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PROSPECTUS
ASK JEEVES, INC.
1,631,863 SHARES
COMMON STOCK
The selling stockholders identified in this prospectus are selling 1,631,863
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 February 23, 2000, the last reported sales price for our common stock
was $63.31 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 73.
Concurrently with this common stock offering and by a separate prospectus,
Ask Jeeves is offering up to $100,000,000 of common stock, and selling
stockholders are selling up to an additional $50,000,000 of common stock, in an
underwritten public offering. Ask Jeeves has offered to the underwriters an
option to purchase up to $22,500,000 of common stock exercisable for up to 30
days after the closing of the underwritten offering to cover over-allotments.
The completion of this common stock offering and the underwritten offering are
not dependent on one another.
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 FEBRUARY 24, 2000
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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 an online personal service
infrastructure to provide real-time access to information, products and
services. Our online personal service infrastructure allows companies to create
an intuitive interaction with their customers. We accomplish this by connecting
Web users to answers through easy-to-use services that include automated search,
natural language question answering, intelligent advisor technology and live
help. We believe that by providing users with a more intuitive, relevant and
flexible way to access information online, companies will be able to maximize
the returns on their Web-based strategies through better customer targeting and
acquisition, increased conversion and retention rates, lowered support costs and
access to customer data. Key elements of our strategy are to extend our reach in
corporate markets, introduce new technologies and services, provide customer
insight, increase awareness of the Ask Jeeves brand, expand our syndication
business and expand our international presence.
Our online personal service infrastructure is built on proprietary
technology combined with human intelligence to create an interaction centered on
understanding users' specific needs and interests and connecting them to the
most relevant information, products and services. We introduced Jeeves Answers,
our natural language question answering service, on Ask Jeeves at Ask.com in
1997 to provide Web users with a more satisfying and productive experience and
to help companies better target and acquire customers. In 1998, we launched a
customized service to develop and implement Jeeves Answers on corporate Web
sites to help companies better acquire, convert and retain customers. In 1999,
we expanded our suite of services to include Jeeves Advisor and Jeeves Live
which permit our corporate customers to offer a decision advisory process and
real-time interaction with a live representative. In February 2000, we added
Jeeves Search, a popularity-based automated search technology that uses the
collective queries and Web site selections of users to deliver relevant results
across the Internet or on a corporate Web site. Our services are built on a
flexible, scalable architecture with an information gathering system that
collects users' questions and selections across Ask Jeeves-enabled Web sites. We
store and analyze the information we collect to improve the performance of our
services and to deliver user insight to our corporate customers.
We deliver our online personal service infrastructure through our Web
Properties and Syndication Group and our Corporate Services Group. Our Web
Properties and Syndication Group delivers potential customers to companies' Web
sites through a combination of advertising, sponsorships, listing and shopping
services available on Ask.com and DirectHit.com. We have recently added a
syndication service, whereby we syndicate our services to generate traffic to
our Web sites. This service also includes our existing licensing arrangements
with portals, such as AltaVista and Netscape. Currently, we reach millions of
Web users through our Web Properties and Syndication Group, enabling companies
to reach a broad set of potential customers. Our Corporate Services Group
develops and maintains customized automated search, natural language question
answering, intelligent advisor and live help services on corporate Web sites. We
believe our corporate services help companies convert shoppers to buyers, reduce
support costs, gain consumer insight and improve customer retention. The
Corporate Services Group provides these services on an outsourced basis with
little involvement from our corporate customers' technical personnel.
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Through syndication, we are able to license our technology and our knowledge
base to portals, Web sites and media companies so that they can provide their
users with an easier and more intuitive way to find the information, products
and services such users need. Syndication allows us to expand the reach of our
interactive network and increase revenues without expending large amounts of
resources.
In November 1999, we acquired Net Effect Systems, Inc., a provider of a live
help service that enables real-time, text-based communication between a company
and its online customers. In February 2000, we acquired Direct Hit
Technologies, Inc., a leading provider of technology that aggregates and
organizes online content to enable users to quickly find relevant and accurate
information, products and services. We believe that the addition of online live
help technology and popularity-based search technology to our natural language
question answering technology will increase the likelihood that users will find
more relevant answers and will do so more efficiently.
We have also recently created Ask Jeeves International, Inc., a wholly-owned
subsidiary, to make our interactive network accessible worldwide. Central to
these efforts is customizing our interactive network for both language and
cultural differences.
We were incorporated in California in June 1996 and reincorporated in
Delaware in June 1999. Our principal executive offices are located at 5858
Horton Street, Suite 350, Emeryvillle, 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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<S> <C>
Common Stock offered by selling
stockholders............................... 1,631,863 shares
Common Stock to be outstanding after the
offering................................... 28,472,883 shares (1)
Use of Proceeds.............................. We will not receive any proceeds from the
sale of common stock by the selling
stockholders.
Nasdaq National Market symbol................ ASKJ
Risk Factors................................. You should read the "Risk Factors" section,
beginning on page 6, as well as the other
cautionary statements, risks and
uncertainties described in this prospectus so
that you understand the risks associated with
an investment in the common stock.
Concurrent common stock offering............. Concurrently with this common stock offering
and by a separate prospectus, we are offering
up to $100,000,000 of common stock, and the
selling stockholders are selling up to an
additional $50,000,000 of common stock in an
underwritten public offering. We have offered
to the underwriters an option to purchase up
to $22,500,000 of common stock to cover over-
allotments. The completion of this common
stock offering and the underwritten offering
are not dependent on one another.
</TABLE>
- ------------------------
(1) Excludes (a) 6,505,149 shares of common stock issuable upon the exercise of
options outstanding as of December 31, 1999, with a weighted average
exercise price of $21.40 per share, (b) approximately 316,000 shares of
common stock subject to outstanding options with a weighted average exercise
price of $8.51 per share assumed as part of the Direct Hit acquisition,
(c) an aggregate of 1,996,661 shares of common stock reserved for future
issuance under our stock option plans, (d) an aggregate of 400,000 shares of
common stock reserved for future issuance under our 1999 Employee Stock
Purchase Plan, and (e) 13,750 shares of common stock issuable upon the
exercise of warrants outstanding as of December 31, 1999, with a weighted
average exercise price of $12.24 per share.
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SUMMARY CONSOLIDATED FINANCIAL DATA
The summary consolidated balance sheet data below as of December 31, 1999 is
presented
on:
- an actual basis; and
- a pro forma basis to give effect to our acquisition of Direct Hit
Technologies, Inc. in February 2000.
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<CAPTION>
PERIOD FROM
JUNE 13, 1996
(INCEPTION)
THROUGH YEAR ENDED DECEMBER 31,
DECEMBER 31, --------------------------------------------
1996 1997 1998 1999
------------- ------------ ------------- -------------
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CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Total revenues........................ $ -- $ 22,603 $ 800,398 $ 22,026,796
Gross profit (loss)................... -- 22,603 (598,994) 7,942,866
Operating loss........................ (107,797) (730,174) (6,966,362) (54,906,702)
Net loss.............................. $ (107,797) $ (724,639) $ (6,806,359) $ (52,929,226)
========== ============ ============= =============
Basic and diluted net loss per
share............................... $ (.08) $ (.21) $ (.74) $ (2.64)
========== ============ ============= =============
Weighted average shares outstanding
used in computing basic and diluted
net loss per share.................. 1,295,342 3,394,397 9,162,624 20,046,959
========== ============ ============= =============
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
------------------------------
ACTUAL PRO FORMA(1)
------------ ---------------
(UNAUDITED)
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CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents and short-term investments........ $ 51,530,227 $ 68,442,603
Working capital............................................. 35,756,807 39,166,568
Total assets................................................ 76,164,089 579,497,437
Capital lease obligations, less current portion............. 2,350,760 2,350,760
Total stockholders' equity.................................. 41,851,363 528,452,268
</TABLE>
(1) As consideration for Direct Hit, we issued approximately 4.78 million shares
of common stock with a value of $456.0 million, assumed options exercisable
into approximately 316,000 shares of our common stock with a value of $30.6
million (net of $1.5 million in proceeds upon exercise), assumed liabilities
of $5.0 million and incurred approximately $11.7 million in acquisition
costs. The purchase consideration is subject to finalization.
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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 OCCUR, OUR BUSINESS,
FINANCIAL CONDITION OR OPERATING RESULTS COULD BE SERIOUSLY HARMED. 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.
Because the Internet is constantly changing, we may need to change our business
model to adapt to those changes.
In November 1999, we acquired Net Effect Systems, Inc., a provider of a live
help service that enables real-time, text-based communication between a company
and its online customers. In February 2000, we acquired Direct Hit
Technologies, Inc., a leading provider of technology that aggregates and
organizes online content to enable users to quickly find relevant and accurate
information, products and services. These acquisitions and future acquisitions
and the resulting changes in organizational structure could impose significant
burdens on our management and our employees and could result in loss of
productivity or increase attrition.
Any investment in our company must be considered in light of the problems
frequently encountered by companies in an early stage of development in new and
rapidly evolving markets. To address the risks we face, we must, among other
things:
- maintain and enhance our brand;
- expand our product and service offerings;
- increase the amount of traffic to Ask.com and DirectHit.com;
- increase the number and types of businesses that use our online personal
service infrastructure;
- increase the value of our online personal service infrastructure to our
users, customers, electronic commerce merchants and advertisers; and
- attract, integrate, retain and motivate qualified personnel.
We cannot be certain that our business strategy will be successful or that
we will successfully address these risks.
WE HAVE A HISTORY OF NET LOSSES AND EXPECT TO CONTINUE TO INCUR NET LOSSES.
We have incurred significant net losses in each fiscal quarter since our
inception, including a net loss of approximately $52.9 million for the year
ended December 31, 1999 and, as of December 31, 1999, we had an accumulated
deficit of approximately $60.6 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, syndication relationships, 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, enhance of our online personal service infrastructure and expand 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
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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.
OUR ONLINE PERSONAL SERVICE INFRASTRUCTURE IS NOVEL AND UNPROVEN.
We will be successful only if Internet users adopt our natural-language
services and popularity-based searches as their primary method of navigating the
Internet. Internet users have a variety of search techniques, such as search
engines, available to them to navigate the Internet. Users can also rely on
methods, such as call centers, chat rooms and e-mail, rather than
difficult-to-navigate corporate Web sites, to obtain information on products and
services. It is difficult to predict the extent and rate of user adoption of our
online personal service infrastructure. We cannot assure you that widespread
acceptance of our services has occured or will occur. Visitors to our online
personal service infrastructure may use it once or twice and then revert to
traditional search techniques to navigate the Internet or choose new search
techniques.
OUR METHODS OF GENERATING REVENUE ARE RELATIVELY NEW AND LARGELY UNTESTED.
We generated approximately 57%, 34%, 5% and 4% of our revenues for the year
ended December 31, 1999 through Internet advertising, licensing to corporate
customers, electronic commerce transaction fees and syndication fees for
providing Internet-wide navigation services, respectively. Revenues from
Internet advertising will make up a significant amount of our revenues for the
foreseeable future. Since the Internet advertising market is new and rapidly
evolving, we cannot yet gauge its effectiveness as compared to traditional
advertising media. Advertisers that have traditionally relied on other
advertising media may be reluctant to advertise on the Internet believing that
Internet advertising is less effective than traditional advertising media for
promoting their products and services. Consequently, they may allocate only
limited portions of their advertising budgets to Internet advertising. Our
business could be seriously harmed if Internet advertising does not continue to
grow or if we are unsuccessful in increasing our advertising revenues.
Furthermore, we rely on a third-party advertising service, provided by
DoubleClick, Inc., to deliver advertisements to our users. If DoubleClick fails
to deliver the advertisements as contracted for, due to reliability or
performance problems, or if advertisements cannot be targeted as promised to
advertisers, our revenues will decrease.
Furthermore, we expect sales to corporate customers to constitute a growing
percentage of our revenues. As of December 31, 1999, we had provided customized
solutions to approximately 60 companies. Our online personal service
infrastructure has only been recently implemented onto these corporate Web
sites. As such, we cannot yet determine the effectiveness of our services
compared to traditional methods of customer relationship management. If we
cannot demonstrate to corporate customers that our services increase the rate at
which browsers become purchasers, improve customer satisfaction on their Web
sites and reduce 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 seriously harmed if we are unsuccessful in increasing the
number of corporate customers.
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 products and services purchased online 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.
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OUR ACQUISITIONS OF NET EFFECT SYSTEMS, INC., THE EVERGREEN PROJECT, INC. AND
DIRECT HIT TECHNOLOGIES, INC. AND ANY FUTURE ACQUISITIONS MAY BE DIFFICULT TO
INTEGRATE, DISRUPT OUR BUSINESS, DILUTE STOCKHOLDER VALUE OR DIVERT MANAGEMENT
ATTENTION.
We acquired Net Effect Systems, Inc. in November 1999, The Evergreen Project
Inc. in January 2000 and Direct Hit Technologies, Inc. in February 2000. We are
in the initial stages of integrating the products, services, technologies and
personnel from each company into Ask Jeeves. We may encounter problems
associated with the assimilation of Net Effect, Evergreen and Direct Hit
including:
- difficulties in assimilation of acquired personnel, operations,
technologies or products;
- unanticipated costs associated with the acquisitions;
- diversion of management's attention from other business concerns;
- adverse effects on our existing business relationships with our, Net
Effect, Evergreen and Direct Hit customers; and
- inability to retain employees of Net Effect, Evergreen and Direct Hit.
If we are unable to successfully integrate Net Effect, Evergreen and Direct
Hit or to create new or enhanced services, we may not achieve the anticipated
benefits from our acquisitions of Net Effect, Evergreen and Direct Hit. If we
fail to achieve the anticipated benefits from the acquisitions, we may incur
increased expenses, experience a shortfall in our anticipated revenues and we
may not obtain a satisfactory return on our investment. In addition, if any
significant number of Net Effect, Evergreen or Direct Hit employees fail to
remain employed with us, we may experience difficulties in achieving the
expected benefits of the acquisitions.
In addition, in the first quarter of 2000, we will incur a one-time charge
related to in-process research and development acquired in connection with our
recent acquisitions. Beginning in the first quarter of 2000, we will also begin
to amortize charges from assets acquired, including goodwill, from Evergreen and
Direct Hit. We expect these charges to be significant.
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.
TO MANAGE OUR GROWTH, WE NEED TO IMPROVE OUR SYSTEMS, CONTROLS AND PROCEDURES.
We have experienced and may continue to experience rapid growth, which has
placed, and could continue to place, a significant strain on our managerial,
financial and operational resources and personnel. 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 cannot be
assured that our systems, procedures or controls will be adequate to support our
operations or that we will be able to manage any growth effectively. If we do
not manage growth effectively, our business would be seriously harmed.
OUR GROWTH WILL DEPEND ON OUR ABILITY TO DEVELOP OUR BRAND.
We believe that broader brand recognition and a favorable public perception
of the Ask Jeeves brand is essential to our future success. Accordingly, we
intend to continue pursuing an aggressive brand-
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enhancement strategy, which will include mass market advertising, promotional
programs 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 and customers may not increase. Further, even if the number
of new users increases, the amount of traffic on Ask.com and DirectHit.com and
the number of our 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.
WE MAY NOT BE ABLE TO EFFECTIVELY COMPETE AGAINST OUR CURRENT AND POTENTIAL
COMPETITORS.
We have a number of competitors for our online personal service
infrastructure.
CORPORATE SERVICES GROUP. We compete with a number of companies that are
addressing the same need to improve automated or online customer service for
corporate customers. For example, we compete with companies that provide
shopping advisors, such as Active Research Inc.; automated e-mail response and
live interaction, such as Kana Communications, Inc.; search technology, such as
Inktomi Corporation; and customer relationship management, such as Siebel
Systems, Inc.
WEB PROPERTIES AND SYNDICATION GROUP. We face direct competition from
companies that provide Internet-wide search and directory services. For example,
we compete with search engines, including Excite@Home Corporation, Inktomi
Corporation, Google Inc. and AltaVista Company, for the traffic generated by
Internet users seeking links to third-party content to address their online
information needs. We also compete with directory services, such as
Yahoo! Inc., Goto.com, Inc. and LookSmart, Ltd. because they provide alternative
ways for users to obtain the desired information.
Our ability to compete depends on many factors, many of which are outside of
our control. These factors include: the quality of content, the ease of use of
online services, the timing and market acceptance of new and enhanced online
services and sales and marketing efforts by our competitors and by us.
Many of our existing competitors, as well as potential new competitors, have
longer operating histories, greater name recognition, larger customer bases and
significantly greater financial, technical and marketing resources than we do.
This may allow them to devote greater resources than we can to the development
and promotion of their services. Many of these competitors offer a wider range
of services than we do. These services may attract users to our competitors'
sites and, consequently, result in a decrease in traffic to our site. These
competitors may also engage in more extensive research and development, adopt
more aggressive pricing policies and make more attractive offers to existing and
potential corporate customers, advertisers, syndicators and electronic commerce
merchants. Our competitors may develop products and services that are equal to,
or superior to, our products and services, or achieve greater market acceptance.
In addition, current and potential competitors have established or may establish
cooperative relationships among themselves or with third parties to better
address the needs of advertisers and businesses engaged in electronic commerce.
As a result, it is possible that new competitors may emerge and rapidly acquire
significant market share.
OUR RECENTLY FORMED INTERNATIONAL SUBSIDIARY MAY NOT BE SUCCESSFUL.
In the fourth quarter of 1999, we formed a wholly-owned subsidiary, Ask
Jeeves International, Inc., or AJI, for the purpose of marketing our online
personal services infrastructure outside of the United States. AJI recently
entered into a joint venture to provide our services in the United Kingdom. This
expansion into international markets will require substantial management
attention and financial resources. At this time, we have recorded no sales from
our international operations. We cannot be certain that our
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investment in AJI and in establishing operations in other countries will produce
the desired levels of revenue. In addition, AJI is subject to other inherent
risks and problems, including:
- the impact of recessions in economies outside the United States;
- greater difficulty in accounts receivable collections;
- unexpected changes in regulatory requirements;
- difficulties and costs of staffing and managing foreign operations;
- reduced protection for intellectual property rights in some countries;
- political and economic instability;
- the introduction of the euro;
- fluctuations in currency exchange rates; and
- difficulty in maintaining effective communications due to distance,
language and cultural barriers.
Some or all of the above factors could seriously harm the results of our
operations.
OUR OPERATING RESULTS ARE VOLATILE AND DIFFICULT TO PREDICT.
You should not rely on our results of operations during any particular
quarter as an indication of our future results for a full year or any other
quarter. Our quarterly revenues and operating results have varied significantly
in the past and may vary significantly in the future due to a number of factors,
including:
- our ability to obtain new corporate customers, the length of time needed
to customize our online personal services infrastructure for corporate
customers and the timing of revenue recognition with respect to contracts
with corporate customers;
- our ability to obtain new advertising contracts, maintain existing ones
and effectively manage our advertising inventory;
- the number of users of Ask.com, DirectHit.com, Web sites syndicating our
services and the Web sites of our corporate customers;
- our ability to attract and retain advertisers and our ability to link our
electronic commerce merchants to potential customers;
- seasonal and other fluctuations in demand for our electronic commerce
services and for advertising space on Ask.com and DirectHit.com;
- our ability to develop and introduce new technology;
- announcements and new technology introductions by our competitors;
- our ability to attract and retain key personnel;
- costs relating to possible acquisitions and integration of technologies or
businesses;
- rate changes for advertising on Ask.com and DirectHit.com;
- marketing expenses and technology infrastructure costs as well as other
costs that we may incur as we expand our operations; and
- the timing of charges related to the acquisitions and any amortization of
expenses related to the acquisitions.
We have experienced lower traffic during the year-end holiday season and a
slower rate of growth during the summer months. Given our limited operating
history, user traffic on our Web site is extremely
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difficult to forecast accurately. Moreover, obtaining new corporate customers
depends on many factors that we are not able to control, such as the allocation
of budgetary resources by potential customers. The average sales cycle for
obtaining new corporate customers has typically ranged from two to four months.
Therefore, it is difficult to predict the number of corporate customers that we
will have in the future. We may be unable to adjust spending to compensate for
an unexpected shortfall in our revenues. In addition we expect our operating
expenses to increase as we expand our engineering, sales and marketing
operations, broaden our customer support capabilities, develop new strategic
alliances, fund increased levels of research and development and build our
operational infrastructure. As a result, if we experience an unexpected
shortfall in revenues, or if our revenues do not grow faster than the increase
in these expenses, we could experience significant variations in the operating
results from quarter to quarter.
IF WE FAIL TO MEET THE EXPECTATIONS OF PUBLIC MARKET ANALYSTS AND INVESTORS, THE
MARKET PRICE OF OUR COMMON STOCK MAY DECREASE SIGNIFICANTLY.
Public market analysts and investors have not been able to develop
consistent financial models for the Internet market because of the unpredictable
rate of growth of Internet use, the rapidly changing models of doing business on
the Internet and the Internet's relatively low barriers to entry. As a result,
and because of the other risks discussed in this prospectus, it may be likely
that our actual results will not meet the expectations of public market analysts
and investors in future periods. If this occurs, the price of our common stock
will likely fall.
FAILURE TO ADD CORPORATE CUSTOMERS OR RETAIN NEW CORPORATE CUSTOMERS MAY HAVE AN
ADVERSE EFFECT ON OUR REVENUES.
In the coming year, we expect that revenues associated with corporate
customers will be dependent on a limited number of customers, comprised
primarily of corporations with large, difficult-to-navigate Web sites. If we do
not complete sales to a sufficient number of customers, our future revenues will
be seriously harmed.
Most of our corporate customer contracts have a term of one year following
the implementation of our services. As a result, if we are unable to offer value
to our customers during the term of these contracts, or if our customers choose
a competitor's service over our service, or if such customers decide to use
their own proprietary technology to develop services similar to ours, such
customers may not renew their contracts. If we do not obtain a sufficient number
of contract renewals or if such renewal contracts are obtained on terms less
favorable than the original contract, our business could be seriously harmed.
CUSTOMIZING OUR SERVICES FOR OUR CORPORATE CUSTOMERS IS LABOR INTENSIVE.
Because the customization of our services is labor intensive, it is
difficult to predict the length of the development cycle. Factors that affect
the length of the development cycle include the overall size and complexity of
the Web site, the interaction with the customer and the dynamic nature of the
content. Generally, it takes three to four months to launch a customized version
of our services. The long development cycle makes it difficult to predict the
delivery time to the customer, realize our revenue goals and manage our internal
hiring needs to meet new projects. In addition, in order to meet increased
demand by corporate customers, we may have to hire additional people and train
them in advance of orders. When we outsource development of custom knowledge
bases, we will have little control over the speed and quality of the
development. Any decline in the speed or quality of the implementation of our
custom services could seriously harm our business.
WE DEPEND ON THIRD-PARTY CONTENT.
Ask.com is designed to directly link users to a page within a third-party
Web site that contains the answer to a question asked. However, when Ask.com
attempts to direct the user to a page within the Web
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site, some companies have automatically redirected users to their home page. If
companies prevent us from directly linking our users to a page within a
third-party Web site, and if there are no comparable alternative Web sites to
which we can direct our users, the utility and attractiveness of our services to
consumers may be reduced. If this occurs, traffic on Ask.com could significantly
decrease, which would seriously harm our business.
Visitors to Ask.com use it to obtain direct access to the information,
products and services they need through the display of a third-party Web page
containing the answer to the user's question. We have little control over the
content contained on these third-party Web sites. If these third-party Web sites
do not contain high-quality, up-to-date and useful information to the user, the
utility of our service to the user will be reduced, which could seriously harm
our business.
WE MAY BE LIABLE FOR OUR LINKS TO THIRD-PARTY WEB SITES.
We could be exposed to liability with respect to the selection of
third-party Web sites that may be accessible through Ask.com and DirectHit.com.
These claims might include, among others, that by linking to Web sites operated
by third parties, we may be liable for copyright or trademark infringement or
other unauthorized actions by these third-party Web sites. Other claims may be
based on errors or false or misleading information provided on Ask.com,
including information deemed to constitute professional advice such as legal,
medical, financial or investment advice. Other claims may be based on our links
to sexually explicit Web sites and our provision of sexually explicit
advertisements when this content is displayed. Our business could be seriously
harmed due to the cost of investigating and defending these claims, even to the
extent these claims do not result in liability. Implementing measures to reduce
our exposure to this liability may require us to spend substantial resources and
limit the attractiveness of our service to users.
WE FACE RISKS RELATED TO EXPANDING INTO RELATIVELY NEW SERVICES AND BUSINESS
AREAS, IN PARTICULAR, ELECTRONIC COMMERCE.
To increase our revenues, we will need to expand our operations by promoting
new or complementary products and by expanding the breath and depth of our
services. In particular, our future success will largely depend on our ability
to substantially increase revenues through the facilitation of electronic
commerce transactions. The market for electronic commerce services is extremely
competitive. Because we only recently entered this market and we have little
experience in it, we may have limited success in this market. In January 2000,
we expanded our pilot electronic commerce program. The expansion of our
electronic commerce services may strain our management, financial and
operational resources. Our expansion into new product and service offerings may
not be timely or may not generate sufficient revenues to offset their cost. If
this occurs, our business, operating results and financial condition will be
seriously harmed.
OUR FUTURE SUCCESS DEPENDS ON OUR ABILITY TO RETAIN OUR PRESIDENT AND CHIEF
EXECUTIVE OFFICER.
Our future success depends, in part, on the continued service of Robert
Wrubel, our President and Chief Executive Officer. Mr. Wrubel is not bound by an
employment agreement for any specific term. Our relationship with Mr. Wrubel is
at will. Although we are the beneficiaries of a key person life insurance policy
on Mr. Wrubel's life, the loss of his services would seriously harm our
business.
OUR FUTURE SUCCESS DEPENDS ON OUR ABILITY TO ATTRACT, RETAIN AND MOTIVATE HIGHLY
SKILLED EMPLOYEES.
Our future success also depends on our ability to attract, retain and
motivate highly skilled employees. Competition for employees in our industry is
intense. Additionally, it is often more difficult to attract employees once a
company's stock is publicly traded because the exercise price of equity awards
such as stock options are based on the public market, which is highly volatile.
We may be unable to attract,
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assimilate or retain other highly qualified employees in the future. We have
experienced, and we expect to continue to experience in the future, difficulty
in hiring and retaining highly skilled employees with appropriate
qualifications.
WE WILL ONLY BE ABLE TO EXECUTE OUR BUSINESS PLAN IF INTERNET USAGE GROWS.
Our business would be adversely affected if Internet usage does not continue
to grow or grows at significantly lower rates compared to current trends. The
continued growth of the Internet depends on various factors, many of which are
outside our control. These factors include:
- the Internet infrastructure may not be able to support the demands placed
on it;
- performance and reliability of the Internet may decline as usage grows;
- security and performance concerns due to hackers and authentication
concerns with respect to the transmission over the Internet of
confidential information, such as credit card numbers, and attempts by
unauthorized computer users, so-called hackers, to penetrate online
security systems; and
- privacy concerns, including those related to the ability of Web sites to
gather user information without the user's knowledge or consent.
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.com
or DirectHit.com could result in reduced user traffic and reduced revenues. Our
network and server equipment for Ask.com is located at Frontier GlobalCenter in
Palo Alto, California and Exodus Communications in Sunnyvale, California. The
servers hosting our popularity engine technology are located at Exodus
Communications in Waltham, Massachusetts, Santa Clara, California, and London,
England. Additionally, some of our corporate customer Web sites are co-located
with our customers' servers at other facilities. 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.
We have experienced slower response times and interruptions in service due
to malfunction at our hosting facilities and on the Internet backbone networks,
major software upgrades at Ask Jeeves and undetected software defects. Ask.com
has been interrupted for periods ranging from a few minutes to three hours and
DirectHit.com has experienced interruptions of up to hours. In addition,
Ask.com and DirectHit.com could also be affected by computer viruses, electronic
break-ins or other similar disruptions. If we experience outages, frequent or
persistent system failures or degraded response times, our reputation and brand
could be permanently harmed. In addition, we could lose advertising revenues
during these interruptions and user satisfaction could be negatively impacted if
the service is slow or unavailable.
Our users and customers depend on Internet service providers, online service
providers and other Web site operators for access to Ask.com and DirectHit.com.
Each of these providers has experienced significant outages in the past and
could experience outages, delays and other difficulties due to system failures
unrelated to our systems.
The occurrence of an earthquake or other natural disaster or unanticipated
problems at our principal facilities or at the servers that host or back-up our
systems could cause interruptions or delays in our interactive network or a loss
of data. Our systems are vulnerable to damage or interruption from fire, flood,
power loss, telecommunications failure, break-ins, earthquake and similar
events. Our general liability insurance policies may not adequately compensate
us for losses that may occur due to interruptions in our service.
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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
seriously harmed if we incur significant costs to adapt to these changes. If we
cannot adapt to these changes, or do not sufficiently increase the features and
functionality of our products and services, our customers may switch to the
product and service offerings of our competitors. Furthermore, our competitors
or potential competitors may develop a novel method of Internet navigation that
is equal or superior to those we offer. As a result, demand for our online
personal service infrastructure may decrease.
WE MAY FACE POTENTIAL LIABILITY FOR INVASION OF PRIVACY.
We have a policy against using personally identifiable information obtained
from users of our online personal service infrastructure without the user's
permission. In the past, the Federal Trade Commission has investigated companies
that have used personally identifiable information without permission or in
violation of a stated privacy policy. If we use this information without
permission or in violation of our policy, we may face potential liability for
invasion of privacy for compiling and providing information to our corporate
customers and electronic commerce merchants.
WE NEED TO EXPAND OUR SALES AND SUPPORT ORGANIZATIONS.
We will continue to expand our advertising sales, syndication and corporate
sales operations and marketing efforts to increase market awareness and sales of
our products and services. We will need to increase our staff to support new
customers and the expanding needs of our existing customers. Competition for
highly-qualified sales personnel is intense, and we may not be able to hire the
kind and number of sales personnel we are targeting. Hiring highly-qualified
customer service and account management personnel is very competitive in our
industry due to the limited number of people available with the necessary
technical skills and understanding of the Internet.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES COULD HARM OUR BUSINESS.
Any new law or regulation pertaining to the Internet, or the application or
interpretation of existing laws, could decrease the demand for our services,
increase our cost of doing business or otherwise seriously harm our business.
There is, and will likely continue to be, an increasing number of laws and
regulations pertaining to the Internet. These laws or regulations may relate to
liability for information retrieved from or transmitted over the Internet,
online content regulation, user privacy, taxation and the quality of products
and services. Furthermore, the growth and development of electronic commerce may
prompt calls for more stringent consumer protection laws that may impose
additional burdens on electronic commerce companies as well as companies like us
that provide electronic commerce services.
We file tax returns in such states as required by law based on principles
applicable to traditional businesses. However, one or more states could seek to
impose additional income tax obligations or sales tax collection obligations on
out-of-state companies, such as ours, which engage in or facilitate electronic
commerce. A number of proposals have been made at state and local levels that
could impose such taxes on the sale of products and services through the
Internet or the income derived from such sales. Such proposals, if adopted,
could substantially impair the growth of electronic commerce and seriously harm
our profitability.
Legislation limiting the ability of the states to impose taxes on
Internet-based transactions recently has been enacted by the United States
Congress. However, this legislation, known as the Internet Tax Freedom Act,
imposes only a three-year moratorium, which commenced October 1, 1998 and ends
on October 21, 2001, on state and local taxes on electronic commerce, where such
taxes are discriminatory and Internet
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access, unless such taxes were generally imposed and actually enforced prior to
October 1, 1998. It is possible that the tax moratorium could fail to be renewed
prior to October 21, 2001. Failure to renew this legislation would allow various
states to impose taxes on Internet-based commerce. The imposition of such taxes
could seriously harm our ability to become profitable.
In addition, we are not certain how our business may be affected by the
application of existing laws governing issues such as property ownership,
copyrights, encryption and other intellectual property issues, taxation, libel,
obscenity and export or import matters. The vast majority of such laws were
adopted prior to the advent of the Internet. As a result, they do not
contemplate or address the unique issues of the Internet and related
technologies. Changes in laws intended to address such issues could create
uncertainty in the Internet market. Such uncertainty could reduce demand for our
services or increase the cost of doing business as a result of litigation costs
or increased service delivery costs.
WE MAY FACE POTENTIAL ELECTRONIC COMMERCE-RELATED LIABILITIES AND EXPENSES.
Arrangements with electronic commerce merchants may expose us to legal risks
and uncertainties, including potential liabilities to consumers of the products
and services offered by these electronic commerce merchants. Although we carry
general liability insurance, our insurance may not cover potential claims of
this type or may not be adequate to indemnify us for all liability that may be
imposed.
Some of the risks that may result from these arrangements with businesses
engaged in electronic commerce include:
- potential liabilities for illegal activities that may be conducted by
participating merchants;
- product liability or other tort claims relating to goods or services sold
through third-party commerce sites;
- consumer fraud and false or deceptive advertising or sales practices;
- breach of contract claims relating to merchant transactions;
- claims that materials included in merchant sites or sold by merchants
through these sites infringe third-party patents, copyrights, trademarks
or other intellectual property rights, or are libelous, defamatory or in
breach of third-party confidentiality or privacy rights; and
- claims relating to any failure of merchants to appropriately collect and
remit sales or other taxes arising from electronic commerce transactions.
Even to the extent that such claims do not result in material liability,
investigating and defending such claims could seriously harm our business.
WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS AND WE MAY BE
LIABLE FOR INFRINGING THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS.
Third parties may infringe or misappropriate our patents, trademarks or
other proprietary rights, which could have a material adverse effect on our
business. We have applied for a patent on our "Grammar Template Query System"
with the United States Patent and Trademark Office. We have obtained registered
trademark status for "Ask Jeeves" in the United States, Tunisia and Norway. We
have also applied for registered trademark status for "Ask.com," "Ask Jeeves for
Kids," and our logo and service marks in the United States and various foreign
countries. Additionally, in connection with our acquisition of Direct Hit, we
received an assignment of one United States patent issued to Gary Culliss,
Direct Hit's co-founder, Chief Technology Officer and Chairman, covering aspects
of Direct Hit's technology, and three U.S. patent applications covering other
aspects of Direct Hit's technology. We do not know whether we will be able to
defend our proprietary rights since the validity, enforceability and scope of
protection of proprietary rights in Internet-related industries are uncertain
and still evolving. Because we are devoting
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<PAGE>
significant resources to building our brands, primarily "Ask Jeeves" and
"Ask.com," through media advertising campaigns, if we are unable to register the
trade and service marks for which we have applied, or if we are unable to defend
our intellectual property rights, our business may be seriously harmed.
In July 1999, IP Learn LLC filed a complaint against us in the United States
District Court for the Northern District of California, which was amended by the
plaintiff, which alleges that aspects of the Ask Jeeves technology infringe one
or more patents alleged to be held by the plaintiff. We have answered the
complaint and discovery has begun. Additionally, in December 1999, Patrick H.
Winston and Boris Katz filed a complaint against us in the United States
District Court for the District of Massachusetts. The complaint alleges that our
technology infringes two patents alleged to be held by the plaintiffs. We have
answered the complaint, but discovery has not begun. We intend to vigorously
defend against the allegations asserted in these complaints and we believe we
have meritorious defenses to the claims. The results of any litigation matter
are inherently uncertain. In the event of an adverse result in either of these
lawsuits, or in any other litigation with third parties that could arise in the
future with respect to intellectual property rights relevant to our products or
services, we could be required to pay substantial damages, including treble
damages if we are held to have willfully infringed, to cease the use of
infringing products or services, to expend significant resources to develop
non-infringing technology or to attempt to obtain licenses to the infringing
technology on commercially reasonable terms, if at all. In addition, litigation
frequently involves substantial expenditures and can require significant
management attention, even if we ultimately prevail. Accordingly, we cannot
assure you that these lawsuits will not seriously harm our business.
Third parties may assert infringement claims against us. From time to time
in the ordinary course of business we have been, and we expect to continue to
be, subject to claims of alleged infringement of the 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 by FASB, we may be
required to establish a new measurement date for stock options granted after
December 15, 1998, to our employees for the purpose of accounting for stock
options under APB No. 25. If a new measurement date is required to be
established, we would recognize deferred stock-based compensation which would be
amortized as stock-based compensation over the remaining vesting periods of the
options. We estimate that this charge could be approximately $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 seriously harm our operating
results.
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WE MAY NOT BE ABLE TO SECURE ADDITIONAL FINANCING TO MEET OUR FUTURE CAPITAL
NEEDS.
Concurrently with this common stock offering and by a separate prospectus,
we are offering up to $100,000,000 of common stock, and the selling stockholders
are selling up to an additional $50,000,000 of common stock, in an underwritten
public offering. We have offered to the underwriters an option to purchase up to
$22,500,000 of common stock to cover over-allotments. The completion of this
common stock offering and the underwritten offering are not dependent on one
another. We currently anticipate that our available cash resources combined with
the net proceeds from the underwritten offering 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
to fund brand promotion, develop new or enhanced services, respond to
competitive pressures or make acquisitions. We may be unable to obtain any
required additional financing on terms favorable to us, if at all. If adequate
funds are not available on acceptable terms, we may be unable to fund our
expansion, successfully promote our brand, develop or enhance services, respond
to competitive pressures or take advantage of acquisition opportunities, any of
which could seriously harm our business. If we raise additional funds through
the issuance of equity securities, our stockholders may experience dilution of
their ownership interest, and the newly-issued securities may have rights
superior to those of the common stock. If we raise additional funds by issuing
debt, we may be subject to limitations on our operations, including limitations
on the payment of dividends.
PROVISIONS IN DELAWARE LAW AND OUR CHARTER, STOCK OPTION AGREEMENTS AND OFFER
LETTERS TO EXECUTIVE OFFICERS MAY PREVENT OR DELAY A CHANGE OF CONTROL.
We are subject to the Delaware anti-takeover laws regulating corporate
takeovers. These anti-takeover laws prevent Delaware corporations from engaging
in a merger or sale of more than 10% of its assets with any stockholder,
including all affiliates and associates of the stockholder, who owns 15% or more
of the corporation's outstanding voting stock, for three years following the
date that the stockholder acquired 15% or more of the corporation's assets
unless:
- the board of directors approved the transaction where the stockholder
acquired 15% or more of the corporation's assets;
- after the transaction where the stockholder acquired 15% or more of the
corporation's assets, the stockholder owned at least 85% of the
corporation's outstanding voting stock, excluding shares owned by
directors, officers and employee stock plans in which employee
participants do not have the right to determine confidentially whether
shares held under the plan will be tendered in a tender or exchange offer;
or
- on or after this date, the merger or sale is approved by the board of
directors and the holders of at least two-thirds of the outstanding voting
stock that is not owned by the stockholder.
A Delaware corporation may opt out of the Delaware anti-takeover laws if its
certificate of incorporation or bylaws so provide. We have not opted out of the
provisions of the anti-takeover laws. As such, these laws could prohibit or
delay mergers or other takeover or change of control of Ask Jeeves and may
discourage attempts by other companies to acquire us.
Our certificate of incorporation and bylaws include a number of provisions
that may deter or impede hostile takeovers or changes of control or management.
These provisions include:
- our board is classified into three classes of directors as nearly equal in
size as possible with staggered three year-terms;
- the authority of our board to issue up to 5,000,000 shares of preferred
stock and to determine the price, rights, preferences and privileges of
these shares, without stockholder approval;
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- all stockholder actions must be effected at a duly called meeting of
stockholders and not by written consent;
- special meetings of the stockholders may be called only by the chairman of
the board, the chief executive officer or the board; and
- no cumulative voting.
These provisions may have the effect of delaying or preventing a change of
control.
Our certificate of incorporation and bylaws provide that we will indemnify
officers and directors against losses that may incur in investigations and legal
proceedings resulting from their services to us, which may include services in
connection with takeover defense measures. These provisions may have the effect
of preventing changes in our management.
In addition, our option agreements under the 1996 Stock Option plan provide
that if a change of control of Ask Jeeves occurs prior to the first anniversary
of the vesting commencement date of an option, then the vesting which would have
occurred by such anniversary shall occur. After the first anniversary of the
date of grant, these option agreements provide that the vesting of each option
shall accelerate by six months upon a change of control. As of December 31,
1999, there were 3,838,838 shares of common stock reserved for unvested options
granted under this plan. Furthermore, offer letters with our executive officers
provide for the payment of severance and acceleration of options upon the
termination of these executive officers following a change of control of Ask
Jeeves. These provisions in our stock option agreements and offer letters could
have the effect of discouraging potential takeover attempts.
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>
HIGH LOW
-------- --------
<S> <C> <C>
1999
Third Quarter (from July 1, 1999)......................... $ 77.82 $ 24.00
Fourth Quarter............................................ $190.50 $ 31.00
2000
First Quarter (through February 23, 2000)................. $139.75 $ 60.25
</TABLE>
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SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data are qualified by
reference to, and should be read in conjunction with, our 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 consolidated statement of operations data presented
below for the years ended December 31, 1997, 1998 and 1999, and the selected
consolidated balance sheet data at December 31, 1998 and 1999, give effect to
the merger with Net Effect Systems, Inc. a wholly-owned subsidiary, which was
accounted for as a pooling of interests, and are derived from our consolidated
financial statements that have been audited by Ernst & Young LLP, independent
auditors, except as to certain assets and net loss which were audited by other
auditors, included elsewhere in this prospectus. The selected consolidated
statement of operations data presented below for the period from June 13, 1996
(inception) through December 31, 1996, and the selected consolidated balance
sheet data at December 31, 1996 and 1997, give effect to the merger with Net
Effect and were taken from our audited consolidated financial statements. The
consolidated financial data for the year ended December 31, 1999 are not
necessarily indicative of the results that may be expected for any other future
period.
The unaudited pro forma consolidated balance sheet data gives effect to the
acquisition of Direct Hit as if the transaction occurred on December 31, 1999
and combines our audited consolidated balance sheet as of December 31, 1999 and
the audited consolidated balance sheet of Direct Hit as of December 31, 1999.
The unaudited pro forma information is presented for illustrative purposes only
and is not necessarily indicative of the operating results or financial position
that would have occurred if the transaction had been consummated at the dates
indicated, nor is it necessarily indicative of the future operating results or
financial position of the combined companies.
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<TABLE>
<CAPTION>
PERIOD FROM
JUNE 13, 1996 YEAR ENDED DECEMBER 31,
(INCEPTION) THROUGH --------------------------------------
DECEMBER 31, 1996 1997 1998 1999
------------------- --------- ----------- ------------
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
Web Properties and Syndication.............. $ -- $ -- $ 577,159 $ 14,563,669
Corporate Services.......................... -- 22,603 223,239 7,463,127
--------- --------- ----------- ------------
Total revenues............................ -- 22,603 800,398 22,026,796
Cost of revenues:
Web Properties and Syndication.............. -- -- 602,716 6,283,640
Corporate Services.......................... -- -- 796,676 7,800,290
--------- --------- ----------- ------------
Total cost of revenues.................... -- -- 1,399,392 14,083,930
Gross profit (loss)........................... 22,603 (598,994) 7,942,866
Operating expenses:
Product development......................... 107,797 440,740 1,712,466 8,609,774
Sales and marketing......................... -- 94,214 2,301,108 35,304,630
General and administrative.................. -- 217,823 2,324,784 8,410,943
Amortization of deferred stock
compensation.............................. -- -- 29,010 3,935,518
Write-off of in-process technology.......... -- -- -- 543,517
Acquisition costs........................... -- -- -- 6,045,186
--------- --------- ----------- ------------
Total operating expenses.................. 107,797 752,777 6,367,368 62,849,568
--------- --------- ----------- ------------
Operating loss................................ (107,797) (730,174) (6,966,362) (54,906,702)
Interest income............................... -- 5,535 165,741 2,164,195
Interest expense.............................. -- -- (5,738) (186,719)
--------- --------- ----------- ------------
Net loss...................................... $(107,797) $(724,639) $(6,806,359) $(52,929,226)
========= ========= =========== ============
Basic and diluted net loss per share.......... $ (.08) $ (.21) $ (.74) $ (2.64)
========= ========= =========== ============
Weighted average shares outstanding used in
computing basic and diluted net loss per
share....................................... 1,295,342 3,394,397 9,162,624 20,046,959
========= ========= =========== ============
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA
AS OF DECEMBER 31, AS OF
---------------------------------------------- DECEMBER 31,
1996 1997 1998 1999 1999
-------- -------- ---------- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents and short-term
investments.............................. $ -- $583,476 $8,510,851 $51,530,227 $ 68,442,603
Working capital............................ (6,219) 500,816 7,318,473 35,756,807 39,166,568
Total assets............................... -- 678,655 9,933,411 76,164,089 579,497,437
Capital lease obligations, less current
portion.................................. -- -- 45,945 2,350,760 2,350,760
Total stockholders' equity (deficit)....... (6,219) 567,797 8,291,156 41,851,363 528,452,268
</TABLE>
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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 introduced Ask Jeeves on Ask.com in 1997 to provide Web users with a more
satisfying and productive experience and to help companies target and acquire
customers. Since that time, we have launched customized services for corporate
Web sites to help companies better convert and retain customers. In
November 1999, we acquired Net Effect Systems, Inc., a provider of a live help
service that enables real-time, text-based communication between a company and
its online customers. In February 2000, we acquired Direct Hit
Technologies, Inc., a leading provider of technology that aggregates and
organizes online content to enable users to quickly find relevant and accurate
information, products and services. We deliver our services through our Web
Properties and Syndication Group and our Corporate Services Group.
Revenues associated with our Web Properties and Syndication Group consist
primarily of three components:
- advertising revenues;
- syndication fees; and
- electronic commerce transaction fees.
We earn advertising revenues from short-term advertising contracts by
delivering impressions to users over a specified period of time for a fixed fee.
Advertising rates, measured on a cost per thousand impressions, or CPM basis,
are dependent on whether the impressions are displayed in general rotation
throughout our Web sites or are directed to targeted visitors to Ask.com and
DirectHit.com, such as the computer, entertainment, family, health, money,
shopping and travel channels. Revenues are based upon actual impressions
delivered as measured by our third-party advertising delivery provider,
DoubleClick, Inc. As of December 31, 1999, we syndicated our services to four
companies that provide Internet-wide navigation services. Syndication fees
consist of a fixed fee that is recognized ratably over the contractual term,
generally a twelve-month period. We have acquired a number of syndication
relationships as a result of our acquisition of Direct Hit under which revenues
are earned on a fixed fee or revenue sharing basis, generally over a twelve
month term. We also generate revenues from a third component, the facilitation
of electronic commerce. Revenues from electronic commerce are generated when a
user clicks on the answer that links to an electronic commerce merchant's Web
site on a cost per click, or CPC basis. Electronic commerce transaction fees are
derived from short-term electronic commerce merchant contracts, generally over a
three-to-six month period.
Revenues from our Corporate Services Group consist of two components:
- customization; and
- maintenance and information service fees.
Since its introduction in October 1998, our Corporate Services have been
adopted by approximately 60 corporate customers. Throughout 1999, we have added
accounts in our targeted vertical markets of e-tailing, financial services,
technology and healthcare industries. We recognize customization, maintenance
and information service fees ratably over the contractual term, generally twelve
to fifteen months. Payments received prior to delivering the knowledge base or
providing maintenance and information services are recorded as deferred revenue
and recognized ratably over the contractual term.
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Cost of revenues for our Web Properties and Syndication Group consists
primarily of salaries and related personnel costs associated with the content
development, data analysis, testing and maintenance of our Web sites. Cost of
revenues for our Corporate Services Group consists primarily of salaries and
related personnel costs and other direct costs to provide customization,
information and maintenance services to our corporate customers. Cost of
revenues also includes amortization charges related to assets acquired from
Lumina Design Systems, Inc. and Excellerate, LLC. Beginning in the first quarter
of 2000, cost of revenues will include significant amortization charges related
to assets acquired from Evergreen and Direct Hit. We believe that ongoing
content development is required to remain competitive, and we expect that our
production and content expenses will continue to increase in the future.
Product development expenses consist primarily of salaries and related
personnel costs, consultant fees and expenses related to the design,
development, testing and enhancement of our technology and services. To date,
all software development costs have been expensed as incurred. We believe that
continued investment in product development is critical to attaining our
strategic product objectives and, as a result, we expect these expenses to
increase in the future.
Sales and marketing expenses consist primarily of salaries, commissions and
related personnel expenses as well as advertising and promotional expenditures.
We have a direct sales force dedicated to selling our services, which is
supplemented by a number of strategic relationships with sales and
implementation companies, such as USWeb/CKS and People Support Inc. We plan to
increase our investments in sales, marketing, infrastructure and product
development in an effort to capture market share faster.
General and administrative expenses consist primarily of salaries and
related personnel costs and other related costs for general corporate functions,
including executive management, business development, finance, facilities
administration, legal, recruiting and fees for other professional services. We
expect general and administrative expenses to increase in the future as we add
personnel and incur additional costs related to the growth of our business.
Interest income includes income on our cash and short-term investments.
Interest expense relates to interest due on our financing obligations.
For the year ended December 31, 1999, in connection with the grant of stock
options to employees and consultants, we recorded deferred stock compensation
totaling $8.6 million representing the difference between the deemed fair value
of our common stock on the date such options were granted and the exercise price
of the options. 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 $3.9 million for
the year ended December 31, 1999. At December 31, 1999, we had a total of
approximately $5.2 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. Additionally,
Direct Hit has an unamortized deferred stock compensation balance of $6.9
million as of December 31, 1999, which will be recognized over the remaining
vesting periods of the outstanding options.
Write-off of in-process technology and acquisition costs relate to costs
incurred in connection with our purchases of Lumina and Excellerate in
April 1999, and our acquisition of Net Effect in November 1999.
As a result of the acquisition of Direct Hit, we determined that the
technology we acquired from Excellerate in November 1999 was obsolete, and had
no future benefit to us. Accordingly, we expect to record a charge of $989,000
to operations in the first quarter of 2000. In addition, in the first quarter of
2000, we expect to incur a one-time charge related to in-process research and
development acquired in connection with our recent acquisitions. Beginning in
the first quarter of 2000, we will also begin to amortize charges related to
assets acquired from Evergreen and Direct Hit. We expect these charges to be
significant.
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We have incurred significant net losses and negative cash flows from
operations since our inception, and at December 31, 1999, we had an accumulated
deficit of approximately $60.6 million. These losses have been funded primarily
through the issuance of preferred and common equity securities, including our
initial public offering in July 1999. 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 and 1999, we
had net operating loss carryforwards for federal income tax purposes of
approximately $2.8 million and $33.9 million, respectively, which will expire in
fiscal years 2012 through 2019 if not utilized, and net operating loss
carryforwards for state income tax purposes of $19.3 million, which will expire
in fiscal year 2004 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 $16.7 million during the year ended December 31, 1999. 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.
ANNUAL RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1999
REVENUES. Revenues were $800,000 for the year ended December 31, 1998, and
$22.0 million for the year ended December 31, 1999. Web Properties and
Syndication revenues were $577,000 or 72% of total revenues for the year ended
December 31, 1998 and $14.6 million or 66% of total revenues for the year ended
December 31, 1999. These revenues consisted of $455,000 in advertising revenues
for the year ended December 31, 1998, and $12.5 million for the year ended
December 31, 1999. Syndication fees were $122,000 for the year ended
December 31, 1998, and $1.0 million for the year ended December 31, 1999.
Electronic commerce revenues were $1.1 million for the year ended December 31,
1999. There were no electronic commerce revenues for the year ended
December 31, 1998. Corporate Services revenues were $223,000 or 28% of total
revenues for the year ended December 31, 1998, and $7.5 million or 34% of total
revenues for the year ended December 31, 1999. These revenues consisted of
$223,000 in customization fees for the year ended December 31, 1998, and $4.4
million in customization fees for the year ended December 31, 1999. Maintenance
and information services revenues were $3.1 million, or 14% of total revenues
for the year ended December 31, 1999. There were no maintenance and information
services revenues for the year ended December 31, 1998. Our reach increased to
5.1 million unique users at December 31, 1999, representing a 455% increase
since the beginning of 1999. Ask.com ranked as the 28th most visited Web site in
the December 1999 Media Metrix Internet Web properties listing compared to 345th
in December 1998.
COST OF REVENUES. Cost of revenues for Web Properties and Syndication was
$603,000 for the year ended December 31, 1998 and $6.3 million for the year
ended December 31, 1999. The increase in cost of revenues is attributed to
increased third-party advertising management fees, hosting costs, and additional
personnel and related personnel costs associated with developing, maintaining,
analyzing and testing of Ask.com to support the growth in traffic and the
resulting revenues. Cost of revenues for Corporate Services was $797,000 for the
year ended December 31, 1998 and $7.8 million for the year ended December 31,
1999. The increase in cost of revenues is attributed to personnel and related
personnel costs associated with providing customization, information and
maintenance services to our customers. Cost of
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revenues also includes amortization charges related to assets acquired from
Lumina and Excellerate. Beginning in the first quarter of 2000, cost of revenues
will also include significant amortization charges related to assets acquired
from Evergreen and Direct Hit. We expect our hosting, third party advertising
management fees, content development and Web site costs will continue to
increase to meet the demands for Web services and to provide additional services
to users of our services.
PRODUCT DEVELOPMENT EXPENSES. Product development expenses were
$1.7 million for the year ended December 31, 1998, and $8.6 million for the year
ended December 31, 1999. The increase in expenses resulted from the hiring of
additional personnel and related personnel costs, consultant fees, expenses
related to the design, development, testing and enhancement of our technology
and services. We believe the development of additional features and tools are
vital for us to remain competitive in our industry. We anticipate that we will
continue to devote substantial resources to product development. As a result,
these costs are expected to continue to increase in future periods.
SALES AND MARKETING EXPENSES. Sales and marketing expenses were
$2.3 million for the year ended December 31, 1998, and $35.3 million for the
year ended December 31, 1999. The increase in expenses are attributed to
advertising expenses related to our branding campaign, the hiring of additional
direct sales and marketing personnel and sales commissions associated with the
increase in revenues. We intend to continue pursuing an aggressive
brand-enhancement strategy, which will include mass market and multimedia
advertising, promotional programs and public relations activities. These costs
are expected to continue to increase in future periods.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
were $2.3 million for the year ended December 31, 1998, and $8.4 million for the
year ended December 31, 1999. The increase in expenses is attributed to hiring
of additional personnel and related personnel costs for finance, legal, business
development and internal information systems development and support that has
accompanied the growth of our business, recruiting costs associated with filling
key executive positions and depreciation expense associated with adding property
and equipment.
AMORTIZATION OF DEFERRED STOCK COMPENSATION. For the year ended
December 31, 1998 and 1999, we recorded $29,000 and $3.9 million, respectively,
in amortization of deferred stock compensation in connection with the grant of
stock options to employees and consultants. The increase in amortization is due
to the significant increase in grants to employees and consultants in 1999
versus 1998 and the differences between the deemed fair value of our common
stock and the exercise price of options in 1999.
IN-PROCESS RESEARCH AND DEVELOPMENT AND ACQUISITION COSTS. For the year
ended December 31, 1999, we recognized purchased in-process research and
development costs of $544,000 in connection with the acquisition of certain
technology and computer equipment from Lumina and Excellerate. In connection
with the acquisition of Net Effect in November 1999, we recorded acquisition
costs of $6.0 million which primarily included investment banking fees, legal
and accounting costs.
INTEREST INCOME AND INTEREST EXPENSE. Interest income was $166,000 for the
year ended December 31, 1998, and $2.2 million for the year ended December 31,
1999. The increase in interest income is attributed to the interest on proceeds
from our equity financings. Interest expense was $6,000 for the year ended
December 31, 1998, and $187,000 for the year ended December 31, 1999. The
increase in interest expense is attributable to the interest charges incurred on
additional capital lease obligations.
YEARS ENDED DECEMBER 31, 1997 AND DECEMBER 31, 1998
REVENUES. Revenues were $23,000 for the year ended December 31, 1997, and
and $800,000 for the year ended December 31, 1998. Revenues for the year ended
December 31, 1998, consisted of $577,000 in revenues from Web Properties and
Syndication, of which $455,000 was generated from advertising revenues and
$122,000 from syndication fees. There were no Web Properties and Syndication
revenues for
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the year ended December 31, 1997. Revenues from Corporate Services were $23,000
for the year ended December 31, 1997, and $223,000 for the year ended
December 31, 1998, which were attributed to customization fees and ongoing
services.
COST OF REVENUES. Cost of revenues for Web Properties and Syndication were
$603,000, for the year ended December 31, 1998. Cost of revenues for Corporate
Services were $797,000 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 the development of
Ask.com, 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 customization, information and
maintenance services to our corporate customers.
PRODUCT DEVELOPMENT EXPENSES. Product development expenses increased to
$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 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 $94,000 for the year
ended December 31, 1997. The increase was primarily due to increases in
advertising expenses related to our branding campaign, the hiring of marketing
and direct sales personnel and sales commissions needed to support the increase
in revenues.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased to $2.3 million for the year ended December 31, 1998, from $218,000
for the year ended December 31, 1997. The 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.
INTEREST INCOME AND INTEREST EXPENSE. Interest income was $6,000 for the
year ended December 31, 1997 and $166,000 for the year ended December 31, 1998.
The increase in interest income is attributable to the interest on proceeds from
our equity financings. Interest expense was none for the year ended
December 31, 1997, and $6,000 for the year ended December 31, 1998. The increase
in interest expense is attributable to the interest charges incurred on
additional capital lease obligations.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth unaudited quarterly consolidated statements
of operations results for the four quarters ended December 31, 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
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information in accordance with generally accepted accounting principles. The
results for any quarter are not necessarily indicative of results for any future
period.
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------------------
MAR. 31, 1999 JUNE 30, 1999 SEPT. 30, 1999 DEC. 31, 1999
------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Web Properties and Syndication....... $ 1,059,068 $ 1,898,817 $ 4,243,231 $ 7,362,553
Corporate Services................... 444,198 920,992 2,558,546 3,539,391
----------- ------------ ------------ ------------
Total revenues......................... 1,503,266 2,819,809 6,801,777 10,901,944
Cost of revenues:
Web Properties and Syndication....... 699,131 1,162,199 1,803,526 2,618,784
Corporate Services................... 1,176,525 1,389,377 2,087,034 3,147,354
----------- ------------ ------------ ------------
Total cost of revenues................. 1,875,656 2,551,576 3,890,560 5,766,138
Gross profit (loss).................... (372,390) 268,233 2,911,217 5,135,806
Operating expenses:
Product development.................. 1,174,894 1,790,566 2,347,499 3,296,815
Sales and marketing.................. 3,047,465 7,896,673 10,390,474 13,970,018
General and administrative........... 1,140,299 1,463,939 2,077,092 3,729,613
Amortization of deferred stock
compensation....................... 317,048 592,193 695,983 2,330,294
Write-off of in-process technology... -- 360,697 -- 182,820
Acquisition costs.................... -- -- -- 6,045,186
----------- ------------ ------------ ------------
Total operating expenses............... 5,679,706 12,104,068 15,511,048 29,554,746
----------- ------------ ------------ ------------
Operating loss......................... (6,052,096) (11,835,835) (12,599,831) (24,418,940)
Interest income........................ 163,887 376,529 841,390 782,389
Interest expense....................... (11,237) (4,577) (64,056) (106,849)
----------- ------------ ------------ ------------
Net loss............................... $(5,899,446) $(11,463,883) $(11,822,497) $(23,743,400)
=========== ============ ============ ============
</TABLE>
REVENUES. Total revenues increased in each of the four quarters ended
December 31, 1999. The revenue growth over each respective prior quarter is
primarily attributable to increased advertising revenues 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 Services. The increases
in Web Properties and Syndication revenues reflect our performance in connecting
advertisers with targeted customers. Ask.com ranked as the 28th most visited Web
site in the December 1999 Media Metrix Internet Web properties listing, compared
to the 35th most visited Web site in September 1999. For the quarter ended
December 31, 1999, Ask.com received 196 million questions, representing an
increase of 46% from 134 million questions from the quarter ended September 30,
1999. Revenue per thousand page views, or RPMs, increased to $13.35,
representing a 33% increase over the quarter ended September 30, 1999. The
number of companies that subscribe to our Corporate Services increased from 26
to 60 during the quarter ended December 31, 1999. Corporate Services processed
4.2 million questions for the quarter ended December 31, 1999, representing a
68% increase from the 2.5 million questions processed for the quarter ended
September 30, 1999.
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COST OF REVENUES. Cost of revenues increased in each of the four quarters
ended December 31, 1999. The increase in cost of revenues during these periods
is related to increased third-party advertising management fees, hosting costs,
and additional personnel and related personnel costs. We also incurred higher
costs associated with personnel and related personnel costs required to provide
customization and information services to our corporate customers. Cost of
revenues also includes amortization charges related to the acquisition of assets
from Lumina and Excellerate. Beginning in the first quarter of 2000, cost of
revenues will also include significant amortization charges related to assets
acquired from Evergreen and Direct Hit. We expect our hosting, third-party
advertising management fees, content development and Web site costs will
continue to increase to meet the demands for Web services and to provide
additional services to customers.
PRODUCT DEVELOPMENT EXPENSES. Product development expenses increased in
each of the four quarters ended December 31, 1999. The primary reasons for the
increase were the hiring of additional personnel and related personnel costs and
consultant fees and expenses related to the design, development, testing and
enhancement of our technology and services. We believe the development of
additional features and tools are vital for us to remain competitive in our
industry. We anticipate that we will continue to devote substantial resources to
product development. These costs are expected to continue to increase in future
periods.
SALES AND MARKETING EXPENSES. Sales and marketing expenses increased in
each of the four quarters ended December 31, 1999. The increase was primarily
due to increases in advertising expenses related to our branding campaign and
the hiring of additional direct sales and marketing personnel and commissions
paid to support the increase in revenues. We intend to continue pursuing an
aggressive brand-enhancement strategy, which will include mass market and
multimedia advertising, promotional programs and public relations activities.
Consequently, these costs are expected to continue to increase in future
periods. We intend to continue to incur significant expenditures, approximately
$40 million to $50 million for 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 December 31, 1999. The increase
primarily reflects the addition of finance, information technology, legal,
executive management and administrative personnel and related costs.
AMORTIZATION OF DEFERRED STOCK COMPENSATION. For each of the four quarters
ended December 31, 1999, the increase in amortization of deferred stock
compensation was attributable to stock option grants to employees and
consultants that are being amortized by charges to operations on a graded
vesting method.
IN-PROCESS RESEARCH AND DEVELOPMENT AND ACQUISITION COSTS. For the quarter
ended June 30, 1999 and quarter ended December 31, 1999, we recognized purchased
in-process research and development costs of $361,000 and $183,000, respectively
in connection with the acquisitions of certain technology and computer equipment
from Lumina and Excellerate. In connection with the acquisition of Net Effect in
November 1999, we recorded acquisition costs of $6.0 million in the quarter
ended December 31, 1999, which primarily included investment banking fees, legal
and accounting costs.
RECENT EVENTS
In November 1999, we acquired certain 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.
In November 1999, we acquired Net Effect Systems, Inc. All outstanding
shares of Net Effect were converted into 1,631,863 shares of our common stock,
and options to purchase Net Effect common stock were converted into options to
purchase 497,353 shares of our common stock.
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In December 1999, our wholly-owned subsidiary, Ask Jeeves
International, Inc., entered into a joint venture to create The Ask Jeeves U.K.
Partnership, with Carlton Communications Plc. and Granada Media Group, the two
largest commercial television companies in the United Kingdom. We contributed a
license to substantially all of our intellectual property having a zero
accounting basis. We have a zero basis in the Partnership for accounting
purposes and therefore will not recognize any of the Partnership's losses.
Carlton and Granada will each contribute $31.3 million in cash and advertising
to fund the development and promotion of a Web site.
In January 2000, we acquired The Evergreen Project, Inc. for $2.0 million in
cash and 18,896 shares of our common stock.
In February 2000, we acquired Direct Hit Technologies, Inc. All outstanding
shares were converted into approximately 4.78 million shares our common stock.
Also included were options to purchase Direct Hit common stock which converted
into options to purchase approximately 316,000 shares of our common stock.
SEASONALITY AND QUARTERLY FLUCTUATIONS IN OPERATING RESULTS
Our operating results may fluctuate significantly in the future as a result
of a variety of factors, many of which are beyond our control. Factors that may
adversely affect our results of operations include:
- our ability to obtain new corporate customers, the length of the
development cycle for corporate customers and the timing of revenue
recognition with respect to contracts with corporate customers;
- our ability to obtain new advertising contracts, maintain existing ones,
and effectively manage our advertising inventory;
- the number of questions asked and answered on Ask.com and DirectHit.com
and on the Web sites of our corporate customers;
- our ability to attract and retain advertisers and our ability to link our
electronic commerce partners to potential customers;
- seasonal and other fluctuations in demand for our electronic commerce
services and for advertising space on Ask.com and DirectHit.com;
- our ability to develop and introduce new technology;
- announcements and new technology introductions by our competitors;
- our ability to attract and retain key personnel;
- costs relating to possible acquisitions and integration of technologies or
businesses;
- rate changes for advertising on Ask.com and DirectHit.com; and
- marketing expenses and technology infrastructure costs as well as other
costs that we may incur as we expand our operations.
Because of the foregoing factors, we believe that period-to-period
comparisons of our operating results should not be relied upon as an indicator
of our future performance.
As Internet advertising makes the transition from an emerging to a more
developed market, seasonal and cyclical patterns may develop in our industry
that may also affect our revenues. For instance, during 1998 and 1999 traffic
levels on Ask Jeeves fluctuated during the summer and year-end vacation and
holiday periods. Similar to traditional media, this may result in our
advertising sales being lower during these periods. In addition, we believe that
sales from electronic commerce will increase during the fourth quarter as a
result of the holiday season and will fluctuate during other periods.
Seasonality in the retail industry
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and in Internet service usage are likely to cause quarterly fluctuations in our
results of operations and could harm our business.
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
December 31, 1999, we had $51.5 million in cash and cash equivalents and
short-term investments. Net cash used in operating activities was $5.2 million
for the year ended December 31, 1998, and $32.3 million for the year ended
December 31, 1999. 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, accrued
marketing expenses, acquisition costs, deferred revenue and other accrued
liabilities. Net cash used in investing activities was $977,000 for the year
ended December 31, 1998, and $42.1 million for the year ended December 31, 1999.
Net cash used in investing activities related to purchases of $952,000 of
property and equipment for the year ended December 31, 1998, and purchases of
$6.3 million of property and equipment and $34.2 million of short-term
investments for the year ended December 31, 1999. Net cash provided by financing
activities was $14.1 million for the year ended December 31, 1998, and
$83.3 million for the year ended December 31, 1999. For the year ended
December 31, 1998, net cash provided by financing activities related primarily
to net proceeds of $2.8 million from the sale of common and $11.3 million from
the sale of preferred equity securities. For the year ended December 31, 1999,
net cash provided from financing activities related primarily to net proceeds of
$4.4 million from the sale of common and $34.4 million from the sale of
preferred equity securities, $43.0 million of net proceeds from our initial
public offering, and $1.8 million of proceeds from capital lease financings.
As a result of our acquisition of Net Effect in November 1999, we assumed a
$1.0 million credit agreement with a financial institution, which matures in May
2000. As of December 31, 1999, there were no amounts outstanding under this line
of credit.
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 Ventures, Inc. to finance equipment and software purchases up to a
maximum of $3.5 million. As of December 31, 1999, we had utilized the total
lease financing line. Payments are due on a monthly basis under lease terms
ranging from 30 to 48 months from the date of financing and bear interest at a
rate of 8.3% per annum. In addition, as consideration for improved lease terms
we issued a warrant to Comdisco to purchase 11,250 shares of common stock. The
exercise price of this warrant is $14.00 per share and the warrant matures in
June 2004.
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, including the
proceeds from the underwritten offering 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 seriously harm our business. If we
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raise additional funds through the issuance of equity or convertible debt
securities, the percentage ownership of our existing stockholders will be
reduced.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to financial market risk, including changes in interest rates
and marketable equity security prices, relates primarily to our investment
portfolio. We typically do not attempt to reduce or eliminate our market
exposure on our investment securities because a substantial majority of our
investments are in fixed-rate, short-term securities. We do not have any
derivative instruments. The fair value of our investment portfolio or related
income would not be significantly impacted by either a 100 basis point increase
or decrease in interest rates due mainly to the fixed-rate, short-term nature of
the substantial majority of our investment portfolio.
YEAR 2000
We have not experienced any problems with our computer systems relating to
such systems being unable to recognize appropriate dates related to the year
2000. We are also not aware of any material problems with our clients or
vendors. Accordingly, we do not anticipate incurring material expenses or
experiencing any material operational disruptions as a result of any Year 2000
issues.
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BUSINESS
OVERVIEW
Ask Jeeves has developed and deployed an online personal service
infrastructure to provide real-time access to information, products and
services. Our online personal service infrastructure allows companies to create
an intuitive interaction with their customers. We accomplish this by connecting
consumers to answers through easy-to-use services that include automated search,
natural language question answering, intelligent advisor technology and live
help. We believe that by providing consumers with a more intuitive, relevant and
flexible way to access information online, companies will be able to maximize
the returns on their Web-based strategies through better consumer targeting and
acquisition, increased conversion and retention rates, lowered support costs and
access to customer data. Key elements of our strategy are to extend our reach in
corporate markets, introduce new technologies and services, provide customer
insight, increase awareness of the Ask Jeeves brand, expand our syndication
business, and expand our international presence.
Our online personal service infrastructure is built on proprietary
technology combined with human intelligence to create an interaction centered on
understanding users' specific needs and interests and connecting them to the
most relevant information, products and services. We introduced Jeeves Answers,
our natural language question answering service, on Ask Jeeves at Ask.com in
1997 to provide users with a more satisfying and productive experience and to
help companies better target and acquire customers. In 1998, we launched a
customized service to develop and implement Jeeves Answers on corporate Web
sites to help companies better convert and retain consumers. In 1999, we
expanded our suite of services to include Jeeves Advisor and Jeeves Live, which
permit our corporate customers to offer a decision advisory process and
real-time interaction with a live representative. In February 2000, we added
Jeeves Search, a popularity-based automated search technology that uses the
collective queries and Web site selections of users to deliver relevant results
across the Internet or on a corporate Web site. Our services are built on a
flexible, scalable architecture with an information gathering system that
collects users' questions and selections across Ask Jeeves-enabled Web sites. We
store and analyze the information we collect to improve the performance of our
services and to deliver user insight to our corporate customers.
We deliver our online personal service infrastructure through our Web
Properties and Syndication Group and our Corporate Services Group. Our Web
Properties and Syndication Group delivers potential consumers to companies' Web
sites through a combination of advertising, sponsorships, listing and shopping
services available on Ask.com and DirectHit.com. We have recently added a
syndication service, whereby we syndicate our services to generate traffic to
our Web sites. This service also includes our existing licensing arrangements
with portals, such as AltaVista and Netscape. Currently, we reach millions of
Web users through our Web Properties and Syndication Group enabling, companies
to reach a broad set of potential customers. Our Corporate Services Group
develops and maintains customized automated search, natural language question
answering, intelligent advisor and live help services on corporate Web sites. We
believe our corporate services help companies convert shoppers to buyers, reduce
support costs, gain consumer insight and improve consumer retention. The
Corporate Services Group provides these services on an outsourced basis with
little involvement from our corporate customers' technical personnel.
Our goal is to become the standard for online personal service and Web
interaction. We believe we can accomplish this by building a global brand that
represents superior online personal service. We further believe that as we
expand our services, capture more consumer data and extend our reach into the
corporate market, we will create a superior platform for consumer targeting and
conversion that will become an important part of companies' Web strategies.
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INDUSTRY BACKGROUND
The Internet has emerged as a mass-market communications medium, enabling
millions of users to obtain and share information and interact and conduct
business electronically. International Data Corporation, or IDC, estimates that
the number of Internet users will increase from approximately 196 million at the
end of 1999 to approximately 500 million by the end of 2003. In addition to its
benefits for individuals, the ubiquity of the Internet as a global
communications tool provides businesses with an attractive vehicle to target and
acquire customers, deliver product information, market and sell products and
services and provide pre-sales and post-sales support. According to IDC,
worldwide electronic commerce revenue is expected to increase from approximately
$111 billion in 1999 to more than $1.3 trillion in 2003. Additionally, Forrester
Research estimates that the dollar value of advertising on the web is expected
to increase from approximately $12.8 billion in 1999 to approximately $22.2
billion in 2004.
ONLINE CUSTOMER SERVICE IS CRITICAL
While the importance of the Internet for individuals and businesses has
drawn users at an unprecedented pace, this growth has increased competitive
pressures in online markets. The abundance of information available on the
Internet and the difficulty in accessing this information means that consumers
are often frustrated in their attempts to locate the information, products and
services they need. Companies therefore have a difficult time identifying
qualified prospects and introducing them to their products and services. Once
users arrive at a corporate Web site, companies often face difficulties in
providing a level of service that effectively answers questions, provides
education about relevant products and services and provides a high level of
support. Thus, to maintain or increase market share, many businesses are
focusing on the quality of Web-based service as a key competitive
differentiator. Whether asking about product features, checking the status of an
order or receiving help with a loan application, online customers have
traditional service needs, and they want to be assured that these needs will be
met before conducting a transaction. In the increasingly competitive electronic
commerce environment, companies that fail to address these consumer service
needs may lose sales to competitors located a mouse click away.
TRADITIONAL APPROACHES ARE INEFFICIENT
Online businesses have attempted to target, convert and retain online users
by employing a variety of customer acquisition and support tools including
search engines, e-mail response systems, and call-centers. However, standard
search engines and directory services often provide an overabundance of
irrelevant results making it difficult to provide personal interaction and
tailored answers to specific questions; e-mail responses tend to address users'
concerns too slowly and inefficiently; and call-centers are difficult to manage
and costly. As a result, users often abandon their searches causing online
businesses to lose opportunities for sales. Currently, the online conversion
rate, the percentage of visitors who complete a purchase, is approximately 2.0%,
according to Forrester Research, similar to that of unsolicited direct mailings
through conventional mail.
NEED FOR REAL-TIME PERSONAL SERVICE
Companies are searching for new methods of conducting business online. They
are focusing on increasing online conversion rates by providing timely,
personalized service to guide users through the process of finding answers and
receiving help. In addition, companies are looking for methods to increase
customer satisfaction with their products and services in order to create repeat
buyers. Also, the emergence of online vertical markets and more informed
consumers has required businesses to adopt solutions that are focused on the
particular needs of their industry. We believe that the competitive nature of
online business is leading companies to develop Web sites that fulfill a variety
of needs, including:
- attracting or delivering users;
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- providing users with easy access to requested information;
- retaining user's attention by expanding the scope of the interaction;
- enabling user's transactions;
- dealing with pre-sales and post-sales questions; and
- improving management of customer relationships by collecting and analyzing
consumer data.
We believe that companies can better target and acquire customer, achieve
higher conversion rates, lower customer service costs and increase customer
retention through:
- the combination of automated self-service systems with human intelligence
that provides a more personal experience and offers relevant answers to
specific questions;
- the efficient delivery of relevant answers by educating customer through
automated self-service with a path to real-time interaction with a live
representative; and
- cost-effective and relevant solutions that can provide varying levels of
service depending on the potential profitability of the transaction.
To rapidly adopt such services, we believe many companies will outsource the
resources and expertise necessary to quickly create and skillfully manage the
solution. We believe that the delivery of intuitive and intelligent customer
service tools designed to manage a company's real-time interactions with its
customers that can be implemented on an outsourced basis is an emerging market
opportunity.
THE ASK JEEVES SOLUTION
Ask Jeeves has developed and deployed an online personal service
infrastructure to provide real-time access to information, products and
services. Our online personal service infrastructure allows companies to create
an intuitive interaction with their customers. We accomplish this by connecting
users to answers through a suite of easy-to-use services that include automated
search, natural language question answering, intelligent advisor technology and
live help. We believe that by providing a more intuitive, relevant and flexible
way to access online information, companies will be able to maximize the returns
on their Web-based strategies through better targeting and acquisition of users,
increased conversion and retention rates, lowered support costs and access to
customer data. Our online personal service infrastructure includes Jeeves
Search, Jeeves Answers, Jeeves Advisor, Jeeves Live and Jeeves Insight, which we
deliver through our Web Properties and Syndication Group and our Corporate
Services Group.
Through our Web Properties and Syndication Group, we provide targeting
services designed to drive qualified prospects to corporate Web sites. We
accomplish this through a combination of advertising, sponsorship, listing and
shopping services available through Ask.com, DirectHit.com and our syndication
services. The benefits to companies that use our targeting services are:
- ACCESS TO USERS. We provide access to a large number of Web users. This
access offers companies the ability to target a broad set of potential
customers.
- IMPROVED TARGETING. Through our popularity-based automated search and
natural language question answering services, we are able to capture the
questions users ask and the Web sites they select to identify their needs
and preferences. We believe that this enables us to deliver highly
qualified prospects to corporate Web sites.
- DIVERSE DELIVERY SYSTEMS. Companies can use multiple channels to reach
targeted prospects, including banner advertising, sponsorship, key word
listings, directories and merchant listings.
Through our Corporate Services Group we provide customized conversion
services for corporate Web sites to manage a broad range of customer
interactions, from pre-sales to post-sales support. Our customer
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conversion services include automated search, natural language question
answering, intelligent advisor, live help and consumer information analysis.
These services are designed to convert shoppers to buyers, reduce support costs,
understand customer preferences and improve customer retention. The benefits to
companies that use our conversion services are:
- INCREASED CONVERSION RATES. Our services are designed to facilitate access
to relevant information, products and services on corporate Web sites,
thereby reducing a user's frustration level. Our services also provide
multi-level access to information with an escalation path to assist users
with complex decision-making. For high value interactions, companies can
offer a decision advisory process and real-time access to a live
representative to supplement our automated self service products. As a
result, we believe that Ask Jeeves-enabled Web sites will result in a
higher conversion of shoppers to buyers and increase repeat purchase
rates.
- REDUCED SUPPORT COSTS. By connecting users to relevant information, we
believe our online personal service infrastructure facilitates access to
information on a self-service basis, thereby reducing the costs of
customer support, including phone and e-mail interactions.
- VALUABLE CONSUMER INSIGHT. Ask Jeeves collects information about each
users' interaction to provide comprehensive reports on users' needs and
interests that our corporate customers can use to direct product
development, marketing and Web site strategies.
- FLEXIBLE SERVICES. Companies can implement the full array of our customer
conversion services or deploy them separately. Our scalable and
customizable services combine proprietary technology with human input to
varying degrees, allowing our corporate customers to tailor the level and
cost of the services offered to the value of the interaction. As our
corporate customers' needs progress, we are able to provide additional
services to manage our entire range of real-time customer interactions.
- OUTSOURCED DEVELOPMENT. By providing a stand-alone, fully outsourced
service, our customized online personal service infrastructure can be
easily developed using existing company Web content and can be maintained
with minimal impact on internal resources and without interference with
the company's other information systems.
THE ASK JEEVES STRATEGY
Our objective is to establish Ask Jeeves as the standard for online personal
service by providing companies with the services they need to improve customer
targeting, acquisition, conversion and retention. Key elements of our strategy
include the following:
EXTEND REACH IN CORPORATE MARKETS. To increase the number of companies that
use our online personal service infrastructure, we intend to expand our sales
and marketing efforts in targeted vertical markets. We believe each deployment
of our online personal service infrastructure in a particular market improves
the quality of our service and allows us to become more efficient as we extend
the service to additional companies within those markets. We intend to
complement our direct sales force by expanding existing, and entering into new,
strategic relationships with sales and implementation companies, outsourced call
centers and systems integrators. We believe these relationships will increase
our sales coverage and give us access to additional corporate customers. We
believe that as our corporate customers benefit from the implementation of our
services, they will want to obtain more services from us to provide an effective
escalation path for customer interaction on their Web sites.
INTRODUCE NEW TECHNOLOGIES AND SERVICES. We recently added popularity-based
automated search, intelligent advisor and live help technologies to our core
natural language question answering technology. We intend to continue to expand
our services and capabilities through new and existing technologies to improve
the ease, relevance and performance of our service to users and to provide a
more intuitive interaction between a company and its customers. We plan to add
technology that delivers improved
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personalization, deeper integration into enterprise systems and improved access
to information, products and services. We also plan to add richer analysis and
tracking tools to capture customer data and to improve the networking
capabilities of our knowledge bases to enable answers anywhere on the Web. We
believe that the scalability and flexibility of our technologies will allow us
to facilitate the development of additional applications and promote rapid
response to marketplace changes. In addition, we believe that our expanding
range of services coupled with our ability to provide insight into the specific
needs and interests of a company's customers, will allow us to cross-sell and
up-sell our services within existing accounts.
PROVIDE CUSTOMER INSIGHT. We plan to continue to collect Internet-wide and
Web site specific information about user questions, language and selections to
gain insight into customer needs and interests. We believe that our data related
to customer needs and interests is one of our most important assets. We plan to
improve our ability to collect, analyze and integrate this data to increase the
relevance of our services to corporate customers, including networking our
information to connect customers to the most relevant information, regardless of
where the customer or the information is on the Internet. We believe this will
enable us to increase the efficacy of our services through more focused consumer
targeting and better customer service, resulting in higher customer acquisition,
conversion and retention for our corporate customers and increased monetization
of our technology.
INCREASE AWARENESS OF THE ASK JEEVES BRAND. We will continue to pursue an
aggressive brand development strategy with the goal of making the Ask Jeeves
brand synonymous with superior online personal service. Our branding strategy
will remain centered on the Jeeves character, a friendly assistant who provides
an intuitive, relevant experience on the Web. We believe our branding strategy
will create consumer and corporate demand for the ease and relevance of the Ask
Jeeves experience, driving users to our Web properties and extending our reach
into the corporate marketplace. To drive awareness of our brand, we will
continue to employ a mix of traditional and innovative programs including print,
radio and television advertising.
EXPAND THE ASK JEEVES SYNDICATION BUSINESS. We plan to grow our syndication
business by increasing the number of companies syndicating our services and
expanding the services offered. To enable us to expand the reach of our online
personal service infrastructure, we intend to expand our syndication sales
force. We believe that additional syndication will allow us to extend the reach
of our services to a larger number of users without incurring substantial
marketing costs. We believe that we will also be able to further monetize our
online personal service infrastructure through syndication fees and increased
traffic.
EXPAND INTERNATIONAL PRESENCE. We believe there is a significant market
opportunity for the international expansion of our online personal service
infrastructure. We intend to achieve this through joint venture arrangements
with local partners, the use of local management and employees and the
implementation of language and country specific deployments of our services. To
accomplish this, we have recently formed Ask Jeeves International, Inc., a
wholly owned subsidiary of Ask Jeeves. We believe that the scalable and flexible
nature of our services will facilitate our global expansion into fast growing
international markets.
PRODUCTS AND SERVICES
Our online personal service infrastructure is designed to help companies
improve customer acquisition, increase conversion of browsers to purchasers and
reduce expensive support costs such as phone calls to call centers. We believe
that our services make interaction with the Internet more intuitive, less
frustrating and significantly more productive and help companies provide a high
quality, human-like online experience for their customers.
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PERSONAL SERVICE INFRASTRUCTURE
The Ask Jeeves' online personal service infrastructure includes the
following services:
- JEEVES ANSWERS, our question answering service, combines natural language
technology with human editorial judgment to allow Web users to ask
questions in plain English and be directed to online content containing
relevant answers. Ask Jeeves interacts 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 Web page or site that
contains the answer. Companies use Jeeves Answers to help their customers
easily navigate their Web sites to find information, products and
services, and cross-sell and up-sell based on customers' queries.
- JEEVES SEARCH, automated technology recently acquired from Direct Hit,
uses popularity-based search methodology to enable a customer-driven
approach to provide relevant responses within a company's Web site or
Internet-wide. Jeeves Search aggregates and organizes online content by
tracking the information, products and services people seek, the amount of
time they spend at various Web sites, and how frequently they return. The
core of Jeeves Search is its popularity engine, which leverages a database
of more than one billion search records and employs proprietary algorithms
that dynamically rank the site selections of Internet users. Jeeves Search
assimilates this data into popularity rankings, reflecting consumer
preferences for online information. Companies can use Jeeves Search to
supplement their existing search capabilities or integrate the Jeeves
Search line of popularity, shopping, and directory products as a complete
solution. Companies use Jeeves Search to provide a broader and more
relevant set of answers to users' queries and help users quickly find
information about a company's products and services.
- JEEVES ADVISOR, our decision support service, leads the user through a
question and answer dialogue to guide real-time purchase decisions. Jeeves
Advisor asks customers questions to establish their needs and preferences
and provides them with a personalized list of recommendations, selected
product features and side-by-side comparisons. Companies can implement
Jeeves Advisor to dynamically tailor the shopping experience to the
individual needs of their customers.
- JEEVES LIVE, technology recently acquired from Net Effect, provides
real-time, text-based communication between live representatives and
users. Companies use Jeeves Live to provide real-time assistance at
selected points in the electronic commerce and electronic support cycle,
reducing frustration levels and barriers to purchase. Call centers and
other Web-based customer support companies integrate Jeeves Live with
e-mail, telecommunications, call tracking and customer management systems,
to provide businesses with a combination of technology and live
representatives. Upon selecting the live help button on a Jeeves
Live-enabled Web site, users enter into a text-based dialogue with a
service representative of our corporate customers.
- JEEVES INSIGHT captures Internet-wide and site specific information about
users' questions, language and selections to gain insight into their needs
and interests. This insight can be used for more focused targeting, better
customer service, and improved customer acquisition, conversion and
retention. Companies can use this information to tailor Web site content,
direct product development and refine marketing and sales efforts.
We deliver our online personal service infrastructure to companies through
our Corporate Services Group and Web Properties and Syndication Group.
CORPORATE SERVICES GROUP
We customize our online personal service infrastructure for corporate Web
sites to enable intuitive access to information and personalized interaction
between a company and its customers. We believe visitors to an Ask
Jeeves-enabled Web site can more readily find desired information, products and
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services, which provide more effective online interaction, help companies
increase electronic commerce, reduce support costs, build loyalty and learn
about their customers.
Companies use our services to address a broad range of interactions from
pre-sales support to electronic commerce to post-sales support. Companies can
implement our services across their entire Web site or limit the implementation
to a specific section. Companies can implement our Corporate Services separately
or deploy them together to provide an escalation path from self-service to
interaction with a live representative. We provide our services on an outsourced
basis with little involvement from our corporate customers' technical personnel.
When we begin working with a company, our professional services group
develops and implements our services on a company's Web site. As of
December 31, 1999, we had 128 professionals dedicated to providing a wide range
of professional services including application management, solution development
and installation. Our professional services teams work with our customers to
understand their specific requirements, analyze their business needs and
implement an integrated solution. We provide these services ourselves or
together with system integrators who have built consulting expertise on our
online personal service infrastructure and can implement complete solutions for
our customers.
WEB PROPERTIES AND SYNDICATION GROUP
Companies can use our online personal service infrastructure to drive
targeted users to their Web sites through advertising, sponsorship listing and
shopping services on our Web sites, including Ask.com and DirectHit.com. We also
syndicate the services on our Web sites to extend the reach of our online
personal service infrastructure.
- ASK.COM. Ask Jeeves at Ask.com, provides consumers with an easy-to-use,
human-like interface to the Web to assist them with finding relevant
answers to their questions. Ask Jeeves at Ask.com processed approximately
2.6 million questions a day in January 2000, compared to approximately
431,000 questions in January 1999. The number of users has grown from
425,000 users in September 1998 to more than 5 million in December 1999.
We have used the questions asked on Ask.com to increase our knowledge base
and enable consumers to get answers to the most frequently asked questions
on the Internet, including "Is it raining in Paris?" and "Where can I
comparison shop for cameras?" to "How do I install a modem?" and "How can
I fix a leaky faucet?" The Jeeves character featured on Ask.com serves as
a trusted assistant for our users, providing help and guidance when they
visit the Web site.
- DIRECTHIT.COM: DirectHit.com, is powered by our popularity engine which
determines the relevancy ranking of online content by anonymously
compiling information collected from the searching activity of millions of
Internet users to deliver more relevant results in response to user
queries.
- SYNDICATION: We syndicate our proprietary Jeeves Answers and Jeeves Search
services to companies seeking to provide consumers with a broad and
relevant set of answers across the Internet. The syndication of Jeeves
Answers and Jeeves Search enables us to extend the reach of our online
personal service infrastructure. Companies that syndicate our services pay
us a revenue share or licensing fee.
We believe our online personal service infrastructure provides a
non-intrusive way for companies to target and acquire customers. Companies can
target visitors to Ask.com and DirectHit.com through banner advertising, text
links, sponsorships and electronic commerce referrals.
ASK JEEVES INTERNATIONAL
We recently formed Ask Jeeves International, Inc., a wholly-owned subsidiary
of Ask Jeeves. Ask Jeeves International intends to expand through joint venture
arrangements with local partners, the use of local management and employees, and
by implementing language and country specific deployments of our
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services. Ask Jeeves International also recently formed its first country
specific joint venture, joining with Carlton Communications Plc and Granada
Media Group, the two largest commercial television companies in the United
Kingdom, to create Ask Jeeves UK. Ask Jeeves UK intends to design a service to
meet the specific needs and interests of users in Britain and the Republic of
Ireland. In addition, as a result of our merger with Direct Hit, we have
existing customer relationships with the following international Internet
portals: Catcha.com (Asia), UKMax.com (UK), Punto (Italy) and Scandinavia Online
(Denmark, Norway and Sweden). We intend to expand the range of services we offer
to these portals.
SALES AND MARKETING
SALES STRATEGY
Our Corporate Services Group sells our services, including Jeeves Search,
Jeeves Answers, Jeeves Advisor, Jeeves Live and Jeeves Insight, for deployment
on corporate Web sites. We target companies seeking to increase conversion and
retention rates through a direct sales force that is complemented by our account
management team. Our account management team maintains close relationships with
our corporate customers to identify and serve their ongoing needs, enabling our
sales professionals to focus on new business opportunities. We believe this
approach leads to a higher level of satisfaction for our corporate customers and
increased cross-selling and up-selling opportunities. We also sell our services
through strategic relationships with sales and implementation companies that
include PeopleSupport, Inc. and USWeb/CKS. These relationships provide us
opportunities to extend our reach by marketing and selling our services to their
existing network of customers.
Our Web Properties and Syndication Group sells advertising, sponsorship, key
word and shopping listings and syndication services. We sell primarily through a
direct sales organization and target our sales to companies seeking to
efficiently target and acquire customers online. Our direct sales force consists
of 16 people with offices in California and New York. We plan to expand our
direct sales force to increase the syndication of our Internet-wide services.
This sales team will target highly trafficked Web sites, including portals and
destination sites.
MARKETING
Our marketing program is designed to acquire new corporate customers and
drive traffic to our Web properties. We engage in a number of marketing programs
to build our brand and reach consumers and companies. These programs include
online and offline advertising, public relations, direct mail, trade shows and
ongoing customer communications programs. Our marketing group assists our sales
team by providing them with product collateral materials, customer case studies,
market surveys and customer profiles. In addition, our marketing group helps
identify and develop strategic relationship opportunities and channel
distribution relationships.
CUSTOMERS
Our Corporate Services Group had 60 total customers for the year ended
December 31, 1999, including customers in our targeted vertical markets of
technology, financial services, telecommunications, e-tailing and healthcare.
The following is a complete, alphabetical list of our customers as of
December 31, 1999.
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CORPORATE SERVICES CUSTOMERS
3D Systems, Inc.
adam.com Inc.
Airtouch Communications, Inc.
Alcatel Alsthom S.A.
American Express Company
Arthur Andersen LLP
AT Int'l. TV
Babbage's Etc. LLC
BEA Systems, Inc. (WebLogic)
Bell South Corporation
Cincinatti Bell Inc.
Collaborative Media, Inc.
(etown.com)
Compaq Computer Corporation
Convergsys
CSL (Fujitsu)
Datek Online Brokerage Services,
LLC
Dell Computer Corporation
E-MD.net
E*Trade Group, Inc.
F5 Networks, Inc.
Fidelity Brokerage Services, Inc.
Hewlett-Packard Company
IDG Books Worldwide, Inc.
Intel Corporation
Iomega Corporation
Martha Stewart Living Omnimedia,
Inc.
Micron Technology, Inc.
Microsoft Corporation
MyPoints.com, Inc.
Network Solutions, Inc.
NIKE, Inc.
The Northpoint Group
Office Depot, Inc.
OneNetNow
Oxygen Media, Inc.
PCY2000 Alliance
PeopleSupport, Inc.
PricewaterhouseCoopers LLP
Quaartz, Inc. (Timeweaver)
The Right Start, Inc.
SBC Communications Inc.
Service911.com, Inc.
Smart Harbor/KikoNet
SportsHabitat.com, Inc.
Stream International, Inc.
TD Waterhouse Investor Services,
Inc.
TELLIS Communications, Inc.
Toshiba America, Inc.
Trillium Corporation
University of Calgary
uBid, Inc.
Urban Cool Network, Inc.
US West Inc.
USWeb Corp./CKS
VerticalNet, Inc.
The Walt Disney Company/ESPN
WebTV Networks, Inc.
Williams-Sonoma, Inc.
Yahoo! Inc. (Geocities)
Our Web Properties and Syndication Group had 520 customers for the year
ended December 31, 1999. The following alphabetical list includes our ten
largest advertising and sponsorship, e-commerce and syndication customers, based
on revenues, for the fourth quarter ended December 31, 1999:
<TABLE>
<CAPTION>
ADVERTISING E-COMMERCE SYNDICATION
- -------------------------------- -------------------------------- --------------------------------
<S> <C> <C>
ArtistDirect, Inc. Amazon.com, Inc. About.com, Inc.
drKoop.com, Inc. ArtistDirect, Inc. AltaVista Company
Finet Holdings Corp eToys, Inc. Infonautics Corporation
Intelligent Life Corporation KB Holdings (KB Kids)
(Bank Rate Monitor) mySimon, Inc.
Lifeminders Com Inc. Nifty Cool, Inc.
OnHealth Network Company Office Depot.com
Providian Financial Corporation Reel.com, Inc.
(Aria.com) Value America, Inc.
theglobe.com WorldRes, Inc.
uBid Inc.
Web Power
</TABLE>
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AltaVista Company and theglobe.com each accounted for approximately 10% of
total revenues, for the year ended December 31, 1998. For the year ended
December 31, 1999, no customer accounted for more than 10% of our total
revenues. In addition, in 2000 we expect that revenues associated with the
Corporate Services Group will be heavily dependent on a limited number of
customers.
TECHNOLOGY AND OPERATIONS
Ask Jeeves has developed and acquired proprietary technology to create an
online personal service infrastructure aimed at creating a unique user
experience that emphasizes ease of use, relevance, precision and ability to
learn. The goal of the Ask Jeeves' services is to combine the strengths of
automated natural language parsing software and popularity-based search
technology with editorially selected online content and text-based live-help to
give Web users easy access to the information they seek. Our infrastructure also
provides companies an efficient and effective means to target prospective
customers, convert browsers into shoppers, retain existing customers and provide
customer data. Our core technology was developed by Ask Jeeves and forms the
basis for our natural language question answering services. We also acquired
technology from Direct Hit and Net Effect.
JEEVES ANSWERS
Jeeves Answers, our question answering technology, matches a user's question
to a short list of dialogue questions and directs the user to corresponding
answers on the Internet. To do this, we focus on four main areas: the question
processing engine, the knowledge base creation and maintenance process, data
tracking and analysis, and the editorial process.
The Question Processing Engine, or QPE, is the engine that drives our
question answering service. The QPE uses our natural-language processing
software to parse, or identify the linguistically significant terms in, each
user question. The QPE analyzes a user's question syntactically and semantically
and reorganizes it into a structure that can be matched to our "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. When the user picks a dialogue question, the QPE then extracts an
"answer template" from the knowledge base that contains the information
necessary to link the user directly to a destination on the Internet or a page
on a corporate Web site. The answer links have been editorially selected for
relevance, accuracy and credibility. A meta-search function, 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.
Our knowledge base is a collection of question templates and answer
templates. The knowledge base is created and maintained using a set of
internally-developed proprietary tools that allow human content editors to make
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. 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 links from the knowledge base to the Web to ensure that the links are
functioning and that the content is still relevant to the question.
Our tracking and analysis store, analyze and report on all queries asked of
our online personal service infrastructure, whether from the Web Properties and
Syndication Group or the Corporate Services Group. In the process of responding
to user questions, the QPE logs all questions and the selected dialogue
questions to a "user log." We analyze this information to determine patterns in
the usage of our Web Properties and Syndication Services and our Corporate
Services. This data helps editors determine what
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questions should be answered and also enables our corporate customers to
identify content gaps on their Web sites.
Our editorial process is designed to take 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 or our
corporate customers. 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 the knowledge base diminishes.
JEEVES SEARCH
Jeeves Search, our popularity-based search technology and proprietary
software which we recently acquired from Direct Hit, has been designed to serve
as the foundation for a variety of scalable information organization and
aggregation applications. The core of Jeeves Search is its Popularity Engine,
which leverages a database of more than one billion search records and employs
proprietary algorithms that rank the site selections of internet users. The
Popularity Engine can be readily deployed to work with various data, such as
multi-media content and corporate Web site-specific data. It anonymously
monitors the activity of millions of Internet users on a daily basis to
systematically organize large volumes of information according to user demand.
The technology operates to create a data file of relevancy records identifying
the information, products or services that users found useful in satisfying
their requests for information. Our systems process these relevancy records and
use our proprietary mathematical algorithms to rank the information, products or
services according to user demand. These rankings are then incorporated into the
Popularity Engine and utilized in responding to the requests of subsequent
users. The Popularity Engine's modularity simplifies deployment as either a
stand-alone solution or as a complement to existing technology.
JEEVES ADVISOR
Jeeves Advisor, our decision support service, asks users questions to
establish their needs and preferences and provides them with a personalized list
of recommendations, selected product features and side-by-side comparisons. It
employs advice logic to interpret user answers in terms of importance, which it
uses in rating products to create a short list of recommendations. It also uses
this information to generate personalized lists of pros and cons for each
alternative, identifying concisely the information most useful in helping the
user choose among the alternatives. The Jeeves Advisor technology is based on a
unique synthesis of multi-attribute decision analysis and knowledge based expert
systems.
JEEVES LIVE
Jeeves Live, our Live Help service which we acquired from Net Effect,
provides real-time, text-based communication between users and live
representatives. The Live Help technology features skills-based routing,
multi-session management, real-time session escalation, transcript capture,
knowledge base integration, remote browser control and solution development
tools. The Live Help Technology is implemented as a Java-based software suite
that brings real-time interpersonal communications to online customer support
agents through a set of applications, including a client console which is
delivered to consumers through their browsers.
SCALABILITY AND OPERATIONS
Our question answering technology runs 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.
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Our Popularity Engine distribution servers are arrays of Intel-based server
systems running the FreeBSD operating system and Apache Web Server Software. The
software is written as C++ FastCGI modules for highest scalability and realtime
performance. The Popularity Engine Processing Servers are also Intel systems
running Windows NT as well as Sun Sparc Systems running Solaris, utilizing
Oracle back-end software. To scale as user traffic increases, we need only
install additional distribution servers. To scale as we add more data sources
such as international search or corporate databases, we add more capacity to the
Oracle systems or increase the number of systems.
The servers hosting Ask Jeeves and some of our customers' Web sites are
located at Frontier GlobalCenter in Palo Alto, California and Exodus
Communications in Sunnyvale, California. The servers hosting our popularity
engine technology are located at Exodus Communications in Waltham,
Massachusetts, Santa Clara, California, and London, England. Additionally, some
of our corporate customer Web sites are co-located with our customers' servers
at other facilities. The 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.
COMPETITION
CORPORATE SERVICES GROUP
Our Corporate Services Group 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 combining
automated technology with human intelligence to deliver customer service for
company Web
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sites. The companies that provide automated online customer products and
services against which we compete can be categorized as follows:
<TABLE>
<CAPTION>
CATEGORY FOCUS COMPETITORS
- -------- -------------------------------- --------------------------------
<S> <C> <C>
Commerce & Content Shopping Advisors, Comparative Active Research Inc.,
Price Shopping Engines, Shopping Frictionless Commerce
Carts Incorporated, Interactive
Desktop Video, LLC (Vignette),
Art Technology Group, Inc.,
Interwoven, Inc., mySimon inc.,
BroadVision Inc., Interworld
Corporation
Communications Automated E-mail Response, Kana Communications, Inc., eGain
Automated E-mail Routing, Communications Corp.,
Instant Messaging and Live Brightware, Inc., Mustang.com,
Interaction Inc., Webline Communications
Corp., FaceTime Communications,
Inc., LivePerson, Inc., Aptex
Software, Inc.
Search Search, Advanced Search, Inktomi Corporation, Google
Chatterbots Inc., AltaVista Company, Verity,
Inc., Infoseek Corporation,
Autonomy, Inc., eHNC (a division
of HNC Software, Inc.), Big
Science Company, Neuromedia,
Inc., Artificial Life, Inc.
Customer Relationship Management Customer Service, Call Center Siebel Systems, Inc., Remedy
Applications, Customer Service Corporation, PeopleSoft, Inc.,
Knowledge Management Silknet Software Inc., Octane
Software, Inc., ServiceWare,
Inc., Servicesoft Technologies,
Inc., Answers.com, Primus
Knowledge Solutions, Inc.,
Advantagekbs, Inc., Nortel
Networks 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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WEB PROPERTIES AND SYNDICATION GROUP
We face direct competition from companies that provide Internet-wide search
and directory services. For example, we compete with search engines, including
Excite@Home Corporation, Inktomi Corporation, Google Inc. and AltaVista Company,
for the traffic generated by Internet users seeking links to third-party content
to address their online information needs. We also compete with directory
services, such as Yahoo! Inc., Goto.com, Inc. and LookSmart, Ltd. because they
provide alternative ways for users to obtain the desired information. An
increasing number of these search and directory companies are syndicating
services to corporations, presenting additional competition for the syndication
service we recently acquired from Direct Hit.
INTELLECTUAL PROPERTY
We seek to protect our proprietary rights, but our actions may be inadequate
to protect our patents, trademarks or other proprietary rights or prevent others
from claiming violations of their proprietary rights. We have one patent
application on file with the United States Patent and Trademark Office for our
"Grammar Template Query System." We have obtained registered trademark status
for "Ask Jeeves" and have 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. In connection with our acquisition of Net
Effect, we acquired two pending patent applications covering aspects of the Net
Effect technology and in connection with our purchase of certain assets from
Excellerate LLC, we acquired one pending patent application covering certain
Excellerate technology. In addition, in connection with our acquisition of
Direct Hit, we received assignments of two United States patents issued to Gary
Culiss, Direct Hit's co-founder, Chief Technology Officer and Chairman, covering
certain Direct Hit technology, and two U.S. patent applications, one of which
has been allowed, covering other aspects of Direct Hit's technology. We entered
into confidentiality agreements with our employees, consultants and strategic
partners, and generally control access to and distribution of our proprietary
information. Despite our efforts to protect our proprietary rights from
unauthorized use or disclosure, parties may attempt to disclose, obtain or use
our proprietary information. The steps we have taken may not prevent
misappropriation of our proprietary information. Third parties may infringe or
misappropriate our proprietary rights, which could seriously harm our business.
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 us. Claims
relating to infringement of the patents, trademarks and other intellectual
property rights of third parties and any resulting litigation, should it occur,
could subject us to significant liability for damages and could result in the
invalidation of our proprietary rights. In addition, even if we prevail, 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 seriously
harm our business. Any claims from third parties may also result in limitations
on our ability to use the trademarks and other intellectual property subject to
those claims unless we enter into agreements with the third parties responsible
for those claims, which may be unavailable on commercially reasonable terms.
In July 1999, IP Learn LLC filed a complaint against us in the United States
District Court for the Northern District of California, which was amended by the
plaintiff, which alleges that aspects of the Ask Jeeves technology infringe one
or more patents alleged to be held by the plaintiff. We have answered the
complaint and discovery has begun. Additionally, in December 1999, Patrick H.
Winston and Boris Katz filed a complaint against us in the United States
District Court for the District of Massachusetts. The complaint alleges that our
technology infringes two patents alleged to be held by the plaintiffs. We have
answered the complaint, but discovery has not begun. We intend to vigorously
defend against the allegations asserted in these complaints and we believe we
have meritorious defenses to the claims.
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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 have attempted 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, DirectHit.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 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 December 31, 1999, we had approximately 416 employees. In addition we
expect to retain approximately 65 employees as a result of our acquisitions of
Evergreen and Direct Hit. We have never had a work stoppage, and no employees
are represented under collective bargaining agreements. We consider our
relations with our employees to be good.
FACILITIES
Our headquarters are currently located in a leased facility in Emeryville,
California. The facility consists of 76,608 square feet. Our annual rent expense
under the lease is $1.9 million. The lease expires in 2004. As a result of our
acquisitions of Net Effect and Direct Hit, we have assumed leases for office
space of approximately 32,000 square feet in Natick, Massachusetts and North
Hollywood, California. These leases expire in 2002 and 2004, respectively. Our
annual rent expense under these leases is approximately $710,000.
We have also leased smaller facilities in California, Missouri and New York,
primarily for sales and marketing personnel. We are currently in negotiation to
lease up to 60,000 square feet in Oakland, California, which is expected to have
an annual rent expense of $1.9 million and a lease term of six years.
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We believe that our facilities will be adequate to meet our needs for the
foreseeable future.
LEGAL PROCEEDINGS
On July 8, 1999, IPLearn, LLC filed a complaint against us in the United
States District Court for the Northern District of California (Oakland Division)
(IPLEARN, LLC V. ASK JEEVES, INC., Action No. C99-3392 SBA-ENE), which was
amended by IPLearn on August 23, 1999, alleging infringement by us of United
States Patent Nos. 5,884,302, 5,836,771 and 5,934,910 that are alleged to be
held by the plaintiff. The complaint seeks injunctive relief and unspecified
damages, including attorneys' fees. We filed an answer to the complaint on
August 30, 1999. The answer denies the allegations made in the complaint and
seeks a dismissal of the complaint, invalidation of the asserted patents and an
award to us of our costs, including attorneys' fees. The parties have begun the
discovery process in this litigation.
On December 16, 1999, Patrick H. Winston and Boris Katz filed a complaint
against us in the United States District Court for the District of Massachusetts
(PATRICK H. WINSTON AND BORIS KATZ V. ASK JEEVES, INC., Case No. 99GV12584 MLW),
alleging infringement by us of United States Patent Nos. 5,309,359 and 5,404,295
that are alleged to be held by the plaintiffs. The complaint seeks injunctive
relief and unspecified damages, including attorneys' fees. We filed an answer to
the complaint and a counterclaim for declaratory relief on January 28, 2000. The
answer denies the allegations made in the complaint and seeks a dismissal of the
complaint, invalidation of the asserted patents and an award to us of our costs,
including attorneys' fees. The parties have not yet begun the discovery process
in this litigation.
We intend to vigorously defend against the allegations asserted in these
complaints and we believe we have meritorious defenses to the claims. The
results of any litigation matter are inherently uncertain. In the event of an
adverse result in either of these lawsuits, or in any other litigation with
third parties that could arise in the future with respect to intellectual
property rights relevant to our products or services, we could be required to
pay substantial damages, including treble damages if we are held to have
willfully infringed, to cease the use of infringing products or services, to
expend significant resources to develop non-infringing technology or to attempt
to obtain licenses to the infringing technology on commercially reasonable
terms. In addition, litigation frequently involves substantial expenditures and
can require significant management attention, even if we ultimately prevail.
Accordingly, we cannot assure you that these lawsuits will not seriously harm
our business.
In the normal course of business, we are subject to various other legal
matters. While the results of litigation and claims cannot be predicted with
certainty, we believe that the final outcome of these other matters will not
seriously harm our business, operating results or financial condition.
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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>
Robert W. Wrubel.......................... 39 President, Chief Executive Officer and
Director
Edward D. Briscoe III..................... 37 Senior Vice President and General Manager,
Web Properties and Syndication Group
Christine M. Davis........................ 42 Vice President and Controller
Laurence G. Fishkin....................... 47 Senior Vice President, Business
Development
George S. Lichter......................... 48 President of Ask Jeeves International
M. Bruce Nakao............................ 56 Chief Financial Officer
Enrique Salem............................. 34 Senior Vice President of Engineering and
Operations
Amy Slater................................ 45 General Counsel and Secretary
Frank A. Vaculin.......................... 41 Senior Vice President and General Manager,
Corporate Service
David C. Warthen.......................... 41 Chief Technical Officer
Roger A. Strauch(1)(3).................... 43 Chairman of the Board
A. George (Skip) Battle(1)(2)............. 55 Director
Garrett Gruener(1)........................ 45 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.
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.
EDWARD D. BRISCOE III joined Ask Jeeves as Senior Vice President and General
Manager, Web Properties anc Syndication Group 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.
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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.
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.
GEORGE S. LICHTER has served as President of Ask Jeeves International since
May 1999. From January 1997 to May 1999, Mr. Lichter served as Senior Vice
President, Business Development of Havas Interactive/Cendant Software. From 1994
to 1997, Mr. Lichter served as Vice President New Business Development of
Knowledge Adventure, an educational software compay. From 1993 to 1994, Mr.
Lichter was employed as an attorney at the law firm of Rosenfeld, Meger &
Susman.
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 Board of Directors of Puma Technology Inc.
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.
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 Ask Jeeves.
FRANK A. VACULIN joined Ask Jeeves as Senior Vice President and General
Manager, Corporate Service Group 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.
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
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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.
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 served as Chief Executive Officer and
Chief Financial Officer of Symmetricom, Inc., a manufacturer of mixed signal
integrated circuits and telecommunications hardware, from June 1998 and
July 1998, respectively until December 1998. 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.
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 Turnstone
Systems, Inc. and MMC Networks, Inc.
BOARD COMPOSITION
Our Board of Directors is divided into three classes designated as Class I,
Class II and Class III, respectively. At the 2000 annual meeting of
stockholders, 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 2001
annual meeting of stockholders, 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 2002 annual meeting of stockholders, the term of office of the
Class III
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<PAGE>
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.
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 in May, July and December 1998, options to purchase an
aggregate of 169,470 shares of our common stock at a weighted average exercise
price of $0.14 per share. A. George (Skip) Battle, one of our directors,
received in August and December 1998, options to purchase an aggregate of 60,000
shares of our common stock at a weighted average exercise price of $0.63 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.
EXECUTIVE COMPENSATION
The following table sets forth information concerning compensation earned in
the fiscal year ended December 31, 1999 for our President and Chief Executive
Officer and our four other most highly compensated executive officers whose
compensation as defined by the Securities and Exchange Commission exceeded
$100,000 in the fiscal year ended December 31, 1999. The information in the
table includes salaries, bonuses, stock options granted and other miscellaneous
compensation. We have not granted stock appreciation rights or restricted stock
awards and have no long-term compensation benefits other than stock options.
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SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
---------------------------------------------------- ------------------
OTHER ANNUAL SECURITIES ALL OTHER
NAME AND 1999 PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(2) UNDERLYING OPTIONS COMPENSATION(3)
- -------------------------------- -------- ------------ -------- --------------- ------------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Robert W. Wrubel ........... 1999 $ 187,500 $ -- $ 5,305 177,000 $ --
President and Chief Executive 1998 96,231 9,844(1) 300 1,050,000 --
Officer
Edward D. Briscoe III ...... 1999 169,846 225,403(1) 4,871 402,600 --
Senior Vice President and 1998 -- -- -- -- --
General Manager, Web
Properties and Syndication
Group
Frank A. Vaculin ........... 1999 165,128 115,468(4) 4,890 326,000 --
Senior Vice President and 1998 -- -- -- -- --
General Manager, Corporate
Services Group
David C. Warthen ........... 1999 140,940 -- 5,005 102,000 --
Chief Technical Officer 1998 77,590 -- -- 88,209 40,552
Laurence G. Fishkin ........ 1999 124,583 -- 2,278 226,000 --
Senior Vice President, 1998 -- -- -- -- --
Business Development
</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 to Purchase Common Stock Purchase Agreement dated August 27,
1997, 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."
(4) Represents commissions paid.
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<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information concerning the grant of stock
options to each of the executive officers named in the Summary Compensation
Table listed above during the fiscal year ended December 31, 1999.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS REALIZABLE VALUE AT
---------------------------------------------------- ASSUMED ANNUAL RATES
NUMBER OF % OF TOTAL OF STOCK PRICE
SECURITIES OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM(3)
OPTIONS EMPLOYEES IN PRICE PER DATE OF ------------------------------
GRANTED(1) FISCAL 1999(2) SHARE(3) EXPIRATION 5% 10%
---------- -------------- --------- ---------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Robert W. Wrubel.......... 163,631 2.6% $10.00 05/20/09 $ 27,520,618 $ 43,465,768
11,639 0.2 $10.00 05/20/09 1,960,765 3,096,811
2,000 * $32.94 09/30/09 280,202 453,948
Edward D. Briscoe III..... 137,438 2.2 $ 0.73 01/19/09 24,024,673 36,633,882
262,562 4.2 $ 0.73 01/20/09 45,896,813 69,985,487
2,600 * $32.94 09/30/09 364,263 590,133
Frank A. Vaculin.......... 293,688 4.7 $ 0.73 01/10/09 51,303,310 78,179,655
6,312 0.1 $ 0.73 01/10/09 1,102,621 1,680,252
11,691 0.2 $10.00 05/20/09 1,969,246 3,109,804
13,309 0.2 $10.00 05/20/09 2,242,101 3,541,151
1,000 * $32.94 09/30/09 140,101 226,974
David C. Warthen.......... 84,821 1.4 $ 3.50 03/07/09 14,691,711 22,671,679
15,179 0.2 $ 3.50 03/07/09 2,629,130 4,057,172
2,000 * $32.94 09/30/09 280,202 453,948
Laurence G. Fishkin....... 225,000 3.6 $ 0.73 01/17/09 39,341,395 60,004,810
1,000 * $32.94 09/30/09 140,101 226,974
</TABLE>
- ------------------------
* Represents less than 0.1%
(1) Options granted during the fiscal year ended December 31, 1999 were granted
under either the 1996 Equity Incentive Plan or the 1999 Equity Incentive
Plan. These 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. 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.
(2) Based on granted options to purchase 6,214,090 shares of common stock during
the period from January 1, 1999 to December 31, 1999.
(3) Potential realizable values are computed by multiplying the number of shares
of common stock subject to a given option by the closing price of $112.94
per share on December 31, 1999, assuming that the aggregate stock value
derived from that calculation compounds at the annual 5% and 10% rate shown
in the table for the remainder of the ten-year term of the option and
subtracting from that result the aggregate option exercise price. The 5% and
10% assumed annual rates of stock appreciation are mandated by the rules of
the SEC and do not reflect our estimate or projection of future stock price
growth.
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<PAGE>
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, 1999 and the number of shares of common stock subject to
exercisable and unexercisable stock options held as of December 31, 1999 by each
of the executive officers named in the Summary Compensation Table. 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
closing price of $112.94 on December 31, 1999.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE MONEY OPTION
NUMBER OF AT DECEMBER 31, 1999 AT DECEMBER 31, 1999
SHARES ACQUIRED VALUE ------------------------------ ------------------------------
NAME IN EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- --------------- ---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Robert W. Wrubel................. 354,170 $3,341,700 52,456 820,374 $ 5,835,094 $90,539,974
Edward D. Briscoe III............ 400,000 $3,508,960 2,600 -- 208,000 --
Frank A. Vaculin................. 137,438 $1,205,661 1,000 187,562 80,000 20,814,503
David C. Warthen................. -- -- 186,458 100,002 20,973,342 10,943,919
Laurence G. Fishkin.............. 56,250 $ 493,448 1,000 168,750 80,000 18,935,420
</TABLE>
EMPLOYEE BENEFIT PLANS
1996 EQUITY INCENTIVE PLAN
Our 1996 Equity Incentive Plan was adopted by the board and approved by the
stockholders in December 1996. The 1996 Incentive Plan was amended in
January 1999 and February 1999. There is currently an aggregate of 5,973,372
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 December 31, 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 2,192,548 shares had been exercised,
options to purchase approximately 216,688 shares had been cancelled and options
to purchase approximately 2,988,063 shares at exercise prices ranging from $0.03
to $11.00 per share remained outstanding.
The 1996 Incentive Plan provides for the grant of incentive stock options
under the Internal Revenue Code of 1986, 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 the 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 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
54
<PAGE>
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 which was
approved by the stockholders in May 1999. 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 Internal Revenue Code, to employees and non-statutory stock
options, restricted stock purchase awards and stock bonuses to employees,
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 the recipients and types of awards to be granted,
including the exercise price, number of shares subject to the award and the
exercisability thereof. Currently, the 1999 Incentive Plan is administered by
the compensation committee of the board.
The terms of options granted under the 1999 Incentive Plan may not exceed
10 years. The board or a committee approved by the board, determines the
exercise price of options granted under the 1999 Incentive Plan. However, the
exercise price for an incentive stock option cannot be less than 100% of the
fair market value of the common stock on the date of the option grant, and the
exercise price for a 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 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
55
<PAGE>
service relationship with Ask Jeeves or any affiliate ceases for any reason may
exercise vested options for the term provided in the option agreement.
No incentive stock option may be granted to any person who, at the time of
the grant, owns stock possessing more than 10% of the total combined voting
power of Ask Jeeves or any affiliate of Ask Jeeves, 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 all stock plans of Ask Jeeves and its
affiliates, may not exceed $100,000.
Subject to Section 162(m) of the Internal Revenue Code which denies a
deduction to publicly held corporations for certain compensation paid to
specified employees in a taxable year to the extent that the compensation
exceeds $1,000,000, no person may be granted options under the 1999 Incentive
Plan covering more than 500,000 shares of common stock in any calendar year.
Shares subject to stock awards that have expired or otherwise terminated
without having been exercised in full again become available for the grant of
awards under the 1999 Incentive Plan.
Restricted stock purchase awards granted under the 1999 Incentive Plan may
be granted pursuant to a repurchase option in favor of Ask Jeeves in accordance
with a vesting schedule determined by the board or a committee appointed by the
board. The price of a restricted stock purchase award under the 1999 Incentive
Plan 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 December 31, 1999, 2,265,572 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 100,653 shares have been exercised,
options to purchase 159,500 shares have been cancelled and options to purchase
2,005,419 shares with exercise prices ranging from $0.36 to $68.31 remain
outstanding. The 1999 Incentive Plan will terminate on April 15, 2009 unless
sooner terminated by the board or committee appointed by the board.
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 Plan.
The 1999 Non-Officer 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 members of
our board or any of our affiliates. The 1999 Non-Officer 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 Plan is administered by the stock option committee of the board.
The terms of options granted under the 1999 Non-Officer 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
56
<PAGE>
Non-Officer 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 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
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 Plan.
Restricted stock purchase awards granted under the 1999 Non-Officer 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
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 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 December 31, 1999, 816,840 options to purchase shares of common stock
been granted under the 1999 Non-Officer Plan. To date there have been no
exercises, options to purchase 3,500 shares have been cancelled and options to
purchase 813,340 shares with exercise prices ranging from $60.50 to $131.06
remain outstanding under this plan. The 1999 Non-Officer Plan will terminate on
October 14, 2009 unless sooner terminated by the board, or a committee appointed
by the board.
1997 STOCK PLAN OF NET EFFECT SYSTEMS, INC.
Pursuant to our acquisition of Net Effect Systems, Inc. in November 1999, 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 $103.00 per share. We will not make future grants
under the 1997 Stock Plan of Net Effect.
1998-A STOCK PLAN OF DIRECT HIT TECHNOLOGIES, INC.
Pursuant to our acquisition of Direct Hit Technologies, Inc. in February
2000, we assumed the 1998-A Stock Plan of Direct Hit, which had outstanding
options to purchase approximately 316,000 shares of our common stock with a
weighted average exercise price of $8.51 per share. We will not make future
grants under the 1998-A Stock Plan of Direct Hit.
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<PAGE>
EMPLOYEE STOCK PURCHASE PLAN
In April 1999, the board adopted and the stockholders approved the Employee
Stock Purchase Plan covering an aggregate of 125,000 shares of common stock. In
May 1999, the board amended and the stockholders approved the Purchase Plan to
increase the number of shares reserved under the Purchase Plan to 400,000 shares
of common stock and to provide that each year on the date of the annual
stockholders meeting, beginning in 2000, the share reserve under the Purchase
Plan shall be increased by the least of the following: (1) 300,000 shares,
(2) 0.5% of shares outstanding or (3) a smaller number of shares as determined
by the board. The Purchase Plan became 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 Internal Revenue 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 December 31, 1999, no shares of common stock
had been purchased under the Purchase Plan.
In the event of certain changes of control of Ask Jeeves, 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 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 limits, and
have the amount of reduction contributed to the 401(k) Plan. The trustee under
the 401(k) Plan, at the direction of each participant, invests the assets of the
401(k) Plan in any of eight investment options. The 401(k) Plan is intended to
qualify under Section 401(a) of the Internal Revenue Code so that contributions
by employees to the 401(k) Plan, and income earned on plan contributions, are
not taxable to employees until
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withdrawn, and so that we can deduct the contributions by employees when made.
We may make matching or additional contributions to the 401(k) Plan, in amounts
to be determined annually by the board. We do not expect to make matching or
additional contributions to the 401(k) Plan in 2000.
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 $0.46 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 $0.73
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 of Ask Jeeves, 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 $0.73 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 of Ask Jeeves, 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 of Ask Jeeves, 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 $0.73 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
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<PAGE>
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 $0.73 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.
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 of Ask
Jeeves, 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 of control of Ask Jeeves, 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 $1.0 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 $0.10 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 our 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. Our
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.
60
<PAGE>
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 our 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.
Presently, 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.
61
<PAGE>
CERTAIN TRANSACTIONS
COMMON STOCK FINANCINGS
We issued 1,083,498 shares of common stock at a purchase price of $0.23 per
share and warrants to purchase 541,749 shares of common stock with an exercise
price of $0.23 per share 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, 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 $0.14 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 $0.10 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 $0.53 per share. The following executive officers, directors,
holders of more than 5% of our securities and members of such persons' immediate
families purchased shares of common stock:
<TABLE>
<CAPTION>
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 and Selling
Stockholders" for information relating to the beneficial ownership of such
shares.
62
<PAGE>
In September 1998, we sold an aggregate of 1,855,415 shares of common stock
at a purchase price of $0.73 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 our 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 and Selling
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 SHARES OF
SERIES A SERIES B
PREFERRED PREFERRED AGGREGATE
PURCHASER STOCK STOCK PURCHASE PRICE
- --------- --------- --------- --------------
<S> <C> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS
Roger A. Strauch........................................... 106,125 -- $ 218,618
M. Bruce Nakao............................................. 4,847 8,645 47,418
Amy Slater................................................. 4,847 8,520 46,877
Daniel H. Miller........................................... 106,125 -- 218,618
Garrett Gruener............................................ 92,595 57,758 440,838
Benjamin M. Rosen.......................................... 519,544 172,776 1,818,381
5% STOCKHOLDERS
CPQ Holdings, Inc.......................................... 2,480,765 344,091 $6,600,290
Leavitt Family Trust....................................... 42,248 128,136 641,860
</TABLE>
See the notes to the table on beneficial ownership in "Principal and Selling
Stockholders" for information relating to the beneficial ownership of such
shares.
INVESTOR RIGHTS AGREEMENT
In connection with our Series B preferred stock financing, we entered into
the Amended and Restated Investor Rights Agreement dated February 24, 1999 with
the holders of Series A and Series B preferred stock. The Investor Rights
Agreement provided these stockholders rights relating to the registration of
their preferred stock with the Securities and Exchange Commission. These rights
have been waived as to this offering by the holders of the common stock obtained
upon the conversion of the Series A and
63
<PAGE>
Series B preferred stock in our initial public offering. The other registration
rights survive this offering and terminate no later than three years after the
closing date of our initial public 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 $0.73 per share
to each of Roger A. Strauch and Daniel H. Miller, which vest monthly over six
months. 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 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, Frank A. Vaculin and
George G. Lichter each in the amount of $200,000, $100,000 and $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.
PERSONAL GUARANTEES BY EXECUTIVE OFFICERS
During 1998, Roger A. Strauch and Daniel H. Miller, personally guaranteed
obligations by Ask Jeeves 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, 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.
In July 1999, Ask Jeeves assigned its leases for this office space to Nightfire
Software, Inc. of which Roger A. Strauch is a director and the Roda Group is an
investor. Under the terms of the lease assignment our maximum liability is
$250,000.
We believe that the foregoing transactions were on terms no less favorable
to us than could be obtained from unaffiliated third parties.
64
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information with respect to beneficial
ownership of our common stock as of January 31, 2000 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 executive officers listed in the Summary Compensation Table;
- all of our directors and executive officers as a group; and
- each selling stockholder and in certain cases their limited partners.
The information provided in the table below with respect to each selling
stockholders has been obtained from such selling stockholders.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED AFTER
NUMBER OF SHARES NUMBER OF THIS OFFERING
BENEFICIALLY SHARES BEING -----------------------
NAME AND ADDRESS OF BENEFICIAL OWNERS OWNED(1) PERCENTAGE OFFERED NUMBER PERCENTAGE
- ------------------------------------- ---------------- ---------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C>
CPQ Holding, Inc.(2)
529 Bryant Street,
Palo Alto CA 94301..................... 2,774,856 9.64% -- 2,774,856 9.64%
Entities affiliated with
Highland Capital Partners, Inc.(3)
Two International Place,
Boston, MA 02110....................... 2,310,323 8.02 -- 2,310,323 8.02
Entities affiliated with
Institutional Venture Partners(4)
3000 Sand Hill Rd,
Building Two, Suite 290,
Menlo Park, CA 94025................... 1,386,193 4.81 -- 1,386,193 4.81
Roda Group Investments
Fund I, L.L.C.(5)
918 Parker Street,
Berkeley, CA 94710..................... 856,732 2.98 -- 856,732 2.98
Roger A. Strauch(6)...................... 2,990,550 10.39 -- 2,990,550 10.39
Daniel H. Miller(7)...................... 2,869,456 9.97 -- 2,869,456 9.97
A. George (Skip) Battle(8)............... 170,625 * -- 170,625 *
Garrett Gruener(9)....................... 2,801,298 9.73 -- 2,801,298 9.73
Daniel J. Nova(3)........................ 2,310,322 8.02 -- 2,310,322 8.02
Benjamin M. Rosen(2)..................... 1,413,803 4.91 -- 1,413,803 4.91
Geoffrey Y. Yang(4)...................... 1,386,193 4.81 -- 1,386,193 4.81
Robert W. Wrubel(10)..................... 462,038 1.60 -- 462,038 1.60
David C. Warthen(11)..................... 1,062,347 3.69 -- 1,062,347 3.69
Edward D. Briscoe III(12)................ 634,964 2.21 -- 634,964 2.21
Frank A. Vaculin(13)..................... 144,064 * -- 144,064 *
Laurence G. Fishkin(14).................. 74,193 * -- 74,193 *
All executive officers as a group
(16 persons)(15)....................... 17,641,331 61.27% -- 17,641,331 61.27%
</TABLE>
65
<PAGE>
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED AFTER
NUMBER OF SHARES NUMBER OF THIS OFFERING
BENEFICIALLY SHARES BEING ---------------------
NAME AND ADDRESS OF BENEFICIAL OWNERS OWNED(1) PERCENTAGE OFFERED NUMBER PERCENTAGE
- ------------------------------------- ---------------- ---------- ------------ -------- ----------
<S> <C> <C> <C> <C> <C>
631465 Alberta Ltd.(16)..................... 50,930 * 12,329 38,601 *
Alpert Living Trust dated 1/21/98........... 22,983 * 22,983 -- *
Carl Sturmer(17)............................ 21,113 * 12,329 8,784 *
Christine L. Surowiec....................... 2,937 * 2,937 -- *
Greylock IX Limited Partnership............. 574,408 1.99% 574,408 -- *
Gweneth H. Glessner......................... 308 * 308 -- *
J. Bradford King(18)........................ 25,052 * 20,984 -- *
Judith M. O'Brien Custodian Connor
O'Brien................................... 123 * 123 -- *
Judith M. O'Brien Custodian Lauren
O'Brien................................... 123 * 123 -- *
Kenneth Van Wagenen Trust................... 6,164 * 6,164 -- *
King Living Trust U/A/D June 19, 1989(19)... 106,506 * 96,840 -- *
Laura Hanff(20)............................. 115 * 77 38 *
Lisa Corbett................................ 993 * 993 -- *
Mark S. Manasse............................. 277 * 277 -- *
Media First Public Relations, Inc........... 2,465 * 2,465 -- *
Michael E. McFall(21)....................... 185,897 * 119,296 66,601 *
Milam Knecht and Company.................... 2,465 * 2,465 -- *
O'Brien Family Trust U/T/A dtd. 7/1/92...... 2,552 * 2,552 -- *
Old Dominion University Research
Foundation................................ 393 * 393 -- *
Paul D. Schaller............................ 24,659 * 24,659 -- *
Q Financial Group, LLC...................... 18,494 * 18,494 -- *
R.E.K. Profit Sharing Trust FBO Robert E.
King...................................... 9,543 * 9,543 -- *
Randal A. Johnson........................... 4,623 * 4,623 -- *
Robert Wyse................................. 2,465 * 2,465 -- *
San Francisco International Investors....... 12,329 * 12,329 -- *
Stanford University(22)..................... 14,794 * 14,794 -- *
TL Ventures III Interfund L.P............... 7,008 * 7,008 -- *
TL Ventures III L.P......................... 214,645 * 214,645 -- *
TL Ventures III Offshore L.P................ 44,930 * 44,930 -- *
Trinity V Side by Side Fund, L.P............ 21,307 * 21,307 -- *
Augustus Tai
Fenton Family 1994 Trust
Fremont Sequoia Holdings, Ltd.
Fremont TVL V Partners, L.P.
Judy Wunderlich Trust
Lederer-Orr Family Trust
Michele A. Valentine
Nierenberg Family Trust
Shennan 1995 Trust
Shennan Family Partnership I
Tod H. Francis
TVL Management Corp.
Trinity Ventures V, L.P. 373,655 1.30% 373,655 -- *
Augustus Tai
Bank of Tokyo
Big Trees
</TABLE>
66
<PAGE>
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED AFTER
NUMBER OF SHARES NUMBER OF THIS OFFERING
BENEFICIALLY SHARES BEING ---------------------
NAME AND ADDRESS OF BENEFICIAL OWNERS OWNED(1) PERCENTAGE OFFERED NUMBER PERCENTAGE
- ------------------------------------- ---------------- ---------- ------------ -------- ----------
<S> <C> <C> <C> <C> <C>
Bradley Holdings, Ltd.
Brian Aspland
Cameron Trust
Capital Asia
Carrara Venture Fund
CI Venture Capital
Ciocca Living Trust
Crescent Intl Holdings Limited
Diane Wilsey
Donald Chase Doolittle
Edith Stern Trust
Fenton Family 1994 Trust
Fremont Sequoia Holding Ltd.
George O. Sheldon
Hallco
Harbourvest VI Ltd.
Harold Naparst
Henry Living Trust
Herbert M. Dwight, Trustee
Herst Family Trust
Hitachi
James Simpson
John O'Donnell IRA Rollover
Kevin E. Grant
Laval Family Trust
Lederer-Orr Family Trust
Maurice Werdegar
Miami Corp
Michael & Yvonne Deggelman
Ohawine Trust
Paul Lego
Pente Venture Trust
Peter Stott
Quinn Family Trust
Rees Family Trust
Richard Frank Living Trust
Rod & Connie Georgiu
Shapiro Family Trust
Shennan 1995 Trust
Sutro Group
Suwannukul Family Traust
Thanksgiving Foundation
Tod H. Francis
TVL Management Corp.
Union Insurance
W. Andrew Beckstoffer
Wayne & Judith Earl Trust
Woodside Electronics Trust
WL Investment 99A........................... 1,666 * 1,666 -- *
WS Investment Company 97B................... 6,164 * 6,164 - *
</TABLE>
67
<PAGE>
- ------------------------
* Represents beneficial ownership of less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes voting or investment power
with respect to the securities. Common stock subject to options or warrants
that are currently exercisable or exercisable within 60 days of
January 31, 2000 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 28,793,899 shares of common stock outstanding as of January 31,
2000 and shares of common stock outstanding after this offering,
assuming no exercise of the underwriters' over-allotment option.
(2) Benjamin M. Rosen is Chairman of the Board of Compaq Computer Corporation
of which CPQ Holdings, Inc. is a wholly-owned subsidiary.
(3) Highland Capital Partners, Inc. manages Highland Capital Partners IV
Limited Partnership (HCP IV) and Highland Entrepreneurs' Fund IV Limited
Partnership (HEF IV, and together with HCP IV, the Highland Entities).
Includes 2,217,910 shares of common stock owned by HCP IV and
92,413 shares of common stock owned by HEF IV. Daniel J. Nova, a director
of Ask Jeeves, is a general partner of the 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.
(4) Institutional Venture Partners manages Institutional Venture
Partners VIII, L.P. (IVP) and IVP Institutional Investment Fund, III, LLC
(IIF, and together with IVP, the "Institutional Entities"). Includes
1,365,400 shares of common stock owned by IVP and 20,793 shares of common
stock owned by IIF. Geoffrey Y. Yang, a director of Ask Jeeves, is a
general partner of the 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.
(5) 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.
(6) Includes 1,967,881 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 Mr. Strauch is a managing member and as
to which he disclaims beneficial ownership. 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.
68
<PAGE>
(7) Includes 1,997,724 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, and as to which Mr. Strauch disclaims beneficial ownership. 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.
(8) Includes 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,
as to which Mr. Battle disclaims beneficial ownership.
(9) Includes 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 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 Ask Jeeves, 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 102,248 shares issuable pursuant to options exercisable within
60 days.
(11) Includes all 211,458 shares issuable pursuant to options exercisable
within 60 days.
(12) Includes all 2,600 shares issuable pursuant to options exercisable within
60 days.
(13) Includes all 4,841 shares issuable pursuant to options exercisable within
60 days.
(14) Includes all 10,375 shares issuable pursuant to options exercisable within
60 days.
(15) Represents 17,296,183 shares and 345,148 options that are currently
exercisable or exercisable within 60 days.
(16) Includes 38,601 shares owned by Kelly Graves as to which 631465 Alberta
Ltd. disclaims beneficial ownership.
(17) Includes 3,000 shares from options exercised February 14, 2000, and an
additional 5,784 shares issuable pursuant to options exercisable within
60 days.
(18) Includes 4,068 shares owned by San Francisco International Investors as to
which Mr. King disclaims beneficial ownership.
(19) Includes 9,543 shares held by R.E.K. Profit Sharing Trust and 123 shares
held by San Francisco International Investors as to which Mr. King
disclaims beneficial ownership.
(20) Includes 32 shares from options exercised February 10, 2000, and an
additional 6 shares issuable pursuant to options exercisable within
60 days.
(21) Includes 60,980 shares from options exercised January 1, 2000, and an
additional 5,621 shares issuable pursuant to options exercisable within
60 days.
(22) Stanford University disclaims beneficial ownership of any shares owned by
investment funds of which Stanford University is a limited partner.
69
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
As of January 31, 2000, there were 28,793,899 outstanding shares of common
stock, outstanding options to purchase 6,351,661 shares of common stock and
outstanding warrants to purchase 13,750 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 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 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
We are subject to Section 203 of the Delaware General Corporation Law. This
provision generally prohibits any Delaware corporation from engaging in any
business combination with any interested stockholder for a period of three years
following the date the stockholder became an interested stockholder, unless:
- prior to that date the board of directors approved either the business
combination or the transaction that resulted in the stockholder becoming
an interested stockholder;
- upon completion of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock outstanding at the time the transaction
began; or
- on or following that 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 66 2/3% of the
outstanding voting stock that is not owned by the interested stockholder.
70
<PAGE>
Section 203 defines business combination to include:
- any merger or consolidation involving the corporation and the interested
stockholder;
- any sale, transfer, pledge or other disposition of 10% or more of the
assets of the corporation involving the interested stockholder;
- subject to certain exceptions, any transaction that results in the
issuance or transfer by the corporation of any stock of the corporation to
the interested stockholder;
- any transaction involving the corporation that has the effect of
increasing the proportionate share of the stock of any class or series of
the corporation beneficially owned by the interested stockholder; or
- the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
In general, Section 203 defines an interested stockholder as any entity or
person beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by the entity or person.
CHARTER AND BYLAW PROVISIONS
Our 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 preferences and privileges
of these shares, without stockholder approval;
- all stockholder action must be effected at a duly called meeting of
stockholders and not by written consent;
- special meetings of the stockholders may be called only by the chairman of
the board, the chief executive officer or the board; and
- the elimination of cumulative voting.
Such provisions may have the effect of delaying or preventing a change of
control.
Our certificate of incorporation and bylaws provide that we will indemnify
officers and directors against losses that they incur in investigations and
legal proceedings resulting from their services 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.
71
<PAGE>
REGISTRATION RIGHTS
We entered into the Amended and Restated Investor Rights Agreement dated
February 24, 1999 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 common stock
obtained upon the conversion of preferred stock in the initial public offering.
The registration rights will survive this offering and terminate no later than
July 7, 2000.
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."
72
<PAGE>
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 and
attorneys who have performed services for Ask Jeeves beneficially own an
aggregate of 7,810 shares of common stock of Ask Jeeves.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements at December 31, 1998 and 1999 and for each of the three
years ended December 31, 1999, as set forth in their report which as to years
1997 and 1998 are based in part on the report of PricewaterhouseCoopers, LLP,
independent accountants for Net Effect Systems, Inc. We have included our
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.
The consolidated financial statements of Direct Hit Technologies, Inc. as of
December 31, 1998 and 1999 and for the period from inception (April 27, 1998)
through December 31, 1998 and for the year ended December 31, 1999 included in
this prospectus have been audited by Deloitte & Touche LLP, independent
73
<PAGE>
auditors, as stated in their report appearing herein, and have been so included
in reliance upon the report of such firm given upon their authority as experts
in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 with respect to the shares of common stock offered by this
prospectus. This prospectus, which constitutes a part of the registration
statement, does not contain all of the information set forth in the registration
statement or the exhibits and schedules which are part of the registration
statement. For further information with respect to us and our common stock, see
the registration statement and the exhibits thereto. Statements contained in
this prospectus regarding the contents of any contract or any other document to
which reference is made are not necessarily complete, and, in each instance
where a copy of such contract or other document has been filed as an exhibit to
the registration statement, reference is made to the copy so filed, each such
statement being qualified in all respects by such reference. Any document we
file may be read and copied at the Public Reference Room of the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. The public may
obtain information on the operation of the Public Reference Room by calling the
Commission at 1-800-SEC-0330. Our filings with the Commission are also available
to the public from the Commission's Web site (http://www.sec.gov).
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.
74
<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
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statements of Stockholders' Equity (Deficit)... F-5
Consolidated Statements of Cash Flow........................ F-6
Notes to Consolidated Financial Statements.................. F-7
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
Overview.................................................... F-25
Unaudited Pro Forma Condensed Combined Balance Sheets....... F-26
Unaudited Pro Forma Condensed Combined Statements of
Operations................................................ F-27
Notes to Unaudited Pro Forma Condensed Combined Financial
Information............................................... F-28
DIRECT HIT TECHNOLOGIES, INC.
Independent Auditors' Report................................ F-29
Consolidated Balance Sheets................................. F-30
Consolidated Statements of Operations....................... F-31
Consolidated Statements of Stockholders' Equity............. F-32
Consolidated Statements of Cash Flows....................... F-33
Notes to Consolidated Financial Statements.................. F-34
</TABLE>
F-1
<PAGE>
REPORT OF ERNST AND YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Ask Jeeves, Inc.
We have audited the accompanying consolidated balance sheets of Ask
Jeeves, Inc. as of December 31, 1998 and 1999, and the related consolidated
statements of operations, stockholders' equity (deficit) and cash flows for each
of the three years in the period ended December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits. We did not audit the financial statements of Net
Effect Systems, Inc., a wholly-owned subsidiary, 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 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 Net
Effect Systems, Inc. is based solely on the report of the other auditors.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 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 reports of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Ask Jeeves, Inc. at
December 31, 1999 and 1998, and the consolidated results of its operations, and
its cash flows for each of the three years ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
Walnut Creek, CA
January 17, 2000, except for Note 13,
as to which the date is February 2, 2000
F-2
<PAGE>
ASK JEEVES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998 1999
----------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 8,510,851 $ 17,420,387
Short-term investments.................................... -- 34,109,840
Accounts receivable, net of allowance for doubtful
accounts of $85,000 at December 31, 1998 and $1,167,709
at December 31, 1999.................................... 293,940 8,458,873
Prepaid expenses and other current assets................. 109,992 6,414,673
----------- ------------
Total current assets................................ 8,914,783 66,403,773
Property and equipment, net................................. 878,930 7,416,002
Other assets................................................ 139,698 2,344,314
----------- ------------
Total assets........................................ $ 9,933,411 $ 76,164,089
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 828,090 $ 4,717,223
Accrued compensation and related expenses................. 253,062 5,049,437
Accrued marketing expenses................................ -- 2,983,010
Accrued merger costs...................................... -- 5,280,119
Other accrued liabilities................................. 307,810 4,452,662
Deferred revenue.......................................... 179,128 7,346,555
Current portion of capital lease obligations.............. 28,220 817,960
----------- ------------
Total current liabilities........................... 1,596,310 30,646,966
Capital lease obligations, less current portion............. 45,945 2,350,760
Other liabilities........................................... -- 1,315,000
Commitments
Stockholders' equity:
Convertible preferred stock, $.001 par value; 5,000,000
shares authorized; 3,810,462 and 0 shares issued and
outstanding at December 31, 1998 and 1999
respectively............................................ 11,558,482 --
Common stock, $.001 par value; 150,000,000 shares
authorized; 11,586,173 and 28,472,883 shares issued and
outstanding at December 31, 1998 and 1999,
respectively............................................ 4,848,453 107,635,676
Deferred stock compensation............................... (476,984) (5,174,691)
Accumulated deficit....................................... (7,638,795) (60,568,021)
Accumulated other comprehensive income, net of tax
effect.................................................. -- (41,601)
----------- ------------
Total stockholders' equity.......................... 8,291,156 41,851,363
----------- ------------
Total liabilities and stockholders' equity.......... $ 9,933,411 $ 76,164,089
=========== ============
</TABLE>
See accompanying notes.
F-3
<PAGE>
ASK JEEVES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1998 1999
---------- ----------- ------------
<S> <C> <C> <C>
Revenues:
Web Properties and Syndication....................... $ -- $ 577,159 $ 14,563,669
Corporate Services................................... 22,603 223,239 7,463,127
---------- ----------- ------------
Total revenues................................. 22,603 800,398 22,026,796
Cost of revenues:
Web Properties and Syndication....................... -- 602,716 6,283,640
Corporate Services................................... -- 796,676 7,800,290
---------- ----------- ------------
Total cost of revenues......................... -- 1,399,392 14,083,930
Gross profit (loss).................................... 22,603 (598,994) 7,942,866
Operating expenses:
Product development.................................. 440,740 1,712,466 8,609,774
Sales and marketing.................................. 94,214 2,301,108 35,304,630
General and administrative........................... 217,823 2,324,784 8,410,943
Amortization of deferred stock compensation.......... -- 29,010 3,935,518
Write-off of in-process technology................... -- -- 543,517
Acquisition costs.................................... -- -- 6,045,186
---------- ----------- ------------
Total operating expenses....................... 752,777 6,367,368 62,849,568
---------- ----------- ------------
Operating loss......................................... (730,174) (6,966,362) (54,906,702)
Interest income........................................ 5,535 165,741 2,164,195
Interest expense....................................... -- (5,738) (186,719)
---------- ----------- ------------
Net loss............................................... $ (724,639) $(6,806,359) $(52,929,226)
========== =========== ============
Basic and diluted net loss per share................... $ (.21) $ (.74) $ (2.64)
========== =========== ============
Weighted average shares outstanding used in computing
basic and diluted net loss per share................. 3,394,397 9,162,624 20,046,959
========== =========== ============
</TABLE>
See accompanying notes.
F-4
<PAGE>
ASK JEEVES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK DEFERRED
------------------------ ------------------------- STOCK 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........................... 54,250 220,000 -- -- -- --
Contribution of services by
stockholders................... -- -- -- 105,000 -- --
Issuance of common stock for
cash........................... -- -- 3,759,109 854,944 -- --
Issuance of common stock options
to consultants................. -- -- -- 15,510 -- --
Compensation charge related to
grants of common stock
options........................ -- -- -- 16,665 -- --
Net loss and comprehensive
loss........................... -- -- -- -- -- (724,639)
---------- ----------- ---------- ------------ ----------- ------------
Balances at December 31, 1997...... 54,250 220,000 6,159,109 1,180,233 -- (832,436)
Issuance of preferred stock for
cash........................... 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........................... -- -- 5,410,764 2,774,270 -- --
Issuance of common stock to
consultants.................... -- -- 16,300 7,521 -- --
Issuance of common stock warrants
to consultants................. -- -- -- 23,780 -- --
Compensation charge related to
grants of common stock stock
options........................ -- -- -- 56,655 -- --
Deferred stock compensation...... -- -- -- 505,994 (505,994) --
Amortization of deferred stock
compensation................... -- -- -- -- 29,010 --
Net loss and comprehensive
loss........................... -- -- -- -- -- (6,806,359)
---------- ----------- ---------- ------------ ----------- ------------
Balances at December 31, 1998...... 3,810,462 11,558,482 11,586,173 4,848,453 (476,984) (7,638,795)
Issuance of preferred stock for
cash........................... 7,070,148 34,423,356 -- -- -- --
Issuance of preferred stock for
license fee.................... 393 45,000 -- -- -- --
Issuance of common stock to
consultants.................... -- -- 3,761 99,047 -- --
Issuance of common stock warrants
to consultants................. -- -- -- 8,750 -- --
Issuance of common stock warrants
in connection with equipment
lease financings............... -- -- 157,500 -- --
Conversion of preferred stock to
common stock................... (9,485,690) (32,535,201) 9,485,690 32,535,201 -- --
Issuance of common stock for
cash........................... -- 5,771,071 47,446,425 -- --
Conversion of preferred stock to
common stock upon Net Effect
acquisition.................... (1,395,313) (13,491,637) 1,395,313 13,491,637 -- --
Common stock issued for assets
acquired....................... -- 230,875 1,412,438 -- --
Compensation charge related to
grants of common stock
options........................ -- -- -- 203,000 -- --
Issuance of common stock options
to stockholders in exchange for
services....................... -- -- -- 510,750 (510,750) --
Deferred stock compensation...... -- -- -- 6,922,475 (8,122,475) --
Amortization of deferred stock
compensation................... -- -- -- -- 3,935,518 --
Unrealized losses on
investments.................... -- -- -- -- -- --
Net loss......................... -- -- -- -- -- (52,929,226)
---------- ----------- ---------- ------------ ----------- ------------
Balances at December 31, 1999...... -- $ -- 28,472,883 $107,635,676 $(5,174,691) $(60,568,021)
========== =========== ========== ============ =========== ============
See accompanying notes.
<CAPTION>
ACCUMULATED TOTAL
OTHER STOCKHOLDERS'
COMPREHENSIVE EQUITY
INCOME (DEFICIT)
-------------- -------------
<S> <C> <C>
Balances at December 31, 1996...... $ -- $ (6,219)
Contribution of capital by
founders....................... -- 86,536
Issuance of preferred stock for
cash........................... -- 220,000
Contribution of services by
stockholders................... -- 105,000
Issuance of common stock for
cash........................... -- 854,944
Issuance of common stock options
to consultants................. -- 15,510
Compensation charge related to
grants of common stock
options........................ -- 16,665
Net loss and comprehensive
loss........................... -- (724,639)
-------- ------------
Balances at December 31, 1997...... -- 567,797
Issuance of preferred stock for
cash........................... -- 11,338,482
Issuance of common stock options
to stockholders in exchange for
services....................... -- 300,000
Issuance of common stock for
cash........................... -- 2,774,270
Issuance of common stock to
consultants.................... -- 7,521
Issuance of common stock warrants
to consultants................. -- 23,780
Compensation charge related to
grants of common stock stock
options........................ -- 56,655
Deferred stock compensation...... -- --
Amortization of deferred stock
compensation................... -- 29,010
Net loss and comprehensive
loss........................... -- (6,806,359)
-------- ------------
Balances at December 31, 1998...... -- 8,291,156
Issuance of preferred stock for
cash........................... -- 34,423,356
Issuance of preferred stock for
license fee.................... -- 45,000
Issuance of common stock to
consultants.................... -- 99,047
Issuance of common stock warrants
to consultants................. -- 8,750
Issuance of common stock warrants
in connection with equipment
lease financings............... -- 157,500
Conversion of preferred stock to
common stock................... -- --
Issuance of common stock for
cash........................... -- 47,446,425
Conversion of preferred stock to
common stock upon Net Effect
acquisition.................... -- --
Common stock issued for assets
acquired....................... -- 1,412,438
Compensation charge related to
grants of common stock
options........................ -- 203,000
Issuance of common stock options
to stockholders in exchange for
services....................... -- --
Deferred stock compensation...... -- (1,200,000)
Amortization of deferred stock
compensation................... -- 3,935,518
Unrealized losses on
investments.................... (41,601) (41,601)
Net loss......................... -- (52,929,226)
-------- ------------
Balances at December 31, 1999...... $(41,601) $ 41,851,363
======== ============
See accompanying notes.
</TABLE>
F-5
<PAGE>
ASK JEEVES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1998 1999
---------- ----------- ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss.................................................... $ (724,639) $(6,806,359) $(52,929,226)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................. 4,098 114,787 1,271,494
Loss on disposal of assets................................ -- -- 126,615
Issuance of common stock options to consultants........... 15,510 -- --
Issuance of common stock to consultants................... -- 7,521 99,047
Issuance of common stock warrants to consultants.......... -- 23,780 8,750
Issuance of preferred stock for license fee............... -- -- 45,000
Contribution of services by stockholders.................. 105,000 300,000 --
Compensation charge related to grants of common stock
options................................................. 16,665 56,655 203,000
Amortization of deferred stock compensation............... -- 29,010 3,935,518
Amortization of intangibles............................... -- -- 340,196
Write-off of in-process technology........................ -- -- 543,517
Changes in operating assets and liabilities:
Accounts receivable..................................... (24,698) (269,242) (8,164,933)
Prepaid expenses and other current assets............... (3,500) (106,492) (6,147,181)
Accounts payable........................................ -- 828,090 3,889,133
Accrued compensation and related expenses............... 27,446 219,397 4,796,375
Accrued marketing expenses.............................. -- -- 2,983,010
Accrued merger costs.................................... -- -- 5,280,119
Other accrued liabilities............................... 64,193 243,617 4,144,852
Deferred revenue........................................ 13,000 166,128 7,167,427
Other liabilities....................................... -- -- 115,000
---------- ----------- ------------
Net cash used in operating activities....................... (506,925) (5,193,108) (32,292,287)
INVESTING ACTIVITIES
Purchases of property and equipment......................... (71,079) (952,192) (6,261,768)
Sale of property and equipment.............................. -- 114,632 16,612
Purchases of investments.................................... -- -- (34,151,441)
Purchase of other assets.................................... -- (139,698) (1,675,891)
---------- ----------- ------------
Net cash used in investing activities....................... (71,079) (977,258) (42,072,488)
FINANCING ACTIVITIES
Issuance of common stock.................................... 854,944 2,774,270 47,446,425
Issuance of preferred stock................................. 220,000 11,338,482 34,423,356
Contribution of capital by founders......................... 86,536 -- --
Proceeds from sale-leaseback transaction.................... -- -- 1,808,810
Repayment of capital lease obligations...................... -- (15,011) (404,280)
---------- ----------- ------------
Net cash provided by financing activities................... 1,161,480 14,097,741 83,274,311
---------- ----------- ------------
Increase in cash and cash equivalents....................... 583,476 7,927,375 8,909,536
Cash and cash equivalents at beginning of period............ -- 583,476 8,510,851
---------- ----------- ------------
Cash and cash equivalents at end of period.................. $ 583,476 $ 8,510,851 $ 17,420,387
========== =========== ============
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING
ACTIVITIES
Capital lease obligations incurred........................ $ -- $ 89,176 $ 1,690,025
========== =========== ============
Common stock issued for assets acquired................... $ -- $ -- $ 1,412,438
========== =========== ============
Common stock warrants issued in connection with equipment
lease financings........................................ $ -- $ -- $ 157,500
========== =========== ============
Deferred stock compensation in connection with employment
guarantee............................................... $ -- $ -- $ 1,200,000
========== =========== ============
Deferred stock compensation in connection with common
stock options issued to stockholders in exchange for
services................................................ $ -- $ -- $ 510,750
========== =========== ============
Interest paid............................................. $ -- $ 5,738 $ 121,094
========== =========== ============
</TABLE>
See accompanying notes.
F-6
<PAGE>
ASK JEEVES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Ask Jeeves, Inc. ("Ask Jeeves" or the "Company") provides online personal
service infrastructure for companies seeking to target, acquire, convert and
retain customers online. The online personal service infrastructure allows
companies to connect users to information through automated search, natural
language question answering, decision advisory support and interaction with live
customer care representatives. The Company was incorporated in California in
June 1996 and reincorporated in Delaware in June 1999. The Company was in the
development stage prior to 1998.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany transactions and
balances have been eliminated.
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.
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. Cash and cash equivalents are recorded at cost, which
approximates fair value. Substantially all of the Company's cash and cash
equivalents are custodied with three major domestic financial institutions.
CONCENTRATIONS OF CREDIT RISK AND CREDIT RISK EVALUATIONS
Financial instruments which potentially 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, commercial paper and
debt securities of domestic municipalities with strong credit ratings.
Investments consist primarily of debt securities of domestic municipalities and
corporations with strong credit ratings. Cash and cash equivalents and
investments are held with various domestic financial institutions with high
credit standing. 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
F-7
<PAGE>
ASK JEEVES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 one to five years. Leasehold improvements are
amortized over the shorter of the useful life or the remaining lease term.
COMPUTER SOFTWARE
The Company accounts for software developed or obtained for internal use in
accordance with Statement of Position 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.
SOFTWARE DEVELOPMENT COSTS
Development costs related to software incorporated in the Company's products
incurred subsequent to the establishment of technological feasibility are
capitalized and amortized over the estimated lives of the related products.
Technological feasibility is established upon completion of a working model. To
date, costs incurred subsequent to the establishment of technological
feasibility have not been significant, and all software development costs have
been charged to product development expense in the accompanying statements of
operations.
REVENUE RECOGNITION
The Company currently offers its services through its two business groups:
(1) Web Properties and Syndication and (2) Corporate Services. The Web
Properties and Syndication Group allows users to obtain answers to the most
frequently asked questions online. Corporate Services help companies convert
shoppers to buyers, reduce support costs, and improve customer retention.
Revenues from Web Properties and Syndication consist primarily of three
components: (1) advertising revenues; (2) syndication 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 sites or for
targeted audiences and properties within specific areas of Ask.com and
DirectHit.com such as the computer, entertainment, family, health, money,
shopping and travel channels. The Company recognizes revenues based upon actual
impressions delivered. Web Properties and Syndication also include syndication
of the Company's knowledge base for the purpose of enhancing Internet-wide
searching to various search engine companies. Revenues for these syndication
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 over 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.
F-8
<PAGE>
ASK JEEVES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenues from Corporate Services consist of two components: knowledge base
customization and maintenance and information service fees. The Company
recognizes knowledge base customization, maintenance and information service
fees ratably over the contractual term, generally twelve to fifteen months.
Payments received prior to delivering the knowledge base or providing
maintenance and information services are recorded as deferred revenue and
recognized ratably over the contractual term.
SIGNIFICANT CUSTOMERS
For the year ended December 31, 1999, no customer accounted for more than
ten percent of total revenues. For the year ended December 31, 1998, two
customers each accounted for 10% of total 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, 1998 and 1999 was $12,512,
$1,091,591 and $23,823,509, respectively.
INCOME TAXES
The Company uses the liability method to account for income taxes. 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.
F-9
<PAGE>
ASK JEEVES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The calculation of basic and diluted net loss per share is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1998 1999
---------- ----------- ------------
<S> <C> <C> <C>
Net loss............................... $ (724,639) $(6,806,359) $(52,929,226)
========== =========== ============
Weighted average shares outstanding
used in computing basic and diluted
net per loss share................... 3,394,397 9,162,624 20,046,959
========== =========== ============
Basic and diluted net loss per share... $ (.21) $ (.74) $ (2.64)
========== =========== ============
</TABLE>
If the Company had reported net income, the calculation of historical
diluted earnings per share would have included an additional 570,629, 893,352
and 4,450,618 common equivalent shares related to the outstanding stock options
and warrants not included above (determined using the treasury stock method) for
the years ended December 31, 1997, 1998 and 1999, respectively. For the years
ended December 31, 1997, 1998 and 1999, a total of 383,387, 398,007 and 143,926
common equivalent shares related to outstanding stock options and warrants
(determined using the treasury stock method) have been excluded from the
calculation of historical diluted earnings per share as their respective
exercise prices were more than the average market value for the respective
periods.
BUSINESS SEGMENTS
The Company has adopted 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
groups, the Web Properties and Syndication Group and the Corporate Services
Group. 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. The Company's management relies on an internal management
accounting system. Results of operations for these business groups, which are
provided to the CEO, include revenues, cost of revenues, gross profit (loss) and
sales and marketing expense information as provided below in accordance with
FAS 131. The Company's management makes financial decisions and allocates
resources based on the
F-10
<PAGE>
ASK JEEVES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
information it receives from this internal system. Summarized financial
information by segment for 1997, 1998, and 1999, as taken from the internal
management information system is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1997 1998 1999
-------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
WEB PROPERTIES AND SYNDICATION:
Revenues................................... $ -- $ 577,159 $14,563,669
Cost of revenues........................... -- 602,716 6,283,640
------- ---------- -----------
Gross profit (loss)........................ $ -- $ (25,557) $ 8,280,029
------- ---------- -----------
Sales and marketing expense................ $17,509 $1,601,346 $25,671,057
======= ========== ===========
CORPORATE SERVICES:
Revenues................................... $22,603 $ 223,239 $ 7,463,127
Cost of revenues........................... -- 796,676 7,800,290
------- ---------- -----------
Gross profit (loss)........................ $22,603 $ (573,437) $ (337,163)
======= ========== ===========
Sales and marketing expense................ $76,705 $ 699,762 $ 9,633,573
======= ========== ===========
</TABLE>
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("FAS 133"), which establishes accounting
and reporting standards for derivative instruments and hedging activities.
FAS 133 requires that an entity recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair value.
The Company will be required to adopt FAS 133 effective January 1, 2001.
Management of the Company does not believe the adoption of this statement will
have a material effect on the Company's consolidated financial position, results
of operations or cash flows.
RECLASSIFICATIONS
Certain prior year balances have been restated to conform to current year
presentation.
2. BUSINESS COMBINATIONS
PURCHASE COMBINATIONS
During the year ended December 31, 1999 the Company made the business and
technology acquisitions described in the paragraphs that follow, each of which
has been accounted for as a purchase. The consolidated financial statements
include the operating results of each business from the date of acquisition.
PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT. The amounts allocated to
purchased research and development were determined through established valuation
techniques in the high technology Internet industry and were expensed upon
acquisition, because technological feasibility had not been established
F-11
<PAGE>
ASK JEEVES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. BUSINESS COMBINATIONS (CONTINUED)
and no future alternative uses existed. The values assigned to purchased
in-process technology were determined by identifying the on-going research
projects for which technological feasibility had not been achieved and assessing
the state of completion of the research and development effort. The state of
completion was determined by estimating the costs and time incurred to date
relative to those costs and time to be incurred to develop the purchased
in-process technology into commercially viable products, estimating the
resulting net cash flows only from the percentage of research and development
efforts complete at the date of acquisition, and discounting the net cash flows
back to their present value. The discount rate included a factor that took into
account the uncertainty surrounding the successful development of the purchased
in-process technology projects.
PURCHASED TECHNOLOGY. To determine the values of purchased technology, the
expected future cash flows of the existing developed technologies were
discounted taking into account the characteristics and applications of the
product, the size of existing markets, growth rates of existing and future
markets as well as an evaluation of past and anticipated product lifecycles.
ACQUIRED WORKFORCE. To determine the values of the acquired workforce,
employees were identified who would require significant cost to replace and
train. Then each employee's partially burdened cost (salary, benefits,
facilities), the cost to train the employee, and the recruiting costs (locating,
interviewing, and hiring) were estimated. These costs were then aggregated and
tax-affected to estimate the value of the assembled workforce.
Amounts allocated to purchased technology, goodwill and other intangible
assets for the business acquisitions that follow are being amortized on a
straight-line basis over periods of three to four years.
LUMINA DECISION SYSTEMS, INC.
In April 1999, the Company purchased certain technology and computer
equipment from Lumina Decision Systems, Inc. ("Lumina") for total consideration
of approximately $1.5 million, consisting of $700,000 in cash, 225,000 shares of
common stock with a value of $787,500, and approximately $50,000 in acquisition
costs. Approximately 107,500 shares have been placed in escrow subject to a
right of repurchase by the Company based upon the continued employment of
certain Lumina employees. The right of repurchase lapses 25% after one year and
ratably thereafter over a 48 month period. This technology acquisition gives the
Company the ability to offer to its corporate customers a solution that provides
shopping advisory services on the Internet for their customers. The purchase
consideration of the acquired assets were allocated based on fair values as
follows:
<TABLE>
<S> <C>
Purchased in-process research and development charged to
operations in the quarter ended June 30, 1999............. $ 360,697
Purchased technology........................................ 1,059,333
Goodwill.................................................... 117,470
----------
Total purchase consideration................................ $1,537,500
==========
</TABLE>
EXCELLERATE, LLC
In November 1999, the Company purchased certain technology and computer
equipment from Excellerate, LLC ("Excellerate") for total consideration of
approximately $1.3 million, consisting of
F-12
<PAGE>
ASK JEEVES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. BUSINESS COMBINATIONS (CONTINUED)
$625,000 in cash, 5,875 shares of common stock with a value of $624,938, and
approximately $20,000 in acquisition costs. 588 shares are held in escrow and
will be released in one year upon the expiration of certain indemnification
obligations. This technology was acquired for the purpose of enhancing the
Company's existing search navigation capabilities. The purchase consideration of
the acquired assets were allocated based on fair values as follows:
<TABLE>
<S> <C>
Purchased in-process research and development charged to
operations in the quarter ended December 31, 1999......... $ 182,820
Equipment................................................... 40,000
Purchased technology and other.............................. 1,047,118
----------
Total purchase consideration................................ $1,269,938
==========
</TABLE>
POOLING OF INTERESTS COMBINATION
In November 1999, the Company entered into an Agreement and Plan of Merger
(the "Agreement") with Net Effect Systems, Inc. ("Net Effect") in a
stock-for-stock transaction which was accounted for as a pooling of interests.
Pursuant to the Agreement, all outstanding shares of Net Effect were converted
into 1,631,863 shares of the Company's common stock, and options to purchase Net
Effect common stock were converted into options to purchase 497,353 shares of
the Company's common stock.
As the merger was accounted for as a pooling of interests in 1999, all prior
periods have been restated. Restated financial statements of the Company combine
the December 31, 1997, 1998 and 1999, results of the Company with the respective
results of Net Effect. No adjustments have been necessary to conform accounting
policies of the entities. There were no intercompany transactions requiring
elimination in any period presented.
The following table shows the historical results of the Company and Net
Effect for the periods prior to the consummation of the merger of the two
entities:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS
----------------------- ENDED
1997 1998 SEPTEMBER 30, 1999
--------- ----------- ------------------
(UNAUDITED)
<S> <C> <C> <C>
Revenues:
Ask Jeeves.......................... $ -- $ 592,659 $10,301,445
Net Effect.......................... 22,603 207,739 823,407
-------- ---------- -----------
Total............................... $ 22,603 $ 800,398 $11,124,852
======== ========== ===========
Net loss:
Ask Jeeves.......................... $447,777 $4,261,625 $24,178,747
Net Effect.......................... 276,862 2,544,734 5,007,081
-------- ---------- -----------
Total............................... $724,639 $6,806,359 $29,185,828
======== ========== ===========
</TABLE>
F-13
<PAGE>
ASK JEEVES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. BUSINESS COMBINATIONS (CONTINUED)
JOINT VENTURE
In December 1999, the Company, through its wholly-owned subsidiary, Ask
Jeeves (Jersey) Limited ("AJ Jersey"), entered into a joint venture to create a
new partnership, the Ask Jeeves U.K. Partnership (the "Partnership") with
Carlton & Granada Internet Limited ("CGCo"), a joint venture between Carlton
Communications Plc. ("Carlton") and Granada Media Group Limited ("Granada"), the
two largest commercial television companies in the United Kingdom. The Company
contributed a license to substantially all of its intellectual property, having
a zero accounting basis. CGCo will contribute $62.5 million in cash and
advertising to fund the development and promotion of a Web site, which is
expected to be fully-operational by the end of Q1 2000. The Company will account
for its investment in the Partnership under the equity method of accounting. The
Company has a zero basis in the Partnership for accounting purposes and
therefore will not recognize any of the Partnership's losses. In the event that
additional cash may be needed by the Partnership, the Company is prepared to
abandon its investments.
3. INVESTMENTS
At December 31, 1999, all of the Company's investments were classified as
available for sale. Investments with a maturity date of less than one year from
the balance sheet date are classified short-term and are carried at fair value,
based on quoted market prices. Management determines the appropriate
classification of investments at the time of purchase and reevaluates such
designation at the end of each period. The amortized cost of short-term
investments at December 31, 1997 and 1998, approximated fair value and the
amount of unrealized gains or losses was not significant. Unrealized gains and
losses on these investments as of December 31, 1999, are included as a separate
component of stockholders' equity, net of any related tax effect. The amount of
realized gains or losses for the years ended December 31, 1997, 1998 and 1999,
was not significant.
The following tables summarize the Company's investments:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
DECEMBER 31, 1999 COST GAINS LOSSES FAIR VALUE
- ----------------- ------------ ---------- ---------- ------------
<S> <C> <C> <C> <C>
Bank deposits................................. $ 5,314,234 $ -- $ -- $ 5,314,234
Money market funds............................ 248,985 -- -- 248,985
Commercial paper.............................. 13,685,051 1,086 (7,239) 13,678,898
Municipal bonds............................... 2,000,000 -- -- 2,000,000
State notes................................... 2,000,000 -- -- 2,000,000
US Government notes........................... 11,986,841 -- (7,991) 11,978,850
Corporate notes............................... 13,720,716 -- (27,457) 13,693,259
Equity securities............................. 2,616,001 -- -- 2,616,001
------------ ------- -------- ------------
Total available for sale securities........... 51,571,828 1,086 (42,687) 51,530,227
Less amounts classified as cash and cash
equivalents................................. (17,419,301) (1,086) -- (17,420,387)
------------ ------- -------- ------------
Total short-term investments.................. $ 34,152,527 $ -- $(42,687) $ 34,109,840
============ ======= ======== ============
</TABLE>
At December 31, 1999, all of the Company's debt investments mature within
one year.
F-14
<PAGE>
ASK JEEVES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
1998 1999
--------- -----------
<S> <C> <C>
Equipment............................................ $ 844,398 $ 7,071,172
Furniture and fixtures............................... 43,289 1,172,121
Leasehold improvements............................... 110,128 525,952
--------- -----------
997,815 8,769,245
Less accumulated depreciation and amortization....... (118,885) (1,353,243)
--------- -----------
Property and equipment, net.......................... $ 878,930 $ 7,416,002
========= ===========
</TABLE>
Cost related to assets under capital lease obligations at December 31, 1998
and 1999 were $89,176 and $3,498,835, respectively. Accumulated amortization
related to assets under capital lease obligations at December 31, 1998 and 1999
were $16,801 and $542,780, respectively.
5. LEASE COMMITMENTS
In June 1999, the Company entered into a leasing agreement with an equipment
leasing company to finance equipment and software purchases of up to a maximum
of $3.5 million, including the sale-leaseback of certain assets previously
purchased by the Company. As of December 31, 1999, the Company has utilized the
total lease financing line. Lease payments are due on a monthly basis under
lease terms which range from 30 to 48 months and bear interest at a rate of 8.3%
per annum. In connection with the leasing agreement, the Company issued a
warrant to purchase 11,250 shares of common stock.
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 LEASES OPERATING LEASES
-------------- ----------------
<S> <C> <C>
Years ending December 31:
2000........................................................ $1,041,643 $ 2,464,857
2001........................................................ 1,041,643 2,469,344
2002........................................................ 977,195 2,427,651
2003........................................................ 589,048 2,426,914
2004........................................................ -- 2,313,899
Thereafter.................................................. -- 164,349
---------- -----------
Total minimum lease payments................................ 3,649,529 $12,267,014
===========
Less interest............................................... 480,809
----------
Present value of minimum lease payments..................... 3,168,720
Less current portion of capital lease obligations........... (817,960)
----------
Capital lease obligations, less current portion............. $2,350,760
==========
</TABLE>
Rent expense was $10,206, $128,031 and $1,498,731 for the years ended
December 31, 1997, 1998 and 1999, respectively.
F-15
<PAGE>
ASK JEEVES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LINE OF CREDIT
As a result of the acquisition of Net Effect, the Company assumed a
$1.0 million credit agreement with a financial institution, which matures in
May 2000. Borrowings on the line accrue interest at the rate of prime plus 0.25%
per annum and are secured by the general assets of the Company. As of
December 31, 1999, there were no amounts outstanding under the line of credit.
7. 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 and for all
jurisdictions.
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,
--------------------------
1998 1999
----------- ------------
<S> <C> <C>
Net operating loss carryforwards.................. $ 1,137,723 $ 12,684,492
Capitalized research and development costs........ 478,751 716,680
Accrued expenses.................................. 352,638 4,878,596
Other............................................. 25,950 386,515
----------- ------------
Total deferred tax assets......................... $ 1,995,062 $ 18,666,283
Valuation allowance............................... $(1,995,062) $(18,666,283)
----------- ------------
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 and $16,671,000
during the years ended December 31, 1998 and 1999, respectively. 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, 1998 and 1999, the Company had net operating loss
carryforwards for federal income tax purposes of approximately $2,848,000 and
$33,894,000 which expire in the years 2012 through 2019. The Company also had
net operating loss carryforwards for state income tax purposes of approximately
$19,344,000 expiring in the year 2004.
Utilization of the Company's 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.
F-16
<PAGE>
ASK JEEVES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCKHOLDERS' EQUITY
STOCK SPLIT
On April 16, 1999, the Company's Board of Directors approved a 1 for 2
reverse stock split of all issued and outstanding common and preferred stock.
All common and preferred share and per share amounts in the accompanying
consolidated financial statements have been adjusted to reflect the stock split.
STOCK COMPENSATION
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.
The Company recorded compensation charges of $16,665, $56,655, and $203,000
during the years ended December 31, 1997, 1998 and 1999, respectively, 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 1997 and 1998, the Company granted 380,000 and 931,000 stock options to
purchase common stock to a consultant and an employee who became a consultant in
October 1999, respectively. The Company determined the charge related to the
stock options to be immaterial in 1997 and 1998. In 1999, the Company recorded
deferred stock compensation of $4,702,275 relating to these options. This amount
is being amortized by charges to operations on a graded vesting method over the
vesting periods of the individual stock options. Such amortization amounted to
$1,569,522 in the year ended December 31, 1999.
In 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 $7,521 was allocated to the
shares issued. In 1999, the Company issued 3,761 shares of common stock to an
independent contractor for services performed. The Company imputed a value for
the services of $99,047, which was allocated to the shares issued.
From August 1997 through December 1999, certain members of the Company's
Board of Directors who served in management positions during this period
received cash and common stock options for services performed. The Company
recorded charges to operations in 1997 and 1998 of $105,000 and $300,000,
respectively for the monthly grants of options. In January 1999, the Directors
received a grant of 150,000 options which vested monthly through June 1999. In
connection with the grant, the Company recorded deferred compensation of
$510,750 all of which was charged to operations in the year ended December 31,
1999.
The Company recorded deferred stock compensation of $505,994 and $2,220,200,
during the years ended December 31, 1998 and 1999, 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 $29,010
and $1,521,124 for the years ended December 31, 1998 and 1999, respectively.
Also in 1999, in conjunction with an employment contract with an executive,
the Company guaranteed $1,200,000 in cash or stock to be paid to the executive
after 36 months of employment. This amount has
F-17
<PAGE>
ASK JEEVES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCKHOLDERS' EQUITY (CONTINUED)
been recorded as deferred stock compensation and is being amortized by charges
to operations using a graded vesting method over the 36-month life of the
guarantee. Such amortization amounted to $334,122 for the year ended
December 31, 1999.
WARRANTS
During 1998, outstanding warrants to purchase 1,137,672 shares of common
stock at a per share exercise price of $.24 were exercised and the Company
received 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 $.53 to $.73. The warrants expire on various dates between May and
December 2003. The Company determined the fair value of the warrants to be
$23,780 using the Black Scholes valuation model and recorded a charge to
operations over the consulting period, which concluded in 1998. These warrants
were exercised in April and December 1999 for aggregate proceeds of $24,089.
In March 1999, the Company issued warrants exercisable into 2,500 shares of
common stock to a consultant. The warrants are immediately exercisable into
shares of common stock at a per share exercise price of $4.33. The warrant
expires in March 2004. The Company determined the fair value of the warrants to
be $8,750 using the Black Scholes valuation model and recorded a charge to
operations over the consulting period, which concluded in 1999.
In June 1999, the Company issued warrants exercisable into 11,250 shares of
common stock to an equipment leasing company in connection with an equipment
financing line of $3.5 million. The warrants are immediately exercisable into
shares of common stock at a per share exercise price of $14.00. The warrants
expire in June 30, 2004. The Company determined the fair value of the warrants
to be $157,500 using the Black Scholes valuation model, which is being amortized
over 12 months to interest expense on a straight line basis. Interest expense
relating to these warrants was $65,625 in 1999.
SHARES RESERVED FOR FUTURE ISSUANCE
At December 31, 1999, the Company has reserved shares of capital stock for
future issuance as follows:
<TABLE>
<S> <C>
Stock options outstanding................................... 6,505,149
Stock options available for grant........................... 1,996,661
Warrants to purchase common stock........................... 13,750
Employee stock purchase plan................................ 400,000
---------
8,915,560
=========
</TABLE>
F-18
<PAGE>
ASK JEEVES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. COMPREHENSIVE INCOME
The components of comprehensive income are as follows:
<TABLE>
<CAPTION>
1997 1998 1999
--------- ----------- ------------
<S> <C> <C> <C>
Net loss................................................ $(724,639) $(6,806,359) $(52,929,226)
Other comprehensive loss:
Change in unrealized loss on investments, net of tax
benefit of none..................................... -- -- (41,601)
--------- ----------- ------------
Total comprehensive loss............................ $(724,639) $(6,806,359) $(52,970,827)
========= =========== ============
</TABLE>
10. EMPLOYEE BENEFIT PLANS
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.
1999 EMPLOYEE STOCK PURCHASE PLAN
In May 1999, the Company adopted, as amended, the 1999 Employee Stock
Purchase Plan. 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.
STOCK OPTION PLANS
1996 EQUITY INCENTIVE PLAN
Under the Company's 1996 Equity Incentive Plan ("1996 Plan"), as amended,
5,973,372 shares of common stock are reserved for the issuance of incentive
stock options ("ISOs") or non-statutory stock options ("NSOs") to employees,
officers, directors, and consultants. The ISOs may be granted at a price per
share not less than the fair market value on the date of the grant. The NSOs may
be granted at a price per share not less than 85% of the fair market value at
the date of grant. Options granted under the 1996 Plan are exercisable over a
maximum term of ten years from the date of grant and generally vest over periods
of up to four years. Options granted under the 1996 plan contain an accelerated
vesting feature based upon a change in control of the Company. The Company has
also granted 1,050,520 options outside the 1996 Plan which contain similar terms
as options granted under the 1996 Plan.
1999 EQUITY INCENTIVE PLAN
In April 1999, the Company 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.
F-19
<PAGE>
ASK JEEVES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. EMPLOYEE BENEFIT PLANS (CONTINUED)
1999 NON-OFFICER EQUITY INCENTIVE PLAN
In October 1999, the Company adopted the 1999 Non-Officer Equity Incentive
Plan. 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 the Company and its
affiliates who are not officers or member of the Board of Directors of the
Company or any of its affiliates.
NET EFFECT 1997 STOCK PLAN
Pursuant to the merger with Net Effect Systems, Inc., the Company assumed
the 1997 Stock Plan of Net Effect (the "Net Effect Plan"), including incentive
and non-statutory stock options to purchase 497,353 shares of common stock with
exercise prices ranging from $0.81 to $103.00. The Company will not grant any
additional options under the Net Effect Plan. Options granted under the Net
Effect Plan are exercisable over a maximum term of ten years from the date of
grant and generally vest over periods of up to four years.
A summary of stock option activity of the Company is set forth below:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
--------------------------------
WEIGHTED-AVERAGE
EXERCISE PRICE
SHARES PER SHARE
------------- ----------------
<S> <C> <C>
Outstanding at December 31, 1996............................ 790,001 $ .01
Granted................................................... 264,250 .12
Exercised................................................. (574,998) .01
------------- -------------
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................................................... 6,214,090 23.50
Canceled.................................................. (568,173) 6.17
Exercised................................................. (2,282,071) 1.93
------------- -------------
Outstanding at December 31, 1999............................ 6,505,149 $ 21.40
============= =============
Vested and exercisable at December 31, 1998................. 590,592 $ .16
============= =============
Vested and exercisable at December 31, 1999................. 797,211 $ 2.31
============= =============
</TABLE>
The weighted-average remaining contractual life of options outstanding at
December 31, 1998 and 1999 was 9.4 years and 9.2 years, respectively.
F-20
<PAGE>
ASK JEEVES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. EMPLOYEE BENEFIT PLANS (CONTINUED)
The following table summarizes the status of stock options outstanding at
December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ------------------------------------------------------------------------------ ------------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE
RANGE OF NUMBER REMAINING CONTRACTUAL EXERCISE PRICE NUMBER EXERCISE PRICE
EXERCISE PRICES OUTSTANDING LIFE (IN YEARS) PER SHARE EXERCISABLE PER SHARE
- --------------------- ----------- --------------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$ 0.00-0.46 857,186 8.11 $ 0.31 361,922 $ 0.17
0.47-0.53 155,178 8.63 0.53 28,710 0.53
0.54-0.73 852,165 8.95 0.73 69,215 0.73
0.74-3.50 1,011,779 8.92 2.59 289,575 1.60
3.51-9.50 672,008 9.32 9.18 23,754 6.63
9.51-10.00 896,500 9.40 10.00 3,000 10.00
10.01-32.94 1,188,719 9.62 23.86 15,100 29.80
32.95-116.38 789,114 9.86 103.70 6,935 88.77
116.39-128.00 67,500 9.95 122.83 -- --
128.01-131.06 15,000 9.97 131.06 -- --
--------- ---- ------- ------- ------
Total................ 6,505,149 9.17 $ 21.40 798,211 $ 2.31
========= ==== ======= ======= ======
</TABLE>
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, 1998 and 1999, was 6.0%, 6.5% and 6.5%,
respectively. The expected life of options granted in the years ended
December 31, 1997, 1998 and 1999, was 5 years each. No dividend and a volatility
factor of 4.3, 0.34 and 2.6 for 1997, 1998, and 1999, respectively, 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 valuation 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 the estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
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
F-21
<PAGE>
ASK JEEVES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. EMPLOYEE BENEFIT PLANS (CONTINUED)
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 1999
--------- ----------- ------------
<S> <C> <C> <C>
Pro forma net loss...................................... $(753,773) $(7,179,799) $(74,382,290)
========= =========== ============
Pro forma basic and diluted net loss per share.......... $ (.22) $ (.78) $ (3.71)
========= =========== ============
</TABLE>
The weighted-average grant-date fair value of options granted, which is the
value assigned to the options under FAS 123, was $0.16, $0.31 and $24.14 for
grants made during years ended December 31, 1997, 1998 and 1999, respectively.
The pro forma impact of options on the net loss for the years ended
December 31, 1997, 1998 and 1999, 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.
11. 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, $109,000 and $151,000 for
the years ended December 31, 1997, 1998 and 1999, respectively. For 1997 and
1998, these directors served in management positions of the Company and received
monthly grants of common stock options as compensation pursuant to the terms of
a management agreement which expired in December 1998. Effective January 1999,
these directors entered into a new management agreement whereby they received
$200,000 in cash and a grant of 150,000 common stock options for services
performed through December 31, 1999. The options vested over a six month period
ending in June 1999. The management services agreement was terminated in
August 1999. The Company determined the fair value of the services contributed
to be $105,000, $300,000 and $510,750 for the years ended December 31, 1997,
1998 and 1999, respectively and recorded charges to operations in the respective
periods.
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 has 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. There were no
transactions with this entity in 1999.
12. LEGAL PROCEEDINGS
The Company is subject to various legal proceedings, claims, and litigation
arising in the ordinary course of business. The Company's management does not
expect that the ultimate costs to resolve these matters, including the matters
discussed in the following paragraph, will have a material adverse effect on the
Company's consolidated financial position, results of operations, or cash flows.
In July 1999, IP Learn LLC filed a complaint against the Company in the
United States District Court for the Northern District of California. The
complaint, which was amended by the plaintiff and which
F-22
<PAGE>
ASK JEEVES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. LEGAL PROCEEDINGS (CONTINUED)
alleges that aspects of the Company's technology infringe three patents alleged
to be held by the plaintiff. The Company has answered the complaint and
discovery has begun. Additionally, in December 1999, Patrick H. Winston and
Boris Katz filed a complaint against the Company in the United States District
Court for the District of Massachusetts. The complaint alleges that the
Company's technology infringes two patents alleged to be held by the plaintiffs.
The Company has answered the complaint, but discovery has not yet begun. The
Company intends to vigorously defend against the allegations asserted in these
complaints and believes it has meritorious defenses to the claims. However, the
outcome of litigation is difficult to predict and could result in a judgement
against the Company which could seriously harm the Company's business.
13. PENDING BUSINESS COMBINATIONS
In January and February 2000, the Company entered into definitive agreements
to acquire Direct Hit Technologies, Inc. ("Direct Hit") and The Evergreen
Project, Inc. ("Evergreen"), each of which will be accounted for as a purchase
using the methodologies referred to in Note 2, BUSINESS COMBINATIONS. Amounts
allocated to purchased technology, goodwill, acquired workforce and other
intangible assets will be amortized on a straight-line basis over periods of one
to five years. The terms of the business combinations are as follows:
THE EVERGREEN PROJECT, INC.
In January 2000, the Company acquired all the assets and liabilities of
Evergreen, which produces Internet-based video programs in life science,
geography and environmental economics that are found in over 8,000 schools
nationwide. The purchase consideration consisted of 18,896 shares of common
stock with a value of $1.95 million, $1.95 million in cash, liabilities assumed
of $529,173, and approximately $30,000 in acquisition costs. 3,779 shares were
placed into an escrow account that will be released upon the expiration of
certain indemnification obligations. The purchase consideration of the acquired
assets and assumed liabilities were allocated based on fair values as follows:
<TABLE>
<S> <C>
Purchased in-process research and development to be charged
to operations in the quarter ended March 31, 2000......... $ 404,014
Assets acquired............................................. 374,157
Purchased technology........................................ 455,061
Acquired workforce.......................................... 199,994
Goodwill.................................................... 3,025,947
----------
Total purchase consideration................................ $4,459,173
==========
</TABLE>
DIRECT HIT TECHNOLOGIES, INC.
In February 2000, the Company acquired Direct Hit, a provider of search and
navigation services on the Internet. The purchase consideration consisted of
4,780,316 shares of common stock with a value of $456.0 million, 316,289 shares
to be issued upon the exercise of outstanding Direct Hit options assumed as part
of the merger with a value of $30,600,905, liabilities assumed of $5,018,214 and
approximately $11.7 million in acquisition costs. 478,032 shares are held in
escrow and will be released upon the expiration of certain indemnification
obligations. The purchase consideration of the acquired assets and
F-23
<PAGE>
ASK JEEVES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. PENDING BUSINESS COMBINATIONS (CONTINUED)
assumed liabilities 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: (A) the final Direct Hit
consolidated balance sheet, (B) the finalization of the valuation of acquired
technology; and (C) the finalization of the integration plan. The purchase
consideration of the acquired assets and assumed liabilities were preliminarily
allocated based on fair values as follows:
<TABLE>
<S> <C>
Tangible assets acquired.................................... $ 20,394,811
Equipment acquired.......................................... 1,753,446
Intangible assets acquired.................................. 30,844,718
Goodwill.................................................... 450,340,373
------------
Total purchase consideration................................ $503,333,348
============
</TABLE>
The following unaudited pro forma summary reflects the consolidated results
of operations for the years ended December 31, 1998 and 1999, as if the
acquisition of Direct Hit had occurred on January 1, 1998 and 1999, and is not
intended to be indicative of future results:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1998 1999
---------------- ----------------
<S> <C> <C>
Pro forma total revenues.................................... $ 975,818 $ 23,923,111
================ ================
Pro forma net loss.......................................... $ (103,835,617) $ (157,240,440)
================ ================
Pro forma basic and diluted net loss per share.............. $ (7.45) $ (6.33)
================ ================
Weighted average shares outstanding used in computing pro
forma basic and diluted net loss per share................ 13,942,940 24,827,275
================ ================
</TABLE>
The pro forma consolidated results of operations include historical
operations of the Company and Direct Hit adjusted to reflect certain pro forma
adjustments, including amortization of goodwill and other intangible assets
arising from the acquisition. These results do not purport to be indicative of
what would have occurred had the acquisition been made as of that date or the
consolidated results of operations which may occur in future periods.
TECHNOLOGY OBSOLESCENCE
As a result of the acquisition of Direct Hit, the Company determined that
the technology acquired from Excellerate was obsolete and had no future benefit.
Accordingly, the Company expects to record a charge to operations in Q1 2000 of
approximately $989,000 of acquired core technology.
F-24
<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. 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. and
Direct Hit Technologies, Inc. and should be read in conjunction with those
financial statements.
The unaudited pro forma condensed combined balance sheets assume the Direct
Hit Technologies, Inc. merger took place as of December 31, 1999, and
preliminarily allocate 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
the historical statements of operations for Ask Jeeves, Inc. and Direct Hit
Technologies, Inc. for the year ended December 31, 1999, and give effect to the
merger, including the amortization of goodwill and other intangible assets, as
if it had occurred on January 1, 1999.
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: (A) the final Direct Hit
Technologies, Inc. consolidated balance sheet, (B) the finalization of the
valuation of acquired technology and (C) 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-25
<PAGE>
ASK JEEVES, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-------------------------------------------------------------------------------
PRO FORMA
BUSINESS PRO FORMA AS OF
COMBINATIONS DECEMBER 31,
ASK JEEVES DIRECT HIT COMBINED ADJUSTMENTS 1999
------------ ------------ ------------ ------------- ---------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................. $ 17,420,387 $ 11,787,942 $ 29,208,329 $ -- $ 29,208,329
Short-term investments..................... 34,109,840 5,124,434 39,234,274 -- 39,234,274
Refundable advertising costs............... -- 2,065,556 2,065,556 -- 2,065,556
Accounts receivable, net................... 8,458,873 1,008,870 9,467,743 -- 9,467,743
Prepaid expenses and other current
assets................................... 6,414,673 155,402 6,570,075 -- 6,570,075
------------ ------------ ------------ ------------ ------------
Total current assets..................... 66,403,773 20,142,204 86,545,977 86,545,977
Property and equipment, net.................. 7,416,002 1,753,446 9,169,448 -- 9,169,448
Other assets................................. 2,344,314 102,607 2,446,921 481,185,091 (2) 483,632,012
Restricted cash.............................. -- 150,000 150,000 -- 150,000
------------ ------------ ------------ ------------ ------------
Total assets............................. $ 76,164,089 $ 22,148,257 $ 98,312,346 $481,185,091 $579,497,437
============ ============ ============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................... $ 4,717,223 $ 1,364,122 $ 6,081,345 $ 11,714,229 (1) $ 17,795,574
Accrued compensation and related
expenses................................. 5,049,437 156,227 5,205,664 -- 5,205,664
Accrued professional fees.................. -- 639,800 639,800 -- 639,800
Accrued marketing expenses................. 2,983,010 2,240,621 5,223,631 -- 5,223,631
Accrued merger costs....................... 5,280,119 -- 5,280,119 -- 5,280,119
Accrued expenses........................... -- 228,454 228,454 228,454
Other accrued liabilities.................. 4,452,662 45,791 4,498,453 -- 4,498,453
Deferred revenue........................... 7,346,555 343,199 7,689,754 -- 7,689,754
Current portion of capital lease
obligations.............................. 817,960 -- 817,960 -- 817,960
------------ ------------ ------------ ------------ ------------
Total current liabilities................ 30,646,966 5,018,214 35,665,180 11,714,229 47,379,409
Capital lease obligations, less current
portion.................................... 2,350,760 -- 2,350,760 -- 2,350,760
Other liabilities............................ 1,315,000 -- 1,315,000 -- 1,315,000
Commitments
Stockholders' equity
Convertible preferred stock................ -- 29,650,529 29,650,529 (29,650,529)(3) --
Common stock............................... 107,635,676 9,864 107,645,540 486,591,041 (3) 594,236,581
Additional paid-in capital................. -- 9,319,903 9,319,903 (9,319,903)(3) --
Deferred stock compensation................ (5,174,691) (6,924,631) (12,099,322) 6,924,631 (3) (5,174,691)
Accumulated deficit........................ (60,568,021) (14,925,622) (75,493,643) 14,925,622 (3) (60,568,021)
Accumulated other comprehensive income..... (41,601) -- (41,601) -- (41,601)
------------ ------------ ------------ ------------ ------------
Total stockholders' equity............... 41,851,363 17,130,043 58,981,406 469,470,862 528,452,268
------------ ------------ ------------ ------------ ------------
Total liabilities and stockholders'
equity................................. $ 76,164,089 $ 22,148,257 $ 98,312,346 $481,185,091 $579,497,437
============ ============ ============ ============ ============
</TABLE>
See accompanying notes to the Unaudited Pro Forma Condensed Combined Financial
Information.
F-26
<PAGE>
ASK JEEVES, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
------------------------------------------------------------------------------
PRO FORMA PRO FORMA FOR THE
BUSINESS YEAR ENDED
COMBINATIONS DECEMBER 31,
ASK JEEVES DIRECT HIT COMBINED ADJUSTMENTS 1999
------------ ------------ ------------ ------------- -----------------
<S> <C> <C> <C> <C> <C>
Revenues:
Web Properties and Syndication.............. $ 14,563,669 $ 1,896,315 $ 16,459,984 $ -- $ 16,459,984
Corporate Services.......................... 7,463,127 -- 7,463,127 -- 7,463,127
------------ ------------ ------------ ------------- -------------
Total revenues............................ 22,026,796 1,896,315 23,923,111 -- 23,923,111
Cost of revenues:
Web Properties and Syndication.............. 6,283,640 703,419 6,987,059 -- 6,987,059
Corporate Services.......................... 7,800,290 -- 7,800,290 -- 7,800,290
------------ ------------ ------------ ------------- -------------
Total cost of revenues.................... 14,083,930 703,419 14,787,349 -- 14,787,349
Gross profit(loss)............................ 7,942,866 1,192,896 9,135,762 -- 9,135,762
Operating expenses:
Product development......................... 8,609,774 2,552,420 11,162,194 -- 11,162,194
Sales and marketing......................... 35,304,630 9,950,451 45,255,081 -- 45,255,081
General and administrative.................. 8,410,943 1,622,868 10,033,811 -- 10,033,811
Amortization of deferred stock
compensation.............................. 3,935,518 1,792,115 5,727,633 -- 5,727,633
Write-off of in-process technology.......... 543,517 -- 543,517 -- 543,517
Acquisition costs........................... 6,045,186 -- 6,045,186 6,045,186
Amortization of goodwill and other
intangible assets......................... -- -- -- 96,237,018(A) 96,237,018
------------ ------------ ------------ ------------- -------------
Total operating expenses.................. 62,849,568 15,917,854 78,767,422 96,237,018 168,959,254
Operating loss................................ (54,906,702) (14,724,958) (69,631,660) (96,237,018) (159,823,492)
Interest income, net.......................... 1,977,476 591,576 2,569,052 -- 2,569,052
------------ ------------ ------------ ------------- -------------
Net loss...................................... $(52,929,226) $(14,133,382) $(67,062,608) $(96,237,018) $(157,254,440)
------------ ------------ ------------ ------------- -------------
Pro forma basic and diluted net loss per
share....................................... $ (6.33)(B)
=============
Weighted average shares outstanding used in
computing pro forma basic and diluted net
loss per share.............................. 24,827,275 (B)
=============
</TABLE>
See accompanying notes to the Unaudited Pro Forma Condensed Combined Financial
Information.
F-27
<PAGE>
ASK JEEVES, INC.
NOTES TO THE UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL INFORMATION
The total estimated purchase cost of the acquisition of Direct Hit
Technologies, Inc. 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: (A) the final
Direct Hit Technologies, Inc. consolidated balance sheet (B) the finalization of
the valuation of acquired technology and (C) the finalization of the integration
plan.
The adjustments to the unaudited pro forma condensed combined balance sheets
as of December 31, 1999 have been calculated as if the merger occurred on
December 31, 1999 and are as follows:
(1) To reflect the acquisition of Direct Hit Technologies, Inc. for total
estimated purchase price of approximately $503.3 million. The purchase
consideration consists of the following:
-- Issuance of 4,780,316 shares of Ask Jeeves, Inc.'s common stock to
the shareholders of Direct Hit Technologies, Inc. with a fair value of
approximately $456.0 million. An additional 316,289 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 $30.6 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 February 1, 2000.
-- Assumption of liabilities approximating $5.0 million.
-- Other related transaction and merger costs estimated to be
approximately $11.7 million, including banker fees, for the acquisition
of Direct Hit Technologies, Inc.
(2) Recognition of the excess purchase consideration of approximately
$481.2 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, 1999 have been calculated assuming
that the merger occurred as of January 1, 1999, and are as follows:
(A) To reflect the annual amortization of goodwill and other intangible
assets resulting from the Direct Hit Technologies, Inc. acquisition. The
goodwill and other intangible assets are being amortized over a period of
sixty months.
(B) Pro forma basic and diluted net loss per share reflects the issuance of
4,780,316 shares of Ask Jeeves, Inc.'s common stock related to the Direct
Hit Technologies, Inc. acquisition as if the shares had been outstanding
for the entire period. The effect of issued stock options 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.
include 478,032 shares held in escrow which will be released upon the
achievement of certain performance obligations.
F-28
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Direct Hit Technologies, Inc.
Natick, Massachusetts
We have audited the accompanying consolidated balance sheets of Direct Hit
Technologies, Inc. as of December 31, 1998 and 1999, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the period from inception (April 27, 1998) to December 31, 1998 and for the year
ended December 31, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company at December 31,
1998 and 1999, and the results of its operations and its cash flows for the
period from inception (April 27, 1998) to December 31, 1998 and for the year
ended December 31, 1999 in conformity with generally accepted accounting
principles.
As discussed in Note 8 to the consolidated financial statements, the Company
was acquired by Ask Jeeves, Inc. on February 2, 2000.
Deloitte & Touche LLP
Boston, Massachusetts
January 25, 2000
(February 2, 2000 as to Note 8)
F-29
<PAGE>
DIRECT HIT TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1999
------------- -------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 2,557,673 $ 11,787,942
Short term investments.................................... -- 5,124,434
Accounts receivable, less allowances of $5,100 in 1998 and
$83,600 in 1999......................................... 162,846 1,008,870
Refundable advertising costs.............................. -- 2,065,556
Prepaid expenses and other current assets................. 20,830 155,402
------------ ------------
Total current assets.................................... 2,741,349 20,142,204
------------ ------------
Property and equipment, net................................. 170,046 1,753,446
------------ ------------
Restricted cash............................................. -- 150,000
Other assets................................................ 12,535 102,607
------------ ------------
Total Assets................................................ $ 2,923,930 $ 22,148,257
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 7,558 $ 1,364,122
Accrued marketing expenses................................ -- 2,240,621
Accrued professional fees................................. 31,805 639,800
Accrued compensation...................................... 28,646 156,227
Accrued expenses.......................................... -- 228,454
Other liabilities......................................... -- 45,791
Deferred revenue.......................................... 32,500 343,199
------------ ------------
Total current liabilities............................... 100,509 5,018,214
------------ ------------
Commitments (Note 3)
Stockholders' Equity:
Convertible Preferred Stock:
Series C, $.001 par value, 4,431,265 shares authorized,
4,431,263 issued and outstanding (liquidation
preference, $26,299,997).............................. -- 26,279,085
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 9,863,892 shares issued and
outstanding............................................. 9,625 9,864
Additional paid-in capital................................ 733,319 9,319,903
Deferred compensation..................................... (498,727) (6,924,631)
Accumulated deficit....................................... (792,240) (14,925,622)
------------ ------------
Total stockholders' equity.......................... 2,823,421 17,130,043
------------ ------------
Total Liabilities and Stockholders' Equity.................. $ 2,923,930 $ 22,148,257
============ ============
</TABLE>
See notes to consolidated financial statements.
F-30
<PAGE>
DIRECT HIT TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(APRIL 27, 1998) FOR THE
TO YEAR ENDED
DECEMBER 31, DECEMBER 31,
1998 1999
----------------- -------------
<S> <C> <C>
Revenues:
OEM....................................................... $ 175,420 $ 1,625,153
Advertising............................................... -- 271,162
------------ ------------
Total revenues...................................... 175,420 1,896,315
Cost of revenues:...........................................
OEM....................................................... 51,595 630,232
Advertising............................................... -- 73,187
------------ ------------
51,595 703,419
------------ ------------
Gross profit................................................ 123,825 1,192,896
------------ ------------
Operating Expenses:
Selling and marketing..................................... 90,332 9,950,451
Research and development.................................. 471,598 2,552,420
General and administrative................................ 150,260 1,622,868
Equity related compensation............................... 231,775 1,792,115
------------ ------------
Total operating expenses............................ 943,965 15,917,854
------------ ------------
Loss from operations........................................ (820,140) (14,724,958)
------------ ------------
Interest/other income....................................... 27,900 591,576
------------ ------------
Net loss.................................................... $ (792,240) $(14,133,382)
============ ============
Net loss per share--basic and diluted....................... $ (0.45) $ (3.88)
============ ============
Shares used in per share calculation basic and diluted...... 1,772,864 3,638,886
============ ============
</TABLE>
See notes to consolidated financial statements.
F-31
<PAGE>
DIRECT HIT TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (APRIL 27, 1998) TO DECEMBER 31, 1998
AND FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------------ -------------------- PAID-IN DEFERRED
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION
---------- ----------- --------- -------- ---------- -------------
<S> <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 for cash................ -- -- 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.......................................... -- -- -- -- -- --
---------- ----------- --------- ------ ---------- -----------
BALANCE, DECEMBER 31, 1998.......................... 6,511,413 3,371,444 9,624,684 9,625 733,319 (498,727)
Repurchase of common stock........................ -- -- (22,500) (23) (577) --
Exercise of stock options for cash................ -- -- 261,708 262 369,142 --
Issuance of Series C preferred stock, net of
issuance costs of $20,895....................... 4,431,263 26,279,085 -- -- -- --
Deferred compensation related to grant of stock
options......................................... -- -- -- -- 7,993,019 (7,993,019)
Transfer of shares to employees................... -- -- -- -- 225,000 --
Amortization of deferred compensation............. -- -- -- -- -- 1,567,115
Net loss.......................................... -- -- -- -- -- --
---------- ----------- --------- ------ ---------- -----------
BALANCE, DECEMBER 31, 1999.......................... 10,942,676 $29,650,529 9,863,892 $9,864 $9,319,903 $(6,924,631)
========== =========== ========= ====== ========== ===========
<CAPTION>
TOTAL
ACCUMULATED STOCKHOLDERS'
DEFICIT EQUITY
------------ -------------
<S> <C> <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 for cash................ -- 12,442
Deferred compensation related to grant of stock
options......................................... -- --
Amortization of deferred compensation............. -- 231,775
Net loss.......................................... (792,240) (792,240)
------------ ------------
BALANCE, DECEMBER 31, 1998.......................... (792,240) 2,823,421
Repurchase of common stock........................ -- (600)
Exercise of stock options for cash................ -- 369,404
Issuance of Series C preferred stock, net of
issuance costs of $20,895....................... -- 26,279,085
Deferred compensation related to grant of stock
options......................................... -- --
Transfer of shares to employees................... -- 225,000
Amortization of deferred compensation............. -- 1,567,115
Net loss.......................................... (14,133,382) (14,133,382)
------------ ------------
BALANCE, DECEMBER 31, 1999.......................... $(14,925,622) $ 17,130,043
============ ============
</TABLE>
See notes to consolidated financial statements.
F-32
<PAGE>
DIRECT HIT TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(APRIL 27, 1998)
TO YEAR ENDED
DECEMBER 31, DECEMBER 31,
1998 1999
------------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $ (792,240) $(14,133,382)
------------ ------------
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 21,665 250,185
Equity-related compensation............................. 231,775 1,792,115
Changes in operating assets and liabilities:
Accounts receivable................................... (162,846) (846,024)
Prepaid expenses and other current assets............. (20,830) (2,200,128)
Accounts payable and accrued expenses................. 68,009 4,607,006
Deferred revenue...................................... 32,500 310,699
------------ ------------
Total adjustments................................... 170,273 3,913,853
------------ ------------
Net cash used in operating activities............... (621,967) (10,219,529)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in other assets.................................. (12,535) (90,072)
Purchases of short-term investments....................... -- (20,291,434)
Maturities of short-term investments...................... -- 15,167,000
Restricted cash deposits.................................. -- (150,000)
Purchases of property and equipment....................... (191,711) (1,833,585)
------------ ------------
Net cash used in investing activities............... (204,246) (7,198,091)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock upon exercise of stock options... 12,442 369,404
Repurchase 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...................... -- 26,279,085
Proceeds from issuance of note payable.................... 100,000 --
------------ ------------
Net cash provided by financing activities........... 3,383,886 26,647,889
------------ ------------
INCREASE IN CASH AND CASH EQUIVALENTS....................... 2,557,673 9,230,269
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. -- 2,557,673
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 2,557,673 $ 11,787,942
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION
Conversion of note payable to Series A preferred stock.... $ 100,000 --
============ ============
</TABLE>
See notes to consolidated financial statements.
F-33
<PAGE>
DIRECT HIT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
December 31, 1999, had an accumulated deficit of approximately $14.9 million.
Such losses and accumulated deficit resulted from both the Company's lack of
substantial revenue, the recent brand promotion campaign, 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.
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 consolidated financial statements
and notes hereto for all periods presented have been adjusted to reflect the
three-for-one stock split.
BASIS OF PRESENTATION--The accompanying consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiary Direct Hit
Securities Corporation.
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, in debt securities of U.S. Government agencies,
in municipal auction rate securities and in 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 municipal auction rate securities have an original
maturity of thirty years (ranging from August 2026 to July 2029); however, these
securities reset their rates every 28 days and allow for liquidity at this time.
Based on this liquidity provision, the Company has classified these securities
as cash equivalents, as management intends to utilize this liquidity provision
rather than hold to maturity. 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 interest/other income as incurred. At
December 31, 1999, effectively, all of the Company's available-for-sale debt
securities mature within one year.
F-34
<PAGE>
DIRECT HIT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 contact 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 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 receivables 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
$5,100 and $78,500 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%, respectively, of total revenues and 82%
and 18%, respectively, of total receivables, at December 31, 1998. Two customers
accounted for 45% and 12%, respectively, of total revenues for the year ended
December 31, 1999. Three customers accounted for 37%, 13% and 12%, respectively,
of total receivables at December 31, 1999.
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.
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.
F-35
<PAGE>
DIRECT HIT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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, adserving and other related indirect costs. These costs are allocated
between OEM and advertising based on pageviews served for the respective Web
sites. 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 of Statement of
Financial Accounting Standards ("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 "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use," 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.
MARKETING AND ADVERTISING COSTS--Selling and marketing expenses consist
primarily of advertising and other marketing-related expenses, compensation and
employee-related expenses, sales commission and travel costs. Advertising costs
are expensed as incurred and totaled $0 and $6.4 million for the period from
inception (April 27, 1998) through December 31, 1998 and for the year ended
December 31, 1999, respectively. During 1999 the Company paid, in advance,
certain advertising costs related to programs that were subsequently cancelled.
Pursuant to the terms and conditions of these advertising arrangements, the
Company is entitled to a refund and, accordingly, the Company has recorded the
refunds due in current assets. Pursuant to other terms and condition of other
advertising arrangements entered into by the Company, obligations to pay certain
advertising costs have been incurred and recorded as liabilities at
December 31, 1999.
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 SFAS No. 123,
"Accounting for Stock-Based Compensation." Under APB 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.
NET LOSS 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 year ended
F-36
<PAGE>
DIRECT HIT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
December 31, 1999, options to purchase 72,510 and 1,437,646 shares of common
stock, respectively, restricted common stock of 7,071,093 and 5,036,311 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 December 31, 1999, the fair values of these instruments approximated
their financial statement carrying amounts.
COMPREHENSIVE LOSS--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 consolidated
financial statements.
2. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL DECEMBER 31, DECEMBER 31,
LIVES 1998 1999
---------- ------------- -------------
<S> <C> <C> <C>
Property and equipment:
Computer equipment and software 3 years $ 149,298 $1,717,569
Furniture and fixtures................................. 7 years 39,788 122,704
Office equipment....................................... 5 years 2,625 67,049
Leasehold improvements................................. lease term -- 117,974
---------- ----------
Total............................................ 191,711 2,025,296
Less: accumulated depreciation (21,665) (271,850)
---------- ----------
Property and equipment, net...................... $ 170,046 $1,753,446
========== ==========
</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 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 $272,766 for the year ended December 31,
1999. Rental income from the sublease amounted to
F-37
<PAGE>
DIRECT HIT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. COMMITMENTS (CONTINUED)
$25,706 for the year ended December 31, 1999 and is recorded, net of expense, in
general and administrative expense.
Future minimum annual lease payments under noncancelable operating leases,
net of sublease income, as of December 31, 1999 are as follows:
<TABLE>
<S> <C>
2000........................................................ $747,413
2001........................................................ 753,086
2002........................................................ 406,395
</TABLE>
4. PREFERRED STOCK
CONVERTIBLE PREFERRED STOCK--The authorized preferred stock of the Company
consists 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-38
<PAGE>
DIRECT HIT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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% 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 $26,279,085 (net of offering costs of $20,895). 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.
AUTOMATIC CONVERSION--The preferred stock will automatically be converted
into shares of common stock upon the closing of a public offering of common
stock at an offering price of at least $11.8702 per share that values the
Company at not less than $253 million and results in gross proceeds to the
Company of at least $20 million.
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 Founder Shares vest ratably over four years. On
July 6, 1999 the founder transferred 60,000 of his
F-39
<PAGE>
DIRECT HIT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. COMMON STOCK (CONTINUED)
restricted Founders shares to two employees for past services rendered. The fair
value of these shares, approximating $225,000, was charged to expense.
The Company has determined that the measurement date for the founders shares
coincided with the issuance of the Series A preferred stock. During 1998, the
Company 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 $111,000 for the period from inception (April 27, 1998) through
December, 31, 1998 and the year ended December 31, 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 Shares and stock option
exercises........................................... 9,624,684 $ 0.001
Repurchased........................................... -- --
Lapse 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..................... 261,708 1.403
Repurchased........................................... (45,000) (0.027)
Issued from treasury shares........................... 22,500 0.027
Lapse of restriction due to vesting................... (2,273,990) 0.011
----------
Outstanding at December 31, 1999........................ 5,036,311 $ 0.070
========== =======
</TABLE>
STOCK OPTIONS--The Company's Option Plans 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. In the event of termination after change in control (as defined in
the Option
F-40
<PAGE>
DIRECT HIT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. COMMON STOCK (CONTINUED)
Plans), the vesting of 25% of the remaining unvested shares will automatically
be accelerated. Certain of the Company's senior management team have a special
provision related to termination after change in control that automatically
accelerates the vesting of 100% of the remaining unvested shares.
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 will 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................................................... 1,929,372 $0.02
Exercised................................................. (1,774,686) 0.01
Canceled, forfeited or expired............................ (82,176) 0.27
---------- -----
Outstanding and exercisable, December 31, 1998.............. 72,510 $0.10
Granted................................................... 1,672,500 1.88
Exercised................................................. (284,208) 1.29
Canceled, forfeited or expired............................ (23,156) 0.49
---------- -----
Outstanding and exercisable, December 31, 1999.............. 1,437,646 $1.94
========== =====
</TABLE>
Included in options granted for the period from inception (April 27, 1998)
through December 31, 1998, and for the year ended December 31, 1999 are options
to purchase 218,748 and 95,500 shares, respectively, granted to consultants,
resulting in deferred compensation of approximately $59,000 and $1,995,000 in
1998 and 1999, respectively. Compensation expense is being recognized over the
vesting period based on fair value pursuant to SFAS No. 123 and EITF No. 96-18.
Accordingly, the total amount of compensation expense to be recognized, for
stock options granted to consultants, will increase or decrease over the vesting
period based on changes in the fair value of such stock options. Total expense
for the period from inception (April 27, 1998) through December 31, 1998 and for
the year ended December 31, 1999, related to these options is approximately
$36,000 and $960,000, 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 $5,998,000 for the year ended December 31,
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 $496,000 for the year ended December 31, 1999.
F-41
<PAGE>
DIRECT HIT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. COMMON STOCK (CONTINUED)
The weighted average fair value of options granted for the period from
inception (April 27, 1998) through December 31, 1998 and the year ended
December 31, 1999 were $0.07 and $5.75, respectively. The following table
summarizes information about stock options outstanding at December 31, 1999:
<TABLE>
<CAPTION>
VESTED
WEIGHTED ---------------------
AVERAGE WEIGHTED WEIGHTED
NUMBER REMAINING AVERAGE AVERAGE
EXERCISE OF OPTIONS CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE PRICE OF OPTIONS PRICE
- --------------------- ----------- ----------- -------- ---------- --------
<S> <C> <C> <C> <C> <C>
$0.03 3,000 8.51 $0.03 3,000 $0.03
0.17 207,000 9.12 0.17 13,833 0.17
0.30 90,000 9.35 0.30 8,500 0.30
0.45 108,000 9.51 0.45 1,417 0.45
1.78 315,646 9.60 1.78 -- --
2.30 338,000 9.67 2.30 500 2.30
2.82 115,000 9.72 2.82 875 2.82
3.34 33,500 9.84 3.34 500 3.34
3.86 204,500 9.92 3.86 -- --
4.38 20,500 9.96 4.38 -- --
7.52 2,500 9.99 7.52 -- --
- --------------------- --------- ---- ----- ------ -----
$.03--$7.52 1,437,646 9.59 $1.94 28,625 $0.38
===================== ========= ==== ===== ====== =====
</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.
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(APRIL 27, 1998)
THROUGH YEAR ENDED
DECEMBER 31, DECEMBER 31,
1998 1999
---------------- -------------
<S> <C> <C>
Net loss as reported............................. $ (792,240) $(14,133,382)
Net loss pro forma............................... $ (811,187) $(14,224,652)
</TABLE>
F-42
<PAGE>
DIRECT HIT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES
The components of the Company's net deferred tax accounts consisted of the
following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1999
------------- -------------
<S> <C> <C>
Current assets:
Deferred compensation..................................... $ 95,028 $ 479,028
Research and development credits.......................... 30,553 202,257
----------- -----------
125,581 681,285
----------- -----------
Long-term assets (liabilities):
Net operating loss carryforwards.......................... 319,035 5,065,488
Depreciation.............................................. (2,499) (46,499)
----------- -----------
316,536 5,018,989
----------- -----------
Net deferred tax assets before valuation allowance........ 442,117 5,700,274
Less: valuation allowance................................. (442,117) (5,700,274)
----------- -----------
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 $13.2 million and $202,000, respectively, as of December 31, 1999.
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 or 1999.
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
On January 25, 2000, the Company entered into an Agreement and Plan of
Merger and Reorganization (the "Merger") to be acquired by Ask Jeeves, Inc.
("Ask Jeeves") for consideration of approximately 4,780,000 shares of Ask Jeeves
common stock for substantially all of the outstanding common and preferred stock
of the Company and approximately 316,000 shares to be issued upon exercise of
F-43
<PAGE>
DIRECT HIT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. SUBSEQUENT EVENT (CONTINUED)
outstanding stock options of the Company assumed as part of the Merger. Ask
Jeeves develops and deploys natural-language corporate and consumer service on
the Internet for consumers and companies. The closing of the Merger occurred on
February 2, 2000.
* * * * * *
F-44
