contributions by employees to the 401(k)
Plan, and income earned on plan contributions, are not taxable to employees
until
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<PAGE>
withdrawn, and so that Ask Jeeves, Inc. can deduct the contributions by
employees when made. Ask Jeeves may make matching or additional contributions to
the 401(k) Plan, in amounts to be determined annually by the Board. Ask Jeeves
does not expect to make matching or additional contributions to the 401(k) Plan
in 1999.
COMPENSATION ARRANGEMENTS
Mr. Wrubel's employment letter of May 22, 1998 with Ask Jeeves provides for
an initial annual base salary of $180,000. Pursuant to the offer letter, Mr.
Wrubel received a loan of $75,000 for 90 days with an annual interest rate of
7.5%. The loan was repaid in full in February 1999. In May 1998, Mr. Wrubel was
granted an option to purchase 675,000 shares of common stock at an exercise
price of $.46 per share. Pursuant to the offer letter, upon his promotion to
Chief Executive Officer in November 1998, Mr. Wrubel received an additional
option to purchase 375,000 shares of common stock at an exercise price of $.73
per share. In May 1999, the board granted Mr. Wrubel an option to purchase an
additional 175,000 shares at an exercise price of $10.00 per share. The options
vest over four years; provided however, that in the event Mr. Wrubel's
employment is terminated less than six months before or less than one year after
a change of control, all unvested options held by Mr. Wrubel shall vest and
become immediately exercisable. In addition, Ask Jeeves paid $9,844 in
relocation expenses for Mr. Wrubel. On June 1, 1999, Mr. Wrubel's offer letter
was revised to provide that, in the event Mr. Wrubel's employment is terminated
for any reason other than cause, he will receive six months base salary and the
equivalent of six months expected bonus, with a total of expected bonus and
salary cost not to exceed $200,000.
Mr. Briscoe's employment offer letter of January 18, 1999 with Ask Jeeves
provides for an initial annual base salary of $170,000, approximately $156,000
of which he has elected to defer until February 2000, a bonus of $30,000 payable
on January 20, 2000 and a potential performance-based bonus of $100,000 payable
on January 20, 2000. Mr. Briscoe was granted an option to purchase 400,000
shares of common stock at an exercise price of $.73 per share. The option vests
over a period of four years with 100,000 shares vesting in January 2000 and
8,333 shares vesting at the end of each month thereafter. The offer letter also
provided Mr. Briscoe with the right to purchase 231,032 shares of Series B
Preferred Stock at a price of $4.33 per share in our March 1999 financing which
converted into common stock on a one-for-one basis at the initial public
offering. Mr. Briscoe also received a relocation allowance of up to $150,000.
Mr. Briscoe's offer letter was revised on June 1, 1999 to increase his annual
base salary to $175,000 and to provide that in the event Mr. Briscoe's
employment is terminated without cause he will receive six months base salary
and the equivalent of six months expected bonus, with the total payment not to
exceed $150,000. In addition, if Mr. Briscoe's employment is terminated due to a
change of control, in addition to any accelerated vesting contained in his
option agreement, six month of vesting under the option shall become immediately
exercisable.
Mr. Nakao's employment offer letter of April 16, 1999 with Ask Jeeves
provides for an initial annual base salary of $175,000. It also provides that,
in the event Mr. Nakao's employment is terminated for any reason other than
cause, he will receive six months salary. Mr. Nakao was also granted an option
to purchase 250,000 shares of common stock at an exercise price of $9.50 per
share. The option vests over a period of four years, with 62,500 shares vesting
in April 2000 and 5,208 shares vesting at the end of each month thereafter;
provided, however, that in the event Mr. Nakao's employment is terminated
without cause, (i) prior to April 19, 2000, 100,000 of the shares will become
immediately exercisable or (ii) after April 19, 2000, 37,500 of the shares will
become immediately exercisable. However, if Mr. Nakao resigns and a transition
to a successor Chief Financial Officer approved by the Board has been
accomplished, Mr. Nakao will receive the same vesting acceleration as if he was
terminated without cause.
Mr. Fishkin's employment offer letter of January 11, 1999 with Ask Jeeves
provides for an initial annual base salary of $130,000 and an initial bonus of
$50,000. It also provides that, in the event Mr. Fishkin's employment is
terminated due to a change of control, he will receive six months base salary.
Mr. Fishkin was also granted an option to purchase 225,000 shares of common
stock at an exercise price of $.73
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per share. The option vests over four years, with 56,250 shares vesting in
January 2000 and 4,687 shares vesting at the end of each month thereafter;
provided, however, that in the event of a change of control, in addition to any
acceleration of vesting contained in his option agreement, twelve months of
vesting under the options shall become immediately exercisable.
Mr. Vaculin's employment offer letter of Janaury 5, 1999 with Ask Jeeves
provides for an initial annual base salary of $175,000 and quarterly
performance-based bonuses based upon achievement of recognized revenues. It also
provides that in the event Mr. Vaculin's employment is terminated for any reason
other than cause, he will receive six months base salary and the equivalent of
six months expected bonus, with a total of expected bonus and salary not to
exceed $150,000. Mr. Vaculin was also granted an option to purchase 300,000
shares of common stock at an exercise price of $.73 per share. The option vests
over four years, with 75,000 shares vesting in January 2000 and 6,250 shares
vesting at the end of each month thereafter; provided, however, in the event Mr.
Vaculin's employment is terminated due to a change of control of Ask Jeeves, in
addition to any acceleration of vesting contained in his option agreement, six
months of vesting under the option shall become immediately exercisable. On
May 21, 1999 Mr. Vaculin was granted an additional option to purchase 25,000
shares at an exercise price of $10.00 per share. The option vests over four
years with 6,250 shares vesting on May 21, 2000 and 521 shares vesting at the
end of each month thereafter.
Mr. Lichter's employment offer letter of May 19, 1999 with Ask Jeeves
provides for an initial annual base salary of $150,000 and an initial annual
bonus of $50,000 paid on the first anniversary of his start date. Mr. Lichter
was also granted an option to purchase 100,000 shares of common stock at an
exercise price of $10.00 per share. The option vests over four years, with
25,000 shares vesting in May 2000 and 2,083 shares vesting at the end of each
month thereafter; provided, however, in the event of a change of control, in
addition to any vested options, six months of vesting under the option shall
become immediately exercisable. The offer letter also provides that, in the
event Mr. Lichter's employment is terminated without cause, he will receive six
months base salary and, in addition to any vested options, six months of vesting
under the options shall become immediately exercisable.
Mr. Salem's employment offer letter of September 24, 1999 with Ask Jeeves
provides for an initial annual base salary of $175,000. Mr. Salem was granted an
option to purchase 275,000 shares of common stock at an exercise price of
$32.94. The option vests over a forty-eight month period. We have guaranteed a
stock option value of $1.2 million after 18 months of employment. The offer
letter also provides that, in the event Mr. Salem's employment is terminated due
to a change in control of the company, he will receive six months base salary
and immediately vest 25% of his stock options and 12.5% of the remaining stock
options if terminated after September 24, 2000. Mr. Salem also received a
relocation allowance of up to $115,000 and a temporary housing allowance of
$5,000 per month until a permanent residence is established. We have provided a
loan commitment up to $1 million, payable over a four year term at current
market rates.
As described under "Certain Transactions," Mr. Warthen's employment
agreement contained in the Common Stock and Warrant to Purchase Common Stock
Purchase Agreement dated August 20, 1997 provides for an initial annual base
salary of $80,000 and the grant of immediately exercisable non-statutory stock
options at an exercise price equal to 25% of the fair market value of the common
stock on the date of grant. Pursuant to this provision, we granted Mr. Warthen
options to purchase an aggregate of 184,458 shares of common stock at a weighted
average exercise price of $.10 per share. This provision has expired and we will
not grant any further options under this provision. To date, Mr. Warthen has not
exercised such options.
INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS AND LIMITATION OF LIABILITY
Under Section 145 of the Delaware General Corporation Law we have broad
powers to indemnify its directors and officers against liabilities they may
incur in such capacities, including liabilities under the
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Securities Act. Our Bylaws provide that we will indemnify our directors and
executive officers and may indemnify other officers to the fullest extent
permitted by law. Under our Bylaws, indemnified parties are entitled to
indemnification for negligence, gross negligence and otherwise to the fullest
extent permitted by law. The Bylaws also require us to advance litigation
expenses in the case of stockholder derivative actions or other actions, against
an undertaking by the indemnified party to repay such advances if it is
ultimately determined that the indemnified party is not entitled to
indemnification.
In addition, our Certificate of Incorporation provides that, pursuant to
Delaware law, our directors shall not be liable for monetary damages for breach
of the directors' fiduciary duty of care to us and our stockholders. This
provision in the Certificate of Incorporation does not eliminate the duty of
care, and in appropriate circumstances equitable remedies such as injunctive or
other forms of non-monetary relief will remain available under Delaware law. In
addition, each director will continue to be subject to liability for breach of
the director's duty of loyalty to us for acts or omissions not in good faith or
involving intentional misconduct, for knowing violation of law, for actions
leading to improper personal benefit to the director, and for payment of
dividends or approval of stock repurchases or redemptions that are unlawful
under Delaware law. The provision also does not affect a director's
responsibilities under any other law, such as the federal securities laws or
state or federal environmental laws.
We have entered into indemnity agreements with each of our directors and
executive officers. Such indemnity agreements contain provisions that are in
some respects broader than the specific indemnification provisions contained in
Delaware law.
At present, there is no pending litigation or proceeding involving one of
our directors, officers or employees regarding which indemnification is sought,
nor are we aware of any threatened litigation that may result in claims for
indemnification.
We maintain a policy providing directors' and officers' liability insurance,
which insures our directors and officers in certain circumstances with a
liability limit of $15,000,000 per claim and in the aggregate, subject to
varying retentions. This coverage is on a claims made basis.
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CERTAIN TRANSACTIONS
COMMON STOCK FINANCINGS
We issued 1,083,498 shares of common stock at a purchase price of $.23 per
share and warrants to purchase 541,749 shares of common stock with an exercise
price of $.23 to each of Roger A. Strauch, our Chairman of the Board, and Daniel
H. Miller, a 5% stockholder and former officer and director of Ask Jeeves,
pursuant to the Common Stock and Warrant to Purchase Common Stock Purchase
Agreement dated August 20, 1997 among the Company, Roger A. Strauch, Daniel H.
Miller, the Roda Group Venture Development, LLC ("the Roda Group") and David C.
Warthen (the "Purchase Agreement"). Mr. Strauch and Mr. Miller are managing
members of the Roda Group. As a condition of the Purchase Agreement, the Roda
Group agreed to lease Ask Jeeves 1,700 square feet of office space at 918 Parker
Street, Berkeley, California, 94710 through December 31, 1998. Ask Jeeves paid a
total of $4,157 in lease payments to the Roda Group during such term. As a
further condition of the Purchase Agreement, Mr. Strauch and Mr. Miller agreed
to provide us with management services through December 31, 1998 for which they
each received non-statutory stock options at an exercise price equal to 25% of
the fair market value of the common stock on the date of grant. Pursuant to such
provision, Mr. Strauch and Mr. Miller each received options to purchase an
aggregate of 169,470 shares of common stock at a weighted average exercise price
of $.14 per share. This provision has expired and we will not grant any further
options under this provision. As a further condition of the Purchase Agreement,
Mr. Warthen agreed to act as our Executive Vice President and Chief Technical
Officer, for which he received an annual salary of $80,000 and nonstatutory
stock options at an exercise price equal to 25% of the fair market value of the
common stock on the date of grant. Pursuant to such provision, we granted
Mr. Warthen an immediately exercisable option to purchase an aggregate of
184,458 shares of common stock at a weighted average price of $.10 per share.
This provision has expired and we will not grant any further options under this
provision. If Mr. Warthen voluntarily terminates his employment with us prior to
August 20, 1999, we have the right to repurchase a portion of the total number
of our shares held by him at the original issuance price.
In June 1998, we sold an aggregate of 2,148,807 shares of common stock at a
purchase price of $.53 per share. In September 1998, we sold an aggregate of
1,855,415 shares of common stock at a purchase price of $.73 per share. The
following executive officers, directors, holders of more than 5% of our
securities and members of such persons' immediate families purchased shares of
common stock:
<TABLE>
<CAPTION>
SHARES
OF AGGREGATE
COMMON PURCHASE
PURCHASER STOCK PRICE
- --------- -------- ---------
<S> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS
Roger A. Strauch............................................ 94,661 $ 50,170
Daniel H. Miller............................................ 94,661 50,170
M. Bruce Nakao.............................................. 47,330 25,085
A. George ("Skip") Battle................................... 47,330 25,085
Garrett Gruener............................................. 94,661 50,170
Benjamin M. Rosen........................................... 141,991 75,255
5% STOCKHOLDERS
Leavitt Family Trust........................................ 236,653 $125,426
</TABLE>
See the notes to the table on beneficial ownership in "Principal
Stockholders" for information relating to the beneficial ownership of such
shares.
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<PAGE>
In September 1998, we sold an aggregate of 1,855,415 shares of common stock
at a purchase price of $.73 per share. The following executive officers,
directors, holders of more than 5% of our securities and members of such
persons' immediate families purchased shares of Common Stock:
<TABLE>
<CAPTION>
SHARES OF AGGREGATE
COMMON PURCHASE
PURCHASER STOCK PRICE
- --------- --------- ----------
<S> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS
Roger A. Strauch............................................ 137,438 $ 100,330
Daniel H. Miller............................................ 137,438 100,330
Garrett Gruener............................................. 137,438 100,330
Benjamin M. Rosen........................................... 584,112 426,402
5% STOCKHOLDERS
Leavitt Family Trust........................................ 103,078 $ 75,247
</TABLE>
See the notes to the table on beneficial ownership in "Principal
Stockholders" for information relating to the beneficial ownership of such
shares.
PREFERRED STOCK FINANCINGS
In November 1998 and January 1999, we sold an aggregate of 3,709,884 shares
of Series A preferred stock at a purchase price of $2.06 per share. In February
and March 1999, we sold an aggregate of 5,775,806 shares of Series B preferred
stock at a purchase price of $4.33 per share. All of our shares of preferred
stock converted to common stock on a one to one basis upon the occurrence of our
initial public offering in July 1999. The following executive officers,
directors, holders of more than 5% of our securities and member of such persons'
immediate families purchased shares of Series A preferred stock and Series B
preferred stock.
<TABLE>
<CAPTION>
SHARES OF
SERIES A AGGREGATE
PREFERRED PURCHASE
PURCHASER STOCK PRICE
- --------- --------- -----------
<S> <C> <C>
EXECUTIVE AND OFFICERS AND DIRECTORS
Roger A. Strauch............................................ 106,125 $ 218,618
M. Bruce Nakao.............................................. 4,847 9,985
Amy Slater.................................................. 4,847 9,985
Daniel H. Miller............................................ 106,125 218,618
Garrett Gruener............................................. 92,595 190,746
Benjamin M. Rosen........................................... 519,544 1,070,261
5% STOCKHOLDERS
CPQ Holdings, Inc........................................... 2,480,765 $5,110,376
Leavitt Family Trust........................................ 42,248 87,031
</TABLE>
See the notes to the table on beneficial ownership in "Principal
Stockholders" for information relating to the beneficial ownership of such
shares.
VOTING AGREEMENT
In connection with our Series B preferred stock financing, we entered into
the Amended and Restated Voting Agreement dated February 24, 1999 (the "Voting
Agreement") with the holders of Series A preferred stock, the Series B preferred
stock and certain of our common stockholders to provide for the future voting of
such holders' shares. Under the Voting Agreement, the preferred stockholders
agreed to vote their shares in connection with any class or series vote pursuant
to the company's Amended and Restated Certificate of Incorporation, bylaws or
the law in the same proportion as the overall vote of the eligible stock of Ask
Jeeves. In addition, these holders agreed to elect one individual nominated by
entities
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<PAGE>
affiliated with Highland Capital to our Board, for so long as entities
affiliated with Highland Capital hold at least 5% of our outstanding common
stock. The Voting Agreement terminates on the closing date of this offering.
INVESTOR RIGHTS AGREEMENT
In connection with our Series B preferred stock financing, we entered into
the Amended and Restated Investor Rights Agreement dated February 24, 1999 with
the holders of Series A and Series B preferred stock (the "Investor Rights
Agreement"). The Investor Rights Agreement provided these stockholders rights
relating to the registration of their preferred stock with the Securities and
Exchange Commission. These rights have been waived as to this offering by the
holders of the Series A and Series B preferred stock. In addition, the Investors
Rights Agreement granted these investors a right of first refusal to participate
in future issuances of equity securities by Ask Jeeves. This offering is not
covered by this right of first refusal and it terminates on the closing date of
this offering. The other registration rights will survive this offering
terminate no later than three years after the closing date of this offering.
CONSULTING AGREEMENT
The Consulting Agreement with the Roda Group dated December 14, 1998
provides for cash payments and the grant of non-statutory stock options to
purchase 37,500 shares of common stock with an exercise price of $.73 per share
to each of Roger A. Strauch and Daniel H. Miller, which vest monthly over six
months. Roger A. Strauch, our Chairman of the Board, is a managing member of the
Roda Group. This consulting agreement with the Roda Group was terminated in
August 1999.
LOANS TO EXECUTIVE OFFICER
In May 1998, the Board approved a loan to Robert W. Wrubel, our Chief
Executive Officer, of $75,000 at an interest rate of 7.5% per annum. The loan
was repaid in full in February 1999. In June 1999, the board approved loans to
Mr. Wrubel, Mr. Vaculin and Mr. Lichter each in the amount of $200,000, $100,000
amd $100,000, respectivley, bearing interest of 7.5%. Such notes have a term of
one year and are secured by their options to purchase stock granted to each
member.
OPTIONS TO EXECUTIVE OFFICERS
In March 1999, the Board of Directors granted David Warthen, our Chief
Technical Officer, an option to purchase 100,000 shares of common stock at an
exercise price of $3.50 per share. In May 1999, the board granted Robert Wrubel,
our President and Chief Executive Officer, an option to purchase 200,000 shares
of common stock at an exercise price of $10.00 per share. Both options vest over
four years. The exercise prices of these options were equal to the fair market
value of our common stock on the date of grant, as determined by the Board.
PERSONAL GUARANTEES BY EXECUTIVE OFFICERS
During 1998, Roger A. Strauch, the Chairman of the Board, and Daniel H.
Miller, former director and President of Ask Jeeves, personally guaranteed
obligations by the Company to make payments in the aggregate of approximately
$77,000 in connection with certain equipment leases.
ASSUMPTION OF LEASE OBLIGATIONS
In January 1999, the Roda Group assigned its leases for office space at 918
Parker Street, Berkeley, California 94710, Suites A-11, A-12, and A-14 to Ask
Jeeves, and Ask Jeeves assumed all of the Roda Group's obligations under these
leases. Our rental payment under these leases total approximately $519,000 over
the remaining terms of the leases. Roger A. Strauch, our Chairman of the Board,
is a managing member of the Roda Group. In July 1999, Ask Jeeves assigned its
leases for this office space to Nightfire Software, Inc. of which Roger A.
Stauch is a director and the Roda Group is an investor.
We believe that the foregoing transactions were on terms no less favorable
to us than could be obtained from unaffiliated third parties.
57
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information with respect to beneficial
ownership of our Common Stock as of December 31, 1999 and as adjusted to reflect
the sale of Common Stock in this offering for:
- each person or entity known by us to beneficially own more than 5% of our
outstanding Common Stock;
- each of our directors;
- each of the Named Executive Officer listed in the Summary Compensation
Table
- all of our directors and executive officers as a group; and
- each selling stockholder.
In connection with our acquisition of Net Effect Systems, Inc., we agreed to
register common stock for those stockholders for resale. Our registration of the
shares of common stock does not necessarily mean that the selling stockholders
will sell all or any of the shares.
The information provided in the table below with respect to each selling
stockholders has been obtained from such selling stockholders.
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF SHARES BENEFICIALLY OWNED
SHARES SHARES AFTER THIS OFFERING
BENEFICIALLY BEING -------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED (1) PERCENTAGE OFFERED NUMBER PERCENTAGE
- ------------------------------------ ------------ ---------- --------- ------------ ----------
<S> <C> <C> <C> <C> <C>
CPQ Holding, Inc.(3) 9.74%
529 Bryant Street,
Palo Alto CA 94301..................... 2,774,856 10.34% -- 2,774,856
Entities affiliated with 8.11%
Highland Capital Partners, Inc.(4)
Two International Place,
Boston, MA 02110....................... 2,310,323 8.61% -- 2,310,323
Entities affiliated with 4.87%
Institutional Venture Partners(5)
3000 Sand Hill Rd,
Building Two, Suite 290,
Menlo Park, CA 94025................... 1,386,193 5.16% -- 1,386,193
Roda Group Investments Fund I, 3.01%
L.L.C.(6)
918 Parker Street,
Berkeley, CA 94710..................... 856,732 3.19% -- 856,732
Roger A. Strauch(7).................... 2,993,550 11.16% -- 2,993,550 10.53%
A. George ("Skip") Battle(8)........... 170,625 * -- 170,625 *
Garrett Gruener(9)..................... 2,801,508 10.44% -- 2,801,508 9.84%
Daniel J. Nova(4)...................... 2,310,322 8.61% -- 2,310,322 8.11%
Benjamin M. Rosen...................... 1,413,803 5.27% -- 1,413,803 4.96%
Daniel Miller.......................... 2,871,956 10.7% -- 2,871,956 10.1%
Geoffrey Y. Yang(5).................... 1,386,193 5.16% -- 1,386,193 4.87%
Robert W. Wrubel(10)................... 444,118 1.65% -- 444,118 1.56%
David Warthen.......................... 1,036,458 3.9% -- 1,036,458 3.6%
All executive officers as a group 54.6%
(15 persons)........................... 15,554,957 57.9% -- 15,554,957
631465 Alberta Ltd..................... 12,329 * 12,329 -- *
</TABLE>
58
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF SHARES BENEFICIALLY OWNED
SHARES SHARES AFTER THIS OFFERING
BENEFICIALLY BEING -------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED (1) PERCENTAGE OFFERED NUMBER PERCENTAGE
- ------------------------------------ ------------ ---------- --------- ------------ ----------
<S> <C> <C> <C> <C> <C>
A. Sidney Alpert and Jo Ann Alpert, *
Trustees of the Alpert Living Trust
dated 1/21/98.......................... 22,983 * 22,983 --
Lisa Corbett........................... 993 * 993 -- *
Gweneth H. Glessner.................... 308 * 308 -- *
Greylock IX Limited Partnership........ 574,408 2.1% 574,408 -- *
Laura Hanff............................ 144 * 77 67 *
Randal A. Johnson...................... 4,623 * 4,623 -- *
The R.E.K. Profit-Sharing Trust FBO *
Robert E. King......................... 9,543 * 9,543 --
King Living Trust U/A/D June 19, 1989-- *
Robert Eliot King, Dorothy Jones King,
Trustees............................... 96,840 * 96,840 --
J. Bradford King....................... 20,984 * 20,984 -- *
Mark S. Manasse........................ 277 * 277 -- *
Michael E. McFall...................... 178,483 * 119,296 59,187 *
Milam Knecht and Company............... 2,465 * 2,465 -- *
Judith M. O'Brien Custodian Connor *
O'Brien Under CA Uniform Transfers To
Minors Act Until Age 21................ 123 * 123 --
Judith M. O'Brien Custodian Lauren *
O'Brien Under CA Uniform Transfers To
Minors Act Until Age 21................ 123 * 123 --
Bradford C. O'Brien and Judith Mayer *
O'Brien, Trustees of the O'Brien Family
Trust U/T/A dtd. 7/1/92................ 2,552 * 2,552 --
Old Dominion University Research *
Foundation............................. 393 * 393 --
Q Financial Group, LLC................. 18,494 * 18,494 -- *
San Francisco International *
Investors.............................. 12,329 * 12,329 --
Paul D. Schaller....................... 24,659 * 24,659 -- *
Stanford University.................... 14,794 * 14,794 -- *
Carl Sturmer........................... 28,242 * 12,329 15,913 *
Christine L. Surowiec.................. 2,937 * 2,937 -- *
TL Ventures III Interfund L.P.......... 7,008 * 7,008 -- *
TL Ventures III Offshore L.P........... 44,930 * 44,930 -- *
TL Ventures III L.P.................... 214,645 * 214,645 -- *
Trinity Ventures V, L.P................ 373,656 1.4% 373,656 -- *
Trinity V Side by Side Fund, L.P....... 21,307 * 21,307 -- *
Kenneth Van Wagenen Trust-- *
Kenneth Van Wagenen, Trustee........... 6,164 * 6,164 --
WS Investment 99A...................... 1,666 * 1,666 -- *
WS Investment Company 97B.............. 6,164 * 6,164 -- *
Robert Wyse............................ 2,465 * 2,465 -- *
</TABLE>
- ------------------------
* Represents beneficial ownership of less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes voting or investment power
with respect to the securities. Common stock
59
<PAGE>
subject to options or warrants that are currently exercisable or exercisable
within 60 days of September 30, 1999 are deemed to be outstanding and to be
beneficially owned by the person holding such options or warrants for the
purpose of computing the percentage ownership of such person, but are not
treated as outstanding for the purpose of computing the percentage ownership
of any other person. Unless otherwise indicated, the address for each of the
individuals listed in the table is c/o Ask Jeeves, 5858 Horton St., Suite
350, Emeryville, California 94608. Unless otherwise indicated by footnote,
the persons named in the table have sole voting and sole investment power
with respect to all shares of common stock shown as beneficially owned by
them, subject to applicable community property laws. Percentage of
beneficial ownership is based on 28,472,883 shares of common stock
outstanding as of December 31, 1999.
(2) Assumes no exercise of the underwriters' over-allotment option.
(3) Benjamin M. Rosen is Chairman of the Board of Compaq Computer Corporation of
which CPQ Holdings, Inc. is a wholly-owned subsidiary.
(4) Highland Capital Partners, Inc. manages Highland Capital Partners IV Limited
Partnership (HCP IV) and Highland Entrepreneurs' Fund IV Limited Partnership
(HEF IV, and together with HCP IV, the "Highland Entities"). Includes
2,217,910 shares of common stock owned by HCP IV and 92,413 shares of common
stock owned by HEF IV. Daniel J. Nova, a director of the Company, is a
general partner of the General Partner of HCP IV and HEF IV and can be
deemed to be a beneficial owner of the shares held by HCP IV and HEF IV as
he has shared voting and investment power in connection with his role as
general partner.
(5) Institutional Venture Partners manages Institutional Venture Partners VIII,
L.P. (IVP) and IVP Institutional Investment Fund, III, LLC (IIF, and
together with IVP, the "Institutional Entities"). Includes 1,365,400 shares
of common stock owned by IVP and 20,793 shares of common stock owned by IIF.
Geoffrey Y. Yang, a director of the Company, is a general partner of the the
General Partner of IVP and IIF and can be deemed to be a beneficial owner of
the shares held by IVP and IIF as he has shared voting and investment power
in connection with his role as general partner.
(6) Roger A. Strauch and Daniel H. Miller are managing members and Garrett
Gruener is a member of Roda Group Investment Fund I, L.L.C.
(7) Includes 2,014,631 shares held by the Strauch Kulhanjian Family Trust UAD
December 3, 1992. Also includes 856,732 shares held by Roda Group Investment
Fund I, L.L.C., of which he is a managing member. Also includes
1,500 shares held by Benno S.M. Kling Educational Trust, Roger A. Strauch,
Trustee, 1,500 shares held by Samuel J.M. Kling Educational Trust, Roger A.
Strauch, Trustee, 1,500 shares held by Jesse Kling Educational Trust,
Roger A. Strauch, Trustee, 1,500 shares held by Rebecca A. Miller
Educational Trust, Roger A. Strauch, Trustee, 1,500 shares held by Sarah
Miller Educational Trust, Roger A. Strauch, Trustee, 1,500 shares held by
Julia F. Dan Educational Trust, Roger A. Strauch, Trustee, 1,500 shares held
by Kalden Gonsar Educational Trust, Roger A. Strauch, Trustee, 1,500 shares
held by Fletcher Kennamer Educational Trust, Roger A. Strauch, Trustee,
1,500 shares held by Aidan Clements Educational Trust, Roger A. Strauch,
Trustee, 15,000 shares held by Cooper Ogden Miller Educational Trust, Roger
A. Strauch, Trustee, 45,812 shares held by Roger Strauch as Custodian Under
CUTMA for Alexander K. Strauch, 45,812 shares held by Roger Strauch as
Custodian Under CUTMA for Paul K. Strauch and 45,813 shares held by Roger
Strauch as Custodian Under CUTMA for Nairi S. Strauch. Includes 6,250 shares
issuable pursuant to options exercisable within 60 days.
(8) Includes 156,431 shares held by Mr. Battle, 6,847 shares held by A. George
Battle Custodian Emily Taylor Battle UTMA IL, 4,847 shares held by A. George
Battle TTEE UA Daniel Kurt Webster Battle Trust and 2,500 shares held by
Daniel Kurt Webster Battle.
(9) Includes 1,760,344 shares held by Mr. Gruener, 84,182 shares held by Amy
Slater and 856,732 shares held by Roda Group Investment Fund I, L.L.C.,
100,000 shares held in the Garrett Gruener Annuity
60
<PAGE>
Trust and 250 shares held by Lindsey Pitman, Garrett Gruener's custodian.
Amy Slater is the spouse of Mr. Gruener. Mr. Gruener, a director of the
Company, is a member of Roda Group Investments Fund I, L.L.C and disclaims
beneficial ownership of the shares held by such entity.
(10) Includes 52,456 shares issuable pursuant to options exercisable within
60 days.
(11) Includes 1,993,974 shares held by Mr. Miller. Also includes 856,732 shares
held by Roda Group Investment Fund I, L.L.C., of which he is a managing
member. Also includes 15,000 shares held by Cooper Ogden Miller Educational
Trust, Roger A. Strauch, Trustee, 1,500 shares held by Rebecca A. Miller
Educational Trust, Roger A. Strauch Trustee as to which Mr. Miller disclaims
beneficial ownership. Includes 6,250 shares issuable pursuant to options
exercisable within 60 days.
(12) Includes 184,458 shares issuable pursuant to options exercisable within
60 days.
(13) Represents 13,493,534 shares and 441,019 options that are currently
exercisable or exercisable within 60 days.
61
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
As of December 31, 1999 there were 28,473,883 outstanding shares of common
stock, outstanding options to purchase 6,506,149 shares of common stock and
outstanding warrants to purchase 85,424 shares of common stock.
COMMON STOCK
Subject to preferences that may apply to shares of preferred stock
outstanding at the time, the holders of outstanding shares of common stock are
entitled to received dividends out of assets legally available thereof at such
time and in such amounts as the board of directors may from time to time
determine. Each stockholder is entitled to vote for each share of common stock
held by all on matters submitted to a vote of stockholders. Cumulative voting
for the election of directors is not provided for in our Amended and Restated
Certificate of Incorporation, which means that the holders of a majority of the
shares voted can elect all of the directors then standing for election. The
common stock is not entitled to preemptive rights and is not to subject to
conversion or redemption. Upon the occurrence of a liquidation, dissolution or
winding-up, the holders of shares of common stock would be entitled to share
ratably in the distribution of all of Ask Jeeves' assets remaining available for
distribution after satisfaction of all of our liabilities and the payment of the
liquidation preference of any outstanding preferred stock. Each outstanding
shares of common stock is, and all shares of common stock to be outstanding upon
completion of this offering will be, fully paid and nonassessable.
PREFERRED STOCK
The board of directors has the authority, within the limitations and
restrictions stated in the Amended and Restated Certification of Incorporation,
to authorize the issuance of shares of preferred stock, in one or more classes
or series, and to fix the rights, preferences, privileges and restrictions
thereof, including dividend rights, conversion rights, voting rights, terms of
redemption, liquidation preferences and the number of shares constituting any
series or the designation of such series. The issuance of preferred stock could
have the effect of decreasing the market price of the common stock and could
adversely affect the voting and other rights of the holders of common stock.
ANTI-TAKEOVER PROVISIONS
DELAWARE LAW
Upon the closing of this offering, we will be subject to the provisions of
Section 203 of the Delaware General Corporation Law (the "Anti-Takeover Law")
regulating corporate takeovers. The Anti-Takeover Law prevents certain Delaware
corporations, including those that are listed on the Nasdaq National Market,
from engaging, under certain circumstances, in a "business combination," which
includes a merger or sale of more than 10% of the corporation's assets, with any
"interested stockholder," a stockholder who owns 15% or more of the
corporation's outstanding voting stock, as well as affiliates and associates of
any such person, for three years following the date that such stockholder became
an "interested stockholder" unless:
- the transaction that resulted in the stockholders' becoming an "interested
stockholder" was approved by the board of directors prior to the date the
"interested stockholder" attained such status;
- upon consummation of the transaction that resulted in the stockholder's
becoming an "interested stockholder," the "interested stockholder" owned
at least 85% of the voting stock of the corporation outstanding at the
time the transaction commenced, excluding those shares owned by
(i) persons who are directors and also officers and (ii) employee stock
plans in which employee
62
<PAGE>
participants do not have the right to determine confidentially whether
shares held subject to the plan will be tendered in a tender or exchange
offer; or
- on or subsequent to such date the "business combination" is approved by
the board of directors and authorized at an annual or special meeting of
stockholders by the affirmative vote of at least two-thirds of the
outstanding voting stock that is not owned by the "interested
stockholder."
A Delaware corporation may "opt out" of the Anti-Takeover Law with an
express provision in its original certificate of incorporation or an express
provision in its certificate of incorporation or bylaws resulting from a
stockholders' amendment approved by at least a majority of the outstanding
voting shares. We have not "opted out" of the provisions of the Anti-Takeover
Law. This statute could prohibit or delay mergers or other takeover or
change-in-control attempts with respect to Ask Jeeves and, accordingly, may
discourage attempts to acquire us.
CHARTER AND BYLAW PROVISIONS
Our Amended and Restated Certificate of Incorporation and Bylaws include a
number of provisions that may have the effect of deterring or impeding hostile
takeovers or changes of control or management. These provisions include:
- our board of directors is classified into three classes of directors as
nearly equal in size as possible with staggered three year terms;
- the authority or our board to issue up to 5,000,000 shares of preferred
stock and to determine the price and the rights preeferences and
privileges of these shares, without stockholder approval;
- all stockholder action must be effected at a duly called meeting of
stockholders and not by written consent;
- special meetings of the stockholders may be called only by the Chairman of
the Board, the Chief Executive Officer or the board;
- the elimination of cumulative voting;
Such provisions may have the effect of delaying or preventing a change of
control.
Our Amended and Restated Certificae of Incorporation and Bylaws provide that
we will indemnify officers and directors against losses that they incur in
investigations and legal proceedings resulting from their servies to Ask Jeeves,
which may include service in connection with takeover defense measures. Such
provisions may have the effect of preventing changes in our management.
AGREEMENTS
In addition, our option agreements under the 1996 Equity Incentive Plan
provide that if a change of control of Ask Jeeves occurs prior to the first
anniversary of the vesting commencement date of an option, then the vesting
which would have occurred by such anniversary shall occur. After the first
anniversary of the date of grant, these option agreements provide that the
vesting of each option shall accelerate by six months upon a change of control.
Furthermore, offer letters with our executive officers provide for the payment
of severance and acceleration of options upon the termination of these executive
officers upon a change of control of Ask Jeeves. These provisions in our stock
option agreements and offer letters could have the effect of discouraging
potential takeover attempts.
REGISTRATION RIGHTS
We entered into the Amended and Restated Investor Rights Agreement with the
purchasers of our Series A and Series B preferred stock. Under this agreement,
these purchasers are entitled to rights relating to the registration of their
shares with the Securities and Exchange Commission. These rights have been
waived as to this offering by the holders of preferred stock. The registration
rights will survive this offering and terminate no later than three years after
the closing of our initial public offering July 7, 1999.
63
<PAGE>
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for our common stock is Boston Equiserve.
LISTING
Our common stock is listed on the Nasdaq National Market under the trading
symbol "ASKJ."
PLAN OF DISTRIBUTION
The shares of common stock offered by the selling stockholders, or by their
pledgees, transferees or other successors in interest, may be sold from time to
time to purchasers directly by any of the selling stockholders acting as
principal for its own account in one or more transactions at a fixed price,
which may be changed, or at varying prices determined at the time of sale or at
negotiated prices. Alternatively, any of the selling stockholders may from time
to time offer the common stock through underwriters, dealers or agents who may
receive compensation in the form of underwriting discounts, commissions or
concessions from the selling stockholders and/or the purchasers of shares for
whom they may act as agent. Sales may be made on the Nasdaq National Market or
in private transactions. In addition to sales of common stock pursuant to the
registration statement of which this prospectus is a part, the selling
stockholders may sell such common stock in compliance with Rule 144 promulgated
under the Securities Act of 1933, as amended (the "Act").
The selling stockholders and any agents, broker-dealers or underwriters that
participate in the distribution of the common stock offered hereby may be deemed
to be underwriters within the meaning of the Act, and any discounts, commissions
or concessions received by them and any profit on the resale of the common stock
purchased by them might be deemed to be underwriting discounts and commissions
under the Act.
In order to comply with the securities laws of certain states, if
applicable, the common stock may be sold in such jurisdictions only through
registered or licensed brokers or dealers. In addition, in certain states the
common stock may not be sold unless it has been registered or qualified for sale
or an exemption from registration or qualification requirements is available and
is complied with.
In connection with our acquisition of Net Effect Systems, Inc., we have
agreed to register the selling stockholders' common stock under applicable
federal and state securities laws under certain circumstances and at certain
times. We will pay substantially all of the expenses incident to the offering
and sale of the common stock to the public, other than commissions, concessions
and discounts of underwriters, dealers or agents. Such expenses (excluding such
commissions and discounts) are estimated to be $250,000. The agreements related
to the above referenced provide for cross-indemnification of the selling
stockholders the extent permitted by law, for losses, claims, damages,
liabilities and expenses arising, under certain circumstances, out of any
registration of the common stock.
LEGAL MATTERS
The validity of the issuance of the shares of common stock offered hereby
and certain other matters will be passed upon for us by Cooley Godward LLP, Palo
Alto, California. An investment partnership of attorneys of Cooley Godward
beneficially own an aggregate of 27,598 shares of common stock of Ask Jeeves.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our supplemental
consolidated financial statements at December 31, 1997 and 1998 and for the
period from June 13, 1996 (inception) through December 31, 1996 and for each of
the years in the two year period ended December 31, 1998, as set forth in their
report which as to years 1997 and 1998 are based in part on the report of
PricewaterhouseCoopers, LLP, independent auditors. We have included our
supplemental consolidated financial statements in the prospectus and elsewhere
in the registration statement in reliance on Ernst & Young LLP's report, given
on the authority of such firm as experts in accounting and auditing.
64
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 with respect to the shares of common stock offered by this
prospectus. This prospectus, which constitutes a part of the registration
statement, does not contain all of the information set forth in the registration
statement or the exhibits and schedules which are part of the registration
statement. For further information with respect to us and our common stock, see
the registration statement and the exhibits thereto. Statements contained in
this prospectus regarding the contents of any contract or any other document to
which reference is made are not necessarily complete, and, in each instance
where a copy of such contract or other document has been filed as an exhibit to
the registration statement, reference is made to the copy so filed, each such
statement being qualified in all respects by such reference. Any document we
file may be read and copied at the Public Reference Room of the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. The public may
obtain information on the operation of the Public Reference Room by calling the
Commission at 1-800-SEC-0330. Our filings with the Commission are also available
to the public from the Commission's Web site (http://www.sec.gov).
We are subject to the information and periodic reporting requirements of the
Securities Exchange Act and, accordingly, will file periodic reports, proxy
statements and other information with the Commission. Such periodic reports,
proxy statements and other information will be available for inspection and
copying at the Commission's public reference rooms, and the Web site of the
Commission referred to above.
Our principal executive offices are located at 5858 Horton Street, Suite
350, Emeryville, California 94608 and our telephone number is (510) 985-7400.
Our fiscal year ends on December 31. We maintain a worldwide web site at
HTTP://WWW.ASK.COM AND HTTP://WWW.ASK.COM.UK. The reference to our worldwide web
address does not constitute incorporation by reference of the information
contained at this site.
INCORPORATION BY REFERENCE
We have incorporated by reference the financial statements of Net Effect
Systems, Inc. contained in our current report on Form 8-K/A filed with the
Commission on January 20, 2000.
65
<PAGE>
ASK JEEVES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Ask Jeeves, Inc.
Report of Ernst & Young, LLP Independent Auditors........... F-2
Supplemental Consolidated Balance Sheets.................... F-3
Supplemental Consolidated Statements of Operations.......... F-4
Supplemental Consolidated Statements of Stockholders' Equity
(deficit)................................................. F-5
Supplemental Consolidated Statements of Cash Flow........... F-6
Notes to Supplemental Consolidated Financial Statements..... F-7
Unaudited Pro Forma Condensed Combined Financial Information
Overview.................................................... F-20
Unaudited Pro Forma Condensed Combined Balance Sheets....... F-21
Unaudited Pro Forma Condensed Combined Statements of
Operations................................................ F-22
Notes to Unaudited Pro Forma Condensed Combined Financial
Information............................................... F-24
Direct Hit Technologies, Inc.
Independent Auditor's Report................................ F-25
Balance Sheets.............................................. F-26
Statements of Operations.................................... F-27
Statements of Stockholders' Equity.......................... F-28
Statements of Cash Flows.................................... F-29
Notes to Financial Statements............................... F-30
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Ask Jeeves, Inc.
We have audited the accompanying supplemental consolidated balance sheets of
Ask Jeeves, Inc. (formed as a result of the consolidation of Ask Jeeves, Inc.
and Net Effect Systems, Inc.) as of December 31, 1997 and 1998, and the related
supplemental consolidated statements of operations, stockholders' equity
(deficit), and cash flows for the period from June 13, 1996 (inception) through
December 31, 1996 and for each of the two years ended December 31, 1998. The
supplemental consolidated financial statements give retroactive effect to the
merger of Ask Jeeves, Inc. and Net Effect Systems, Inc. on November 19, 1999,
which has been accounted for using the pooling of interests method as described
in the notes to the supplemental consolidated financial statements. These
supplemental financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these supplemental
consolidated financial statements based on our audits. We did not audit the
financial statements of Net Effect Systems, Inc. which statements reflect total
assets and net loss constituting 10% and 38%, respectively, for 1997 and 31% and
37%, respectively, for 1998 of the related supplemental consolidated financial
statement totals. Those statements were audited by other auditors whose report
has been furnished to us, and our opinion, insofar as it relates to data
included for Ask Jeeves, Inc. is based solely on the report of the other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
supplemental consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Ask
Jeeves, Inc. at December 31, 1997 and 1998, and the consolidated results of its
operations and its cash flows for the period from June 13, 1996 (inception)
through December 31, 1996 and for each of the two years ended December 31, 1998
after giving retroactive effect to the merger of Ask Jeeves, Inc. as described
in the notes to the supplemental consolidated financial statements, in
conformity with accounting principles generally accepted in the United States.
Walnut Creek, California
November 19, 1999
F-2
<PAGE>
ASK JEEVES, INC.
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ SEPTEMBER 30,
1997 1998 1999
---------- ----------- --------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................ $ 583,476 $ 8,465,851 $ 38,644,546
Short-term investments............................... -- -- 22,279,913
Restricted cash...................................... -- 45,000 --
Accounts receivable, net of allowance for doubtful
accounts of none at December 31, 1997 and $85,000
at December 31, 1998 and $338,283 September 30,
1999............................................... 24,698 293,940 6,896,232
Prepaid expenses and other current assets............ 3,500 109,992 2,382,733
---------- ----------- ------------
Total current assets........................... 611,674 8,914,783 70,203,424
Property and equipment, net............................ 66,981 878,930 5,813,714
Investments............................................ -- -- 1,997,913
Intangibles and other assets........................... -- 139,698 1,375,764
---------- ----------- ------------
Total assets................................... $ 678,655 $ 9,933,411 $ 79,390,815
========== =========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................... $ -- $ 828,090 $ 2,255,583
Accrued compensation and related expenses............ 33,665 253,062 4,036,868
Accrued marketing expenses........................... -- -- 1,119,825
Other accrued liabilities............................ 64,193 307,814 2,882,357
Deferred revenue..................................... 13,000 179,128 2,774,093
Current portion of capital lease obligations......... -- 28,220 660,609
---------- ----------- ------------
Total current liabilities...................... 110,858 1,596,314 13,729,335
Capital lease obligations, less current portion........ -- 45,945 1,966,462
Other liabilities...................................... -- -- 230,000
Commitments
Stockholders' equity:
Convertible preferred stock, no par value;
5,000,000 shares authorized; 54,250, 3,810,462 and
1,357,513 shares issued and outstanding at
December 31, 1997 and 1998 and September 30, 1999,
respectively....................................... 4,400 11,342,882 12,981,038
Common stock, no par value; 150,000,000 shares
authorized; 6,159,109, 11,586,173 and
27,040,735 shares issued and outstanding at
December 31, 1997 and 1998 and September 30, 1999,
respectively....................................... 1,395,833 5,064,053 89,045,983
Deferred stock compensation.......................... -- (476,984) (1,737,376)
Accumulated deficit.................................. (832,436) (7,638,799) (36,824,627)
---------- ----------- ------------
Total stockholders' equity..................... 567,797 8,291,152 63,465,018
---------- ----------- ------------
Total liabilities and stockholders' equity..... $ 678,655 $ 9,933,411 $ 79,390,815
========== =========== ============
</TABLE>
F-3
<PAGE>
F-3
ASK JEEVES, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM YEAR ENDED NINE MONTHS
JUNE 13, 1996 DECEMBER 31, ENDED SEPTEMBER 30,
(INCEPTION) THROUGH ----------------------- --------------------------
DECEMBER 31, 1996 1997 1998 1998 1999
------------------- --------- ----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Consumer....................... $ -- $ -- $ 577,159 $ 155,386 $ 7,201,116
Corporate...................... -- 22,603 223,239 83,050 3,923,736
--------- --------- ----------- ----------- ------------
Total revenues............... -- 22,603 800,398 238,436 11,124,852
Cost of revenues:
Consumer....................... -- -- 602,716 285,249 3,664,856
Corporate...................... -- -- 796,676 163,718 4,652,936
--------- --------- ----------- ----------- ------------
Total cost of revenues....... -- -- 1,399,392 448,967 8,317,792
Gross profit (loss).............. 22,603 (598,994) (210,531) 2,807,060
Operating expenses:
Product development............ 107,797 440,740 1,712,466 882,770 5,312,959
Sales and marketing............ -- 94,214 2,301,108 953,123 21,334,612
General and administrative..... -- 217,823 2,324,788 1,140,726 4,681,330
Amortization of deferred stock
compensation................. -- -- 29,010 -- 1,605,226
Write-off of in-process
technology................... -- -- -- -- 360,697
--------- --------- ----------- ----------- ------------
Total operating expenses..... 107,797 752,777 6,367,372 2,976,619 33,294,824
--------- --------- ----------- ----------- ------------
Operating loss................... (107,797) (730,174) (6,966,366) (3,187,150) (30,487,764)
Interest income.................. -- 5,535 165,741 86,726 1,381,806
Interest expense................. -- -- (5,738) (5,738) (79,870)
--------- --------- ----------- ----------- ------------
Net loss......................... $(107,797) $(724,639) $(6,806,363) $(3,106,162) $(29,185,828)
========= ========= =========== =========== ============
Basic and diluted net loss per
share.......................... $ (.08) $ (.21) $ (.74) $ (.39) $ (1.65)
========= ========= =========== =========== ============
Weighted average shares
outstanding used in computing
basic and diluted net loss per
share.......................... 1,295,342 3,394,397 9,162,624 8,021,526 17,659,875
========= ========= =========== =========== ============
</TABLE>
SEE ACCOMPANYING NOTES
F-4
<PAGE>
F-4
ASK JEEVES, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK
------------------------- ------------------------ DEFERRED ACCUMULATED
SHARES AMOUNT SHARES AMOUNT COMPENSATION DEFICIT
---------- ------------ ---------- ----------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1996.............. -- $ -- 2,400,000 $ 101,578 $ -- $ (107,797)
Contribution of capital by founders...... -- -- -- 86,536 -- --
Issuance of preferred stock for cash, net
of issuance costs...................... 54,250 4,400 -- --
Contribution of services by
stockholders........................... -- -- -- 105,000 -- --
Issuance of common stock for cash, net of
issuance costs......................... -- -- 3,184,111 1,068,436 -- --
Issuance of common stock upon exercise of
stock options.......................... -- -- 574,998 2,108 -- --
Issuance of stock options to
consultants............................ -- -- -- 15,510 -- --
Compensation charge related to grants of
stock options.......................... -- -- -- 16,665 -- --
Net loss and comprehensive loss.......... -- -- -- -- -- (724,639)
---------- ------------ ---------- ----------- ----------- ------------
Balances at December 31, 1997.............. 54,250 4,400 6,159,109 1,395,833 -- (832,436)
Issuance of preferred stock for cash net
of issuance costs...................... 3,756,212 11,338,482 -- -- -- --
Issuance of common stock options to
Stockholders in exchange for
Services............................... -- -- -- 300,000 -- --
Issuance of common stock for cash........ -- -- 5,141,892 2,747,500 -- --
Issuance of common stock upon exercise of
stock options.......................... -- -- 287,366 31,765 -- --
Issuance of common stock to
consultants............................ -- -- 16,300 7,521 -- --
Issuance of common stock warrants to
consultants............................ -- -- -- 23,780 -- --
Redemption of common stock............... -- -- (18,494) (4,995) --
Compensation charge related to grants of
stock options.......................... -- -- -- 56,655 -- --
Deferred stock compensation.............. -- -- -- 505,994 (505,994) --
Amortization of deferred stock
compensation........................... -- -- -- -- 29,010 --
Net loss and comprehensive loss.......... -- -- -- -- -- (6,806,363)
Classification adjustment................
---------- ------------ ---------- ----------- ----------- ------------
Balances at December 31, 1998.............. 3,810,462 11,342,882 11,586,173 5,064,053 (476,984) (7,638,799)
Issuance of preferred stock for cash, net
of issuance costs (unaudited).......... 7,032,741 34,173,357 -- -- -- --
Proceeds from issuance of common stock in
initial public offering, net of
issuance costs (unaudited)............. -- -- 3,450,000 43,042,219 -- --
Conversion of preferred stock to common
stock (unaudited)...................... (9,485,690) (32,535,201) 9,485,690 32,535,201 -- --
Issuances of common stock in connection
with purchases of businesses and assets
(unaudited)............................ -- -- 225,000 787,500 -- --
Issuance of common stock to consultants
(unaudited)............................ -- -- 2,535 19,047 -- --
Issuance of common stock upon exercise of
stock options (unaudited).............. -- -- 2,273,837 4,350,362 -- --
Issuance of common stock upon exercise of
warrants (unaudited)................... -- -- 17,500 12,733 -- --
Issuance of common stock warrants in
connection with equipment lease
financing (unaudited).................. -- -- -- 157,500 -- --
Compensation charge related to grants of
stock options (unaudited).............. -- -- -- 211,750 -- --
Deferred stock compensation
(unaudited)............................ -- -- -- 2,865,616 (2,865,616) --
Amortization of deferred stock
compensation (unaudited)............... -- -- -- -- 1,605,226 --
Net loss and comprehensive loss
(unaudited)............................ -- -- -- -- -- (29,185,828)
---------- ------------ ---------- ----------- ----------- ------------
Balances at September 30, 1999
(unaudited)................................ 1,357,513 $ 12,981,038 27,040,735 $89,045,981 $(1,737,374) $(36,824,627)
========== ============ ========== =========== =========== ============
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY (DEFICIT)
----------------
<S> <C>
Balances at December 31, 1996.............. $ (6,219)
Contribution of capital by founders...... 86,536
Issuance of preferred stock for cash, net
of issuance costs...................... 4,400
Contribution of services by
stockholders........................... 105,000
Issuance of common stock for cash, net of
issuance costs......................... 1,068,436
Issuance of common stock upon exercise of
stock options.......................... 2,108
Issuance of stock options to
consultants............................ 15,510
Compensation charge related to grants of
stock options.......................... 16,665
Net loss and comprehensive loss.......... (724,639)
------------
Balances at December 31, 1997.............. 567,797
Issuance of preferred stock for cash net
of issuance costs...................... 11,338,482
Issuance of common stock options to
Stockholders in exchange for
Services............................... 300,000
Issuance of common stock for cash........ 2,747,500
Issuance of common stock upon exercise of
stock options.......................... 31,765
Issuance of common stock to
consultants............................ 7,521
Issuance of common stock warrants to
consultants............................ 23,780
Redemption of common stock............... (4,995)
Compensation charge related to grants of
stock options.......................... 56,655
Deferred stock compensation.............. --
Amortization of deferred stock
compensation........................... 29,010
Net loss and comprehensive loss.......... (6,806,363)
Classification adjustment................ --
------------
Balances at December 31, 1998.............. 8,291,152
Issuance of preferred stock for cash, net
of issuance costs (unaudited).......... 34,173,357
Proceeds from issuance of common stock in
initial public offering, net of
issuance costs (unaudited)............. 43,042,219
Conversion of preferred stock to common
stock (unaudited)...................... --
Issuances of common stock in connection
with purchases of businesses and assets
(unaudited)............................ 787,500
Issuance of common stock to consultants
(unaudited)............................ 19,047
Issuance of common stock upon exercise of
stock options (unaudited).............. 4,350,362
Issuance of common stock upon exercise of
warrants (unaudited)................... 12,733
Issuance of common stock warrants in
connection with equipment lease
financing (unaudited).................. 157,500
Compensation charge related to grants of
stock options (unaudited).............. 211,750
Deferred stock compensation
(unaudited)............................ --
Amortization of deferred stock
compensation (unaudited)............... 1,605,226
Net loss and comprehensive loss
(unaudited)............................ (29,185,830)
------------
Balances at September 30, 1999
(unaudited)................................ $ 63,465,018
============
</TABLE>
SEE ACCOMPANYING NOTES
F-5
<PAGE>
ASK JEEVES, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM YEAR ENDED NINE MONTHS ENDED
JUNE 13, 1966 DECEMBER 31, SEPTEMBER 30,
(INCEPTION) THROUGH ----------------------- --------------------------
DECEMBER 31, 1996 1997 1998 1998 1999
------------------- --------- ----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss............................................. $(107,797) $(724,639) $(6,806,359) $(3,106,162) $(29,185,828)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization...................... -- 4,098 114,787 52,549 699,557
Loss on disposal of assets......................... -- -- -- -- 10,608
Issuance of stock options to consultants........... -- 15,510 -- -- 28,500
Issuance of common stock to consultants............ -- -- 7,521 7,521 19,047
Issuance of common stock warrants to consultants... -- -- 23,780 11,210 8,750
Contribution of assets and services by
stockholders..................................... 53,333 105,000 300,000 225,000 --
Compensation charge related to grants of stock
options.......................................... -- 16,665 56,655 38,312 174,500
Amortization of deferred stock compensation........ -- -- 29,010 -- 1,605,226
Amortization of intangibles........................ -- -- -- -- 199,150
Write-off of in-process technology................. -- -- -- -- 360,697
Changes in operating assets and liabilities:
Restricted cash.................................. -- -- (45,000) -- 45,000
Accounts receivable.............................. -- (24,698) (269,242) (283,962) (6,602,292)
Prepaid and other current assets................. -- (3,500) (106,492) (56,188) (2,115,241)
Accounts payable................................. -- -- 828,090 223,516 1,427,493
Accrued compensation and related expenses........ 6,219 27,446 219,397 (16,934) 3,783,806
Accrued marketing expenses....................... -- -- -- -- 1,119,825
Other accrued liabilities........................ -- 64,193 243,617 157,504 2,574,543
Deferred revenue................................. -- 13,000 166,128 216,149 2,594,965
Other liabilities................................ -- -- -- -- 230,000
--------- --------- ----------- ----------- ------------
Net cash used in operating activities................ (48,245) (506,925) (5,238,108) (2,531,485) (23,021,694)
INVESTING ACTIVITIES
Purchases of property and equipment.................. -- (71,079) (952,192) (415,982) (4,716,907)
Proceeds from disposal of assets..................... -- -- 114,632 -- --
Purchases of investments............................. -- -- -- -- (24,277,826)
Purchases of intangibles and other assets............ -- -- (139,698) (22,617) (1,008,413)
--------- --------- ----------- ----------- ------------
Net cash used in investing activities................ -- (71,079) (977,258) (438,599) (30,003,146)
FINANCING ACTIVITIES
Issuance of common stock............................. -- 1,070,544 2,779,265 2,754,261 47,405,314
Issuance of preferred stock.......................... -- 4,400 11,338,482 5,250,260 34,173,357
Redemption of common stock........................... -- -- (4,995) (4,995) --
Contribution of capital by founders.................. 48,245 86,536 -- -- --
Proceeds from capital lease financing................ -- -- -- -- 1,808,810
Repayment of capital lease obligations............... -- -- (15,011) (8,799) (183,946)
--------- --------- ----------- ----------- ------------
Net cash provided by financing activities............ 48,245 1,161,480 14,097,741 (7,990,727) 83,203,535
--------- --------- ----------- ----------- ------------
Increase in cash and cash equivalents................ -- 583,476 7,882,375 5,020,643 30,178,695
Cash and cash equivalents at beginning of period..... -- -- 583,476 583,476 8,465,851
--------- --------- ----------- ----------- ------------
Cash and cash equivalents at end of period........... $ -- $ 583,476 $ 8,465,851 $ 5,604,119 $ 38,644,546
========= ========= =========== =========== ============
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Capital lease obligations incurred................... $ -- $ -- $ 89,176 $ 89,176 $ 928,042
========= ========= =========== =========== ============
Common stock issued in connection with purchases of
businesses......................................... $ -- $ -- $ -- $ -- $ 787,500
========= ========= =========== =========== ============
Common stock warrants issued in connection with
equipment lease financing.......................... $ -- $ -- $ -- $ -- $ 157,500
========= ========= =========== =========== ============
Cash paid for interest............................... $ -- $ -- $ 5,738 $ 5,738 $ 53,620
========= ========= =========== =========== ============
</TABLE>
SEE ACCOMPANYING NOTES
F-6
<PAGE>
F-6
ASK JEEVES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 30, 1999 AND FOR THE NINE
MONTHS ENDED SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED.)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Ask Jeeves, Inc. ("Ask Jeeves" or the "Company") develops and deploys
natural-language Corporate and Consumer Service on the Internet for consumers
and companies. The Company's services provide users a fast, easy and intuitive
way to find information, products and services on the Internet. The Company
combines proprietary tools and technologies with editorial judgment to let users
ask questions in plain English and to direct them to a small selection of
relevant destinations on the Internet. The Company was incorporated in
California in June 1996 and reincorporated in Delaware in June 1999. The Company
was in the development stage in 1996 and 1997.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany transactions and balances
have been eliminated.
As more fully described in Note 10, the Company merged with Net Effect
Systems, Inc. ("Net Effect") in November 1999. This Merger has been accounted
for as a pooling of interests, and the historical financial statements of the
Company for all periods prior to the merger have been restated to include the
financial position, results of operations and cash flows of Net Effect.
UNAUDITED INTERIM FINANCIAL INFORMATION
The accompanying consolidated supplemental financial statements at
September 30, 1999 and for the nine months ended September 30, 1998 and 1999 are
unaudited but include all adjustments (consisting of normal recurring accruals)
which, in the opinion of management, are necessary for a fair statement of the
financial position and the operating results and cash flows for the interim date
and periods presented. Results for the interim periods ended September 30, 1998
and 1999 are not necessarily indicative of results for the entire fiscal year or
future periods.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ materially
from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all cash and highly liquid investments purchased with
an original maturity of less than three months at the date of purchase to be
cash equivalents. Substantially all of its cash and cash equivalents are
custodied with three major domestic financial institutions.
F-7
<PAGE>
ASK JEEVES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1999 AND FOR THE NINE
MONTHS ENDED SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED.)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVESTMENTS
The Company's investments comprise U.S., state, and municipal government
obligations and public corporate equity securities. Investments with less than
one year are classified as short-term. Nearly all investments are held in the
Company's name and custodied with two major financial institutions. The specific
identification method is used to determine the cost of securities disposed of,
with realized gains and losses reflected in other income and expense. At
September 30, 1999, all of the Company's investments were classified as
available for sale. The amortized cost of cash equivalents, short-term
investments and long-term investments at December 31, 1997 and 1998 and
September 30, 1999 approximated fair value and the amount of unrealized gains or
losses was not significant. The amount of realized gains or losses for the years
ended December 31, 1997 and 1998 and the nine months ended September 30, 1998
and 1999 were not significant.
CONCENTRATIONS OF CREDIT RISK AND CREDIT RISK EVALUATIONS
Financial instruments which subject the Company to concentrations of credit
risk consist primarily of cash and cash equivalents, investments and accounts
receivable. Cash and cash equivalents consist principally of demand deposit and
money market accounts held with domestic financial institutions with high credit
standing. Investments consist primarily of debt securities of domestic
municipalities and corporations with strong credit ratings. The Company has not
experienced any significant losses on its cash and cash equivalents or
investments.
The Company conducts business with companies in various industries primarily
in the United States. The Company performs ongoing credit evaluations of its
customers and generally does not require collateral. Allowances are maintained
for potential credit issues, and such losses to date have been within
management's expectations.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and depreciated using the
straight-line method over three to five years. Leasehold improvements are
amortized over the shorter of the useful life or the remaining lease term.
SOFTWARE DEVELOPMENT COSTS
The Company accounts for software development costs in accordance with
Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of
Computer Software to be Sold, Leased, or Otherwise Marketed" ("FAS 86") under
which certain software development costs incurred subsequent to the
establishment of technological feasibility are capitalized and amortized over
the estimated lives of the related products. Technological feasibility is
established upon completion of a working model. To date, costs incurred
subsequent to the establishment of technological feasibility have not been
significant, and all software development costs have been charged to product
development expense in the accompanying statements of operations.
F-8
<PAGE>
ASK JEEVES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1999 AND FOR THE NINE
MONTHS ENDED SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED.)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
The Company currently conducts business within two business units, the
Consumer and Corporate Service. The Consumer Service, Ask Jeeves, at Ask.com,
allows users to obtain answers to the most frequently asked questions online.
The Corporate Service helps companies provide a high quality, human-like online
interface for their customers.
Revenues from the Consumer Service consist primarily of three components:
(1) advertising revenues; (2) knowledge base licensing fees; and (3) electronic
commerce transaction fees. Advertising revenues are derived from short-term
advertising contracts. Under these contracts, the Company delivers impressions
(key word, category, run-of-site, and home page banners) to users over a
specified period of time for a fixed fee. Advertising rates, measured on a cost
per thousand impressions ("CPMs") basis, are dependent on whether the
impressions are for general rotation throughout the Company's Web site or for
targeted audiences and properties within specific areas of Ask Jeeves such as
the computer, entertainment, family, health, money, shopping and travel
channels. The Company recognizes revenues based upon actual impressions
delivered. The Consumer Service also licenses the Ask Jeeves knowledge base for
the purpose of enhancing Internet-wide searching to various search engine
companies. Revenues for these licensing arrangements are recognized ratably over
the contractual term, generally twelve months. Electronic commerce transaction
fees are derived from short-term electronic commerce merchant contracts,
generally a three to six month period. Revenues are generated and recognized on
a cost per click ("CPC") basis based on pre-determined rates established by the
Company.
Revenues from the Corporate Service consist of two components: knowledge
base customization and information service fees. The Company recognizes
knowledge base customization and information fees ratably over the contractual
term, generally twelve months. Payments received prior to delivery of the
knowledge base and information services are recorded as deferred revenue and
recognized ratably over the contractual term.
SIGNIFICANT CUSTOMERS
For the nine months ended September 30, 1999 no customer accounted for more
than ten percent of our total revenues, compared to the year ended December 31,
1998 when two customers each accounted for approximately 10% of our revenues.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company accounts for employee stock options using the intrinsic value
method in accordance with Accounting Principles Board Opinion No. 25 ("APB 25")
and makes the pro forma disclosures required by Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation"
("FAS 123").
ADVERTISING COSTS
The Company expenses the costs of advertising as incurred. Advertising
expense for the years ended December 31, 1997 and 1998 was $12,512 and
$1,100,873, respectively.
F-9
<PAGE>
ASK JEEVES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1999 AND FOR THE NINE
MONTHS ENDED SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED.)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Company uses the liability method to account for income taxes as
required by Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes" ("FAS 109"). Under this method, deferred tax assets and
liabilities are determined based on differences between financial reporting and
tax bases of assets and liabilities. Deferred tax assets and liabilities are
measured using enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
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.
The calculation of historical basic and diluted net loss per share is as
follows:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
PERIOD FROM JUNE 13, 1996 DECEMBER 31, SEPTEMBER 30,
(INCEPTION) THROUGH ------------------------ --------------------------
DECEMBER 31, 1996 1997 1998 1998 1999
-------------------------- ---------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Net loss.............. $ (107,797) $ (724,639) $(6,806,359) $(3,106,162) $(29,185,828)
========== ========== =========== =========== ============
Weighted average
shares of common
stock outstanding
used in computing
basic and diluted
net per loss
share............... 1,295,342 3,394,397 9,162,624 8,021,526 17,659,875
========== ========== =========== =========== ============
Basic and diluted net
loss per share...... $ (.08) $ (.21) $ (.74) $ (.39) $ (1.65)
========== ========== =========== =========== ============
</TABLE>
OTHER COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, "Reportable Comprehensive
Income" ("FAS 130") which establishes standards for reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. There is no difference in the Company's historical net
losses as reported and the comprehensive net losses under the provisions of FAS
130 for all periods presented. Accordingly, the adoption of FAS 130 had no
effect on the Company's reported results of operations.
F-10
<PAGE>
ASK JEEVES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1999 AND FOR THE NINE
MONTHS ENDED SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED.)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
BUSINESS SEGMENTS
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
("FAS 131") which establishes standards for reporting information about
operating segments in annual financial statements. It also establishes standards
for related disclosures about products and services, geographic areas and major
customers. For management purposes, the Company is divided into two business
units, the Consumer Service and the Corporate Service. Each of these groups has
a vice president who reports directly to the Chief Executive Officer ("CEO"),
who is the Chief Operating Decision Maker as defined by FAS 131. Results of
operations for these business units which are provided to the CEO include only
revenue and gross profit (loss) information which is disclosed in the statement
of operations in accordance with FAS 131. The majority of the Company's
operating expenses are not allocated to the business units, but instead are
treated as corporate expenses.
COMPUTER SOFTWARE
In March 1998, the American Institute of Certified Public Accountants issued
SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use" ("SOP 98-1"). SOP 98-1 requires that entities capitalize
certain costs related to internal use software once certain criteria have been
met. The Company is required to implement SOP 98-1 for the year ending
December 31, 1999. Adoption of SOP 98-1 is expected to have no material impact
on the Company's financial condition or results of operations.
RECLASSIFICATIONS
Certain prior year balances have been restated to conform with current year
presentation.
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
-------------------- --------------
1997 1998 1999
-------- --------- --------------
(UNAUDITED)
<S> <C> <C> <C>
Equipment................................... $71,079 $ 844,398 $5,345,796
Furniture and fixtures...................... -- 43,289 719,648
Leasehold improvements...................... -- 110,128 565,300
------- --------- ----------
71,079 997,818 6,630,744
Less accumulated depreciation and
amortization.............................. (4,098) (118,885) (817,030)
------- --------- ----------
Property and equipment, net................. $66,981 $ 878,930 $5,813,714
======= ========= ==========
</TABLE>
Cost of and accumulated amortization related to assets under capital lease
obligations at December 31, 1998 were $89,176 and $16,801, respectively. No
assets were acquired under capital lease arrangements in 1997.
F-11
<PAGE>
`
ASK JEEVES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. LEASE COMMITMENTS
The Company has entered into operating and capital leases for certain office
space and equipment which contain certain renewal options.
Capital lease obligations for equipment represent the present value of
future lease payments under the agreements. The Company has options to purchase
the leased assets at the end of the lease terms.
The future minimum lease payments under all non-cancellable leases with
terms in excess of one year are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
---------- -----------
<S> <C> <C>
Years ending December 31:
1999................................................ $ 36,939 $ 567,560
2000................................................ 36,939 576,894
2001................................................ 10,651 344,031
2002................................................ -- 199,143
2003................................................ -- 199,143
Thereafter.......................................... 99,572
---------- -----------
Total minimum lease payments........................ 84,529 $ 1,986,343
===========
Less interest....................................... (10,364)
----------
Present value of minimum lease payments............. 74,165
Less current portion of capital lease obligations... (28,220)
----------
Capital lease obligations, less current portion..... $ 45,945
==========
</TABLE>
Rent expense was none, $4,157 and $128,031 for the period from June 13, 1996
(inception) through December 31, 1996 and the years ended December 31, 1997 and
1998, respectively.
4. LINE OF CREDIT
The Company has a credit agreement with Imperial Bank in the amount of
$1 million. As of September 30, 1999 there were no amounts outstanding under the
Company's line of credit.
5. INCOME TAXES
There has been no provision for U.S. federal or state income taxes for any
period as the Company has incurred operating losses in all periods.
F-12
<PAGE>
ASK JEEVES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1997 1998
--------- -----------
<S> <C> <C>
Net operating loss carryforwards..................... $ 110,758 $ 1,137,723
Capitalized research and development costs........... -- 478,751
Accrued expenses..................................... -- 352,638
Other................................................ -- 25,950
--------- -----------
Total deferred tax assets............................ $ 110,758 $ 1,995,062
Valuation allowance.................................. (110,758) (1,995,062)
--------- -----------
Net deferred tax assets.............................. $ -- $ --
========= ===========
</TABLE>
A valuation allowance has been established and, accordingly, no benefit has
been recognized for the Company's net operating losses and other deferred tax
assets. The net valuation allowance increased by $1,884,000 during the year
ended December 31, 1998. The Company believes that, based on a number of
factors, the available objective evidence creates sufficient uncertainty
regarding the realizability of the deferred tax assets such that a full
valuation allowance has been recorded. These factors include the Company's
history of net losses since its inception and expected near-term future losses.
The Company will continue to assess the realizability of the deferred tax assets
based on actual and forecasted operating results.
At December 31, 1997 and 1998, the Company has net operating loss
carryforwards for federal income tax purposes of approximately $277,000 and
$2,848,000 respectively, which expire in the year 2017 and 2018, respectively.
Utilization of the Company's net operating loss may be subject to a
substantial annual limitation due to the ownership change limitations provided
by the Internal Revenue Code and similar state provisions. Such an annual
limitation could result in the expiration of the net operating loss before
utilization.
6. STOCKHOLDERS' EQUITY
PREFERRED STOCK
As a result of the merger with Net Effect Systems, Inc., the Company assumed
the outstanding convertible preferred stock of Net Effect Systems, Inc. The
convertible preferred stock outstanding converted to 1,357,513 shares of common
stock upon the merger in November 1999.
STOCK COMPENSATION
The Company recorded a compensation charge of $16,665 and $56,655 during the
years ended December 31, 1997 and 1998 for the difference between the exercise
price and the deemed fair value of certain stock options granted by the Company.
These amounts were expensed immediately as the options vested at the grant date.
In April 1998, the Company issued 16,300 shares of common stock to an
independent contractor for services performed. The Company imputed a value for
the services of $13,221, of which $5,700 was paid in cash, and the remainder was
allocated to the shares issued.
F-13
<PAGE>
ASK JEEVES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. STOCKHOLDERS' EQUITY (CONTINUED)
The Company recorded deferred stock compensation of none and $505,994 during
the years ended December 31, 1997, 1998, respectively, representing the
difference between the exercise price and the deemed fair value of certain of
the Company's stock options granted to employees. These amounts are being
amortized by charges to operations on a graded vesting method over the vesting
periods of the individual stock options. Such amortization amounted to none and
$29,010 for the year ended December 31, 1997, 1998, respectively.
WARRANTS
In connection with the issuance of common stock in August, September and
October 1997, the Company issued to purchasers of common stock a warrant
exercisable into one share of common stock for each two shares of common stock
purchased. In total, the Company issued warrants exercisable into 1,191,846
shares of common stock at a per share exercise price of $.24. In April and
June 1998, all of the Company's outstanding warrants were exercised and the
Company issued 1,137,672 shares of common stock for cash proceeds of $262,500.
During 1998, the Company issued warrants exercisable into 39,000 shares of
common stock to various contractors for services performed. The warrants are
exercisable at any time into shares of common stock at per share exercise prices
ranging from $.52 to $.73. The warrants expire on various dates between May and
December 2003. The Company determined the fair value of the warrants to be
$23,780 using the Black Scholes valuation model and recorded a charge to
operations over the consulting period, which concluded in 1998.
OPTIONS ISSUED TO CONSULTANTS
The Company granted options to purchase 70,500 shares of common stock to
consultants at an exercise price of $.01 in September 1997. These options were
granted in exchange for consulting services provided. The Company valued these
options using the Black Scholes valuation model. Amounts recorded totaling
$15,510 were charged to operations over the consulting period, which concluded
in 1997.
7. EMPLOYEE BENEFITS PLAN
STOCK OPTION PLAN
Under the Company's 1996 Equity Incentive Plan ("1996 Plan"), 5,357,585
shares of common stock are reserved for the issuance of incentive stock options
("ISO's) or non-statutory stock options ("NSOs") t employees, officers,
directors, and consultants. The ISOs may be granted at a price per share not
less than the fair market value on the date of the grant. The NSOs may be
granted at a price per share not less than 85% of the fair market value at the
date of grant. Options granted under the 1996 Plan are exercisable over a
maximum term of 10 years from the date of grant and generally vest over periods
of up to 4 years. Options granted under the 1996 Plan contain an accelerated
vesting feature based upon a change in control of the Company.
F-14
<PAGE>
ASK JEEVES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. EMPLOYEE BENEFITS PLAN (CONTINUED)
A summary of stock option activity is set forth below:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------
WEIGHTED-AVERAGE
EXERCISE PRICE
PER
SHARES SHARE
----------- ----------------
<S> <C> <C>
Granted..................................................... 790,001 $ .01
----------- -----
Outstanding at December 31, 1996............................ 790,001 .01
Granted..................................................... 264,249 .12
Exercised................................................... (574,997) .00
----------- -----
Outstanding at December 31, 1997............................ 479,253 .08
Granted..................................................... 2,971,916 .59
Canceled.................................................... (22,500) .60
Exercised................................................... (287,366) .12
----------- -----
Outstanding at December 31, 1998............................ 3,141,303 .55
Granted (unaudited)......................................... 4,593,620 8.04
Canceled (unaudited)........................................ (187,188) 5.85
Exercised (unaudited)....................................... (2,268,127) 1.41
----------- -----
Outstanding at September 30, 1999 (unaudited)............... 5,279,608 $5.93
=========== =====
Vested and exercisable at September 30, 1999 (unaudited).... 483,476 $ .86
=========== =====
</TABLE>
The weighted-average remaining contractual life of options outstanding at
December 31, 1997, and 1998 was 9.3 years, and 9.4 years, respectively.
PRO FORMA DISCLOSURES OF THE EFFECT OF STOCK-BASED COMPENSATION
Pro forma information regarding the results of operations and net loss per
share is required by FAS 123, which also requires that the information be
determined as if the Company had accounted for its employee stock options using
the fair value method of FAS 123. The fair value of each option granted is
estimated on the date of grant using the Black Scholes valuation model. The
risk-free interest rate for 1997 and 1998 was 6.0% and 6.5%, respectively. The
expected life of options granted in the years ended December 31, 1997 and 1998
was 5 years. No dividend and a near zero volatility factor were used.
The Company has elected to follow APB 25 and related interpretations in
accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FAS 123 requires the use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, when the exercise price of the Company's employee
stock options equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized.
The option valuations models were developed for use in estimating the fair
value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected life of the option. Because the
Company's employee stock options have characteristics significantly different
from those of traded options and because changes in the subjective input
assumptions can materially affect the fair value of estimate, in
F-15
<PAGE>
ASK JEEVES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. EMPLOYEE BENEFITS PLAN (CONTINUED)
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
Had compensation cost for the Company's stock-based compensation plans been
determined using the fair value at the grant dates for awards under those plans
calculated using the minimum value method of FAS 123, the Company's net loss and
basic and diluted net loss per share would have been increased to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1997 1998
---------- ------------
<S> <C> <C>
Pro forma net loss................................... $(753,773) $(7,179,799)
Pro forma basic and diluted net loss per share....... $ (.22) $ (.78)
</TABLE>
The weighted-average grant-date fair value of options granted, which is the
value assigned to the options under FAS 123, was $0.28 and $0.31 for grants made
during years ended December 31, 1997 and 1998, respectively.
The pro forma impact of options on the net loss for the years ended
December 31, 1997 and 1998 is not representative of the effects on net income
(loss) for future years, as future years will include the effects of additional
years of stock option grants.
8. RELATED PARTY TRANSACTIONS
Certain members of the Company's Board of Directors are also owners of a
related entity to which the Company paid facilities fees for rent, utilities,
and administrative services of approximately $4,000 and $109,000 for the years
ended December 31, 1997 and 1998, respectively. For the years ended
December 31, 1997, 1998 and 1999, these directors served in management positions
of the Company and received common stock options as compensation. The Company
determined the fair value of the services contributed to be $105,000, and
$300,000 for the years ended December 31, 1997, 1998, respectively.
All of the employees of the Company were paid from the Company's inception
until August 1997 by a separate related entity. The contributions provided by
this entity have been recorded as a capital contribution and as a charge to
operations of $86,536 in the year ended December 31, 1997. In 1997, the Company
also purchased approximately $22,000 of computer and office equipment and
furniture from this related entity. In 1998, the related entity paid certain
expenses totaling $80,440 on the Company's behalf. The Company reimbursed the
related entity for all amounts paid on its behalf during 1998.
9. LEGAL PROCEEDINGS
The Company is also subject to 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 will have a material
adverse effect on the Company's consolidated financial position, results of
operations, or cash flows.
On July 7, 1999, IP Learn LLC filed a complaint against the Company in the
United States District Court for the Northern District of California, as case
number 99-3352 SBA. The complaint, which was amended by the plaintiff on
August 23, 1999, alleges that certain aspects of the Ask Jeeves technology
infringe one or more patents alleged to be held by the plaintiff. The Company
has answered the complaint
F-16
<PAGE>
ASK JEEVES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. LEGAL PROCEEDINGS (CONTINUED)
and discovery has begun. [Additionally, on December 16, 1999, Patrick H. Winston
and Boris Katz filed a complaint against Ask Jeeves in the United States
District Court for the District of Massachusetts, as case number 99CV12584MLW.
The complaint alleges that the Company's technology infringes two patents
alleged to be held by the plaintiffs. The Company has not yet answered the
complaint. Ask Jeeves does not believe that either lawsuit is meritorious and is
vigorously defending each of the cases. However, the outcome of litigation is
difficult to predict and could result in a judgement against the Company.
10. SUBSEQUENT EVENTS
DEFINED CONTRIBUTION PLAN
Effective January 1, 1999, the Company adopted a defined contribution
retirement plan under Section 401(k) of the Internal Revenue Code which covers
substantially all employees. Eligible employees may contribute amounts to the
plan, via payroll withholding, subject to certain limitations. The Company does
not match contributions by plan participants.
STOCK SPLIT
On April, 16, 1999, the Board of Directors approved, a 1 for 2 reverse stock
split of issued and outstanding common and preferred stock. All common and
preferred share and per share amounts in the accompanying financial statements
have been retroactively adjusted to reflect the stock split.
1999 EQUITY INCENTIVE PLAN
In April 1999, the Board of Directors adopted the 1999 Equity Incentive Plan
(the "1999 Plan"). The Company has reserved a total of 2,125,000 shares of
common stock for the issuance of ISOs or NSOs to employees, officers, directors,
or consultants under the 1999 Plan.
1999 EMPLOYEE STOCK PURCHASE PLAN
The Company's 1999 Employee Stock Purchase Plan was adopted by the Board of
Directors and approved by the stockholders in April 1999. The Company has
reserved a total of 400,000 shares of common stock for issuance under the plan.
Eligible employees may purchase common stock at 85% of the lesser of the fair
market value of the Company's common stock on the first day of the applicable
one year offering period or the last day of the applicable six month purchase
period.
ASSET PURCHASE
In April 1999, the Company entered into an asset purchase agreement and a
license agreement with Lumina Decision Systems, Inc. ("Lumina") for the
acquisition of certain technology of Lumina in exchange for total consideration
of $1,537,500 which is comprised of cash of $700,000, 225,000 shares of the
Company's common stock valued at $3.50 per share and $50,000 in acquisition
costs. The Company allocated $1,176,803 of the purchase price to core technology
and $360,697 to in-process technology. The core technology will be amortized
over a three year period. The in-process technology will be written off as a
one-time charge in the second quarter of 1999. In addition, approximately
107,500 shares of the shares issued are to be held in escrow for a two year
period.
F-17
<PAGE>
ASK JEEVES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. SUBSEQUENT EVENTS (CONTINUED)
INITIAL PUBLIC OFFERING
On June 30, 1999, the Company completed an initial public offering of
3,450,000 shares of common stock at a purchase price of $14.00 per share. Net
proceeds to the Company aggregated approximately $43.0 million. In connection
with the offering, all of the preferred stock outstanding automatically
converted into 9,485,690 shares of common stock. The Company's Board of
Directors and stockholders also approved an amendment to the Company's Articles
of Incorporation to increase the total number of shares which the Company is
authorized to issue to 155,000,000 shares, of which 150,000,000 is common stock
and 5,000,000 is preferred stock.
1999 NON-OFFICER EQUITY INCENTIVE PLAN
The Company's 1999 Non-Officer Equity Incentive Plan was adopted by the
Board of Directors in October 1999. The Company has reserved a total of
2,000,000 shares of common stock authorized for issuance under the 1999
Non-Officer Incentive Plan, which provides for the grant of non-statutory stock
options, restricted stock purchase awards and stock bonuses to employees and
consultants of Ask Jeeves and its affiliates who are not officers or member of
the Board of Directors of Ask Jeeves or any of its affiliates.
BUSINESS COMBINATIONS
In November 1999, Ask Jeeves entered into an asset purchase agreement with
Excellerate, LLC, for the acquisition of certain technology and computer
equipment for cash in the amount of $625,000 and 5,875 shares of Ask Jeeves
stock. The number of shares issued to Excellerate was calculated using a 10-day
average closing price for the period immediately preceding the date of the
signing of the definitive agreement valued at $106.00 per share and $20,000 in
acquisition costs. Approximately $612,300 of the purchase price was allocated to
core technology and $183,000 to in-process technology. The core technology will
be amortized over a three year period. The in-process technology was written off
as a one-time charge in the fourth quarter of 1999. In addition, 587 shares of
the shares issued are to be held in escrow for a one year period subject to a
right of repurchase by the Company.
The Company acquired a developed search engine, the next generation search
engine, one employee, and certain computer equipment and software from
Excellerate, LLC. The current search engine has reached technological
feasibility and has been classified as core technology. However, ongoing
significant development efforts to add new features will substantially enhance
the functionality and value of technology. The next generation search engine
technology has yet to reach technological feasibility and therefore, this
product is classified as in-process technology. This acquisition provides
technology and expertise that will complement our existing technology. The value
of the purchased in-process technology was determined by estimating the
projected net cash flows related to such products, including costs to complete
the development of the technology and the future revenues to be earned upon
commercialization of the products. These cash flows were discounted back to
their net present value. The resulting projected net cash flows from such
products were based on our estimates of revenues and operating profits related
to such products. These estimates were based on several assumptions, including
the use of a discount rate of 30% for purchased in-process technology, which was
calculated based on the weighted average cost of capital, adjusted for the
technology risk asssociated with the purchased in-process technology, which was
considered to be significant due to the rapid pace of technological change in
the Internet industry. For projected cash flows attributable to existing
technology, a discount rate of 25% was used, which reflects the
F-18
<PAGE>
ASK JEEVES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. SUBSEQUENT EVENTS (CONTINUED)
weighted average cost of capital, adjusted for the technology risk associated
with these technologies. The Company's analysis considered only future operating
results of the existing and in-process technology on a stand-alone basis and did
not take into consideration any potential increased revenue or operating
efficiency that may occur post-acquisition.
POOLING OF INTEREST COMBINATIONS
In November 1999, Ask Jeeves, Inc. entered into an Agreement and Plan of
Merger (the "Agreement") with Net Effect in a stock-for-stock transaction to be
accounted for as a pooling of interests. Pursuant to the Agreement, all
outstanding shares of Net Effect were converted into 1,631,880 million shares of
Ask Jeeves common stock, and options to purchase Net Effect Common Stock were
converted into options to purchase 497,342 shares of Ask Jeeves, Inc. Common
Stock.
Pursuant to the acquisition of Net Effect, the Company assumed the 1992
Stock Plan of Net Effect, including options to purchase 497,353 shares of common
stock with exercise prices ranging from $0.81 to $103.00.
11. BUSINESS COMBINATIONS (UNAUDITED)
PENDING PURCHASE COMBINATIONS
On January 24, 2000, the Company announced a definitive agreement to
purchase Direct Hit Technologies, Inc. ("Direct Hit"). Direct Hit provides
search and navigation services on the Internet. Consideration for this
transaction will be 4,750,000 shares of the Company's common stock and 3,000
shares issuable upon exercise of outstanding Direct Hit Technologies options
assumed as part of the merger.
On January 26, 2000, the Company entered into an Agreement and Plan of
Merger to purchase Evergreen Project, LLC. Evergreen produces web-based video
programs and workshops to assist teachers in integrating the Internet and
computer applications into the curriculum. Consideration for this transaction is
$3.9 million of which $1.95 million is payable in cash and the balance in shares
of Ask Jeeves, Inc. common stock.
JOINT VENTURE
On December 6, 1999, Ask Jeeves announced that it has entered into a 50/50
joint venture to create Ask Jeeves U.K. Ask Jeeves has partnered with Carlton
Communications Plc and Granada Media Group, the two largest commercial
television companies in the United Kingdom. Both Carlton and Granada will
contribute $31.25 million in cash and advertising to fund Ask.com. The site will
be designed to meet the needs and interests of users in Britain and the Republic
of Ireland.
F-19
<PAGE>
ASK JEEVES, INC.
UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL INFORMATION
The following unaudited pro forma condensed combined financial information
for Ask Jeeves, Inc. gives effect to the merger of Direct Hit
Technologies, Inc., Inc. into Ask Jeeves, Inc. The merger of Direct Hit
Technologies, Inc. into Ask Jeeves, Inc. is based on a preliminary allocation of
the total purchase cost. The historical financial information has been derived
from the respective historical financial statements of Ask Jeeves, Inc. (as
adjusted for the Net Effect acquisition) and Direct Hit Technologies, Inc. and
should be read in conjunction with those financial statements
The unaudited pro forma condensed combined balance sheets assumes the Direct
Hit Technologies, Inc. merger took place as of September 30, 1999 and allocates
the total purchase cost of the fair values of assets and liabilities of Direct
Hit Technologies, Inc. based on a preliminary valuation.
The unaudited pro forma condensed combined statements of operations combine
historical statements of operations for Ask Jeeves, Inc. and Direct Hit
Technologies, Inc. for the year ended December 31, 1998, and for the nine months
ended September 30, 1999, and gives effect to the merger, including the
amortization of goodwill and other intangible assets, as if they had occurred on
January 1, 1998, and January 1, 1999, respectively.
The total estimated purchase consideration of the Direct Hit
Technologies, Inc. merger has been allocated on a preliminary basis to assets
and liabilities based on management's estimates of its fair value with the
excess consideration over the net assets acquired allocated to goodwill. This
allocation is subject to change pending a final analysis of the total purchase
consideration and the fair value of the assets acquired and liabilities assumed.
The impact of these changes could be material. The following items could affect
the final purchase price allocation at the date the transaction is consummated:
(A) Direct Hit Technologies, Inc. balance sheet (B) the stock option activity of
Direct Hit Technologies, Inc.; (C) finalization of the valuation of acquired
technology; and (D) the finalization of the integration plan.
The unaudited pro forma condensed combined 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 transactions had
been consummated at the dates indicated, nor is it necessarily indicative of
future operating results or financial position of the combined companies.
F-20
<PAGE>
ASK JEEVES, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
-----------------------------------------------------------------------
PRO FORMA PRO FORMA
BUSINESS AS OF
COMBINATIONS SEPTEMBER
ASK JEEVES DIRECT HIT COMBINED ADJUSTMENTS 30, 1999
------------ ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents.............. $ 38,644,546 $16,427,389 $ 55,071,935 -- $ 55,071,935
Short-term investments..... 22,279,913 10,059,351 32,339,264 -- 32,339,264
Accounts receivable, net... 6,896,232 357,238 7,253,470 -- 7,253,470
Prepaid expenses and other
current assets........... 2,382,733 37,311 2,420,044 -- 2,420,044
------------ ----------- ------------ ------------ ------------
Total current assets... 70,203,424 26,881,289 97,084,713 97,084,713
Property and equipment,
net........................ 5,813,714 991,475 6,805,189 -- 5,813,714
Intangibles, net and other
long-term assets........... 1,997,913 26,610 2,024,523 493,661,256(2) 495,685,779
Restricted cash.............. -- 150,000 150,000 -- 150,000
Long-term investments........ 1,375,764 -- 1,375,764 -- 1,375,764
------------ ----------- ------------ ------------ ------------
Total assets........... $ 79,390,815 $28,049,374 $107,440,189 $493,661,256 $601,101,445
============ =========== ============ ============ ============
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Accounts payable........... $ 2,255,583 $ 150,377 2,405,960 10,614,229(1) $ 13,020,189
Accrued compensation and
related expenses......... 4,036,868 357,176 4,394,044 -- 4,394,044
Accrued market expenses.... 1,119,825 -- 1,119,825 -- 1,119,825
Other accrued
liabilities.............. 2,882,357 260,013 3,142,370 -- 3,142,370
Deferred revenue........... 2,774,093 245,135 3,019,228 -- 3,019,228
Current portion of capital
lease obligations........ 660,609 -- 660,609 -- 660,609
------------ ----------- ------------ ------------ ------------
Total current
liabilities.......... 13,729,335 1,012,701 14,742,036 10,614,229 25,356,265
Capital lease obligations,
less current portion....... 1,966,462 -- 1,966,462 -- 1,966,462
Other liabilities............ 230,000 -- 230,000 -- 230,000
Commitments
Stockholders' equity:
Convertible preferred
stock.................... 12,981,038 29,650,912 42,631,950 (29,650,912)(3) 12,981,038
Common stock............... 89,045,983 9,722 89,055,705 510,073,978 (3) 599,129,683
Additional paid-in
capital.................. -- 5,602,058 5,602,058 (5,602,058)(3) --
Deferred stock
compensation............. (1,737,376) (4,504,145) (6,241,521) 4,504,145 (3) (1,737,376)
Accumulated deficit........ (36,824,627) (3,721,874) (40,546,501) 3,721,874 (3) (36,824,627)
------------ ----------- ------------ ------------ ------------
Total stockholders'
equity............... 63,465,018 27,036,673 90,501,691 483,047,027 573,548,718
------------ ----------- ------------ ------------ ------------
Total liabilities and
stockholders'
equity............... $ 79,390,815 $28,049,374 $107,440,189 $493,661,256 $601,101,445
============ =========== ============ ============ ============
</TABLE>
See accompanying notes to the Unaudited Pro Forma Condensed Combined Financial
Information.
F-21
<PAGE>
ASK JEEVES, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1999
------------------------------------------------------------------------
PRO FORMA
FOR THE
PRO FORMA NINE MONTHS
BUSINESS ENDED
COMBINATIONS SEPTEMBER 30,
ASK JEEVES DIRECT HIT COMBINED ADJUSTMENTS 1999
------------ ----------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Revenues:
Consumer...................... $ 7,201,116 $ 862,203 $ 8,063,319 -- $ 8,063,319
Corporate..................... 3,923,736 -- 3,923,736 -- 3,923,736
------------ ----------- ------------ ------------ -------------
Total revenues.................. 11,124,852 862,203 11,987,055 -- 11,987,055
Cost of revenues:
Consumer...................... 3,664,856 360,524 4,025,380 -- 4,025,380
Corporate..................... 4,652,936 -- 4,652,936 -- 4,652,936
------------ ----------- ------------ ------------ -------------
Total cost of revenues.......... 8,317,792 360,524 8,678,316 -- 8,678,316
------------ ----------- ------------ ------------ -------------
Gross profit (loss)............. 2,807,060 501,679 3,308,739 -- 3,308,739
Operating expenses:
Product development........... 5,312,959 1,502,224 6,815,183 -- 6,815,183
Sales and marketing........... 21,334,612 948,123 22,282,735 -- 22,282,735
General and administrative.... 4,815,998 412,855 5,228,853 -- 5,228,853
Amortization of deferred stock
compensation................ 1,470,558 826,927 2,297,485 -- 2,297,485
Write-off of in-process
technology.................. 360,697 -- 360,697 -- 360,697
Amortization of goodwill and
other intangible assets..... -- -- -- 92,561,486(A) 92,561,486
------------ ----------- ------------ ------------ -------------
Total operating expenses........ 33,294,824 3,690,129 36,984,953 92,561,486
------------ ----------- ------------ ------------ -------------
Operating loss.................. (30,487,764) (3,188,450) (33,676,214) 92,561,486 (126,237,700)
Interest income, net............ 1,301,936 258,816 1,560,752 -- 1,560,752
------------ ----------- ------------ ------------ -------------
Net loss........................ $(29,185,828) $(2,929,634) $(32,115,462) $(92,561,486) $(124,676,948)
============ =========== ============ ============ =============
Pro forma basic and diluted net
loss per share................ $ (1.65) $ (0.26) (B) $ (5.56)
============ =========== =============
Weighted average shares
outstanding used in computing
pro forma basic and diluted
pro forma net loss per
share......................... 17,659,875 11,091,546 (B) 22,409,875
============ =========== =============
</TABLE>
See accompanying notes to the Unaudited Pro Forma Condensed Combined Financial
Information.
F-22
<PAGE>
ASK JEEVES, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
-----------------------------------------------------------------------
PRO FORMA PRO FORMA FOR
BUSINESS THE YEAR ENDED
COMBINATIONS DECEMBER 31,
ASK JEEVES DIRECT HIT COMBINED ADJUSTMENTS 1998
----------- ---------- ----------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Revenues:
Consumer.................. $ 577,159 $ 175,420 $ 752,579 -- $ 752,579
Corporate................. 223,239 -- 223,239 -- 223,239
----------- --------- ----------- ------------- -------------
Total revenues.............. 800,398 175,420 975,818 975,818 975,818
Cost of revenues:
Consumer.................. 602,716 51,595 654,311 -- 654,311
Corporate................. 796,676 -- 796,676 -- 796,676
----------- --------- ----------- ------------- -------------
Total cost of revenues...... 1,399,392 51,595 1,450,987 -- 1,450,987
----------- --------- ----------- ------------- -------------
Gross profit (loss)......... (598,994) 123,825 (475,169) -- (475,169)
Operating expenses:
Product development....... 1,712,466 471,598 2,184,064 -- 2,184,064
Sales and marketing....... 2,301,108 90,332 2,391,440 -- 2,391,440
General and
administrative.......... 2,324,784 150,260 2,474,244 -- 2,474,244
Amortization of deferred
stock compensation...... 29,010 231,775 260,785 -- 260,785
Amortization of goodwill
and other intangible
assets.................. -- -- -- 123,415,314(A) 123,415,314
----------- --------- ----------- ------------- -------------
Total operating expenses.... 6,367,368 943,965 7,310,533 123,415,314 130,725,847
----------- --------- ----------- ------------- -------------
Operating loss.............. (6,966,362) (820,140) (7,785,702) (123,415,314) (131,201,016)
Interest income, net........ 160,003 27,900 187,903 -- 187,903
----------- --------- ----------- ------------- -------------
Net loss.................... $(6,806,359) $(792,240) $(7,598,599) $(123,415,314) $(131,013,913)
=========== ========= =========== ============= =============
Pro forma basic and diluted
net loss per share........ $ (0.74) $ (0.12) $ (9.14)
=========== ========= =============
Weighted average shares
outstanding used in
computing pro forma basic
and diluted net loss per
share..................... 9,162,624 6,705,378 14,327,101
=========== ========= =============
</TABLE>
See accompanying notes to the Unaudited Pro Forma Condensed Combined Financial
Information.
F-23
<PAGE>
ASK JEEVES, INC.
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL INFORMATION
The total estimated purchase cost of the Direct Hit
Technologies, Inc., Inc. merger has been allocated on a preliminary basis to
assets and liabilities based on management's estimate of its fair value. The
excess of the purchase consideration over the fair value of the net assets
acquired has been allocated to goodwill. This allocation is subject to change
pending the completion of the final analysis of the fair value of the assets
acquired and liabilities assumed. The impact of these changes could be material.
The following items could affect the final purchase price allocation at the date
the transaction is consummated: (A) Direct Hit Technologies, Inc., Inc. balance
sheet (B) the stock option activity of Direct Hit Technologies, Inc., Inc.; and
(C) the finalization of the integration plan.
The adjustments to the unaudited pro forma condensed combined balance sheets
as of September 30, 1999, have been calculated as if the merger occurred on
September 30, 1999 and are as follows:
(1) To reflect the acquisition of Direct Hit Technologies, Inc. for total
estimated purchase price of approximately $521.7 million. The purchase
consideration consists of the following:
- Issuance of 4,750,000 shares of Ask Jeeves, Inc.'s common stock to
the shareholders of Direct Hit Technologies, Inc., with a fair
value of $475,000,000. An additional 350,837 shares are included in
the purchase price for unvested options to purchase common stock to
the employees of Direct Hit Technologies, Inc. with a fair value of
approximately $35.1 million. The fair value per share of Ask
Jeeves, Inc.'s common stock issued in the Direct Hit
Technologies, Inc. acquisition is based on the closing price of Ask
Jeeves, Inc.'s common stock on January 21, 2000.
- Other related transaction and merger costs estimated to be
approximately $10.6 million for the acquisition of Direct Hit
Technologies, Inc.
(2) Recognition of the excess purchase consideration of approximately $493.7
million over the fair value of the net assets acquired, has been recorded
as goodwill and other intangible assets.
(3) To reflect the elimination of the historical stockholders' equity
accounts of Direct Hit Technologies, Inc.
The adjustments to the unaudited pro forma condensed combined statements of
operations for the year ended December 31, 1998 and the nine months ended
September 30, 1999, have been calculated assuming that the merger occurred as of
January 1, 1998 and January 1, 1999, respectively and are as follows:
(A) To reflect the amortization of goodwill and other intangible assets
resulting from the Direct Hit Technologies, Inc., Inc. acquisition. The
goodwill and other intangible assets are being amortized over a period of
forty-eight months.
(B) Pro forma basic and diluted net loss per share reflects the issuance
of 4,750,000 shares of Ask Jeeves, Inc.'s common stock related to the Direct
Hit Technologies, Inc., Inc. acquisition as if the shares had been
outstanding for the entire period. The effect of stock options issued
assumed in the merger have not been included as their inclusion would be
anti-dilutive. The shares issued to the shareholders of Direct Hit
Technologies, Inc., Inc. include 475,000 shares held in escrow which will be
released upon the achievement of certain performance obligations.
F-24
<PAGE>
F-25
<PAGE>
DIRECT HIT TECHNOLOGIES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------- --------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents............................ $2,557,673 $16,427,389
Short-term investments............................... -- 10,059,351
Accounts receivable, less allowances of $5,100 in
1998 and $44,100 in 1999........................... 162,846 357,238
Prepaid expenses and other current assets............ 20,830 37,311
---------- -----------
Total current assets............................... 2,741,349 26,881,289
---------- -----------
Property and equipment, net.......................... 170,046 991,475
Restricted cash...................................... -- 150,000
Other assets......................................... 12,535 26,610
---------- -----------
Total Assets......................................... $2,923,930 $28,049,374
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable..................................... $ 7,558 $ 150,377
Accrued expenses..................................... -- 166,661
Accrued professional fees............................ 31,805 55,907
Accrued compensation................................. 28,646 357,176
Other liabilities.................................... -- 37,445
Deferred revenue..................................... 32,500 245,135
---------- -----------
Total current liabilities.......................... 100,509 1,012,701
---------- -----------
Commitments (Note 3)
Stockholders' Equity:
Convertible Preferred Stock:
Series C $.001 par value, 4,431,265 shares
authorized, 4,431,263 shares issued and outstanding
(liquidation preference, $26,299,980).............. -- 26,279,468
Series B $.001 par value, 1,323,912 shares
authorized, issued and outstanding (liquidation
preference, $2,000,000)............................ 1,993,110 1,993,110
Series A $.001 par value, 5,187,501 shares
authorized, issued and outstanding (liquidation
preference, $1,383,334)............................ 1,378,334 1,378,334
Common stock, $.001 par value, 35,000,000 shares
authorized, 9,624,684 and 9,722,048 shares issued
and outstanding.................................... 9,625 9,722
Additional paid-in capital........................... 733,319 5,602,058
Deferred compensation................................ (498,727) (4,504,145)
Accumulated deficit.................................. (792,240) (3,721,874)
---------- -----------
Total stockholders' equity......................... 2,823,421 27,036,673
========== ===========
Total Liabilities and Stockholders' Equity............. $2,923,930 $28,049,374
========== ===========
</TABLE>
See Notes to Financial Statements
F-26
<PAGE>
DIRECT HIT TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(APRIL 27, 1998) NINE MONTHS
THROUGH ENDED
DECEMBER 31, 1998 SEPTEMBER 30, 1999
------------------ -------------------
(UNAUDITED)
<S> <C> <C> <C>
REVENUES:
OEM........................................ $ 175,420 $ 805,044
Advertising................................ -- 57,159
---------- ----------
Total revenues........................... 175,420 862,203
Cost of revenues........................... 51,595 360,524
---------- ----------
Gross profit............................... 123,825 501,679
---------- ----------
Operating expenses:
Sales and marketing........................ 90,332 948,123
Research and development................... 471,598 1,502,224
General and administrative................. 150,260 412,855
Equity-related compensation................ 231,775 826,927
---------- ----------
Total operating expenses................. 943,965 3,690,129
---------- ----------
Operating loss............................... (820,140) (3,188,450)
Interest income.............................. 27,900 258,816
---------- ----------
Net loss..................................... $ (792,240) $(2,929,634)
========== ==========
Net loss per share--basic and diluted........ $ (0.45) $ (0.88)
========== ==========
Shares used in per share calculation--basic
and diluted................................ 1,772,864 3,330,290
========== ==========
</TABLE>
See Notes to Financial Statements
F-27
<PAGE>
DIRECT HIT TECHNOLOGIES, INC
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (APRIL 27, 1998) THROUGH DECEMBER 31, 1998 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------------- --------------------- PAID-IN DEFERRED ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION DEFICIT
----------- ----------- ---------- -------- ---------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT INCEPTION (APRIL
27, 1998)
Issuance of common stock to
founders.................. -- -- 7,849,998 $7,850 $ 542,150 $ (550,000) --
Issuance of Series A
preferred stock, net of
issuance costs of
$5,000.................... 5,187,501 $ 1,378,334 -- -- -- -- --
Issuance of Series B
preferred stock, net of
issuance costs of
$6,890.................... 1,323,912 1,993,110 -- -- -- -- --
Exercise of stock options... -- -- 1,774,686 1,775 10,667 -- --
Deferred compensation
related to grant of stock
options................... -- -- -- -- 180,502 (180,502) --
Amortization of deferred
compensation.............. -- -- -- -- -- 231,775 --
Net loss.................... -- -- -- -- -- -- $ (792,240)
----------- ----------- ---------- ------ ---------- ----------- -----------
BALANCE, DECEMBER 31,
1998...................... 6,511,413 3,371,444 9,624,684 9,625 733,319 (498,727) (792,240)
UNAUDITED:
Repurchase and retirement
of common stock, net.... -- -- (22,500) (23) (577) -- --
Exercise of stock
options................. -- -- 119,864 120 36,971 -- --
Issuance of Series C
preferred stock, net of
issuance costs of
$20,512................. 4,431,263 26,279,468 -- -- -- -- --
Deferred compensation
related to grant of
stock options........... -- -- -- -- 4,607,345 (4,607,345) --
Transfer of shares of
employees............... -- -- -- -- 225,000 -- --
Amortization of deferred
compensation............ -- -- -- -- -- 601,927 --
Net loss.................. -- -- -- -- -- -- (2,929,634)
----------- ----------- ---------- ------ ---------- ----------- -----------
BALANCE, SEPTEMBER 30, 1999
(UNAUDITED)............... 10,942,676 $29,650,912 9,722,048 $9,722 $5,602,058 $(4,504,145) $(3,721,874)
=========== =========== ========== ====== ========== =========== ===========
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
-------------
<S> <C>
BALANCE AT INCEPTION (APRIL
27, 1998)
Issuance of common stock to
founders.................. --
Issuance of Series A
preferred stock, net of
issuance costs of
$5,000.................... $ 1,378,334
Issuance of Series B
preferred stock, net of
issuance costs of
$6,890.................... 1,993,110
Exercise of stock options... 12,442
Deferred compensation
related to grant of stock
options................... --
Amortization of deferred
compensation.............. 231,775
Net loss.................... (792,240)
-----------
BALANCE, DECEMBER 31,
1998...................... 2,823,421
UNAUDITED:
Repurchase and retirement
of common stock, net.... (600)
Exercise of stock
options................. 37,091
Issuance of Series C
preferred stock, net of
issuance costs of
$20,512................. 26,279,468
Deferred compensation
related to grant of
stock options........... --
Transfer of shares of
employees............... 225,000
Amortization of deferred
compensation............ 601,927
Net loss.................. (2,929,634)
-----------
BALANCE, SEPTEMBER 30, 1999
(UNAUDITED)............... $27,036,673
===========
</TABLE>
See Notes to Financial Statements
F-28
<PAGE>
DIRECT HIT TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION (APRIL 27, NINE MONTHS
1998) THROUGH ENDED
DECEMBER 31, 1998 SEPTEMBER 30, 1999
-------------------- ------------------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net loss................................................. $ (792,240) $(2,929,634)
---------- -----------
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.......................... 21,665 121,390
Equity-related compensation............................ 231,775 826,927
Changes in operating assets and liabilities:
Accounts receivable.................................. (162,846) (194,392)
Prepaid expenses and other current assets............ (20,830) (16,481)
Accounts payable and accrued expenses................ 68,009 699,557
Deferred revenue..................................... 32,500 212,635
---------- -----------
Total adjustments.................................... 170,273 1,649,636
---------- -----------
Net cash used in operating activities................ (621,967) (1,279,998)
---------- -----------
Cash flows from investing activities:
Increase in other assets............................. (12,535) (14,075)
Purchase of short-term investments................... -- (10,059,351)
Restricted cash deposits............................. -- (150,000)
Purchases of property and equipment.................. (191,711) (942,819)
---------- -----------
Net cash used in investing activities................ (204,246) (11,166,245)
---------- -----------
Cash flows from financing activities:
Issuance of common stock upon exercise of stock
options............................................ 12,442 37,091
Repurchase and retirement of common stock............ -- (600)
Issuance of Series A preferred stock................. 1,278,334 --
Issuance of Series B preferred stock................. 1,993,110 --
Issuance of Series C preferred stock................. -- 26,279,468
Proceeds from issuance of note payable............... 100,000 --
---------- -----------
Net cash provided by financing activities............ 3,383,886 26,315,959
========== ===========
Increase in cash and cash equivalents...................... 2,557,673 13,869,716
Cash and cash equivalents, beginning of period............. -- 2,557,673
---------- -----------
Cash and cash equivalents, end of period................... $2,557,673 $16,427,389
========== ===========
Supplemental cash flow information conversion of note
payable to Series A preferred stock...................... $ 100,000 $ --
========== ===========
</TABLE>
See Notes to Financial Statements
F-29
<PAGE>
DIRECT HIT TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 IS UNAUDITED.)
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS--Direct Hit Technologies, Inc. (the "Company") provides
technology that aggregates and organizes online content to enable users to
quickly find relevant and accurate information, products and services. The
Company was incorporated on April 27, 1998.
The Company has a single operating segment, aggregation and organization of
online content. The Company has no organizational structure dictated by product
lines, geography or customer type. Revenues have been primarily derived from
popularity-based search products.
The Company has experienced net losses since its inception and, as of
September 30, 1999, had an accumulated deficit of approximately $3.7 million.
Such losses and accumulated deficit resulted from both the Company's lack of
substantial revenue and costs incurred in the development of the Company's
service and in the establishment of the Company's Web site. For the foreseeable
future, the Company expects to continue to experience significant growth in its
operating expenses in order to execute its current business plan, particularly
those related to sales and marketing and research and development.
INTERIM FINANCIAL STATEMENTS (UNAUDITED)--The financial statements as of
September 30, 1999 and for the nine months then ended are unaudited. In the
opinion of management, such unaudited interim financial statements include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation. The results of operations for interim periods are not
necessarily indicative of the results which may be expected for any other
interim period or for the full year.
STOCK SPLIT--On July 9, 1999, prior to the Series C investment, the
Company's Board of Directors approved a three-for-one stock split of the
Company's common and preferred stock. Shareholders of record on July 14, 1999
(the record date) received two additional shares for every share held on that
date. All share and per share amounts in these financial statements and notes
hereto for all periods presented have been adjusted to reflect the three-for-one
stock split.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES--The preparation of financial statements in accordance with
generally accepted accounting principles requires management 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. Actual results could differ from those estimates.
CASH, CASH EQUIVALENTS AND SHORT TERM INVESTMENTS--The Company invests its
cash in money market accounts and in debt securities of U.S. Government agencies
and commercial paper from high quality corporate issuers. All highly liquid
instruments with an original maturity of ninety days or less are considered cash
equivalents and those with original maturities greater than ninety days and less
than one year are considered short term investments. The Company's short term
investments in marketable securities are classified as available-for-sale and
are reported at fair value, with unrealized gains and losses, if any, net of
tax, recorded in stockholders' equity. Such unrealized gains and losses to date
have been immaterial. Realized gains or losses and permanent declines in value,
if any, on available-for-sale securities will be reported in income as incurred.
At September 30, 1999, all of the Company's available-for-sale debt securities
mature within one year.
F-30
<PAGE>
DIRECT HIT TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 IS UNAUDITED.)
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RESTRICTED CASH--The Company is required to maintain a $150,000 compensating
balance with a bank to support an outstanding letter of credit which is issued
in favor of the Company's landlord in lieu of a deposit on leased office space.
REVENUE RECOGNITION--Revenues are comprised of OEM revenues and advertising
revenues. OEM revenues are generated through a variety of contractual
arrangements, which include per-query fees and advertising revenue sharing
arrangements with OEM customers. Per-query fees are recognized in the period
earned, and revenues from advertising revenue sharing arrangements are
recognized in the period that the advertisement is displayed through the OEM
customer's Web site. When the OEM contract calls for payments based on per-query
fees, revenues are recognized based on the number of Web pages accessed as
reported by the OEM customer or as determined by the Company, depending on the
contract. When the OEM contract provides for minimum monthly fees, such fees are
recognized monthly as earned.
Advertising revenues are derived primarily from the sale of banner
advertisements on Web pages. Revenues are recognized over the term the
advertisements are displayed.
Deferred revenue is primarily comprised of payments and billings in excess
of recognized revenue relating to customer contracts.
CONCENTRATION OF CREDIT RISK Financial instruments that potentially subject
the Company to significant concentration of credit risk consist primarily of
cash and cash equivalents, short term investments and accounts receivable.
Substantially all of the Company's cash and cash equivalents are managed by two
financial institutions. At December 31, 1998 and September 30, 1999, the Company
had cash balances at certain financial institutions in excess of federally
insured limits. However, the Company does not believe that it is subject to
unusual credit risk beyond the normal credit risk associated with commercial
banking relationships.
Accounts receivable are typically unsecured and are derived from revenues
earned from customers primarily located in the United States. The Company
performs ongoing credit evaluations of its customers. The Company maintains an
allowance for potential credit losses. Accordingly, the Company has provided for
$5,100 and $39,000 for such allowances in 1998 and 1999, respectively. The
Company has not recorded any write-offs in 1998 or 1999.
For the period from inception (April 27, 1998) through December 31, 1998,
two customers accounted for 78% and 22% of total revenues and 82% and 18% of
total receivables, at December 31, 1998, respectively. One customer accounted
for 70% of total revenues for the nine months ended September 30, 1999. Three
customers accounted for 69%, 13% and 13% of total receivables at September 30,
1999, respectively.
DEPRECIATION AND AMORTIZATION--Property and equipment, including leasehold
improvements, are stated at cost and depreciated using the straight-line method
over the estimated useful lives of the assets. The Company periodically
evaluates the recoverability of its long-lived assets based on expected
undiscounted cash flows and recognizes impairments, if any, based on expected
discounted future cash flows.
F-31
<PAGE>
DIRECT HIT TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 IS UNAUDITED.)
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES--Deferred income tax assets and liabilities are determined
based on the differences between the financial reporting and tax bases of assets
and liabilities and are measured using the currently enacted tax rates and laws.
A valuation allowance is provided for the amount of deferred tax assets
that, based on currently available evidence, are not expected to be realized.
COST OF REVENUES--Cost of revenues consist primarily of expenses associated
with the ongoing maintenance and support of our products, including compensation
and employee-related expenses, consulting fees, equipment costs, networking,
bandwidth and other related indirect costs. The Company enters into contracts
for bandwidth with third-party network providers.
RESEARCH AND DEVELOPMENT--Research and development expenses consist
primarily of compensation and employee-related expenses, equipment costs, and
fees for professional services related to the continued development and
enhancement of our product offerings.
Costs incurred in the engineering and development of the Company's product
are expensed as incurred, except for certain software development costs. Costs
associated with the development of computer software are expensed prior to the
establishment of technological feasibility (as defined by SFAS No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise
Marketed") and capitalized thereafter.
The Company also has incurred expenditures on software used to both
facilitate internal processes and create and maintain its Web site. The Company
has adopted Statement of Position ("SOP") 98-1, which requires computer software
costs associated with internal use software to be charged to operations as
incurred until certain capitalization criteria are met. Costs eligible for, and
capitalized under SFAS No. 86 and SOP 98-1, have been insignificant to date.
ADVERTISING COSTS--Advertising costs are recorded as sales and marketing
expense as incurred. Advertising expenses for the period from inception
(April 27, 1998) through December 31, 1998 and for the nine months ended
September 30, 1999 were $0 and $183,696, respectively.
STOCK-BASED COMPENSATION--The Company accounts for stock-based employee
compensation arrangements in accordance with the provisions of Accounting
Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to
Employees," and complies with the disclosure provisions of Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation." Under APB No. 25, compensation cost is recognized on a straight
line basis over the vesting period based on the difference, if any, on the date
of grant between the fair value of the Company's stock and the exercise price.
EARNINGS PER SHARE--Basic net loss per share is computed using the weighted
average number of common shares outstanding during the period adjusted for those
restricted shares that are contingently returnable. Diluted net loss per share
is computed using the weighted average number of common shares outstanding
during the period, plus the dilutive effect of potential common stock. Potential
common stock consists of convertible preferred stock, restricted common stock
that is contingently returnable, and stock options. For the period from
inception (April 27, 1998) to December 31, 1998 and for the nine months ended
September 30, 1999, options to purchase 72,510 and 1,204,646 shares of common
stock, respectively,
F-32
<PAGE>
DIRECT HIT TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 IS UNAUDITED.)
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
restricted common stock of 7,071,093 and 5,498,565 shares, respectively, that is
contingently returnable and preferred stock convertible into 6,511,413 and
10,942,676 shares of common stock, respectively, were excluded from the
calculation since their inclusion would be antidilutive.
FINANCIAL INSTRUMENTS--The Company's financial instruments include cash,
accounts receivable, accounts payable and accrued expenses. At December 31, 1998
and September 30, 1999, the fair values of these instruments approximated their
financial statement carrying amounts.
COMPREHENSIVE INCOME--Comprehensive loss is the same as net loss for all
periods presented.
NEW ACCOUNTING PRONOUNCEMENTS--In June 1998, the Financial Accounting
Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," which establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. The Statement, as amended, is
effective for fiscal years beginning after June 15, 2000. The Company has
evaluated the impact of adopting SFAS No. 133 and, based on its current business
activities, believes that it will not have a material effect on its financial
statements.
2. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
ESTIMATED USEFUL DECEMBER 31, SEPTEMBER 30,
LIVES 1998 1999
---------------- ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Property and equipment:
Computer equipment and software.................... 3 years $149,298 $1,010,172
Furniture and fixtures............................. 7 years 39,788 82,907
Office equipment................................... 5 years 2,625 28,163
Leasehold improvements............................. lease term -- 13,288
---------- -------- ----------
Total............................................ 191,711 1,134,530
Less accumulated depreciation........................ (21,665) (143,055)
-------- ----------
Property and equipment, net.......................... $170,046 $ 991,475
======== ==========
</TABLE>
3. COMMITMENTS
The Company leases office space under operating leases expiring through
October 2002. Certain of the leases contain renewal options. Some of the leases
provide for increasing rents over the terms of the leases; total rent under
these leases is being spread ratably over the lease terms. The Company has
sublet certain office space over the remainder of its lease term at an amount
that approximates the Company's obligation under the lease.
Total rent expense was $32,417 for the period from inception (April 27,
1998) through December 31, 1998, and $154,421 for the nine months ended
September 30, 1999. Rental income from the sublease amounted to $15,424 for the
nine months ended September 30, 1999 and is recorded, net of expense, in general
and administrative expense.
F-33
<PAGE>
DIRECT HIT TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 IS UNAUDITED.)
3. COMMITMENTS (CONTINUED)
Future minimum annual lease payments under noncancelable operating leases,
net of sublease income, as of September 30, 1999 are as follows:
<TABLE>
<S> <C>
1999 (Remainder of year).................................... $119,986
2000........................................................ 747,173
2001........................................................ 752,846
2002........................................................ 406,195
</TABLE>
4. PREFERRED STOCK
CONVERTIBLE PREFERRED STOCK--The authorized preferred stock of the Company
consists of 10,942,678 shares of preferred stock with a par value of $0.001, of
which 5,187,501 shares are designated as Series A convertible preferred stock
("Series A preferred stock"), 1,323,912 shares are designated as Series B
convertible preferred stock ("Series B preferred stock"), and 4,431,265 shares
are designated as Series C convertible preferred stock ("Series C preferred
stock").
SERIES A CONVERTIBLE PREFERRED STOCK--On May 22, 1998, the Company issued
5,187,501 shares of Series A preferred stock at $0.2667 per share to investors
for total consideration, including the conversion of two 8% promissory notes
amounting to $100,000, of $1,378,334 (net of offering costs of $5,000). The
Series A preferred stock is convertible into common stock, on a one-for-one
basis, at any time by the holders. The holders of the Series A preferred stock
have voting rights equivalent to the number of shares of common stock into which
their shares of Series A preferred stock convert. The Series A preferred stock
earns non-cumulative dividends when and if declared in the amount of $0.0213 per
share. Upon liquidation, after setting apart or paying in full the preferential
amounts due the holders of Series C preferred stock, holders of Series A
preferred stock are entitled to receive, out of funds then generally available,
in conjunction with holders of Series B preferred stock and prior to any payment
with respect to the holders of common stock, $0.2667 per share, plus any
declared and unpaid dividends thereon. Following payment to holders of all other
classes of preferred stock to which the Series A preferred stock is subordinate,
holders of Series A preferred stock are then entitled to share in remaining
available funds on an "as-if converted" basis with holders of common stock.
SERIES B CONVERTIBLE PREFERRED STOCK--On November 12, 1998, the Company
issued 1,323,912 shares of Series B preferred stock at $1.51067 per share to
investors for total consideration of $1,993,110 (net of offering costs of
$6,890). The Series B preferred stock is convertible into common stock, on a
one-for-one basis, at any time by the holders. The holders of the Series B
preferred stock have voting rights equivalent to the number of shares of common
stock into which their shares of Series B preferred stock convert. The Series B
preferred stock earns non-cumulative dividends when and if declared in the
amount of $0.121 per share. Upon liquidation, after setting apart or paying in
full the preferential amounts due the holders of Series C preferred stock,
holders of Series B preferred stock are entitled to receive, out of funds then
generally available, in conjunction with holders of Series A preferred stock and
prior to any payment with respect to the holders of common stock, $1.51067 per
share, plus any declared and unpaid dividends thereon. Following payment to
holders of all other classes of preferred stock to which the Series B preferred
stock is subordinate, holders of Series B preferred stock are then entitled to
share in remaining available funds on an "as-if converted" basis with holders of
common stock.
F-34
<PAGE>
DIRECT HIT TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 IS UNAUDITED.)
4. PREFERRED STOCK (CONTINUED)
In addition, as long as any shares of Series B preferred stock are
outstanding, the Company shall not, without first obtaining approval by vote or
written consent of the holders of at least a majority of the total number of
shares of Series B preferred stock outstanding, voting together as a class,
undertake or effect any reorganization event (as defined) in which the value of
the consideration to be received per share of Series B preferred stock in such
transaction is less than 150% percent of the original Series B issue price of
$1.51067 per share.
SERIES C CONVERTIBLE PREFERRED STOCK--On July 16, 1999, the Company issued
4,431,263 shares of Series C preferred stock at $5.9351 per share to investors
for total consideration of $26,279,468 (net of offering costs of $20,512). The
Series C preferred stock is convertible into common stock, on a one-for-one
basis, at any time by the holders. The holders of the Series C preferred stock
have voting rights equivalent to the number of shares of common stock into which
their shares of Series C preferred stock convert. The Series C preferred stock
earns non-cumulative dividends when declared in the amount of $0.4748 per share.
Upon liquidation, holders of Series C preferred stock are entitled to receive,
out of funds then generally available, dividends previously declared or accrued
and a per share amount as follows: i) $8.90265 per share if the consideration
received in a liquidation is $2.99 per fully diluted share of common stock or
less; ii) $10.386425 per share if the consideration received in a liquidation is
between $3.00 and $8.96 per fully diluted share of common stock; iii) $11.8702
per share if the consideration received in a liquidation is between $8.97 and
$11.96 per fully diluted share of common stock or; iv) $5.9351 per share if the
consideration received in a liquidation is over $11.96 per fully diluted share
of common stock.
5. COMMON STOCK
The Company's Certificate of Incorporation was amended on July 14, 1999 to
increase the number of authorized shares of common stock from 10,000,000 to
35,000,000 shares.
The Company's Certificate of Incorporation precludes the payment of
dividends to shareholders of common stock so long as any shares of Series A, B
or C preferred stock are issued and outstanding.
FOUNDERS SHARES--On April 28, 1998, the Company issued to the two founders
of the Company 2,943,750 and 4,906,248 shares of restricted common stock (the
"Founders Shares"), respectively, at a per share price of $0.0003.
The Founder Stock Purchase Agreement relating to 2,943,750 shares of common
stock provided for vesting of 10% of the shares upon the issuance of the
Series A Preferred Stock and the remaining 90% vest ratably over four years.
The Founder Stock Purchase Agreement relating to 4,906,248 shares of common
stock were issued to a founder as part of the initial capitalization of the
Company including his contribution and development of certain technology
pursuant to the terms of an Exclusive Patent License Agreement. Upon issuance of
the Series A Preferred Stock 25% of his shares became immediately vested. The
remaining balance of these Founders Shares vest ratably over four years. On
July 6, 1999, the founder transferred 60,000 of his restricted Founders Shares
to two employees for past services rendered. The fair value of these shares,
approximating $225,000, was charged to expense.
F-35
<PAGE>
DIRECT HIT TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 IS UNAUDITED.)
5. COMMON STOCK (CONTINUED)
The Company has determined that the measurement date for the Founders Shares
coincided with the issuance of the Series A preferred stock. The Company has
recognized deferred compensation of $550,000, based on the fair value of the
common shares on that day, to be amortized over the vesting period. Accordingly,
the Company has recorded compensation expense of approximately $174,000 and
$83,000 for the period from inception (April 27, 1998) through December 31, 1998
and the nine months ended September 30, 1999, respectively.
The Company has the right to repurchase unvested shares at the amount paid.
The Company's right to repurchase the unvested shares terminates if the founder
is terminated by the Company without cause, upon a change in control or upon the
effectiveness of the Company's initial public offering.
Restricted shares include the Founders Shares and shares purchased pursuant
to the Company's 1998 and 1998-A Stock Option Plans (the "Option Plans").
Restricted shares activity since inception follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF PURCHASE
SHARES PRICE
---------- --------
<S> <C> <C>
Outstanding at inception (April 27, 1998)................... -- --
Issued for Founders Share and stock option exercise....... 9,624,684 $ 0.001
Repurchased............................................... -- --
Laps of restriction due to vesting........................ (2,553,591) 0.001
---------- -------
Outstanding at December 31, 1998............................ 7,071,093 0.001
Issued for stock option exercises......................... 119,864 0.291
Repurchased............................................... (45,000) (0.027)
Issued from treasury shares............................... 22,500 0.027
Lapse of restriction due to vesting....................... (1,669,892) 0.003
---------- -------
Outstanding at September 30,1999............................ 5,498,565 $0.0005
========== =======
</TABLE>
STOCK OPTIONS--The Company's Option Plans initially provided for the
granting of stock options to purchase up to 1,962,501 shares of the Company's
common stock. In 1998, the Company's shareholders ratified and approved to
increase the number of shares available for grant by 225,000 to a total of
2,187,501 for the Option Plans. In 1999 the Company's shareholders ratified and
approved to increase the number of shares available for grant by 1,600,000, to a
total of 3,787,501 for the Option Plans. Options may be granted to employees,
officers, directors and consultants of the Company with terms of up to
10 years. The options can be granted at such prices and vesting schedules as the
Board of Directors (the "Board") may determine; however ISO's cannot be granted
at less than 100% and nonqualified options cannot be granted at less than 85% of
the stock's fair market value at the date of grant.
Options generally vest over 48 months as follows: (i) 25% 12 months from the
date of grant and (ii) the remaining 75% thereafter at 2.0833% per month. In the
event of a change of control of the Company (as defined in the Option Plan), the
vesting of 25% of the remaining unvested shares will automatically be
accelerated.
F-36
<PAGE>
DIRECT HIT TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 IS UNAUDITED.)
5. COMMON STOCK (CONTINUED)
Generally, the Option Plans provide that the Option holders may exercise
their stock options immediately. Shares issued upon exercise of such options are
restricted and continue to vest under the terms of the option agreement.
Stock option activity since inception is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
---------- --------
<S> <C> <C>
Outstanding at inception.................................... -- --
Granted................................................... 1,929,373 $0.02
Exercised................................................. (1,774,687) 0.01
Canceled, forfeited or expired............................ (82,176) 0.27
---------- -----
Outstanding and exercisable, December 31, 1998.............. 72,510 0.10
Granted................................................... 1,274,500 1.37
Exercised................................................. (142,364) 0.25
Canceled, forfeited or expired............................ -- --
---------- -----
Outstanding at September 30,1999............................ 1,204,646 $1.43
========== =====
</TABLE>
Included in options granted for the period from inception (April 27, 1998)
through December 31, 1998, and the nine months ended September 30, 1999 are
109,062 and 86,000 options, respectively, granted to consultants. Compensation
expense is being recognized over the vesting period based on fair value pursuant
to SFAS No. 123 and EITF No. 96-18. Total expense for the period from inception
(April 27, 1998) through December 31, 1998, and the nine months ended
September 30, 1999 related to these options is approximately $36,000 and
$322,000, respectively.
For financial reporting purposes, the deemed fair value of the common stock
at the dates of stock option grants to employees resulted in deferred
compensation of approximately $122,000 for the period from inception (April 27,
1998) through December 31, 1998 and approximately $3,789,000 for the nine months
ended September 30, 1999. These charges are being recognized ratably over the
vesting period. Compensation expense for options to employees was approximately
$22,000 for the period from inception (April 27, 1998) through December 31, 1998
and approximately $197,000 for the nine months ended September 30, 1999.
The weighted average fair value of options granted for the period from
inception (April 27, 1998) through December 31, 1998 and the nine months ended
September 30, 1999 was $0.07 and $2.85, respectively.
F-37
<PAGE>
DIRECT HIT TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 IS UNAUDITED.)
5. COMMON STOCK (CONTINUED)
The following table summarized information about stock options outstanding
at September 30, 1999:
<TABLE>
<CAPTION>
VESTED
--------------------------
WEIGHTED AVERAGE WEIGHTED WEIGHTED
NUMBER OF OPTIONS REMAINING CONTRACTUAL AVERAGE NUMBER OF AVERAGE
EXERCISE PRICES OUTSTANDING LIFE EXERCISE PRICE OPTIONS EXERCISE PRICE
--------------------- ----------------- --------------------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C>
0.03.$.......... 3,000 8.76 $0.03 3,000 $0.03
0.17........... 229,500 9.36 0.17 4,835 0.17
0.30........... 112,500 9.59 0.30 -- --
0.45........... 108,000 9.76 0.45 -- --
1.78........... 325,646 9.85 1.78 8,135 1.78
2.30........... 3,338,000 9.92 2.30 -- --
2.82........... 88,000 9.96 2.82 -- --
---------- --------- ---- ----- ------ -----
0.03-$2.82...... 1,240,646 9.75 $1.43 15,970 $0.96
========== ========= ==== ===== ====== =====
</TABLE>
The weighted average remaining contractual life of the options at
December 31, 1998 was 9.75 years.
Under SFAS No. 123, the fair value of stock-based awards to employees is
calculated through the use of option pricing models. For purposes of determining
the disclosure required by SFAS No. 123, the Black Scholes valuation method was
used with the following assumptions: expected life, 5 years, a risk-free rate of
return of 5.5%, expected volatility of 107% and no expected dividends. If the
computed fair values of the 1999 and 1998 awards had been amortized to expense
over the vesting period, pro forma net loss would have been as follows:
<TABLE>
<CAPTION>
PERIOD FROM INCEPTION
(APRIL 27, 1998) THROUGH NINE MONTHS ENDED
DECEMBER 31, 1998 SEPTEMBER 30, 1999
------------------------ ------------------
(UNAUDITED)
<S> <C> <C>
Net loss as reported................................... $(792,240) $(2,929,634)
Net loss pro forma..................................... (811,187) (3,071,890)
</TABLE>
F-39
<PAGE>
DIRECT HIT TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 IS UNAUDITED.)
6. INCOME TAXES
The components of the Company's net deferred tax assets consisted of the
following:
<TABLE>
<CAPTION>
PERIOD FROM INCEPTION
(APRIL 27, 1998) THROUGH
DECEMBER 31, 1998
------------------------
<S> <C>
Current assets
Deferred compensation..................................... $ 95,028
Research and development credits.......................... 30,553
---------
125,581
---------
Long-term assets (liabilities):
Net operating loss carryforwards.......................... 319,035
Depreciation.............................................. (2,499)
---------
316,536
---------
Net deferred tax assets before valuation allowance.......... 442,117
Less: valuation allowance................................... (442,117)
---------
Net deferred tax assets..................................... $ --
=========
</TABLE>
A valuation allowance is established if it is more likely than not that all
or a portion of the deferred tax asset will not be realized. Accordingly,
because of the Company's limited operating history, management has provided a
valuation allowance for the full amount of the deferred tax asset due to the
uncertainty of realization.
The Company has available for future periods federal and state tax net
operating loss carryforwards and research and development credits of
approximately $792,000 and $31,000, respectively, as of December 31, 1998. The
net operating loss carryforwards expire beginning in 2013 and 2003 for federal
and state tax purposes, respectively. The federal research and development
credits begin to expire in 2013. The Company did not pay any income taxes in
1998.
Under the provisions of the Internal Revenue Code, certain substantial
changes in the Company's ownership may have limited, or may limit in the future,
the amount of net operating loss carryforwards which could be utilized annually
to offset future taxable income and income tax liabilities. The amount of any
annual limitation is determined based upon the Company's value prior to an
ownership change.
7. BENEFIT PLAN
The Company maintains a 401(k) Profit Sharing Plan (the "Plan") for its
full-time employees. Each participant in the Plan may elect to contribute from
1% to 20% of his or her annual compensation to the Plan. The Company does not
match employee contributions. Under the Plan, all participants are fully vested
and all benefits and accounts can not be forfeited for any reason.
8. SUBSEQUENT EVENT (UNAUDITED)
On January 25, 2000, the Company entered into an Agreement and Plan of
Merger and Reorganization to be acquired by Ask Jeeves, Inc. ("Ask Jeeves"). Ask
Jeeves develops and deploys natural-language Corporate and Consumer Service on
the Internet for consumers and companies. Total consideration for this
transaction will be 4,750,000 shares of Ask Jeeves common stock for
substantially all of the outstanding common and preferred stock of the Company.
F-40
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by us in connection with the
sale of common stock being registered. All amounts are estimates.
<TABLE>
<S> <C>
SEC registration fee........................................ $ 42,785
Nasdaq National Market listing fee.......................... 17,500
Printing and engraving expenses............................. 50,000
Legal fees and expenses..................................... 75,000
Accounting fees and expenses................................ 50,000
Blue sky fees and expenses.................................. 2,500
Transfer agent fees......................................... 2,500
Miscellaneous fees and expenses............................. 9,715
--------
Total....................................................... $250,000
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Under Section 145 of the Delaware General Corporation Law we have broad
powers to indemnify its directors and officers against liabilities they may
incur in such capacities, including liabilities under the Securities Act. Our
Bylaws provide that we will indemnify our directors and executive officers and
may indemnify other officers to the fullest extent permitted by law. Under our
Bylaws, indemnified parties are entitled to indemnification for negligence,
gross negligence and otherwise to the fullest extent permitted by law. The
Bylaws also require us to advance litigation expenses in the case of stockholder
derivative actions or other actions, against an undertaking by the indemnified
party to repay such advances if it is ultimately determined that the indemnified
party is not entitled to indemnification.
In addition, our Certificate of Incorporation provides that, pursuant to
Delaware law, our directors shall not be liable for monetary damages for breach
of the directors' fiduciary duty of care to us and our stockholders. This
provision in the Certificate of Incorporation does not eliminate the duty of
care, and in appropriate circumstances equitable remedies such as injunctive or
other forms of non-monetary relief will remain available under Delaware law. In
addition, each director will continue to be subject to liability for breach of
the director's duty of loyalty to us for acts or omissions not in good faith or
involving intentional misconduct, for knowing violation of law, for actions
leading to improper personal benefit to the director, and for payment of
dividends or approval of stock repurchases or redemptions that are unlawful
under Delaware law. The provision also does not affect a director's
responsibilities under any other law, such as the federal securities laws or
state or federal environmental laws.
We have entered into indemnity agreements with each of our directors and
executive officers. Such indemnity agreements contain provisions that are in
some respects broader than the specific indemnification provisions contained in
Delaware law.
We maintain a policy providing directors' and officers' liability insurance,
which insures our directors and officers in certain circumstances with a
liability limit of $15,000,000 per claim and in the aggregate, subject to
varying retentions. This coverage is on a claims made basis.
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since the Company's inception on June 13, 1996, the Company has issued and
sold the following unregistered securities:
1. On June 17, 1996, the Company issued 1,500,000 shares of its common stock to
Garrett Gruener in consideration of the assets of Cameo Technology, Inc. a
company owned by Garrett Gruener, and $20,000 pursuant to the Asset Purchase
Agreement and Plan on Reorganization by and between the Company and Cameo
Technology, Inc.
2. On June 17, 1996, the Company issued 900,000 shares of its common stock to
David Warthen in consideration of $20,000.
3. From inception through April 30, 1999, the Company granted options to
purchase 6,403,354 shares of common stock at a weighted average exercise
price of $2.00 per share to employees, consultants, directors and other
service providers pursuant to its 1996 Option Plan and issued an aggregate
of 1,036,939 shares of its common stock to employees, consultants, directors
and other service providers for aggregate consideration of approximately
$86,348 pursuant to exercises of options granted under the 1996 Option Plan.
4. From inception through April 30, 1999, the Company granted options to
purchase 579,998 shares of common stock at a weighted average exercise price
of $0.41 per share to employees and consultants pursuant to option
agreements outside of the 1996 stock Option Plan and issued an aggregated
390,540 shares of its common stock to employees, consultants, directors and
other service providers for aggregate consideration of approximately $1,406
pursuant to exercise of such options outside of the 1996 Option Plan.
5. In August 1997, the Company issued 1,083,498 shares of common stock at a
purchase price of $0.23 and warrants to purchase 541,749 shares of common
stock to two investors. The warrants have a per share exercise price of
$0.23 per share.
6. In April 1998, the Company issued 32,600 shares of common stock to an
independent contractor for services performed. The Company imputed a value
for the services of $13,221, of which $5,700 was paid in cash, and the
remainder was allocated to the shares issued.
7. In November 1997, the Company issued 12,000 shares of common stock in
exchange for assets valued at $.23 per share.
8. In December 1997, the Company issued 541,829 shares of common stock for an
aggregate purchase price of $249,241 or $.46 per share to one investor.
9. In May, June and July 1998, the Company issued warrants exercisable into
21,500 shares of common stock to a consultant for services performed. The
warrants are exercisable into shares of common stock at a per share exercise
prices of $.53.
10. In June 1998, the Company issued and sold an aggregate of 2,148,807 shares
of its common stock for an aggregate purchase price of approximately
$1,138,868 or $.53 per share to 16 investors.
11. In September 1998, the Company issued and sold 1,855,415 shares of its
common stock for an aggregate purchase price of approximately $983,370 or
$.73 per share to 11 investors.
12. In November 1998 and January 1999, the Company issued and sold 3,709,884
shares of its Series A preferred stock for an aggregate purchase price of
approximately $7,642,361 or $2.06 per share to 25 investors.
13. In December 1998, the Company issued warrants to purchase 17,500 shares of
common stock to our landlord in partial consideration for lease obligations.
II-2
<PAGE>
The warrants were exercised in April 1999.
14. In February and March 1999, the Company issued and sold 5,775,806 shares of
its Series B Preferred Stock for an aggregate purchase price of
approximately $25,009,239, or $4.33 per share to 44 investors.
15. In March 1999, the Company issued a warrant exercisable into 2,500 shares of
common stock to a consultant for services performed. The warrant is
exercisable into shares of common stock at a per share exercise price of
$4.32.
16. On April 16, 1999, the Company issued 450,000 shares of common stock in
consideration of, among other things, certain assets relating to Lumina
Decision Systems, Inc., pursuant to the Asset Purchase Agreement by and
between the Company and Lumina Decision Systems.
17. On November 17, 1999, the Company issued 5,875 shares of common stock in
connection with the purchase of assets from Excellerate LLC.
18. On November 19, 1999, the Company 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 1,631,863 million shares of common stock.
The sale of the above securities was deemed to be exempt from registration
under the Securities Act in reliance upon Section 4(2) of the Securities Act or
Regulation D promulgated thereunder, or Rule 701 promulgated under Section 3(b)
of the Securities Act as transactions by an issuer not involving any public
offering or transactions pursuant to compensation benefit plans and contracts
relating to compensation as provided under Rule 701. The recipients of
securities in each such transaction represented their intentions to acquire the
securities for investment only and not with a view to or for sale in connection
with any distribution thereof, and appropriate legends were affixed to the share
certificates issued in such transactions. All recipients had adequate access,
through their relationships with us, to information about Ask Jeeves.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- --------------------- -----------
<C> <S>
3.1* Certificate of Incorporation of the Registrant.
3.2* Bylaws of the Registrant.
4.1* Reference is made to Exhibit 3.1.
4.2* Specimen Certificate for Registrant's Common Stock.
4.3* Warrant to purchase 15,000 shares of Common Stock granted by
the Registrant to Antenna Group PR dated as of June 30,
1998.
4.4* Warrant to purchase 20,000 shares of Common Stock granted by
the Registrant to Antenna Group PR dated as of July 31,
1998.
4.5* Warrant to purchase 8,000 shares of Common Stock granted by
the Registrant to Antenna Group PR dated as of May 31,
1998.
4.6* Warrant to purchase 5,000 shares of Common Stock granted by
the Registrant to Soren Jacobsen dated as of March 11,
1999.
5.1+ Opinion of Cooley Godward LLP.
10.1* Amended and Restated 1996 Equity Incentive Plan.
10.2* Form of Option Agreement for the Amended and Restated 1996
Equity Incentive Plan.
10.3.1* 1999 Equity Incentive Plan.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- --------------------- -----------
<C> <S>
10.3.2* 1999 Equity Incentive Plan, As Amended.
10.4* Form of Option Agreement for the 1999 Equity Incentive Plan.
10.5.1* 1999 Employee Stock Purchase Plan.
10.5.2* 1999 Employee Stock Purchase Plan, As Amended.
10.6* Commercial Office Lease by and between Eat/Work Development,
L.P. and the Roda Group Venture Development Company dated
as of August 20, 1997.
10.7* Commercial Office Lease by and between Eat/Work Development,
L.P. and the Roda Development Company dated as of August
14, 1998.
10.8* Commercial Office Lease by and between Eat/Work Development,
L.P. and the Roda Development Company dated as of November
15, 1998.
10.9* Commercial Office Lease by and between Eat/Work Development,
L.P. and the Registrant dated as of May 15, 1998.
10.10* Lease Agreement by and between Parker Associates and the
Registrant dated as of January 26, 1999.
10.11* Assignment and Assumption of Standard Commercial Office
Lease for Eat/Work Development by and between the Roda
Group Development Company, L.L.C. and the Registrant dated
as of January 1, 1999 (relating to 918 Parker Street,
Suite A-14, Berkeley, CA).
10.12* License Agreement between the Registrant and Compaq Computer
Corporation dated as of October 2, 1998.
10.13* License and Development Agreement between the Registrant and
Compaq Computer Corporation dated as of September 30,
1999.
10.14* Consulting Services Agreement by and between the Registrant
and the Roda Development Group dated as of December 14,
1998.
10.15* Offer letter by and between the Company and M. Bruce Nakao
dated as of April 16, 1999.
10.16* Offer letter by and between the Registrant and Laurence
Fishkin dated as of January 11, 1999.
10.17.1* Offer letter by and between the Registrant and Edward
Briscoe III dated as of January 18, 1999.
10.17.2* Offer Letter by and between Registrant and Edward
Briscoe III, as amended, dated June 1, 1999.
10.18* Offer letter by and between the Registrant and Frank Vaculin
dated as of January 5, 1999.
10.19.1* Offer letter by and between the Registrant and Robert W.
Wrubel dated as of May 22, 1998.
10.19.2* Offer letter by and between Registrant and Robert W. Wrubel,
as amended, dated June 1, 1999.
10.20* Common Stock and Warrant Purchase Agreement by and between
the Registrant, and each of Daniel H. Miller, Roger A.
Strauch and The Roda Group Venture Development Company,
LLC. dated as of August 20, 1997.
10.21* Common Stock Subscription Agreement, by and between the
Registrant and certain investors of the Registrant dated
as of June 26, 1998.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- --------------------- -----------
<C> <S>
10.22* Common Stock Subscription Agreement, by and between the
Registrant and certain investors of the Registrant dated
as of August, 1998.
10.23* Series A Preferred Stock Purchase Agreement by and between
the Registrant and certain investors of the Registrant
dated as of November 13, 1998.
10.24* Series B Preferred Stock Purchase Agreement by and between
the Registrant and certain investors of the Registrant
dated as of February 24, 1999.
10.25* Asset Purchase Agreement by and between the Registrant and
Lumina Decision Systems, Inc. dated as of April 16, 1999.
10.26* Form of Indemnity Agreement by and between the Registrant
and each of its directors and executive officers.
10.27* Assignment and Assumption of Standard Commercial Office
Lease for EAT/Work development by and between the Rod
Group Development Company, LLC and the Registrant dated as
of January 1, 1999 (relating to 918 Parker Street,
Suite A-1-1 and A-1-2, Berkeley, CA).
10.28* Office Lease by and between Emery Station Associates, L.L.C.
and the Registrant dated as of April 29, 1999.
10.29* Offer Letter by and between the Registrant and George
Lichter dated as of May 27, 1999.
10.30* Master Lease Agreement by and between the Registrant and
Comdisco, Inc. dated as of June 15, 1999.
10.31* Forms of Promissory Note and Stock Pledge Agreement for
loans to executive officers.
10.32** Agreement and Plan of Merger and Reorganization by and
between Net Effect Systems, Inc. and Neutral Acquisition
Corp. dated November 19, 1999.
10.33+ Agreement and Plan of Merger and Reorganization by and
between Direct Hit, Inc. and Answer Acquisition Corp.
signed January 25, 1999.
10.34 Offer letter by and between Registrant and Enrique Salem
dated .
10.35+ Registration Rights Agreement between Registrant and
Stockholders of Net Effect System, Inc. dated
November 19, 1999.
10.36+ Registration Rights Agreement between Registrant and
Stockholders of Direct Hit, Inc. signed January 25, 1999.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of Cooley Godward LLP. Reference is made to Exhibit
5.1.
24.1 Power of attorney. Reference is made to Page II-6.
27.1 Financial Data Schedule.
</TABLE>
* Previously filed on Registrant's S-1 Registration Statement, filed with the
Securities and Exchange Commission on June 30, 1999.
** Previously filed on Registrant's 8-K, as filed with the Securities and
Exchange Commission on November 18, 1999.
+ To be filed by Amendment.
(b) FINANCIAL STATEMENT SCHEDULES.
All schedules have been omitted because the information required to be set
forth therein is not applicable or is shown in the combined financial statements
or notes thereto.
II-5
<PAGE>
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreement, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon rule 430A and contained in a
form of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) of
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purposes of determining any liability under the
Securities Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Berkeley,
State of California, on January 28, 2000.
<TABLE>
<S> <C> <C>
ASK JEEVES, INC.
By: /s/ ROBERT W. WRUBEL
-----------------------------------------
Robert W. Wrubel
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENT, that the persons whose signatures appear
below each severally constitutes and appoints Robert W. Wrubel, Christine M.
Davis and Amy Slater, and each of them, as true and lawful attorneys-in-fact and
agents, with full powers of substitution and resubstitution, for them in their
name, place and stead, in any and all capacities, to sign any and all amendments
(including pre-effective and post-effective amendments) to this Registration
Statement and to sign any registration statement (and any post-effective
amendments thereto) relating to the same offering as this Registration Statement
that is to be effective upon filing pursuant to Rule 462(b) under the Securities
Act of 1933, as amended and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as they might or could do in person, hereby ratifying and
confirming all which said attorneys-in-fact and agents, or any of them, or their
substitute or substitutes, may lawfully do, or cause to be done by virtue
hereof.
II-7
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
Chairman and Chief
/s/ ROBERT W. WRUBEL Executive Officer
------------------------------------------- (PRINCIPAL EXECUTIVE January 28, 2000
J. LEIGHTON READ, M.D. OFFICER)
/s/ M. BRUCE NAKAO
------------------------------------------- Chief Financial Officer January 28, 2000
M. BRUCE NAKAO
/s/ CHRISTINE M. DAVIS
------------------------------------------- Controller January 28, 2000
CHRISTINE M. DAVIS
/s/ ROGER A. STRAUCH
------------------------------------------- Chairman of the Board of January 28, 2000
ROGER A STRAUCH Directors
/s/ A. GEORGE ("Skip") Battle
------------------------------------------- Director January 28, 2000
A. GEORGE ("SKIP") BATTLE
/s/ BENJAMIN M. ROSEN
------------------------------------------- Director January 28, 2000
BENJAMIN M. ROSEN
------------------------------------------- Director , 2000
DANIEL J. NOVA
/s/ GEOFFREY Y. YANG
------------------------------------------- Director , 2000
GEOFFREY Y. YANG
/s/ GARRETT GRUENER
------------------------------------------- Director January 28, 2000
GARRETT GRUENER
</TABLE>
II-8
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- --------------------- -----------
<C> <S>
3.1* Certificate of Incorporation of the Registrant.
3.2* Bylaws of the Registrant.
4.1* Reference is made to Exhibit 3.1.
4.2* Specimen Certificate for Registrant's Common Stock.
4.3* Warrant to purchase 15,000 shares of Common Stock granted by
the Registrant to Antenna Group PR dated as of June 30,
1998.
4.4* Warrant to purchase 20,000 shares of Common Stock granted by
the Registrant to Antenna Group PR dated as of July 31,
1998.
4.5* Warrant to purchase 8,000 shares of Common Stock granted by
the Registrant to Antenna Group PR dated as of May 31,
1998.
4.6* Warrant to purchase 5,000 shares of Common Stock granted by
the Registrant to Soren Jacobsen dated as of March 11,
1999.
5.1+ Opinion of Cooley Godward LLP.
10.1* Amended and Restated 1996 Equity Incentive Plan.
10.2* Form of Option Agreement for the Amended and Restated 1996
Equity Incentive Plan.
10.3.1* 1999 Equity Incentive Plan.
10.3.2* 1999 Equity Incentive Plan, As Amended.
10.4* Form of Option Agreement for the 1999 Equity Incentive Plan.
10.5.1* 1999 Employee Stock Purchase Plan.
10.5.2* 1999 Employee Stock Purchase Plan, As Amended.
10.6* Commercial Office Lease by and between Eat/Work Development,
L.P. and the Roda Group Venture Development Company dated
as of August 20, 1997.
10.7* Commercial Office Lease by and between Eat/Work Development,
L.P. and the Roda Development Company dated as of August
14, 1998.
10.8* Commercial Office Lease by and between Eat/Work Development,
L.P. and the Roda Development Company dated as of November
15, 1998.
10.9* Commercial Office Lease by and between Eat/Work Development,
L.P. and the Registrant dated as of May 15, 1998.
10.10* Lease Agreement by and between Parker Associates and the
Registrant dated as of January 26, 1999.
10.11* Assignment and Assumption of Standard Commercial Office
Lease for Eat/Work Development by and between the Roda
Group Development Company, L.L.C. and the Registrant dated
as of January 1, 1999 (relating to 918 Parker Street,
Suite A-14, Berkeley, CA).
10.12* License Agreement between the Registrant and Compaq Computer
Corporation dated as of October 2, 1998.
10.13* License and Development Agreement between the Registrant and
Compaq Computer Corporation dated as of September 30,
1999.
10.14* Consulting Services Agreement by and between the Registrant
and the Roda Development Group dated as of December 14,
1998.
10.15* Offer letter by and between the Company and M. Bruce Nakao
dated as of April 16, 1999.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- --------------------- -----------
<C> <S>
10.16* Offer letter by and between the Registrant and Laurence
Fishkin dated as of January 11, 1999.
10.17.1* Offer letter by and between the Registrant and Edward
Briscoe III dated as of January 18, 1999.
10.17.2* Offer Letter by and between Registrant and Edward
Briscoe III, as amended, dated June 1, 1999.
10.18* Offer letter by and between the Registrant and Frank Vaculin
dated as of January 5, 1999.
10.19.1* Offer letter by and between the Registrant and Robert W.
Wrubel dated as of May 22, 1998.
10.19.2* Offer letter by and between Registrant and Robert W. Wrubel,
as amended, dated June 1, 1999.
10.20* Common Stock and Warrant Purchase Agreement by and between
the Registrant, and each of Daniel H. Miller, Roger A.
Strauch and The Roda Group Venture Development Company,
LLC. dated as of August 20, 1997.
10.21* Common Stock Subscription Agreement, by and between the
Registrant and certain investors of the Registrant dated
as of June 26, 1998.
10.22* Common Stock Subscription Agreement, by and between the
Registrant and certain investors of the Registrant dated
as of August, 1998.
10.23* Series A Preferred Stock Purchase Agreement by and between
the Registrant and certain investors of the Registrant
dated as of November 13, 1998.
10.24* Series B Preferred Stock Purchase Agreement by and between
the Registrant and certain investors of the Registrant
dated as of February 24, 1999.
10.25* Asset Purchase Agreement by and between the Registrant and
Lumina Decision Systems, Inc. dated as of April 16, 1999.
10.26* Form of Indemnity Agreement by and between the Registrant
and each of its directors and executive officers.
10.27* Assignment and Assumption of Standard Commercial Office
Lease for EAT/Work development by and between the Rod
Group Development Company, LLC and the Registrant dated as
of January 1, 1999 (relating to 918 Parker Street,
Suite A-1-1 and A-1-2, Berkeley, CA).
10.28* Office Lease by and between Emery Station Associates, L.L.C.
and the Registrant dated as of April 29, 1999.
10.29* Offer Letter by and between the Registrant and George
Lichter dated as of May 27, 1999.
10.30* Master Lease Agreement by and between the Registrant and
Comdisco, Inc. dated as of June 15, 1999.
10.31* Forms of Promissory Note and Stock Pledge Agreement for
loans to executive officers.
10.32** Agreement and Plan of Merger and Reorganization by and
between Net Effect Systems, Inc. and Neutral Acquisition
Corp. dated November 19, 1999.
10.33+ Agreement and Plan of Merger and Reorganization by and
between Direct Hit, Inc. and Answer Acquisition Corp.
signed January 25, 1999.
10.34 Offer letter by and between Registrant and Enrique Salem
dated .
10.35+ Registration Rights Agreement between Registrant and
Stockholders of Net Effect System, Inc. dated
November 19, 1999.
10.36+ Registration Rights Agreement between Registrant and
Stockholders of Direct Hit, Inc. signed January 25, 1999.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- --------------------- -----------
<C> <S>
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of Cooley Godward LLP. Reference is made to Exhibit
5.1.
24.1 Power of attorney. Reference is made to Page II-6.
27.1 Financial Data Schedule.
</TABLE>
* Previously filed on Registrant's S-1 Registration Statement, filed with the
Securities and Exchange Commission on June 30, 1999.
** Previously filed on Registrant's 8-K, as filed with the Securities and
Exchange Commission on November 18, 1999.
+ To be filed by Amendment.
<PAGE>
September 24, 1999
Enrique Salem
351 North Kenter Ave.
Los Angeles, CA 90049
Dear Enrique;
I am pleased to confirm our offer of employment to you effective upon your
acceptance of this offer, for the position of Senior Vice President of
Technology and Operations reporting to me. Your official hiredate is October 1,
1999.
Ask Jeeves offers employees a competitive and comprehensive compensation and
benefits package. The following information outlines the terms and conditions of
our job offer.
BASE SALARY
Your starting annual salary will be $175,000, paid on a semi-monthly basis, in
accordance with the Company's normal payroll procedures.
BONUS
You will be eligible to receive a lump sum bonus of $50,000 which will become
payable twelve months from your hire date. Details of the performance
measurements associated with this bonus will be presented to your within the
first 30 days of your employment and will be mutually agreed upon.
STOCK OPTIONS
Subject to approval by our Board of Directors, you will be granted 275,000
options to purchase stock in the Company. Your options will vest over a
period of four years, with 25% of the shares vesting on the first anniversary
of your employment, and the remaining shares vesting in 36 equal monthly
installments thereafter, at the end of each month during which you remain an
active regular employee of Ask Jeeves. In addition, Ask Jeeves will guarantee
that after 18 months of employment, your package of stock options will have a
value of $1.2 MILLION. Should the value of your options be below $1.2
million, Ask Jeeves will pay you the difference between the value of the
options and $1.2 million in cash or Ask Jeeves' stock. You will be able to
determine the choice. This differential will be placed in an escrow account
and if at the end of 36 months your value in this stock options were $2
million or greater than the amount held in escrow, the funds would revert
back to Ask Jeeves. If the stock options have a value less than $2 million,
the escrow account will be released to you at that time.
<PAGE>
SEVERANCE
Should Ask Jeeves terminate your employment within the first year due to change
of control, you will be entitled to immediately vest 12/48th of your stock
options or 6/48ths of the Options if termination is after 1 year from your hire
date. You will also receive 6 months of your base salary as severance not to
exceed $88,000.
RELOCATION AND HOME LOAN ASSISTANCE
Ask Jeeves will cover all related relocation expense up to a total amount of
$115,000. This will cover expenses such as temporary housing, moving and any
real estate expenses related to the purchase of a home in this area. In
addition, we will provide you with a monthly temporary housing allowance of
$5000 until you have moved into your permanent residence.
Ask Jeeves will issue you a secured loan of $1 million at current market rate.
The provisions of the loan is outlined:
1. Interest on loan for first 36 months will be accrued but not payable
to Ask Jeeves during the first 36 months and will be added to the loan
balance.
2. You will begin paying interest on a current basis beginning on the
37th month.
3. Entire loan balance and all outstanding interest will be payable at
the end of 48 months.
4. Should your employment with Ask Jeeves terminate prior to the 48
months, you will repay the entire loan and outstanding interest within
6 months of your termination date.
5. The loan is to be secured by a trust deed on your home.
OTHER EMPLOYMENT BENEFITS
Enclosed is a summary of our current employee benefits. Information on our
Benefit plans will be provided to you upon acceptance of this offer.
AT-WILL EMPLOYMENT STATUS
It is the policy of Ask Jeeves that employment is "at-will." This means that if
you accept this offer of employment from Ask Jeeves, Ask Jeeves may terminate
your employment for any reason at any time, with or without notice, and with or
without cause. Similarly, you are free to resign at any time, for any reason or
for no reason. This offer is contingent upon your signing an Agreement of
At-Will Employment Status.
TERMS AND CONDITIONS OF EMPLOYMENT
This letter, along with the Confidential Information and Invention Assignment
Agreement between you and the Company, sets for the terms of your employment
with the Company and supersedes any prior representations or agreements, whether
written or oral. This letter may not be modified or amended except by a written
agreement signed by the Company and by you.
<PAGE>
:Enclosures
I agree and accept the terms of this employment offer.
/s/ Enrique Salem 10/25/99
- -------------------------------- -----------------
Enrique Salem Start Date
<PAGE>
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the references to our firm under the captions "Selected
Supplemental Consolidated Financial Data" and "Experts" and to the use of our
report dated November 19, 1999, in the Registration Statement (Form S-1) and
related Prospectus of Ask Jeeves, Inc. for the registration of 1,631,864 shares
of its common stock.
Walnut Creek, California
January 28, 1998
