<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 9, 2000
REGISTRATION NO. 333-30494
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------------
ASK JEEVES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 7375 94-3334199
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
------------------------------
5858 HORTON STREET, SUITE 350
EMERYVILLE, CALIFORNIA 94608
(510) 985-7400
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
------------------------------
ROBERT W. WRUBEL
PRESIDENT AND CHIEF EXECUTIVE OFFICER
ASK JEEVES, INC.
5858 HORTON STREET, SUITE 350
EMERYVILLE, CALIFORNIA 94608
(510) 985-7400
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
COPIES TO:
<TABLE>
<S> <C>
SUZANNE SAWOCHKA HOOPER, ESQ. NORA L. GIBSON, ESQ.
MICHAEL L. WEINER, ESQ. LAURA M. DE PETRA ESQ.
COOLEY GODWARD LLP LORA D. BLUM, ESQ.
3000 EL CAMINO REAL BROBECK, PHLEGER & HARRISON LLP
PALO ALTO, CALIFORNIA 94306-2155 ONE MARKET
(650) 843-5000 SPEAR STREET TOWER
SAN FRANCISCO, CALIFORNIA 94105
(415) 442-0900
</TABLE>
------------------------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
FROM TIME TO TIME AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
------------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
It this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. / /
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE. INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR
AMENDMENT.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
The information in this preliminary prospectus is not complete and may be
changed. These securities may not be sold until the registration statement filed
with the Securities and Exchange Commission is effective. This preliminary
prospectus is not an offer to sell nor does it seek an offer to buy these
securities in any jurisdiction where the offer or sale is not permitted.
<PAGE>
Subject to Completion. Dated February 29, 2000.
2,100,000 Shares
[LOGO]
Common Stock
-------------
Ask Jeeves, Inc. is offering 1,400,000 shares to be sold in the offering.
The selling stockholders identified in this prospectus are offering an
additional 700,000 shares. Ask Jeeves will not receive any of the proceeds from
the sale of the shares being sold by the selling stockholders.
The common stock is quoted on the Nasdaq National Market under the symbol
"ASKJ." The last reported sale price for the common stock on February 25, 2000
was $68.13 per share.
SEE "RISK FACTORS" BEGINNING ON PAGE 6 TO READ ABOUT FACTORS YOU SHOULD
CONSIDER BEFORE BUYING SHARES OF THE COMMON STOCK.
------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY
HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
------------------
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Initial price to public..................................... $ $
Underwriting discount....................................... $ $
Proceeds, before expenses, to Ask Jeeves.................... $ $
Proceeds, before expenses, to the selling stockholders...... $ $
</TABLE>
To the extent that the underwriters sell more than 2,100,000 shares of
common stock, the underwriters have the option to purchase up to an additional
315,000 shares from Ask Jeeves at the initial price to public less the
underwriting discount.
------------------
The underwriters expect to deliver the shares against payment in New York,
New York, on , 2000.
GOLDMAN, SACHS & CO. CHASE H&Q
ROBERTSON STEPHENS U.S. BANCORP PIPER JAFFRAY
------------
Prospectus dated , 2000.
<PAGE>
EDGAR COLORWORK DESCRIPTIONS:
INSIDE FRONT COVER OF PROSPECTUS:
TITLE: Got a question? Ask Jeeves
Picture of Ask Jeeves Logo
CAPTION 1 (right of logo): Ask Jeeves has developed and deployed an online
personal service infrastructure to provide real-time access to information,
products and services through an intuitive Web-based interaction. We provide
our online personal service infrastructure through our Corporate Services
Group, which develops customized services for corporate Web sites to help
companies convert shoppers to buyers, reduce support costs, understand
customer preferences and improve customer retention, and through our Web
Properties and Syndication Group, which delivers potential customers to
corporate Web sites through targeting services available at Ask.com,
DirectHit.com and our syndication services.
TITLE: Ask Jeeves Personal Service Infrastructure
DESCRIPTION of Diagram: Picture of person at computer (Left to right)
Arrow pointing from consumer to boxes representing and titled Ask
Jeeves-enabled Web site.
Caption 1: Jeeves Advisor
Our decision support service leads users through a question and answer
dialogue to assist with real-time purchase decisions.
Caption 2: Jeeves Answers
Our natural language question answering service allows users to ask questions
in plain English and be directed to online content
containing relevant answers.
Caption 3: Jeeves Search
Our popularity-based automated search service ranks the web site selections
of Internet users to deliver relevant results.
Arrow pointing from Captions 1, 2, and 3 to Caption 4
Caption accompanying arrow: Companies can escalate their
response to a customer's question from an automated,
self-service environment to a live representative.
Caption 4: Jeeves Live
Our live help service enables real-time text-based communication between a
customer and a live representative for assistance at selected
points in the electronic commerce and electronic support cycle.
Graphical representation of call center agents, right of caption.
Caption 5: Jeeves Insight
Our customer data reporting service, collects Internet-wide and Web site
specific information about Web users' questions, language and selections. We
store and analyze this information to improve the performance of our services
and to deliver user insight to our corporate customer.
Graphical representation of a database behind text.
Arrow pointing from Jeeves Insight to the picture of person at computer
Caption 6: Under picture of person at computer
targeting
conversion
acquisition
retention
<PAGE>
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
3
<PAGE>
services on an outsourced basis with little involvement from our corporate
customers' technical personnel.
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
<TABLE>
<S> <C>
Common Stock offered by us................... 1,400,000 shares
Common Stock offered by selling
stockholders............................... 700,000 shares
Common Stock to be outstanding after the
offering................................... 34,945,777 shares (1)
Use of Proceeds.............................. We intend to use the proceeds for general
corporate purposes. See "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.
</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) 331,596 shares of common stock
subject to outstanding options with a weighted average exercise price of
$9.25 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 as of December 31, 1999, (d) an aggregate of
400,000 shares of common stock reserved for future issuance under our 1999
Employee Stock Purchase Plan as of December 31, 1999, 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. Includes 4,751,878 shares of common stock issued in connection with
our acquisition of Direct Hit in February 2000.
4
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The summary consolidated balance sheet data below as of December 31, 1999 is
presented
on:
- an actual basis;
- a pro forma basis to give effect to our acquisition of Direct Hit
Technologies, Inc. in February 2000; and
- a pro forma as adjusted basis to give effect to the issuance and sale by
us of 1,400,000 shares of our common stock in this offering at an assumed
public offering price of $68.13 per share and the application of net
proceeds from the offering, after deducting the underwriting discounts and
commissions and estimated offering expenses payable by us, as set forth
under "Use of Proceeds."
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 13, 1996
(INCEPTION)
THROUGH YEAR ENDED DECEMBER 31,
DECEMBER 31, --------------------------------------
1996 1997 1998 1999
------------- --------- ----------- ------------
<S> <C> <C> <C> <C>
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
-------------------------------------------------
PRO FORMA
ACTUAL PRO FORMA(1) AS ADJUSTED
------------- --------------- ---------------
(UNAUDITED)
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents and short-term
investments.............................. $ 51,530,227 $ 68,442,603 $ 157,792,048
Working capital............................ 35,756,807 39,166,568 128,516,013
Total assets............................... 76,164,089 582,296,944 671,646,389
Capital lease obligations, less current
portion.................................. 2,350,760 2,350,760 2,350,760
Total stockholders' equity................. 41,851,363 531,717,434 621,066,879
</TABLE>
(1) As consideration for Direct Hit, we issued 4,751,878 shares of common stock
with a value of $456.0 million, assumed options exercisable into
331,596 shares of our common stock with a value of $25.8 million, net of
proceeds upon exercise, assumed liabilities of $10.2 million and incurred
$11.2 million in acquisition costs.
5
<PAGE>
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
6
<PAGE>
additional revenues to achieve profitability. Consequently, it is possible that
we may never achieve profitability, and even if we do achieve profitability, we
may not sustain or increase profitability on a quarterly or annual basis in the
future. If we do not achieve or sustain profitability in the future we will be
unable to continue our operations.
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.
7
<PAGE>
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.
8
<PAGE>
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-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.
9
<PAGE>
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 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;
10
<PAGE>
- costs relating to possible acquisitions and integration of technologies or
businesses;
- rate changes for advertising on Ask.com and DirectHit.com;
- marketing expenses and technology infrastructure costs as well as other
costs that we may incur as we expand our operations; and
- the timing of charges related to the acquisitions and any amortization of
expenses related to the acquisitions.
We have experienced lower traffic during the year-end holiday season and a
slower rate of growth during the summer months. Given our limited operating
history, user traffic on our Web site is extremely difficult to forecast
accurately. Moreover, obtaining new corporate customers depends on many factors
that we are not able to control, such as the allocation of budgetary resources
by potential customers. The average sales cycle for obtaining new corporate
customers has typically ranged from two to four months. Therefore, it is
difficult to predict the number of corporate customers that we will have in the
future. We may be unable to adjust spending to compensate for an unexpected
shortfall in our revenues. In addition we expect our operating expenses to
increase as we expand our engineering, sales and marketing operations, broaden
our customer support capabilities, develop new strategic alliances, fund
increased levels of research and development and build our operational
infrastructure. As a result, if we experience an unexpected shortfall in
revenues, or if our revenues do not grow faster than the increase in these
expenses, we could experience significant variations in the operating results
from quarter to quarter.
IF WE FAIL TO MEET THE EXPECTATIONS OF 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
11
<PAGE>
the content. Generally, it takes three to four months to launch a customized
version of our services. The long development cycle makes it difficult to
predict the delivery time to the customer, realize our revenue goals and manage
our internal hiring needs to meet new projects. In addition, in order to meet
increased demand by corporate customers, we may have to hire additional people
and train them in advance of orders. When we outsource development of custom
knowledge bases, we will have little control over the speed and quality of the
development. Any decline in the speed or quality of the implementation of our
custom services could seriously harm our business.
WE DEPEND ON THIRD-PARTY CONTENT.
Ask.com is designed to directly link users to a page within a third-party
Web site that contains the answer to a question asked. However, when Ask.com
attempts to direct the user to a page within the Web site, some companies have
automatically redirected users to their home page. If companies prevent us from
directly linking our users to a page within a third-party Web site, and if there
are no comparable alternative Web sites to which we can direct our users, the
utility and attractiveness of our services to consumers may be reduced. If this
occurs, traffic on Ask.com could significantly decrease, which would seriously
harm our business.
Visitors to Ask.com use it to obtain direct access to the information,
products and services they need through the display of a third-party Web page
containing the answer to the user's question. We have little control over the
content contained on these third-party Web sites. If these third-party Web sites
do not contain high-quality, up-to-date and useful information to the user, the
utility of our service to the user will be reduced, which could seriously harm
our business.
WE MAY BE LIABLE FOR OUR LINKS TO THIRD-PARTY WEB SITES.
We could be exposed to liability with respect to the selection of
third-party Web sites that may be accessible through Ask.com and DirectHit.com.
These claims might include, among others, that by linking to Web sites operated
by third parties, we may be liable for copyright or trademark infringement or
other unauthorized actions by these third-party Web sites. Other claims may be
based on errors or false or misleading information provided on Ask.com,
including information deemed to constitute professional advice such as legal,
medical, financial or investment advice. Other claims may be based on our links
to 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.
12
<PAGE>
OUR FUTURE SUCCESS DEPENDS ON OUR ABILITY TO RETAIN OUR PRESIDENT AND CHIEF
EXECUTIVE OFFICER.
Our future success depends, in part, on the continued service of Robert
Wrubel, our Chief Executive Officer. Mr. Wrubel is not bound by an employment
agreement for any specific term. Our relationship with Mr. Wrubel is at will.
Although we are the beneficiaries of a key person life insurance policy on
Mr. Wrubel's life, the loss of his services would seriously harm our business.
OUR FUTURE SUCCESS DEPENDS ON OUR ABILITY TO ATTRACT, RETAIN AND MOTIVATE HIGHLY
SKILLED EMPLOYEES.
Our future success also depends on our ability to attract, retain and
motivate highly skilled employees. Competition for employees in our industry is
intense. Additionally, it is often more difficult to attract employees once a
company's stock is publicly traded because the exercise price of equity awards
such as stock options are based on the public market, which is highly volatile.
We may be unable to attract, assimilate or retain other highly qualified
employees in the future. We have experienced, and we expect to continue to
experience in the future, difficulty in hiring and retaining highly skilled
employees with appropriate qualifications.
WE WILL ONLY BE ABLE TO EXECUTE OUR BUSINESS PLAN IF INTERNET USAGE GROWS.
Our business would be adversely affected if Internet usage does not continue
to grow or grows at significantly lower rates compared to current trends. The
continued growth of the Internet depends on various factors, many of which are
outside our control. These factors include:
- the Internet infrastructure may not be able to support the demands placed
on it;
- performance and reliability of the Internet may decline as usage grows;
- security and performance concerns due to hackers and authentication
concerns with respect to the transmission over the Internet of
confidential information, such as credit card numbers, and attempts by
unauthorized computer users, so-called hackers, to penetrate online
security systems; and
- privacy concerns, including those related to the ability of Web sites to
gather user information without the user's knowledge or consent.
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 AboveNet Communications in San Jose, 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
and DirectHit.com have had partial interruptions for periods ranging from a few
minutes to three hours. In addition, Ask.com and DirectHit.com could also be
affected by computer viruses, electronic break-ins or other similar disruptions.
If we experience outages, frequent or persistent system failures or degraded
response times, our
13
<PAGE>
reputation and brand could be permanently harmed. In addition, we could lose
advertising revenues during these interruptions and user satisfaction could be
negatively impacted if the service is slow or unavailable.
Our users and customers depend on Internet service providers, online service
providers and other Web site operators for access to Ask.com and DirectHit.com.
Each of these providers has experienced significant outages in the past and
could experience outages, delays and other difficulties due to system failures
unrelated to our systems.
The occurrence of an earthquake or other natural disaster or unanticipated
problems at our principal facilities or at the servers that host or back-up our
systems could cause interruptions or delays in our interactive network or a loss
of data. Our systems are vulnerable to damage or interruption from fire, flood,
power loss, telecommunications failure, break-ins, earthquake and similar
events. Our general liability insurance policies may not adequately compensate
us for losses that may occur due to interruptions in our service.
WE MAY NOT BE ABLE TO ADAPT 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
14
<PAGE>
liability for information retrieved from or transmitted over the Internet,
online content regulation, user privacy, taxation and the quality of products
and services. Furthermore, the growth and development of electronic commerce may
prompt calls for more stringent consumer protection laws that may impose
additional burdens on electronic commerce companies as well as companies like us
that provide electronic commerce services.
We file tax returns in such states as required by law based on principles
applicable to traditional businesses. However, one or more states could seek to
impose additional income tax obligations or sales tax collection obligations on
out-of-state companies, such as ours, which engage in or facilitate electronic
commerce. A number of proposals have been made at state and local levels that
could impose such taxes on the sale of products and services through the
Internet or the income derived from such sales. Such proposals, if adopted,
could substantially impair the growth of electronic commerce and seriously harm
our profitability.
Legislation limiting the ability of the states to impose taxes on
Internet-based transactions recently has been enacted by the United States
Congress. However, this legislation, known as the Internet Tax Freedom Act,
imposes only a three-year moratorium, which commenced October 1, 1998 and ends
on October 21, 2001, on state and local taxes on electronic commerce, where such
taxes are discriminatory and Internet access, unless such taxes were generally
imposed and actually enforced prior to October 1, 1998. It is possible that the
tax moratorium could fail to be renewed prior to October 21, 2001. Failure to
renew this legislation would allow various states to impose taxes on
Internet-based commerce. The imposition of such taxes could seriously harm our
ability to become profitable.
In addition, we are not certain how our business may be affected by the
application of existing laws governing issues such as property ownership,
copyrights, encryption and other intellectual property issues, taxation, libel,
obscenity and export or import matters. The vast majority of such laws were
adopted prior to the advent of the Internet. As a result, they do not
contemplate or address the unique issues of the Internet and related
technologies. Changes in laws intended to address such issues could create
uncertainty in the Internet market. Such uncertainty could reduce demand for our
services or increase the cost of doing business as a result of litigation costs
or increased service delivery costs.
WE MAY FACE POTENTIAL ELECTRONIC COMMERCE-RELATED LIABILITIES AND EXPENSES.
Arrangements with electronic commerce merchants may expose us to legal risks
and uncertainties, including potential liabilities to consumers of the products
and services offered by these electronic commerce merchants. Although we carry
general liability insurance, our insurance may not cover potential claims of
this type or may not be adequate to indemnify us for all liability that may be
imposed.
Some of the risks that may result from these arrangements with businesses
engaged in electronic commerce include:
- potential liabilities for illegal activities that may be conducted by
participating merchants;
- 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.
15
<PAGE>
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 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.
16
<PAGE>
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.
WE MAY NOT BE ABLE TO SECURE ADDITIONAL FINANCING TO MEET OUR FUTURE CAPITAL
NEEDS.
We currently anticipate that our available cash resources combined with the
net proceeds from this offering will be sufficient to meet our anticipated needs
for working capital and capital expenditures for at least 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.
SUBSTANTIAL SALES OF COMMON STOCK BY OUR EXISTING STOCKHOLDERS COULD CAUSE OUR
STOCK PRICE TO FALL.
The market price of our common stock could decline as a result of sales by
our existing stockholders of shares of common stock in the market after this
offering or the perception that these sales could occur. These sales also might
make it more difficult for us to sell equity securities in the future at a time
and at a price that we deem appropriate. Upon completion of this offering,
assuming the number of outstanding shares as of January 31, 2000, and including
the 4,751,878 shares of common stock issued in connection with Direct Hit in
February 2000, we will have 34,945,777 outstanding shares of common stock,
35,260,777 shares if the underwriters exercise their over-allotment option in
full. Of these shares, a total of approximately 18,821,026 shares held by our
directors, executive officers, 5% stockholders and the selling stockholders are
subject to lock-up agreements generally providing that these stockholders will
not sell or otherwise dispose of their shares for a period of 90 days following
the date of the final prospectus for this offering
17
<PAGE>
without the prior written consent of the representatives; provided, however,
that up to 8% of these shares may be sold by these stockholders on a pro rata
basis beginning 60 days following the date of the final prospectus for this
offering.
In addition, 2,207,802 shares of common stock acquired in connection with
the acquisition of Direct Hit, which are not subject to a lock-up agreement with
the underwriters, will be freely tradeable pursuant to a registration statement
beginning 90 days following the date of the final prospectus for this offering;
provided, however, that up to 8% of these shares may be sold by these
stockholders on a pro rata basis beginning 60 days following the date of the
final prospectus for this offering. In addition, options to purchase up to
6,505,149 shares of our common stock are outstanding as of December 31, 1999,
under our 1996 Equity Incentive Plan, our 1999 Equity Incentive Plan, our 1999
Non-officer Stock Option Plan, the Net Effect 1997 Stock Plan and additional
options granted outside of these plans. In addition, in connection with our
acquisition of Direct Hit, we assumed options to purchase 331,596 shares of our
common stock pursuant to the Direct Hit 1998-A Stock Plan. The shares issuable
upon exercise of these options are freely tradeable.
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;
- 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.
18
<PAGE>
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.
NEW INVESTORS WILL SUFFER IMMEDIATE AND SUBSTANTIAL DILUTION IN THE PRO FORMA
NET TANGIBLE BOOK VALUE OF THEIR SHARES.
We expect the public offering price to be substantially higher than the pro
forma net tangible book value per share of the common stock. Therefore, you will
incur immediate dilution in pro forma net tangible book value of $50.19 per
share, assuming a public offering price of $68.13 per share.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and elsewhere in this prospectus constitute
forward-looking statements. These statements involve known and unknown risks,
uncertainties and other factors that may cause our actual results, levels of
activity, performance or achievements to be materially different from any future
results, levels of activity, performance or achievements expressed or implied by
such forward-looking statements. Such factors include, among other things, those
listed under "Risk Factors" and elsewhere in this prospectus.
In some cases, you can identify forward-looking statements by terminology
such as "may," "will," "should," "could," "expects," "plans," "intends,"
"anticipates," "believes," "estimates," "predicts," "potential" or "continue" or
the negative of such terms and other comparable terminology.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements.
19
<PAGE>
USE OF PROCEEDS
We are offering 1,400,000 shares of common stock at an assumed public
offering price of $68.13 per share. After deducting the underwriters' discounts
and commissions and estimated offering expenses payable by us, we anticipate
retaining approximately $89.3 million of the proceeds from our sale of common
stock. We will not receive any of the proceeds from the sale of common stock by
the selling stockholders.
We intend to use our net proceeds from this offering of approximately
$89.3 million for general corporate purposes, including acquisitions, and
working capital requirements. Although we actively seek acquisition
opportunities, no agreement with respect to any future acquisition has been
reached. Pending their ultimate use, we intend to invest the net proceeds from
this offering in short-term, investment grade, interest-bearing securities,
certificates of deposit or direct or guaranteed obligations of the United
States.
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 25, 2000)................ $139.75 $ 60.25
</TABLE>
20
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1999:
- on an actual basis;
- a pro forma basis to give effect to our acquisition of Direct Hit
Technologies, Inc. in February 2000;
- a pro forma as adjusted basis to give effect to the issuance and sale by
us of 1,400,000 shares of our common stock in this offering at an assumed
public offering price of $68.13 per share and the application of net
proceeds from the offering, after deducting the underwriting discounts and
commissions and estimated offering expenses payable by us, as set forth
under "Use of Proceeds."
You should read this table together with our consolidated financial
statements and related notes thereto and other financial and operating data
included elsewhere in this prospectus or incorporated by reference into this
prospectus. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
---------------------------------------------
PRO FORMA
ACTUAL PRO FORMA(1) AS ADJUSTED
----------- --------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Capital lease obligations, less current
portion...................................... $ 2,350,760 $ 2,350,760 $ 2,350,760
----------- --------------- -------------
Stockholders' equity:
Convertible preferred stock, $.001 par value;
5,000,000 shares authorized; 0 shares
issued and outstanding actual, pro forma
and pro forma as adjusted.................. -- -- --
Common stock, $.001 par value; 150,000,000
shares authorized; 28,472,883 shares issued
and outstanding actual; 33,224,761 issued
and outstanding pro forma; and 34,624,761
shares issued and outstanding pro forma as
adjusted................................... 107,635,676 597,501,747 686,851,192
Deferred stock compensation.................. (5,174,691) (5,174,691) (5,174,691)
Accumulated deficit.......................... (60,568,021) (60,568,021) (60,568,021)
Accumulated other comprehensive income, net
of tax effect.............................. (41,601) (41,601) (41,601)
----------- --------------- -------------
Total stockholders' equity................. 41,851,363 531,717,434 621,066,879
----------- --------------- -------------
Total capitalization..................... $44,202,123 $ 534,068,194 $ 623,417,639
=========== =============== =============
</TABLE>
(1) As consideration for Direct Hit, we issued 4,751,878 shares of common stock
with a value of $456.0 million, assumed options exercisable into 331,596
shares of our common stock with a value of $25.8 million, net of proceeds
upon exercise, assumed liabilities of $10.2 million and incurred $11.2
million in acquisition costs.
21
<PAGE>
DILUTION
As of December 31, 1999, we had a pro forma net tangible book value of
$531,717,434, or $16.00 per share based on 33,224,761 shares of our pro forma
common stock outstanding. Our pro forma net tangible book value includes the
assets acquired, including goodwill and other intangible assets, and liabilities
assumed related to our acquisition of Direct Hit in February 2000. Our pro forma
common stock outstanding includes 4,751,878 shares of common stock issued in
connection with the Direct Hit acquisition. Our pro forma common stock
outstanding excludes:
- 6,505,149 shares of common stock subject to outstanding stock options at
December 31, 1999, at a weighted average exercise price of $21.40 per
share;
- 331,596 shares of common stock subject to outstanding stock options with a
weighted average exercise price of $9.25 per share assumed as part of the
Direct Hit acquisition;
- an aggregate of 1,996,661 shares of common stock reserved for future
issuance under our stock option plans as of December 31, 1999;
- an aggregate of 400,000 shares of common stock reserved for future
issuance under our 1999 Employee Stock Purchase Plan as of December 31,
1999; and
- 13,750 shares of common stock issuable upon the exercise of warrants as of
December 31, 1999, with a weighted average exercise price of $12.24 per
share.
Pro forma net tangible book value per share is determined by dividing our
pro forma tangible net worth, total pro forma tangible assets less total pro
forma liabilities, by the pro forma number of outstanding shares of common
stock. After giving effect to the sale by us of the 1,400,000 shares of common
stock offered hereby at the assumed public offering price of $68.13 per share
and after deducting the underwriting discounts and commissions and estimated
offering expenses payable by us, our pro forma net tangible book value as of
December 31, 1999 would have been $621,066,879, or $17.94 per share. This
represents an immediate increase in the pro forma net tangible book value per
share of $1.94 to existing stockholders and an immediate dilution of $50.19 per
share to new investors purchasing shares at the public offering price. The
following table illustrates this dilution per share:
<TABLE>
<S> <C> <C>
Assumed public offering price per share..................... $68.13
Pro forma net tangible book value per share as of December
31, 1999................................................ $16.00
Increase per share attributable to new investors.......... $ 1.94
------
As adjusted pro forma net tangible book value per share
after the offering........................................ $17.94
------
Dilution per share to new investors......................... $50.19
======
</TABLE>
22
<PAGE>
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 not
included elsewhere in this prospectus. 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 financial position that would have
occurred if the transaction had been consummated at the dates indicated, nor is
it necessarily indicative of the future financial position of the combined
companies.
23
<PAGE>
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 13, 1996
(INCEPTION) THROUGH YEAR ENDED DECEMBER 31,
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 76,164,089 582,296,944
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 41,851,363 531,717,434
</TABLE>
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH OUR FINANCIAL
STATEMENTS AND THE RELATED NOTES CONTAINED ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
We 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
25
<PAGE>
maintenance and information services are recorded as deferred revenue and
recognized ratably over the contractual term.
Cost of revenues for our Web Properties and Syndication Group consists
primarily of salaries and related personnel costs associated with the content
development, data analysis, testing and maintenance of our Web sites. 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.
26
<PAGE>
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.
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.
27
<PAGE>
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 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
28
<PAGE>
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 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.
29
<PAGE>
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 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.
30
<PAGE>
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.
31
<PAGE>
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.
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 4,751,878 million shares of our common stock. Also
included were options to purchase Direct Hit common stock which converted into
options to purchase 331,596 shares of our common stock.
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.
32
<PAGE>
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 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.
33
<PAGE>
We currently anticipate that our available cash resources will be sufficient
to meet our anticipated needs for working capital and capital expenditures for
at least the next twelve months. At the end of such period, we will need to
generate sufficient cash flow from operations to meet our anticipated needs for
working capital and capital expenditures, or we will need to raise additional
capital. However, if during that twelve month period or thereafter, we are not
successful in generating sufficient cash flow from operations or in raising
additional capital when required in sufficient amounts and on terms acceptable
to us, these failures could seriously harm our business. If we 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.
34
<PAGE>
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
35
<PAGE>
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.
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
36
<PAGE>
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;
- 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.
37
<PAGE>
- 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 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
38
<PAGE>
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 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
39
<PAGE>
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.
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
40
<PAGE>
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
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.
41
<PAGE>
- 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 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 recently launched a service designed 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.
42
<PAGE>
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.
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>
43
<PAGE>
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
44
<PAGE>
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 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.
45
<PAGE>
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.
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 AboveNet
Communications in San Jose, 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
46
<PAGE>
service for company Web 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.
47
<PAGE>
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.
48
<PAGE>
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.
49
<PAGE>
In February 2000, we entered into a lease for additional facilities in
Oakland, California. Our initial annual lease expense under this lease is
approximately $425,000, increasing to approximately $1.5 million when we occupy
all of the leased space.
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.
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.
50
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
Set forth below is certain information regarding our executive officers,
directors and key employees as of December 31, 1999.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- -------- ------------------------------------------
<S> <C> <C>
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 Corporate 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 and 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,
51
<PAGE>
Mr. Briscoe was Director of Sales and Marketing for the Personal Interactive
Electronics Division of Apple Computer, Inc., a computer manufacturing company.
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 company. From 1993 to 1994, Mr.
Lichter was employed as an attorney at the law firm of Rosenfeld, Meyer &
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
52
<PAGE>
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 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 managing director 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., TiVo, Inc. and MMC Networks, Inc.
53
<PAGE>
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 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
54
<PAGE>
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.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------------------------- ------------------
NAME AND 1999 PRINCIPAL OTHER ANNUAL SECURITIES ALL OTHER
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 1998 96,231 9,844(1) 300 1,050,000 --
Executive Officer
Edward D. Briscoe III ... 1999 169,846 225,403(1) 4,871 402,600 --
Senior Vice President 1998 -- -- -- -- --
and General Manager,
Web Properties and
Syndication Group
Frank A. Vaculin ........ 1999 165,128 115,468(4) 4,890 326,000 --
Senior Vice President 1998 -- -- -- -- --
and 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.
55
<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.
56
<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 OPTIONS
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 $39,799,960 52,456 820,374 $ 5,835,094 $90,539,974
Edward D. Briscoe III...... 400,000 $44,884,960 2,600 -- 208,000 --
Frank A. Vaculin........... 137,438 $15,422,248 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 $ 6,311,947 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
57
<PAGE>
terminates for any reason other than by death or permanent and total disability,
may exercise vested options in the three-month period following such cessation,
unless such options terminate or expire sooner by their terms, or in such longer
or shorter period specified in the option agreement. Vested options may be
exercised for up to 12 months after an option holder's employment or other
service relationship with us or any affiliate ceases due to death or disability,
unless such options terminate or expire sooner by their terms.
Prior to the termination of the 1996 Incentive Plan, shares subject to stock
options that have expired or otherwise terminated without having been exercised
in full become available again for the grant of awards under the 1996 Incentive
Plan.
No incentive stock option may be granted to any person who, at the time of
the grant, owns stock possessing more than 10% of the total combined voting
power of Ask Jeeves or any affiliate of Ask Jeeves, unless the option exercise
price is at least 110% of the fair market value of the stock subject to the
option on the date of grant, and the term of the option does not exceed five
years from the date of grant. The aggregate fair market value, determined at the
time of grant, of the shares of common stock with respect to which incentive
stock options are exercisable for the first time by an option holder during any
calendar year under all stock option plans of Ask Jeeves and its affiliates may
not exceed $100,000.
The option agreements may provide that we may exercise a right of first
refusal on any proposed transfer of shares exercised. Substantially all of the
option agreements provide that if a change of control of Ask Jeeves occurs prior
to the first anniversary of the vesting commencement date of the option
agreement, then the vesting which would have occurred by such anniversary shall
occur. After the first anniversary of the date of grant, these option agreements
provide that the vesting of each option shall accelerate by six months.
Upon a change of control of Ask Jeeves, each outstanding option shall be
assumed or an equivalent option substituted by the successor corporation or, if
the successor corporation does not assume or substitute for outstanding options,
the vesting provisions of all such options shall accelerate.
1999 EQUITY INCENTIVE PLAN
In April 1999, the board adopted the 1999 Equity Incentive Plan 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
58
<PAGE>
Plan vest at the rate specified in the option agreement. Generally, the option
holder may not transfer a stock option other than by will or the laws of descent
or distribution unless the option holder holds a non-statutory stock option that
provides for transfer in the stock option agreement. However, an option holder
may designate a beneficiary who may exercise the option following the option
holder's death. An option holder whose employment or other service relationship
with Ask Jeeves or any affiliate ceases for any reason may exercise vested
options for the term provided in the option agreement.
No incentive stock option may be granted to any person who, at the time of
the grant, owns 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.
59
<PAGE>
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 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.
60
<PAGE>
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 331,596 shares of our common stock with a weighted average
exercise price of $9.25 per share. We will not make future grants under the
1998-A Stock Plan of Direct Hit.
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.
61
<PAGE>
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 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 $225,403.
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
62
<PAGE>
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 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
63
<PAGE>
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.
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.
64
<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.
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
65
<PAGE>
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 AGGREGATE
PREFERRED PREFERRED PURCHASE
PURCHASER STOCK STOCK 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
George (Skip) Battle.................................... -- 13,458 58,273
Edward D. Briscoe III................................... -- 231,032 1,000,369
5% STOCKHOLDERS
CPQ Holdings, Inc....................................... 2,480,765 344,091 $ 6,600,290
Entities affiliated with
Highland Capital Partners, Inc........................ -- 2,310,322 10,003,694
Institutional Venture Partners........................ -- 1,386,193 6,002,216
Leavitt Family Trust.................................... -- 128,136 554,829
Roda Group Investment Fund I, LLC....................... -- 856,732 3,709,650
</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.
66
<PAGE>
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 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 S. Lichter each in the amount of $200,000, $100,000 and $100,000,
respectively, 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.
67
<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.
The information provided in the table below with respect to each selling
stockholder 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 8.27% 135,987 2,638,869 7.55%
Entities affiliated with
Highland Capital Partners, Inc.(3)
Two International Place,
Boston, MA 02110.................. 2,310,322 6.89 113,221 2,197,101 6.29
Entities affiliated with
Institutional Venture Partners(4)
3000 Sand Hill Rd,
Building Two, Suite 290,
Menlo Park, CA 94025.............. 1,386,193 4.13 -- 1,386,193 3.97
Roda Group Investments
Fund I, L.L.C.(5) ..............
918 Parker Street,
Berkeley, CA 94710................ 856,732 2.55 -- 856,732 2.45
Roger A. Strauch(6)................. 2,990,550 8.91 -- 2,990,550 8.56
A. George (Skip) Battle(7).......... 168,625 * 6,916 161,709 *
Garrett Gruener(8).................. 2,801,298 8.35 95,395 2,705,903 7.74
Daniel H. Miller(9)................. 2,869,456 8.55 -- 2,869,456 8.21
Daniel J. Nova(3)................... 2,310,322 6.89 113,221 2,197,101 6.29
Benjamin M. Rosen(2)................ 1,413,803 4.21 69,286 1,344,517 3.85
Geoffrey Y. Yang(4)................. 1,386,193 4.13 -- 1,386,193 3.97
Edward D. Briscoe III(10)........... 634,964 1.89 16,288 618,676 1.77
Christine M. Davis(11).............. 23,595 * 1,003 22,592 *
Laurence G. Fishkin(12)............. 73,192 * 3,127 70,065 *
George S. Lichter(13)............... 42,102 * 544 41,558 *
</TABLE>
68
<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>
M. Bruce Nakao(14).................. 188,888 * 4,258 184,630 *
Frank A. Vaculin(15)................ 140,223 * 3,763 136,460 *
David C. Warthen(16)................ 1,062,347 3.17% 41,699 1,020,648 2.92%
Robert W. Wrubel(17)................ 445,824 1.33 17,022 428,802 1.23
All directors and executive officers
as a group (16 persons)(18)...... 12,834,695 38.26% 508,509 12,326,186 35.27%
Advent Atlantic and Pacific III
LP(19)............................ 117,999 * 8,260 109,739 *
Bayview 99 I and II, LP(19)......... 19,199 * 1,343 17,856 *
Michael Cassidy(19)................. 670,880 2.00 46,963 623,917 1.79
Commonwealth Capital Ventures II
LP(19)............................ 73,179 * 5,122 68,057 *
CCV II Associates LP(19)............ 3,617 * 253 3,364 *
Gary Cullis(19)..................... 1,091,698 3.25 76,421 1,015,277 2.91
Hikari Tsushin, Inc.(19)............ 191,993 * 13,440 178,553 *
Mosaic Venture Partners, LP(19)..... 238,879 * 16,722 222,157 *
David Parker(19).................... 62,136 * 4,349 57,787 *
TA/Advent VIII LP(19)............... 256,004 * 17,920 238,084 *
TA Executives Fund LLC(19).......... 4,876 * 341 4,535 *
TA Investors LLC(19)................ 5,107 * 357 4,750 *
Total selling stockholder shares... 700,000
</TABLE>
- ------------------------
* Represents beneficial ownership of less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes voting or investment power
with respect to the securities. Common stock subject to options or warrants
that are currently exercisable or exercisable within 60 days of
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 33,545,777 shares of common stock outstanding as of January 31,
2000 and 34,945,777 shares of common stock outstanding after this offering,
including 4,751,878 shares issued in the Direct Hit acquisition and
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
69
<PAGE>
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 the
Highland Entities 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 Institutional Entities 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 except to the extent of his pro
rata investment in such shares. Also includes 1,500 shares held by Benno
S.M. Kling Educational Trust, Roger A. Strauch, Trustee, 1,500 shares held
by Samuel J.M. Kling Educational Trust, Roger A. Strauch, Trustee, 1,500
shares held by Jesse Kling Educational Trust, Roger A. Strauch, Trustee,
1,500 shares held by Rebecca A. Miller Educational Trust, Roger A. Strauch,
Trustee, 1,500 shares held by Sarah Miller Educational Trust, Roger A.
Strauch, Trustee, 1,500 shares held by Julia F. Dan Educational Trust,
Roger A. Strauch, Trustee, 1,500 shares held by Kalden Gonsar Educational
Trust, Roger A. Strauch, Trustee, 1,500 shares held by Fletcher Kennamer
Educational Trust, Roger A. Strauch, Trustee, 1,500 shares held by Aidan
Clements Educational Trust, Roger A. Strauch, Trustee, 15,000 shares held
by Cooper Ogden Miller Educational Trust, Roger A. Strauch, Trustee, 45,812
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 as to which Mr. Strauch disclaims beneficial
ownership.
(7) Includes 27,499 shares which are subject to a right of repurchase by Ask
Jeeves, 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.
(8) Includes 84,182 shares held by the Amy Slater Revocable Trust, Amy Slater,
trustee, 7,501 shares issuable to Ms. Slater pursuant to options
exercisable within 60 days, 1,000 shares held by Ms. Slater as custodian
under CUTMA for Zachary A. Adams, 1,000 shares held by Ms. Slater as
custodian under CUTMA for Caleb J. Adams, of which Ms. Slater disclaims
beneficial ownership, 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 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. Of the 95,395 shares being
sold by Mr. Gruener 4,125 shares are being sold by Amy Slater.
(9) 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
70
<PAGE>
Ogden Miller Educational Trust, Roger A. Strauch, Trustee, as to which
Mr. Miller disclaims beneficial ownership.
(10) Includes 300,000 shares subject to a right of repurchase by Ask Jeeves and
2,600 shares issuable pursuant to options exercisable within 60 days.
(11) Includes 3,125 shares issuable pursuant to options exercisable within 60
days.
(12) Includes 9,374 shares issuable pursuant to options exercisable within 60
days.
(13) Includes 30,000 shares subject to a right of repurchase by Ask Jeeves and
1,000 shares issuable pursuant to options exercisable within 60 days.
(14) Includes 100,000 shares subject to a right of repurchase by Ask Jeeves and
2,000 shares issuable pursuant to options exercisable within 60 days.
(15) Includes 62,438 shares subject to a right of repurchase by Ask Jeeves and
1,000 shares issuable pursuant to options exercisable within 60 days.
(16) Includes 211,458 shares issuable pursuant to options exercisable within 60
days.
(17) Includes 12,439 shares subject to a right of repurchase by Ask Jeeves and
86,034 shares issuable pursuant to options exercisable within 60 days.
(18) Includes 532,376 shares subject to a right of repurchase by Ask Jeeves and
324,092 shares issuable pursuant to options exercisable within 60 days.
(19) Includes 10% of the shares beneficially owned which are held in escrow
pursuant to the Agreement and Plan of Merger and Reorganization by and
between Ask Jeeves, Inc., Answer Acquisition Corp. and Direct Hit
Technologies, Inc., dated January 25, 2000.
71
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
As of January 31, 2000, there were 33,545,777 outstanding shares of common
stock including 4,751,878 shares of common stock issued pursuant to the
acquisition of Direct Hit in February 2000, outstanding options to purchase
6,687,825 shares of common stock, including options to purchase 331,596 shares
of common stock assumed pursuant to the acquisition of Direct Hit, 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
72
<PAGE>
- 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.
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
73
<PAGE>
each option shall accelerate by six months upon a change of control.
Furthermore, offer letters with our executive officers provide for the payment
of severance and acceleration of options upon the termination of these executive
officers upon a change of control of Ask Jeeves. These provisions in our stock
option agreements and offer letters could have the effect of discouraging
potential takeover attempts.
REGISTRATION RIGHTS
We entered into the Amended and Restated Investor Rights Agreement 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."
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, based on the number of shares outstanding
on January 31, 2000, we will have 34,945,777 outstanding shares of common stock,
including 4,751,878 shares of common stock issued pursuant to the acquisition of
Direct Hit in February 2000, 35,260,777 shares if the underwriters exercise
their over-allotment option in full, assuming no exercise of outstanding
warrants and options.
Of the outstanding shares, a total of approximately 18,821,026 shares held
by our directors, executive officers, 5% stockholders and the selling
stockholders are subject to "lock-up" agreements generally providing that, these
stockholders will not (1) offer, pledge, sell, contract to sell, sell any option
or contract to purchase, purchase any option or contract to sell, grant any
option, right or warrant to purchase, lend, file a registration statement, or
otherwise transfer or dispose of, directly or indirectly, any shares of common
stock or any securities convertible into or exercisable or exchangeable for
common stock or (2) enter into any swap or other arrangement that transfers to
another, in whole or in part, any of the economic consequences of ownership of
the common stock, whether any of these transactions described in (1) or (2) are
to be settled by delivery of common stock or such other securities, in cash or
otherwise, for a period of 90 days following the date of the final prospectus
for this offering without the prior written consent of the representatives;
provided, however, that up to 8% of these shares may be sold by these
stockholders on a pro rata basis beginning 60 days following the date of the
final prospectus for this offering. The restrictions described in this paragraph
do not apply to:
- the sale of shares to the underwriters;
- the issuance by us of shares of common stock upon the exercise of an
option or a warrant or the conversion of a security outstanding on the
date of this prospectus of which the underwriters have been advised in
writing;
- transactions by any person other than us relating to shares of common
stock or other securities acquired in open market transactions after the
completion of the offering of the shares; or
74
<PAGE>
- transfers by gift or distributions by a partnership to its partners, so
long as, in any such instance, such transferee executes a lock-up
agreement with terms identical to those described in this paragraph.
In addition, 2,207,802 shares of common stock acquired in connection with
the acquisition of Direct Hit, which are not subject to a lock-up agreement with
the underwriters, will be freely tradeable pursuant to a registration statement
beginning 90 days following the date of the final prospectus for this offering;
provided, however, that up to 8% of these shares may be sold by these
stockholders on a pro rata basis beginning 60 days following the date of the
final prospectus for this offering. In addition, options to purchase up to
6,505,149 shares of our common stock are outstanding as of December 31, 1999,
under our 1996 Equity Incentive Plan, our 1999 Equity Incentive Plan, our 1999
Non-officer Stock Option Plan, the Net Effect 1997 Stock Plan and additional
options granted outside of these plans. In addition, in connection with our
acquisition of Direct Hit, we assumed options to purchase 331,596 shares of our
common stock pursuant to the Direct Hit 1998-A Stock Plan. The shares issuable
upon exercise of these options are freely tradeable.
75
<PAGE>
UNDERWRITING
Ask Jeeves, the selling stockholders and the underwriters for the offering
named below have entered into an underwriting agreement with respect to the
shares being offered. Subject to certain conditions, each underwriter has
severally agreed to purchase the number of shares indicated in the following
table. Goldman, Sachs & Co., Chase Securities Inc., FleetBoston Robertson
Stephens Inc. and U.S. Bancorp Piper Jaffray Inc. are the representatives of the
underwriters.
<TABLE>
<CAPTION>
Underwriters Number of Shares
------------ ----------------
<S> <C>
Goldman, Sachs & Co......................................
Chase Securities Inc.....................................
FleetBoston Robertson Stephens Inc.......................
U.S. Bancorp Piper Jaffray Inc...........................
------------
Total.................................................... 2,100,000
============
</TABLE>
If the underwriters sell more shares than the total number set forth in the
table above, the underwriters have an option to buy up to an additional 315,000
shares from Ask Jeeves to cover such sales. They may exercise that option for
30 days. If any shares are purchased pursuant to this option, the underwriters
will severally purchase shares in approximately the same proportion as set forth
in the table above.
The following table shows the per share and total underwriting discounts and
commissions to be paid to the underwriters by Ask Jeeves and the selling
stockholders. Such amounts are shown assuming both no exercise and full exercise
of the underwriters' option to purchase additional shares.
<TABLE>
<CAPTION>
Paid by Ask Jeeves
------------------
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
Per Share........................................ $ $
Total............................................ $ $
</TABLE>
<TABLE>
<CAPTION>
Paid by the Selling
Stockholders
------------
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
Per Share........................................ $ $
Total............................................ $ $
</TABLE>
Shares sold by the underwriters to the public will initially be offered at
the initial price to public set forth on the cover of this prospectus. Any
shares sold by the underwriters to securities dealers may be sold at a discount
of up to $ per share from the initial price to public. Any such
securities dealers may resell any shares purchased from the underwriters to
certain other brokers or dealers at a discount of up to $ per share from
the initial price to public. If all the shares are not sold at the initial price
to public, the underwriters may change the offering price and the other selling
terms.
76
<PAGE>
Ask Jeeves, its directors and officers, its 5% stockholders and the selling
stockholders have agreed with the underwriters not to dispose of or hedge any of
their common stock or securities convertible into or exchangeable for shares of
common stock during the period from the date of this prospectus continuing
through the date 90 days after the date of this prospectus, except with the
prior written consent of the representatives; provided, however, that up to 8%
of these shares may be sold by these stockholders on a pro rata basis beginning
60 days following the date of the final prospectus for this offering.
In connection with the offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in this offering.
Stabilizing transactions consist of certain bids or purchases made for the
purpose of preventing or retarding a decline in the market price of the common
Stock while the offering is in progress.
The underwriters also may impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares sold
by or for the account of such underwriter in stabilizing or short covering
transactions.
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the common stock. As a result, the price of the
common stock may be higher than the price that otherwise might exist in the open
market. If these activities are commenced, they may be discontinued by the
underwriters at any time. These transactions may be effected on the Nasdaq
National Market, in the over-the-counter market or otherwise.
As permitted by Rule 103 under the Securities Exchange Act of 1934, certain
underwriters and selling group members that are market makers ("passive market
makers") in the common stock may make bids for or purchases of common stock in
the Nasdaq National Market until a stabilizing bid has been made. Rule 103
generally provides that:
- a passive market maker's net daily purchases of the common stock may not
exceed 30% of its average daily trading volume in such securities for the
two full consecutive calendar months, or any 60 consecutive days ending
within the 10 days, immediately preceding the filing date of the
registration statement of which this prospectus forms a part,
- a passive market maker may effect purchases or display bids for common
stock at a price that exceeds the highest independent bid for the common
stock by persons who are not passive market makers, and
- bids made by passive market makers must be identified as such.
Ask Jeeves estimates that the total expenses of the offering payable by Ask
Jeeves, excluding underwriting discounts and commissions, will be approximately
$1,025,000.
Ask Jeeves and the selling stockholders have agreed to indemnify the several
underwriters against certain liabilities, including liabilities under the
Securities Act of 1933.
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. Legal matters relating
to this offering will be passed upon for the underwriters by Brobeck Phleger &
Harrison LLP, San Francisco, California.
77
<PAGE>
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
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.
78
<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
F-7
<PAGE>
ASK JEEVES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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
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
F-8
<PAGE>
ASK JEEVES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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 information it
F-10
<PAGE>
ASK JEEVES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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
F-11
<PAGE>
ASK JEEVES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. BUSINESS COMBINATIONS (CONTINUED)
had not been established and no future alternative uses existed. The values
assigned to purchased in-process technology were determined by identifying the
on-going research projects for which technological feasibility had not been
achieved and assessing the state of completion of the 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>
F-12
<PAGE>
ASK JEEVES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. BUSINESS COMBINATIONS (CONTINUED)
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 $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.
F-17
<PAGE>
ASK JEEVES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCKHOLDERS' EQUITY (CONTINUED)
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 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
F-21
<PAGE>
ASK JEEVES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. EMPLOYEE BENEFIT PLANS (CONTINUED)
value method of FAS 123, the Company's net loss and basic and diluted net loss
per share would have been increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1997 1998 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.
F-22
<PAGE>
ASK JEEVES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. LEGAL PROCEEDINGS (CONTINUED)
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 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 significantly affect the Company's consolidated financial
position, results of operations or cash flows.
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
4,751,878 shares of common
F-23
<PAGE>
ASK JEEVES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. PENDING BUSINESS COMBINATIONS (CONTINUED)
stock with a value of $456.0 million, 331,596 shares to be issued upon the
exercise of outstanding Direct Hit options assumed as part of the merger with a
value of $25.8 million, liabilities assumed of $10.2 million and $11.2 million
in acquisition costs. 475,188 shares are held in escrow and will be released
upon the expiration of certain indemnification obligations. The purchase
consideration of the acquired assets and assumed liabilities were allocated
based on fair values as follows:
<TABLE>
<S> <C>
Tangible assets acquired.................................... $ 16,890,290
Equipment acquired.......................................... 2,454,715
Intangible assets acquired.................................. 30,844,718
Goodwill.................................................... 453,139,880
------------
Total purchase consideration................................ $503,329,603
============
</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.......................................... $ (104,395,519) $ (163,859,528)
================ ================
Pro forma basic and diluted net loss per share.............. $ (7.50) $ (6.61)
================ ================
Weighted average shares outstanding used in computing pro
forma basic and diluted net loss per share................ 13,914,502 24,798,837
================ ================
</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 an 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 allocate
the total purchase cost of the fair values of assets and liabilities of Direct
Hit Technologies, Inc. based on a 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 purchase consideration of the
Direct Hit Technologies, Inc. merger has been allocated 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.
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 2,446,921 483,984,598 (2) 486,431,519
Restricted cash........................ -- 150,000 150,000 -- 150,000
------------ ------------ ------------ ------------ ------------
Total assets....................... $ 76,164,089 $ 22,148,257 $ 98,312,346 $483,984,598 $582,296,944
============ ============ ============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................... $ 4,717,223 $ 1,364,122 $ 6,081,345 $ 11,248,570 (1) $ 17,329,915
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 11,248,570 46,913,750
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 9,864 107,645,540 489,856,207 (3) 597,501,747
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 58,981,406 472,736,028 531,717,434
------------ ------------ ------------ ------------ ------------
Total liabilities and stockholders'
equity........................... $ 76,164,089 $ 22,148,257 $ 98,312,346 $483,984,598 $582,296,944
============ ============ ============ ============ ============
</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> <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...... -- -- -- 96,796,920 (A) 96,796,920
------------ ------------ ------------ ------------- -------------
Total operating expenses..... 62,849,568 15,917,854 78,767,422 96,796,920 175,564,342
Operating loss................... (54,906,702) (14,724,958) (69,631,660) (96,796,920) (166,428,580)
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) $ (96,796,920) $(163,859,528)
============ ============ ============ ============= =============
Pro forma basic and diluted net
loss per share................. $ (6.61)(B)
=============
Weighted average shares
outstanding used in computing
pro forma basic and diluted net
loss per share................. 24,798,837 (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 purchase cost of the acquisition of Direct Hit Technologies, Inc.
has been allocated 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.
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
purchase price of $503.3 million. The purchase consideration consists of
the following:
-- Issuance of 4,751,878 shares of Ask Jeeves, Inc.'s common stock to
the shareholders of Direct Hit Technologies, Inc. with a fair value of
$456.0 million. An additional 331,596 shares are included in the purchase
price for outstanding options to purchase common stock to the employees
of Direct Hit Technologies, Inc. with a fair value of $25.8 million, net
of proceeds upon exercise. 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 of $10.2 million.
-- Other related transaction and merger costs of $11.2 million,
including banker fees, for the acquisition of Direct Hit
Technologies, Inc.
(2) Recognition of the excess purchase consideration of $484.0 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
4,751,878 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 475,188 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
F-34
<PAGE>
DIRECT HIT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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.
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.
F-35
<PAGE>
DIRECT HIT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
INCOME TAXES--Deferred income tax assets and liabilities are determined
based on the differences between the financial reporting and tax bases of assets
and liabilities and are measured using the currently enacted tax rates and laws.
A valuation allowance is provided for the amount of deferred tax assets that,
based on currently available evidence, are not expected to be realized.
COST OF REVENUES--Cost of revenues consist primarily of expenses associated
with the ongoing maintenance and support of our products, including compensation
and employee-related expenses, consulting fees, equipment costs, networking,
bandwidth, 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.
F-36
<PAGE>
DIRECT HIT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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
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
F-37
<PAGE>
DIRECT HIT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. COMMITMENTS (CONTINUED)
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 $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
F-38
<PAGE>
DIRECT HIT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. PREFERRED STOCK (CONTINUED)
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.
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.
F-39
<PAGE>
DIRECT HIT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. COMMON STOCK (CONTINUED)
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 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
F-40
<PAGE>
DIRECT HIT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. COMMON STOCK (CONTINUED)
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 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.
F-41
<PAGE>
DIRECT HIT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. COMMON STOCK (CONTINUED)
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.
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
F-43
<PAGE>
DIRECT HIT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. SUBSEQUENT EVENT (CONTINUED)
of 4,751,878 shares of Ask Jeeves common stock for substantially all of the
outstanding common and preferred stock of the Company and 331,596 shares to be
issued upon exercise of 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
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
No dealer, salesperson or other person is authorized to give any information
or to represent anything not contained in this prospectus. You must not rely on
any authorized information or representations. This prospectus is an offer to
sell only the shares offered hereby, but only under circumstances and in
jurisdictions where it is lawful to do so. The information contained in this
prospectus is current only as of its date.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
--------
<S> <C>
Prospectus Summary................... 3
Risk Factors......................... 6
Special Note Regarding Forward-
Looking Statements................. 19
Use of Proceeds...................... 20
Dividend Policy...................... 20
Price Range of Common Stock.......... 20
Capitalization....................... 21
Dilution............................. 22
Selected Consolidated Financial
Data............................... 23
Management's Discussion and
Analysis of Financial Condition
and Results of Operations........ 25
Business............................. 35
Management........................... 51
Certain Transactions................. 65
Principal and Selling Stockholders... 68
Description of Capital Stock......... 72
Shares Eligible for Future Sale...... 74
Underwriting......................... 76
Legal Matters........................ 77
Experts.............................. 78
Where You Can Find More Information.. 78
Index to Consolidated Financial
Statements......................... F-1
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
2,100,000 Shares
ASK JEEVES, INC.
Common Stock
-------------
[LOGO]
-------------
GOLDMAN, SACHS & CO.
CHASE H&Q
ROBERTSON STEPHENS
U.S. BANCORP PIPER JAFFRAY
Representatives of the Underwriters
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by us in connection with the
sale of common stock being registered. All amounts are estimates.
<TABLE>
<S> <C>
SEC registration fee........................................ $ 45,540
NASD fee.................................................... 17,750
Nasdaq National Market listing fee.......................... 17,500
Printing and engraving expenses............................. 200,000
Legal fees and expenses..................................... 300,000
Accounting fees and expenses................................ 250,000
Blue sky fees and expenses.................................. 3,000
Transfer agent fees......................................... 25,000
Miscellaneous fees and expenses............................. 166,210
Total....................................................... 1,025,000
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
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. The
Bylaws also require us to advance litigation expenses in the case of stockholder
derivative actions or other actions, against an undertaking by the indemnified
party to repay such advances if it is ultimately determined that the indemnified
party is not entitled to indemnification.
In addition, our Certificate of Incorporation provides that, pursuant to
Delaware law, our directors shall not be liable for monetary damages for breach
of the directors' fiduciary duty of care to us and our stockholders. This
provision in the Certificate of Incorporation does not eliminate the duty of
care, and in appropriate circumstances equitable remedies such as injunctive or
other forms of non-monetary relief will remain available under Delaware law. In
addition, each director will continue to be subject to liability for breach of
the director's duty of loyalty to us for acts or omissions not in good faith or
involving intentional misconduct, for knowing violation of law, for actions
leading to improper personal benefit to the director, and for payment of
dividends or approval of stock repurchases or redemptions that are unlawful
under Delaware law. The provision also does not affect a director's
responsibilities under any other law, such as the federal securities laws or
state or federal environmental laws.
We have entered into indemnity agreements with each of our directors and
executive officers. Such indemnity agreements contain provisions that are in
some respects broader than the specific indemnification provisions contained in
Delaware law.
We maintain a policy providing directors' and officers' liability insurance,
which insures our directors and officers in certain circumstances with a
liability limit of $15,000,000 per claim and in the aggregate, subject to
varying retentions. This coverage is on a claims made basis.
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since January 1, 1997, Ask Jeeves has issued and sold the following
unregistered securities:
1. From June 13, 1996 through July 1, 1999, Ask Jeeves granted options to
purchase 5,397,299 shares of common stock at a weighted average exercise
price of $2.56 per share to employees, consultants, directors and other
service providers pursuant to its 1996 Equity Incentive Plan, and issued an
aggregate of 2,124,978 shares of its common stock to employees,
consultants, directors and other service providers for aggregate
consideration of approximately $3,230,537 pursuant to exercises of options
granted under the 1996 Equity Incentive Plan.
2. From June 13, 1996 through October 5, 1999, Ask Jeeves granted options to
purchase 2,263,572 shares of common stock at a weighted average exercise
price of $17.57 per share to employees, consultants, directors and other
service providers pursuant to its 1999 Equity Incentive Plan, and issued an
aggregate of 98,764 shares of its common stock to employees, consultants,
directors and other service providers for aggregate consideration of
approximately $1,030,496 pursuant to exercises of options granted under the
1999 Equity Incentive Plan.
3. From adoption date through December 31, 1999, Ask Jeeves granted options to
purchase 816,840 shares of common stock at a weighted average exercise
price of $107.47 per share to employees, consultants, directors and other
service providers pursuant to its 1999 Non-Officer Equity Incentive Plan.
4. From inception through December 31, 1999, Ask Jeeves granted options to
purchase 1,050,520 shares of common stock at a weighted average exercise
price of $0.13 per share to employees and consultants pursuant to option
agreements outside of the 1996 Equity Incentive Plan, and issued an
aggregate of 848,560 shares of its common stock to employees and
consultants for aggregate consideration of approximately $100,896 pursuant
to exercises of options granted outside of the 1996 Equity Incentive Plan,
1999 Equity Incentive Plan, and 1999 Non-Officer Equity Incentive Plan.
5. In August 1997, Ask Jeeves issued 1,083,498 shares of common stock at a
purchase price of $0.23 and warrants to purchase 541,749 shares of common
stock to Roger A. Strauch, and Daniel H. Miller. The warrants have an
aggregate purchase price of $124,602, with an exercise price of $0.23 per
share.
6. In November 1997, Ask Jeeves issued 12,000 shares of common stock to Albert
J. Janschewitz in exchange for assets related to the domain name "AJ.com."
for an aggregate purchase price of $2,760 or $0.23 per share.
7. In December 1997, Ask Jeeves issued 541,829 shares of common stock to the
Leavitt Family Trust for an aggregate purchase price of $249,241 or $0.46
per share.
8. In April 1998, Ask Jeeves issued 16,300 shares of common stock to Soren
Jacobsen in exchange for assets related to the domain name "ask.com." Ask
Jeeves imputed a value for the services of $13,221, of which $5,700 was
paid in cash, and the remainder was allocated to the shares issued.
9. In May, June and July 1998, Ask Jeeves issued warrants exercisable into
21,500 shares of common stock to Antenna Group PR, for public relations
services performed with a value of $11,005. The warrants are exercisable
into shares of common stock at a per share exercise price of $0.53.
II-2
<PAGE>
10. In June 1998, Ask Jeeves issued and sold an aggregate of 2,148,807 shares
of its common stock for an aggregate purchase price of approximately
$1,135,000 or $0.53 per share to 16 investors.
11. In September 1998, Ask Jeeves issued and sold 1,855,415 shares of its
common stock for an aggregate purchase price of approximately $1,350,000 or
$0.73 per share to 11 investors.
12. In November 1998 and January 1999, Ask Jeeves issued and sold 3,709,884
shares of its Series A preferred stock for an aggregate purchase price of
approximately $7,653,492 or $2.06 per share to 25 investors.
13. In February and March 1999, Ask Jeeves issued and sold 5,775,806 shares of
its Series B preferred stock for an aggregate purchase price of
approximately $25,000,000 or $4.33 per share to 44 investors.
14. In March 1999, Ask Jeeves issued a warrant exercisable into 2,500 shares of
common stock to, Marco Sorensen, consultant in consideration for graphic
design services performed. The warrant is exercisable into shares of common
stock at a per share exercise price of $4.33.
15. On April 16, 1999, Ask Jeeves issued 225,000 shares of common stock with a
value of $3.50 per share along with $700,000 in cash in consideration for
assets of Lumina Decision Systems, Inc. valued at $1,538,000. The assets
were related to the Personal Decision Engine technology and the Analytica
Decision Engine technologies.
16. On June 15, 1999, Ask Jeeves issued a warrant to purchase 11,250 shares of
the common stock of Ask Jeeves with an exercise price of $ 14.00 per share
to Comdisco, Inc., Ask Jeeves's equipment lease provider, in consideration
for improved lease terms.
17. On November 17, 1999, Ask Jeeves issued 5,875 shares of common stock in
connection with the purchase of assets from Excellerate LLC with an
aggregate purchase price of $1,270,000.
18. On November 19, 1999, Ask Jeeves merged with Net Effect Systems, Inc.,
pursuant to which all outstanding shares of Net Effect were converted into
1,631,863 shares of its common stock with an aggregate value of $210
million, and all outstanding options were converted into options to
purchase approximately 497,353 shares of our common stock with a value of
$58.8 million.
19. On January 25, 2000, Ask Jeeves entered into an Agreement and Plan of
Merger with Direct Hit Technologies, Inc., pursuant to which on the closing
date of February 2, 2000, all outstanding shares of Direct Hit were
converted into 4,751,878 million shares of our common stock with a value of
$456.0 million, and all outstanding options were converted into options to
purchase 331,596 shares of our common stock with a value of $25.8 million.
20. On January 28, 2000, Ask Jeeves entered into an Agreement and Plan of
Merger with The Evergreen Project, Inc., pursuant to which Ask Jeeves
issued 18,896 shares of its common stock with an aggregate purchase price
of $1,950,000.
With respect to the grant of stock options described in paragraphs (1)-(4),
an exemption from registration was unnecessary in that none of the transactions
involved a 'sale' of securities as this term is used in Section 2(3) of the
Securities Act. The sale and issuance of securities and the exercise of options
described in paragraphs (1)-(4) above were deemed to be exempt from registration
under the Securities Act by virtue of Rule 701 promulgated thereunder in that
they were offered and sold either pursuant to a written compensatory benefit
plan or pursuant to a written contract relating to compensation, as provided in
Rule 701. The sale and issuance of securities described in paragraphs (5)-(20)
above were deemed to be exempt from registration under the Securities Act by
virtue of Rule 4(2) or Regulation D promulgated thereunder.
II-3
<PAGE>
Appropriate legends are affixed to the stock certificates issued in the
aforementioned transactions. Similar legends were imposed in connection with any
subsequent sales of any of these securities. All recipients either received
adequate information about Ask Jeeves or had access, through employment or other
relationships, to such information.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES.
(a) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1* Certificate of Incorporation of the Registrant.
3.2* Bylaws of the Registrant.
4.1* Reference is made to Exhibit 3.1.
4.2* Specimen Certificate for Registrant's Common Stock.
4.3* Warrant to purchase 15,000 shares of Common Stock granted by
the Registrant to Antenna Group PR dated as of June 30,
1998.
4.4* Warrant to purchase 20,000 shares of Common Stock granted by
the Registrant to Antenna Group PR dated as of July 31,
1998.
4.5* Warrant to purchase 8,000 shares of Common Stock granted by
the Registrant to Antenna Group PR dated as of May 31,
1998.
4.6* Warrant to purchase 5,000 shares of Common Stock granted by
the Registrant to Soren Jacobsen dated as of March 11,
1999.
5.1 Opinion of Cooley Godward LLP.
10.1* Amended and Restated 1996 Equity Incentive Plan.
10.2* Form of Option Agreement for the Amended and Restated 1996
Equity Incentive Plan.
10.3.1* 1999 Equity Incentive Plan.
10.3.2* 1999 Equity Incentive Plan, As Amended.
10.4* Form of Option Agreement for the 1999 Equity Incentive Plan.
10.5.1* 1999 Employee Stock Purchase Plan.
10.5.2* 1999 Employee Stock Purchase Plan, As Amended.
10.6* Commercial Office Lease dated as of August 20, 1997, by and
between Eat/ Work Development, L.P. and the Roda Group
Venture Development Company.
10.7* Commercial Office Lease dated as of August 14, 1998, by and
between Eat/ Work Development, L.P. and the Roda
Development Company.
10.8* Commercial Office Lease dated as of November 15, 1998, by
and between Eat/Work Development, L.P. and the Roda
Development Company.
10.9* Commercial Office Lease dated as of May 15, 1998, by and
between Eat/Work Development, L.P. and the Registrant.
10.10* Lease Agreement dated as of January 26, 1999, by and between
Parker Associates and the Registrant.
10.11* Assignment and Assumption of Standard Commercial Office
Lease for Eat/Work Development dated as of January 1,
1999, by and between the Roda Group Development Company,
L.L.C. and the Registrant (relating to 918 Parker Street,
Suite A-14, Berkeley, CA).
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -----------
<C> <S>
10.12* License Agreement dated as of October 2, 1998, between the
Registrant and Compaq Computer Corporation.
10.13* License and Development Agreement dated as of September 30,
1999, between the Registrant and Compaq Computer
Corporation.
10.14* Consulting Services Agreement dated as of December 14, 1998,
by and between the Registrant and the Roda Development
Group.
10.15* Offer letter dated as of April 16, 1999, by and between the
Registrant and M. Bruce Nakao.
10.16* Offer letter dated as of January 11, 1999, by and between
the Registrant and Laurence G. Fishkin.
10.17.1* Offer letter dated as of January 18, 1999, by and between
the Registrant and Edward D. Briscoe III.
10.17.2* Offer Letter dated June 1, 1999, by and between Registrant
and Edward D. Briscoe III, as amended.
10.18* Offer letter dated as of January 5, 1999, by and between the
Registrant and Frank A. Vaculin.
10.19.1* Offer letter dated as of May 22, 1998, by and between the
Registrant and Robert W. Wrubel.
10.19.2* Offer letter dated June 1, 1999, by and between Registrant
and Robert W. Wrubel, as amended.
10.20* Common Stock and Warrant To Purchase Common Stock Purchase
Agreement dated as of August 20, 1997, by and between the
Registrant, and each of Daniel H. Miller, Roger A. Strauch
and The Roda Group Venture Development Company, LLC.
10.21* Common Stock Subscription Agreement, dated as of June 26,
1998, by and between the Registrant and certain investors
of the Registrant.
10.22* Common Stock Subscription Agreement, dated as of August,
1998, by and between the Registrant and certain investors
of the Registrant.
10.23* Series A Preferred Stock Purchase Agreement dated as of
November 13, 1998, by and between the Registrant and
certain investors of the Registrant.
10.24* Series B Preferred Stock Purchase Agreement dated as of
February 24, 1999, by and between the Registrant and
certain investors of the Registrant.
10.25* Asset Purchase Agreement dated as of April 16, 1999, by and
between the Registrant and Lumina Decision Systems, Inc.
10.26* Form of Indemnity Agreement by and between the Registrant
and each of its directors and executive officers.
10.27* Assignment and Assumption of Standard Commercial Office
Lease for EAT/Work development dated as of January 1,
1999, by and between the Roda Group Development Company,
LLC and the Registrant (relating to 918 Parker Street,
Suite A-1-1 and A-1-2, Berkeley, CA).
10.28* Office Lease dated as of April 29, 1999, by and between
Emery Station Associates, L.L.C. and the Registrant.
10.29* Offer Letter dated as of May 27, 1999, by and between the
Registrant and George S. Lichter.
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -----------
<C> <S>
10.30* Master Lease Agreement dated as of June 15, 1999, by and
between the Registrant and Comdisco, Inc.
10.31* Forms of Promissory Note and Stock Pledge Agreement for
loans to executive officers.
10.32** Agreement and Plan of Merger and Reorganization dated
November 19, 1999, by and between the Registrant, Net
Effect Systems, Inc. and Neutral Acquisition Corp.
10.33**** Agreement and Plan of Merger and Reorganization dated
January 25, 2000, by and between the Registrant, Direct
Hit Technologies, Inc. and Answer Acquisition Corp.
10.34*** Offer letter dated September 24, 1999, by and between
Registrant and Enrique Salem.
10.35*** Form of Registration Rights Agreement, between the
Registrant and Stockholders of Net Effect Systems, Inc.
10.36 Office Lease dated as of February 24, 2000, by and between
Oakland City Center LLC and the Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of Deloitte & Touche LLP.
23.3 Consent of PricewaterhouseCoopers LLP.
23.4 Consent of Cooley Godward LLP. Reference is made to Exhibit
5.1.
24.1 Power of attorney. Reference is made to Page II-8.
27.1+ Financial Data Schedule.
</TABLE>
- ------------------------
* Previously filed with Registrant's S-1 Registration Statement
No. 333-77539.
** Previously filed with Registrant's Current Report on Form 8-K, as filed with
the Securities and Exchange Commission on November 18, 1999.
*** Previously filed with Registrant's S-1 Registration Statement
No. 333-95691.
****Previously filed with Registrant's Current Report on Form 8-K, as filed with
the Securities and Exchange Commission on February 14, 2000.
+ Previously filed.
(b) FINANCIAL STATEMENT SCHEDULES.
All schedules have been omitted because the information required to be
set forth therein is not applicable or is shown in the combined financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreement, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling
II-6
<PAGE>
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon rule 430A and contained in a form
of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) of
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purposes of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Emeryville,
State of California, on March 9, 2000.
<TABLE>
<S> <C> <C>
ASK JEEVES, INC.
By: /s/ CHRISTINE M. DAVIS
-----------------------------------------
Christine M. Davis
Vice President and Corporate Controller
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
* President and Chief Executive
-------------------------------------- Officer (PRINCIPAL EXECUTIVE March 9, 2000
Robert W. Wrubel OFFICER)
*
-------------------------------------- Chief Financial Officer March 9, 2000
M. Bruce Nakao (PRINCIPAL FINANCIAL OFFICER)
/s/ CHRISTINE M. DAVIS Vice President and Corporate
-------------------------------------- Controller (PRINCIPAL March 9, 2000
Christine M. Davis ACCOUNTING OFFICER)
*
-------------------------------------- Chairman of the Board of March 9, 2000
Roger A. Strauch Directors
*
-------------------------------------- Director March 9, 2000
A. George (Skip) Battle
*
-------------------------------------- Director March 9, 2000
Garrett Gruener
*
-------------------------------------- Director March 9, 2000
Daniel J. Nova
</TABLE>
II-8
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
*
-------------------------------------- Director March 9, 2000
Benjamin M. Rosen
*
-------------------------------------- Director March 9, 2000
Geoffrey Y. Yang
/s/ CHRISTINE M. DAVIS
--------------------------------------
Christine M. Davis
ATTORNEY-IN-FACT
</TABLE>
II-9
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1* Certificate of Incorporation of the Registrant.
3.2* Bylaws of the Registrant.
4.1* Reference is made to Exhibit 3.1.
4.2* Specimen Certificate for Registrant's Common Stock.
4.3* Warrant to purchase 15,000 shares of Common Stock granted by
the Registrant to Antenna Group PR dated as of June 30,
1998.
4.4* Warrant to purchase 20,000 shares of Common Stock granted by
the Registrant to Antenna Group PR dated as of July 31,
1998.
4.5* Warrant to purchase 8,000 shares of Common Stock granted by
the Registrant to Antenna Group PR dated as of May 31,
1998.
4.6* Warrant to purchase 5,000 shares of Common Stock granted by
the Registrant to Soren Jacobsen dated as of March 11,
1999.
5.1 Opinion of Cooley Godward LLP.
10.1* Amended and Restated 1996 Equity Incentive Plan.
10.2* Form of Option Agreement for the Amended and Restated 1996
Equity Incentive Plan.
10.3.1* 1999 Equity Incentive Plan.
10.3.2* 1999 Equity Incentive Plan, As Amended.
10.4* Form of Option Agreement for the 1999 Equity Incentive Plan.
10.5.1* 1999 Employee Stock Purchase Plan.
10.5.2* 1999 Employee Stock Purchase Plan, As Amended.
10.6* Commercial Office Lease dated as of August 20, 1997, by and
between Eat/ Work Development, L.P. and the Roda Group
Venture Development Company.
10.7* Commercial Office Lease dated as of August 14, 1998, by and
between Eat/ Work Development, L.P. and the Roda
Development Company.
10.8* Commercial Office Lease dated as of November 15, 1998, by
and between Eat/Work Development, L.P. and the Roda
Development Company.
10.9* Commercial Office Lease dated as of May 15, 1998, by and
between Eat/Work Development, L.P. and the Registrant.
10.10* Lease Agreement dated as of January 26, 1999, by and between
Parker Associates and the Registrant.
10.11* Assignment and Assumption of Standard Commercial Office
Lease for Eat/Work Development dated as of January 1,
1999, by and between the Roda Group Development Company,
L.L.C. and the Registrant (relating to 918 Parker Street,
Suite A-14, Berkeley, CA).
10.12* License Agreement dated as of October 2, 1998, between the
Registrant and Compaq Computer Corporation.
10.13* License and Development Agreement dated as of September 30,
1999, between the Registrant and Compaq Computer
Corporation.
10.14* Consulting Services Agreement dated as of December 14, 1998,
by and between the Registrant and the Roda Development
Group.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -----------
<C> <S>
10.15* Offer letter dated as of April 16, 1999, by and between the
Registrant and M. Bruce Nakao.
10.16* Offer letter dated as of January 11, 1999, by and between
the Registrant and Laurence G. Fishkin.
10.17.1* Offer letter dated as of January 18, 1999, by and between
the Registrant and Edward D. Briscoe III.
10.17.2* Offer Letter dated June 1, 1999, by and between Registrant
and Edward D. Briscoe III, as amended.
10.18* Offer letter dated as of January 5, 1999, by and between the
Registrant and Frank A. Vaculin.
10.19.1* Offer letter dated as of May 22, 1998, by and between the
Registrant and Robert W. Wrubel.
10.19.2* Offer letter dated June 1, 1999, by and between Registrant
and Robert W. Wrubel, as amended.
10.20* Common Stock and Warrant To Purchase Common Stock Purchase
Agreement dated as of August 20, 1997, by and between the
Registrant, and each of Daniel H. Miller, Roger A. Strauch
and The Roda Group Venture Development Company, LLC.
10.21* Common Stock Subscription Agreement, dated as of June 26,
1998, by and between the Registrant and certain investors
of the Registrant.
10.22* Common Stock Subscription Agreement, dated as of August,
1998, by and between the Registrant and certain investors
of the Registrant.
10.23* Series A Preferred Stock Purchase Agreement dated as of
November 13, 1998, by and between the Registrant and
certain investors of the Registrant.
10.24* Series B Preferred Stock Purchase Agreement dated as of
February 24, 1999, by and between the Registrant and
certain investors of the Registrant.
10.25* Asset Purchase Agreement dated as of April 16, 1999, by and
between the Registrant and Lumina Decision Systems, Inc.
10.26* Form of Indemnity Agreement by and between the Registrant
and each of its directors and executive officers.
10.27* Assignment and Assumption of Standard Commercial Office
Lease for EAT/Work development dated as of January 1,
1999, by and between the Roda Group Development Company,
LLC and the Registrant (relating to 918 Parker Street,
Suite A-1-1 and A-1-2, Berkeley, CA).
10.28* Office Lease dated as of April 29, 1999, by and between
Emery Station Associates, L.L.C. and the Registrant.
10.29* Offer Letter dated as of May 27, 1999, by and between the
Registrant and George S. Lichter.
10.30* Master Lease Agreement dated as of June 15, 1999, by and
between the Registrant and Comdisco, Inc.
10.31* Forms of Promissory Note and Stock Pledge Agreement for
loans to executive officers.
10.32** Agreement and Plan of Merger and Reorganization dated
November 19, 1999, by and between the Registrant, Net
Effect Systems, Inc. and Neutral Acquisition Corp.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -----------
<C> <S>
10.33**** Agreement and Plan of Merger and Reorganization dated
January 25, 2000, by and between the Registrant, Direct
Hit Technologies, Inc. and Answer Acquisition Corp.
10.34*** Offer letter dated September 24, 1999, by and between
Registrant and Enrique Salem.
10.35*** Form of Registration Rights Agreement, between the
Registrant and Stockholders of Net Effect Systems, Inc.
10.36 Office Lease dated as of February 24, 2000, by and between
Oakland City Center LLC and the Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of Deloitte & Touche LLP.
23.3 Consent of PricewaterhouseCoopers LLP.
23.4 Consent of Cooley Godward LLP. Reference is made to Exhibit
5.1.
24.1 Power of attorney. Reference is made to Page II-8.
27.1+ Financial Data Schedule.
</TABLE>
- ------------------------
* Previously filed with Registrant's S-1 Registration Statement, No.
333-77539.
** Previously filed with Registrant's Current Report on Form 8-K, filed with
the Securities and Exchange Commission on November 18, 1999.
*** Previously filed with Registrant's S-1 Registration Statement No. 333-95691.
****Previously filed with Registrant's Current Report on Form 8-K, filed with
the Securities and Exchange Commission on February 14, 2000.
+ Previously Filed.
<PAGE>
ASK JEEVES, INC.
COMMON STOCK, $0.001 PAR VALUE PER SHARE
UNDERWRITING AGREEMENT
, 2000
Goldman, Sachs & Co.
Chase Securities Inc.
FleetBoston Robertson Stephens Inc.
U.S. Bancorp Piper Jaffray Inc.
As representatives of the several Underwriters
named in Schedule I hereto,
c/o Goldman, Sachs & Co.,
85 Broad Street,
New York, New York 10004.
Ladies and Gentlemen:
Ask Jeeves, Inc., a Delaware corporation (the "Company"), proposes,
subject to the terms and conditions stated herein, to issue and sell to the
Underwriters named in Schedule I hereto (the "Underwriters") an aggregate of
2,100,000 shares and, at the election of the Underwriters, up to 315,000
additional shares of Common Stock, $0.001 par value per share ("Stock") of the
Company and the stockholders of the Company designated as the Principal Selling
Stockholders named in Schedule II hereto (the "Principal Selling Stockholders")
and the stockholders of the Company designated as the Other Selling Stockholders
named in Schedule II hereto (the "Other Selling Stockholders" and together with
the Principal Selling Stockholders, the "Selling Stockholders") propose, subject
to the terms and conditions stated herein, to sell to the Underwriters an
aggregate of 700,000 shares of Stock. The aggregate of 2,100,000 shares to be
sold by the Company and the Selling Stockholders is herein called the "Firm
Shares" and the aggregate of 315,000 additional shares to be sold by the Company
is herein called the "Optional Shares". The Firm Shares and the Optional Shares
that the Underwriters elect to purchase pursuant to Section 2 hereof are herein
collectively called the "Shares".
1. (a) The Company represents and warrants to, and agrees with,
each of the Underwriters that:
(i) A registration statement on Form S-1 (File No. 333-30494)
(the "Initial Registration Statement") in respect of the Shares has been
filed with the Securities and Exchange Commission (the "Commission"); the
Initial Registration Statement and any post-effective amendment thereto,
each in the form heretofore delivered to you, and, excluding exhibits
thereto, to you for each of the other Underwriters, have been declared
effective by the Commission in such form; other than a registration
statement, if any, increasing the size of the
<PAGE>
offering (a "Rule 462(b) Registration Statement"), filed pursuant to Rule
462(b) under the Securities Act of 1933, as amended (the "Act"), which
became effective upon filing, no other document with respect to the
Initial Registration Statement has heretofore been filed with the
Commission; and no stop order suspending the effectiveness of the Initial
Registration Statement, any post-effective amendment thereto or the Rule
462(b) Registration Statement, if any, has been issued and no proceeding
for that purpose has been initiated or, to the knowledge of the Company,
threatened by the Commission (any preliminary prospectus included in the
Initial Registration Statement or filed with the Commission pursuant to
Rule 424(a) of the rules and regulations of the Commission under the Act
is hereinafter called a "Preliminary Prospectus"; the various parts of
the Initial Registration Statement and the Rule 462(b) Registration
Statement, if any, including all exhibits thereto and including the
information contained in the form of final prospectus filed with the
Commission pursuant to Rule 424(b) under the Act in accordance with
Section 5(a) hereof and deemed by virtue of Rule 430A under the Act to be
part of the Initial Registration Statement at the time it was declared
effective, each as amended at the time such part of the Initial
Registration Statement became effective or such part of the Rule 462(b)
Registration Statement, if any, became or hereafter becomes effective,
are hereinafter collectively called the "Registration Statement"; and
such final prospectus, in the form first filed pursuant to Rule 424(b)
under the Act, is hereinafter called the "Prospectus";
(ii) No order preventing or suspending the use of any
Preliminary Prospectus has been issued by the Commission, and each
Preliminary Prospectus, at the time of filing thereof, conformed in all
material respects to the requirements of the Act and the rules and
regulations of the Commission thereunder, and did not contain an untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in the
light of the circumstances under which they were made, not misleading;
PROVIDED, HOWEVER, that this representation and warranty shall not apply
to any statements or omissions made in reliance upon and in conformity
with information furnished in writing to the Company by an Underwriter
through Goldman, Sachs & Co. expressly for use therein or by a Selling
Stockholder expressly for use in the preparation of the answers therein
to Items 7 and 11(l) of Form S-1;
(iii) The Registration Statement conforms, and the Prospectus and
any further amendments or supplements to the Registration Statement or
the Prospectus will conform, in all material respects to the requirements
of the Act and the rules and regulations of the Commission thereunder and
do not and will not, as of the applicable effective date as to the
Registration Statement and any amendment thereto and as of the applicable
filing date as to the Prospectus and any amendment or supplement thereto,
contain an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading; PROVIDED, HOWEVER, that this
representation and warranty shall not apply to any statements or
omissions made in reliance upon and in conformity with information
furnished in writing to the Company by an Underwriter through Goldman,
Sachs & Co. expressly for use therein or by a Selling Stockholder
expressly for use in the preparation of the answers therein to Items 7
and 11(l) of Form S-1;
2
<PAGE>
(iv) Neither the Company nor any of its subsidiaries has
sustained since the date of the latest audited financial statements
included in the Prospectus any material loss or interference with its
business from fire, explosion, flood or other calamity, whether or not
covered by insurance, or from any labor dispute or court or governmental
action, order or decree, otherwise than as set forth or contemplated in
the Prospectus; and, since the respective dates as of which information
is given in the Registration Statement and the Prospectus, there has not
been any change in the capital stock (other than in connection with the
exercise of outstanding stock options described in the Prospectus under
the caption "Capitalization") or long-term debt of the Company or any of
its subsidiaries or any material adverse change, or any development
involving a prospective material adverse change, in or affecting the
general affairs, management, financial position, stockholders' equity or
results of operations of the Company and its subsidiaries (a "Material
Adverse Effect"), otherwise than as set forth or contemplated in the
Prospectus;
(v) The Company and its subsidiaries own no real property, have
good and marketable title to all personal property owned by them, free
and clear of all liens, encumbrances and defects except such as are
described in the Prospectus or such as do not materially affect the value
of such property and do not interfere with the use made and proposed to
be made of such property by the Company and its subsidiaries; and any
real property and buildings held under lease by the Company and its
subsidiaries are held by them under valid, subsisting and enforceable
leases with such exceptions as are not material and do not interfere with
the use made and proposed to be made of such property and buildings by
the Company and its subsidiaries;
(vi) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State of
Delaware, with power and authority (corporate and other) to own its
properties and conduct its business as described in the Prospectus, and
has been duly qualified as a foreign corporation for the transaction of
business and is in good standing under the laws of each other
jurisdiction in which it owns or leases properties or conducts any
business so as to require such qualification, or is subject to no
material liability or disability by reason of the failure to be so
qualified in any such jurisdiction; and each subsidiary of the Company
has been duly incorporated and is validly existing as a corporation in
good standing under the laws of its jurisdiction of incorporation;
(vii) The Company has an authorized capitalization as set forth
in the Prospectus, and all of the issued shares of capital stock of the
Company have been duly and validly authorized and issued, are fully paid
and non-assessable and conform to the description of the Stock contained
in the Prospectus; and all of the issued shares of capital stock of each
subsidiary of the Company have been duly and validly authorized and
issued, are fully paid and non-assessable and (except for directors'
qualifying shares) are owned directly or indirectly by the Company, free
and clear of all liens, encumbrances, equities or claims;
(viii) The unissued Shares to be issued and sold by the Company to
the Underwriters hereunder have been duly and validly authorized and,
when issued and delivered against
3
<PAGE>
payment therefor as provided herein, will be duly and validly issued and
fully paid and non-assessable and will conform to the description of the
Stock contained in the Prospectus;
(ix) The issue and sale of the Shares to be sold by the Company
and the compliance by the Company with all of the provisions of this
Agreement and the consummation of the transactions herein contemplated
will not conflict with or result in a breach or violation of any of the
terms or provisions of, or constitute a default under, any indenture,
mortgage, deed of trust, loan agreement or other material agreement or
instrument to which the Company or any of its subsidiaries is a party or
by which the Company or any of its subsidiaries is bound or to which any
of the property or assets of the Company or any of its subsidiaries is
subject, nor will such action result in any violation of the provisions
of the Certificate of Incorporation or By-laws of the Company or any
statute or any order, rule or regulation of any court or governmental
agency or body having jurisdiction over the Company or any of its
subsidiaries or any of their properties; and no consent, approval,
authorization, order, registration or qualification of or with any such
court or governmental agency or body is required for the issue and sale
of the Shares or the consummation by the Company of the transactions
contemplated by this Agreement, except the registration under the Act of
the Shares and such consents, approvals, authorizations, registrations or
qualifications as may be required under state securities or Blue Sky laws
or the bylaws, rules and regulations of the National Association of
Securities Dealers, Inc. (the "NASD") in connection with the purchase and
distribution of the Shares by the Underwriters;
(x) Neither the Company nor any of its subsidiaries is in
violation of its Certificate of Incorporation or By-laws or in default in
the performance or observance of any material obligation, agreement,
covenant or condition contained in any indenture, mortgage, deed of
trust, loan agreement, lease or other material agreement or instrument to
which it is a party or by which it or any of its properties may be bound;
(xi) The statements set forth in the Prospectus under the
caption "Description of Capital Stock", insofar as they purport to
constitute a summary of the terms of the Stock are accurate, complete and
fair;
(xii) Other than as set forth in the Prospectus, there are no
legal or governmental proceedings pending to which the Company or any of
its subsidiaries is a party or of which any property of the Company or
any of its subsidiaries is the subject which, if determined adversely to
the Company or any of its subsidiaries, would individually or in the
aggregate have a material adverse effect on the current or future
consolidated financial position, stockholders' equity or results of
operations of the Company and its subsidiaries; and, to the best of the
Company's knowledge, no such proceedings are threatened or contemplated
by governmental authorities or threatened by others;
(xiii) The Company is not and, after giving effect to the offering
and sale of the Shares, will not be an "investment company", as such term
is defined in the Investment Company Act of 1940, as amended (the
"Investment Company Act");
4
<PAGE>
(xiv) Neither the Company nor any of its affiliates does business
with the government of Cuba or with any person or affiliate located in
Cuba within the meaning of Section 517.075, Florida Statutes;
(xv) Ernst & Young LLP, who have certified certain financial
statements of the Company and its subsidiaries, and Deloitte & Touche
LLP, who have certified certain financial statements of Direct Hit
Technologies, Inc., are each independent public accountants as required
by the Act and the rules and regulations of the Commission thereunder;
and
(xvi) The Company has reviewed its operations and that of its
subsidiaries and has received representations from any third parties with
which the Company or any of its subsidiaries has a material relationship
to evaluate the extent to which the business or operations of the Company
or any of its subsidiaries has been or will be affected by the Year 2000
Problem. As a result of such review and based on the representations
received from such third parties, the Company has no reason to believe,
and does not believe, that the Year 2000 Problem has had or will have
Material Adverse Effect. The "Year 2000 Problem" as used herein means
any significant risk that computer hardware or software used in the
receipt, transmission, processing, manipulation, storage, retrieval,
retransmission or other utilization of data or in the operation of
mechanical or electrical systems of any kind is not functioning or will
not function, in the case of dates or time periods occurring after
December 31, 1999, at least as effectively as in the case of dates or
time periods occurring prior to January 1, 2000; and
(xvii) The Company owns, or possesses adequate rights to use, all
material patents purported to be owned by it and that are necessary for
the conduct of its business; to the Company's knowledge, no valid United
States patent is or would be infringed by the activities of the Company,
except as would not have a Material Adverse Effect ; except as set forth
in the Prospectus, there are no actions, suits or judicial proceedings
pending relating to patents or proprietary information to which the
Company is a party or of which any property of the Company is subject,
and, to the knowledge of the Company, no actions, suits or judicial
proceedings are threatened by governmental authorities or, except as set
forth in the Prospectus, others, in each case except as would not result
in any Material Adverse Effect, or, to the Company's knowledge, in any
development which the Company reasonably expects to cause a Material
Adverse Effect. Except as described in the Prospectus, the Company is
not aware of any claim by others that the Company is infringing or
otherwise violating the patents or other intellectual property of others
and is not aware of any rights of third parties to any of the Company's
patent applications, licensed patents or licenses which could affect
materially the use thereof by the Company.
(b) Each of the Selling Stockholders severally represents and
warrants to, and agrees with, each of the Underwriters and the Company that:
(i) All consents, approvals, authorizations and orders
necessary for the execution and delivery by such Selling Stockholder of
this Agreement and the Power of Attorney and the
5
<PAGE>
Custody Agreement hereinafter referred to, and for the sale and delivery
of the Shares to be sold by such Selling Stockholder hereunder, have been
obtained; and such Selling Stockholder has full right, power and
authority to enter into this Agreement, the Power-of-Attorney and the
Custody Agreement and to sell, assign, transfer and deliver the Shares to
be sold by such Selling Stockholder hereunder;
(ii) The sale of the Shares to be sold by such Selling
Stockholder hereunder and the compliance by such Selling Stockholder with
all of the provisions of this Agreement, the Power of Attorney and the
Custody Agreement and the consummation of the transactions herein and
therein contemplated will not conflict with or result in a breach or
violation of any of the terms or provisions of, or constitute a default
under, any statute, indenture, mortgage, deed of trust, loan agreement or
other agreement or instrument to which such Selling Stockholder is a
party or by which such Selling Stockholder is bound or to which any of
the property or assets of such Selling Stockholder is subject, nor will
such action result in any violation of the provisions of [the Certificate
of Incorporation or By-laws of such Selling Stockholder if such Selling
Stockholder is a corporation, the Partnership Agreement of such Selling
Stockholder if such Selling Stockholder is a partnership or any statute
or any order, rule or regulation of any court or governmental agency or
body having jurisdiction over such Selling Stockholder or the property of
such Selling Stockholder;
(iii) Such Selling Stockholder has, and immediately prior to each
Time of Delivery (as defined in Section 4 hereof) such Selling
Stockholder will have, good and valid title to the Shares to be sold by
such Selling Stockholder hereunder, free and clear of all liens,
encumbrances, equities or claims; and, upon delivery of such Shares and
payment therefor pursuant hereto, good and valid title to such Shares,
free and clear of all liens, encumbrances, equities or claims, will pass
to the several Underwriters;
(iv) During the period beginning from the date hereof and
continuing to and including the date 90 days after the date of the
Prospectus, not to offer, sell contract to sell or otherwise dispose of,
except as provided in the Lock-up Agreement attached hereto as EXHIBIT A,
any securities of the Company that are substantially similar to the
Shares, including but not limited to any securities that are convertible
into or exchangeable for, or that represent the right to receive, Stock
or any such substantially similar securities (other than pursuant to
employee stock option plans existing on, or upon the conversion or
exchange of convertible or exchangeable securities outstanding as of, the
date of this Agreement), without your prior written consent, provided,
however, that up to eight percent of such Selling Stockholder's Shares
subject to such lock-up agreement may be sold on a pro rata basis
beginning 60 days following the date of the Prospectus;
(v) Such Selling Stockholder has not taken and will not take,
directly or indirectly, any action which is designed to or which has
constituted or which might reasonably be expected to cause or result in
stabilization or manipulation of the price of any security of the Company
to facilitate the sale or resale of the Shares;
(vi) To the extent that any statements or omissions made in the
Registration
6
<PAGE>
Statement, any Preliminary Prospectus, the Prospectus or any amendment or
supplement thereto are made in reliance upon and in conformity with
written information furnished to the Company by such Selling Stockholder
expressly for use therein, such Preliminary Prospectus and the
Registration Statement did, and the Prospectus and any further amendments
or supplements to the Registration Statement and the Prospectus, when
they become effective or are filed with the Commission, as the case may
be, will conform in all material respects to the requirements of the Act
and the rules and regulations of the Commission thereunder and will not
contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading;
(vii) In order to document the Underwriters' compliance with the
reporting and withholding provisions of the Tax Equity and Fiscal
Responsibility Act of 1982 with respect to the transactions herein
contemplated, such Selling Stockholder will deliver to you prior to or at
the First Time of Delivery (as hereinafter defined) a properly completed
and executed United States Treasury Department Form W-9 (or other
applicable form or statement specified by Treasury Department regulations
in lieu thereof);
(viii) Certificates in negotiable form representing all of the
Shares to be sold by such Selling Stockholder hereunder have been placed
in custody under a Custody Agreement, in the form heretofore furnished to
you (the "Custody Agreement"), duly executed and delivered by such
Selling Stockholder to [Name of Custodian], as custodian (the
"Custodian"), and such Selling Stockholder has duly executed and
delivered a Power of Attorney, in the form heretofore furnished to you
(the "Power of Attorney"), appointing the persons indicated in Schedule
II hereto, and each of them, as such Selling Stockholder's
attorneys-in-fact (the "Attorneys-in-Fact") with authority to execute and
deliver this Agreement on behalf of such Selling Stockholder, to
determine the purchase price to be paid by the Underwriters to the
Selling Stockholders as provided in Section 2 hereof, to authorize the
delivery of the Shares to be sold by such Selling Stockholder hereunder
and otherwise to act on behalf of such Selling Stockholder in connection
with the transactions contemplated by this Agreement and the Custody
Agreement; and
(ix) The Shares represented by the certificates held in custody
for such Selling Stockholder under the Custody Agreement are subject to
the interests of the Underwriters hereunder; the arrangements made by
such Selling Stockholder for such custody, and the appointment by such
Selling Stockholder of the Attorneys-in-Fact by the Power of Attorney,
are to that extent irrevocable; the obligations of the Selling
Stockholders hereunder shall not be terminated by operation of law,
whether by the death or incapacity of any individual Selling Stockholder
or, in the case of an estate or trust, by the death or incapacity of any
executor or trustee or the termination of such estate or trust, or in the
case of a partnership or corporation, by the dissolution of such
partnership or corporation, or by the occurrence of any other event; if
any individual Selling Stockholder or any such executor or trustee should
die or become incapacitated, or if any such estate or trust should be
terminated, or if any such partnership or corporation should be
dissolved, or if any other such event should occur, before the delivery
of the Shares hereunder, certificates representing the Shares shall be
delivered by or on behalf of
7
<PAGE>
the Selling Stockholders in accordance with the terms and conditions of
this Agreement and of the Custody Agreements; and actions taken by the
Attorneys-in-Fact pursuant to the Powers of Attorney shall be as valid as
if such death, incapacity, termination, dissolution or other event had
not occurred, regardless of whether or not the Custodian, the
Attorneys-in-Fact, or any of them, shall have received notice of such
death, incapacity, termination, dissolution or other event.
2. Subject to the terms and conditions herein set forth, (a) the
Company and each of the Selling Stockholders agree, severally and not jointly,
to sell to each of the Underwriters, and each of the Underwriters agrees,
severally and not jointly, to purchase from the Company and each of the Selling
Stockholders, at a purchase price per share of $.............., the number of
Firm Shares (to be adjusted by you so as to eliminate fractional shares)
determined by multiplying the aggregate number of Shares to be sold by the
Company and each of the Selling Stockholders as set forth opposite their
respective names in Schedule II hereto by a fraction, the numerator of which is
the aggregate number of Firm Shares to be purchased by such Underwriter as set
forth opposite the name of such Underwriter in Schedule I hereto and the
denominator of which is the aggregate number of Firm Shares to be purchased by
all of the Underwriters from the Company and all of the Selling Stockholders
hereunder and (b) in the event and to the extent that the Underwriters shall
exercise the election to purchase Optional Shares as provided below, the Company
agrees to sell to each of the Underwriters, and each of the Underwriters agrees,
severally and not jointly, to purchase from the Company, at the purchase price
per share set forth in clause (a) of this Section 2, that portion of the number
of Optional Shares as to which such election shall have been exercised (to be
adjusted by you so as to eliminate fractional shares) determined by multiplying
such number of Optional Shares by a fraction the numerator of which is the
maximum number of Optional Shares which such Underwriter is entitled to purchase
as set forth opposite the name of such Underwriter in Schedule I hereto and the
denominator of which is the maximum number of Optional Shares that all of the
Underwriters are entitled to purchase hereunder.
The Company hereby grants to the Underwriters the right to purchase at
their election up to 315,000 Optional Shares, at the purchase price per share
set forth in the paragraph above, for the sole purpose of covering sales of
shares in excess of the number of Firm Shares. Any such election to purchase
Optional Shares shall be made in proportion to the maximum number of Optional
Shares to be sold by the Company. Any such election to purchase Optional Shares
may be exercised only by written notice from you to the Company, given within a
period of 30 calendar days after the date of this Agreement and setting forth
the aggregate number of Optional Shares to be purchased and the date on which
such Optional Shares are to be delivered, as determined by you but in no event
earlier than the First Time of Delivery (as defined in Section 4 hereof) or,
unless you and the Company otherwise agree in writing, earlier than two or later
than ten business days after the date of such notice.
3. Upon the authorization by you of the release of the Firm Shares,
the several Underwriters propose to offer the Firm Shares for sale upon the
terms and conditions set forth in the Prospectus.
4. (a) The Shares to be purchased by each Underwriter hereunder,
in definitive form,
8
<PAGE>
and in such authorized denominations and registered in such names as Goldman,
Sachs & Co. may request upon at least forty-eight hours' prior notice to the
Company and the Selling Stockholders shall be delivered by or on behalf of the
Company and the Selling Stockholders to Goldman, Sachs & Co., through the
facilities of the Depository Trust Company ("DTC"), for the account of such
Underwriter, against payment by or on behalf of such Underwriter of the purchase
price therefor by wire transfer of Federal (same-day) funds to the account
specified by the Company and the Custodian, as their interests may appear, to
Goldman, Sachs & Co. at least forty-eight hours in advance. The Company will
cause the certificates representing the Shares to be made available for checking
and packaging at least twenty-four hours prior to the Time of Delivery (as
defined below) with respect thereto at the office of DTC or its designated
custodian (the "Designated Office"). The time and date of such delivery and
payment shall be, with respect to the Firm Shares, 9:30 a.m., New York time, on
............., 2000 or such other time and date as Goldman, Sachs & Co., the
Company and the Selling Stockholders may agree upon in writing, and, with
respect to the Optional Shares, 9:30 a.m., New York time, on the date specified
by Goldman, Sachs & Co. in the written notice given by Goldman, Sachs & Co. of
the Underwriters' election to purchase such Optional Shares, or such other time
and date as Goldman, Sachs & Co. and the Company may agree upon in writing.
Such time and date for delivery of the Firm Shares is herein called the "First
Time of Delivery", such time and date for delivery of the Optional Shares, if
not the First Time of Delivery, is herein called the "Second Time of Delivery",
and each such time and date for delivery is herein called a "Time of Delivery".
(b) The documents to be delivered at each Time of Delivery by
or on behalf of the parties hereto pursuant to Section 7 hereof, including the
cross receipt for the Shares and any additional documents requested by the
Underwriters pursuant to Section 7(k) hereof, will be delivered at the offices
of Cooley Godward LLP, 3000 El Camino Real, Palo Alto, California 94306-2155
(the "Closing Location"), and the Shares will be delivered at the Designated
Office, all at such Time of Delivery. A meeting will be held at the Closing
Location at .......p.m., New York City time, on the New York Business Day next
preceding such Time of Delivery, at which meeting the final drafts of the
documents to be delivered pursuant to the preceding sentence will be available
for review by the parties hereto. For the purposes of this Section 4, "New York
Business Day" shall mean each Monday, Tuesday, Wednesday, Thursday and Friday
which is not a day on which banking institutions in New York are generally
authorized or obligated by law or executive order to close.
5. The Company agrees with each of the Underwriters:
(a) To prepare the Prospectus in a form approved by you and to
file such Prospectus pursuant to Rule 424(b) under the Act not later than the
Commission's close of business on the second business day following the
execution and delivery of this Agreement, or, if applicable, such earlier time
as may be required by Rule 430A(a)(3) under the Act; to make no further
amendment or any supplement to the Registration Statement or Prospectus prior to
the last Time of Delivery which shall be disapproved by you promptly after
reasonable notice thereof; to advise you, promptly after it receives notice
thereof, of the time when any amendment to the Registration Statement has been
filed or becomes effective or any supplement to the Prospectus or any amended
Prospectus has been filed and to furnish you with copies thereof; to advise you,
promptly after it receives notice thereof, of the issuance by the Commission of
any stop order or of any order preventing or suspending the use of any
9
<PAGE>
Preliminary Prospectus or prospectus, of the suspension of the qualification of
the Shares for offering or sale in any jurisdiction, of the initiation or
threatening of any proceeding for any such purpose, or of any request by the
Commission for the amending or supplementing of the Registration Statement or
Prospectus or for additional information; and, in the event of the issuance of
any stop order or of any order preventing or suspending the use of any
Preliminary Prospectus or prospectus or suspending any such qualification,
promptly to use its best efforts to obtain the withdrawal of such order;
(b) Promptly from time to time to take such action as you may
reasonably request to qualify the Shares for offering and sale under the
securities laws of such jurisdictions as you may request and to comply with such
laws so as to permit the continuance of sales and dealings therein in such
jurisdictions for as long as may be necessary to complete the distribution of
the Shares, provided that in connection therewith the Company shall not be
required to qualify as a foreign corporation or to file a general consent to
service of process in any jurisdiction;
(c) Prior to 10:00 A.M., New York City time, on the New York
Business Day next succeeding the date of this Agreement and from time to time,
to furnish the Underwriters with copies of the Prospectus in New York City in
such quantities as you may reasonably request, and, if the delivery of a
prospectus is required at any time prior to the expiration of nine months after
the time of issue of the Prospectus in connection with the offering or sale of
the Shares and if at such time any events shall have occurred as a result of
which the Prospectus as then amended or supplemented would include an untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements therein, in the light of the circumstances under
which they were made when such Prospectus is delivered, not misleading, or, if
for any other reason it shall be necessary during such period to amend or
supplement the Prospectus in order to comply with the Act, to notify you and
upon your request to prepare and furnish without charge to each Underwriter and
to any dealer in securities as many copies as you may from time to time
reasonably request of an amended Prospectus or a supplement to the Prospectus
which will correct such statement or omission or effect such compliance, and in
case any Underwriter is required to deliver a prospectus in connection with
sales of any of the Shares at any time nine months or more after the time of
issue of the Prospectus, upon your request but at the expense of such
Underwriter, to prepare and deliver to such Underwriter as many copies as you
may request of an amended or supplemented Prospectus complying with Section
10(a)(3) of the Act;
(d) To make generally available to its securityholders as soon
as practicable, but in any event not later than eighteen months after the
effective date of the Registration Statement (as defined in Rule 158(c) under
the Act), an earnings statement of the Company and its subsidiaries (which need
not be audited) complying with Section 11(a) of the Act and the rules and
regulations of the Commission thereunder (including, at the option of the
Company, Rule 158);
(e) During the period beginning from the date hereof and
continuing to and including the date 90 days after the date of the Prospectus,
not to offer, sell, contract to sell or otherwise dispose of, except as provided
hereunder, any securities of the Company that are substantially similar to the
Shares, including but not limited to any securities that are convertible into or
exchangeable for, or that represent the right to receive, Stock or any such
substantially similar securities (other than pursuant to employee stock option
plans existing on, or upon the conversion or exchange of convertible or
10
<PAGE>
exchangeable securities outstanding as of, the date of this Agreement), without
your prior written consent;
(f) To furnish to its stockholders as soon as practicable after
the end of each fiscal year an annual report (including a balance sheet and
statements of income, stockholders' equity and cash flows of the Company and its
consolidated subsidiaries certified by independent public accountants) and, as
soon as practicable after the end of each of the first three quarters of each
fiscal year (beginning with the fiscal quarter ending after the effective date
of the Registration Statement), to make available to its stockholders
consolidated summary financial information of the Company and its subsidiaries
for such quarter in reasonable detail;
(g) During a period of five years from the effective date of
the Registration Statement, to furnish to you copies of all reports or other
communications (financial or other) furnished to stockholders, and to deliver to
you (i) as soon as they are available, copies of any reports and financial
statements furnished to or filed with the Commission or any national securities
exchange on which any class of securities of the Company is listed; and (ii)
such additional information concerning the business and financial condition of
the Company as you may from time to time reasonably request (such financial
statements to be on a consolidated basis to the extent the accounts of the
Company and its subsidiaries are consolidated in reports furnished to its
stockholders generally or to the Commission);
(h) To use the net proceeds received by it from the sale of the
Shares pursuant to this Agreement in the manner specified in the Prospectus
under the caption "Use of Proceeds"; and
(i) To use its best efforts to list for quotation the Shares on
the National Association of Securities Dealers Automated Quotations National
Market System ("Nasdaq"); and
(j) If the Company elects to rely upon Rule 462(b), the Company
shall file a Rule 462(b) Registration Statement with the Commission in
compliance with Rule 462(b) by 10:00 P.M., Washington, D.C. time, on the date of
this Agreement, and the Company shall at the time of filing either pay to the
Commission the filing fee for the Rule 462(b) Registration Statement or give
irrevocable instructions for the payment of such fee pursuant to Rule 111(b)
under the Act.
6. The Company and each of the Selling Stockholders covenant and
agree with one another and with the several Underwriters that (a) the Company
and such Selling Stockholder will pay or cause to be paid a pro rata share based
on the number of Shares to be sold by the Company and the Selling Stockholders
the following: (i) the fees, disbursements and expenses of the Company's counsel
and accountants in connection with the registration of the Shares under the Act
and all other expenses in connection with the preparation, printing and filing
of the Registration Statement, any Preliminary Prospectus and the Prospectus and
amendments and supplements thereto and the mailing and delivering of copies
thereof to the Underwriters and dealers; (ii) the cost of printing or producing
any Agreement among Underwriters, this Agreement, the Blue Sky Memorandum,
closing documents (including any compilations thereof) and any other documents
in connection with the offering, purchase, sale and delivery of the Shares;
(iii) all expenses in connection with the qualification of the Shares for
offering and sale under state securities laws as provided in Section 5(b)
hereof, including
11
<PAGE>
the reasonable fees and disbursements of counsel for the Underwriters in
connection with such qualification and in connection with the Blue Sky survey
(iv) all fees and expenses in connection with listing the Shares on the Nasdaq;
(v) the filing fees incident to, and disbursements of counsel for the
Underwriters in connection with, securing any required review by the National
Association of Securities Dealers, Inc. of the terms of the sale of the Shares;
and (b) the Company will pay or cause to be paid: (i) the cost of preparing
stock certificates; (ii) the cost and charges of any transfer agent or registrar
and (iii) all other costs and expenses incident to the performance of its
obligations hereunder which are not otherwise specifically provided for in this
Section; and (c) such Selling Stockholder will pay or cause to be paid all costs
and expenses incident to the performance of such Selling Stockholder's
obligations hereunder which are not otherwise specifically provided for in this
Section, including (i) any reasonable fees and expenses of counsel for such
Selling Stockholder, (ii) such Selling Stockholder's pro rata share of the fees
and expenses of the Attorneys-in-Fact and the Custodian, and (iii) all expenses
and taxes incident to the sale and delivery of the Shares to be sold by such
Selling Stockholder to the Underwriters hereunder. It is understood, however,
that the Company shall bear, and the Selling Stockholders shall not be required
to pay or to reimburse the Company for, the cost of any other matters not
directly relating to the sale and purchase of the Shares pursuant to this
Agreement, and that, except as provided in this Section, and Sections 8 and 11
hereof, the Underwriters will pay all of their own costs and expenses, including
the fees of their counsel, stock transfer taxes on resale of any of the Shares
by them, and any advertising expenses connected with any offers they may make.
7. The obligations of the Underwriters hereunder, as to the Shares to
be delivered at each Time of Delivery, shall be subject, in their discretion, to
the condition that all representations and warranties and other statements of
the Company and of the Selling Stockholders herein are, at and as of the such
Time of Delivery, true and correct, the condition that the Company and the
Selling Stockholders shall have performed all of its and their obligations
hereunder theretofore to be performed, and the following additional conditions:
(a) The Prospectus shall have been filed with the Commission
pursuant to Rule 424(b) within the applicable time period prescribed for such
filing by the rules and regulations under the Act and in accordance with Section
5(a) hereof; if the Company has elected to rely upon Rule 462(b), the Rule
462(b) Registration Statement shall have become effective by 10:00 P.M.,
Washington, D.C. time, on the date of this Agreement; no stop order suspending
the effectiveness of the Registration Statement or any part thereof shall have
been issued and no proceeding for that purpose shall have been initiated or
threatened by the Commission; and all requests for additional information on the
part of the Commission shall have been complied with to your reasonable
satisfaction;
(b) Brobeck, Phleger & Harrison LLP, counsel for the
Underwriters, shall have furnished to you such written opinion or opinions (a
draft of each such opinion is attached as Annex II(a) hereto), dated such Time
of Delivery, with respect to the matters covered in paragraphs (i), (ii), (vii),
(xi), and (xiii) of subsection (c) below as well as such other related matters
as you may reasonably request, and such counsel shall have received such papers
and information as they may reasonably request to enable them to pass upon such
matters;
12
<PAGE>
(c) Cooley Godward LLP, counsel for the Company, shall have
furnished to you their written opinion (a draft of such opinion is attached as
Annex II(b) hereto), dated such Time of Delivery, in form and substance
satisfactory to you, to the effect that:
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State of
Delaware, with corporate power and corporate authority to own its
properties and conduct its business as described in the Prospectus;
(ii) The Company has an authorized capitalization as set forth
in the Prospectus under the caption, "Capitalization", and all of the
issued shares of capital stock of the Company (including the Shares being
delivered at such Time of Delivery) described therein have been duly and
validly authorized and issued and are fully paid and non-assessable; and
the Shares conform in all material respects to the description of the
Stock contained in the Prospectus;
(iii) The Company has been duly qualified as a foreign
corporation for the transaction of business and is in good standing under
the laws of each other jurisdiction within the United States in which it
owns or leases properties or conducts any business so as to require such
qualification, or is subject to no material liability or disability by
reason of failure to be so qualified in any such jurisdiction (such
counsel being entitled to rely in respect of the opinion in this clause
upon opinions of local counsel and in respect of matters of fact upon
certificates of officers of the Company, provided that such counsel shall
state that they believe that both you and they are justified in relying
upon such opinions and certificates);
(iv) Each United States subsidiary of the Company has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of its jurisdiction of incorporation; and all of the
issued shares of capital stock of each such subsidiary have been duly and
validly authorized and issued, are fully paid and non-assessable, and
(except for directors' qualifying shares) are owned directly or
indirectly by the Company, free and clear of all liens, encumbrances,
equities or claims (such counsel being entitled to rely in respect of the
opinion in this clause upon opinions of local counsel and in respect of
matters of fact upon certificates of officers of the Company or its
subsidiaries, provided that such counsel shall state that they believe
that both you and they are justified in relying upon such opinions and
certificates);
(v) To such counsel's knowledge and other than as set forth in
the Prospectus, there are no legal or governmental proceedings pending to
which the Company or any of its subsidiaries is a party or of which any
property of the Company or any of its subsidiaries is the subject which,
if determined adversely to the Company or any of its subsidiaries, would
individually or in the aggregate have a material adverse effect on the
current or future consolidated financial position stockholders' equity or
results of operations of the Company and its subsidiaries; and, to the
best of such counsel's knowledge, no such proceedings are overtly
threatened by governmental authorities or others;
(vi) This Agreement has been duly authorized, executed and
delivered by the
13
<PAGE>
Company;
(vii) The issue and sale of the Shares being delivered at such
Time of Delivery to be sold by the Company and the compliance by the
Company with all of the provisions of this Agreement and the consummation
of the transactions herein set forth will not conflict with or result in
a breach or violation of any of the terms or provisions of, or constitute
a default under, any indenture, mortgage, deed of trust, loan agreement
or other agreement filed as an exhibit to the Registration Statement,
which such counsel believes constitute the only such agreements required
to be filed as exhibits to the Registration Statement, nor will such
action result in any violation of the provisions of the Certificate of
Incorporation or By-laws of the Company or any material statute or any
order, rule or regulation known to such counsel of any court or
governmental agency or body having jurisdiction over the Company or any
of its subsidiaries or any of their properties, except for the rules and
regulations of the NASD and state securities and Blue Sky Laws, as to
which such counsel need express no opinion;
(viii) To such counsel's knowledge, no consent, approval,
authorization, order, registration or qualification of or with any such
court or governmental agency or body is required for the issue and sale
of the Shares or the consummation by the Company of the transactions set
forth in this Agreement, except the registration under the Act of the
Shares, and such consents, approvals, authorizations, registrations or
qualifications as may be required under state securities or Blue Sky laws
or bylaws, rules and regulations of the NASD (as to which such counsel
need express no opinion) in connection with the purchase and distribution
of the Shares by the Underwriters;
(ix) Neither the Company nor any of its subsidiaries is in
violation of its Certificate of Incorporation or By-laws.
In addition, such counsel shall state the following: in
connection with the preparation of the Registration Statement and the
Prospectus it has participated in conferences with officers and
representatives of the Company and with its certified public accountants,
as well as with representatives of the Underwriters and their counsel.
At such conferences, the contents of the Registration Statement and the
Prospectus and related matters were discussed. Such counsel has not
independently verified, and accordingly, except as specified in
subparagraphs (ii) and (x), is not confirming and assumes no
responsibility for the accuracy or completeness of the statements
contained in the Registration Statement and the Prospectus. On the basis
of the foregoing, nothing has come to such counsel's attention that has
caused it to believe (i) that the Registrations Statement (except as to
the financial statements and other financial data therein, as to which
such counsel need express no belief) at the Effective Date contained
any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary in order to make the
statements therein not misleading , or (ii) that the Prospectus
(except as to the financial statements and other financial data
therein, as to which such counsel need express no belief) as of its
date or at the Time of Delivery, contained or contains any untrue
statement of a material fact or omitted or omits to state a material
fact necessary in order to make the statements therein, in the light
of the circumstances under which they were made, not misleading.
(x) The statements set forth in the Prospectus under the
caption "Description of Capital Stock", insofar as they purport to
constitute a summary of the terms of the Stock, to the extent required
with respect to such matters under the Act and rules and regulations
thereunder;
(xi) The Company is not an "investment company", as such term is
defined in the Investment Company Act; and
(xii) The Registration Statement and the Prospectus and any
further amendments and supplements thereto made by the Company prior to
such Time of Delivery (other than the financial statements and other
financial data therein, as to which such counsel need express no opinion)
comply as to form in all material respects with the requirements of the
Act and the rules and regulations thereunder; and such counsel does not
know of any amendment to the Registration Statement required to be filed
or of any contracts or other documents of a
14
<PAGE>
character required to be described in the Registration Statement or the
Prospectus, which are not filed or described as required.
(d) Townsend & Townsend, patent counsel for the Company, shall
have furnished to you their written opinion (a draft of such opinion is attached
as Annex II(c) hereto), dated such Time of Delivery, in form and substance
satisfactory to you, to the effect that:
(i) The Company is listed in the records of the United
States Patent and Trademark Office as the holder of record of the
patents listed on a schedule to such opinion (the "Patents") and
each of the applications listed on a schedule to such opinion (the
"Applications") or is in the process of being listed. To the
knowledge of such counsel, there are no claims of third parties
to any ownership interest or lien with respect to any of the
Patents or Applications. Such counsel is not aware of any
material defect in form in the preparation or filing of the
Applications on behalf of the Company except for those
Applications which have been abandoned as indicated on the
schedule to such opinion. To the knowledge of such counsel, the
Applications are being pursued by the Company. To the knowledge
of such counsel, the Company owns as its sole property the
Patents and pending Applications;
(ii) The Company is listed in the records of the
appropriate foreign offices as the sole holder of record of
each of the applications listed on a schedule to such opinion
(the "Foreign Applications"). To the knowledge of such counsel,
there are no claims of third parties to any ownership interest
or lien with respect to the Foreign Applications. Such counsel
is not aware of any material defect of form in the preparation
or filing of the Foreign Applications on behalf of the Company.
To the knowledge of such counsel,
15
<PAGE>
the Foreign Applications are being pursued by the Company. To the
knowledge of such counsel, the Company owns as its sole property
the pending Foreign Applications;
(iii) Such counsel knows of no reason why the Patents
are not valid as issued. Such counsel has no knowledge of any
reason why any patent to be issued as a result of any
Application or Foreign Application would not be valid or would
not afford the Company useful patent protection with respect
thereto;
(iv) As to the statements under the captions "Risk
Factors -- We rely on our intellectual property rights and may
be unable to protect those rights" and "Business --
Intellectual Property," nothing has come to the attention of
such counsel which caused them to believe that the
above-mentioned sections of the Registration Statement, the
Prospectus and any amendment or supplement thereto made
available and reviewed by such counsel, at the time such
Registration Statement became effective and at all times
subsequent thereto up to and on the Closing Date and on any
later date on which the Optional Shares are to be issued, as
the case may be, contained any untrue statement of a material
fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein, in light
of the circumstances under which they were made, not
misleading; and
(v) Except for the proceedings described in the
Registration Statement, such counsel knows of no material
action, suit, claim or proceeding relating to patents, patent
rights or licenses, trademarks or trademark rights, copyrights,
collaborative research, licenses or royalty arrangements or
agreements or trade secrets, know-how or proprietary
techniques, including processes and substances, owned by or
affecting the business or operations of the Company which are
pending or threatened against the Company or any of its
officers or directors.
(e) The respective counsel for each of the Selling
Stockholders, as indicated in Schedule II hereto, each shall have furnished to
you their written opinion with respect to each of the Selling Stockholders for
whom they are acting as counsel (a draft of each such opinion is attached as
Annex II(c) hereto), dated the First Time of Delivery, in form and substance
satisfactory to you, to the effect that:
(i) A Power-of-Attorney and a Custody Agreement have been duly
executed and delivered by such Selling Stockholder and constitute valid
and binding agreements of such Selling Stockholder in accordance with
their terms;
(ii) This Agreement has been duly executed and delivered by or
on behalf of such Selling Stockholder; and the sale of the Shares to be
sold by such Selling Stockholder hereunder and the compliance by such
Selling Stockholder with all of the provisions of this Agreement, the
Power-of-Attorney and the Custody Agreement and the consummation of the
transactions herein and therein contemplated will not conflict with or
result in a material breach or material violation of any terms or
provisions of, or constitute a default under, any statute, material
indenture, mortgage, deed of trust, loan agreement or other agreement or
instrument
16
<PAGE>
known to such counsel to which such Selling Stockholder is a party or by
which such Selling Stockholder is bound or to which any of the property
or assets of such Selling Stockholder is subject, nor will such action
result in any violation of the provisions of the Certificate of
Incorporation or By-laws of such Selling Stockholder if such Selling
Stockholder is a corporation, the Partnership Agreement of such Selling
Stockholder if such Selling Stockholder is a partnership or any order,
rule or regulation known to such counsel of any court or governmental
agency or body having jurisdiction over such Selling Stockholder or the
property of such Selling Stockholder;
(iii) To such counsel's knowledge, no consent, approval,
authorization or order of any court or governmental agency or body is
required for the consummation of the transactions contemplated by this
Agreement in connection with the Shares to be sold by such Selling
Stockholder hereunder, except such as have been obtained under the Act
and such as may be required under state securities or Blue Sky laws or
the bylaws, rules or regulations of the NASD in connection with the
purchase and distribution of such Shares by the Underwriters;
(iv) Immediately prior to such Time of Delivery, such Selling
Stockholder had, to such counsel's knowledge, good and valid title to the
Shares to be sold at the such Time of Delivery by such Selling
Stockholder under this Agreement, free and clear of all liens,
encumbrances, equities or claims, and full right, power and authority to
sell, assign, transfer and deliver the Shares to be sold by such Selling
Stockholder hereunder; and
(v) Upon delivery of and payment for the Shares to be sold by
such Selling Stockholder as provided in this Agreement, and upon
registration of such Shares in the stock records of the Company in the
names of the Underwriters or their nominees, the Underwriters will be the
owners of such Shares, free and clear of any adverse claim, provided that
(a) neither the Underwriters nor their nominees grant any right, title or
interest in or to such Shares to any person or entity prior to sale of
such Shares to the public, (b) the Underwriters are purchasing such
Shares in good faith and (c) the Underwriters, together with their
nominees (if any) hold such Shares without notice of any adverse claim.
In rendering the opinion in paragraph (iv), such counsel may rely upon a
certificate of such Selling Stockholder in respect of matters of fact as to
ownership of, and liens, encumbrances, equities or claims on, the Shares sold by
such Selling Stockholder, provided that such counsel shall state that they
believe that both you and they are justified in relying upon such certificate;
17
<PAGE>
(f) On the date of the Prospectus at a time prior to the
execution of this Agreement, at 9:30 a.m., New York City time, on the effective
date of any post-effective amendment to the Registration Statement filed
subsequent to the date of this Agreement and also at each Time of Delivery,
Ernst & Young LLP shall have furnished to you a letter or letters, dated the
respective dates of delivery thereof, in form and substance satisfactory to you,
to the effect set forth in Annex I hereto (the executed copy of the letter
delivered prior to the execution of this Agreement is attached as Annex I(a)
hereto and a draft of the form of letter to be delivered on the effective date
of any post-effective amendment to the Registration Statement and as of each
Time of Delivery is attached as Annex I(b) hereto); Deloitte & Touche LLP shall
have furnished to you a letter or letters, dated the respective dates of
delivery thereof, in form and substance satisfactory to you, related to the
financial statements of Direct Hit Technologies, Inc.
(g) Neither the Company nor any of its subsidiaries shall have
sustained since the date of the latest audited financial statements included in
the Prospectus any loss or interference with its business from fire, explosion,
flood or other calamity, whether or not covered by insurance, or from any labor
dispute or court or governmental action, order or decree, otherwise than as set
forth or contemplated in the Prospectus, and (ii) since the respective dates as
of which information is given in the Prospectus there shall not have been any
change in the capital stock or long-term debt of the Company or any of its
subsidiaries or any change, or any development involving a prospective change,
in or affecting the general affairs, management, financial position,
stockholders' equity or results of operations of the Company and its
subsidiaries, otherwise than as set forth or contemplated in the Prospectus, the
effect of which, in any such case described in clause (i) or (ii), is in the
judgment of the Representatives so material and adverse as to make it
impracticable or inadvisable to proceed with the public offering or the delivery
of the Shares being delivered at such Time of Delivery on the terms and in the
manner contemplated in the Prospectus;
(h) On or after the date hereof there shall not have occurred
any of the following: (i) a suspension or material limitation in trading in
securities generally on the New York Stock Exchange or on Nasdaq; (ii) a
suspension or material limitation in trading in the Company's securities on
Nasdaq; (iii) a general moratorium on commercial banking activities declared by
either Federal or New York or
18
<PAGE>
California State authorities; or (iv) the outbreak or escalation of hostilities
involving the United States or the declaration by the United States of a
national emergency or war, if the effect of any such event specified in this
clause (iv) in the judgment of the Representatives makes it impracticable or
inadvisable to proceed with the public offering or the delivery of the Shares
being delivered at such Time of Delivery on the terms and in the manner
contemplated in the Prospectus;
(i) The Shares at such Time of Delivery shall have been duly
listed for quotation on Nasdaq;
(j) The Company has obtained and delivered to the Underwriters
executed copies of an agreement from each [LIST APPROPRIATE STOCKHOLDERS OF THE
COMPANY OTHER THAN THE SELLING STOCKHOLDERS], substantially to the effect set
forth in Subsection 1(b)(iv) hereof in form and substance satisfactory to you;
(k) The Company shall have complied with the provisions of
Section 5(c) hereof with respect to the furnishing of prospectuses on the New
York Business Day next succeeding the date of this Agreement; and
(l) The Company and the Selling Stockholders shall have
furnished or caused to be furnished to you at such Time of Delivery certificates
of officers of the Company and of the Selling Stockholders, respectively,
satisfactory to you as to the accuracy of the representations and warranties of
the Company and the Selling Stockholders, respectively, herein at and as of such
Time of Delivery, as to the performance by the Company and the Selling
Stockholders of all of their respective obligations hereunder to be performed at
or prior to such Time of Delivery, and as to such other matters as you may
reasonably request, and the Company shall have furnished or caused to be
furnished certificates as to the matters set forth in subsections (a) and (f) of
this Section.
8. (a) The Company and each of the Principal Selling Stockholders,
jointly and severally, will indemnify and hold harmless each Underwriter against
any losses, claims, damages or liabilities, joint or several, to which such
Underwriter may become subject, under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon an untrue statement or alleged untrue statement of a
material fact contained in any Preliminary Prospectus, the Registration
Statement or the Prospectus, or any amendment or supplement thereto, or arise
out of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, and will reimburse each Underwriter for any legal or
other expenses reasonably incurred by such Underwriter in connection with
investigating or defending any such action or claim as such expenses are
incurred; PROVIDED, HOWEVER, that the Company and the Principal Selling
Stockholders shall not be liable in any such case to the extent that any such
loss, claim, damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission made in
any Preliminary Prospectus, the Registration Statement or the Prospectus or any
such amendment or supplement in reliance upon and in conformity with written
information furnished to the Company by any Underwriter through Goldman, Sachs &
Co. expressly for use therein.
(b) Each of Other Selling Stockholders, will indemnify and hold
harmless each Underwriter
19
<PAGE>
against any losses, claims, damages or liabilities, joint or several, to which
such Underwriter may become subject, under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon an untrue statement or alleged untrue statement of a
material fact contained in any Preliminary Prospectus, the Registration
Statement or the Prospectus, or any amendment or supplement thereto, or arise
out of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, in each case to the extent, but only to the extent, that
such untrue statement or alleged untrue statement or omission or alleged
omission was made in any Preliminary Prospectus, the Registration Statement or
the Prospectus or any such amendment or supplement in reliance upon and in
conformity with written information furnished to the Company by such Other
Selling Stockholder expressly for use therein; and will reimburse each
Underwriter for any legal or other expenses reasonably incurred by such
Underwriter in connection with investigating or defending any such action or
claim as such expenses are incurred; PROVIDED, HOWEVER, that such Other Selling
Stockholder shall not be liable in any such case to the extent that any such
loss, claim, damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission made in
any Preliminary Prospectus, the Registration Statement or the Prospectus or any
such amendment or supplement in reliance upon and in conformity with written
information furnished to the Company by any Underwriter through Goldman, Sachs &
Co. expressly for use therein.
(c) Each Underwriter will indemnify and hold harmless the Company and
each Selling Stockholder against any losses, claims, damages or liabilities to
which the Company or such Selling Stockholder may become subject, under the Act
or otherwise, insofar as such losses, claims, damages or liabilities (or actions
in respect thereof) arise out of or are based upon an untrue statement or
alleged untrue statement of a material fact contained in any Preliminary
Prospectus, the Registration Statement or the Prospectus, or any amendment or
supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, in each case to the
extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made in any Preliminary
Prospectus, the Registration Statement or the Prospectus or any such amendment
or supplement in reliance upon and in conformity with written information
furnished to the Company by such Underwriter through Goldman, Sachs & Co.
expressly for use therein; and will reimburse the Company and each Selling
Stockholder for any legal or other expenses reasonably incurred by the Company
or such Selling Stockholder in connection with investigating or defending any
such action or claim as such expenses are incurred.
(d) Promptly after receipt by an indemnified party under subsection
(a), (b) or (c) above of notice of the commencement of any action, such
indemnified party shall, if a claim in respect thereof is to be made against the
indemnifying party under such subsection, notify the indemnifying party in
writing of the commencement thereof; but the omission so to notify the
indemnifying party shall not relieve it from any liability which it may have to
any indemnified party otherwise than under such subsection. In case any such
action shall be brought against any indemnified party and it shall notify the
indemnifying party of the commencement thereof, the indemnifying party shall be
entitled to participate therein and, to the extent that it shall wish, jointly
with any other indemnifying party
20
<PAGE>
similarly notified, to assume the defense thereof, with counsel satisfactory to
such indemnified party (who shall not, except with the consent of the
indemnified party, be counsel to the indemnifying party), and, after notice from
the indemnifying party to such indemnified party of its election so to assume
the defense thereof, the indemnifying party shall not be liable to such
indemnified party under such subsection for any legal expenses of other counsel
or any other expenses, in each case subsequently incurred by such indemnified
party, in connection with the defense thereof other than reasonable costs of
investigation. No indemnifying party shall, without the written consent of the
indemnified party, effect the settlement or compromise of, or consent to the
entry of any judgment with respect to, any pending or threatened action or claim
in respect of which indemnification or contribution may be sought hereunder
(whether or not the indemnified party is an actual or potential party to such
action or claim) unless such settlement, compromise or judgment (i) includes an
unconditional release of the indemnified party from all liability arising out of
such action or claim and (ii) does not include a statement as to or an admission
of faut, culpability or a failure to act, by or on behalf of any indemnified
party.
(e) If the indemnification provided for in this Section 8 is
unavailable to or insufficient to hold harmless an indemnified party under
subsection (a), (b) or (c) above in respect of any losses, claims, damages or
liabilities (or actions in respect thereof) referred to therein, then each
indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or liabilities (or
actions in respect thereof) in such proportion as is appropriate to reflect the
relative benefits received by the Company and the Selling Stockholders on the
one hand and the Underwriters on the other from the offering of the Shares. If,
however, the allocation provided by the immediately preceding sentence is not
permitted by applicable law or if the indemnified party failed to give the
notice required under subsection (d) above, then each indemnifying party shall
contribute to such amount paid or payable by such indemnified party in such
proportion as is appropriate to reflect not only such relative benefits but also
the relative fault of the Company and the Selling Stockholders on the one hand
and the Underwriters on the other in connection with the statements or omissions
which resulted in such losses, claims, damages or liabilities (or actions in
respect thereof), as well as any other relevant equitable considerations. The
relative benefits received by the Company and the Selling Stockholders on the
one hand and the Underwriters on the other shall be deemed to be in the same
proportion as the total net proceeds from the offering (before deducting
expenses) received by the Company and the Selling Stockholders bear to the total
underwriting discounts and commissions received by the Underwriters, in each
case as set forth in the table on the cover page of the Prospectus. The
relative fault shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relate to information supplied by the
Company or the Selling Stockholders on the one hand or the Underwriters on the
other and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission. The Company, each
of the Selling Stockholders and the Underwriters agree that it would not be just
and equitable if contributions pursuant to this subsection (e) were determined
by PRO RATA allocation (even if the Underwriters were treated as one entity for
such purpose) or by any other method of allocation which does not take account
of the equitable considerations referred to above in this subsection (e). The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages or liabilities (or actions in respect thereof) referred to above
in this subsection (e) shall be
21
<PAGE>
deemed to include any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or defending any such action
or claim. Notwithstanding the provisions of this subsection (e), no Underwriter
shall be required to contribute any amount in excess of the amount by which the
total price at which the Shares underwritten by it and distributed to the public
were offered to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations in this subsection
(e) to contribute are several in proportion to their respective underwriting
obligations and not joint.
(f) The obligations of the Company and the Selling Stockholders under
this Section 8 shall be in addition to any liability which the Company and the
respective Selling Stockholders may otherwise have and shall extend, upon the
same terms and conditions, to each person, if any, who controls any Underwriter
within the meaning of the Act; and the obligations of the Underwriters under
this Section 8 shall be in addition to any liability which the respective
Underwriters may otherwise have and shall extend, upon the same terms and
conditions, to each officer and director of the Company and to each person, if
any, who controls the Company or any Selling Stockholder within the meaning of
the Act.
9. (a) If any Underwriter shall default in its obligation to
purchase the Shares which it has agreed to purchase hereunder at a Time of
Delivery, you may in your discretion arrange for you or another party or other
parties to purchase such Shares on the terms contained herein. If within
thirty-six hours after such default by any Underwriter you do not arrange for
the purchase of such Shares, then the Company and the Selling Stockholders shall
be entitled to a further period of thirty-six hours within which to procure
another party or other parties satisfactory to you to purchase such Shares on
such terms. In the event that, within the respective prescribed periods, you
notify the Company and the Selling Stockholders that you have so arranged for
the purchase of such Shares, or the Company and the Selling Stockholders notify
you that they have so arranged for the purchase of such Shares, you or the
Company and the Selling Stockholders shall have the right to postpone a Time of
Delivery for a period of not more than seven days, in order to effect whatever
changes may thereby be made necessary in the Registration Statement or the
Prospectus, or in any other documents or arrangements, and the Company agrees to
file promptly any amendments to the Registration Statement or the Prospectus
which in your opinion may thereby be made necessary. The term "Underwriter" as
used in this Agreement shall include any person substituted under this Section
with like effect as if such person had originally been a party to this Agreement
with respect to such Shares.
(b) If, after giving effect to any arrangements for the
purchase of the Shares of a defaulting Underwriter or Underwriters by you and
the Company and the Selling Stockholders as provided in subsection (a) above,
the aggregate number of such Shares which remains unpurchased does not exceed
one-eleventh of the aggregate number of all the Shares to be purchased at such
Time of Delivery, then the Company and the Selling Stockholders shall have the
right to require each non-defaulting
22
<PAGE>
Underwriter to purchase the number of Shares which such Underwriter agreed to
purchase hereunder at such Time of Delivery and, in addition, to require each
non-defaulting Underwriter to purchase its pro rata share (based on the number
of Shares which such Underwriter agreed to purchase hereunder) of the Shares of
such defaulting Underwriter or Underwriters for which such arrangements have not
been made; but nothing herein shall relieve a defaulting Underwriter from
liability for its default.
(c) If, after giving effect to any arrangements for the
purchase of the Shares of a defaulting Underwriter or Underwriters by you and
the Company and the Selling Stockholders as provided in subsection (a) above,
the aggregate number of such Shares which remains unpurchased exceeds
one-eleventh of the aggregate number of all of the Shares to be purchased at
such Time of Delivery, or if the Company and the Selling Stockholders shall not
exercise the right described in subsection (b) above to require non-defaulting
Underwriters to purchase Shares of a defaulting Underwriter or Underwriters,
then this Agreement (or, with respect to the Second Time of Delivery, the
obligations of the Underwriters to purchase and of the Company to sell the
Optional Shares) shall thereupon terminate, without liability on the part of any
non-defaulting Underwriter or the Company or the Selling Stockholders, except
for the expenses to be borne by the Company and the Selling Stockholders and the
Underwriters as provided in Section 6 hereof and the indemnity and contribution
agreements in Section 8 hereof; but nothing herein shall relieve a defaulting
Underwriter from liability for its default.
10. The respective indemnities, agreements, representations,
warranties and other statements of the Company, the Selling Stockholders and the
several Underwriters, as set forth in this Agreement or made by or on behalf of
them, respectively, pursuant to this Agreement, shall remain in full force and
effect, regardless of any investigation (or any statement as to the results
thereof) made by or on behalf of any Underwriter or any controlling person of
any Underwriter, or the Company, or any of the Selling Stockholders, or any
officer or director or controlling person of the Company, or any controlling
person of any Selling Stockholder, and shall survive delivery of and payment for
the Shares.
11. If this Agreement shall be terminated pursuant to Section 9
hereof, neither the Company nor the Selling Stockholders shall then be under any
liability to any Underwriter except as provided in Sections 6 and 8 hereof; but,
if for any other reason any Shares are not delivered by or on behalf of the
Company and the Selling Stockholders as provided herein, the Company and each of
the Selling Stockholders pro rata (based on the number of Shares to be sold by
the Company and such Selling Stockholder hereunder) will reimburse the
Underwriters through you for all out-of-pocket expenses approved in writing by
you, including fees and disbursements of counsel, reasonably incurred by the
Underwriters in making preparations for the purchase, sale and delivery of the
Shares not so delivered, but the Company and the Selling Stockholders shall then
be under no further liability to any Underwriter in respect of the Shares not so
delivered except as provided in Sections 6 and 8 hereof.
12. In all dealings hereunder, you shall act on behalf of each of the
Underwriters, and the parties hereto shall be entitled to act and rely upon any
statement, request, notice or agreement on behalf of any Underwriter made or
given by you jointly or by Goldman, Sachs & Co. on behalf of you as the
representatives; and in all dealings with any Selling Stockholder hereunder, you
and the Company shall be entitled to act and rely upon any statement, request,
notice or agreement on behalf of
23
<PAGE>
such Selling Stockholder made or given by any or all of the Attorneys-in-Fact
for such Selling Stockholder.
All statements, requests, notices and agreements hereunder shall be in
writing, and if to the Underwriters shall be delivered or sent by mail, telex or
facsimile transmission to you as the representatives in care of Goldman, Sachs &
Co., 32 Old Slip, 21st Floor, New York, New York 10005, Attention: Registration
Department; if to any Selling Stockholder shall be delivered or sent by mail,
telex or facsimile transmission to counsel for such Selling Stockholder at its
address set forth in Schedule II hereto; and if to the Company shall be
delivered or sent by mail, telex or facsimile transmission to the address of the
Company set forth in the Registration Statement, Attention: Secretary; provided,
however, that any notice to an Underwriter pursuant to Section 8(d) hereof shall
be delivered or sent by mail, telex or facsimile transmission to such
Underwriter at its address set forth in its Underwriters' Questionnaire or telex
constituting such Questionnaire, which address will be supplied to the Company
or the Selling Stockholders by you on request. Any such statements, requests,
notices or agreements shall take effect upon receipt thereof.
13. This Agreement shall be binding upon, and inure solely to the
benefit of, the Underwriters, the Company and the Selling Stockholders and, to
the extent provided in Sections 8 and 10 hereof, the officers and directors of
the Company and each person who controls the Company, any Selling Stockholder or
any Underwriter, and their respective heirs, executors, administrators,
successors and assigns, and no other person shall acquire or have any right
under or by virtue of this Agreement. No purchaser of any of the Shares from
any Underwriter shall be deemed a successor or assign by reason merely of such
purchase.
14. Time shall be of the essence of this Agreement. As used herein,
the term "business day" shall mean any day when the Commission's office in
Washington, D.C. is open for business.
15. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF NEW YORK.
16. This Agreement may be executed by any one or more of the parties
hereto in any number of counterparts, each of which shall be deemed to be an
original, but all such counterparts shall together constitute one and the same
instrument.
If the foregoing is in accordance with your understanding, please sign
and return to us six counterparts hereof, and upon the acceptance hereof by you,
on behalf of each of the Underwriters, this letter and such acceptance hereof
shall constitute a binding agreement among each of the Underwriters, the Company
and each of the Selling Stockholders. It is understood that your acceptance of
this letter on behalf of each of the Underwriters is pursuant to the authority
set forth in a form of Agreement among Underwriters, the form of which shall be
submitted to the Company and the Selling Stockholders for examination, upon
request, but without warranty on your part as to the authority of the signers
thereof.
Any person executing and delivering this Agreement as Attorney-in-Fact
for a Selling Stockholder represents by so doing that he has been duly appointed
as Attorney-in-Fact by such
24
<PAGE>
Selling Stockholder pursuant to a validly existing and binding Power-of-Attorney
which authorizes such Attorney-in-Fact to take such action.
Very truly yours,
Ask Jeeves, Inc.
By:..................................
Name: Robert W. Wruel
Title: Chief Executive Officer
[Names of Selling Stockholders]
By:..................................
Name:
Title:
As Attorney-in-Fact acting on
behalf of each of the Selling
Stockholders named in Schedule II
to this Agreement.
Accepted as of the date hereof
Goldman, Sachs & Co.
Chase Securities Inc.
FleetBoston Robertson Stephens Inc.
U.S. Bancorp Piper Jaffray Inc.
By:................................
(Goldman, Sachs & Co.)
On behalf of each of the Underwriters
25
<PAGE>
SCHEDULE I
<TABLE>
<CAPTION>
NUMBER OF OPTIONAL
TOTAL NUMBER OF SHARES TO BE
FIRM PURCHASED IF
SHARES MAXIMUM OPTION
UNDERWRITER TO BE PURCHASED EXERCISED
----------- --------------- ---------
<S> <C> <C>
Goldman, Sachs & Co...............................
Chase Securities Inc..............................
FleetBoston Robertson Stephens Inc................
U.S. Bancorp Piper Jaffray Inc....................
--------------- ---------
Total ....................................
--------------- ---------
--------------- ---------
</TABLE>
26
<PAGE>
SCHEDULE II
<TABLE>
<CAPTION>
NUMBER OF OPTIONAL
TOTAL NUMBER OF SHARES TO BE
FIRM SOLD IF
SHARES MAXIMUM OPTION
TO BE SOLD EXERCISED
---------- ---------
<S> <C> <C>
The Company..........................................
The Principal Selling Stockholder(s):................
[Name of Selling Stockholder](a)...............
[Name of Selling Stockholder](b)...............
[Name of Selling Stockholder](c)...............
The Other Selling Stockholder(s).....................
[Name of Selling Stockholder](d)...............
[Name of Selling Stockholder](e)...............
---------- ---------
Total .......................................
---------- ---------
---------- ---------
</TABLE>
(a) This Selling Stockholder is represented by [NAME AND ADDRESS OF COUNSEL]
and has appointed [NAMES OF ATTORNEYS-IN-FACT (NOT LESS THAN TWO)], and each of
them, as the Attorneys-in-Fact for such Selling Stockholder.
(b) This Selling Stockholder is represented by [NAME AND ADDRESS OF COUNSEL]
and has appointed [NAMES OF ATTORNEYS-IN-FACT (NOT LESS THAN TWO)], and each of
them, as the Attorneys-in-Fact for such Selling Stockholder.
(c) This Selling Stockholder is represented by [NAME AND ADDRESS OF COUNSEL]
and has appointed [NAMES OF ATTORNEYS-IN-FACT (NOT LESS THAN TWO)], and each of
them, as the Attorneys-in-Fact for such Selling Stockholder.
(d) This Selling Stockholder is represented by [NAME AND ADDRESS OF COUNSEL]
and has appointed [NAMES OF ATTORNEYS-IN-FACT (NOT LESS THAN TWO)], and each of
them, as the
27
<PAGE>
Attorneys-in-Fact for such Selling Stockholder.
(e) This Selling Stockholder is represented by [NAME AND ADDRESS OF COUNSEL]
and has appointed [NAMES OF ATTORNEYS-IN-FACT (NOT LESS THAN TWO)], and each of
them, as the Attorneys-in-Fact for such Selling Stockholder.
28
<PAGE>
ANNEX I
FORM OF ANNEX I DESCRIPTION OF COMFORT LETTER
FOR REGISTRATION STATEMENTS ON FORM S-1
Pursuant to Section 7(d) of the Underwriting Agreement, the accountants
shall furnish letters to the Underwriters to the effect that:
(i) They are independent certified public accountants with
respect to the Company and its subsidiaries within the meaning of the Act
and the applicable published rules and regulations thereunder;
(ii) In their opinion, the financial statements and any
supplementary financial information and schedules (and, if applicable,
financial forecasts and/or pro forma financial information) examined by
them and included in the Prospectus or the Registration Statement comply
as to form in all material respects with the applicable accounting
requirements of the Act and the related published rules and regulations
thereunder; and, if applicable, they have made a review in accordance
with standards established by the American Institute of Certified Public
Accountants of the unaudited consolidated interim financial statements,
selected financial data, pro forma financial information, financial
forecasts and/or condensed financial statements derived from audited
financial statements of the Company for the periods specified in such
letter, as indicated in their reports thereon, copies of which have been
separately furnished to the representatives of the Underwriters (the
"Representatives");
(iii) They have made a review in accordance with standards
established by the American Institute of Certified Public Accountants of
the unaudited condensed consolidated statements of income, consolidated
balance sheets and consolidated statements of cash flows included in the
Prospectus as indicated in their reports thereon copies of which have
been separately furnished to the Representatives and on the basis of
specified procedures including inquiries of officials of the Company who
have responsibility for financial and accounting matters regarding
whether the unaudited condensed consolidated financial statements
referred to in paragraph (vi)(A)(i) below comply as to form in all
material respects with the applicable accounting requirements of the Act
and the related published rules and regulations, nothing came to their
attention that caused them to believe that the unaudited condensed
consolidated financial statements do not comply as to form in all
material respects with the applicable accounting requirements of the Act
and the related published rules and regulations;
(iv) The unaudited selected financial information with respect
to the consolidated results of operations and financial position of the
Company for the five most recent fiscal years included in the Prospectus
agrees with the corresponding amounts (after restatements where
applicable) in the audited consolidated financial statements for such
five fiscal years which were included or incorporated by reference in the
Company's Annual Reports on Form 10-K for such fiscal years;
<PAGE>
(v) They have compared the information in the Prospectus under
selected captions with the disclosure requirements of Regulation S-K and
on the basis of limited procedures specified in such letter nothing came
to their attention as a result of the foregoing procedures that caused
them to believe that this information does not conform in all material
respects with the disclosure requirements of Items 301, 302, 402 and
503(d), respectively, of Regulation S-K;
(vi) On the basis of limited procedures, not constituting an
examination in accordance with generally accepted auditing standards,
consisting of a reading of the unaudited financial statements and other
information referred to below, a reading of the latest available interim
financial statements of the Company and its subsidiaries, inspection of
the minute books of the Company and its subsidiaries since the date of
the latest audited financial statements included in the Prospectus,
inquiries of officials of the Company and its subsidiaries responsible
for financial and accounting matters and such other inquiries and
procedures as may be specified in such letter, nothing came to their
attention that caused them to believe that:
(A)(i) the unaudited consolidated statements of income,
consolidated balance sheets and consolidated statements of cash
flows included in the Prospectus do not comply as to form in all
material respects with the applicable accounting requirements of
the Act and the related published rules and regulations, or (ii)
any material modifications should be made to the unaudited
condensed consolidated statements of income, consolidated balance
sheets and consolidated statements of cash flows included in the
Prospectus for them to be in conformity with generally accepted
accounting principles;
(B) any other unaudited income statement data and balance
sheet items included in the Prospectus do not agree with the
corresponding items in the unaudited consolidated financial
statements from which such data and items were derived, and any
such unaudited data and items were not determined on a basis
substantially consistent with the basis for the corresponding
amounts in the audited consolidated financial statements included
in the Prospectus;
(C) the unaudited financial statements which were not
included in the Prospectus but from which were derived any
unaudited condensed financial statements referred to in clause (A)
and any unaudited income statement data and balance sheet items
included in the Prospectus and referred to in clause (B) were not
determined on a basis substantially consistent with the basis for
the audited consolidated financial statements included in the
Prospectus;
(D) any unaudited pro forma consolidated condensed
financial statements included in the Prospectus do not comply as
to form in all material respects with the applicable accounting
requirements of the Act and the published rules and regulations
thereunder or the pro forma adjustments have not been properly
applied to the historical amounts in the compilation of those
statements;
2
<PAGE>
(E) as of a specified date not more than five days prior to
the date of such letter, there have been any changes in the
consolidated capital stock (other than issuances of capital stock
upon exercise of options and stock appreciation rights, upon
earn-outs of performance shares and upon conversions of
convertible securities, in each case which were outstanding on the
date of the latest financial statements included in the
Prospectus) or any increase in the consolidated long-term debt of
the Company and its subsidiaries, or any decreases in consolidated
net current assets or stockholders' equity or other items
specified by the Representatives, or any increases in any items
specified by the Representatives, in each case as compared with
amounts shown in the latest balance sheet included in the
Prospectus, except in each case for changes, increases or
decreases which the Prospectus discloses have occurred or may
occur or which are described in such letter; and
(F) for the period from the date of the latest financial
statements included in the Prospectus to the specified date
referred to in clause (E) there were any decreases in consolidated
net revenues or operating profit or the total or per share amounts
of consolidated net income or other items specified by the
Representatives, or any increases in any items specified by the
Representatives, in each case as compared with the comparable
period of the preceding year and with any other period of
corresponding length specified by the Representatives, except in
each case for decreases or increases which the Prospectus
discloses have occurred or may occur or which are described in
such letter; and
(vii) In addition to the examination referred to in their
report(s) included in the Prospectus and the limited procedures,
inspection of minute books, inquiries and other procedures referred to in
paragraphs (iii) and (vi) above, they have carried out certain specified
procedures, not constituting an examination in accordance with generally
accepted auditing standards, with respect to certain amounts, percentages
and financial information specified by the Representatives, which are
derived from the general accounting records of the Company and its
subsidiaries, which appear in the Prospectus, or in Part II of, or in
exhibits and schedules to, the Registration Statement specified by the
Representatives, and have compared certain of such amounts, percentages
and financial information with the accounting records of the Company and
its subsidiaries and have found them to be in agreement.
3
<PAGE>
[LETTERHEAD]
March 9, 2000
Ask Jeeves, Inc.
5858 Horton Street
Suite 350
Emeryville, California 94608
Ladies and Gentlemen:
You have requested our opinion with respect to certain matters in connection
with the filing by Ask Jeeves, Inc. (the "Company") of a Registration
Statement on Form S-1 (the "Registration Statement") with the Securities and
Exchange Commission covering an underwritten public offering of up to
2,100,000 shares of common stock, including 1,400,000 shares to be sold by
the Company, plus 315,000 shares to be sold by the Company upon exercise of
the over-allotment option (the "Company Shares"), and 700,000 shares to be
sold by certain selling stockholders (the "Selling Stockholder Shares"). The
Company Shares and the Selling Stockholder Shares are collectively referred
to herein as "Common Stock."
In connection with this opinion, we have examined and relied upon the
Registration Statement and related Prospectus, the Company's Amended and
Restated Certificate of Incorporation and By-laws, as amended, and such other
documents, records, certificates, memoranda and other instruments as we deem
necessary as a basis for this opinion. We have assumed the genuineness and
authenticity of all documents submitted to us as originals, the conformity to
originals of all documents submitted to us as copies thereof, and the due
execution and delivery of all documents where due execution and delivery are a
prerequisite to the effectiveness thereof. We have also assumed that the shares
of Common Stock will be sold by the Underwriters at a price established by the
Board of Directors of the Company.
On the basis of the foregoing, and in reliance thereon, we are of the opinion
that the Company Shares, when sold and issued in accordance with the
Registration Statement and related Prospectus, will be validly issued, fully
paid and nonassessable.
<PAGE>
March 9, 2000
Page Two
We consent to the reference to our firm under the caption "Legal Matters" in the
Prospectus included on the Registration Statement and to the filing of this
opinion as an exhibit to the Registration Statement.
Very truly yours,
COOLEY GODWARD LLP
By: /s/ Suzanne Sawochka Hooper
-----------------------------
Suzanne Sawochka Hooper
<PAGE>
1111 BROADWAY
OFFICE LEASE
OAKLAND CITY CENTER LLC,
a Delaware limited liability company,
Landlord
and
ASK JEEVES, INC.,
a Delaware corporation,
Tenant
DATED AS OF: February __, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Paragraph Page
- --------- ----
<S> <C> <C>
1. Premises ......................................................................1
2. Certain Basic Lease Terms .....................................................1
3. Term; Delivery of Possession of Premises ......................................2
4. Condition of Premises .........................................................2
5. Monthly Rent ..................................................................5
6. Letter of Credit. .............................................................6
7. Additional Rent: Increases in Operating Expenses and Tax Expenses .............6
8. Use of Premises; Compliance with Law ..........................................9
9. Alterations and Restoration ..................................................10
10. Repair .......................................................................11
11. Abandonment ..................................................................11
12. Liens ........................................................................12
13. Assignment and Subletting ....................................................12
14. Indemnification of Landlord ..................................................15
15. Insurance ....................................................................15
16. Mutual Waiver of Subrogation Rights ..........................................16
17. Utilities ....................................................................16
18. Personal Property and Other Taxes ............................................18
19. Rules and Regulations ........................................................18
20. Surrender; Holding Over ......................................................18
21. Subordination and Attornment .................................................19
22. Financing Condition ..........................................................19
23. Entry by Landlord ............................................................19
24. Insolvency or Bankruptcy .....................................................20
25. Default and Remedies .........................................................20
26. Damage or Destruction ........................................................22
27. Eminent Domain ...............................................................23
28. Landlord's Liability; Sale of Building .......................................23
29. Estoppel Certificates ........................................................24
30. Right of Landlord to Perform .................................................24
31. Late Charge ..................................................................24
32. Attorneys' Fees; Waiver of Jury Trial ........................................25
33. Waiver .......................................................................25
34. Notices ......................................................................25
35. Notice of Surrender ..........................................................25
36. Defined Terms and Marginal Headings ..........................................25
37. Time and Applicable Law ......................................................26
38. Successors ...................................................................26
39. Entire Agreement; Modifications ..............................................26
40. Light and Air ................................................................26
41. Name of Building .............................................................26
42. Severability .................................................................26
43. Authority ....................................................................26
44. No Offer .....................................................................26
45. Real Estate Brokers ..........................................................26
46. Consents and Approvals .......................................................26
47. Reserved Rights ..............................................................27
48. Financial Statements .........................................................27
49. Signage; Directories .........................................................27
50. Nondisclosure of Lease Terms .................................................27
51. Hazardous Substance Disclosure ...............................................27
52. Parking ......................................................................28
53. Option to Renew ..............................................................28
54. Rights of First Offer on 19 th and 21 st Floors ..............................29
</TABLE>
<PAGE>
EXHIBITS:
A - Outline of Premises
B - Rules and Regulations
C - Form of Letter of Credit
D - Appraisal Procedure
E - Outline of First Offer Space A
F - Outline of First Offer Space B
<PAGE>
LEASE
THIS LEASE is made as of the ______ day of February, 2000, between
OAKLAND CITY CENTER LLC, a Delaware limited liability company ("Landlord"), and
ASK JEEVES, INC., a Delaware corporation ("Tenant").
1. PREMISES. Landlord hereby leases to Tenant, and Tenant hereby
leases from Landlord, on the terms and conditions set forth herein, the space
outlined on the attached Exhibit A (the "Premises"). The Premises consist of two
increments of space, which are labeled the "Initial Premises" and "Added
Premises", respectively, on such Exhibit A. The Premises are located on the
floor(s) specified in Paragraph 2 below of the building (the "Building") located
at 1111 Broadway, Oakland, California. The Building is a part of the office,
retail and service complex located in the area bounded by Broadway, Fourteenth,
Clay and Eleventh Streets, which complex, including its associated garages, the
parcel(s) of land on which the complex is located and the other improvements on
such land, is referred to herein as "City Center." The Building, the associated
garage, the parcel(s) of land (the "Land") on which the Building and garage are
located and the other improvements on the Land (including the walkways and
landscaping) are referred to herein as the "Real Property."
Tenant's lease of the Premises shall include the right to use, in
common with others and subject to the other provisions of this Lease, the public
lobbies, entrances, stairs, elevators and other public portions of the Building.
All of the windows and outside walls of the Premises and any space in the
Premises used for shafts, stacks, pipes, conduits, ducts, electrical equipment
or other utilities or Building facilities are reserved solely to Landlord and
Landlord shall have rights of access through the Premises for the purpose of
operating, maintaining and repairing the same.
2. CERTAIN BASIC LEASE TERMS. As used herein, the following terms
shall have the meaning specified below:
a. Floors on which the Premises are located: Initial Premises:
Twentieth (20th) floor. Added Premises: Eleventh (11 th )
and twelfth (12th) floors.
b. Lease term: Approximately six (6) years, commencing on the
date of Substantial Completion (as defined in Paragraph 4.c.
below) of the Tenant Improvements to be constructed in the
Initial Premises as provided in Paragraph 4 (the
"Commencement Date"), and ending on the last day of the
seventy-second (72nd) full calendar month after the
Commencement Date (the "Expiration Date"). Notwithstanding
the foregoing, however, the Lease term with respect to the
Added Premises shall commence on the date of Substantial
Completion of the Tenant Improvements to be constructed in
the Added Premises (the "Added Premises Commencement Date").
c. Monthly Rent for each respective portion of the Premises
shall be as follows:
i. Initial Premises: The respective sums set forth as
follows:
<TABLE>
<CAPTION>
Period Monthly Rent
------ ------------
<S> <C>
First and Second Lease Years $35,438.00
Third and Fourth Lease Years $37,770.00
Fifth and Sixth Lease Years $39,635.00
</TABLE>
ii. Added Premises: The respective sums set forth as
follows:
<TABLE>
<CAPTION>
Period Monthly Rent
------ ------------
<S> <C>
Commencing on the Added
Premises Commencement
Date through the end of the
Second Lease Year $131,282.00
Third and Fourth Lease Years $139,239.00
Fifth and Sixth Lease Years $147,195.00
</TABLE>
1
<PAGE>
For purposes of this Lease, the "First Lease Year"
shall be the period commencing on the Commencement Date and
ending on the last day of the twelfth (12th) full calendar
month thereafter. Each twelve (12) calendar month period
thereafter shall constitute a "Lease Year", except that the
Sixth Lease Year shall end on the Expiration Date.
d. Letter of Credit Amount: Three Million Two Hundred Thousand
Dollars ($3,200,000.00).
e. Tenant's Share: The respective percentages set forth below:
Initial Premises: 2.07% Added Premises: 8.90%.
f. Base Year: The calendar year 2000. Base Tax Year: The fiscal
tax year ending June 30, 2001.
g. Business of Tenant: Software engineering and internet
applications.
h. Real estate broker(s): Shorenstein Management, Inc. and
AEGIS.
3. TERM; DELIVERY OF POSSESSION OF PREMISES.
a. The term of this Lease shall commence on the Commencement
Date (as defined in Paragraph 2.b.), and, unless sooner terminated pursuant to
the terms hereof or at law, shall expire on the Expiration Date (defined in
Paragraph 2.b.). The Commencement Date, Added Premises Commencement Date and
Expiration Date shall be confirmed by the parties in writing following the
determination thereof.
b. The Initial Premises shall be delivered to Tenant upon
Substantial Completion (as that term is defined in Paragraph 4.c.) of the Tenant
Improvements (as that term is defined in Paragraph 4.a.) to be constructed in
such portion of the Premises by Landlord pursuant to Paragraph 4. If Substantial
Completion of the Tenant Improvements for the Initial Premises or the Added
Premises and delivery of possession of the Initial Premises or Added Premises is
delayed for any reason whatsoever, this Lease shall not be void or voidable, nor
shall any delay in delivery of possession of the Initial Premises or the Added
Premises to Tenant shall operate to extend the term of this Lease or amend
Tenant's obligations under this Lease; provided, however, that Landlord shall
use commercially reasonable and diligent efforts, including initiation of
appropriate unlawful detainer proceedings, subject to the requirements of
applicable law, to recover possession of the Premises from the existing
tenant(s) therein in the event any existing tenant of the Premises shall
wrongfully holdover therein beyond the expiration of its lease. In no event
shall Landlord be liable to Tenant for any delay in completion of the Tenant
Improvements caused or occasioned by strikes, lockout, labor disputes, shortages
of material or labor, fire or other casualty, acts of God or any other cause.
c. If, at Tenant's request, Landlord permits Tenant to take
occupancy of any portion of the Premises prior to Substantial Completion of the
Tenant Improvements for such portion of the Premises, then the Commencement Date
or Added Premises Commencement Date, as the case may be, shall be the date of
such early occupancy by Tenant; provided, however, that the Expiration Date
shall not be affected by such early occupancy.
4. CONDITION OF PREMISES.
a. GENERALLY. Landlord shall have no obligation to make or pay
for any improvements or renovations in or to the Premises, or otherwise prepare
the Premises for Tenant's occupancy, except as specifically provided in this
Paragraph 4.
b. PLANS; TENANT IMPROVEMENTS. On or before March 15, 2000,
Tenant shall furnish to Landlord for Landlord's review and approval detailed
layout plans and finish specifications (the "Space Plans") prepared by an
architect retained by Tenant and reasonably acceptable to Landlord ("Tenant's
Architect"), showing all of the improvements which Tenant desires to be
constructed in the Premises. The Space Plans shall show improvements which
conform to Landlord's base building system and comply with all applicable
building codes and other legal requirements. The Space Plans and improvements
shown thereon shall also comply with the "Tenant Construction Standards" and
"Conditions for Construction" applicable to the Building (collectively, the
"Building Construction Standards"), receipt of which is hereby acknowledged by
Tenant. Landlord shall respond to the Space Plans within ten (10) Business Days
(as defined in Paragraph 17.a. below) of its receipt thereof. Tenant shall
respond promptly to any written objections of Landlord to the Space Plans and
shall resubmit appropriately revised Space Plans prepared by Tenant's Architect
within five (5) Business Days. This procedure shall be followed until all
objections have been resolved and the Space Plans approved. The Space Plans, as
finally approved in writing by Landlord, shall be referred to herein as the
"Final Space Plans." On or before April 15, 2000, Tenant shall furnish to
2
<PAGE>
Landlord for Landlord's written approval working plans and specifications (the
"Working Drawings") prepared by Tenant's Architect for all of the improvements
which Tenant desires to be constructed in the Premises. The Working Drawings
shall show improvements that conform to the Final Space Plans (except to the
extent specifically noted therein or in accompanying specifications) and the
Building Construction Standards, shall separately note any proposed structural
work or extraordinary or supplemental electrical, plumbing or HVAC requirements,
and shall be in sufficient detail as to enable the general contractor for the
work to obtain all necessary governmental permits for construction of all of the
improvements and to secure complete bids from qualified contractors to perform
the work for all of the improvements to be constructed in the Premises. The
Working Drawings shall identify any "long-lead" materials then known by Tenant
or Tenant's Architect. Tenant shall respond promptly to any written objections
of Landlord to the Working Drawings and shall resubmit appropriately revised
Working Drawings prepared by Tenant's Architect within five (5) Business Days of
Tenant's receipt of Landlord's written objections, and such resubmitted plans
shall clearly indicate which portions of the plans are revised and which
portions of the plans remain unchanged from the previously submitted plans.
Landlord shall respond to resubmitted Working Drawings promptly. This procedure
shall be followed until all objections have been resolved and the Working
Drawings approved; provided however, that if Tenant has not submitted acceptable
Working Drawings to Landlord on or before May 1, 2000 (the "Final Plan Date"),
then each day beyond the Final Plan Date that Tenant has not submitted
acceptable Working Drawings to Landlord shall constitute a day of Tenant Delay
under Paragraph 4.d. below. The Working Drawings, as approved in writing by
Landlord, are hereinafter called the "Plans," and the work shown on the Plans is
hereinafter called the "Tenant Improvements."
Landlord and Tenant shall cooperate with each other to resolve any
space planning or other issues that are raised by applicable local, state or
federal building codes during the planning, permit or construction process.
Notwithstanding anything to the contrary contained herein, Landlord's approval
of any item reviewed by Landlord under this Paragraph 4 shall merely indicate
Landlord's consent to the proposed work shown thereon, and in no event shall
such consent by Landlord be deemed to constitute a representation by Landlord
that the work called for therein complies with applicable building codes or
other legal requirements nor shall such consent release Tenant from Tenant's
obligations to supply Space Plans, Working Drawings and Plans that do so conform
to applicable building codes and legal requirements.
c. CONSTRUCTION BY LANDLORD'S CONTRACTOR.
i. BUDGET. Landlord shall cause Landlord's Contractor to
solicit bids from not less than three (3) subcontractors for each major
trade working on the Tenant Improvements (including any appropriate
subcontractors recommended by Tenant). When Landlord's Contractor has
received responses to its bid request, Landlord's Contractor will analyze
the same and provide Tenant with a copy of Landlord's Contractor's bid
analysis, recommended winning bidders and estimated budget for the Tenant
Improvements, based upon the selected subcontractors' bids and including
Landlord's Contractor's fees (as described in Paragraph 4.e.i. below) and a
reasonable contingency. Tenant shall have three (3) Business Days after the
receipt of Landlord's Contractor's bid analysis to approve or reasonably
disapprove Landlord's Contractor's selection of subcontractors and
Landlord's Contractor's estimated budget. Further, if Tenant disapproves of
the estimated budget, then within three (3) Business Days of Tenant's
receipt thereof, Tenant shall so notify Landlord and the Plans shall
promptly be modified, at Tenant's cost, by Tenant's Architect, in order to
satisfactorily modify the scope of the work upon which the budget is based.
Any and all revisions to the Plans shall be subject to Landlord's approval.
Upon Tenant's disapproval of any subcontractor or the revision of the
Plans, Landlord shall cause Landlord's Contractor to promptly prepare and
submit to Tenant a revised estimated budget. Tenant shall respond to the
revised estimated budget in the manner described above. Any delay in
Substantial Completion (as defined in Paragraph 4.e.iii. below) of the
Tenant Improvements resulting from any revision to the Plans or the budget
shall constitute a Tenant Delay as defined in Paragraph 4.d. below; in the
event of any such Tenant Delay, Tenant's obligation to pay rent for the
Premises shall be accelerated as provided in Paragraph 5.a. below. If
Tenant fails to raise any objections to the analysis and/or budget within
the period(s) described above, Tenant shall be deemed to have approved
Landlord's Contractor's recommended bid acceptance and proposed budget.
ii. CHANGES. If Tenant desires any change in or to the Plans
("Changes"), then Tenant shall request that Tenant's Architect, at Tenant's
cost, prepare revised Working Drawings incorporating the Change. If
Landlord approves any proposed Change, then together with such approval, if
practicable, and if not practicable as soon thereafter as is practicable,
Landlord shall give Tenant Landlord's estimated increase or decrease in the
cost of the Tenant Improvements which would result from incorporating such
Change and Landlord's estimate of the delay, if any, in the commencement or
completion of the Tenant Improvements which would result from incorporating
such Change. If the Change increases the cost of the Tenant Improvements
and the funds from Landlord's Allowance (as defined in Paragraph 4.e.
below) are not sufficient to pay for the Change, then Tenant shall be
liable for the additional cost, which cost shall be payable, at Landlord's
option, during the course of construction. Landlord will use reasonable
care in preparing the estimates, but they shall be good faith estimates
only and will not limit Tenant's obligation to pay for the actual increase
in the cost of the Tenant Improvements or Tenant's responsibility for the
actual construction delay resulting from the Change. Within three (3)
Business Days after receipt of such cost and delay
3
<PAGE>
estimates, Tenant shall notify Landlord in writing whether Tenant approves
the Change. If Tenant fails to approve the Change within such three (3)
Business Day period, construction of the Tenant Improvements shall proceed
as provided in accordance with the Plans as they existed prior to the
requested Change. If, following Tenant's review of the estimated costs and
delays, Tenant desires Landlord to incorporate the Change into the Tenant
Improvements, then Tenant and Landlord shall execute a change order for
such Change on Landlord's standard form therefor, and the term "Plans"
shall thereafter be deemed to refer to the Working Drawings as so revised
and approved. The submission of the proposed estimated budget to Tenant and
Tenant's approval thereof shall not constitute a guarantee that the cost of
the Tenant Improvements shall not exceed the amount shown on the estimated
budget. Any delay in Substantial Completion (as defined below) of the
Tenant Improvements resulting from any revision to the Plans or the
proposed budget shall constitute a Tenant Delay, as defined in Paragraph
4.d. below.
iii. CONSTRUCTION; SUBSTANTIAL COMPLETION. Landlord shall cause a
contractor selected by Landlord ("Landlord's Contractor") to construct the
Tenant Improvements as shown on the Plans in compliance with this Paragraph
4. With regard to telephones and computer systems, Landlord shall provide
and cause to be installed only those wall terminal boxes and/or floor
monuments required for Tenant's telephone or computer systems as are shown
on the Plans. Landlord will provide ordinary power wiring to locations
shown on the Plans and shall provide and cause to be installed conduits as
required for Tenant's telephone and computer systems as shown on the Plans,
but shall in no event install, pull or hook up such wires, supply jacks or
plugs or provide wiring necessary for special conditioned power to the
Premises."Substantial Completion" of the Tenant Improvements for the
Initial Premises or Added Premises, as the case may be, shall be deemed to
have occurred when the Tenant Improvements for such portion of the Premises
have, in Landlord's reasonable judgment, been completed in accordance with
the Plans, subject only to correction or completion of "Punch List" items,
which items shall be limited to minor items of incomplete or defective work
or materials or mechanical maladjustments that are of such a nature that
they do not materially interfere with or impair Tenant's use of such
portion of the Premises for Tenant's business. The definition of
"Substantially Completed" shall also apply to the terms "Substantial
Completion" and "Substantially Complete."
d. TENANT DELAYS. Tenant shall be responsible for, and shall
pay to Landlord, any and all costs and expenses incurred by Landlord in
connection with any delay in the commencement or completion of any Tenant
Improvements and any increase in the cost of Tenant Improvements caused by (i)
Tenant's failure to submit or resubmit plans or construction documents by the
dates or within the time periods set forth in Paragraph 4.b. above or to have
approved Plans completed by the Final Plan Date (as extended by any delay by
Landlord in responding to plans within the periods set forth above), (ii) any
Changes requested by Tenant in the Tenant Improvements shown on the Plans
(including any cost or delay resulting from proposed Changes that are not
ultimately made) or Tenant's disapproval of any aspect of the Working Drawings
except to the extent that such aspect does not properly reflect the Final Space
Plans, (iii) any failure by Tenant to timely pay any amounts due from Tenant
hereunder, including any additional costs resulting from any Change (it being
acknowledged that if Tenant fails to make or otherwise delays making such
payments, Landlord may stop work on the Tenant Improvements and any delay from
such a work stoppage will be a Tenant Delay), (iv) the inclusion in the Tenant
Improvements of any so-called "long lead" materials (such as fabrics, panelings,
carpeting or other items that must be imported or are of unusual character or
limited availability), (v) any delay by Tenant in responding to inquiries
regarding the construction of the Tenant Improvements or in granting Tenant's
approval of materials or finishes for the Tenant Improvements, or (vi) any other
delay requested or caused by Tenant. Each of the foregoing is referred to herein
as a "Tenant Delay."
e. COST OF CONSTRUCTION OF TENANT IMPROVEMENTS. Landlord shall
contribute toward the cost of designing, constructing and installing the Tenant
Improvements, an amount not to exceed Two Hundred Seventy-Nine Thousand Seven
Hundred Seventy-Five Dollars ($279,775.00) with respect to the Initial Premises
and Two Hundred Thirty-Eight Thousand Six Hundred Ninety-Five Dollars
($238,695.00) with respect to the Added Premises (the sum of both such amounts
being referred to collectively as "Landlord's Allowance"). The following
provisions shall govern the payment of Landlord's Allowance:
i. EXCESS COST. Tenant shall pay for all costs of the
construction of the Tenant Improvements (including architectural costs and
Landlord's Contractor's charge) in excess of Landlord's Allowance (the
"Excess Cost"). If the cost of construction (including Landlord's
Contractor's fee, comprising Landlord's contractor's charge for overhead
and profit equal to fifteen percent (15%) of the first One Hundred Thousand
Dollars ($100,000.00) of construction costs, plus twelve percent (12%) of
such costs, if any, in excess of $100,000.00, plus Landlord's Contractor's
standard supervision fees) exceeds the funds available therefor from
Landlord's Allowance, then Tenant shall pay to Landlord, as work progresses
in course of construction installments and within fifteen (15) days of
written demand, the anticipated cost of the construction of the Tenant
Improvements that exceeds Landlord's Allowance.
4
<PAGE>
ii. CERTAIN COSTS. If Landlord reasonably determines that, upon
Substantial Completion of the Tenant Improvements for the Initial Premises
or Added Premises, as the case may be, Landlord's Contribution would not be
exhausted by construction of the Tenant Improvements for such portion of
the Premises, and the remaining balance of Landlord's Contribution will
exceed the amount needed to fully pay for all outstanding anticipated costs
relating to the Tenant Improvements for such portion of the Premises, then
Tenant may apply a portion of Landlord's Allowance, up to a maximum of
Twenty-two Thousand Three Hundred Eighty-two Dollars ($22,382.00) with
respect to the Initial Premises and Ninety-five Thousand Four Hundred
Seventy-eight Dollars ($95,478.00) with respect to the Added Premises,
toward the reasonable cost of design, space planning, architectural fees,
and construction drawings for the Tenant Improvements for such portion of
the Premises. In no event may any portions of Landlord's Allowance be
applied towards the costs of Tenant's trade fixtures, personal property,
equipment, cabling, furniture, signage, moving expenses, or rental
obligations.
f. EARLY ENTRY. Notwithstanding anything to the contrary in
this Lease, Tenant may, prior to the Substantial Completion of the Tenant
Improvements, enter the Premises for the purpose of installing telephones,
cabling, electronic communication or related equipment, and fixtures, provided
that Tenant shall be solely responsible for any of such equipment, fixtures, or
material and for any loss or damage thereto from any cause whatsoever, excluding
only the gross negligence or deliberate misconduct of Landlord or Landlord's
contractors. Such early access to the Premises and such installation shall be
permitted only to the extent that Landlord determines that such early access and
installation activities will not delay Landlord's Contractor's completion of the
construction of the Tenant Improvements. The provisions of the final grammatical
paragraph of Paragraph 8.a. below, the provisions of Paragraph 9.a. below, and
the provisions of Paragraphs 14 and 15 below shall apply in full during the
period of any such early entry, and Tenant shall (i) provide certificates of
insurance evidencing the existence and amounts of liability insurance carried by
Tenant and its agents and contractors, reasonably satisfactory to Landlord,
prior to such early entry, and (ii) comply with all applicable laws,
regulations, permits and other approvals applicable to such early entry work in
the Premises. Notwithstanding the foregoing, if such early access or
installation delays or interferes with Landlord's construction of the Tenant
Improvements, or increases the cost of the Tenant Improvements, the same shall
be a Tenant Delay.
5. MONTHLY RENT.
a. On or before the first day of each calendar month during the
term hereof, Tenant shall pay to Landlord, as monthly rent for the Premises, the
Monthly Rent specified in Paragraph 2 above. If the term of this Lease commences
on a day other than the first day of a calendar month, or terminates on a day
other than the last day of a calendar month, then the Monthly Rent payable for
such partial month shall be appropriately prorated on the basis of a thirty
(30)-day month. Monthly Rent and the Additional Rent specified in Paragraph 7
shall be paid by Tenant to Landlord, in advance, without deduction, offset,
prior notice or demand, in immediately available funds of lawful money of the
United States of America, or by good check as described below, at the office of
Shorenstein Company, L.P., at 555 California Street, 14th floor, San Francisco,
California 94104, or to such other person or at such other place as Landlord may
from time to time designate in writing. Payments made by check must be drawn
either on a California financial institution or on a financial institution that
is a member of the federal reserve system. Notwithstanding the foregoing, if the
Commencement Date for the Initial Premises, or the Added Premises Commencement
Date for the Added Premises, is delayed as a result of a Tenant Delay, then
Tenant's obligation to pay rent for such portion of the Premises shall be
accelerated by the number of days of such delay. Further, notwithstanding the
foregoing, Tenant shall pay to Landlord with Tenant's execution of this Lease,
an amount equal to one (1) month's Monthly Rent hereunder for the Premises,
which amount shall be applied to the Monthly Rent first due and payable
hereunder
b. All amounts payable by Tenant to Landlord under this Lease,
or otherwise payable in connection with Tenant's occupancy of the Premises, in
addition to the Monthly Rent hereunder and Additional Rent under Paragraph 7,
shall constitute rent owed by Tenant to Landlord hereunder.
c. Any rent not paid by Tenant to Landlord when due shall bear
interest from the date due to the date of payment by Tenant at an annual rate of
interest (the "Interest Rate") equal to the lesser of (i) the maximum annual
interest rate allowed by law on such due date for business loans (not primarily
for personal, family or household purposes) not exempt from the usury law, or
(ii) a rate equal to the sum of six (6) percentage points over the six-month
United States Treasury bill rate (the "Treasury Rate") in effect from time to
time during such delinquency (or if there is no such publicly announced rate,
the rate quoted by the San Francisco Main Office of Bank of America, NT&SA, or
any successor bank thereto, in pricing ninety (90)-day commercial loans to
substantial commercial borrowers). Failure by Tenant to pay rent when due,
including any interest accrued under this subparagraph, shall constitute an
Event of Default (as defined in Paragraph 25 below) giving rise to all the
remedies afforded Landlord under this Lease and at law for nonpayment of rent.
5
<PAGE>
d. No security or guaranty which may now or hereafter be
furnished to Landlord for the payment of rent due hereunder or for the
performance by Tenant of the other terms of this Lease shall in any way be a bar
or defense to any of Landlord's remedies under this Lease or at law.
6. LETTER OF CREDIT.
a. As security for the performance by Tenant of Tenant's
obligations hereunder, Tenant shall cause to be delivered to Landlord
concurrently with the execution of this Lease by Tenant, an original irrevocable
standby letter of credit (the "Letter of Credit") in the amount specified in
Paragraph 2.d. above, naming Landlord as beneficiary, which Landlord may draw
upon to cure any default under this Lease or to compensate Landlord for any
damage Landlord incurs as a result of Tenant's failure to perform any of its
obligations hereunder. Any such draw on the Letter of Credit shall not
constitute a waiver of any other rights of Landlord with respect to such default
or failure to perform. The Letter of Credit shall be issued by a major
commercial bank reasonably acceptable to Landlord, with a service and claim
point for the Letter of Credit in the San Francisco Bay Area in California ,
have an expiration date not earlier than the Expiration Date (or, in the
alternative, have a term of not less than one (1) year and be automatically
renewable for an additional one (1) year period unless notice of non-renewal is
given by the issuer to Landlord not later than sixty (60) days prior to the
expiration thereof). The letter of credit shall be in the form attached hereto
as Exhibit D, and shall otherwise be in form and content satisfactory to
Landlord. If the Letter of Credit has an expiration date earlier than the
Expiration Date, then throughout the term hereof (including any renewal or
extension of the term) Tenant shall provide evidence of renewal of the Letter of
Credit to Landlord at least sixty (60) days prior to the date the Letter of
Credit expires. If Landlord draws on the Letter of Credit pursuant to the terms
hereof, Tenant shall immediately replenish the Letter of Credit or provide
Landlord with an additional letter of credit conforming to the requirement of
this paragraph so that the amount available to Landlord from the Letter of
Credit(s) provided hereunder is the amount specified in Paragraph 2.d. above.
Tenant's failure to deliver any replacement, additional or extension of the
Letter of Credit, or evidence of renewal of the Letter of Credit, within the
time specified under this Lease shall entitle Landlord to draw upon the Letter
of Credit then in effect. If Landlord liquidates the Letter of Credit as
provided in the preceding sentence, Landlord shall hold the funds received from
the Letter of Credit as security for Tenant's performance under this Lease, and
Landlord shall not be required to segregate such security deposit from its other
funds and no interest shall accrue or be payable to Tenant with respect thereto.
No holder of a Superior Interest (as defined in Paragraph 21 below), nor any
purchaser at any judicial or private foreclosure sale of the Real Property or
any portion thereof, shall be responsible to Tenant for such security deposit
unless and only to the extent such holder or purchaser shall have actually
received the same. If Landlord transfers such security deposit to the grantee or
transferee of Landlord's interest in the Real Property, Landlord shall be
released from any further responsibility or liability for such security. If
Tenant is not in default at the expiration or termination of this Lease,
Landlord shall return to Tenant the Letter of Credit or the balance of the
security deposit then held by Landlord, as applicable; provided, however, that
in no event shall any such return be construed as an admission by Landlord that
Tenant has performed all of its covenants and obligations hereunder.
b. Notwithstanding the foregoing, however, on the first day of
the Second Lease Year and each subsequent Lease Year (each such date termed
herein a "Reduction Date"), so long as no Event of Default (as defined in
Paragraph 25.a. below) by Tenant under this Lease has occurred since the
previous Reduction Date (or, in the case of the first Reduction Date, since the
Commencement Date), the amount required under the Letter of Credit shall reduce
by Five Hundred Thirty-Three Thousand Three Hundred Thirty-Three Dollars
($533,333.00) on such Reduction Date, and if Tenant is entitled to such
reduction, Tenant may replace or amend the existing Letter of Credit to reflect
such reduced amount on or after the applicable Reduction Date.
7. ADDITIONAL RENT: INCREASES IN OPERATING EXPENSES AND TAX
EXPENSES.
a. Operating Expenses. Tenant shall pay to Landlord, at the
times hereinafter set forth, Tenant's Share, as specified in Paragraph 2.e.
above, of any increase in the Operating Expenses (as defined below) incurred by
Landlord in each calendar year subsequent to the Base Year specified in
Paragraph 2.f. above, over the Operating Expenses incurred by Landlord during
the Base Year. The amounts payable under this Paragraph 7.a. and Paragraph 7.b.
below are termed "Additional Rent" herein.
The term "Operating Expenses" shall mean the total costs and expenses
incurred by Landlord in connection with the management, operation, maintenance,
repair and ownership of the Real Property, including, without limitation, the
following costs: (1) salaries, wages, bonuses and other compensation (including
hospitalization, medical, surgical, retirement plan, pension plan, union dues,
life insurance, including group life insurance, welfare and other fringe
benefits, and vacation, holidays and other paid absence benefits) relating to
employees of Landlord or its agents engaged in the operation, repair, or
maintenance of the Real Property allocated in proportion to the percentage of
such person's working time actually spent working in connection with the Real
Property; (2) payroll, social security, workers' compensation, unemployment and
similar taxes with respect to such employees of Landlord or its agents, and the
cost of providing disability or other benefits imposed by law or otherwise, with
respect to such employees; (3) the cost of uniforms (including the cleaning,
replacement and pressing thereof) provided to
6
<PAGE>
such employees; (4) premiums and other charges incurred by Landlord with respect
to fire, other casualty, rent and liability insurance, any other insurance as is
deemed necessary or advisable in the reasonable judgment of Landlord, or any
insurance required by the holder of any Superior Interest (as defined in
Paragraph 21 below) (provided that, with respect to earthquake insurance which
Landlord does not carry during the Base Year but obtains subsequent to the Base
Year, the cost of such insurance shall not be included in Operating Expenses
unless such insurance is then required by the holder of any mortgage, deed of
trust or ground lease affecting the Real Property, or if in such year
reasonable, prudent owners of first-class office buildings in downtown Oakland
would generally carry such insurance), and, after the Base Year, costs of
repairing an insured casualty to the extent of the deductible amount under the
applicable insurance policy; (5) water charges and sewer rents or fees; (6)
license, permit and inspection fees; (7) sales, use and excise taxes on goods
and services purchased by Landlord in connection with the operation, maintenance
or repair of the Real Property and Building systems and equipment; (8)
telephone, telegraph, postage, stationery supplies and other expenses incurred
in connection with the operation, maintenance, or repair of the Real Property;
(9) management fees and expenses; (10) costs of repairs to and maintenance of
the Real Property, including building systems and appurtenances thereto and
normal repair and replacement of worn-out equipment, facilities and
installations, but excluding the replacement of major building systems (except
to the extent provided in (16) and (17) below); (11) fees and expenses for
janitorial, window cleaning, guard, extermination, water treatment, rubbish
removal, plumbing and other services and inspection or service contracts for
elevator, electrical, mechanical and other building equipment and systems or as
may otherwise be necessary or proper for the operation, repair or maintenance of
the Real Property; (12) costs of supplies, tools, materials, and equipment used
in connection with the operation, maintenance or repair of the Real Property;
(13) accounting, legal and other professional fees and expenses; (14) fees and
expenses for painting the exterior or the public or common areas of the Building
and the cost of maintaining the sidewalks, landscaping and other common areas of
the Real Property; (15) costs and expenses for electricity, chilled water, air
conditioning, water for heating, gas, fuel, steam, heat, lights, power and other
energy related utilities required in connection with the operation, maintenance
and repair of the Real Property; (16) the cost of any capital improvements made
by Landlord to the Real Property or capital assets acquired by Landlord after
the Base Year in order to comply with any local, state or federal law,
ordinance, rule, regulation, code or order of any governmental entity or
insurance requirement (collectively, "Legal Requirement") with which the Real
Property was not required to comply during the Base Year, or to comply with any
amendment or other change to the enactment or interpretation of any Legal
Requirement from its enactment or interpretation during the Base Year; (17) the
cost of any capital improvements made by Landlord to the Building or capital
assets acquired by Landlord after the Base Year for the protection of the health
and safety of the occupants of the Real Property or that are designed to reduce
other Operating Expenses; (18) the cost of furniture, draperies, carpeting,
landscaping and other customary and ordinary items of personal property
(excluding paintings, sculptures and other works of art) provided by Landlord
for use in common areas of the Building or in the Building office (to the extent
that such Building office is dedicated to the operation and management of the
Real Property); (19) any expenses and costs resulting from substitution of work,
labor, material or services in lieu of any of the above itemizations, or for any
additional work, labor, services or material resulting from compliance with any
Legal Requirement applicable to the Real Property or any parts thereof; (20)
Building office rent or rental value; and (21) the Real Property's allocable
share of expenses, in the nature of the other Operating Expenses described in
this Paragraph 7.a., which are incurred with respect to the common areas of City
Center (including without limitation pedestrian walkways, patios, landscaped
areas, sidewalks, service corridors, restrooms, stairways, escalators,
decorative walls, plaza, fountains, malls, throughways, loading areas and ramps
and parking areas), which allocation shall be determined by Landlord in its good
faith business judgment. If the Real Property becomes subject to any covenants,
conditions or restrictions, reciprocal easement agreement, common area
declaration or similar agreement, the foregoing common area expenses shall
include all fees, costs or other expenses allocated to the Real Property under
such agreement. With respect to the costs of items included in Operating
Expenses under (16) and (17), such costs shall be amortized over a reasonable
period, as determined by Landlord, together with interest on the unamortized
balance at a rate per annum equal to three (3) percentage points over the
Treasury Rate charged at the time such item is constructed or acquired, or at
such higher rate as may have been paid by Landlord on funds borrowed for the
purpose of constructing or acquiring such item, but in either case not more than
the maximum rate permitted by law at the time such item is constructed or
acquired.
Operating Expenses shall not include the following: (i) depreciation
on the Building or equipment or systems therein; (ii) debt service; (iii) rental
under any ground or underlying lease; (iv) interest (except as expressly
provided in this Paragraph 7.a.); (v) Tax Expenses (as defined in Paragraph 7.b.
below); (vi) attorneys' fees and expenses incurred in connection with lease
negotiations or lease disputes with former, current or prospective Building
tenants; (vii) the cost (including any amortization thereof) of any improvements
or alterations which would be properly classified as capital expenditures
according to generally accepted property management practices (except to the
extent expressly included in Operating Expenses pursuant to this Paragraph
7.a.); (viii) the cost of decorating, improving for tenant occupancy, painting
or redecorating portions of the Building to be demised to tenants; (ix)
executive salaries; (x) advertising; (xi) real estate broker's or other leasing
commissions; (xii) overhead and profit increments paid to subsidiaries or
affiliates of Landlord for management or other services on or to the Building or
for supplies or other materials to the extent that the cost of the services,
supplies or materials materially exceed the amounts normally payable for similar
goods and services under similar circumstances (taking into account the market
factors in effect on the date any relevant contracts were negotiated) in
comparable buildings in
7
<PAGE>
downtown Oakland and San Francisco; or (xiii) any expense for which Landlord is
actually directly reimbursed by a tenant or other party.
b. TAX EXPENSES. Tenant shall pay to Landlord as Additional
Rent under this Lease, at the times hereinafter set forth, Tenant's Share, as
specified in Paragraph 2.e. above, of any increase in Tax Expenses (as defined
below) incurred by Landlord in each calendar year, over Tax Expenses incurred by
Landlord during the Base Tax Year. Notwithstanding the foregoing, if any
reassessment, reduction or recalculation of any item included in Tax Expenses
during the term results in a reduction of Tax Expenses, then for purposes of
calculating Tenant's Share of increases in Tax Expenses from and after the
calendar year in which such adjustment occurs, Tax Expenses for the Base Tax
Year shall be adjusted to reflect such reduction.
The term "Tax Expenses" shall mean all taxes, assessments (whether
general or special), excises, transit charges, housing fund assessments or other
housing charges, improvement districts, levies or fees, ordinary or
extraordinary, unforeseen as well as foreseen, of any kind, which are assessed,
levied, charged, confirmed or imposed on the Real Property, on Landlord with
respect to the Real Property, on the act of entering into leases of space in the
Real Property, on the use or occupancy of the Real Property or any part thereof,
with respect to services or utilities consumed in the use, occupancy or
operation of the Real Property, on any improvements, fixtures and equipment and
other personal property of Landlord located in the Real Property and used in
connection with the operation of the Real Property, or on or measured by the
rent payable under this Lease or in connection with the business of renting
space in the Real Property, including, without limitation, any gross income tax
or excise tax levied with respect to the receipt of such rent, by the United
States of America, the State of California, the City of Oakland, the County of
Alameda, any political subdivision, public corporation, district or other
political or public entity or public authority, and shall also include any other
tax, fee or other excise, however described, which may be levied or assessed in
lieu of, as a substitute (in whole or in part) for, or as an addition to, any
other Tax Expense. Tax Expenses shall include reasonable attorneys' fees, costs
and disbursements incurred in connection with proceedings to contest, determine
or reduce Tax Expenses. If it shall not be lawful for Tenant to reimburse
Landlord for any increase in Tax Expenses as defined herein, the Monthly Rent
payable to Landlord prior to the imposition of such increases in Tax Expenses
shall be increased to net Landlord the same net Monthly Rent after imposition of
such increases in Tax Expenses as would have been received by Landlord prior to
the imposition of such increases in Tax Expenses.
Tax Expenses shall not include income, franchise, transfer,
inheritance or capital stock taxes, unless, due to a change in the method of
taxation, any of such taxes is levied or assessed against Landlord in lieu of,
as a substitute (in whole or in part) for, or as an addition to, any other
charge which would otherwise constitute a Tax Expense.
c. ADJUSTMENT FOR OCCUPANCY FACTOR. Notwithstanding any other
provision herein to the contrary, in the event the Building is not fully
occupied during any calendar year during the term, including the Base Year, an
adjustment shall be made by Landlord in computing Operating Expenses for such
year so that the Operating Expenses shall be computed for such year as though
the Building had been fully occupied during such year. In addition, if any
particular work or service includable in Operating Expenses is not furnished to
a tenant who has undertaken to perform such work or service itself, Operating
Expenses shall be deemed to be increased by an amount equal to the additional
Operating Expenses which would have been incurred if Landlord had furnished such
work or service to such tenant. The parties agree that statements in this Lease
to the effect that Landlord is to perform certain of its obligations hereunder
at its own or sole cost and expense shall not be interpreted as excluding any
cost from Operating Expenses or Tax Expenses if such cost is an Operating
Expense or Tax Expense pursuant to the terms of this Lease.
d. INTENTION REGARDING EXPENSE PASS-THROUGH. It is the
intention of Landlord and Tenant that the Monthly Rent paid to Landlord
throughout the term of this Lease shall be absolutely net of all increases,
respectively, in Tax Expenses and Operating Expenses over, respectively, Tax
Expenses for the Base Tax Year and Operating Expenses for the Base Year, and the
foregoing provisions of this Paragraph 7 are intended to so provide.
e. NOTICE AND PAYMENT. On or before the first day of each
calendar year during the term hereof, or as soon as practicable thereafter,
Landlord shall give to Tenant notice of Landlord's estimate of the Additional
Rent, if any, payable by Tenant pursuant to Paragraphs 7.a. and 7.b. for such
calendar year. On or before the first day of each month during each such
calendar year, Tenant shall pay to Landlord one-twelfth (1/12th) of the
estimated Additional Rent; provided, however, that if Landlord's notice is not
given prior to the first day of any calendar year Tenant shall continue to pay
Additional Rent on the basis of the prior year's estimate until the month after
Landlord's notice is given. If at any time it appears to Landlord that the
Additional Rent payable under Paragraphs 7.a. and/or 7.b. will vary from
Landlord's estimate by more than five percent (5%), Landlord may, by written
notice to Tenant, revise its estimate for such year, and subsequent payments by
Tenant for such year shall be based upon the revised estimate. On the first
monthly payment date after any new estimate is delivered to Tenant, Tenant shall
also pay any accrued cost increases, based on such new estimate.
8
<PAGE>
f. ANNUAL ACCOUNTING. Landlord shall maintain adequate books
and records of the Operating Expenses and Tax Expenses in accordance with
standard accounting principles. Within ninety (90) days after the close of each
calendar year subsequent to the Base Year, or as soon after such ninety (90) day
period as practicable, Landlord shall deliver to Tenant a statement of the
Additional Rent payable under Paragraphs 7.a. and 7.b. for such year. The
statement shall be based on the results of an audit of the operations of the
Building prepared for the applicable year by a nationally recognized certified
public accounting firm selected by Landlord. Upon Tenant's request, Landlord
shall promptly deliver to Tenant a copy of the auditor's statement on which
Landlord's annual statement is based and such other information regarding the
annual statement as may be reasonably required by Tenant to ascertain Landlord's
compliance with this Paragraph 7. Landlord's annual statement shall be final and
binding upon Landlord and Tenant unless either party, within thirty (30) days
after Tenant's receipt thereof, shall contest any item therein by giving written
notice to the other, specifying each item contested and the reason therefor.
Notwithstanding the foregoing, the Tax Expenses included in any such annual
statement may be modified by any subsequent adjustment or retroactive
application of Tax Expenses affecting the calculation of such Tax Expenses. If
the annual statement shows that Tenant's payments of Additional Rent for such
calendar year pursuant to Paragraph 7.e. above exceeded Tenant's obligations for
the calendar year, Landlord shall at its option either (1) credit the excess to
the next succeeding installments of estimated Additional Rent or (2) pay the
excess to Tenant within thirty (30) days after delivery of such statement. If
the annual statement shows that Tenant's payments of Additional Rent for such
calendar year pursuant to Paragraph 7.e. above were less than Tenant's
obligation for the calendar year, Tenant shall pay the deficiency to Landlord
within ten (10) days after delivery of such statement. Landlord and Tenant shall
endeavor in good faith to promptly resolve any dispute regarding the annual
statement. Tenant shall not withhold payment of any contested or disputed item.
Upon resolution of any such dispute, whether by agreement of the parties or by
judicial determination, Landlord shall promptly refund to Tenant any amount
determined to have been overpaid by Tenant, or Tenant shall promptly pay to
Landlord any deficiency that is determined to be owing. If, as a consequence of
Tenant's review of Landlord's backup information, as provided above, Tenant
determines that there has been in the relevant year an aggregate overstatement
of Operating Expenses of five percent (5%) or more, and Landlord's auditors
concur in such finding (or, in the absence of such concurrence, such
overstatement is confirmed judicially), then Landlord shall bear Tenant's
reasonable costs of such review.
g. PRORATION FOR PARTIAL LEASE YEAR. If this Lease commences on
a day other than the first day of a calendar year or terminates on a day other
than the last day of a calendar year, the Additional Rent payable by Tenant
pursuant to this Paragraph 7 applicable to such partial calendar year shall be
prorated on the basis that the number of days of such partial calendar year
bears to three hundred sixty-five (365).
8. USE OF PREMISES; COMPLIANCE WITH LAW.
a. USE OF PREMISES. The Premises shall be used solely for
general office purposes for the business of Tenant as described in Paragraph
2.g. above and for no other use or purpose.
Tenant shall not do or suffer or permit anything to be done in or
about the Premises or the Real Property, nor bring or keep anything therein,
which would in any way subject Landlord, Landlord's agents or the holder of any
Superior Interest (as defined in Paragraph 21) to any liability, increase the
premium rate of or affect any fire, casualty, liability, rent or other insurance
relating to the Real Property or any of the contents of the Building, or cause a
cancellation of, or give rise to any defense by the insurer to any claim under,
or conflict with, any policies for such insurance. If any act or omission of
Tenant results in any such increase in premium rates, Tenant shall pay to
Landlord upon demand the amount of such increase. Tenant shall not do or suffer
or permit anything to be done in or about the Premises or the Real Property
which will in any way obstruct or interfere with the rights of other tenants or
occupants of the Building or injure or annoy them, or use or suffer or permit
the Premises to be used for any immoral, unlawful or objectionable purpose, nor
shall Tenant cause, maintain, suffer or permit any nuisance in, on or about the
Premises or the Real Property. Without limiting the foregoing, no loudspeakers
or other similar device which can be heard outside the Premises shall, without
the prior written approval of Landlord, be used in or about the Premises.
Tenant shall not commit or suffer to be committed any waste in, to or
about the Premises. Tenant agrees not to employ any person, entity or contractor
for any work in the Premises (including moving Tenant's equipment and
furnishings in, out or around the Premises) whose presence may give rise to a
labor or other disturbance in the Building and, if necessary to prevent such a
disturbance in a particular situation, Landlord may require Tenant to employ
union labor for the work.
b. COMPLIANCE WITH LAW. Tenant shall not do or permit anything
to be done in or about the Premises which will in any way conflict with any
Legal Requirement (as defined in Paragraph 7.a.(16) above) now in force or which
may hereafter be enacted. Tenant, at its sole cost and expense, shall promptly
comply with all such present and future Legal Requirements relating to the
condition, use or occupancy of the Premises, and shall perform all work to the
Premises or other portions of the Real Property required to effect such
compliance (or, at Landlord's election, Landlord may perform such work at
Tenant's cost). Notwithstanding the foregoing, however, Tenant shall not be
required to perform any structural changes to the Premises or other portions of
the Real Property unless such changes are related to or affected or triggered by
(i) Tenant's Alterations (as defined in Paragraph 9 below), (ii) Tenant's
particular use of the
9
<PAGE>
Premises (as opposed to Tenant's use of the Premises for general office purposes
in a normal and customary manner), (iii) Tenant's particular employees or
employment practices, or (iv) the construction of initial improvements to the
Premises, if any. The judgment of any court of competent jurisdiction or the
admission of Tenant in an action against Tenant, whether or not Landlord is a
party thereto, that Tenant has violated any Legal Requirement shall be
conclusive of that fact as between Landlord and Tenant. Tenant shall immediately
furnish Landlord with any notices received from any insurance company or
governmental agency or inspection bureau regarding any unsafe or unlawful
conditions within the Premises or the violation of any Legal Requirement.
c. HAZARDOUS MATERIALS. Tenant shall not cause or permit the
storage, use, generation, release, handling or disposal (collectively,
"Handling") of any Hazardous Materials (as defined below), in, on, or about the
Premises or the Real Property by Tenant or any agents, employees, contractors,
licensees, subtenants, customers, guests or invitees of Tenant (collectively
with Tenant, "Tenant Parties"), except that Tenant shall be permitted to use
normal quantities of office supplies or products (such as copier fluids or
cleaning supplies) customarily used in the conduct of general business office
activities ("Common Office Chemicals"), provided that the Handling of such
Common Office Chemicals shall comply at all times with all Legal Requirements,
including Hazardous Materials Laws (as defined below). Notwithstanding anything
to the contrary contained herein, however, in no event shall Tenant permit any
usage of Common Office Chemicals in a manner that may cause the Premises or the
Real Property to be contaminated by any Hazardous Materials or in violation of
any Hazardous Materials Laws. Tenant shall immediately advise Landlord in
writing of (a) any and all enforcement, cleanup, remedial, removal, or other
governmental or regulatory actions instituted, completed, or threatened pursuant
to any Hazardous Materials Laws relating to any Hazardous Materials affecting
the Premises; and (b) all claims made or threatened by any third party against
Tenant, Landlord, the Premises or the Real Property relating to damage,
contribution, cost recovery, compensation, loss, or injury resulting from any
Hazardous Materials on or about the Premises. Without Landlord's prior written
consent, Tenant shall not take any remedial action or enter into any agreements
or settlements in response to the presence of any Hazardous Materials in, on, or
about the Premises. Tenant shall be solely responsible for and shall indemnify,
defend and hold Landlord and all other Indemnitees (as defined in Paragraph
14.b. below), harmless from and against all Claims (as defined in Paragraph
14.b. below), arising out of or in connection with, or otherwise relating to (i)
any Handling of Hazardous Materials by any Tenant Party or Tenant's breach of
its obligations hereunder, or (ii) any removal, cleanup, or restoration work and
materials necessary to return the Real Property or any other property of
whatever nature located on the Real Property to their condition existing prior
to the Handling of Hazardous Materials in, on or about the Premises. Tenant's
obligations under this paragraph shall survive the expiration or other
termination of this Lease. For purposes of this Lease, "Hazardous Materials"
means any explosive, radioactive materials, hazardous wastes, or hazardous
substances, including without limitation asbestos containing materials, PCB's,
CFC's, or substances defined as "hazardous substances" in the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended, 42
U.S.C. Section 9601- 9657; the Hazardous Materials Transportation Act of 1975,
49 U.S.C. Section 1801-1812; the Resource Conservation and Recovery Act of 1976,
42 U.S.C. Section 6901-6987; or any other Legal Requirement regulating, relating
to, or imposing liability or standards of conduct concerning any such materials
or substances now or at any time hereafter in effect (collectively, "Hazardous
Materials Laws").
d. APPLICABILITY OF PARAGRAPH. The provisions of this Paragraph
8 are for the benefit of Landlord, the holder of any Superior Interest (as
defined in Paragraph 21 below), and the other Indemnitees only and are not nor
shall they be construed to be for the benefit of any tenant or occupant of the
Building.
9. ALTERATIONS AND RESTORATION.
a. Tenant shall not make or permit to be made any alterations,
modifications, additions, decorations or improvements to the Premises, or any
other work whatsoever that would directly or indirectly involve the penetration
or removal (whether permanent or temporary) of, or require access through, in,
under, or above any floor, wall or ceiling, or surface or covering thereof in
the Premises (collectively, "Alterations"), except as expressly provided in this
Paragraph 9.
Tenant shall have the right, without Landlord's consent, to make
any Alteration to the Premises, provided that (a) the Alteration is decorative
in nature (such as paint, carpet or other wall or floor finishes, partitions
other such work), (b) Tenant provides Landlord with ten (10) days' advance
notice of the commencement of any such Alteration, (c) such Alteration does not
affect the Building's electrical, mechanical or HVAC systems or any part of the
Building other than the Premises, (d) the work will not decrease the value of
the Premises, does not require a building permit or other governmental permit,
uses only first-class materials and is performed in a workman-like manner and in
accordance with all applicable laws and regulations, and (e) the work does not
involve opening the ceiling of the Premises. At the time Tenant notifies
Landlord of any such work, Tenant shall give Landlord a copy of Tenant's plans
for the work, or, if the Alterations are of such a nature that formal plans will
not be prepared for the work, Tenant shall provide Landlord with a reasonably
specific description of the work. If Tenant desires any Alteration that is not
covered in the preceding two (2) sentences, Tenant must obtain Landlord's prior
written approval of such Alteration, which approval shall not be unreasonably
withheld or delayed.
10
<PAGE>
All Alterations shall be made at Tenant's sole cost and expense
(including the expense of complying with all present and future Legal
Requirements, including those regarding asbestos, if applicable, and any other
work required to be performed in other areas within or outside the Premises by
reason of the Alterations). Alterations shall be made, at Tenant's election, by
Landlord or by a contractor reasonably approved by Landlord. If Tenant hires
Landlord to perform the Alteration, Landlord's contractor shall be entitled to
receive a fee for such work of fifteen percent (15%) of the first $100,000 of
the construction costs of such work, and the fee for any construction costs over
such amount shall be as negotiated by Tenant and Landlord. If Landlord does not
perform the work pursuant to the above, Tenant shall pay Landlord on demand
prior to or during the course of such construction an amount (the "Alteration
Operations Fee") equal to five percent (5%) of the total cost of the Alteration
(and for purposes of calculating the Alteration Operations Fee, such cost shall
include architectural and engineering fees, but shall not include permit fees)
as compensation to Landlord for electrical energy consumed in connection with
the work, freight elevator operation, additional cleaning expenses, additional
security services, and for other miscellaneous costs incurred by Landlord as
result of the work.
All such work shall be performed diligently and in a first-class
workmanlike manner and in accordance with plans and specifications approved by
Landlord, and shall comply with all Legal Requirements and Landlord's
construction procedures and requirements for the Building (including Landlord's
requirements relating to insurance and contractor qualifications). In no event
shall Tenant employ any person, entity or contractor to perform work in the
Premises whose presence may give rise to a labor or other disturbance in the
Building. Default by Tenant in the payment of any sums agreed to be paid by
Tenant for or in connection with an Alteration (regardless of whether such
agreement is pursuant to this Paragraph 9 or separate instrument) shall entitle
Landlord to all the same remedies as for non-payment of rent hereunder. Any
Alterations, including, without limitation, moveable partitions that are affixed
to the Premises (but excluding moveable, free standing partitions) and all
carpeting, shall at once become part of the Building and the property of
Landlord. Tenant shall give Landlord not less than five (5) days prior written
notice of the date the construction of the Alteration is to commence. Landlord
may post and record an appropriate notice of nonresponsibility with respect to
any Alteration and Tenant shall maintain any such notices posted by Landlord in
or on the Premises.
b. At Landlord's sole election any or all Alterations made for
or by Tenant shall be removed by Tenant from the Premises at the expiration or
sooner termination of this Lease and the Premises shall be restored by Tenant to
their condition prior to the making of the Alterations, ordinary wear and tear
excepted. If Tenant desires permission to leave a specific Alteration in the
Premises at the expiration or earlier termination of the Lease, Tenant shall
request such permission from Landlord in writing at the time Tenant requests
approval for such Alteration and Landlord shall advise Tenant in writing at the
time of Landlord's approval of the subject Alteration whether Landlord will
require the removal of the Alteration at the expiration or earlier termination
of this Lease. The removal of the Alterations and the restoration of the
Premises shall be performed by a general contractor selected by Tenant and
approved by Landlord, and Tenant shall pay the general contractor's fees and
costs in connection with such work. Any separate work letter or other agreement
which is hereafter entered into between Landlord and Tenant pertaining to
Alterations shall be deemed to automatically incorporate the terms of this Lease
without the necessity for further reference thereto.
10. REPAIR. By taking possession of the Premises, Tenant agrees that
the Premises are in good condition and repair. Tenant, at Tenant's sole cost and
expense, shall keep the Premises and every part thereof (including the interior
walls and ceilings of the Premises, those portions of the Building systems
located within and exclusively serving the Premises, and improvements and
Alterations) in good condition and repair. Tenant waives all rights to make
repairs at the expense of Landlord as provided by any Legal Requirement now or
hereafter in effect. It is specifically understood and agreed that, except as
specifically set forth in this Lease, Landlord has no obligation and has made no
promises to alter, remodel, improve, repair, decorate or paint the Premises or
any part thereof, and that no representations respecting the condition of the
Premises or the Building have been made by Landlord to Tenant. Tenant hereby
waives the provisions of California Civil Code Sections 1932(1), 1941 and 1942
and of any similar Legal Requirement now or hereafter in effect.
11. ABANDONMENT. Tenant shall not abandon the Premises or any part
thereof at any time during the term hereof. Upon the expiration or earlier
termination of this Lease, or if Tenant abandons or surrenders all or any part
of the Premises or is dispossessed of the Premises by process of law, or
otherwise, any movable furniture, equipment, trade fixtures, or other personal
property belonging to Tenant and left on the Premises shall at the option of
Landlord be deemed to be abandoned and, whether or not the property is deemed
abandoned, Landlord shall have the right to remove such property from the
Premises and charge Tenant for the removal and any restoration of the Premises
as provided in Paragraph 9. Landlord may charge Tenant for the storage of
Tenant's property left on the Premises at such rates as Landlord may from time
to time reasonably determine, or, Landlord may, at its option, store Tenant's
property in a public warehouse at Tenant's expense. Notwithstanding the
foregoing, neither the provisions of this Paragraph 11 nor any other provision
of this Lease shall impose upon Landlord any obligation to care for or preserve
any of Tenant's property left upon the Premises, and Tenant hereby waives and
releases Landlord from any claim or liability
11
<PAGE>
in connection with the removal of such property from the Premises and the
storage thereof and specifically waives the provisions of California Civil Code
Section 1542 with respect to such release. Landlord's action or inaction with
regard to the provisions of this Paragraph 11 shall not be construed as a waiver
of Landlord's right to require Tenant to remove its property, restore any damage
to the Premises and the Building caused by such removal, and make any
restoration required pursuant to Paragraph 9 above. Tenant's mere vacating of
the Premises during the term hereof shall not constitute an Event of Default (as
defined in Paragraph 25.a.) so long as Tenant continues to pay Monthly Rent,
Additional Rent and all other sums due Landlord under this Lease, maintains the
insurance coverage required pursuant to Paragraph 15 of this Lease and otherwise
continues to perform its obligations under this Lease, and so long as Tenant
provides Landlord with written notice of an alternate address for notices to
Tenant under this Lease (other than the Premises) if such vacancy exceeds sixty
(60) consecutive days.
12. LIENS. Tenant shall not permit any mechanic's, materialman's or
other liens arising out of work performed at the Premises by or on behalf of
Tenant to be filed against the fee of the Real Property nor against Tenant's
interest in the Premises. Landlord shall have the right to post and keep posted
on the Premises any notices which it deems necessary for protection from such
liens. If any such liens are filed, Landlord may, upon twenty (20) days' written
notice to Tenant, without waiving its rights based on such breach by Tenant and
without releasing Tenant from any obligations hereunder, pay and satisfy the
same and in such event the sums so paid by Landlord shall be due and payable by
Tenant immediately without notice or demand, with interest from the date paid by
Landlord through the date Tenant pays Landlord, at the Interest Rate. Tenant
agrees to indemnify, defend and hold Landlord and the other Indemnitees (as
defined in Paragraph 14.b. below) harmless from and against any Claims (as
defined in Paragraph 14.b. below) for mechanics', materialmen's or other liens
in connection with any Alterations, repairs or any work performed, materials
furnished or obligations incurred by or for Tenant.
13. ASSIGNMENT AND SUBLETTING.
a. LANDLORD'S CONSENT. Landlord's and Tenant's agreement with
regard to Tenant's right to transfer all or part of its interest in the Premises
is as expressly set forth in this Paragraph 13. Tenant agrees that, except upon
Landlord's prior written consent, which consent shall not (subject to Landlord's
rights under Paragraph 13.d. below) be unreasonably withheld, neither this Lease
nor all or any part of the leasehold interest created hereby shall, directly or
indirectly, voluntarily or involuntarily, by operation of law or otherwise, be
assigned, mortgaged, pledged, encumbered or otherwise transferred by Tenant or
Tenant's legal representatives or successors in interest (collectively an
"assignment") and neither the Premises nor any part thereof shall be sublet or
be used or occupied for any purpose by anyone other than Tenant (collectively, a
"sublease"). Any assignment or subletting without Landlord's prior written
consent shall, at Landlord's option, be void and shall constitute an Event of
Default entitling Landlord to terminate this Lease and to exercise all other
remedies available to Landlord under this Lease and at law.
The parties hereto agree and acknowledge that, among other
circumstances for which Landlord may reasonably withhold its consent to an
assignment or sublease, it shall be reasonable for Landlord to withhold its
consent where: (i) the assignment or subletting would materially increase the
operating costs for the Building or the burden on the Building services, or
generate additional foot traffic, elevator usage or security concerns in the
Building, or create an increased probability of the comfort and/or safety of
Landlord and other tenants in the Building being compromised or reduced, (ii)
the space will be used for a school or training facility, an entertainment,
sports or recreation facility, retail sales to the public (unless Tenant's
permitted use is retail sales), a personnel or employment agency, an office or
facility of any governmental or quasi-governmental agency or authority, a place
of public assembly (including without limitation a meeting center, theater or
public forum), any use by or affiliation with a foreign government (including
without limitation an embassy or consulate or similar office), or a facility for
the provision of social, welfare or clinical health services or sleeping
accommodations (whether temporary, daytime or overnight); (iii) the proposed
assignee or subtenant is a prospective tenant of the Building (and Landlord is
in written correspondence to them regarding space available) or the proposed
assignee or subtenant is a current tenant of the Building; (iv) Landlord
disapproves of the proposed assignee or subtenant's reputation or
creditworthiness; (v) Landlord determines that the character of the business
that would be conducted by the proposed assignee or subtenant at the Premises,
or the manner of conducting such business, would be inconsistent with the
character of the Building as a first-class office building; (vi) the proposed
assignee or subtenant is an entity or related to an entity with whom Landlord or
any affiliate of Landlord has had adverse dealings relating to the use or
occupancy of space pursuant to a lease or a license, or the proposed assignee or
subtenant is an entity or related to an entity with whom Landlord or any
affiliate of Landlord has been engaged in litigation, or who has asserted a
legal claim against Landlord or any affiliate of Landlord, or against whom
Landlord or any affiliate of Landlord has asserted a legal claim;; (vii) the
assignment or subletting may conflict with any exclusive uses granted to other
tenants of the Real Property, or with the terms of any easement, covenant,
condition or restriction, or other agreement affecting the Real Property; (viii)
the assignment or subletting would involve a change in use from that expressly
permitted under this Lease; or (ix) Landlord determines that the proposed
assignee may be unable to perform all of Tenant's obligations under this Lease
or the proposed subtenant may be unable to perform all of its obligations under
the proposed sublease. Landlord's foregoing rights and options shall continue
throughout the entire term of this Lease.
12
<PAGE>
For purposes of this Paragraph 13, the following events shall be
deemed an assignment or sublease, as appropriate: (i) the issuance of equity
interests (whether stock, partnership interests or otherwise) in Tenant or any
subtenant or assignee, or any entity controlling any of them, to any person or
group of related persons, in a single transaction or a series of related or
unrelated transactions, such that, following such issuance, such person or group
shall have Control (as defined below) of Tenant or any subtenant or assignee;
(ii) a transfer of Control of Tenant or any subtenant or assignee, or any entity
controlling any of them, in a single transaction or a series of related or
unrelated transactions (including, without limitation, by consolidation, merger,
acquisition or reorganization), except that the transfer of outstanding capital
stock or other listed equity interests by persons or parties other than
"insiders" within the meaning of the Securities Exchange Act of 1934, as
amended, through the "over-the-counter" market or any recognized national or
international securities exchange, shall not be included in determining whether
Control has been transferred; (iii) a reduction of Tenant's assets to the point
that this Lease is substantially Tenant's only asset; (iv) a change or
conversion in the form of entity of Tenant, any subtenant or assignee, or any
entity controlling any of them, which has the effect of limiting the liability
of any of the partners, members or other owners of such entity; or (v) the
agreement by a third party to assume, take over, or reimburse Tenant for, any or
all of Tenant's obligations under this Lease, in order to induce Tenant to lease
space with such third party. "Control" shall mean direct or indirect ownership
of 50% or more of all of the voting stock of a corporation or 50% or more of the
legal or equitable interest in any other business entity, or the power to direct
the operations of any entity (by equity ownership, contract or otherwise).
If this Lease is assigned, whether or not in violation of the terms of
this Lease, Landlord may collect rent from the assignee. If the Premises or any
part thereof is sublet, Landlord may, upon an Event of Default by Tenant
hereunder, collect rent from the subtenant. In either event, Landlord may apply
the amount collected from the assignee or subtenant to Tenant's monetary
obligations hereunder.
The consent by Landlord to an assignment or subletting hereunder shall
not relieve Tenant or any assignee or subtenant from obtaining Landlord's
express prior written consent to any other or further assignment or subletting.
Neither an assignment or subletting nor the collection of rent by Landlord from
any person other than Tenant, nor the application of any such rent as provided
in this Paragraph 13.a. shall be deemed a waiver of any of the provisions of
this Paragraph 13.a. or release Tenant from its obligation to comply with the
provisions of this Lease and Tenant shall remain fully and primarily liable for
all of Tenant's obligations under this Lease. If Landlord approves of an
assignment or subletting hereunder and this Lease contains any renewal options,
expansion options, rights of first refusal, rights of first negotiation or any
other rights or options pertaining to additional space in the Building, such
rights and/or options shall not run to the subtenant or assignee, it being
agreed by the parties hereto that any such rights and options are personal to
the Tenant originally named herein and may not be transferred.
b. PROCESSING EXPENSES. Tenant shall pay to Landlord, as
Landlord's cost of processing each proposed assignment or subletting, an amount
equal to the sum of (i) Landlord's reasonable attorneys' and other professional
fees, plus (ii) the sum of $750.00 for the cost of Landlord's administrative,
accounting and clerical time (collectively, "Processing Costs"), and the amount
of all direct and indirect costs and expenses incurred by Landlord arising from
the assignee or sublessee taking occupancy of the subject space (including,
without limitation, costs of freight elevator operation for moving of
furnishings and trade fixtures, security service, janitorial and cleaning
service, and rubbish removal service). Notwithstanding anything to the contrary
herein, Landlord shall not be required to process any request for Landlord's
consent to an assignment or subletting until Tenant has paid to Landlord the
amount of Landlord's estimate of the Processing Costs and all other direct and
indirect costs and expenses of Landlord and its agents arising from the assignee
or subtenant taking occupancy.
c. CONSIDERATION TO LANDLORD. In the event of any assignment or
sublease, whether or not requiring Landlord's consent, Landlord shall be
entitled to receive, as additional rent hereunder, seventy-five percent (75%) of
any consideration (including, without limitation, payment for leasehold
improvements and any "Leasehold Profit" as defined below) paid by the assignee
or subtenant for the assignment or sublease and, in the case of a sublease,
seventy-five percent (75%) of the excess of the amount of rent paid for the
sublet space by the subtenant over the amount of Monthly Rent under Paragraph 5
above and Additional Rent under Paragraph 7 above attributable to the sublet
space for the corresponding month; except that Tenant may recapture, on an
amortized basis over the term of the sublease or assignment, any brokerage
commissions paid by Tenant in connection with the subletting or assignment (not
to exceed commissions typically paid in the market at the time of such
subletting or assignment), reasonable legal fees paid by Tenant in connection
with such assignment or subletting (not to exceed the lesser of (x) $2,500 or
(y) $0.35 per rentable square foot of the sublet or assigned space) and any
improvement allowance paid by Tenant to the subtenant or assignee (collectively
the "Assignment or Subletting Costs"), provided that, as a condition to Tenant
recapturing the Assignment or Subletting Costs, Tenant shall provide to
Landlord, within ninety (90) days of Landlord's execution of Landlord's consent
to the assignment or subletting, a detailed accounting of the Assignment or
Subletting Costs and supporting documents, such as receipts and construction
invoices. To effect the foregoing, Tenant shall deduct from the monthly amounts
received by Tenant from the subtenant or assignee as rent or consideration (i)
the Monthly Rent and Additional Rent payable by Tenant to Landlord for the
subject space and (ii) the incremental amount, on an amortized basis, of the
Assignment or Subletting Costs, and seventy-five percent (75%) of the then
remaining sum shall be paid promptly to
13
<PAGE>
Landlord. Upon Landlord's request, Tenant shall assign to Landlord all amounts
to be paid to Tenant by any such subtenant or assignee and that belong to
Landlord and shall direct such subtenant or assignee to pay the same directly to
Landlord. If there is more than one sublease under this Lease, the amounts (if
any) to be paid by Tenant to Landlord pursuant to the preceding sentence shall
be separately calculated for each sublease and amounts due Landlord with regard
to any one sublease may not be offset against rental and other consideration
pertaining to or due under any other sublease. "Leasehold Profit" shall be the
value allocated to the leasehold between the parties to the assignment or
sublease, but in no event less than the excess of the present value of the fair
market rent of the Premises for the remaining term of this Lease after such
assignment or sublease, over the present value of the Monthly Rent payable
hereunder for such remaining term, as reasonably determined by Landlord.
d. PROCEDURES. If Tenant desires to assign this Lease or any
interest therein or sublet all or part of the Premises, Tenant shall give
Landlord written notice thereof and the terms proposed (the "Sublease Notice"),
which Sublease Notice, in the case of a proposed sublease, shall designate the
space proposed to be sublet. Landlord shall have the prior right and option (to
be exercised by written notice to Tenant given within sixty (60) days after
receipt of Tenant's notice) (i) to sublet from Tenant any portion of the
Premises proposed by Tenant to be sublet, for the term for which such portion is
proposed to be sublet, but at the lesser of the proposed sublease rent or the
same rent (including Additional Rent as provided for in Paragraph 7 above) as
Tenant is required to pay to Landlord under this Lease for the same space,
computed on a pro rata square footage basis, and during the term of such
sublease Tenant shall be released of its obligations under this Lease with
regard to the subject space, (ii) to terminate this Lease as it pertains to the
portion of the Premises so proposed by Tenant to be sublet, or (iii) to approve
Tenant's proposal to sublet conditional upon Landlord's subsequent written
approval of the specific sublease obtained by Tenant and the specific subtenant
named therein. If Landlord exercises its option in (i) above, then Landlord may,
at Landlord's sole cost, construct improvements in the subject space and, so
long as the improvements are suitable for general office purposes, Landlord
shall have no obligation to restore the subject space to its original condition
following the termination of the sublease. If Landlord exercises its option
described in (iii) above, then Tenant shall have three (3) months thereafter to
submit to Landlord, for Landlord's written approval, Tenant's proposed sublease
agreement (in which the proposed subtenant shall be named, and which agreement
shall otherwise meet the requirements of Paragraph 13.e. below), together with a
current financial statement of such proposed subtenant and any other information
reasonably requested by Landlord. If Tenant fails to submit the specific
sublease and other required information within such time, or if the terms of the
specific sublease submitted by Tenant vary from the terms set forth in the
Sublease Notice approved by Landlord pursuant to (iii) above, then Tenant shall
be required to submit a new Sublease Notice for Landlord's evaluation pursuant
to the procedures set forth in this paragraph. If Landlord fails to exercise any
such option to sublet or to terminate, this shall not be construed as or
constitute a waiver of any of the provisions of Paragraphs 13.a., b., c. or d.
herein. If Landlord exercises any option to sublet or to terminate, any costs of
demising the portion of the Premises affected by such subleasing or termination
shall be borne by Tenant. In addition, Landlord shall have no liability for any
real estate brokerage commission(s) or with respect to any of the costs and
expenses that Tenant may have incurred in connection with its proposed
subletting, and Tenant agrees to indemnify, defend and hold Landlord and all
other Indemnitees harmless from and against any and all Claims (as defined in
Paragraph 14.b. below), including, without limitation, claims for commissions,
arising from such proposed subletting. Landlord's foregoing rights and options
shall continue throughout the entire term of this Lease. For purposes of this
Paragraph 13.d., a proposed assignment of this Lease in whole or in part shall
be deemed a proposed subletting of such space.
e. DOCUMENTATION. No permitted assignment or subletting by
Tenant shall be effective until there has been delivered to Landlord a fully
executed counterpart of the assignment or sublease which expressly provides that
(i) the assignee or subtenant may not further assign or sublet the assigned or
sublet space without Landlord's prior written consent (which, in the case of a
further assignment proposed by an assignee, shall not be unreasonably withheld,
subject to Landlord's rights under the provisions of this Paragraph 13), (ii)
the assignee or subtenant will comply with all of the provisions of this Lease,
and Landlord may enforce the Lease provisions directly against such assignee or
subtenant, (iii) in the case of an assignment, the assignee assumes all of
Tenant's obligations under this Lease arising on or after the date of the
assignment, and (iv) in the case of a sublease, the subtenant agrees to be and
remain jointly and severally liable with Tenant for the payment of rent
pertaining to the sublet space in the amount set forth in the sublease, and for
the performance of all of the terms and provisions of this Lease. In addition to
the foregoing, no sublease by Tenant shall be effective until there has been
delivered to Landlord a fully executed counterpart of Landlord's consent to
sublease form. The failure or refusal of a subtenant or assignee to execute any
such instrument shall not release or discharge the subtenant or assignee from
its liability as set forth above. Notwithstanding the foregoing, however, no
subtenant or assignee shall be permitted to occupy the Premises unless and until
such subtenant or assignee provides Landlord with certificates evidencing that
such subtenant or assignee is carrying all insurance coverage required of such
subtenant or assignee under this Lease.
f. NO MERGER. Without limiting any of the provisions of this
Paragraph 13, if Tenant has entered into any subleases of any portion of the
Premises, the voluntary or other surrender of this Lease by Tenant, or a mutual
cancellation by Landlord and Tenant, shall not work a merger, and shall, at the
option of Landlord, terminate all or any existing subleases or subtenancies or,
at the option of Landlord, operate as
14
<PAGE>
an assignment to Landlord of any or all such subleases or subtenancies. If
Landlord does elect that such surrender or cancellation operate as an assignment
of such subleases or subtenancies, Landlord shall in no way be liable for any
previous act or omission by Tenant under the subleases or for the return of any
deposit(s) under the subleases that have not been actually delivered to
Landlord, nor shall Landlord be bound by any sublease modification(s) executed
without Landlord's consent or for any advance rental payment by the subtenant in
excess of one month's rent.
g. AFFILIATES. Notwithstanding anything to the contrary in
Paragraphs 13.a. and 13.d., but subject to Paragraphs 13.e. and 13.f., Tenant
may assign this Lease or sublet the Premises or any portion thereof, without
Landlord's consent, to any partnership, corporation or other entity which
controls, is controlled by, or is under common control with Tenant or Tenant's
parent (control being defined for such purposes as ownership of at least 50% of
the equity interests in, or the power to direct the management of, the relevant
entity) or to any partnership, corporation or other entity resulting from a
merger or consolidation with Tenant or Tenant's parent, or to any person or
entity which acquires substantially all the assets of Tenant as a going concern
(collectively, an "Affiliate"), provided that (i) Landlord receives prior
written notice of an assignment or subletting, (ii) the Affiliate's net worth is
not less than Tenant's net worth as of the date of this Lease, (iii) the
Affiliate remains an Affiliate for the duration of the subletting or the balance
of the term in the event of an assignment, (iv) the Affiliate assumes (in the
event of an assignment) in writing all of Tenant's obligations under this Lease,
and (v) Landlord receives a fully executed copy of an assignment or sublease
agreement between Tenant and the Affiliate.
14. INDEMNIFICATION OF LANDLORD.
a. Landlord and the holders of any Superior Interests (as
defined in Paragraph 21 below) shall not be liable to Tenant and Tenant hereby
waives all claims against such parties for any loss, injury or other damage to
person or property in or about the Premises or the Real Property from any cause
whatsoever, including without limitation, water leakage of any character from
the roof, walls, basement, fire sprinklers, appliances, air conditioning,
plumbing or other portion of the Premises or the Real Property, or gas, fire,
explosion, falling plaster, steam, electricity, or any malfunction within the
Premises or the Real Property, or acts of other tenants of the Building;
provided, however, that the foregoing waiver shall be inapplicable to any loss,
injury or damage resulting directly from Landlord's gross negligence or willful
misconduct. Tenant acknowledges that from time to time throughout the term of
this Lease, construction work may be performed in and about the Building and the
Real Property by Landlord, contractors of Landlord, or other tenants or their
contractors, and that such construction work may result in noise and disruption
to Tenant's business. In addition to and without limiting the foregoing waiver
or any other provision of this Lease, Tenant agrees that Landlord shall not be
liable for, and Tenant expressly waives and releases Landlord and the other
Indemnitees (as defined in Paragraph 14.b. below) from any Claims (as defined in
Paragraph 14.b. below), including without limitation, any and all consequential
damages or interruption or loss of business, income or profits, or claims of
constructive eviction, arising or alleged to be arising as a result of any such
construction activity.
b. Tenant shall hold Landlord and the holders of any Superior
Interest, and the constituent shareholders, partners or other owners thereof,
and all of their agents, contractors, servants, officers, directors, employees
and licensees (collectively with Landlord, the "Indemnitees") harmless from and
indemnify the Indemnitees against any and all claims, liabilities, damages,
costs and expenses, including reasonable attorneys' fees and costs incurred in
defending against the same (collectively, "Claims"), to the extent arising from
(a) the acts or omissions of Tenant or any other Tenant Parties (as defined in
Paragraph 8.c. above) in, on or about the Real Property, or (b) any construction
or other work undertaken by or on behalf of Tenant in, on or about the Premises,
whether prior to or during the term of this Lease, or (c) any breach or Event of
Default under this Lease by Tenant, or (d) any accident, injury or damage,
howsoever and by whomsoever caused, to any person or property, occurring in, on
or about the Premises; except to the extent such Claims are caused directly by
the gross negligence or willful misconduct of Landlord or its authorized
representatives. In case any action or proceeding be brought against any of the
Indemnitees by reason of any such Claim, Tenant, upon notice from Landlord,
covenants to resist and defend at Tenant's sole expense such action or
proceeding by counsel reasonably satisfactory to Landlord. The provisions of
this Paragraph 14.b. shall survive the expiration or earlier termination of this
Lease with respect to any injury, illness, death or damage occurring prior to
such expiration or termination.
15. INSURANCE.
a. TENANT'S INSURANCE. Tenant shall, at Tenant's expense,
maintain during the term of this Lease (and, if Tenant occupies or conducts
activities in or about the Premises prior to or after the term hereof, then also
during such pre-term or post-term period): (i) commercial general liability
insurance including contractual liability coverage, with minimum coverages of
$1,000,000 per occurrence combined single limit for bodily injury and property
damage, $1,000,000 for products-completed operations coverage, $100,000 fire
legal liability, $1,000,000 for personal and advertising injury (which coverage
shall not be subject to the contractual liability exclusion), with a $2,000,000
general aggregate limit, for injuries to, or illness or death of, persons and
damage to property occurring in or about the Premises or otherwise resulting
from Tenant's operations in the Building, (ii) property insurance protecting
Tenant against loss or damage
15
<PAGE>
by fire and such other risks as are insurable under then-available standard
forms of "all risk" insurance policies (excluding earthquake and flood but
including water damage), covering Tenant's personal property and trade fixtures
in or about the Premises or the Real Property, and any improvements and/or
Alterations in the Premises, for the full replacement value thereof without
deduction for depreciation; (iii) workers' compensation insurance in statutory
limits; (iv) at least three months' coverage for loss of business income and
continuing expenses, providing protection against any peril included within the
classification "all risk," excluding earthquake and flood but including water
damage; and (v) if Tenant operates owned, leased or non-owned vehicles on the
Real Property, comprehensive automobile liability insurance with a minimum
coverage of $1,000,000 per occurrence, combined single limit. The above
described policies shall protect Tenant, as named insured, and Landlord and all
the other Indemnitees and any other parties designated by Landlord, as
additional insureds; shall insure Landlord's and such other parties' contingent
liability with regard to acts or omissions of Tenant; shall specifically include
all liability assumed by Tenant under this Lease (provided, however, that such
contractual liability coverage shall not limit or be deemed to satisfy Tenant's
indemnity obligations under this Lease); and, if subject to deductibles, shall
provide for deductible amounts not in excess of those approved in advance in
writing by Landlord in its sole discretion. Landlord reserves the right to
increase the foregoing amount of liability coverage from time to time as
Landlord determines is required to adequately protect Landlord and the other
parties designated by Landlord from the matters insured thereby (provided,
however, that Landlord makes no representation that the limits of liability
required hereunder from time to time shall be adequate to protect Tenant), and
to require that Tenant cause any of its contractors, vendors, movers or other
parties conducting activities in or about or occupying the Premises to obtain
and maintain insurance as determined by Landlord and as to which Landlord and
such other parties designated by Landlord shall be additional insureds.
b. POLICY FORM. Each insurance policy required pursuant to
Paragraph 15.a. above shall be issued by an insurance company licensed in the
State of California and with a general policyholders' rating of "A+" or better
and a financial size ranking of "Class VIII" or higher in the most recent
edition of Best's Insurance Guide. Each insurance policy, other than Tenant's
workers' compensation insurance, shall (i) provide that it may not be materially
changed, cancelled or allowed to lapse unless thirty (30) days' prior written
notice to Landlord and any other insureds designated by Landlord is first given,
(ii) provide that no act or omission of Tenant shall affect or limit the
obligations of the insurer with respect to any other insured, (iii) include all
waiver of subrogation rights endorsements necessary to effect the provisions of
Paragraph 16 below, and (iv) provide that the policy and the coverage provided
shall be primary, that Landlord, although an additional insured, shall
nevertheless be entitled to recovery under such policy for any damage to
Landlord or the other Indemnitees by reason of acts or omissions of Tenant, and
that any coverage carried by Landlord shall be noncontributory with respect to
policies carried by Tenant. Each such insurance policy or a certificate thereof
shall be delivered to Landlord by Tenant on or before the effective date of such
policy and thereafter Tenant shall deliver to Landlord renewal policies or
certificates at least thirty (30) days prior to the expiration dates of expiring
policies. If Tenant fails to procure such insurance or to deliver such policies
or certificates, Landlord may, at its option, procure the same for Tenant's
account, and the cost thereof shall be paid to Landlord by Tenant upon demand.
Landlord may at any time, and from time to time, inspect and/or copy any and all
insurance policies required by this Lease.
c. Nothing in this Paragraph 15 shall be construed as creating
or implying the existence of (i) any ownership by Tenant of any fixtures,
additions, Alterations, or improvements in or to the Premises or (ii) any right
on Tenant's part to make any addition, Alteration or improvement in or to the
Premises.
16. MUTUAL WAIVER OF SUBROGATION RIGHTS. Each party hereto hereby
releases the other respective party and, in the case of Tenant as the releasing
party, the other Indemnitees, and the respective partners, shareholders, agents,
employees, officers, directors and authorized representatives of such released
party, from any claims such releasing party may have for damage to the Building,
the Premises or any of such releasing party's fixtures, personal property,
improvements and alterations in or about the Premises, the Building or the Real
Property that is caused by or results from risks insured against under any fire
and extended coverage insurance policies actually carried by such releasing
party or deemed to be carried by such releasing party; provided, however, that
such waiver shall be limited to the extent of the net insurance proceeds payable
by the relevant insurance company with respect to such loss or damage (or in the
case of deemed coverage, the net proceeds that would have been payable). For
purposes of this Paragraph 16, Tenant shall be deemed to be carrying any of the
insurance policies required pursuant to Paragraph 15 but not actually carried by
Tenant, and Landlord shall be deemed to carry standard fire and extended
coverage policies on the Real Property. Each party hereto shall cause each such
fire and extended coverage insurance policy obtained by it to provide that the
insurance company waives all rights of recovery by way of subrogation against
the other respective party and the other released parties in connection with any
matter covered by such policy.
17. UTILITIES.
a. BASIC SERVICES. Landlord shall furnish the following
utilities and services ("Basic Services") for the Premises: (i) during the hours
of 7 A.M. to 7 P.M. ("Business Hours") Monday through Friday (except public
holidays) ("Business Days"), electricity for Building standard lighting and
power
16
<PAGE>
suitable for the use of the Premises for ordinary general office purposes, (ii)
during Business Hours on Business Days, heat and air conditioning required in
Landlord's judgment for the comfortable use and occupancy of the Premises for
ordinary general office purposes, (iii) unheated water for the restroom(s) and
drinking fountain(s) in the public areas serving the Premises, (iv) elevator
service to the floor(s) of the Premises by nonattended automatic elevators for
general office pedestrian usage, and (v) on Business Days, janitorial services
limited to emptying and removal of general office refuse, light vacuuming as
needed and window washing as determined by Landlord. Notwithstanding the
foregoing, however, Tenant may use water, heat, air conditioning, electric
current, elevator and janitorial service in excess of that provided in Basic
Services ("Excess Services," which shall include without limitation any power
usage other than through existing standard 110-volt AC outlets; electricity
and/or water consumed by Tenant in connection with any dedicated or supplemental
heating, ventilating and/or air conditioning, computer power, telecommunications
and/or other special units or systems of Tenant; chilled, heated or condenser
water; or water used for any purpose other than ordinary drinking and lavatory
purposes), provided that the Excess Services desired by Tenant are reasonably
available to Landlord and to the Premises (it being understood that in no event
shall Landlord be obligated to make available to the Premises more than the pro
rata share of the capacity of any Excess Service available to the Building or
the applicable floor of the Building, as the case may be), and provided further
that Tenant complies with the procedures established by Landlord from time to
time for requesting and paying for such Excess Services and with all other
provisions of this Paragraph 17. Landlord reserves the right to install in the
Premises or the Real Property electric current and/or water meters (including,
without limitation, any additional wiring, conduit or panel required therefor)
to measure the electric current or water consumed by Tenant or to cause the
usage to be measured by other reasonable methods (e.g. by temporary "check"
meters or by survey). Notwithstanding the above, (subject to any temporary
shutdown for repairs, for security purposes, for compliance with any legal
restrictions, or due to strikes, lockouts, labor disputes, fire or other
casualty, acts of God, or other causes beyond the reasonable control of
Landlord) Tenant shall have access to the Premises 24 hours a day, each day of
the Lease term.
b. PAYMENT FOR UTILITIES AND SERVICES. The cost of Basic
Services shall be included in Operating Expenses. In addition, Tenant shall pay
to Landlord upon demand (i) the cost, at Landlord's prevailing rate, of any
Excess Services used by Tenant, (ii) the cost of installing, operating,
maintaining or repairing any meter or other device used to measure Tenant's
consumption of utilities, (iii) the cost of installing, operating, maintaining
or repairing any Temperature Balance Equipment (as defined in Paragraph 17.c.
below) for the Premises and/or any equipment required in connection with any
Excess Services requested by Tenant, and (iv) any cost otherwise incurred by
Landlord in keeping account of or determining any Excess Services used by
Tenant. Landlord's failure to bill Tenant for any of the foregoing shall not
waive Landlord's right to bill Tenant for the same at a later time.
c. TEMPERATURE BALANCE. If the temperature otherwise maintained
in any portion of the Premises by the heating, air conditioning or ventilation
system is affected as a result of (i) the type or quantity of any lights,
machines or equipment (including without limitation typical office equipment)
used by Tenant in the Premises, (ii) the occupancy of such portion of the
Premises by more than one person per two hundred (200) square feet of rentable
area therein, (iii) an electrical load for lighting or power in excess of the
limits specified in Paragraph 17.d. below, or (iv) any rearrangement of
partitioning or other improvements, then at Tenant's sole cost, Landlord may
install any equipment, or modify any existing equipment (including the standard
air conditioning equipment) Landlord deems necessary to restore the temperature
balance (such new equipment or modifications to existing equipment termed herein
"Temperature Balance Equipment"). Tenant agrees to keep closed, when necessary,
draperies which, because of the sun's position, must be closed to provide for
the efficient operation of the air conditioning system, and Tenant agrees to
cooperate with Landlord and to abide by the regulations and requirements which
Landlord may prescribe for the proper functioning and protection of the heating,
ventilating and air conditioning system. Landlord makes no representation to
Tenant regarding the adequacy or fitness of the heating, air conditioning or
ventilation equipment in the Building to maintain temperatures that may be
required for, or because of, any computer or communications rooms, machine
rooms, conference rooms or other areas of high concentration of personnel or
electrical usage, or any other uses other than or in excess of the fractional
horsepower normally required for office equipment, and Landlord shall have no
liability for loss or damage suffered by Tenant or others in connection
therewith.
d. UTILITY CONNECTIONS. Tenant shall not connect or use any
apparatus or device in the Premises (i) using current in excess of 110 volts, or
(ii) which would cause Tenant's electrical demand load to exceed 1.0 watts per
rentable square foot for overhead lighting or 2.0 watts per rentable square foot
for convenience outlets, or (iii) which would exceed the capacity of the
existing panel or transformer serving the Premises. Tenant shall not connect
with electric current (except through existing outlets in the Premises or such
additional outlets as may be installed in the Premises as part of initial
improvements or Alterations approved by Landlord), or water pipes, any apparatus
or device for the purpose of using electrical current or water.
Landlord will not permit additional coring of the floor of the
Premises in order to install new electric outlets in the Premises unless
Landlord is satisfied, on the basis of such information to be supplied by Tenant
at Tenant's expense, that coring of the floor in order to install such
additional outlets will not weaken the structure of the floor.
17
<PAGE>
e. INTERRUPTION OF SERVICES. Landlord's obligation to provide
utilities and services for the Premises are subject to the Rules and Regulations
of the Building, applicable Legal Requirements (including the rules or actions
of the public utility company furnishing the utility or service), and shutdowns
for maintenance and repairs, for security purposes, or due to strikes, lockouts,
labor disputes, fire or other casualty, acts of God, or other causes beyond the
control of Landlord. In the event of an interruption in, or failure or inability
to provide any service or utility for the Premises for any reason, such
interruption, failure or inability shall not constitute an eviction of Tenant,
constructive or otherwise, or impose upon Landlord any liability whatsoever,
including, but not limited to, liability for consequential damages or loss of
business by Tenant. Tenant hereby waives the provisions of California Civil Code
Section 1932(1) or any other applicable existing or future Legal Requirement
permitting the termination of this Lease due to such interruption, failure or
inability. Notwithstanding the foregoing, if any interruption in, or failure or
inability to provide any of the services or utilities described in Paragraph
17.a. is within Landlord's reasonable control and continues for fifteen (15) or
more consecutive days, and such interruption materially impairs Tenant's use of
the Premises for Tenant's business purposes as a result thereof, then Tenant
shall be entitled to an abatement of Monthly Rent under Paragraph 5 hereof and
Additional Rent under Paragraph 7 hereof, which abatement shall be based on the
extent of the impairment of Tenant's use the Premises.
f. GOVERNMENTAL CONTROLS. In the event any governmental
authority having jurisdiction over the Real Property or the Building promulgates
or revises any Legal Requirement or building, fire or other code or imposes
mandatory or voluntary controls or guidelines on Landlord or the Real Property
or the Building relating to the use or conservation of energy or utilities or
the reduction of automobile or other emissions (collectively "Controls") or in
the event Landlord is required or elects to make alterations to the Real
Property or the Building in order to comply with such mandatory or voluntary
Controls, Landlord may, in its sole discretion, comply with such Controls or
make such alterations to the Real Property or the Building related thereto. Such
compliance and the making of such alterations shall not constitute an eviction
of Tenant, constructive or otherwise, or impose upon Landlord any liability
whatsoever, including, but not limited to, liability for consequential damages
or loss of business by Tenant.
18. PERSONAL PROPERTY AND OTHER TAXES. Tenant shall pay, at least ten
(10) days before delinquency, any and all taxes, fees, charges or other
governmental impositions levied or assessed against Landlord or Tenant (a) upon
Tenant's equipment, furniture, fixtures, improvements and other personal
property (including carpeting installed by Tenant) located in the Premises, (b)
by virtue of any Alterations made by Tenant to the Premises, and (c) upon this
transaction or any document to which Tenant is a party creating or transferring
an interest or an estate in the Premises. If any such fee, charge or other
governmental imposition is paid by Landlord, Tenant shall reimburse Landlord for
Landlord's payment upon demand.
19. RULES AND REGULATIONS. Tenant shall comply with the rules and
regulations set forth on Exhibit B attached hereto, as such rules and
regulations may be modified or amended by Landlord from time to time (the
"Rules and Regulations"). Landlord shall not be responsible to Tenant for the
nonperformance or noncompliance by any other tenant or occupant of the
Building of or with any of the Rules and Regulations. In the event of any
conflict between the Rules and Regulations and the express provisions of this
Lease, the provisions of this Lease shall control.
20. SURRENDER; HOLDING OVER.
a. SURRENDER. Upon the expiration or other termination of this
Lease, Tenant shall surrender the Premises to Landlord vacant and broom-clean,
with all improvements and Alterations (except as provided below) in their
original condition, except for reasonable wear and tear, damage from casualty or
condemnation and any changes resulting from approved Alterations; provided,
however, that prior to the expiration or termination of this Lease Tenant shall
remove from the Premises any Alterations that Tenant is required by Landlord to
remove under the provisions of this Lease, and all of Tenant's personal property
and trade fixtures. If such removal is not completed at the expiration or other
termination of this Lease, Landlord may remove the same at Tenant's expense. Any
damage to the Premises or the Building caused by such removal shall be repaired
promptly by Tenant (including the patching or repairing of ceilings and walls)
or, if Tenant fails to do so, Landlord may do so at Tenant's expense. The
removal of Alterations from the Premises shall be governed by Paragraph 9 above.
Tenant's obligations under this paragraph shall survive the expiration or other
termination of this Lease. Upon expiration or termination of this Lease or of
Tenant's possession, Tenant shall surrender all keys to the Premises or any
other part of the Building and shall make known to Landlord the combination of
locks on all safes, cabinets and vaults that may be located in the Premises.
b. HOLDING OVER. If Tenant remains in possession of the
Premises after the expiration or earlier termination of this Lease with the
express written consent of Landlord, Tenant's occupancy shall be a
month-to-month tenancy at a rent agreed upon by Landlord and Tenant, but in no
event less than the greater of (i) one hundred fifty percent (150%) of the
Monthly Rent and Additional Rent payable under this Lease during the last full
month prior to the date of the expiration of this Lease or (ii) the then fair
market rental (as reasonably determined by Landlord) for the Premises. Except as
provided in the preceding sentence, the month-to-month tenancy shall be on the
terms and conditions of this Lease, except that any
18
<PAGE>
renewal options, expansion options, rights of first refusal, rights of first
negotiation or any other rights or options pertaining to additional space in the
Building contained in this Lease shall be deemed to have terminated and shall be
inapplicable thereto. Landlord's acceptance of rent after such holding over with
Landlord's written consent shall not result in any other tenancy or in a renewal
of the original term of this Lease. If Tenant remains in possession of the
Premises after the expiration or earlier termination of this Lease without
Landlord's consent, Tenant's continued possession shall be on the basis of a
tenancy at sufferance and Tenant shall pay as Monthly Rent during the holdover
period an amount equal to the greater of (i) one hundred fifty percent (150%) of
the fair market rental (as reasonably determined by Landlord) for the Premises
or (ii) two hundred percent (200%) of the Monthly Rent and Additional Rent
payable under this Lease for the last full month prior to the date of such
expiration or termination.
c. INDEMNIFICATION. Tenant shall indemnify, defend and hold
Landlord harmless from and against all Claims incurred by or asserted against
Landlord and arising directly or indirectly from Tenant's failure to timely
surrender the Premises, including but not limited to (i) any rent payable by or
any loss, cost, or damages, including lost profits, claimed by any prospective
tenant of the Premises or any portion thereof, and (ii) Landlord's damages as a
result of such prospective tenant rescinding or refusing to enter into the
prospective lease of the Premises or any portion thereof by reason of such
failure to timely surrender the Premises.
21. SUBORDINATION AND ATTORNMENT.
a. This Lease is expressly made subject and subordinate to any
mortgage, deed of trust, ground lease, underlying lease or like encumbrance
affecting any part of the Real Property or any interest of Landlord therein
which is now existing or hereafter executed or recorded, any present or future
modification, amendment or supplement to any of the foregoing, and to any
advances made thereunder (any of the foregoing being a "Superior Interest")
without the necessity of any further documentation evidencing such
subordination. Notwithstanding the foregoing, Tenant shall, within ten (10) days
after Landlord's request, execute and deliver to Landlord a document evidencing
the subordination of this Lease to a particular Superior Interest. Tenant hereby
irrevocably appoints Landlord as Tenant's attorney-in-fact to execute and
deliver any such instrument in the name of Tenant if Tenant fails to do so
within such time. If the interest of Landlord in the Real Property or the
Building is transferred to any person ("Purchaser") pursuant to or in lieu of
proceedings for enforcement of any Superior Interest, Tenant shall immediately
and automatically attorn to the Purchaser, and this Lease shall continue in full
force and effect as a direct lease between the Purchaser and Tenant on the terms
and conditions set forth herein.
b. At Tenant's request, Landlord will request that the holder
of the current Superior Interest execute a written "non-disturbance agreement"
on Tenant's behalf providing that, if Tenant is not in default under this Lease
beyond any applicable grace period, that such party will recognize this Lease
and Tenant's rights hereunder and will not disturb Tenant's possession
hereunder, and if this Lease is by operation of law terminated in a foreclosure,
that a new lease will be entered into on the same terms as this Lease for the
remaining term hereof. The failure of such holder of a Superior Interest to
execute and deliver such a non-disturbance agreement upon Landlord's request
shall not constitute a default hereunder by Landlord, it being understood that
Landlord's sole obligation is to request in good faith the execution and
delivery of such agreement. Further, if in order to obtain such non-disturbance
agreement, Landlord is required to expend any sum, Landlord shall so notify
Tenant and Tenant may elect to pay such sum. In no event shall Landlord be
required to expend any sums in connection therewith.
22. FINANCING CONDITION. If any lender or ground lessor that intends
to acquire an interest in, or holds a mortgage, ground lease or deed of trust
encumbering any portion of the Real Property should require either the execution
by Tenant of an agreement requiring Tenant to send such lender written notice of
any default by Landlord under this Lease, giving such lender the right to cure
such default within any period afforded to Landlord to cure the same and
preventing Tenant from terminating this Lease unless such default remains
uncured after such period, then Tenant agrees that it shall, within ten (10)
days after Landlord's request, execute and deliver such agreement. Tenant
acknowledges and agrees that its failure to timely execute any such agreement or
modification required by such lender or ground lessor may cause Landlord serious
financial damage by causing the failure of a financing transaction and giving
Landlord all of its rights and remedies under Paragraph 25 below, including its
right to damages caused by the loss of such financing , but only to the extent
any such loss is attributable solely or primarily to Tenant's failure to execute
any such agreement.
23. ENTRY BY LANDLORD. Landlord may, at any and all reasonable times,
and upon reasonable advance notice (provided that no advance notice need be
given if an emergency necessitates an immediate entry or prior to entry to
provide routine janitorial services), enter the Premises to (a) inspect the same
and to determine whether Tenant is in compliance with its obligations hereunder,
(b) supply janitorial and any other service Landlord is required to provide
hereunder, (c) show the Premises to prospective lenders, purchasers or tenants,
(d) post notices of nonresponsibility, and (e) alter, improve or repair the
Premises or any other portion of the Real Property. In connection with any such
alteration, improvement or repair, Landlord may erect in the Premises or
elsewhere in the Real Property scaffolding and other structures reasonably
required for the work to be performed. In no event shall such entry or work
entitle Tenant to an
19
<PAGE>
abatement of rent, constitute an eviction of Tenant, constructive or otherwise,
or impose upon Landlord any liability whatsoever, including but not limited to
liability for consequential damages or loss of business or profits by Tenant;
provided, however, that Landlord shall use good faith efforts to cause all such
work to be done in such a manner as to cause as little interference to Tenant as
reasonably possible without incurring additional expense. Landlord shall at all
times retain a key with which to unlock all of the doors in the Premises, except
Tenant's vaults and safes. If an emergency necessitates immediate access to the
Premises, Landlord may use whatever force is necessary to enter the Premises and
any such entry to the Premises shall not constitute a forcible or unlawful entry
into the Premises, a detainer of the Premises, or an eviction of Tenant from the
Premises, or any portion thereof.
24. INSOLVENCY OR BANKRUPTCY. The occurrence of any of the following
shall constitute an Event of Default under Paragraph 25 below:
1. Tenant ceases doing business as a going concern, makes an
assignment for the benefit of creditors, is adjudicated an insolvent, files a
petition (or files an answer admitting the material allegations of such
petition) seeking for Tenant any reorganization, arrangement, composition,
readjustment, liquidation, dissolution or similar arrangement under any state or
federal bankruptcy or other law, or Tenant consents to or acquiesces in the
appointment, pursuant to any state or federal bankruptcy or other law, of a
trustee, receiver or liquidator for the Premises, for Tenant or for all or any
substantial part of Tenant's assets; or
2. Tenant fails within sixty (60) days after the commencement
of any proceedings against Tenant seeking reorganization, arrangement,
composition, readjustment, liquidation, dissolution or similar relief under any
state or federal bankruptcy or other Legal Requirement, to have such proceedings
dismissed, or Tenant fails, within sixty (60) days after an appointment pursuant
to any state or federal bankruptcy or other Legal Requirement without Tenant's
consent or acquiescence, of any trustee, receiver or liquidator for the
Premises, for Tenant or for all or any substantial part of Tenant's assets, to
have such appointment vacated; or
3. Tenant is unable, or admits in writing its inability, to pay
its debts as they mature; or
4. Tenant gives notice to any governmental body of its
insolvency or pending insolvency, or of its suspension or pending suspension of
operations. In no event shall this Lease be assigned or assignable by reason of
any voluntary or involuntary bankruptcy, insolvency or reorganization
proceedings, nor shall any rights or privileges hereunder be an asset of Tenant,
the trustee, debtor-in-possession, or the debtor's estate in any bankruptcy,
insolvency or reorganization proceedings.
25. DEFAULT AND REMEDIES.
a. EVENTS OF DEFAULT. The occurrence of any of the following
shall constitute an "Event of Default" by Tenant:
1. Tenant fails to pay when due Monthly Rent, Additional
Rent or any other rent due hereunder (provided that the first two (2)
occurrences of such a delinquency in any twenty-four (24)-month period that ends
on the date of such occurrence shall be an Event of Default only if Tenant fails
to cure such delinquency within five (5) days of written notice from Landlord
thereof); or
2. Tenant abandons the Premises or vacates the Premises
for more than sixty (60) consecutive days without providing Landlord with
written notice of an alternate address for notices to Tenant under this Lease
(other than the Premises); or
3. Tenant fails to deliver any estoppel certificate
pursuant to Paragraph 29 below, subordination agreement pursuant to Paragraph 21
above, or document required pursuant to Paragraph 22 above, within the
applicable period set forth therein; or
4. Tenant violates the bankruptcy and insolvency
provisions of Paragraph 24 above; or
5. Tenant makes or has made or furnishes or has furnished
any material warranty, representation or statement to Landlord in connection
with this Lease, or any other agreement made by Tenant for the benefit of
Landlord, which is or was false or misleading in any material respect when made
or furnished; or
6. Tenant assigns this Lease or subleases any portion of
the Premises in violation of Paragraph 13 above; or
20
<PAGE>
7. Tenant fails to comply with any other provision of this
Lease in the manner and within the time required, or, with respect to matters
which do not pose a health, safety or security risk and do not annoy other
tenants, Tenant fails to comply within thirty (30) calendar days after written
notice of such failure (or if the noncompliance can be cured but cannot by its
nature be cured within the 30-day period, if Tenant fails to commence to cure
such noncompliance within the 30-day period and thereafter diligently prosecute
such cure to completion).
b. REMEDIES. Upon the occurrence of an Event of Default
Landlord shall have the following remedies, which shall not be exclusive but
shall be cumulative and shall be in addition to any other remedies now or
hereafter allowed by law:
1. Landlord may terminate Tenant's right to possession of
the Premises at any time by written notice to Tenant. Tenant expressly
acknowledges that in the absence of such written notice from Landlord, no other
act of Landlord, including, but not limited to, its re-entry into the Premises,
its efforts to relet the Premises, its reletting of the Premises for Tenant's
account, its storage of Tenant's personal property and trade fixtures, its
acceptance of keys to the Premises from Tenant, its appointment of a receiver,
or its exercise of any other rights and remedies under this Paragraph 25 or
otherwise at law, shall constitute an acceptance of Tenant's surrender of the
Premises or constitute a termination of this Lease or of Tenant's right to
possession of the Premises.
Upon such termination in writing of Tenant's right to possession of
the Premises, this Lease shall terminate and Landlord shall be entitled to
recover damages from Tenant as provided in California Civil Code Section 1951.2
or any other applicable existing or future Legal Requirement providing for
recovery of damages for such breach, including but not limited to the following:
(i) The reasonable cost of recovering the Premises;
plus
(ii) The reasonable cost of removing Tenant's
Alterations, trade fixtures and improvements; plus
(iii) All unpaid rent due or earned hereunder prior to
the date of termination, less the proceeds of any reletting or any rental
received from subtenants prior to the date of termination applied as provided in
Paragraph 25.b.2. below, together with interest at the Interest Rate, on such
sums from the date such rent is due and payable until the date of the award of
damages; plus
(iv) The amount by which the rent which would be
payable by Tenant hereunder, including Additional Rent under Paragraph 7 above,
as reasonably estimated by Landlord, from the date of termination until the date
of the award of damages, exceeds the amount of such rental loss as Tenant proves
could have been reasonably avoided, together with interest at the Interest Rate
on such sums from the date such rent is due and payable until the date of the
award of damages; plus
(v) The amount by which the rent which would be
payable by Tenant hereunder, including Additional Rent under Paragraph 7 above,
as reasonably estimated by Landlord, for the remainder of the then term, after
the date of the award of damages exceeds the amount such rental loss as Tenant
proves could have been reasonably avoided, discounted at the discount rate
published by the Federal Reserve Bank of San Francisco for member banks at the
time of the award plus one percent (1%); plus
(vi) Such other amounts in addition to or in lieu of
the foregoing as may be permitted from time to time by applicable law, including
without limitation any other amount necessary to compensate Landlord for all the
detriment proximately caused by Tenant's failure to perform its obligations
under this Lease or which in the ordinary course of things would be likely to
result therefrom.
2. Landlord has the remedy described in California Civil
Code Section 1951.4 (a landlord may continue the lease in effect after the
tenant's breach and abandonment and recover rent as it becomes due, if the
tenant has the right to sublet and assign subject only to reasonable
limitations), and may continue this Lease in full force and effect and may
enforce all of its rights and remedies under this Lease, including, but not
limited to, the right to recover rent as it becomes due. After the occurrence of
an Event of Default, Landlord may enter the Premises without terminating this
Lease and sublet all or any part of the Premises for Tenant's account to any
person, for such term (which may be a period beyond the remaining term of this
Lease), at such rents and on such other terms and conditions as Landlord deems
advisable. In the event of any such subletting, rents received by Landlord from
such subletting shall be applied (i) first, to the payment of the costs of
maintaining, preserving, altering and preparing the Premises for subletting, the
other costs of subletting, including but not limited to brokers' commissions,
attorneys' fees and expenses of removal of Tenant's personal property, trade
fixtures and Alterations; (ii) second, to the payment of rent then due and
payable hereunder; (iii) third, to the payment of future rent as the same may
become due and payable hereunder; (iv) fourth, the balance, if any, shall be
paid to Tenant upon (but not before) expiration of the term of this Lease. If
the rents received by Landlord from such subletting, after application as
provided above, are insufficient in any month to pay the rent due and payable
hereunder for such month, Tenant shall pay such deficiency to Landlord monthly
upon demand. Notwithstanding any such
21
<PAGE>
subletting for Tenant's account without termination, Landlord may at any time
thereafter, by written notice to Tenant, elect to terminate this Lease by virtue
of a previous Event of Default.
During the continuance of an Event of Default, for so long as Landlord
does not terminate Tenant's right to possession of the Premises and subject to
Paragraph 13, entitled Assignment and Subletting, and the options granted to
Landlord thereunder, Landlord shall not unreasonably withhold its consent to an
assignment or sublease of Tenant's interest in the Premises or in this Lease.
3. During the continuance of an Event of Default and after
lawfully obtaining possession of the Premises, Landlord may enter the Premises
without terminating this Lease and remove all Tenant's personal property,
Alterations and trade fixtures from the Premises and store them at Tenant's risk
and expense, in compliance with all applicable laws. If Landlord removes such
property from the Premises and stores it at Tenant's risk and expense, and if
Tenant fails to pay the cost of such removal and storage after written demand
therefor and/or to pay any rent then due, then after the property has been
stored for a period of thirty (30) days or more Landlord may sell such property
at public or private sale, in the manner and at such times and places as
Landlord deems commercially reasonable following reasonable notice to Tenant of
the time and place of such sale. The proceeds of any such sale shall be applied
first to the payment of the expenses for removal and storage of the property,
the preparation for and the conducting of such sale, and for attorneys' fees and
other legal expenses incurred by Landlord in connection therewith, and the
balance shall be applied as provided in Paragraph 25.b.2. above.
Provided the same is done in compliance with all applicable laws,
Tenant hereby waives all claims for damages that may be caused by Landlord's
reentering and taking possession of the Premises or removing and storing
Tenant's personal property pursuant to this Paragraph 25, and Tenant shall
indemnify, defend and hold Landlord harmless from and against any and all Claims
resulting from any such act. No reentry by Landlord shall constitute or be
construed as a forcible entry by Landlord.
4. Landlord may require Tenant to remove any and all
Alterations from the Premises or, if Tenant fails to do so within ten (10) days
after Landlord's request, Landlord may do so at Tenant's expense.
5. Landlord may cure the Event of Default at Tenant's
expense, it being understood that such performance shall not waive or cure the
subject Event of Default. If Landlord pays any sum or incurs any expense in
curing the Event of Default, Tenant shall reimburse Landlord upon demand for the
amount of such payment or expense with interest at the Interest Rate from the
date the sum is paid or the expense is incurred until Landlord is reimbursed by
Tenant. Any amount due Landlord under this subsection shall constitute
additional rent hereunder.
c. WAIVER OF REDEMPTION. Tenant hereby waives, for itself and
all persons claiming by and under Tenant, all rights and privileges which it
might have under any present or future Legal Requirement to redeem the Premises
or to continue this Lease after being dispossessed or ejected from the Premises.
26. DAMAGE OR DESTRUCTION. If all or a part of the Real Property is
damaged by fire or other casualty, and the damage can, in Landlord's reasonable
opinion, be repaired within one hundred twenty (120) days of the damage, then
this Lease shall remain in full force and effect. If the repairs cannot, in
Landlord's opinion, be made within the one hundred twenty (120)-day period,
Landlord at its option exercised by written notice to Tenant within the one
hundred twenty (120)-day period, may terminate this Lease as of the date
specified by Landlord in the notice, which date shall be not less than thirty
(30) days nor more than sixty (60) days after the date such notice is given, and
this Lease shall terminate on the date specified in the notice. If Landlord does
not give notice terminating this Lease, and, if the damage is to the Premises or
access to or use and occupancy of the Premises is materially impaired as a
result of the damage, Landlord shall repair the damage.
If all or a part of the Premises are damaged by fire or other
casualty, or if the Building is so damaged that access to or use and occupancy
of the Premises is materially impaired, Landlord shall promptly give Tenant
notice of Landlord's reasonable estimate of the time required to make such
repairs (the "Damage Estimate"). If the Damage Estimate is more than one hundred
eighty (180) days, and Landlord does not give notice terminating this Lease (as
provided above), then Tenant may give notice to Landlord, within thirty (30)
calendar days after Tenant receives the Damage Estimate, terminating this Lease
as of the date of such fire or casualty.
Notwithstanding anything to the contrary contained in this Paragraph
26, if the initial Damage Estimate is more than ninety (90) days, and the date
on which Landlord reasonably anticipates the repairs of such damage will be
completed is during the last twelve (12) months of the Lease term, Landlord and
Tenant shall each have the option to terminate this Lease as of the date of such
damage by giving written notice to the other, in the case of Landlord together
with the Damage Estimate, or, in the case of Tenant, within thirty (30) days of
Tenant's receipt of the Damage Estimate.
22
<PAGE>
Notwithstanding anything to the contrary in this Paragraph 26, if
damage which would otherwise lead to a right to terminate this Lease results
from the willful misconduct of Landlord or Tenant, the party from whose
misconduct such damage results shall have no right to terminate this Lease.
If the fire or other casualty damages the Premises or the common areas
of the Real Property necessary for Tenant's use and occupancy of the Premises,
Tenant ceases to use any portion of the Premises as a result of such damage, and
the damage does not result from the negligence or willful misconduct of Tenant
or any other Tenant Parties, then during the period the Premises or portion
thereof are rendered unusable by such damage and repair, Tenant's Monthly Rent
and Additional Rent under Paragraphs 5 and 7 above shall be proportionately
reduced based upon the extent to which the damage and repair prevents Tenant
from conducting, and Tenant does not conduct, its business at the Premises.
Landlord shall not be obligated to repair or replace any of Tenant's movable
furniture, equipment, trade fixtures, and other personal property, nor any
Alterations installed in the Premises by Tenant, and no damage to any of the
foregoing shall entitle Tenant to any abatement, and Tenant shall, at Tenant's
sole cost and expense, repair and replace such items. All such repair and
replacement of Alterations shall be constructed in accordance with Paragraph 9
above regarding Alterations.
A total destruction of the Building shall automatically terminate this
Lease. In no event shall Tenant be entitled to any compensation or damages from
Landlord for loss of use of the whole or any part of the Premises or for any
inconvenience occasioned by any such destruction, rebuilding or restoration of
the Premises, the Building or access thereto, except for the rent abatement
expressly provided above. Tenant hereby waives California Civil Code Sections
1932(2) and 1933(4), providing for termination of hiring upon destruction of the
thing hired and Sections 1941 and 1942, providing for repairs to and of
premises.
27. EMINENT DOMAIN.
a. If all or any part of the Premises are taken by any public
or quasi-public authority under the power of eminent domain, or any agreement in
lieu thereof (a "taking"), this Lease shall terminate as to the portion of the
Premises taken effective as of the date of taking. If only a portion of the
Premises is taken, Landlord or Tenant may terminate this Lease as to the
remainder of the Premises upon written notice to the other party within ninety
(90) days after the taking; provided, however, that Tenant's right to terminate
this Lease is conditioned upon the remaining portion of the Premises being of
such size or configuration that such remaining portion of the Premises is
unusable or uneconomical for Tenant's business. Landlord shall be entitled to
all compensation, damages, income, rent awards and interest thereon whatsoever
which may be paid or made in connection with any taking and Tenant shall have no
claim against Landlord or any governmental authority for the value of any
unexpired term of this Lease or of any of the improvements or Alterations in the
Premises; provided, however, that the foregoing shall not prohibit Tenant from
prosecuting a separate claim against the taking authority for an amount
separately designated for Tenant's relocation expenses or the interruption of or
damage to Tenant's business or as compensation for Tenant's personal property,
trade fixtures, Alterations or other improvements paid for by Tenant so long as
any award to Tenant will not reduce the award to Landlord.
In the event of a partial taking of the Premises which does not result
in a termination of this Lease, the Monthly Rent and Additional Rent under
Paragraphs 5 and 7 hereunder shall be equitably reduced. If all or any part of
the Real Property other than the Premises is taken, Landlord may terminate this
Lease upon written notice to Tenant given within ninety (90) days after the date
of taking; provided, however, that Landlord shall not terminate this Lease as a
result of such taking, unless it also exercises any comparable rights to
terminate the leases of all tenants in the Building that are similarly affected
by the taking (as determined by Landlord in its reasonable judgment).
b. Notwithstanding the foregoing, if all or any portion of the
Premises is taken for a period of time ending prior to the end of the term of
this Lease, this Lease shall remain in full force and effect and Tenant shall
continue to pay all rent and to perform all of its obligations under this Lease;
provided, however, that Tenant shall be entitled to all compensation, damages,
income, rent awards and interest thereon that is paid or made in connection with
such temporary taking of the Premises (or portion thereof), except that any such
compensation in excess of the rent or other amounts payable to Landlord
hereunder shall be promptly paid over to Landlord as received. Landlord and
Tenant each hereby waive the provisions of California Code of Civil Procedure
Section 1265.130 and any other applicable existing or future Legal Requirement
providing for, or allowing either party to petition the courts of the state in
which the Real Property is located for, a termination of this Lease upon a
partial taking of the Premises and/or the Building.
28. LANDLORD'S LIABILITY; SALE OF BUILDING. The term "Landlord," as
used in this Lease, shall mean only the owner or owners of the Real Property at
the time in question. Notwithstanding any other provision of this Lease, the
liability of Landlord for its obligations under this Lease is limited solely to
Landlord's interest in the Real Property as the same may from time to time be
encumbered, and no personal liability shall at any time be asserted or
enforceable against any other assets of Landlord or against the constituent
shareholders, partners or other owners of Landlord, or the directors, officers,
employees and agents of Landlord or such constituent shareholder, partner or
other owner, on account of any of Landlord's
23
<PAGE>
obligations or actions under this Lease. In addition, in the event of any
conveyance of title to the Real Property, then the grantor or transferor shall
be relieved of all liability with respect to Landlord's obligations to be
performed under this Lease after the date of such conveyance (other than
Landlord's obligation to return the security deposit, to the extent that the
grantor or transferor fails to transfer such security deposit to the grantee or
transferee). In no event shall Landlord be deemed to be in default under this
Lease unless Landlord fails to perform its obligations under this Lease, Tenant
delivers to Landlord written notice specifying the nature of Landlord's alleged
default, and Landlord fails to cure such default within thirty (30) days
following receipt of such notice (or, if the default cannot reasonably be cured
within such period, to commence action within such thirty (30)-day period and
proceed diligently thereafter to cure such default). Upon any conveyance of
title to the Real Property, the grantee or transferee shall be deemed to have
assumed Landlord's obligations to be performed under this Lease from and after
the date of such conveyance, subject to the limitations on liability set forth
above in this Paragraph 28. If Tenant provides Landlord with any security for
Tenant's performance of its obligations hereunder, and Landlord transfers such
security to the grantee or transferee of Landlord's interest in the Real
Property, Landlord shall be released from any further responsibility or
liability for such security. Notwithstanding any other provision of this Lease,
but not in limitation of the provisions of Paragraph 14.a. above, Landlord shall
not be liable for any consequential damages or interruption or loss of business,
income or profits, or claims of constructive eviction, nor shall Landlord be
liable for loss of or damage to artwork, currency, jewelry, bullion, unique or
valuable documents, securities or other valuables, or for other property not in
the nature of ordinary fixtures, furnishings and equipment used in general
administrative and executive office activities and functions. Wherever in this
Lease Tenant (a) releases Landlord from any claim or liability, (b) waives or
limits any right of Tenant to assert any claim against Landlord or to seek
recourse against any property of Landlord or (c) agrees to indemnify Landlord
against any matters, the relevant release, waiver, limitation or indemnity shall
run in favor of and apply to Landlord, the constituent shareholders, partners or
other owners of Landlord, and the directors, officers, employees and agents of
Landlord and each such constituent shareholder, partner or other owner.
29. ESTOPPEL CERTIFICATES. At any time and from time to time, upon
not less than ten (10) days' prior notice from Landlord, Tenant shall execute,
acknowledge and deliver to Landlord a statement certifying the commencement date
of this Lease, stating that this Lease is unmodified and in full force and
effect (or if there have been modifications, that this Lease is in full force
and effect as modified and the date and nature of each such modification), that
Landlord is not in default under this Lease (or, if Landlord is in default,
specifying the nature of such default), that Tenant is not in default under this
Lease (or if Tenant is in default, specifying the nature of such default), the
current amounts of and the dates to which the Monthly Rent and Additional Rent
has been paid, and setting forth such other matters as may be reasonably
requested by Landlord. Any such statement may be conclusively relied upon by a
prospective purchaser of the Real Property or by a lender obtaining a lien on
the Real Property as security. If Tenant fails to deliver such statement within
the time required hereunder, such failure shall be conclusive upon Tenant that
(i) this Lease is in full force and effect, without modification except as may
be represented by Landlord, (ii) to the best of Tenant's knowledge, there are no
uncured defaults in Landlord's performance of its obligations hereunder, (iii)
not more than one month's installment of Monthly Rent has been paid in advance,
and (iv) any other statements of fact included by Landlord in such statement are
correct. Tenant acknowledges and agrees that if Tenant fails to execute any such
certificate within the period described above, and thereafter Tenant does not
deliver such executed document within ten (10) days of written notice from
Landlord of such failure, such failure may cause Landlord serious financial
damage by causing the failure of a sale or financing transaction and giving
Landlord all of its rights and remedies under Paragraph 25 above, including its
right to damages caused by the loss of such sale or financing , but only to the
extent any such loss is attributable solely or primarily to Tenant's failure to
deliver any such certificate.
30. RIGHT OF LANDLORD TO PERFORM. If Tenant fails to make any payment
required hereunder (other than Monthly Rent and Additional Rent) or fails to
perform any other of its obligations hereunder, Landlord may, but shall not be
obliged to, and without waiving any default of Tenant or releasing Tenant from
any obligations to Landlord hereunder, make any such payment or perform any
other such obligation on Tenant's behalf. All sums so paid by Landlord and all
necessary incidental costs in connection with the performance by Landlord of an
obligation of Tenant (together with interest thereon from the date of such
payment by Landlord until paid at the Interest Rate) shall be payable by Tenant
to Landlord upon demand, and Tenant's failure to make such payment upon demand
shall entitle Landlord to the same rights and remedies provided Landlord in the
event of non-payment of rent.
31. LATE CHARGE. Tenant acknowledges that late payment of any
installment of Monthly Rent or Additional Rent or any other amount required
under this Lease will cause Landlord to incur costs not contemplated by this
Lease and that the exact amount of such costs would be extremely difficult and
impracticable to fix. Such costs include, without limitation, processing and
accounting charges, late charges that may be imposed on Landlord by the terms of
any encumbrance or note secured by the Real Property and the loss of the use of
the delinquent funds. Therefore, if any installment of Monthly Rent or
Additional Rent or any other amount due from Tenant is not received when due,
Tenant shall pay to Landlord on demand, on account of the delinquent payment, an
additional sum equal to the greater of (i) five percent (5%) of the overdue
amount, or (ii) $100.00, which additional sum represents a fair and reasonable
estimate of the costs that Landlord will incur by reason of late payment by
Tenant (provided that such charge shall be imposed
24
<PAGE>
with respect to the first occurrence of such a delinquency in any twelve
(12)-month period only if Tenant fails to cure such delinquency within five (5)
days of written notice from Landlord thereof). Acceptance of any late charge
shall not constitute a waiver of Tenant's default with respect to the overdue
amount, nor prevent Landlord from exercising its right to collect interest as
provided above, rent, or any other damages, or from exercising any of the other
rights and remedies available to Landlord.
32. ATTORNEYS' FEES; WAIVER OF JURY TRIAL. In the event of any action
or proceeding between Landlord and Tenant (including an action or proceeding
between Landlord and the trustee or debtor in possession while Tenant is a
debtor in a proceeding under any bankruptcy law) to enforce any provision of
this Lease, the losing party shall pay to the prevailing party all costs and
expenses, including, without limitation, reasonable attorneys' fees and
expenses, incurred in such action and in any appeal in connection therewith by
such prevailing party. The "prevailing party" will be determined by the court
before whom the action was brought based upon an assessment of which party's
major arguments or positions taken in the suit or proceeding could fairly be
said to have prevailed over the other party's major arguments or positions on
major disputed issues in the court's decision. Notwithstanding the foregoing,
however, Landlord shall be deemed the prevailing party in any unlawful detainer
or other action or proceeding instituted by Landlord based upon any default or
alleged default of Tenant hereunder if (i) judgment is entered in favor of
Landlord, or (ii) prior to trial or judgment Tenant pays all or any portion of
the rent claimed by Landlord, vacates the Premises, or otherwise cures the
default claimed by Landlord.
If Landlord becomes involved in any litigation or dispute, threatened
or actual, by or against anyone not a party to this Lease, but arising by reason
of or related to any act or omission of Tenant or any Tenant Party, Tenant
agrees to pay Landlord's reasonable attorneys' fees and other costs incurred in
connection with the litigation or dispute, regardless of whether a lawsuit is
actually filed.
IF ANY ACTION OR PROCEEDING BETWEEN LANDLORD AND TENANT TO ENFORCE THE
PROVISIONS OF THIS LEASE (INCLUDING AN ACTION OR PROCEEDING BETWEEN LANDLORD AND
THE TRUSTEE OR DEBTOR IN POSSESSION WHILE TENANT IS A DEBTOR IN A PROCEEDING
UNDER ANY BANKRUPTCY LAW) PROCEEDS TO TRIAL, LANDLORD AND TENANT HEREBY WAIVE
THEIR RESPECTIVE RIGHTS TO A JURY IN SUCH TRIAL. Landlord and Tenant agree that
this paragraph constitutes a written consent to waiver of trial by jury within
the meaning of California Code of Civil Procedure Section 631(a)(2), and Tenant
does hereby authorize and empower Landlord to file this paragraph and/or this
Lease, as required, with the clerk or judge of any court of competent
jurisdiction as a written consent to waiver of jury trial.
33. WAIVER. No provisions of this Lease shall be deemed waived by
Landlord unless such waiver is in a writing signed by Landlord. The waiver by
Landlord of any breach of any provision of this Lease shall not be deemed a
waiver of any subsequent breach of the same or any other provision of this
Lease. No delay or omission in the exercise of any right or remedy of Landlord
upon any default by Tenant shall impair such right or remedy or be construed as
a waiver. Landlord's acceptance of any payments of rent due under this Lease
shall not be deemed a waiver of any default by Tenant under this Lease
(including Tenant's recurrent failure to timely pay rent) other than Tenant's
nonpayment of the accepted sums, and no endorsement or statement on any check or
accompanying any check or payment shall be deemed an accord and satisfaction.
Landlord's consent to or approval of any act by Tenant requiring Landlord's
consent or approval shall not be deemed to waive or render unnecessary
Landlord's consent to or approval of any subsequent act by Tenant.
34. NOTICES. All notices and demands which may or are required to be
given by either party to the other hereunder shall be in writing. All notices
and demands by Landlord to Tenant shall be delivered personally or sent by
United States mail, postage prepaid, or by any reputable overnight or same-day
courier, addressed to Tenant at the Premises, or to such other place as Tenant
may from time to time designate by notice to Landlord hereunder. All notices and
demands by Tenant to Landlord shall be sent by United States mail, postage
prepaid, or by any reputable overnight or same-day courier, addressed to
Landlord in care of Shorenstein Company, L.P., 555 California Street, 49th
floor, San Francisco, California 94104, or to such other place as Landlord may
from time to time designate by notice to Tenant hereunder. Notices delivered
personally or sent same-day courier will be effective immediately upon delivery
to the addressee at the designated address; notices sent by overnight courier
will be effective one (1) Business Day after acceptance by the service for
delivery; notices sent by mail will be effective two (2) Business Days after
mailing. In the event Tenant requests multiple notices hereunder, Tenant will be
bound by such notice from the earlier of the effective times of the multiple
notices.
35. NOTICE OF SURRENDER. At least ninety (90) days before the last
day of the term hereof, Tenant shall give to Landlord a written notice of
intention to surrender the Premises on that date, but neither this paragraph nor
any failure by Landlord to protest the lack of such notice by Tenant shall be
construed as an extension of the term or as a consent by Landlord to any holding
over by Tenant.
36. DEFINED TERMS AND MARGINAL HEADINGS. When required by the
context of this Lease, the singular includes the plural. If more than one person
or entity signs this Lease as Tenant, the obligations hereunder imposed upon
Tenant shall be joint and several, and the act of, written notice to or from,
refund
25
<PAGE>
to, or signature of, any Tenant signatory to this Lease (including without
limitation modifications of this Lease made by fewer than all such Tenant
signatories) shall bind every other Tenant signatory as though every other
Tenant signatory had so acted, or received or given the written notice or
refund, or signed. The headings and titles to the paragraphs of this Lease are
for convenience only and are not to be used to interpret or construe this Lease.
Wherever the term "including" or "includes" is used in this Lease it shall be
construed as if followed by the phrase "without limitation." The language in all
parts of this Lease shall in all cases be construed as a whole and in accordance
with its fair meaning and not construed for or against any party simply because
one party was the drafter thereof.
37. TIME AND APPLICABLE LAW. Time is of the essence of this Lease and
of each and all of its provisions, except as to the conditions relating to the
delivery of possession of the Premises to Tenant. This Lease shall be governed
by and construed in accordance with the laws of the State of California, and the
venue of any action or proceeding under this Lease shall be the City and County
of San Francisco, California.
38. SUCCESSORS. Subject to the provisions of Paragraphs 13 and 28
above, the covenants and conditions hereof shall be binding upon and inure to
the benefit of the parties hereto and their respective heirs, personal
representatives, successors, executors, administrators and assigns.
39. ENTIRE AGREEMENT; Modifications. This Lease (including any
exhibit, rider or attachment hereto) constitutes the entire agreement between
Landlord and Tenant with respect to Tenant's lease of the Premises. No provision
of this Lease may be amended or otherwise modified except by an agreement in
writing signed by the parties hereto. Neither Landlord nor Landlord's agents
have made any representations or warranties with respect to the Premises, the
Building, the Real Property or this Lease except as expressly set forth herein,
including without limitation any representations or warranties as to the
suitability or fitness of the Premises for the conduct of Tenant's business or
for any other purpose, nor has Landlord or its agents agreed to undertake any
alterations or construct any improvements to the Premises except those, if any,
expressly provided in this Lease, and no rights, easements or licenses shall be
acquired by Tenant by implication or otherwise unless expressly set forth
herein. Neither this Lease nor any memorandum hereof shall be recorded by
Tenant.
40. LIGHT AND AIR. Tenant agrees that no diminution of light, air or
view by any structure which may hereafter be erected (whether or not by
Landlord) shall entitle Tenant to any reduction of rent hereunder, result in any
liability of Landlord to Tenant, or in any other way affect this Lease.
41. NAME OF BUILDING. Tenant shall not use the name of the Building
for any purpose other than as the address of the business conducted by Tenant in
the Premises without the written consent of Landlord. Landlord reserves the
right to change the name of the Building at any time in its sole discretion by
written notice to Tenant and Landlord shall not be liable to Tenant for any
loss, cost or expense on account of any such change of name.
42. SEVERABILITY. If any provision of this Lease or the application
thereof to any person or circumstance shall be invalid or unenforceable to any
extent, the remainder of this Lease and the application of such provisions to
other persons or circumstances shall not be affected thereby and shall be
enforced to the greatest extent permitted by law.
43. AUTHORITY. If Tenant is a corporation, partnership, trust,
association or other entity, Tenant and each person executing this Lease on
behalf of Tenant, hereby covenants and warrants that (a) Tenant is duly
incorporated or otherwise established or formed and validly existing under the
laws of its state of incorporation, establishment or formation, (b) Tenant has
and is duly qualified to do business in the state in which the Real Property is
located, (c) Tenant has full corporate, partnership, trust, association or other
appropriate power and authority to enter into this Lease and to perform all
Tenant's obligations hereunder, and (d) each person (and all of the persons if
more than one signs) signing this Lease on behalf of Tenant is duly and validly
authorized to do so.
44. NO OFFER. Submission of this instrument for examination and
signature by Tenant does not constitute an offer to lease or a reservation of or
option for lease, and is not effective as a lease or otherwise until execution
and delivery by both Landlord and Tenant.
45. REAL ESTATE BROKERS. Landlord and Tenant each represents and
warrants to the other that such party has negotiated this Lease directly with
the Real Estate Brokers identified in Paragraph 2 and has not authorized or
employed, or acted by implication to authorize or to employ, any other real
estate broker or salesman to act for such party in connection with this Lease.
Each party shall hold the other harmless from and indemnify and defend the other
against any and all claims by any real estate broker or salesman other than the
Real Estate Brokers identified in Paragraph 2 for a commission, finder's fee or
other compensation as a result of the inaccuracy of such party's representation
above.
46. CONSENTS AND APPROVALS. Wherever the consent, approval, judgment
or determination of Landlord is required or permitted under this Lease, Landlord
may exercise its sole discretion in granting
26
<PAGE>
or withholding such consent or approval or in making such judgment or
determination without reference to any extrinsic standard of reasonableness,
unless the provision providing for such consent, approval, judgment or
determination specifies that Landlord's consent or approval is not to be
unreasonably withheld, or that the standard for such consent, approval, judgment
or determination is to be reasonable, or otherwise specifies the standards under
which Landlord may withhold its consent. Whenever Tenant requests Landlord to
take any action or give any consent or approval, Tenant shall reimburse Landlord
for all of Landlord's costs incurred in reviewing the proposed action or consent
(whether or not Landlord consents to any such proposed action), including
without limitation reasonable attorneys' or consultants' fees and expenses,
within ten (10) days after Landlord's delivery to Tenant of a statement of such
costs. If it is determined that Landlord failed to give its consent or approval
where it was required to do so under this Lease, Tenant's sole remedy will be an
order of specific performance or mandatory injunction of the Landlord's
agreement to give its consent or approval. The review and/or approval by
Landlord of any item shall not impose upon Landlord any liability for accuracy
or sufficiency of any such item or the quality or suitability of such item for
its intended use. Any such review or approval is for the sole purpose of
protecting Landlord's interest in the Real Property, and neither Tenant nor any
Tenant Party nor any person or entity claiming by, through or under Tenant, nor
any other third party shall have any rights hereunder by virtue of such review
and/or approval by Landlord.
47. RESERVED RIGHTS. Landlord retains and shall have the rights set
forth below, exercisable without notice and without liability to Tenant for
damage or injury to property, person or business and without effecting an
eviction, constructive or actual, or disturbance of Tenant's use or possession
of the Premises or giving rise to any claim for rent abatement:
(a) To grant to anyone the exclusive right to conduct any business or
render any service in or to the Building and its tenants, provided
that such exclusive right shall not operate to require Tenant to use
or patronize such business or service or to exclude Tenant from its
use of the Premises expressly permitted herein.
(b) To perform, or cause or permit to be performed, at any time and from
time to time, including during Business Hours, construction in the
common areas and facilities or other leased areas in the Real
Property.
(c) To reduce, increase, enclose or otherwise change at any time and from
time to time the size, number, location, lay-out and nature of the
common areas and facilities and other tenancies and premises in the
Real Property and to create additional rentable areas through use or
enclosure of common areas; provided that such changes shall not
obstruct Tenant's access to the Premises.
48. FINANCIAL STATEMENTS. Upon submission of this Lease to Landlord
and at any time thereafter within thirty (30) days after Landlord's request
therefor, Tenant shall furnish to Landlord copies of true and accurate financial
statements reflecting Tenant's then current financial situation (including
without limitation balance sheets, statements of profit and loss, and changes in
financial condition), Tenant's most recent audited or certified annual financial
statements, and Tenant's federal income tax returns pertaining to Tenant's
business, and in addition shall cause to be furnished to Landlord similar
financial statements and tax returns for any guarantor(s) of this Lease. Tenant
agrees to deliver to any lender, prospective lender, purchaser or prospective
purchaser designated by Landlord such financial statements of Tenant as may be
reasonably requested by such lender or purchaser.
49. SIGNAGE; DIRECTORIES. Landlord shall provide, at Landlord's
expense, a Building-standard plaque identifying Tenant's business at the
entrance to Tenant's Premises on each floor. For any floor on which Tenant
occupies all the rentable space, if Tenant desires to have the sign at the entry
to the Premises be other than Building standard, Tenant may, at Tenant's
expense, install a sign identifying Tenant's business at the entrance to the
Premises on such floor, provided that the design, size, color and location of
the signs shall be subject to Landlord's prior reasonable approval. Tenant shall
be entitled, at no cost to Tenant, to have the name of Tenant's company listed
on the Building directory situated in the lobby of the Building. If, after
Tenant's name is initially listed on the directories, Tenant requests a change
in Tenant's name as printed thereon, Tenant shall reimburse Landlord for
Landlord's cost of reprinting Tenant's name for the directories.
50. NONDISCLOSURE OF LEASE TERMS. Tenant agrees that the terms of
this Lease are confidential and constitute proprietary information of Landlord,
and that disclosure of the terms hereof could adversely affect the ability of
Landlord to negotiate with other tenants. Tenant hereby agrees that Tenant and
its partners, officers, directors, employees, agents, real estate brokers and
sales persons and attorneys shall not disclose the terms of this Lease to any
other person without Landlord's prior written consent, except to any accountants
of Tenant in connection with the preparation of Tenant's financial statements or
tax returns, to an assignee of this Lease or sublessee of the Premises, or to an
entity or person to whom disclosure is required by applicable law or in
connection with any action brought to enforce this Lease.
51. HAZARDOUS SUBSTANCE DISCLOSURE. California law requires
landlords to disclose to tenants the existence of certain hazardous
substances. Accordingly, the existence of gasoline and other automotive
fluids, maintenance fluids, copying fluids and other office supplies and
equipment, certain construction and
27
<PAGE>
finish materials, tobacco smoke, cosmetics and other personal items, and
asbestos-containing materials ("ACM") must be disclosed. Gasoline and other
automotive fluids are found in the garage area of the Building. Cleaning,
lubricating and hydraulic fluids used in the operation and maintenance of the
Building are found in the utility areas of the Building not generally accessible
to Building occupants or the public. Many Building occupants use copy machines
and printers with associated fluids and toners, and pens, markers, inks, and
office equipment that may contain hazardous substances. Certain adhesives,
paints and other construction materials and finishes used in portions of the
Building may contain hazardous substances. Although smoking is prohibited in the
public areas of the Building, these areas may, from time to time, be exposed to
tobacco smoke. Building occupants and other persons entering the Building from
time-to-time may use or carry prescription and non-prescription drugs, perfumes,
cosmetics and other toiletries, and foods and beverages, some of which may
contain hazardous substances.
52. PARKING.
a. Commencing upon the Commencement Date, Landlord shall
provide Tenant, on an unassigned, non-exclusive and unlabelled basis, thirty
(30) parking spaces in the garage of the Building (the "Building Spaces") and
Tenant shall pay Landlord or the operator of the garage, as directed by
Landlord, for such parking at the rate or charge in effect from time to time for
parking in the garage.
In addition, commencing on the Commencement Date, Landlord shall make
available to Tenant's employees, on a month-to month basis, thirty (30)
additional parking spaces, on an unassigned, non-exclusive and unlabelled basis,
in the parking facility currently known as the City Center Garage, located at
525 14th Street, Oakland (the "City Center Garage Spaces"), and Tenant's
employees shall pay Landlord or the operator of the subject garage, as directed
by Landlord, for such parking at the rate or charge in effect from time to time
for parking in the garage. Landlord or Tenant may terminate Tenant's right to
all or any portion of such month-to-month parking spaces by giving thirty (30)
days' notice of such termination to the other.
Tenant acknowledges that the monthly and hourly rates or charges in
effect may vary from time to time based on, among other things, the time of day,
type of parking (e.g., valet, self-park, or tandem) and general rate increases.
b. Tenant shall provide Landlord with advance written notice of
the names of each individual to whom Tenant from time to time distributes
Tenant's parking rights hereunder, and shall cause each such individual to
execute Landlord's standard waiver form for garage users. If the parking charge
with respect to any space is not paid when due, and such failure continues for
ten (10) days after written notice to Tenant of such failure, then in addition
to any other remedies afforded Landlord under this Lease by reason of nonpayment
of rent, Landlord may terminate Tenant's rights under this Paragraph 52 with
respect to such space. Further, if at any time Tenant releases to Landlord any
parking space provided for in this Paragraph 52, then Tenant's right under this
Paragraph 52 to use such released parking space shall automatically terminate.
c. The parking spaces to be made available to Tenant hereunder
may contain a reasonable mix of spaces for compact cars. Landlord shall take
reasonable actions to ensure the availability of the parking spaces leased by
Tenant, but Landlord does not guarantee the availability of those spaces at all
times against the actions of other tenants of the Building and users of the
parking facility. Without limiting the foregoing, in no event shall this Lease
be void or voidable, nor shall Landlord be liable to Tenant for any loss or
damage, nor shall there be any abatement of rent hereunder (other than the
parking charge paid hereunder for any parking space no longer made available),
by reason of any reduction in Tenant's parking rights hereunder by reason of
strikes, lock-outs, labor disputes, shortages of material or labor, fire, flood
or other casualty, acts of God or any other cause beyond the control of
Landlord. Access to the parking spaces to be made available to Tenant shall, at
Landlord's option, be by card, pass, bumper sticker, decal or other appropriate
identification issued by Landlord, and Tenant's right to use the parking
facility is conditioned on Tenant's abiding by and shall otherwise be subject to
such rules and regulations as may be promulgated by Landlord from time to time
for the parking facility.
d. The parking rights set forth in this Paragraph 52 are
non-transferrable, are personal to the Tenant originally named herein, and shall
not inure to the benefit of any successor, assignee or subtenant of Tenant. In
the event of any assignment or sublease of parking space rights which is
approved by Landlord (provided, however, that such approval may be granted or
withheld by Landlord in its sole and absolute discretion), Landlord shall be
entitled to receive one hundred percent (100%) of any profit received by Tenant
in connection with such assignment or sublease.
53. OPTION TO RENEW.
a. OPTION TO RENEW. Provided that Tenant has not theretofore
exercised its termination option under Paragraph 56 below, Tenant shall have the
option to renew this Lease for one (1) additional term of five (5) years,
commencing upon the expiration of the initial term of the Lease. The renewal
option must be exercised, if at all, by written notice given by Tenant to
Landlord not later than twelve (12) months
28
<PAGE>
prior to expiration of the initial term of this Lease. Notwithstanding the
foregoing, at Landlord's election this renewal option shall be null and void and
Tenant shall have no right to renew this Lease if (i) as of the date immediately
preceding the commencement of the renewal period Tenant is not in occupancy of
at least seventy percent (70%) of the entire Premises then demised hereunder or
Tenant does not intend to continue to occupy the Premises (but intends to assign
this Lease or sublet the space in whole or in part), or (ii) on the date Tenant
exercises the option or on the date immediately preceding the commencement date
of the renewal period Tenant is in default of any of its material obligations
under this Lease beyond any applicable cure period.
b. TERMS AND CONDITIONS. If Tenant exercises the renewal
option, then during the renewal period all of the terms and conditions set forth
in this Lease as applicable to the Premises during the initial term shall apply
during the renewal term, except that (i) Tenant shall have no further right to
renew this Lease, (ii) Tenant shall take the Premises in their then "as-is"
state and condition, and (iii) the Monthly Rent payable by Tenant for the
Premises shall be the then-fair market rent for the Premises based upon the
terms of this Lease, as renewed. Fair market rent shall include the periodic
rental increases, if any, that would be included for space leased for the period
the space will be covered by the Lease. For purposes of this Paragraph 53, the
term "fair market rent" shall mean the rental rate for comparable space under
primary lease (and not sublease) to new tenants, taking into consideration the
unique quality and prestige of the Building and such amenities as existing
improvements, view, floor on which the Premises are situated and the like,
situated in first-class, reputable, established high-rise office buildings in
comparable locations in City Center, in comparable physical and economic
condition, taking into consideration the then-prevailing ordinary rental market
practices with respect to tenant concessions (if any) (e.g. not offering
extraordinary rental, promotional deals and other concessions to tenants which
deviate from what is the then-prevailing ordinary practice in an effort to
alleviate cash flow problems, difficulties in meeting loan obligations or other
financial distress, or in response to a greater than average vacancy rate). The
fair market rent shall be mutually agreed upon by Landlord and Tenant in writing
within the thirty (30) calendar day period commencing six (6) months prior to
commencement of the renewal period. If Landlord and Tenant are unable to agree
upon the fair market monthly rent within such thirty (30)-day period, then the
fair market rent shall be established by appraisal in accordance with the
procedures set forth in Exhibit D attached hereto.
c. MINIMUM RENTAL. Notwithstanding anything in the foregoing or
EXHIBIT D attached hereto to the contrary, in no event shall the Monthly Rent
during the renewal period be less than the aggregate of the amounts of Monthly
Rent and Additional Rent payable by Tenant (for all of the Premises leased
hereunder) under Paragraphs 2.c., 5 and 7 hereof for the calendar month
immediately preceding the commencement of the renewal period.
54. RIGHTS OF FIRST OFFER ON 19 TH AND 21 ST FLOORS.
a. FIRST OFFER SPACES; FIRST OFFER RIGHT; AVAILABLE SPACE.
Tenant shall have a one-time right of first offer to lease (i) the increment of
space located on the nineteenth (19th) floor of the Building and outlined on
EXHIBIT E attached hereto and labeled "First Offer Space A", and/or (ii) the
increment of space located on the twenty-first (21 st ) floor of the Building
and outlined on EXHIBIT F attached hereto and labeled "First Offer Space B."
First Offer Space A and First Offer Space B are sometimes referred to herein
collectively as the "First Offer Spaces" and individually as a "First Offer
Space". Tenant's one-time right of first offer with respect to either First
Offer Space shall arise on the first occasion, if any, that such First Offer
Space becomes "available for lease" during the period commencing on the date
hereof and ending on the last day of the Third Lease Year, subject to the
provisions of this Paragraph 54. First Offer Space shall not be deemed
"available for lease" if the tenant under an expiring lease of such space
desires to renew or extend its lease or if any tenant of the Building exercises
an option or right of first offer to lease such First Offer Space, which option
or right of first offer was granted prior to the date of this Lease. Upon the
applicable First Offer Space becoming available for lease, Landlord shall notify
Tenant in writing of such availability prior to marketing such First Offer Space
to other existing or prospective tenants, which notice shall mention the actual
or estimated availability date of such First Offer Space. For a period of five
(5) Business Days after receipt of such notice, Tenant shall have a one-time
right to elect to lease the First Offer Space that was the subject of such
notice. If Tenant does not elect to lease such First Offer Space within such
period, Landlord shall have the right to lease such First Offer Space to any
third party for a term and on such other conditions as Landlord may determine in
Landlord's sole discretion and all rights of Tenant under this Paragraph 54
shall thereafter cease with respect to such First Offer Space.
b. TERMS AND CONDITIONS. Upon Tenant's election to lease
such First Offer Space, Landlord and Tenant shall promptly enter into an
amendment of this Lease, adding such First Offer Space to the Premises on all
the terms and conditions set forth in this Lease as to the Premises originally
demised under this Lease, except that (i) the term of the lease to Tenant of
such First Offer Space shall commence upon the date on which the First Offer
Space is delivered to Tenant and shall continue coextensively with the remaining
term hereof and any extension thereof, (ii) the Monthly Rent payable by Tenant
under Paragraph 5 of this Lease for the First Offer Space shall be the Fair
Market Rent for such space, as provided for below, (iii) Tenant's Share payable
under Paragraph 7 hereof with respect to the First Offer Space shall be
determined by dividing the rentable square footage of the First Offer Space by
the rentable square footage
29
<PAGE>
of the Building, and (iv) Tenant shall take the First Offer Space in its then
"as-is" condition, broom-clean and cleared of all personal property.
The Fair Market Rent for the First Offer Space shall be mutually
agreed upon by Landlord and Tenant in writing within the thirty (30)-day period
commencing with Landlord's notice to Tenant stating the commencement date for
the First Offer Space, but no sooner than six (6) months prior to the date the
First Offer Space is to be added to this Lease. If Landlord and Tenant are
unable to agree upon the Fair Market Rent within such thirty (30)-day period,
then the Fair Market Rent shall be established by appraisal in accordance with
the procedures set forth in EXHIBIT D. Notwithstanding anything in the foregoing
or EXHIBIT D to the contrary, in no event shall the Monthly Rent for any First
Offer Space be less than the amount produced by multiplying the rentable square
footage of the First Offer Space by the aggregate of the monthly rental rate per
rentable square foot payable by Tenant for all Premises then leased under this
Lease under Paragraphs 2, 5 and 7 above for the month immediately preceding the
date the First Offer Space is added to this Lease.
If Tenant shall exercise the right of first offer granted herein,
Landlord does not guarantee that the First Offer Space will be available on the
stated availability date for the lease thereof, if the then existing occupants
of the First Offer Space shall hold-over, or for any other reason beyond
Landlord's reasonable control. In such event, rent with respect to the First
Offer Space shall be abated until Landlord legally delivers the same to Tenant,
as Tenant's sole recourse.
c. LIMITATION ON TENANT'S RIGHT OF FIRST OFFER. Notwithstanding the
foregoing, if (i) on the date of exercise of the right of first offer, or the
date immediately preceding the date the Lease term for the applicable First
Offer Space is to commence, Tenant is in default under this Lease beyond any
applicable cure period, or (ii) on the date immediately preceding the date the
Lease term for such First Offer Space is to commence Tenant named herein (A) is
not in occupancy of at least seventy percent (70%) of the entire Premises then
leased under this Lease and delivered to Tenant, or (B) does not intend to
occupy at least seventy percent (70%) of the entire Premises then leased under
this Lease, together with the entire First Offer Space, then Tenant shall have
no right to lease such First Offer Space and the exercise of the right of first
offer shall be null and void.
THIS LEASE IS EXECUTED by Landlord and Tenant as of the date set forth
at the top of page 1 hereof.
OAKLAND CITY CENTER LLC, ASK JEEVES, INC.,
a Delaware limited liability company a Delaware corporation
By: Shorenstein Realty Investors Three, L.P.,
a California limited partnership,
Member
By: SRI Equity Associates, L.P.,
a California limited partnership,
General Partner
By: Shorenstein Company, L.P.,
a California limited partnership,
General Partner
By: Shorenstein Management, Inc.,
a California corporation,
General Partner
By: /s/ DOUGLAS W. SHORENSTEIN By: /s/ M. BRUCE NAKAO
-------------------------- ------------------------
Douglas W. Shorenstein Name: M. BRUCE NAKAO
President ------------------------
Title: CHIEF FINANCIAL OFFICER
------------------------
Landlord Tenant
30
<PAGE>
EXHIBIT B
RULES AND REGULATIONS
1111 BROADWAY
1. No sign, placard, picture, advertisement, name or notice shall be
inscribed, displayed or printed or affixed on or to any part of the outside or
inside of the Building or any part of the Premises visible from the exterior of
the Premises without the prior written consent of Landlord, which consent may be
withheld in Landlord's sole discretion. Landlord shall have the right to remove,
at Tenant's expense and without notice to Tenant, any such sign, placard,
picture, advertisement, name or notice that has not been approved by Landlord.
All approved signs or lettering on doors and walls shall be printed,
painted, affixed or inscribed at the expense of Tenant by a person approved of
by Landlord.
If Landlord notifies Tenant in writing that Landlord objects to any
curtains, blinds, shades or screens attached to or hung in or used in connection
with any window or door of the Premises, such use of such curtains, blinds,
shades or screens shall be removed immediately by Tenant. No awning shall be
permitted on any part of the Premises.
2. No ice, drinking water, towel, barbering or bootblacking, shoeshining
or repair services, or other similar services shall be provided to the Premises,
except from persons authorized by Landlord and at the hours and under
regulations fixed by Landlord.
3. The bulletin board or directory of the Building will be provided
exclusively for the display of the name and location of tenants only and
Landlord reserves the right to exclude any other names therefrom.
4. The sidewalks, halls, passages, exits, entrances, elevators and
stairways shall not be obstructed by any of the Tenant Parties or used by Tenant
for any purpose other than for ingress to and egress from its Premises. The
halls, passages, exits, entrances, elevators, stairways, balconies and roof are
not for the use of the general public and Landlord shall in all cases retain the
right to control and prevent access thereto by all persons whose presence in the
judgment of Landlord shall be prejudicial to the safety, character, reputation
and interests of the Building and its tenants. No tenant and no employees or
invitees of any tenant shall go upon the roof of the Building.
5. Tenant shall not alter any lock or install any new or additional locks
or any bolts on any interior or exterior door of the Premises without the prior
written consent of Landlord.
6. The toilet rooms, toilets, urinals, wash bowls and other apparatus
shall not be used for any purpose other than that for which they were
constructed and no foreign substance of any kind whatsoever shall be thrown
therein and the expense of any breakage, stoppage or damage resulting from the
violation of this rule shall be borne by the tenant who, or whose employees or
invitees, shall have caused it.
7. Tenant shall not overload the floor of the Premises or mark, drive
nails, screw or drill into the partitions, woodwork or plaster or in any way
deface the Premises or any part thereof.
8. No furniture, freight or equipment of any kind shall be brought into
the Building without the consent of Landlord and all moving of the same into or
out of the Building shall be done at such time and in such manner as Landlord
shall designate. Landlord shall have the right to prescribe the weight, size and
position of all safes and other heavy equipment brought into the Building and
also the times and manner of moving the same in and out of the Building. Safes
or other heavy objects shall, if considered necessary by Landlord, stand on a
platform of such thickness as is necessary to properly distribute the weight.
Landlord will not be responsible for loss of or damage to any such safe or
property from any cause, and all damage done to the Building by moving or
maintaining any such safe or other property shall be repaired at the expense of
Tenant. The elevator designated for freight by Landlord shall be available for
use by all tenants in the Building during the hours and pursuant to such
procedures as Landlord may determine from time to time. The persons employed to
move Tenant's equipment, material, furniture or other property in or out of the
Building must be acceptable to Landlord. The moving company must be a locally
recognized professional mover, whose primary business is the performing of
relocation services, and must be bonded and fully insured. In no event shall
Tenant employ any person or company whose presence may give rise to a labor or
other disturbance in the Project. A certificate or other verification of such
insurance must be received and approved by Landlord prior to the start of any
moving operations. Insurance must be sufficient in Landlord's sole opinion, to
cover all personal liability, theft or damage to the Project, including, but not
limited to, floor coverings, doors, walls, elevators, stairs, foliage and
landscaping. Special care must be taken to prevent damage to foliage and
landscaping during adverse weather. All moving operations shall be conducted at
such times and in such a manner as Landlord shall direct, and all moving shall
take place during non-business hours unless Landlord agrees in writing
otherwise.
1
<PAGE>
9. Tenant shall not employ any person or persons other than the janitor
of Landlord for the purpose of cleaning the Premises, unless otherwise agreed to
by Landlord. Except with the written consent of Landlord, no person or persons
other than those approved by Landlord shall be permitted to enter the Building
for the purpose of cleaning the Building or the Premises. Tenant shall not cause
any unnecessary labor by reason of Tenant's carelessness or indifference in the
preservation of good order and cleanliness.
10. Tenant shall not use, keep or permit to be used or kept any foul or
noxious gas or substance in the Premises, or permit or suffer the Premises to be
occupied or used in a manner offensive or objectionable to Landlord or other
occupants of the Building by reason of noise, odors and/or vibrations, or
interfere in any way with other tenants or those having business therein, nor
shall any animals or birds be brought in or kept in or about the Premises or the
Building. In no event shall Tenant keep, use, or permit to be used in the
Premises or the Building any guns, firearm, explosive devices or ammunition.
11. Except as permitted under Paragraph 23 below, no cooking shall be done
or permitted by Tenant in the Premises, nor shall the Premises be used for the
storage of merchandise, for washing clothes, for lodging, or for any improper,
objectionable or immoral purposes.
12. Tenant shall not use or keep in the Premises or the Building any
kerosene, gasoline, or inflammable or combustible fluid or material, or use any
method of heating or air conditioning other than that supplied by Landlord.
13. Landlord will direct electricians as to where and how telephone and
telegraph wires are to be introduced into the Premises and the Building. No
boring or cutting for wires will be allowed without the prior consent of
Landlord. The location of telephones, call boxes and other office equipment
affixed to the Premises shall be subject to the prior approval of Landlord.
14. Upon the expiration or earlier termination of the Lease, Tenant shall
deliver to Landlord the keys of offices, rooms and toilet rooms which have been
furnished by Landlord to Tenant and any copies of such keys which Tenant has
made. In the event Tenant has lost any keys furnished by Landlord, Tenant shall
pay Landlord for such keys.
15. Tenant shall not lay linoleum, tile, carpet or other similar floor
covering so that the same shall be affixed to the floor of the Premises, except
to the extent and in the manner approved in advance by Landlord. The expense of
repairing any damage resulting from a violation of this rule or removal of any
floor covering shall be borne by the tenant by whom, or by whose contractors,
employees or invitees, the damage shall have been caused.
16. No furniture, packages, supplies, equipment or merchandise will be
received in the Building or carried up or down in the elevators, except between
such hours and in such elevators as shall be designated by Landlord, which
elevator usage shall be subject to the Building's customary charge therefor as
established from time to time by Landlord.
17. On Saturdays, Sundays and legal holidays, and on other days between
the hours of 6:00 P.M. and 8:00 A.M., access to the Building, or to the halls,
corridors, elevators or stairways in the Building, or to the Premises may be
refused unless the person seeking access is known to the person or employee of
the Building in charge and has a pass or is properly identified. Landlord shall
in no case be liable for damages for any error with regard to the admission to
or exclusion from the Building of any person. In case of invasion, mob, riot,
public excitement, or other commotion, Landlord reserves the right to prevent
access to the Building during the continuance of the same by closing the doors
or otherwise, for the safety of the tenants and protection of property in the
Building.
18. Tenant shall be responsible for insuring that the doors of the
Premises are closed and securely locked before leaving the Building and must
observe strict care and caution that all water faucets or water apparatus are
entirely shut off before Tenant or Tenant's employees leave the Building, and
that all electricity, gas or air shall likewise be carefully shut off, so as to
prevent waste or damage, and for any default or carelessness Tenant shall make
good all injuries sustained by other tenants or occupants of the Building or
Landlord. Landlord shall not be responsible to Tenant for loss of property on
the Premises, however occurring, or for any damage to the property of Tenant
caused by the employees or independent contractors of Landlord or by any other
person.
19. Landlord reserves the right to exclude or expel from the Building any
person who, in the judgment of Landlord, is intoxicated or under the influence
of liquor or drugs, or who shall in any manner do any act in violation of any of
the rules and regulations of the Building.
20. The requirements of any tenant will be attended to only upon
application at the office of the Building. Employees of Landlord shall not
perform any work or do anything outside of their regular duties unless under
special instructions from Landlord, and no employee will admit any person
(tenant or otherwise) to any office without specific instructions from Landlord.
2
<PAGE>
21. No vending machine or machines of any description shall be installed,
maintained or operated upon the Premises without the prior written consent of
Landlord.
22. Subject to Tenant's right of access to the Premises in accordance with
Building security procedures, Landlord reserves the right to close and keep
locked all entrance and exit doors of the Building on Saturdays, Sundays and
legal holidays and on other days between the hours of 6:00 P.M. and 8:00 A.M.,
and during such further hours as Landlord may deem advisable for the adequate
protection of the Building and the property of its tenants.
23. Tenant may maintain and use microwave ovens, toaster ovens and
equipment for brewing coffee, tea, hot chocolate and similar beverages; provided
that Tenant shall (i) prevent the emission of any food or cooking odor from
leaving the Premises, (ii) be solely responsible for cleaning the areas where
such equipment is located and removing food-related waste from the Premises and
the Building, or shall pay Landlord's standard rate for such service as an
addition to cleaning services ordinarily provided, (iii) maintain and use such
areas solely for Tenant's employees and business invitees, not as public
facilities, and (iv) keep the Premises free of vermin and other pest infestation
and shall exterminate, as needed, in a manner and through contractors reasonably
approved by Landlord, preventing any emission of odors, due to extermination,
from leaving the Premises. Notwithstanding clause (ii) above, Landlord shall,
without special charge, empty and remove the contents of one (1) 15-gallon (or
smaller) waste container from the food preparation area so long as such
container is fully lined with, and the contents can be removed in, a waterproof
plastic liner or bag, supplied by Tenant, which will prevent any leakage of food
related waste or odors; provided, however, that if at any time Landlord must pay
a premium or special charge to Landlord's cleaning or scavenger contractors for
the handling of food-related or so-called "wet" refuse, Landlord's obligation to
provide such removal, without special charge, shall cease.
3
<PAGE>
EXHIBIT C
FORM OF LETTER OF CREDIT
[Date]
OAKLAND CITY CENTER LLC ["LANDLORD"]
c/o SHORENSTEIN COMPANY, L.P.
555 California Street, 49th Floor
San Francisco, CA 94104
Attn: Legal Department
IRREVOCABLE STANDBY LETTER OF CREDIT NO. __________
We hereby establish our Irrevocable Letter of Credit in your favor available by
your drafts drawn on [BANK], at sight, for any sum or sum(s) not exceeding
___________________ Dollars ($___________), for account of [TENANT] at [TENANT'S
ADDRESS]. Draft(s) must be accompanied by supporting documents as described
below:
A written statement to [BANK] stating that "The principal amount [or the
portion requested] of this Letter of Credit is due and payable in
accordance with the provisions of that certain [TITLE OF DOCUMENT] dated
______________________, between [LANDLORD] and [TENANT]."
The written statement shall be accompanied by this Letter of Credit for
surrender; provided, however, that if less than the balance of the Letter of
Credit is drawn, this Letter of Credit need not be surrendered and shall
continue in full force and effect with respect to the unused balance of this
Letter of Credit unless and until we issue to you a replacement Letter of Credit
for such unused balance, the terms of which replacement Letter of Credit shall
be identical to those set forth in this Letter of Credit. We are not required to
inquire as to the accuracy of the matters recited in the written statement or as
to the authority of the person signing the written statement and may take the
act of signing as conclusive evidence of such accuracy and his or her authority
to do so. The obligation of [BANK] under this Letter of Credit is the individual
obligation of [BANK], and is in no way contingent upon reimbursement with
respect thereto. Each draft must bear upon its face the clause "Drawn under
Letter of Credit No. _____________, dated _____________, of [BANK]."
This Letter of Credit shall be automatically extended for an additional period
of one year from the present or each future expiration date unless we have
notified you in writing delivered via U.S. registered mail, not less than sixty
(60) days before such expiration date, that we elect not to renew this Letter of
Credit. Upon your receipt of such notification, you may draw your sight draft on
us prior to the then applicable expiration date for the unused balance of the
Letter of Credit, which shall be accompanied by your signed written statement
that you received notification of our election not to extend. Except so far as
otherwise expressly stated herein, this Letter of Credit is subject to the
"Uniform Customs and Practices for Documentary Credits (1993 Revision),
International Chamber of Commerce - Publication No. 500." If this Letter of
Credit expires during an interruption of business as described in article 17 of
Publication 500, we hereby specifically agree to effect payment if this Letter
of Credit is drawn against within 30 days after the resumption of business.
We hereby agree with you that drafts drawn under and in compliance with the
terms of this Letter of Credit will be duly honored if presented to the
above-mentioned drawee at our offices at [ADDRESS IN SAN FRANCISCO BAY AREA] on
or before ___________ PM [__________] Time, or such later expiration date to
which this Letter of Credit is extended pursuant to the terms hereof.
If at any time Beneficiary or its authorized transferee is not in possession of
the original of this letter of credit (together with all amendments, if any)
because such original has been delivered to us as required hereunder for a draw
thereon or transfer thereof, our obligations as set forth in this letter of
credit shall continue in full force and effect as if Beneficiary or such
authorized transferee still held such original, and any previous delivery to us,
without return by us, of such original shall be deemed to have satisfied any
requirement that such original be delivered to us for a subsequent draw
hereunder or transfer hereof.
This Letter of Credit may be, without charge and without recourse, assigned to,
and shall inure to the benefit of, any successor in interest to [LANDLORD] under
the [TITLE OF DOCUMENT]. Transfer charges, if any, are for the account of the
applicant.
Sincerely,
[BANK]
<PAGE>
EXHIBIT D
APPRAISAL PROCEDURE
Within fifteen (15) days after the expiration of the thirty (30)-day
period set forth in Paragraph 53 of the Lease for the mutual agreement of
Landlord and Tenant as to the fair market monthly rental, each party hereto, at
its cost, shall engage a real estate appraiser to act on its behalf in
determining the fair market monthly rental. The appraisers each shall have at
least ten (10) years' experience with leases in first-class high-rise office
buildings in downtown Oakland and shall submit to Landlord and Tenant in advance
for Landlord's and Tenant's reasonable approval the appraisal methods to be
used. If a party does not appoint an appraiser within such fifteen (15)-day
period but an appraiser is appointed by the other respective party, the single
appraiser appointed shall be the sole appraiser and shall set the fair market
monthly rental. If the two appraisers are appointed by the parties as stated in
this paragraph, such appraisers shall meet promptly and attempt to set the fair
market monthly rental. If such appraisers are unable to agree within thirty (30)
days after appointment of the second appraiser, the appraisers shall elect a
third appraiser meeting the qualifications stated in this paragraph within ten
(10) days after the last date the two appraisers are given to set the fair
market monthly rental. Each of the parties hereto shall bear one-half (1/2) the
cost of appointing the third appraiser and of the third appraiser's fee. The
third appraiser shall be a person who has not previously acted in any capacity
for either party.
The third appraiser shall conduct his own investigation of the fair
market monthly rent, and shall be instructed not to advise either party of his
determination of the fair market monthly rent except as follows: When the third
appraiser has made his determination, he shall so advise Landlord and Tenant and
shall establish a date, at least five (5) days after the giving of notice by the
third appraiser to Landlord and Tenant, on which he shall disclose his
determination of the fair market monthly rent. Such meeting shall take place in
the third appraiser's office unless otherwise agreed by the parties. After
having initialed a paper on which his determination of fair market monthly rent
is set forth, the third appraiser shall place his determination of the fair
market monthly rent in a sealed envelope. Landlord's appraiser and Tenant's
appraiser shall each set forth their determination of fair market monthly rent
on a paper, initial the same and place them in sealed envelopes. Each of the
three envelopes shall be marked with the name of the party whose determination
is inside the envelope.
In the presence of the third appraiser, the determination of the fair
market monthly rent by Landlord's appraiser and Tenant's appraiser shall be
opened and examined. If the higher of the two determinations is 105% or less of
the amount set forth in the lower determination, the average of the two
determinations shall be the fair market monthly rent, the envelope containing
the determination of the fair market monthly rent by the third appraiser shall
be destroyed and the third appraiser shall be instructed not to disclose his
determination. If either party's envelope is blank, or does not set forth a
determination of fair market monthly rent, the determination of the other party
shall prevail and be treated as the fair market monthly rent. If the higher of
the two determinations is more than 105% of the amount of the lower
determination, the envelope containing the third appraiser's determination shall
be opened. If the value determined by the third appraiser is the average of the
values proposed by Landlord's appraiser and Tenant's appraiser, the third
appraiser's determination of fair market monthly rent shall be the fair market
monthly rent. If such is not the case, fair market monthly rent shall be the
rent proposed by either Landlord's appraiser or Tenant's appraiser which is
closest to the determination of fair market monthly rent by the third appraiser.
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the references to our firm under the captions "Selected
Consolidated Financial Data" and "Experts" and to the use of our report dated
January 17, 2000, except for Note 13, as to which the date is February 2, 2000,
in the Registration Statement No. 333-30494 (Amendment No.2 to Form S-1) and
related Prospectus of Ask Jeeves, Inc. for the registration of 2,100,000 shares
of its common stock.
/s/ Ernst & Young LLP
Walnut Creek, California
March 9, 2000
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in Amendment No.2 to Registration Statement
No. 333-30494 of Ask Jeeves, Inc. on Form S-1 of our report dated January 25,
2000 (February 2, 2000 as to Note 8) relating to the financial statements of
Direct Hit Technologies, Inc. (which expresses an unqualified opinion and
includes an explanatory paragraph relating to the acquisition of Direct Hit
Technologies, Inc. by Ask Jeeves, Inc.) appearing in the Prospectus, which is
part of this Registration Statement, and to the reference to us under the
heading "Experts" in such Prospectus.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
March 9, 2000
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in this Registration
Statement on Form S-1 of Ask Jeeves, Inc. of our report dated March 22,1999,
except Note 9 as to which the date is November 19, 1999, relating to the
financial statements of Net Effect Systems, Inc., which appear in the Current
Report on Form 8-K/A dated January 20, 2000. We also consent to the reference to
us under the heading "Experts" in such Registration Statement.
/s/ PricewaterhouseCoopers LLP
Woodland Hills, California
March 8, 2000
