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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal Year ended December 31, 2000
---------------------------------------------------
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________________ to _______________________
Commission File No. 000-26521
Ask Jeeves, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
5858 Horton Street, Suite 350,
Emeryville, CA 94608
(Address of principal executive offices and zip code)
94-3334199
(I.R.S. Employer Identification No.)
Registrant's telephone number, including area code:
(510) 985-7400
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
The approximate aggregate market value of voting stock held by non-affiliates of
the Registrant, based upon the last sale price of the Common Stock on February
28, 2001 as reported by Nasdaq National Market was approximately $62,575,325.
Shares of Common Stock held by each officer and director and by each person who
owns 5% or more outstanding Common Stock of the Registrant have been excluded
from this computation in that such persons may be deemed to be affiliates.
Determination of affiliate status for this purpose is not a determination of
affiliate status for any other purpose.
As of February 28, 2001, the Registrant had 36, 406, 403 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Ask Jeeves' Definitive Proxy Statement to be filed with the Security
and Exchange Commission (the "Commission") pursuant to Regulation 14A in
connection with the 2001 Annual Meeting of Stockholders ("Annual Meeting") are
incorporated herein by reference into Part III of this report.
- --------------------------------------------------------------------------------
Certain Exhibits filed with Ask Jeeves' Registration Statement on Form S-1,
No. 333-77539; Current Report on Form 8-K, filed with the Commission on
November 18, 1999; Current Report on Form 8-K, filed with the commission on
February 14, 2000; Registration Statement on Form S-1, No. 333-95691;
Registration Statement on Form S-1, No. 333-30494 and Quarterly Report filed
on Form 10-Q, filed with the commission on November 14, 2000 are incorporated
by reference into Part IV of this report.
- --------------------------------------------------------------------------------
ASK JEEVES, INC.
2000 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Page
----
PART I
Item 1. Business...................................................................... 2
Item 2. Properties.................................................................... 36
Item 3. Legal Proceedings............................................................. 37
Item 4. Submission of Matters to a Vote of Security Holders........................... 38
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters......... 39
Item 6. Selected Consolidated Financial Data.......................................... 40
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 42
Item 7A. Quantitative and Qualitative Disclosures about Market Risk................... 50
Item 8. Financial Statements and Supplementary Data................................... 51
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure............................................................... 79
PART III
Item 10. Directors and Executive Officers of the Registrant........................... 81
Item 11. Executive Compensation....................................................... 81
Item 12. Security Ownership of Certain Beneficial Owners and Management............... 81
Item 13. Certain Relationships and Related Transactions............................... 81
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............. 81
SIGNATURES............................................................................... 85
PART I
Item 1. Business
In addition to historical information, the following discussion of the Company's
business contains forward-looking statements within the meaning of federal
securities laws. These forward-looking statements involve risks, uncertainties
and assumptions. The actual results may differ materially from those anticipated
in these forward-looking statements as a result of many factors, including but
not limited to, those discussed in the sections in this Annual Report on Form
10-K entitled "Competition", "Proprietary Rights", "Risk Factors" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management's opinions only as of the
date hereof. Ask Jeeves, Inc. (the "Company" or "Ask Jeeves") undertakes no
obligation to revise or publicly release the results of any revision to these
forward-looking statements. Readers should carefully review the risk factors
described in this document as well as in other documents the Company files from
time to time with the Securities and Exchange Commission, including the
Quarterly Reports on Form 10-Q to be filed by the Company in fiscal year 2001.
Overview
Headquartered in Emeryville, California, Ask Jeeves is a leading provider of
natural language question answering technologies and services. Our proprietary
technology combined with human intelligence creates an interaction centered on
understanding users' specific needs and interests and connecting them to the
most relevant information, products and services. Specifically, our
technology allows users to ask a question in plain English (or other
language) and receive a response pointing to relevant Internet destinations.
We believe that by providing an intuitive way to access information on the
World Wide Web ("Web"), we make online navigation a more satisfying
experience for consumers. We also believe that our natural language approach
enables companies to better acquire and retain valuable customers.
We deliver our natural language question answering technologies and services
through our own Web sites at Ask.com, AJKids.com and DirectHit.com. The first
natural language question answer site on the Web, Ask Jeeves at Ask.com has
emerged as a frequent top twenty Web property in terms of traffic and
advertising. As of December of 2000, our combined Web Properties attracted an
audience of 11.9 million unique monthly users who viewed an average of
approximately 13.1 million Web pages per day on Ask Jeeves branded online
properties. Because of our audience, Ask Jeeves Web Properties provide a
highly targeted medium for advertisers to reach online users. The Company
also syndicates services to portals, infomediaries, and content and
destination sites to help companies increase e-commerce and advertising
revenue.
Through our Business Solutions Group, the Company develops and maintains
customized automated search, natural language question answering and
intelligent advisor services on numerous corporate Web sites. For the year
ended December 2000, 67 business enterprises had adopted Ask Jeeves natural
language navigation and business intelligence technology for their Web sites.
Among these companies are AT&T Broadband, Compaq, DaimlerChrysler, Dell,
E*Trade, First Union Bank, Nike, Office Depot and Verizon Wireless. As of
December 2000, renewal rates for our Business Solutions customers were above
90 percent.
Although fiscal year 2000 ushered in a challenging new business environment, we
adapted to new market dynamics by introducing changes across our organization
that we believe make Ask Jeeves a stronger company and optimize long-term
shareholder value. In 2000, we refined our core product offerings and sales
strategies; implemented a more rigorous financial planning and management
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performance program; and along with our joint venture partners, began to expand
the Jeeves brand into some of the most attractive Internet markets outside the
United States.
Ask Jeeves ended fiscal year 2000 with revenues of approximately $96 million, a
334 percent increase over fiscal 1999. While the economic slowdown stalled the
Company's growth in the fourth quarter, we ended the year 2000 with $105 million
in cash, short-term and long-term investments.
In December 2000, in an effort to streamline operations, increase revenues,
reduce costs and bring staffing in line with current and anticipated
requirements, we announced an internal realignment of our business
organization. As a result of our business realignment, A. George (Skip)
Battle, a member of our Board of Directors, has been appointed Chief
Executive Officer. We believe that the realigned Company, comprised of two
business units, now each with separate profit and loss accountability, will
be better positioned to serve customers and target promising new market
opportunities.
Ask Jeeves Web Properties
Through our Web Properties Group, we provide targeting services designed to help
companies build brand awareness, drive qualified prospects to corporate Web
sites and increase transactions. We accomplish this through a combination of
advertising, sponsorship, listing and shopping services available through
Ask.com, AJKids.com, DirectHit.com and our syndication services. The benefits to
companies that use our targeting services include the following:
o 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.
o Improved Targeting. Through our automated popularity-based search
and natural language question answering services, we are able to
capture the questions users ask. Through our Branded Response
advertising product, for example, we also leverage our ability to
take a consumer's question, not just a key word, and introduce an
advertiser's message at the point where a customer is most
interested in their product or service.
o Diverse Delivery Systems. Companies can use multiple products to
reach targeted prospects, including banner advertising, sponsorship,
key word listings, directories and merchant listings.
Ask Jeeves at www.ask.com, is the flagship web property for our Internet media
network. 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. When a
user enters a question, Ask.com parses the question for word meaning and grammar
and displays a selection of relevant dialogue questions. Question templates
range from "Where can I get customized road directions?" and "Where can I
compare on-line prices for books?" to "How can I install a modem?" and "Is it
raining in Paris?".
Jeeves, the well known butler character featured on Ask.com, serves as a
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trusted assistant for our users, providing them with help and
guidance when they visit the Web site. In December 2000, Ask.com processed
approximately 3.7 million queries a day compared to approximately 2.6 million
questions in December 1999. The number of unique users grew from 5.3 million
users in December of 1999 to more than 11.9 million in December 2000. In 2000,
our patented popularity-based search technology became a standard feature on the
site, drawing from the preferences of millions of Internet users to deliver the
most relevant search results. To further assist Ask.com users to find the
information they need, we introduced Answer Point, a community forum that
enables people to get answers from other Ask.com users.
Modeled on Ask.com, Ask Jeeves for Kids at AJkids.com is a child oriented
version of the Ask.com site that enables children to find answers to
frequently asked questions on all kinds of topics from baseball to
earthquakes. Examples of question templates are "Why is the sky blue?" and
"Where can I play video games?".
DirectHit.com, is a Web site powered by our popularity search 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.
Advertising and Targeting Capabilities
Ask Jeeves Web Properties have designed a suite of integrated advertising and
targeting products for Ask Jeeves at ask.com designed to give our clients with a
powerful tool to drive traffic to their Web sites, increase sales and build
brands. These products are as follows:
o Branded Response. Branded Response provides Ask.com users with
content about an advertiser's brand at the moment they are most
interested - when they are asking a related question. The
advertiser's branded content can appear in a question and answer
format featuring relevant content or as a helpful fact or hint,
presented in paragraph format. Branded Response also features
related links to promotions or incentives. This feature allows
advertisers to occupy highly visible Web real estate in the middle
of the Ask.com reply page in between Jeeves Knowledge Base Answers
and Jeeves Popularity Results.
o Branded Animation. Currently slated for introduction in 2001, the
Company currently plans to offer an animation presence on the
Ask.com homepage that is sponsored by an advertising partner. Using
multi-media animation, we believe Ask.com users will be exposed
to the sponsor's brand and message in a compelling and dynamic way.
o Interstitials. Currently slated for introduction in 2001, an
interstitial launches an advertisement or page in a window behind
the browser. After the advertisement is triggered by keyword, a new
browser window opens that consists of an advertiser's page or a
customized Web area. The user then has the opportunity to explore
the advertiser's page or Web site or minimize the new browser window
for later exploration. In an effort to maintain and increase the
impact of the advertisers' message, frequency caps will be
implemented for interstitials appearing on Ask.com.
o DirectLinx. Currently scheduled to be introduced by the Company in
2001, DirectLinx will permit advertisers to obtain valuable leads
with targeted,
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text-based sponsored placements designed to feel more like an answer
than an advertisement. We believe that DirectLinx will offer
advertisers contextualized advertising with a flexible pricing
model, measurable results and easy implementation. The service's
capacity for up to 30 words is designed to allow advertisers to
convey a more in-depth, detailed message.
Revenue Generation
In general, the Company makes its Web properties available without charge to
users, and generates revenue primarily through the sale of advertisements,
promotions, sponsorships, listing and shopping services. We believe our natural
language question answering technologies and services provide a non-intrusive
way for companies to target and acquire customers. Companies can target Ask.com,
AJKids.com and DirectHit.com users through banner advertising, text links,
sponsorships and electronic commerce referrals.
The majority of advertising on Ask Jeeves Web properties is sold through the
Company's internal advertising sales force. Approximately 447 customers
advertised on Ask Jeeves Web Properties during 2000.
We also syndicate our proprietary Jeeves Search services to companies seeking
to provide consumers with a broad and relevant set of answers across the
Internet. The syndication of Jeeves Search enables us to extend the reach of
our natural language question answering technologies and services. Companies
that syndicate our services pay us a licensing fee. We had 50 syndication
customers during the year 2000.
Ask Jeeves Business Solutions
Ask Jeeves has developed and deployed natural language question answering
technologies and services for corporate web sites that provide real-time
access to information, products and services. By connecting users to answers
through a suite of services that includes automated search, natural language
question answering and intelligent advisor technology, we believe our
Business Solutions allow our corporate customers to create an intuitive
interaction with their customers. Moreover, we believe that by providing a
more intuitive, relevant and flexible way to access online information,
companies will be able to maximize conversion and retention rates, lower
support costs and improve access to customer data. In addition, through our
analysis and reporting tool that captures user questions, we believe that we
can provide critical insight into the specific needs, interests and
preferences of users to help companies make customer-driven business
decisions. Our natural language question answering technologies and services
for corporate customers includes Jeeves Search, Jeeves Answers, Jeeves
Advisor, and Jeeves Insight, which we deliver through our Business Solutions
Group. In 2000, client companies such as Ford, Radio Shack, Dell and Arthur
Andersen used our natural language technologies and services.
Unleashing the Potential Of the Internet
The Internet has established itself as a mass-market communications medium,
enabling users to obtain and share information and interact and conduct
business. However, as the importance of the Internet for individuals and
businesses has drawn users at an unprecedented pace, competitive
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pressures in online markets has increased. 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 desire. Companies therefore have a difficult time
identifying qualified prospects and introducing them to their products and
services.
Moreover, 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. We believe that in
the increasingly competitive electronic commerce environment, companies that
fail to address these consumer service needs will lose sales to competitors
located a mouse click away.
To address these concerns, companies are implementing new methods of conducting
business online. They are focusing on increasing online conversion rates by
providing timely, personalized service to guide users through the process of
finding answers and receiving help. In addition, companies are looking for
methods to increase customer satisfaction with their products and services to
create repeat buyers. 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 to unleash the potential of
the Internet, companies must develop Web sites that fulfill a variety of needs,
including:
o attracting or delivering users;
o providing users with easy access to requested information;
o enabling user's transactions;
o dealing with pre-sale and post-sale questions; and
o improving management of customer relationships by collecting and
analyzing consumer data.
THE ASK JEEVES SOLUTION
Our natural language technologies and services are 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 natural language
technologies and 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.
PRODUCTS AND SERVICES
The Ask Jeeves natural language question answering technologies and services
include the following:
o Jeeves Answers, our foundational 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.
Our Answers 5.0 Global Edition uses the intelligence gained by
answering questions in one language to provide relevant content for
Web sites in other languages. This allows current customers and
prospects to take what they've learned in English speaking markets
and apply it to other markets in order to improve sales and
customer satisfaction, as well as to reduce support costs.
o JEEVES SEARCH, an automated popularity based search technology,
enables 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
differentiating feature of Jeeves Search is its popularity engine,
which 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 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.
o 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.
o 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.
CORPORATE CUSTOMER BENEFITS
We believe the benefits to companies that use our conversion
services include the following:
o Increased Conversion Rates. Our services are designed to facilitate
access to relevant information, products and services on corporate
Web sites, thereby
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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.
o REDUCED SUPPORT COSTS. By connecting users to relevant information,
we believe our natural language question answering technologies and
services for corporate customers facilitates access to information
on a self-service basis, thereby reducing the costs of customer
support, including phone and e-mail interactions.
o VALUABLE CONSUMER INSIGHT. Ask Jeeves collects information about our
users' interaction to provide comprehensive reports on user's needs
and interests that our corporate customers can use to direct product
development, marketing and Web site strategies.
o FLEXIBLE SERVICES. Companies can implement the full array of
services or deploy them separately. Our 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 fit their specific requirements. As our
corporate customers' needs expand, we are able to provide
additional services to manage our entire range of real-time
customer interactions.
o OUTSOURCED DEPLOYMENT. By providing a stand-alone, fully outsourced
service, our customized natural language question answering
technologies and services for corporate customers 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 BUSINESS SOLUTIONS STRATEGY
In 2000, our hosted Business Solutions products and services continued to
attract customers and generate high percentage of renewals and expansions. We
added popularity-based automated search, intelligent advisor and other
technologies to our core natural language question answering technology to
provide consumers with improved access to information, products and services
from corporate Web sites. In 2001, we intend to continue to refine and target
our services and capabilities through technologies that will improve the ease,
relevance and performance of our service to users and to provide a more
intuitive interaction between a company and its customers.
o DELIVER PRODUCTIZED SOLUTIONS. A core element of the Business
Solutions strategy is to migrate from a services based business
model into a productized software solutions model. By focusing on
productized solutions, the Company expects to offer a
better-targeted line of Business Solutions products with better
overall margin characteristics.
o TIERED AND VERTICAL MARKET SOLUTIONS. We believe our flagship
business product, Answers 5.0, has been well received by
customer-centric companies that value advanced e-commerce and
e-support solutions. To extend our reach to a broader set of
companies, the Company currently plans to introduce a highly
automated entry-level version of our Business Solutions for
companies with less complex
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needs. In 2001, we plan to introduce vertical-market solutions
designed to meet the specific requirements of targeted industries
such as the financial services, telecommunications and automotive
markets.
o Non-Hosted Solutions. We have succeeded in attracting high-caliber
clients by hosting our market-leading natural language navigation
technology. In 2001, we currently plan to release a productized
solution to target the large market segment that prefers a
non-hosted solution that can reside within a company's firewall.
This planned product roll out will allow our clients to
independently service and maintain our solutions to suit their own
requirements. By making our solutions more versatile, we hope to
significantly expand our Business Solutions' client base.
o Forge Strategic Alliances and Expand Market Reach. A major thrust of
our 2001 Business Solutions strategy is to ensure our products
interoperate with industry-standard applications and platforms. We
believe that this will increase our market penetration in two ways.
First, for companies with multiple vendors, we believe that our
productized solutions will easily integrate with other preferred
technologies, providing companies with one integrated platform.
Second, with an integrated solution, we believe the Company will
have greater flexibility to form strategic alliances and
partnerships that will enable third parties to sell, install and
support our Business Solutions. By partnering with system
integrators to create an indirect sales channel, we believe that we
can greatly expand our market reach.
o Provide Essential Business Intelligence. We believe that our
natural-language navigation not only improves the user experience,
but also provides companies with quick, customer-driven market
intelligence. Building on this capability and increased client
demand, we currently plan to add richer analysis and tracking tools
to capture customer data in order to help companies manage their Web
site content and refine their marketing and sales strategies.
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Geographic Properties (Ask Jeeves International)
We believe there is a significant market opportunity for the international
expansion of our natural language question answering technologies and services.
We intend to increase international awareness of our brand through new business
ventures, the use of local management and employees and the implementation of
language and geographic specific deployments of our services. We have pursued a
strategy of content aggregation with third parties and currently plan to roll
out a broad range of our products and services for these markets.
Our wholly owned subsidiary, Ask Jeeves International, Inc., ("AJI"), was formed
for the purpose of marketing our natural language question answering
technologies and services outside of the United States. To date, AJI has entered
into joint venture arrangements with local partners to provide our services in
the United Kingdom, Japan, and to the worldwide Spanish-speaking market. In
January 2001, AJI formed Ask Jeeves Australia, a wholly owned subsidiary of AJI,
to provide a localized version of our technologies and services for the
Australian market.
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ASK JEEVES UK
In December 1999, we launched Ask Jeeves UK, as a joint venture with two British
media companies, Carlton Communications and Granada Media Group to market our
natural language question and answering technologies and services to Great
Britain and the Republic of Ireland. As of December 2000, the Ask Jeeves UK Web
site was already the seventh most popular UK Web property with 2.8 million
unique users and 128 million impressions per month. Ask Jeeves owns a 50 percent
interest in this joint venture.
ASK JEEVES EN ESPANOL
Ask Jeeves en Espanol, a joint venture with the Spanish language media
company Univision, launched Pregunta.com, a Spanish-language version of
Ask.com, in March of 2001 to target Spanish speakers worldwide. Ask Jeeves
owns a 50 percent interest in this joint venture.
ASK JEEVES JAPAN
Ask Jeeves Japan, a joint venture with Trans Cosmos, Inc., a Japanese customer
service and information technology support provider, was established to market
Business Solutions to the Japanese marketplace and to launch a Japanese language
version of Ask.com. Ask Jeeves owns a 50 percent interest in this joint venture.
ASK JEEVES AUSTRALIA
Ask Jeeves Australia at Ask.com.au. is a localized Australian version of the
Ask.com Web site that was launched in January 2001. The Company owns 100% of
this entity.
Additional information required by this item is incorporated herein by reference
to Note 14 "Segment and Geographic Information" of the Notes to the Consolidated
Financial Statements which appears in Item 8 of this Annual Report on Form 10-K.
Sales and Marketing
SALES STRATEGY
Our Web Properties 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. As of March 28, 2001 Web Properties direct sales force
consisted of 20 people with offices in California and New York.
Our Business Solutions Group sells our services, including Jeeves Search, Jeeves
Answers, Jeeves Advisor, 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 have recently
established strategic relationships with Vignette Corporation, Lionbridge
Technologies Inc., and Immersent, Inc, technology consulting providers. These
relationships provide us opportunities to extend our reach by marketing and
selling our services to their existing network of customers. As of March 28,
2001, our Business Solutions direct sales force consisted of 20 people with
offices in various locations.
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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 Business Solutions Group had 67 total customers during the year ended
December 31, 2000, including customers in our targeted vertical markets of
technology, financial services, telecommunications, e-tailing and healthcare.
Representative Business Solutions customers as of December 31, 2000 include
Hewlett Packard, Compaq, Network Solutions, E*Trade, Arthur Andersen, TD
Waterhouse, Ford Motor Co., Datek, and Iomega.
Our Web Properties Group had 497 customers for the year ended December 31, 2000.
The following list is representative of our advertising and sponsorship,
e-commerce and syndication customers as March 21, 2001
Advertising E-Commerce Syndication
- ----------- ---------- -----------
Aria Amazon AT&T
Britannica Barnes and Noble Go2Net
ebay Buy.com Hot Bot
Homestore My Simon iWon
MSN Money Central Orvis Lycos Bertelsmann
For the year ended December 31, 2000, no customer accounted for more than 10%
of our total revenues. $37 million, or approximately 40% of our total
revenues, was generated through our Business Solutions Group. These revenues
include approximately $24.7 million derived from licensing our products and
services to corporate customers and $12.3 million of intellectual property
licensing revenues derived from licensing our products and services to our
joint venture partners. In 2001, we expect that revenues associated with the
Business Solutions Group will be heavily dependent on our joint ventures and
on a limited number of customers.
Technology and Operations
Ask Jeeves has developed and acquired proprietary technology to create intuitive
natural language technologies and services aimed at creating a unique user
experience that emphasizes ease of use, relevance, precision and ability to
learn. The goal of our Company's 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.
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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.
We track analyze, store, and report all queries asked of our natural language
question answering technologies and services for corporate customers, whether
from the Web Properties Group or the Business Solutions 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
Business Solutions. 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
is designed to serve as the foundation for a variety of scalable information
organization and aggregation applications. The
12
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
synthesis of multi-attribute decision analysis and knowledge based expert
systems.
Jeeves Insight
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.
Scalability and Operations
Our question answering technology runs on arrays of Intel-based server systems
running Microsoft Windows 2000 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 Exodus GlobalCenter in Palo Alto, California, AboveNet Communications in San
Jose, California,
13
Allegiance Telecom in Boston, Massachusetts, 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
Web Properties Group
We face direct competition from companies that provide Internet-wide search
directory, and network services. For example, we compete with search engines,
including AltaVista Company, Excite@Home Corporation, Google Inc., and
Inktomi Corporation 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 Goto.com, Inc., LookSmart, Ltd.
and Yahoo! Inc., 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 syndication services we acquired from Direct Hit, Inc. in
January 2000.
Business Solutions Group
Our Business Solutions Group competes with a number of companies that are
addressing the same market need to improve automated or online customer service
for corporate clients. While various companies are addressing this problem
through a range of solutions, we believe no company competes directly with our
approach of combining automated technology with human intelligence to deliver
customer service for company Web sites. The companies that provide automated
online customer products and services against which we compete can be
categorized as follows:
- --------------------------------------------------------------------------------
Search Search, AltaVista Company, Autonomy,
Advanced Inc., eGain, Inc., Google, Inc.,
Search, Infoseek Corporation, Inktomi
Chatterbots Corporation, Native Minds, Inc.,
Neuromedia, Inc., Right Now
Technologies, Inc. Verity,
Inc., Terra Networks, S.A.
(Terra Lycos)
- --------------------------------------------------------------------------------
Customer Customer AnswerFriend, Inc., Answer
Relationship Service, Logic, Inc., Broaddaylight,
Management Call Center Inc., Electric Knowledge, Inc.,
Applications, Nortel Networks Corporation,
Customer Lexeme, Inc., PeopleSoft, Inc.,
Service Primus Knowledge Remedy
Knowledge Corporation, Siebel Systems,
Management Inc., ServiceWare, Inc.,
Servicesoft Technologies, Inc.,
Solutions, Inc.
- --------------------------------------------------------------------------------
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
14
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 less 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.
Proprietary Rights
We seek to protect our intellectual property rights, but our actions may be
inadequate to protect our patents, trademarks or other proprietary rights. We
have one patent application on file with the United States Patent and
Trademark Office for our "Grammar Template Query System". Additionally, as a
result of our acquisition of Direct Hit, Inc., we received an assignment of
one United States patent issued to Gary Culliss, the founder of Direct Hit,
and three U.S. patent applications, covering aspects of our automated
popularity based search technology. We have obtained registered trademark
status for "Ask Jeeves" in the United States, Australia, France, Germany,
Tunisia and Norway. We have obtained registered trademark status for the
"Ask!" button design in the United States, France, and Germany. We have
obtained registered trademark status for the butler design, a stylized
depiction of our butler character, in the United States, Australia, Germany,
Mexico, and Norway. We have obtained registered trademark status for "Direct
Hit" and "Popularity Search Engine" in the United States. We have also
applied for registered trademark status for "Ask.com," "Ask Jeeves for Kids,"
and our logos and service marks in several variations in the United States
and various foreign countries. 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 the Company in the United
States District Court for the Northern District of California. The complaint
alleged that aspects of the Company's technology infringed three patents alleged
to be held by the plaintiff. The Company reached a settlement with plaintiff in
this lawsuit in February 2001, and an Order of Dismissal with Prejudice was
entered by the Court on February 20, 2001.
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
15
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 are in the discovery process in
this litigation. We intend to vigorously defend against the allegations
asserted in this complaint 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 this lawsuit, 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 this lawsuit 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.
Strategic Relationships
We have established strategic relationships with Vignette Corporation,
Lionbridge Technologies, Inc., and Immersent, Inc. These relationships provide
us opportunities to extend our reach by marketing and selling our services to
their existing network of customers.
We have also entered into a strategic relationship with Nuance
Communications, Inc., a provider of voice recognition technology, to jointly
develop a voice enabled interface for use on our Web sites.
16
Executive Officers of the Company
Name Age Position
- ---- --- --------
A. George (Skip) Battle...... 57 Chief Executive Officer and Director
Steven J. Sordello........... 32 Chief Financial Officer
Adam Klein................... 49 President and Interim President of Web Properties
Christine M. Davis........... 42 Vice President and Corporate Controller
Cynthia Pevehouse............ 43 General Counsel and Secretary
George S. Lichter............ 48 President of Ask Jeeves International
Claudio Pinkus............... 44 President of Ask Jeeves Business Solutions
A. George (Skip) Battle was appointed Chief Executive Officer in December 2000.
Mr. Battle has served as a director of Ask Jeeves since August 1998 and
currently serves on the compensation committee. 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 Fund, registered investment companies.
Adam Klein joined Ask Jeeves as President in July, 2000. From 1998 to 2000,
Mr. Klein served numerous early stage Internet companies, including
GetConnected.com, Nearlife Inc. and Bidders Edge.com, as board member and
advisor. From 1996 to 1998, Mr. Klein was the executive vice president
and president of global marketing at Hasbro Inc. Prior thereto, Mr. Klein was
the President of Klein & Co., a consulting firm specializing in managing
strategic change.
Steven J. Sordello has served as Chief Financial Officer of Ask Jeeves since
December 2000. Mr. Sordello joined Ask Jeeves in June of 1999 and served as
Director, Financial Planning and Analysis from June of 1999 until April 2000,
when he was promoted to Vice-President-Financial Planning Analysis. From
April 1994 to June 1999, Mr. Sordello served as Senior Director of Financial
Planning for Adobe, Inc., a software company. Prior to Adobe, Mr. Sordello
served in various positions at Syntex Corporation, a pharmaceutical company.
Cynthia Pevehouse has served as General Counsel & Secretary of Ask Jeeves
since January 2000. From 1997 to 2000, Ms. Pevehouse served as legal counsel
at Compaq Computer Corp. From 1996 to 1997, she was legal counsel to Canon
USA, Inc. Prior thereto, Ms. Pevehouse was in private practice in Seattle,
Washington; Portland, Oregon; and Osaka, Japan. Ms. Pevehouse holds a J.D.
from Willamette University and an LL.M. in Asian Law from the University of
Washington.
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.
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
17
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.
Claudio Pinkus has served as President of Ask Jeeves Business Solutions since
December 2000. From June 1999 to December 2000, Mr. Pinkus served as chief
operating officer of Ask Jeeves International. Prior thereto, Mr. Pinkus
served as CEO of Bowne Global Solutions from November 1996 through June of
1999. Prior thereto, Mr. Pinkus founded IDOC, Inc. where he served as CEO
from 1985 until November of 1996.
Employees
Ask Jeeves' future success is substantially dependent on the performance of its
senior management and key technical personnel, and its continuing ability to
attract and retain highly qualified technical and managerial personnel. As part
of our business realignment, in December 2000 we implemented a workforce
reduction of approximately 152 employees, representing approximately 20 percent
of our staff. As of December 31, 2000, the Company had 565 employees. We have
never had a work stoppage, and no employees are represented under collective
bargaining agreements. We consider our relations with our employees to be good.
See the "Risk Factors" section below for a further discussion of certain risks
related to our employees.
Regulation of the Internet
There are currently few laws or regulations specifically addressed to the
Internet. The application of existing laws and regulations to Ask Jeeves
relating to issues such as user privacy, defamation, pricing, advertising,
taxation, gambling, sweepstakes, promotions, content regulation, quality of
products and services, and intellectual property ownership and infringement can
be unclear. In addition, we will also be subject to new laws and regulations
directly applicable to our activities. Any existing or new legislation
applicable to us could expose us to substantial liability, including significant
expenses necessary to comply with such laws and regulations, and dampen the
growth in use of the internet. Several federal laws could have an impact on our
business. The Digital Millennium Copyright Act is intended to reduce the
liability of online service providers for listing or linking to third-party Web
sites that include materials that infringe copyrights or other rights of others.
The Children's Online Protection Act and the Children's Online Privacy
Protection Act are intended to restrict the distribution of certain materials
deemed harmful to children and impose additional restrictions on the ability of
online services to collect user information from minors. In addition, the
Protection of Children From Sexual Predators Act of 1998 requires online service
providers to report evidence of violations of federal child pornography laws
under certain circumstances. Such legislation may impose significant additional
costs on our business or subject us to additional liabilities. We post our
privacy policy and practices concerning the use and disclosure of user data. Due
to the global nature of the Web, it is possible that the governments of other
states and foreign countries might attempt to regulate its transmissions or
18
prosecute us for violations of their laws. We might unintentionally violate such
laws, such laws may be modified and new laws may be enacted in the future. Any
such developments could have a material adverse effect on our business,
operating results and financial condition. We may be subject to legal liability
for our online services. We host a wide variety of services that enable
individuals to exchange information, generate content, conduct business and
engage in various online activities on an international basis, including public
message posting and services relating to online auctions and homesteading. The
law relating to the liability of providers of these online services for
activities of their users is currently unsettled both within the United States
and abroad. Claims have been threatened against us for defamation, negligence,
copyright or trademark infringement, or other theories based on the nature and
content of information that we provide links to or that may be posted online.
Risk Factors
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
flagship public Web site, in April 1997. Because the market and industry
conditions affecting Internet companies are constantly changing, we may need to
evolve our business model to adapt to prevailing conditions.
Any investment in our company must be considered in light of the problems
frequently encountered by companies in new and rapidly evolving markets. To
address the risks we face, we must, among other things:
o maintain and enhance our brand;
o refine our product and service offerings;
o increase the amount of traffic to our Web sites;
o increase the number and types of businesses that use our natural
language question answer technologies and services;
o increase the value of our natural language question answer
technologies and services to our users, customers, electronic
commerce merchants and advertisers; and
o 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 Financial Reporting Losses and Expect to Continue to
Incur Financial Reporting Net Losses.
We incurred net financial reporting losses of $6,806,000 in 1998, $52,929,000
in 1999 and $189,606,000 in 2000, as determined under generally accepted
accounting principles ("GAAP"). As of December 31, 2000, we had an
accumulated deficit of approximately $250.2 million. We expect to have
negative cash flows and net financial reporting losses in the future. The
size of these net financial reporting losses will depend, in part, on the
rate of growth of our revenues from our advertisers, corporate customers and
electronic commerce merchants and on our ability to manage our expenses. It
is critical to our success that
19
we continue to expend financial and management resources to develop our brand
loyalty through marketing and promotion and the enhancement of our natural
language question answer technologies and other services. In December 2000,
we announced steps to narrow our financial reporting losses, including a
realignment of our business and a reduction in our workforce. Although these
steps are intended to reduce our financial reporting losses in the future, we
cannot guarantee that these steps will achieve the intended reduction in
financial reporting losses or allow us to achieve profitability.
As our expenses and other financial reporting charges are likely to continue
to exceed our revenues in the foreseeable future, we will need to generate
significant additional revenues to achieve financial reporting profitability.
Moreover, given the rapid and unexpectedly sharp deterioration of the general
business climate in recent months, we cannot predict whether we will be able
to generate these significant additional revenues or when, if ever, we will
achieve positive cash flows or financial reporting profitability. Even if we
do achieve positive cash flows or financial reporting profitability, we may
not be able to maintain or increase our positive cash flows or financial
reporting profitability on a quarterly or annual basis. If we do not achieve
or sustain positive cash flows profitability in the future, then we will
eventually be unable to continue our operations.
Our Recent Business Realignment may not Result in the Anticipated Results.
In fourth quarter of 2000, we completed a realignment of our business
organization in an effort to streamline operations, increase revenues, reduce
costs and bring staffing in line with our current and anticipated
requirements. Through the realignment, our two independent business units,
Business Solutions and Web Properties, were given independent gross profit
and loss accountability. Our Business Solutions business focuses on licensing
our technologies to corporate clients and our Web Properties business focuses
on sales of our targeting solutions on our Web sites. In addition, as part of
our business realignment, we implemented a workforce reduction of
approximately 152 employees, representing approximately 20% of our staff.
Although we believe that our business realignment will assist us in streamlining
operations, increasing revenues, reducing expenses and thereby achieving
profitability, we cannot assure you that we will achieve these intended results.
In addition, our business realignment and workforce reduction may prompt
employees whom we wish to retain to leave the Company. If we are not successful
in increasing revenues and decreasing costs, we may never achieve profitability.
Our Natural Language Question Answer Technologies and Services are Novel and
Unproven.
We will be successful only if Internet users adopt our natural-language services
and popularity-based searches as a primary method of navigating the Internet.
Internet users have a variety of other search techniques, such as directory
searches, 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
natural language question answer technologies and services. Visitors to our
natural language question answer services may try our Web sites and then revert
to other search techniques to navigate the Internet or choose new search
techniques. It is uncertain whether widespread acceptance of our
natural-language services and popularity based searches will occur.
20
If Accounting Interpretations Relating to Revenue Recognition Change, Our
Reported Revenues Could Decline or We Could Be Forced to Make Changes in Our
Business Practices.
In December 1999, the Securities and Exchange Commission staff issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements,"
or SAB 101, which explains how the SEC staff believes existing revenue
recognition rules should be applied or analogized to for transactions not
addressed by existing rules. Ask Jeeves believes that it is currently in
compliance with SAB 101.
Future changes in the interpretation of SAB 101 or any other revenue
recognition principles could lead to unanticipated changes in Ask Jeeves'
revenue accounting practices, which could cause Ask Jeeves to recognize lower
revenues or delay revenue recognition. As a result, Ask Jeeves may need to
change its business practices in order to continue to recognize a substantial
portion of its license revenues. These changes may extend sales cycles,
increase administrative costs and otherwise adversely affect our business.
Events or Changes in Circumstances May Result in Impairment of Our Goodwill
The Company has recorded significant amounts of goodwill and other intangible
assets on its consolidated financial statements. These assets will continue
to be subject to evaluation for impairment when events or changes in
circumstances indicate that the carrying value of the assets may not be
recoverable. If a determination is made that the assets are impaired, it
could result in a significant reduction in the carrying value of such assets
and a material adverse effect upon the Company's consolidated financial
position or results of operations.
Our Methods of Generating Revenue are Relatively New and Largely Untested.
Internet Advertising. For the year ended December 31, 2000, run-of-site
advertising revenues from our Web Properties accounted for $29.5 million, or
32%, of our total revenues. We expect that revenues from advertising will
continue to represent a significant portion of our total revenues for the
foreseeable future. Our advertising revenues decreased in the latter part of
2000 and may continue to decrease due to the prevailing conditions in the online
advertising market and downward pressure on advertising rates industry-wide.
We compete with traditional media such as television, radio and print, as well
as online
21
advertisers and high-traffic Web sites, for a share of advertisers' total
advertising expenditures. We have experienced, and may continue to experience,
downward pressure on advertising prices in the industry due to the increasing
amount of advertising inventory becoming available on the Internet. As the
Internet evolves, advertisers may find Internet advertising to be a less
effective means of promoting their products or services relative to traditional
advertising media and may reduce or eliminate their expenditures on Internet
advertising. Many potential advertisers and advertising agencies have only
limited experience advertising on the Internet and have not devoted a
significant portion of their advertising expenditures to Internet advertising.
Acceptance of the Internet among advertisers will depend, to a large extent, on
the perceived effectiveness of Internet advertising and the continued growth of
commercial usage of the Internet.
Currently, there are a variety of pricing models for selling advertising on the
Internet, including models based on the number of impressions delivered, the
number of click-throughs by users, the duration over which the advertisement is
displayed or the number of keywords to which the advertisement is linked. It is
difficult to predict which pricing model, if any, will emerge as the industry
standard. This uncertainty makes it difficult to project our future advertising
rates and revenues that we may generate from advertising. A decrease in
advertising sold or advertising rates could adversely affect our operating
results.
In addition, our ability to earn advertising revenues depends on the number of
advertising impressions per search and the number of click-throughs. We believe
category searches generally result in a greater number of advertising
impressions per search and a higher number of click-throughs than keyword
searches. Accordingly, if we are unable to implement category-based search
broadly across our network of affiliates, or if users decide to use keyword
searches more frequently than category searches, our advertising revenues could
decline.
In addition, our advertising revenues will depend on our ability to achieve,
measure and demonstrate to advertisers the breadth of the traffic base using our
search service and the value of our targeted advertising. Filter software
programs that limit or prevent advertising from being displayed on a user's
computer are available. It is unclear whether this type of software will become
widely accepted, but if it does, it would negatively affect Internet-based
advertising. Our business could be seriously harmed if the market for Internet
advertising does not continue to grow or if we are unsuccessful in increasing
our advertising revenues.
We rely on a third-party advertising service, provided by DoubleClick, Inc. and
L90, Inc. to deliver advertisements to our users. If DoubleClick or L90 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 may decrease.
Licensing. As of December 31, 2000, we had provided question answering
technologies and services to almost 70 companies worldwide. For the year-ended
December 31, 2000, $37.7 million, or approximately 40% of our revenues, were
generated from licensing our services to corporate customers and to our joint
ventures through our Business Solutions Group. Business Solutions revenues
include intellectual property licensing revenues of approximately $12.3 million
from our joint ventures. If, in the future, Ask Jeeves is unable to generate
sufficient licensing revenue from our corporate customers and/or our joint
ventures, our results of operations could be substantially impaired.
Renewals. We depend on our existing customer base for additional future revenue
from services and licenses of other products. If our customers fail to renew
their maintenance agreements, our
22
revenue could decrease. The maintenance agreements are generally renewable
annually at the option of the customers and there are no mandatory payment
obligations or obligations to license additional software. Therefore, current
customers may not necessarily generate significant maintenance revenue in future
periods. In addition, customers or joint venture partners may not necessary
purchase additional products or services. Our services revenue and maintenance
revenue also depend upon the use of these services by our installed customer
base. Any downturn in software license revenue could result in lower service
revenues in future quarters.
Electronic Commerce. In addition, a portion of our revenue is derived from the
facilitation of electronic commerce transactions. The market for Internet
products and services continues 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.
Many of our Advertisers are Emerging Internet Companies that Represent Credit
Risks.
We expect to continue to derive a significant portion of our revenues from
the sale of advertising to Internet companies. Many of these companies have
limited operating histories and are operating at a loss. Moreover, many of
these companies have limited cash reserves and limited access to additional
capital. We have in some cases experienced difficulties collecting
outstanding accounts receivable and we may continue to have these
difficulties in the future. Under our revenue recognition policy, we do not
recognize revenue if collectibility is not reasonably assured. These
difficulties may increase as a result of a recent downturn in economic
activity and reductions in funding for Internet companies from public capital
markets and private venture capital and equity sources. If any significant
part of our customer base experiences commercial difficulties or is unable or
unwilling to pay our advertising fees for any reason, our business will
suffer.
Our Past and Future Acquisitions May Be Difficult to Integrate, Disrupt Our
Business, Dilute Stockholder Value or Divert Management Attention.
We have acquired a number of companies and 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. We
may encounter problems with the assimilation of acquired businesses, products or
technologies including:
o difficulties in assimilation of acquired personnel, operations,
technologies or products;
o unanticipated costs associated with acquisitions;
o diversion of management's attention from other business concerns and
potential disruption of our ongoing business;
o adverse effects on our existing business relationships with our
customers;
o potential patent or trademark infringement from acquired
technologies.
o adverse effects on our current employees and the inability to retain
employees of acquired companies;
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o use of substantial portions of our available cash as all or a
portion of the purchase price; and
o dilution of our current stockholders due to issuances of additional
securities as consideration for acquisitions.
If we are unable to successfully integrate our acquired companies or to create
new or enhanced services, we may not achieve the anticipated benefits from our
acquisitions. If we fail to achieve the anticipated benefits from the
acquisitions, we may incur increased expenses and experience a shortfall in our
anticipated revenues and we may not obtain a satisfactory return on our
investment. Also, as the value of our common stock has declined, we may need
to use cash as all or part of the consideration for the acquisition of
businesses, products, or technologies. If we use cash in such a manner, our
cash utilization rate will increase and in turn, our results of operations may
be seriously harmed. Lastly, if a significant number of employees fail to remain
employed with us, we may experience difficulties in achieving the expected
benefits of the acquisitions.
Our Growth Will Depend on Our Ability to Develop Our Brand.
We believe that increased brand recognition and a favorable consumer perception
of the Ask Jeeves brand are essential to our future success. Accordingly, we
intend to continue pursuing an aggressive brand-enhancement strategy, which will
include mass market and multimedia advertising, promotional programs and public
relations activities. These expenditures may not result in a sufficient increase
in revenues to cover such advertising and promotional expenses. In addition,
even if brand recognition increases, the number of new users may not increase.
Further, even if the number of new users increases, the amount of traffic on our
Web sites and the number of corporate customers may not increase sufficiently to
justify the expenditures.
To Manage Our Growth, We Need to Improve Our Systems, Controls and Procedures.
We have experienced and may continue to experience rapid growth, which has
placed, and could continue to place, a significant strain on our managerial,
financial and operational resources. As a result of our recent realignment of
our business, we must continue to improve our operational and financial systems
and managerial controls and procedures, train and manage our workforce with
reduced human resources. 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.
More Individuals are Utilizing Non-PC Devices to Access the Internet and We May
Not Be Successful in Developing a Version of Our Service that Will Gain
Widespread Adoption by Users of Such Devices.
In the coming years, the number of individuals who access the Internet through
devices other than a personal computer such as personal digital assistants,
cellular telephones and television and television set-top devices is expected to
increase dramatically. Our services are designed for rich, graphical
environments such as those available on personal and laptop computers. The lower
resolution, functionality and memory associated with alternative devices may
make the use of our services through such devices difficult and we may be
unsuccessful in our efforts to modify our online properties to provide a
compelling service for users of alternative devices.
As we have limited experience to date in operating versions of our service
developed or optimized for users of alternative devices, it is difficult to
predict the problems we may encounter in doing so and we may need to devote
significant resources to the creation, support and maintenance of such versions.
If we are unable to attract and retain a substantial number of alternative
device users to our online services, we will fail to capture a sufficient share
of an
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increasingly important portion of the market for online services. Further, as a
significant portion of our revenues are derived through the sale of banner and
other advertising optimized for a personal computer screen, we may not be
successful at developing a viable strategy for deriving substantial revenues
from online properties that are directed at the users of alternative devices.
Any failure to develop revenue-generating online properties that are adopted by
a significant number of handheld device users could severely hurt our business.
We May Not Be Able to Effectively Compete Against Our Current and Potential
Competitors.
Web Properties Group. We face direct competition from companies that provide
Internet search and directory services. For example, our Web Properties group
competes with search engines, including AltaVista Company, Excite@Home
Corporation, Google Inc., Northern Light, Infoseek Corporation, and Inktomi
Corporation, for the traffic generated by Internet users seeking links to third-
party content to address their online information needs. Our Web Properties
group also competes with directory services, such as Goto.com, Inc. LookSmart,
Ltd., and Yahoo! Inc., because they provide alternative ways for users to obtain
the desired information.
Business Solutions 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, our Business Solutions Group competes 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.
Our ability to compete depends on many factors, many of which are outside of our
control. These factors include: the quality of content, the ease of use of
online services, the timing and market acceptance of new and enhanced online
services and sales and marketing efforts by our competitors and by us.
Many of our existing competitors, as well as potential new competitors, have
longer operating histories, greater name recognition, larger customer bases and
significantly greater financial, technical and marketing resources than we do.
This may allow them to devote greater resources than we can to the development
and promotion of their services. Many of these competitors offer a wider range
of services than we do. These services may attract users to our competitors'
sites and, consequently, result in a decrease in traffic to our site. These
competitors may also engage in more extensive research and development, adopt
more aggressive pricing policies and make more attractive offers to existing and
potential corporate customers, advertisers, syndicators and electronic commerce
merchants. Our competitors may develop products and services that are equal to,
or superior to, our products and services, or achieve greater market acceptance.
In addition, current and potential competitors have established or may establish
cooperative relationships among themselves or with third parties to better
address the needs of advertisers and businesses engaged in electronic commerce.
As a result, it is possible that new competitors may emerge and rapidly acquire
significant market share.
Our Geographic Properties May Not Be Successful
Our wholly owned subsidiary, Ask Jeeves International, Inc., or AJI, was formed
for the purpose of marketing our natural language question answering
technologies and services outside of the United States. To date, AJI has entered
into joint ventures to provide our services in the United Kingdom, Japan, and to
the Spanish-speaking market worldwide. AJI has also formed a subsidiary
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in Australia to provide a localized version of our services for the Australian
market. This expansion into international markets requires substantial
management attention and financial resources. We cannot be certain that our
investment in AJI and in establishing operations in other countries will produce
the desired levels of revenue. In addition, AJI and its investment properties
are subject to other inherent risks and problems, including:
o the impact of business cycles and downturns in economies outside the
United States;
o longer payment cycles and greater difficulty in accounts receivable
collections;
o unexpected changes in regulatory requirements;
o difficulties and costs of staffing and managing foreign operations;
o reduced protection for intellectual property rights in some
countries;
o unanticipated tax costs associated with the cross-border use of
intangible assets;
o political and economic instability;
o fluctuations in currency exchange rates;
o difficulty in maintaining effective communications with employees
and customers due to distance, language and cultural barriers;
o lower brand recognition for Ask Jeeves and the Jeeves character in
non-English speaking counties;
o lower per capita Internet usage in many foreign countries, for a
variety of reasons such as lower disposable incomes, lack of
adequate telecommunications and computer infrastructure and concerns
regarding online security for e-commerce transactions; and
o competition in international markets from a broad range of
competitors, including AltaVista, Goto.com, LookSmart, Terra Lycos,
Yahoo! and other United States and foreign portals, search engines
and service providers.
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:
o our ability to obtain new corporate customers, the length of time
needed to implement our natural language question answering
technologies and services for corporate customers and the timing of
revenue recognition with respect to contracts with corporate
customers;
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o our ability to obtain new advertising contracts, maintain existing
ones and effectively manage our advertising inventory;
o the number of users of our Web sites, Web sites syndicating our
services and the Web sites of our corporate customers;
o our ability to link our electronic commerce merchants to potential
customers;
o seasonal and other fluctuations in demand for our electronic
commerce services and for advertising space on our Web sites;
o our ability to develop and introduce new technology;
o announcements and new technology introductions by our competitors;
o our ability to attract, retain and motivate key personnel;
o credit risk of Internet companies within our customer base;
o rate changes for advertising on our Web sites;
o marketing expenses and technology infrastructure costs as well as
other costs that we may incur as we expand our operations; and
o costs relating to possible acquisitions of technologies and
businesses including the timing of charges related to the
acquisitions and any amortization of expenses related to the
acquisitions; and
o the other factors discussed in this section on "Business Risks."
We have experienced seasonality in user traffic to our Websites, including 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
sites 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 averaged 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. 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.
Our Stock Price may Fluctuate Significantly Regardless of Our Actual Operating
Performance.
Our common stock is listed for trading on the Nasdaq National Market. The
trading price of our common stock has been and may continue to be highly
volatile. For example, during 2000, the closing price our common stock ranged
from $2.44 to $138. Our stock price may be subject to wide fluctuations in
response to a variety of factors, including:
27
o actual or anticipated variations in quarterly operating results and
announcements of technological innovations;
o new products or services offered by Ask Jeeves or its competitors;
o changes in financial estimates by securities analysts;
o conditions or trends in the Internet services industry and the
online customer service segment in particular;
o Ask Jeeves' announcement of significant acquisitions, strategic
partnerships, joint ventures or capital commitments;
o additions or departures of key personnel;
o sales by current holders of our common stock and general financial
conditions and investor sentiment regarding Internet companies
generally; and
o other events that may be beyond Ask Jeeves' control.
In addition, the Nasdaq National Market, where most publicly held Internet
companies are traded, has periodically experienced extreme price and volume
fluctuations. These fluctuations may be unrelated or disproportionate to the
operating performance of these companies. These broad market and industry
factors may materially adversely affect the market price of our common stock,
regardless of our actual operating performance. In the past, following periods
of volatility in the market price of an individual company's securities,
securities class action litigation often has been instituted against that
company. This type of litigation, if instituted, could result in substantial
costs and a diversion of management's attention and resources.
Lastly, the continuing listing requirements of the Nasdaq National Market
require that our common stock must maintain a minimum trading price. If the
trading price of our common stock fails to satisfy the minimum trading price
over certain periods enumerated under the Nasdaq rules, our common stock may
be subject to delisting from the Nasdaq National Market. If our common stock
is delisted from the Nasdaq National Market, the trading market for our
common stock will be limited and thus, the ability of our stockholders to buy
and sell our common stock may be adversely affected.
If We Fail to Meet the Expectations of the Public Market Analysts and Investors,
the Market Price of Our Common Stock May Decrease Significantly.
Public market analysts and investors have not been able to develop consistent
financial models for the Internet market because of the unpredictable rate of
growth of Internet use, the rapidly changing models of doing business on the
Internet and the Internet's relatively low barriers to entry. As a result, and
because of the other risks noted in this discussion, it may be 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 or Retain Corporate Customers May Have an Adverse Effect On Our
Revenues.
In the coming year we expect that revenues associated with corporate customers
will be comprised primarily of corporations with large, difficult-to-navigate
Web sites. If we do not complete sales to a sufficient number of customers, our
future revenues will be adversely affected.
Most of our corporate customer contracts have a term of one year following the
implementation of our services. As a result, if we are unable to offer value to
our customers during the term of these contracts, or if our customers choose a
competitor's service over our service, or if our customers decide to use their
own proprietary technology to develop services similar to ours, those customers
may not renew their contracts. If we do not obtain a sufficient number of
contract renewals or if
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such renewal contracts are obtained on terms less favorable than the original
contract, our business could be adversely affected.
Implementing Our Services for Our Corporate Customers is Labor Intensive.
Because the implementation of our services is labor intensive, it is difficult
to predict the length of the development cycle. Factors that affect the length
of the development cycle include the overall size and complexity of the Web
site, the interaction with the customer and the dynamic nature of the content.
Generally, it takes three to four months to launch a customized version of our
services. The long development cycle makes it difficult to predict the delivery
time to the customer, realize our revenue goals and manage our internal hiring
needs to meet new projects. In addition, in order to meet increased demand by
corporate customers, we may have to hire additional people and train them in
advance of orders. When we outsource development of custom knowledge bases, we
will have little control over the speed and quality of the development. Any
decline in the speed or quality of the implementation of our services could
seriously harm our business.
We Depend on Third Party Content.
Our Web sites are designed to directly link users to a page within a third-party
Web site that contains the answer to a question asked. However, when our Web
sites attempt 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 our Web sites could significantly decrease, which would
seriously harm our business.
Visitors to our Web sites use the sites 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 of 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 claims for liability with respect to the selection of
third-party Web sites that may be accessible through our Web sites. 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 our Web sites,
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. While no such claims are pending
and we do not believe that any such claim would have legal merit, 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 such claims 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.
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To increase our revenues, we will need to refine our business model by promoting
new or complementary products and by targeting our products and services to meet
the needs of different customers. The evolution of our electronic commerce
services may strain our management, financial and operational resources. Our
development of new product and service offerings may not be timely or may not
generate sufficient revenues to offset their cost. If this occurs, our business,
operating results and financial condition will be seriously harmed.
Our Future Success Depends on Our Ability to Attract, Retain Key Management and
Skilled Technical Employees.
A. George (Skip) Battle, a member of our Board of Directors, has been appointed
Chief Executive Officer. We do not have an employment agreement with Mr. Battle
for any specific term, and the loss of Mr. Battle's services could seriously
harm our business.
Our future success also depends on our ability to attract, retain and motivate
highly skilled employees. Competition for employees in the San Francisco Bay
Area, where our headquarters is located, is intense. This is due, in part, to
the high concentration of high-tech companies vying for qualified employees,
high housing costs and traffic congestion. We have experienced, and we expect to
continue to experience in the future, difficulty in hiring and retaining highly
skilled employees with appropriate qualifications. If we fail to attract, retain
and motivate our employees, our business will be harmed.
Our Workforce Reduction and Financial Performance May Adversely Affect the
Morale and Performance of our Personnel and our Ability to Hire New Personnel.
In connection with our effort to streamline operations, increase revenues,
reduce costs and bring our staffing and structure in line with our current and
anticipated requirements, we recently realigned our business organization, which
included a reduction in our workforce of approximately 152 employees, or
approximately 20 percent of our workforce. There may be costs associated with
the workforce reduction related to severance and other employee-related costs,
and our realignment plan may yield unanticipated consequences, such as attrition
beyond our planned reduction in staff. In addition, our common stock has
recently declined in value below the exercise price of many options granted to
employees pursuant to our stock option plans. Thus, the intended benefits of the
stock option granted to our employees, the creation of performance and retention
incentives, may not be realized. In addition, workforce reductions and
management changes create anxiety and uncertainty and may adversely affect
employee morale. As a result, we may lose employees whom we would prefer to
retain. As a result of these factors, our remaining personnel may seek
employment with larger, more established companies or companies they perceive as
having less volatile stock prices.
We Need to Expand Our Sales and Support Organizations.
Competition for highly-qualified sales personnel is intense, and we may not be
able to maintain the kind and number of sales personnel we need. 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.
We Will Only Be Able to Execute Our Business Plan if Internet Usage Grows.
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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:
o the Internet infrastructure may not be able to support the demands
placed on it;
o performance and reliability of the Internet may decline as usage
grows;
o continued growth in utility and accessibility to desired
information;
o 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
o privacy concerns, including those related to the ability of Web
sites to gather user information without the user's knowledge or
consent.
The Operating Performance of Our Systems and Servers is Critical to Our Business
and Reputation.
Any system failure, including network, software or hardware failure, that
causes an interruption in our service or a decrease in responsiveness of Ask
Jeeves could result in reduced user traffic on our Web sites and reduced
revenues. We have network and server equipment located at AboveNet, Exodus,
Qwest, Alegiance Telecom in various locations in California and
Massachusetts and in London, England. Although we believe that our current
back-up methods are adequate, we cannot be assured that the back-up servers
will not fail or cause an interruption in our service.
We have experienced slower response times and interruptions in service due to
malfunctions at our hosting facilities and on the Internet backbone networks,
major software upgrades on our Web sites and undetected software defects.
Ask.com, AJ Kids, and DirectHit.com have had partial interruptions for
periods ranging from a few minutes to three hours. In addition, our Web sites
could also be affected by computer viruses, electronic break-ins or other
similar disruptions. If we experience outages, frequent or persistent system
failures or degraded response times, our reputation and brand could be
permanently harmed. In addition, we could lose advertising revenues during
these interruptions and user satisfaction could be negatively impacted if the
service is slow or unavailable.
Our users and customers depend on Internet service providers, online service
providers and other Web site operators for access to our Web sites. Each of
these types of providers has experienced significant outages in the past and
could experience outages, delays and other operating 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. We have not developed a comprehensive disaster recovery plan to respond
to system failures. Our general liability insurance policies may not adequately
compensate us for losses that may occur due to interruptions in our service.
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Power Outages In California Could Adversely Affect Us.
We have significant operations in the state of California and are dependent on a
continuous power supply. California's energy crisis could substantially disrupt
our operations and increase our expenses. California, has recently implemented,
and may in the future continue to implement, rolling blackouts throughout the
state. Although state lawmakers are working to minimize the impact, if blackouts
interrupt our power supply, we may be temporarily unable to continue operations
at our California facilities. Any such interruption in our ability to continue
operation at our facilities could delay the development of our products and
services and disrupt communications with our customers or other third parties on
which we rely, such as Web hosting service providers. Future interruptions could
damage our reputation and could result in lost revenue, either of which could
substantially harm our business and results of operations. Furthermore,
shortages in wholesale electricity supplies have caused power prices to
increase. If energy prices continue to increase, our operating expenses will
likely increase which could have a negative effect on our operating results.
Our Security Could Be Breached, Which Could Damage Our Reputation and Deter
Customers From Using Our Services.
We must protect our computer systems and network from physical break-ins,
security breaches and other disruptive problems caused by the Internet or other
users. Computer break-ins could jeopardize the security of information stored in
and transmitted through our computer systems and network, which could adversely
affect our ability to retain or attract customers, damage our reputation and
subject us to litigation. We could be subject to denial of service, vandalism
and other attacks on its systems by Internet hackers. Although we intend to
continue to implement security technology and establish operational procedures
to prevent break-ins, damage and failures, these security measures may fail. Our
insurance coverage in certain circumstances may be insufficient to cover issues
that may result from such events.
We May Not Be Able to Adapt Evolving Internet Technologies and Customer Demands.
To be successful, we must adapt to rapidly changing Internet technologies by
continually enhancing our products and services and introducing new services to
address our customers' changing needs. We could incur substantial development or
acquisition costs if we need to modify our services or infrastructure to adapt
to changes affecting providers of Internet services. Our business could be
seriously harmed if we incur significant costs to adapt to these changes. If we
cannot adapt to these changes, or do not sufficiently increase the features and
functionality of our products and services, our customers may switch to the
product and service offerings of our competitors. Furthermore, our competitors
or potential competitors may develop a novel method of Internet navigation that
is equal or superior to those we offer. As a result, demand for our natural
language question answering technologies and services may decrease.
We May Face Potential Liability, Loss of Users and Damage to our Reputation for
Violation of Privacy Policies.
We have a policy against using personally identifiable information obtained from
users of our natural language question answering technologies and 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
32
invasion of privacy for compiling and providing information to our corporate
customers and electronic commerce merchants.
Government Regulation and Legal Uncertainties Could Harm Our Business.
Any new law or regulation pertaining to the Internet, or the application or
interpretation of existing laws, could decrease the demand for our services,
increase our cost of doing business or otherwise seriously harm our business.
There is, and will likely continue to be, an increasing number of laws and
regulations pertaining to the Internet. These laws or regulations may relate to
liability for information retrieved from or transmitted over the Internet,
online content regulation, user privacy, taxation and the quality of products
and services. Furthermore, the growth and development of electronic commerce may
prompt calls for more stringent consumer protection laws that may impose
additional burdens on electronic commerce companies as well as companies like us
that provide electronic commerce services.
We file tax returns in such states as required by law based on principles
applicable to traditional businesses. However, one or more states could seek to
impose additional income tax obligations or sales tax collection obligations on
out-of-state companies, such as ours, which engage in or facilitate electronic
commerce. A number of proposals have been made at state and local levels that
could impose such taxes on the sale of products and services through the
Internet or the income derived from such sales. Such proposals, if adopted,
could substantially impair the growth of electronic commerce and seriously harm
our profitability.
Legislation limiting the ability of the states to impose taxes on Internet-based
transactions recently has been enacted by the United States Congress. However,
this legislation, known as the Internet Tax Freedom Act, imposes only a
three-year moratorium, which commenced October 1, 1998 and ends on October 21,
2001, on state and local taxes on electronic commerce, where such taxes are
discriminatory and Internet access, unless such taxes were generally imposed and
actually enforced prior to October 1, 1998. It is possible that the tax
moratorium could fail to be renewed prior to October 21, 2001. Failure to renew
this legislation would allow various states to impose taxes on Internet-based
commerce. The imposition of such taxes could impair the growth of the e-commerce
marketplace and impair 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 claims for 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.
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Some of the risks that may result from these arrangements with businesses
engaged in electronic commerce include:
o potential claims for liabilities for illegal activities that may be
conducted by participating merchants;
o product liability or other tort claims relating to goods or services
sold through third-party commerce sites;
o claims for consumer fraud and false or deceptive advertising or
sales practices;
o breach of contract claims relating to merchant transactions;
o 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
o claims relating to any failure of merchants to appropriately collect
and remit sales or other taxes arising from electronic commerce
transactions.
Even to the extent that such claims do not result in material liability,
investigating and defending such claims could seriously harm our business. For
example, investigating and defending any such claims may require significant
financial and human resources, may result in negative publicity for our company
and injure our business reputation.
We May Be Unable to Protect Our Intellectual Property Rights and Other
Proprietary Rights and We May Be Liable for Infringing Upon the Intellectual
Property Rights of Others.
Third parties may assert infringement claims against us. From time to time in
the ordinary course of business we have been subject to claims of alleged
infringement of the trademarks and other intellectual property rights of third
parties. Any such claims, if made, and any resulting 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. (See further discussion blow under
Item 3, Legal Proceedings)
We May Not Be Able to Secure Additional Financing to Meet Our Future Capital
Needs.
We currently anticipate that our available cash resources will be sufficient to
meet our anticipated needs for working capital and capital expenditures for at
least twelve months. If we are unable to generate sufficient cash flows from
operations to meet our anticipated needs for working capital and capital
expenditures, we will need to raise additional funds to fund brand promotion,
develop new or enhanced services, respond to competitive pressures or make
acquisitions. We may be unable to obtain any required additional financing on
terms favorable to us, if at all. If adequate funds are not available on
acceptable terms, we may be unable to fund our expansion, successfully promote
our brand, develop or enhance services, respond to competitive pressures or take
advantage of acquisition opportunities, any of which could seriously harm our
business. If we
34
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.
Future Sales of Stock Could Affect Our Stock Price.
If our stockholders sell substantial amounts of our common stock, including
shares issued upon the exercise of outstanding options, in the public market,
the market price of our common stock could fall. In particular, in July 2000,
the lockup agreement executed by several of our affiliates elapsed. Such
stockholders are eligible to sell all vested shares. These sales also might make
it more difficult for us to sell equity or equity-related securities in the
future at a time and price that we deem appropriate.
Provisions in Delaware Law and our Charter, Stock Option Agreements and Offer
Letters to Executive Officers may Prevent or Delay a Change Of Control.
We are subject to the Delaware anti-takeover laws regulating corporate
takeovers. These anti-takeover laws prevent Delaware corporations from engaging
in a merger or sale of more than 10% of its assets with any stockholder,
including all affiliates and associates of the stockholder, who owns 15% or more
of the corporation's outstanding voting stock, for three years following the
date that the stockholder acquired 15% or more of the corporation's assets
unless:
o the board of directors approved the transaction where the
stockholder acquired 15% or more of the corporation's assets;
o 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
o 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:
o our board is classified into three classes of directors as nearly
equal in size as possible with staggered three year-terms;
o 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;
35
o all stockholder actions must be effected at a duly called meeting of
stockholders and not by written consent;
o except under limited circumstances, special meetings of the
stockholders may be called only by the chairman of the board, the
chief executive officer the board or by holders of shares entitled
to cast not less than 50% of the votes of the meeting; and
o except under limited circumstances, no cumulative voting.
These provisions may have the effect of delaying or preventing a change of
control.
Our certificate of incorporation and bylaws provide that we will indemnify
officers and directors against losses that may incur in investigations and legal
proceedings resulting from their services to us, which may include services in
connection with takeover defense measures. These provisions may have the effect
of preventing changes in our management.
In addition, our option agreements under the Amended and Restated 1996 Stock
Option Plan provide that if a change in control of Ask Jeeves occurs and the
surviving corporation or acquiring corporation refuses to assume all options
granted under the plan, the vesting of each option shall accelerate in full.
These option agreements also 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, the option
agreements provide that the vesting of each option shall accelerate by six
months upon a change of control. As of March 30, 2001, there were 1,388,625
shares of common stock reserved for unvested options granted under this plan.
Our 1999 Non-Officer Equity Incentive Plan, as amended and restated ("1999
Plan") provides that if a change of control of Ask Jeeves occurs and the
surviving corporation or acquiring corporation refuses to assume all options
issued under the plan, the vesting of each option shall accelerate in full.
Certain option agreements under the 1999 Non-Officer Equity Incentive Plan
also provide that if a change of control of Ask Jeeves occurs, the vesting of
50% of shares subject to each option shall accelerate. As of March 30, 2001,
there were 1,599,653 shares of common stock reserved for unvested options
granted under this plan. Furthermore, offer letters with our executive
officers provide for the payment of severance and acceleration of options
upon the termination of these executive officers following a change of
control of Ask Jeeves. These provisions in our stock option agreements and
offer letters could have the effect of discouraging potential takeover
attempts.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under "Prospectus Summary," "Risk Factors," "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business" and elsewhere in this Annual Report on Form 10-K 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 Annual Report on Form 10-K. 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.
Item 2. Properties
36
Our headquarters are currently located in a leased facility in Emeryville,
California. The facility consists of approximately 76,000 square feet. Our
annual rent expense under the lease is $2.4 million. The lease expires in 2005.
In February 2000, the Company entered in an additional lease agreement for
facilities in Oakland, California. The lease consists of approximately 60,000
square feet.
In March 2000, the Company entered in an additional lease agreement for its
international operations in Los Angeles, California. The lease consists of
approximately 8,000 square feet. Our annual rent expense under the lease is
$211,000. The lease expires in September 2004.
As part of our acquisition of Direct Hit, Inc. in first quarter 2000, we assumed
their lease, which consists of approximately 22,000 square feet. Our annual rent
expense under the lease is approximately $500,000. The lease expires October
2002.
In April 2000, the Company entered into an additional lease agreement for
facilities in Oakland, California. The lease consists of approximately 160,000
square feet. Our annual lease commitment under the lease is $6.5 million. The
lease term is ten years and the building is currently under construction with
anticipated completion in second quarter 2002.
We have also leased smaller facilities in California, and New York, primarily
for sales and marketing personnel.
As part of the Company's business realignment announced in December 2000, the
Company closed operations in North Hollywood and Oakland, California, as well
as its facility in St. Louis, Missouri. The cost associated with exiting the
facilities was approximately $8 million.
We believe that as a result of our facility consolidation, our remaining
facilities will be adequate to meet our needs for the foreseeable future.
Item 3. Legal Proceedings
From time to time, the Company is subject to legal proceedings and claims in the
ordinary course of business, including claims of alleged infringement of
trademarks, copyrights and other intellectual property rights, and a variety of
claims arising in connection with the services, such as claims alleging
defamation or invasion of privacy. In addition, from time to time, third parties
assert patent infringement claims against the Company in the form of letters,
lawsuits and other forms of communication. Currently, the Company is engaged in
two lawsuits regarding patent issues.
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, alleged that aspects of the Company's
technology infringed three patents alleged to be held by the plaintiff. The
Company settled this lawsuit in February 2001, and an Order of Dismissal with
Prejudice was entered by the Court on February 20, 2001.
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
37
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 are in the discovery process in this litigation.
We intend to vigorously defend against the allegations asserted in this
complaint 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 this lawsuit, 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
this lawsuit will not seriously harm our business.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 2000.
38
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
PRICE RANGE OF COMMON STOCK
Our common stock has been quoted on the Nasdaq National Market under the symbol
"ASKJ" since our initial public offering in July 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:
High Low
---- ---
1999
Third Quarter (from July 1, 1999) $ 77.82 $24.00
Fourth Quarter $190.50 $31.00
2000
First Quarter $139.75 $60.25
Second Quarter $ 62.00 $16.50
Third Quarter $ 33.83 $13.75
Fourth Quarter $ 18.82 $ 1.82
As of February 28, 2001, the number of stockholders of record of the Company's
common stock was 974. To date, we have not paid any dividends on our common
stock and we do not currently intend to pay dividends in the foreseeable
future.
39
Item 6. Selected Consolidated Financial Data
Year Ended December 31,
-----------------------
Period from
June 13, 1996
(inception) through
(in thousands, except share and per share information) 2000 1999 1998 1997 December 31, 1996
---- ---- ---- ---- -----------------
Consolidated Statement of Operations Data:
Revenues:
Web Properties ................................... $58,397 $14,564 $577 $-- $--
Business Solutions (1) ........................... 37,303 7,463 223 23 --
--------------------------------------------------------------------------
Total revenues ................................ 95,700 22,027 800 23 --
Cost of revenues:
Web Properties ................................... 19,166 6,284 603 -- --
Business Solutions ............................... 20,103 7,800 796 -- --
--------------------------------------------------------------------------
Total cost of revenues ........................ 39,269 14,084 1,399 -- --
Gross profit (loss) .................................. 56,431 7,943 (599) 23
Operating expenses:
Product development .............................. 24,502 8,610 1,712 441 108
Sales and marketing .............................. 81,641 35,304 2,301 94 --
General and administrative ....................... 29,598 8,411 2,325 218 --
Stock-based compensation ......................... 2,996 3,936 29 -- --
Amortization of goodwill and other
intangible assets ............................. 82,624 -- -- -- --
Write-off of in-process technology ............... 11,652 544 -- -- --
Acquisition costs ................................ -- 6,045 -- -- --
Restructuring costs .............................. 13,466 -- -- -- --
--------------------------------------------------------------------------
Total operating expenses ...................... 246,479 62,850 6,367 753 108
Operating loss ....................................... (190,048) (54,907) (6,966) (730) (108)
Interest income ...................................... 6,973 2,165 166 5 --
Interest expense ..................................... (467) (187) (6) -- --
Write-down of impaired investments ................... (4,254) -- -- -- --
--------------------------------------------------------------------------
Net loss before income tax provision ................. (187,796) (52,929) (6,806) (725) (108)
Income tax provision ................................. 1,810 -- -- -- --
Net loss ............................................. $(189,606) $(52,929) $(6,806) $(725) $(108)
==========================================================================
Basic and diluted net loss per share ................. $(5.51) $(2.64) $(0.74) $(0.21) $(0.08)
==========================================================================
Weighted average shares outstanding
used in computing basic and diluted
net loss per share ............................... 34,399,200 20,046,959 9,162,624 3,394,397 1,295,342
==========================================================================
(1) Revenues from related parties $12,308 $118 $-- $-- $--
40
As of December 31,
------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(in thousands)
Consolidated Balance Sheet Data:
Cash and cash equivalents, short-term marketable
securities and marketable securities ................................. $104,966 $51,530 $8,511 $583 $--
Working capital (deficit) ................................................ 53,384 35,357 7,318 501 (6)
Total assets ............................................................. 537,867 75,764 9,933 679 --
Capital lease obligations, less current portion .......................... 1,465 2,351 46 -- --
Total stockholders' equity (deficit) ..................................... 465,768 41,451 8,291 568 (6)
41
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Certain statements contained in this Annual Report, including, without
limitation, statements containing the words "believes," "anticipates,"
"estimates," "expects," "projections," and words of similar import, constitute
"forward-looking statements." You should not place undue reliance on these
forward-looking statements. Our actual results could differ materially from
those discussed here. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in this section as well as in
Part I of this Annual Report on Form 10-K under the heading "Risk Factors" and
the other documents we file with the Securities and Exchange Commission ("SEC"),
including our most recent reports on Form 8-K and Form 10-Q, and amendments
thereto. The following discussion should be read in conjunction with our
financial statements and the related notes contained elsewhere in this Annual
Report on Form 10-K.
Overview
Ask Jeeves is the leading provider of natural language question
answering technologies and services. Our proprietary technology combined with
human intelligence creates an interaction centered on understanding users'
specific needs and interests and connecting them to the most relevant
information, products and services. The Company delivers its natural language
question answering technologies and services through its own Web sites at
Ask.com, AJKids.com and DirectHit.com. Through our Web Properties Group, Ask
Jeeves provides a highly targeted medium for advertisers to reach online
users. The Company also syndicates services to portals, infomediaries, and
content and destination sites to help companies increase e-commerce and
advertising revenue. These services enable companies to convert online
shoppers to buyers, reduce support costs, understand customer preferences and
improve customer retention.
Through our Business Solutions Group, the Company develops and maintains
customized automated search, natural language question answering, and
intelligent advisor services on numerous corporate Web sites. Because we provide
these solutions on an outsourced basis with little involvement from our
corporate customers' technical personnel, we believe that these solutions can
improve consumer satisfaction while simultaneously reducing the companies'
infrastructure costs.
Revenues associated with our Web Properties Group include all revenue
streams generated from the Web sites we own and operate, as well as from the
syndication of services offered on our sites to other companies' sites. These
revenues consist primarily of four components:
- advertising revenues;
- syndication fees;
- eCommerce lead generation revenues; and
- targeting and acquisition revenues.
A significant portion of the Company's advertising revenues are derived
from the sale of promotional space on the Company's online Internet properties.
Services offered range from short-term banner advertisements and sponsorships to
long-term arrangements which may include the development of co-branded,
integrated websites. Revenue derived from such arrangements is recognized during
the period which the service is provided, provided that no significant
obligations remain at the end of the period. Company obligations typically
include the guarantee of a minimum number of "impressions" or times that an
advertisement appears in pages viewed by users of the Company's online
properties. To the extent the minimum guaranteed impressions are not delivered,
the Company defers recognition of the corresponding revenue until the remaining
guaranteed impressions levels are achieved.
42
Syndication fees consist of either a fixed fee that is recognized ratably over
the contractual term, generally a twelve-month period or a revenue sharing
arrangement. 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. Targeting and acquisition solution revenues are generated from
targeting programs designed to maximize the effectiveness of the Ask Jeeves'
question answering and search technologies by creating dynamic, customized
environments based on user behavior.
Revenues from our Business Solutions Group include revenue streams that
are derived from the licensing of our natural language navigation and business
intelligence technologies and from consulting services associated with
implementing a customized natural language question and answering solution. We
are targeting accounts in the vertical markets of technology, financial
services, retail and government. We recognize consulting services, ongoing
support, and licensing fees ratably over the contractual term, generally twelve
months, commencing with the implementation of service. Payments received prior
to service implementation or provision of consulting services are recorded as
deferred revenue and recognized ratably over the contractual term, commencing
upon service implementation.
Cost of revenues for our Web Properties Group consists primarily of
salaries and related personnel costs associated with the content development,
data analysis, testing and maintenance of our Web sites. Additionally, cost of
revenues includes revenue sharing expenses associated with our distribution
relationships. Cost of revenues for our Business Solutions Group consists
primarily of salaries and related personnel costs and other direct costs to
provide consulting, and information services to our corporate customers. Cost of
revenues for our Web Properties and Business Solutions Groups also include
amortization charges related to certain technology assumed as part of our
acquisitions.
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.
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.
General and administrative expenses consist primarily of salaries and
related costs for general corporate functions, recruiting and fees for other
professional services as well as various accounting and legal costs associated
with operating our business.
Other income includes interest income on our cash and investments,
partially offset by interest due on our financing obligations.
Stock-based compensation reflects the amortization of stock compensation
charges from employee stock options. Deferred compensation charges arise from
the difference between the exercise price and the deemed fair value of specific
stock options granted to our employees and are amortized over the vesting
period.
The Company has recorded goodwill and other intangible assets as a result
of various purchase acquisitions made. Amortization of goodwill and intangible
assets is amortized ratably over the estimated economic lives of the respective
assets, generally three to five years.
Write-off of in-process technology relates to costs incurred in connection
with our acquisitions.
43
We have incurred significant net losses and negative cash flows from
operations since our inception, and at December 31, 2000, we had an accumulated
deficit of approximately $250.2 million. These losses have been funded primarily
through the issuance of preferred and common equity securities, including our
initial public offering in July 1999 and follow-on public offering in March
2000.
We believe that we will incur negative cash flows from operations in
the future. Although we are targeting positive cash flows from operations by
the third quarter of 2000, because of the rapid and unexpectedly sharp
deterioration of the general business climate in recent months, we cannot
predict when we will achieve either positive cash flows from operations or
financial reporting profitability in the future.
There was no provision for federal or state income taxes for any period
since inception due to our operating losses. During the year ended December 31,
2000, the Company recorded a foreign income tax provision of $1.8 million
related to taxes withheld from customer payments and remitted to foreign taxing
jurisdictions on the Company's behalf. At December 31, 2000, the Company had net
operating loss carryforwards for federal income tax purposes of approximately
$117.0 million, which expire in the years 2012 through 2020. The Company also
had net operating loss carryforwards for state income tax purposes of
approximately $37.0 million expiring in the year 2004. Utilization of our net
operating loss carryforwards may be subject to a substantial annual limitation
due to 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 $38.6 million during the year ended December
31, 2000. 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, 2000 and December 31, 1999
Revenues
Revenues were $95.7 million for the year ended December 31, 2000, and
$22.0 million for the year ended December 31, 1999. Web Properties revenues were
$58.4 million or 61% of total revenues for the year ended December 31, 2000 and
$14.6 million or 66% of total revenues for the year ended December 31, 1999.
These revenues consisted of $29.5 million in advertising revenues for the year
ended December 31, 2000, and $12.5 million for the year ended December 31, 1999.
Revenues from targeting and acquisition services were $15.5 million for the year
ended December 31, 2000 and $504,000 for the year ended December 31, 1999.
Syndication revenues were $5.1 million and $500,000 for the years ended December
31, 2000 and 1999, respectively. Electronic commerce revenues were $8.3 million
for the year ended December 31, 2000 and $1.1 million for the year ended
December 31, 1999. As of December 31, 2000, our combined Web Properties
attracted an audience of 11.9 million unique monthly users who viewed an average
of approximately 13.1 million Web pages per day on Ask Jeeves branded online
properties.
Business Solutions revenues were $37.3 million or 39% of total revenues
for the year ended December 31, 2000, and $7.5 million or 34% of total revenues
for the year ended December 31, 1999. These revenues consisted of licensing fee
revenues of $24.7 million and $4.0 million for the years ended December 31, 2000
and 1999, respectively. Consulting services were $12.6 million and $3.5 million
for the years ended December 31, 2000 and 1999, respectively.
Cost of Revenues
44
Cost of revenues for Web Properties was $19.2 million for the year ended
December 31, 2000 and $6.3 million for the year ended December 31, 1999. The
increase in cost of revenues is attributed primarily to the increased level of
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 Business Solutions was $20.1 million
for the year ended December 31, 2000 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 consulting, information
and maintenance services to our increased customer base. Cost of revenues also
includes amortization charges related to assets acquired from acquisitions the
Company made in 1999 and 2000.
Product Development Expenses
Product development expenses were $24.5 million for the year ended
December 31, 2000, 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 are
focusing on key, strategic areas of product development to support our business
plan and have therefore reduced the number of product development initiatives
that are not essential to delivering future financial results.
Sales and Marketing Expenses
Sales and marketing expenses were $81.6 million for the year ended
December 31, 2000, 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 to pursue a brand-enhancement strategy, which will include mass market
and multimedia advertising, promotional programs and public relations
activities.
General and Administrative Expenses
General and administrative expenses were $29.6 million for the year ended
December 31, 2000, and $8.4 million for the year ended December 31, 1999. The
increase in expenses is attributed to an increase in the number of general and
administrative personnel, recruiting costs associated with filling key executive
positions and investments in infrastructure as well as increased accounting and
legal costs incurred in connection with business activities.
Stock-based Compensation
For the years ended December 31, 2000 and 1999, we recorded $3.0 and $3.9
million, respectively, in amortization of deferred stock-based compensation in
connection with the grant of stock options to employees and consultants. The
decrease in amortization is due to our graded vesting method of amortization
resulting in larger deferred compensation charges being incurred in earlier
periods. For the year ended December 31, 2000, stock-based compensation also
reflected a charge of $1.2 million to reduce the carrying value of certain
shareholder notes to the fair value of the underlying collateral.
Amortization of Goodwill and Other Intangible Assets
For the year ended December 31, 2000, we recorded $82.6 million in
amortization of goodwill and other intangible assets, compared with no
amortization for the year ended December 31, 1999. The increase is due to
various acquisitions that took place in the fourth quarter of 1999 and the first
quarter of 2000.
45
In-Process Technology
For the year ended December 31, 2000, we wrote off in-process technology
of $11.7 million in connection with the acquisition of certain technology from
Evergreen and Direct Hit. For the year ended December 31, 1999, we recorded
in-process technology write-offs of $544,000 in connection with the acquisition
of certain technology and computer equipment.
Restructuring Costs
In response to new challenges in the business environment, in December
2000, the Company's Board of Directors approved a restructuring program aimed
at streamlining its underlying cost structure to better position the Company
for growth and improved operating results. As part of the restructuring
program, the Company implemented a reduction in force of approximately 152
positions. The reductions came from all areas of the Company and, as of
December 31, 2000, the majority of these terminations were completed. As part
of the restructuring, the Company determined that the operations of the
Evergreen Project, Inc, which was acquired in January 2000, no longer fit the
Company's strategic objectives and were terminated.
The Company incurred a charge of approximately $13.5 million relating to
the restructuring. This charge included $2.2 million related to severance and
other employee costs associated with the elimination of 152 positions and
accounting and legal costs. Costs associated with employee termination included
severance pay and medical and other benefits. All of the affected employees had
been notified as of December 31, 2000.
The charge also included approximately $8.0 million in estimated
facility exit costs and $3.3 million in non-cash asset write-downs. The
facility exit costs are associated with the consolidation of various
facilities in California and Missouri. Asset write-downs related to the
termination of the Evergreen operation included approximately $3.1 million of
goodwill and $200,000 of equipment.
As a result of the restructuring program, the Company's annual expense
base was reduced by approximately $53.0 million as compared with previous
expectations. The majority of the cost savings are expected to be realized as a
result of lower headcount, reduced facility costs and terminated marketing
programs. Over time, these cost savings are expected to be partially offset by
increased operating expenses to support future revenue growth.
While we believe that our business realignment will assist us in
streamlining operations, increasing revenues, reducing expenses and thereby
achieving profitability, we cannot assure you that we will achieve these
anticipated results. We may in the future be required to take additional
actions, including further changes to the business organization, in order to
realign the business with anticipated requirements. If we are not successful in
realigning our business to increase revenues and decrease costs, we may never
achieve profitability.
Interest Income and Interest Expense
Interest income was $7.0 million for the year ended December 31, 2000, 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 $467,000 for the year ended December 31, 2000, 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.
Write-down of Impaired Investments
46
In the fourth quarter of 2000, we recorded write-downs of nonmarketable
investments in privately held companies that we deemed to have had other than
temporary declines in value below their carrying value totaling $4.3 million.
There were no similar write-downs for the year ending December 31, 1999.
Years Ended December 31, 1999 and December 31, 1998
Revenues
Revenues were $22.0 million for the year ended December 31, 1999 and
$800,000 for the year ended December 31, 1998. Web Properties revenues were
$14.6 million or 66% of total revenues for the year ended December 31, 1999 and
$577,000 or 72% of total revenues for the year ended December 31, 1998. These
revenues consisted of $12.5 million in advertising revenues for the year ended
December 31, 1999 and $455,000 in advertising revenues for the year ended
December 31, 1998. Revenues from targeting and acquisition services were
$504,000 for the year ended December 31, 1999. There were no targeting and
acquisition revenues for 1998. Syndication fees were $500,000 million for the
year ended December 31, 1999 and $122,000 for the year ended December 31, 1998.
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.
Business Solutions revenues were $7.5 million or 34% of total revenues for
the year ended December 31, 1999 and $223,000 or 28% of total revenues for the
year ended December 31, 1998. These revenues consisted of $3.5 million in
consulting services for the year ended December 31, 1999 and $223,000 in
consulting services for the year ended December 31, 1998. Licensing fee revenues
were $4.0 million for the year ended December 31, 1999. There were no licensing
fee revenues for the year ended December 31, 1998.
Cost of Revenues
Cost of revenues for Web Properties was $6.3 million for the year ended
December 31, 1999 and $603,000 for the year ended December 31, 1998. 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 Business Solutions was $7.8 million for the year ended December 31, 1999 and
$797,000 for the year ended December 31, 1998. The increase in cost of revenues
is attributed to personnel and related personnel costs associated with providing
consulting, information and maintenance services to our customers, and
amortization charges related to assets acquired.
Product Development Expenses
Product development expenses were $8.6 million for the year ended December
31, 1999 and $1.7 million for the year ended December 31, 1998. 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.
Sales and Marketing Expenses
Sales and marketing expenses were $35.3 million for the year ended
December 31, 1999 and $2.3 million for the year ended December 31, 1998. 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.
47
General and Administrative Expenses
General and administrative expenses were $8.4 million for the year ended
December 31, 1999 and $2.3 million for the year ended December 31, 1998. 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.
Stock-based Compensation
For the years ended December 31, 1999 and 1998, we recorded $3.9 million
and $29,000, respectively, in amortization of deferred stock-based 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 Technology
For the year ended December 31, 1999, we recognized purchased in-process
technology costs of $544,000 in connection with the acquisition of certain
technology and computer equipment from Lumina and Excellerate. In connection
with the acquisition of Net Effect in November 1999, we recorded acquisition
costs of $6.0 million which primarily included investment banking fees, legal
and accounting costs.
Interest Income and Interest Expense
Interest income was $2.2 million for the year ended December 31, 1999 and
$166,000 for the year ended December 31, 1998. The increase in interest income
is attributed to the interest on proceeds from our equity financings. Interest
expense was $187,000 for the year ended December 31, 1999 and $6,000 for the
year ended December 31, 1998. The increase in interest expense is attributable
to the interest charges incurred on additional capital lease obligations.
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. In
June 2000, the FASB issued FAS 138 which significantly amends FAS 133. FAS 133,
as amended, requires that an entity recognize all derivatives as either assets
or liabilities in the Statement of Financial Position 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.
In December 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin 101, "Revenue Recognition in Financial Statements,"
(SAB 101). SAB 101, as amended, summarizes certain of the SEC's views in
applying accounting principles generally accepted to revenue recognition and
classification in financial statements. The Company adopted SAB 101 in the
fourth quarter of 2000. The adoption of SAB 101 did not have a material impact
on its revenues or results of operations.
In March 2000, the FASB issued Interpretation No. 44 ("FIN 44"),
"Accounting for Certain Transactions Involving Stock Compensation," an
interpretation of APB No. 25. FIN 44 clarifies guidance for certain issues that
48
arose in the application of APB No. 25. FIN 44 is generally effective, and to be
applied prospectively, to all new awards, modifications to outstanding awards
and changes in employee status on or after July 1, 2000. The adoption of FIN 44
did not have a material impact on the Company's consolidated financial position
or results of operations.
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:
o our ability to obtain new corporate customers, the length of the
development cycle for corporate customers and consequently, the
timing of revenue recognition with respect to contracts with
corporate customers;
o our ability to obtain new advertising contracts, maintain existing
ones, and effectively manage our advertising inventory;
o the number of questions asked and answered on Ask.com, AJKids.com
and DirectHit.com and on the Web sites of our corporate customers;
o our ability to attract and retain advertisers and our ability to
link our electronic commerce partners to potential customers;
o rate changes for advertising on Ask.com, AJKids.com and
DirectHit.com; and
o marketing expenses and technology infrastructure costs as well as
other costs that we may incur as we expand our operations.
o seasonal and other fluctuations in demand for our electronic
commerce services and for advertising space on Ask.com, AJKids.com
and DirectHit.com;
o our ability to develop and introduce new technology;
o announcements and new technology introductions by our competitors;
o our ability to attract and retain key personnel;
o costs relating to possible acquisitions and integration of
technologies or businesses;
Because of the foregoing factors, we believe that period-to-period
comparisons of our operating results should not be relied upon as an indicator
of our future performance.
As Internet advertising makes the transition from an emerging to a more
developed market, seasonal and cyclical patterns may develop in our industry
that may also affect our revenues. Similar to traditional media, this may result
in our advertising sales being lower during summer vacation and year end holiday
periods. Seasonality in the retail industry and in Internet service usage is
likely to cause quarterly fluctuations in our results of operations and could
harm our business.
49
Liquidity and Capital Resources
Since our inception, we have financed our operations primarily through the
private placement of equity securities, our initial public offering and our
follow-on offering. As of December 31, 2000, we had $105.0 million in cash and
cash equivalents, short-term marketable securities and marketable securities.
Marketable securities consist of highly liquid instruments (primarily U.S.,
state and municipal government securities and corporate debt securities) with
short maturities. Net cash used in operating activities was $61.6 million for
the year ended December 31, 2000, 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 such as depreciation and
amortization and increases in deferred revenue. Net cash used in investing
activities was $35.4 for the year ended December 31, 2000, and $42.1 million for
the year ended December 31, 1999. Net cash used in investing activities for the
year ended December 31, 2000, related to purchases of investments of $68.5 and
property and equipment of $14.7 million, partially offset by redemptions of
investments of $35.1 million. For the year ended December 31, 1999, net cash
used in investing was due primarily to purchases of property and equipment of
$6.3 million and purchases of $34.2 million of short-term investments. Net cash
provided by financing activities was $124.3 million for the year ended December
31, 2000, and $83.3 million for the year ended December 31, 1999. For the year
ended December 31, 2000, net cash provided by financing activities primarily
related to net proceeds of $129.9 million from the sale of common 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.
We have no material commitments or obligations other than those under
capital and operating leases. The Company has available a revolving line of
credit with a bank in the amount of $25 million. The line of credit expires on
July 1, 2002, unless extended. Borrowings under the line of credit bear interest
at one of the following rates as selected by the Company: LIBOR plus 0.5% or the
bank's prime rate. All borrowings are collateralized by the Company's marketable
securities. Borrowings under the line are subject to various covenants. As of
December 31, 2000, there were no amounts outstanding under the line of credit.
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, our brand promotions
and any future acquisitions or divestitures. We have experienced a
substantial increase in our expenditures since our inception consistent with
growth in our operations and staffing.
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.
Item 7A. 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,
50
short-term securities. These securities are classified as available-for-sale
and, consequently, are recorded on the balance sheet at fair value with
unrealized gains or losses reported as a separate component of accumulated other
comprehensive income. 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 150 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. All of our accounts and transactions are denominated in
U.S. dollars and therefore are not subject to foreign exchange fluctuation
exposures.
Item 8. Financial Statements and Supplementary Data
51
ASK JEEVES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Ask Jeeves, Inc.
Report of Ernst & Young LLP, Independent Auditors.......................... 53
Consolidated Balance Sheets................................................ 54
Consolidated Statements of Operations...................................... 56
Consolidated Statements of Stockholders' Equity............................ 57
Consolidated Statements of Cash Flow....................................... 60
Notes to Consolidated Financial Statements................................. 62
52
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, 2000 and 1999, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 2000. Our audits also included the
financial statement schedule listed in the Table of Contents as Item 14(a).
These financial statements and the financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and the financial statement schedule based
on our audits. In November 1999, the Company merged with Net Effect Systems,
Inc. in a transaction that was accounted for as a pooling of interests. We did
not audit the financial statements of Net Effect Systems, Inc. for the year
ended December 31, 1998, which statements reflect net losses constituting
approximately 37% of the related consolidated financial statement totals for the
year ended December 31, 1998. 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 disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the report of the other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors,
the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Ask Jeeves, Inc. at December
31, 2000 and 1999, and the consolidated results of its operations, and its cash
flows for each of the three years ended December 31, 2000, in conformity with
accounting principles generally accepted in the United States. Also, in our
opinion, the financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.
/s/ ERNST AND YOUNG LLP
Walnut Creek, California
February 7, 2001, except for Note 13, as to which the date is
March 30, 2001
53
ASK JEEVES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
December 31,
------------
2000 1999
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents ......................................................... $ 44,725 $ 17,420
Short-term marketable securities .................................................. 47,813 34,110
Accounts receivable, net of allowance for doubtful accounts of $4,627 and $1,168 at
December 31, 2000 and 1999, respectively ....................................... 22,812 8,459
Prepaid expenses and other current assets(1) ...................................... 6,244 6,015
-------------------------
Total current assets ..................................................... 121,594 66,004
Marketable securities ................................................................. 12,428 --
Property and equipment, net ........................................................... 19,088 7,416
Intangible assets, net ................................................................ 381,577 1,984
Other long-term assets ................................................................ 3,180 360
-------------------------
Total assets ............................................................. $ 537,867 $ 75,764
=========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................................................. $5,186 $ 4,717
Accrued compensation and related expenses ......................................... 6,981 5,049
Accrued marketing expenses ........................................................ 3,133 2,983
Accrued merger costs .............................................................. -- 5,280
Accrued restructuring costs ....................................................... 9,132 --
Other accrued liabilities ......................................................... 9,482 4,453
Deferred revenue(2) ............................................................... 33,410 7,347
Current portion of capital lease obligations ...................................... 886 818
-------------------------
Total current liabilities ................................................ 68,210 30,647
Capital lease obligations, less current portion ....................................... 1,465 2,351
Other liabilities ..................................................................... 2,424 1,315
-------------------------
Total liabilities ........................................................ 72,099 34,313
Commitments and contingencies ........................................................ -- --
Stockholders' equity:
Convertible preferred stock, $.001 par value; 5,000,000 shares authorized;
no shares issued and outstanding Common stock, $.001 par value; 150,000,000
shares authorized; 36,246,144 and 28,472,883 shares issued and
outstanding at December 31, 2000 and 1999, respectively ........................ 717,692 107,636
Shareholder notes receivable ...................................................... (1,174) (400)
Deferred stock-based compensation ................................................. (711) (5,175)
Accumulated deficit ............................................................... (250,174) (60,568)
Accumulated other comprehensive income (loss) ..................................... 135 (42)
-------------------------
Total stockholders' equity ............................................... 465,768 41,451
-------------------------
Total liabilities and stockholders' equity ............................... $537,867 $ 75,764
(1) Includes amounts from related parties of $627 and $0 at December 31,
2000 and 1999, respectively
54
(2) Includes amounts from related parties of $28,302 and $0 at December 31,
2000 and 1999, respectively
See accompanying notes.
55
ASK JEEVES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
Year Ended December 31,
-----------------------
2000 1999 1998
---- ---- ----
Revenues:
Web Properties ............................................ $58,397 $14,564 $577
Business Solutions (1) .................................... 37,303 7,463 223
--------------------------------------------------
Total revenues ................................... 95,700 22,027 800
Cost of revenues:
Web Properties ............................................ 19,166 6,284 603
Business Solutions ........................................ 20,103 7,800 796
--------------------------------------------------
Total cost of revenues ........................... 39,269 14,084 1,399
Gross profit (loss) ........................................... 56,431 7,943 (599)
Operating expenses:
Product development ....................................... 24,502 8,610 1,712
Sales and marketing ....................................... 81,641 35,304 2,301
General and administrative ................................ 29,598 8,411 2,325
Stock-based compensation .................................. 2,996 3,936 29
Amortization of goodwill and other intangible assets ...... 82,624 -- --
Write-off of in-process technology ........................ 11,652 544 --
Acquisition costs ......................................... -- 6,045 --
Restructuring costs ....................................... 13,466 -- --
--------------------------------------------------
Total operating expenses ......................... 246,479 62,850 6,367
--------------------------------------------------
Operating loss ................................................ (190,048) (54,907) (6,966)
Interest income ............................................... 6,973 2,165 166
Interest expense .............................................. (467) (187) (6)
Write-down of impaired investments ............................ (4,254) -- --
--------------------------------------------------
Net loss before income tax provision .......................... $(187,796) $(52,929) $(6,806)
Income tax provision .......................................... 1,810 -- --
--------------------------------------------------
Net loss ...................................................... $(189,606) $(52,929) $(6,806)
==================================================
Basic and diluted net loss per share .......................... $(5.51) $(2.64) $(0.74)
==================================================
Weighted average shares outstanding used in computing basic and
diluted net loss per share ................................ 34,399,200 20,046,959 9,162,624
==================================================
(1) Revenues from related parties $12,308 $118 $--
==================================================
See accompanying notes.
56
ASK JEEVES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share data)
Convertible
Preferred Stock Common Stock
--------------- ------------
Shareholder
Notes
Shares Amount Shares Amount Receivable
------ ------ ------ ------ ----------
Balances at December 31, 1997 ........ 54,250 $220 6,159,109 $1,180
Issuance of preferred stock for
cash .......................... 3,756,212 11,338 -- -- --
Issuance of common stock options
to stockholders in exchange for
services ...................... -- -- -- 300 --
Issuance of common stock for cash -- -- 5,410,764 2,774 --
Issuance of common stock to
consultants ................... -- -- 16,300 8 --
Issuance of common stock warrants
to consultants ................ -- -- -- 24 --
Compensation charge related to
grants of common stock options -- -- -- 57 --
Deferred stock-based
compensation -- -- -- 506 --
Amortization of deferred stock-
based compensation ............ -- -- -- -- --
Net loss and comprehensive loss .. -- -- -- -- --
--------------------------------------------------------------------------------------
Balances at December 31, 1998 ........ 3,810,462 11,558 11,586,173 4,849 --
--------------------------------------------------------------------------------------
Issuance of preferred stock for .. 7,070,148 34,423 -- -- --
cash
Issuance of preferred stock for
license fee ................... 393 45 -- -- --
Issuance of common stock to
consultants ................... -- -- 3,761 99 --
Accumulated
Deferred Other Total
Stock-based Accumulated Comprehensive Stockholders' Comprehensive
Compensation Deficit Income (loss) Equity Income (loss)
------------ ------- ------------- ------ -------------
Balances at December 31, 1997 ........ $-- $(833) $-- $567
Issuance of preferred stock for
cash .......................... -- -- -- 11,338
Issuance of common stock options
to stockholders in exchange for
services ...................... -- -- -- 300
Issuance of common stock for cash -- -- -- 2,774
Issuance of common stock to
consultants ................... -- -- -- 8
Issuance of common stock warrants
to consultants ................ -- -- -- 24
Compensation charge related to
grants of common stock options -- -- -- 57
Deferred stock compensation ...... (506) -- -- --
Amortization of deferred stock
compensation .................. 29 -- -- 29
Net loss and comprehensive loss .. -- (6,806) -- (6,806) $(6,806)
---------------------------------------------------------------------------------------
Balances at December 31, 1998 ........ (477) (7,639) -- 8,291
---------------------------------------------------------------------------------------
Issuance of preferred stock for .. -- -- -- 34,423
cash
Issuance of preferred stock for
license fee ................... -- -- -- 45
Issuance of common stock to
consultants ................... -- -- -- 99
57
ASK JEEVES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share data)
Convertible
Preferred Stock Common Stock
--------------- ------------
Shareholder
Notes
Shares Amount Shares Amount Receivable
------ ------ ------ ------ ----------
Issuance of common stock warrants
to consultants ................ -- -- -- 9 --
Issuance of common stock warrants
in connection with equipment
lease financings .............. -- -- 157 --
Conversion of preferred stock to
common stock .................. (9,485,690) (32,535) 9,485,690 32,535 --
Issuance of common stock for cash -- 5,771,071 47,446 --
Conversion of preferred stock to
common stock upon Net Effect
acquisition ................... (1,395,313) (13,491) 1,395,313 13,491 --
Common stock issued for assets
acquired ...................... -- 230,875 1,413 --
Compensation charge related to
grants of common stock options -- -- -- 203 --
Issuance of common stock options
to stockholders in exchange for
services ...................... -- -- -- 511 --
Deferred stock-based
compensation .................. -- -- -- 6,923 --
Amortization of deferred stock-
based compensation ............ -- -- -- -- --
Issuance of shareholder notes
receivable .................... -- -- -- -- (400)
Comprehensive loss:
Unrealized losses on marketable
securities .................... -- -- -- -- --
Net loss ......................... -- -- -- -- --
Comprehensive loss ...................
------------------------------------------------------------------------------------
Balances at December 31, 1999 ........ -- -- 28,472,883 107,636 (400)
------------------------------------------------------------------------------------
Issuance of common stock under
Employee Stock Purchase Plan .. 232,685 2,809 --
Issuance of common stock upon
exercise of stock options and
warrants....................... -- -- 1,391,735 4,582 (1,988)
Issuance of common stock in
Accumulated
Deferred Other Total
Stock-based Accumulated Comprehensive Stockholders' Comprehensive
Compensation Deficit Income (loss) Equity Income (loss)
------------ ------- ------------- ------ -------------
Issuance of common stock warrants
to consultants ................ -- -- -- 9
Issuance of common stock warrants
in connection with equipment
lease financings .............. -- -- -- 157
Conversion of preferred stock to
common stock .................. -- -- -- --
Issuance of common stock for cash -- -- -- 47,446
Conversion of preferred stock to
common stock upon Net Effect
acquisition ................... -- -- -- --
Common stock issued for assets
acquired ...................... -- -- -- 1,413
Compensation charge related to
grants of common stock options -- -- -- 203
Issuance of common stock options
to stockholders in exchange for
services ...................... (511) -- -- --
Deferred stock-based
compensation .................. (8,122) -- -- (1,199)
Amortization of deferred stock-
based compensation ............ 3,935 -- -- 3,935
Issuance of shareholder notes
receivable .................... (400)
Comprehensive loss:
Unrealized losses on marketable
securities .................... -- -- (42) (42) $(42)
Net loss ......................... -- (52,929) -- (52,929) (52,929)
------------
Comprehensive loss ................... $(52,971)
---------------------------------------------------------------------------============
Balances at December 31, 1999 ........ (5,175) (60,568) (42) 41,451
---------------------------------------------------------------------------------------
Issuance of common stock under
Employee Stock Purchase Plan .. -- -- -- 2,809
Issuance of common stock upon
exercise of stock options and
warrants....................... -- -- -- 2,594
Issuance of common stock in
58
ASK JEEVES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share data)
Convertible
Preferred Stock Common Stock
--------------- ------------
Shareholder
Notes
Shares Amount Shares Amount Receivable
------ ------ ------ ------ ----------
connection with business
combinations .................. -- -- 4,770,774 484,619 --
Issuance of common stock in
secondary public offering, net
of issuance costs ............. -- -- 1,715,000 122,472 --
Repurchase of common stock options
early exercised ............... -- -- (313,894) (632) --
Return of shares held in escrow
from Net Effect acquisition ... -- -- (23,039) (2,000) --
Reduction of deferred stock-based
compensation related to
terminations .................. -- -- -- (2,692) --
Amortization of deferred stock-
based compensation ............ -- -- -- -- --
Payments on shareholder notes
receivable .................... -- -- -- -- 167
Adjustments related to shareholder
notes receivable .............. -- -- -- 898 1,047
Comprehensive loss:
Unrealized losses on marketable
securities .................... -- -- -- --
Net loss ......................... -- -- -- --
Comprehensive loss ...................
-------------------------------------------------------------------------------------
Balances at December 31, 2000 ........ -- $-- 36,246,144 $717,692 $(1,174)
============ ============ ============ ============ ===========
Accumulated
Deferred Other Total
Stock-based Accumulated Comprehensive Stockholders' Comprehensive
Compensation Deficit Income (loss) Equity Income (loss)
------------ ------- ------------- ------ -------------
connection with business
combinations .................. -- -- -- 484,619
Issuance of common stock in
secondary public offering, net
of issuance costs ............. -- -- -- 122,472
Repurchase of common stock options
early exercised ............... -- -- -- (632)
Return of shares held in escrow
from Net Effect acquisition ... -- -- -- (2,000)
Reduction of deferred stock-based
compensation related to
terminations .................. 2,692 -- -- 0
Amortization of deferred stock
compensation .................. 1,772 -- -- 1,772
Issuance of shareholder notes
receivable .................... -- -- -- (1,988)
Payments on shareholder notes
receivable .................... -- -- -- 167
Adjustments related to shareholder
notes receivable .............. -- -- -- 1,945
Comprehensive loss:
Unrealized losses on marketable
securities .................... -- -- 177 177 $177
Net loss ......................... -- (189,606) -- (189,606) (189,606)
------------
Comprehensive loss ................... $(189,429)
--------------------------------------------------------------------------============
Balances at December 31, 2000 ........ $(711) $(250,174) $135 $465,768
============ ============ ============ ============
59
ASK JEEVES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
-----------------------
2000 1999 1998
---- ---- ----
Operating activities
Net loss .............................................................................. $(189,606) $ (52,929) $ (6,806)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ..................................................... 5,577 1,271 115
Loss on disposal of assets ........................................................ 3 127 --
Issuance of common stock to consultants ........................................... -- 108 32
Issuance of preferred stock for license fee ....................................... -- 45 --
Contribution of services by stockholders .......................................... -- -- 300
Compensation charge related to grants of common stock options ..................... -- 203 57
Stock-based compensation .......................................................... 2,996 3,936 29
Amortization of goodwill and intangible assets .................................... 88,066 340 --
Non-cash restructuring charges .................................................... 12,411 -- --
Write-off of in-process technology ................................................ 11,652 544 --
Non-cash charge for impaired asset write down ..................................... 4,254 -- --
Non-cash charge for adjustments to shareholder notes receivable ................... 1,945 -- --
Changes in operating assets and liabilities:
Accounts receivable ............................................................ (13,273) (8,166) (271)
Prepaid expenses and other current assets ...................................... 555 (6,147) (106)
Accounts payable ............................................................... (1,678) 3,889 828
Accrued compensation and related expenses ...................................... 1,653 4,796 219
Accrued marketing expenses ..................................................... (1,031) 2,983 --
Accrued merger costs ........................................................... (15,902) 5,280 --
Other accrued liabilities ...................................................... 5,054 4,260 244
Deferred revenue ............................................................... 25,680 7,167 166
--------------------------------------
Net cash used in operating activities ................................................. (61,644) (32,293) (5,193)
Investing activities
Purchases of property and equipment ................................................... (14,660) (6,262) (952)
Sale of property and equipment ........................................................ -- 17 115
Purchases of marketable securities .................................................... (68,524) (34,151) --
Redemption of marketable securities ................................................... 35,138 -- --
Cash acquired from business combinations .............................................. 12,646 -- --
Purchase of other assets .............................................................. -- (1,676) (140)
--------------------------------------
Net cash used in investing activities ................................................. (35,400) (42,072) (977)
Financing activities
Issuance of common stock .............................................................. 129,869 47,846 2,774
Redemption of common stock ............................................................ (2,632) -- --
Issuance of notes receivable to stockholders .......................................... (2,238) (400) --
Repayment of notes receivable to stockholders ......................................... 167 -- --
Issuance of preferred stock ........................................................... -- 34,423 11,338
Proceeds from sale-leaseback transaction .............................................. 1,809 --
Repayment of capital lease obligations ................................................ (817) (404) (14)
--------------------------------------
Net cash provided by financing activities ............................................. 124,349 83,274 14,098
Increase in cash and cash equivalents ................................................. 27,305 8,909 7,928
Cash and cash equivalents at beginning of period ...................................... 17,420 8,511 583
Cash and cash equivalents at end of period ............................................ $ 44,725 $ 17,420 $ 8,511
--------------------------------------
60
Supplemental disclosure of noncash investing and financing activities
Capital lease obligations incurred ................................................ $-- $ 1,690 $ 89
--------- ---------
Common stock issued for assets acquired ........................................... $ 484,619 $ 1,412 $--
--------- ---------
Common stock warrants issued in connection with equipment lease financings ........ $-- $ 158 $--
--------- ---------
Deferred stock-based compensation in connection with employment guarantee ......... $-- $ 1,200 $--
--------- ---------
Deferred stock-based compensation in connection with common stock options issued to
stockholders in exchange for services .......................................... $-- $ 511 $--
--------- ---------
Supplemental disclosure of cash flow information
Interest paid ..................................................................... $ 464 $ 121 $ 6
--------- ---------
Income taxes paid ................................................................. $ 1,810 $-- $--
--------- ---------
See accompanying notes.
61
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 natural
language question answering technologies and services. The Company's
proprietary technology combined with human intelligence creates an
interaction centered on understanding users' specific needs and interests and
connecting them to the most relevant information, products and services. The
Company delivers its natural language question answering technologies and
services through its own Web sites at Ask.com, AJKids.com and DirectHit.com.
Through the Company's Web Properties Group, Ask Jeeves provides a highly
targeted medium for advertisers to reach online users. The Company also
syndicates services to portals, infomediaries, and content and destination
sites to help companies increase e-commerce and advertising revenue. Through
its Business Solutions Group, the Company develops and maintains customized
automated search, natural language question answering, and intelligent
advisor services on numerous corporate Web sites. The Company was
incorporated in California in June 1996 and reincorporated in Delaware in
June 1999.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. Investments in affiliates in
which the Company has significant influence but does not have a controlling
interest are accounted for under the equity method and investments in which the
Company does not have the ability to exert significant influence are accounted
for at cost. All significant intercompany transactions and balances have been
eliminated upon consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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 held in the custody of two major domestic financial
institutions.
Marketable Securities
The Company's marketable securities are primarily comprised of commercial
paper, U.S., state and municipal government securities and corporate debt
securities. Marketable securities are primarily held in the custody of one major
financial institution. The specific identification method is used to determine
the cost of securities disposed. At December 31, 2000 and 1999, substantially
all the Company's marketable securities were
62
classified as available-for-sale. Available-for-sale securities are carried at
fair value with unrealized gains and losses on these securities included as a
separate component of accumulated other comprehensive income (loss).
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,
short and long-term marketable securities and trade accounts receivable. Cash
and cash equivalents consist principally of demand deposit and money market
accounts, commercial paper and U.S., state and municipal government debt
securities with strong credit ratings. Marketable securities consist primarily
of debt securities of domestic municipalities and corporations with strong
credit ratings. Cash and cash equivalents and securities are held with one major
domestic financial institution with high credit standing. The Company has not
experienced any significant losses on its cash and cash equivalents or
marketable securities. 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 are adjusted
periodically to reflect management's expectations of future losses.
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are computed using the straight-line
method over the estimated useful lives of the assets, typically one to five
years. Leasehold improvements are amortized over the shorter of the useful life
or the remaining lease term.
Goodwill and Other Intangible Assets
Goodwill and purchased intangible assets are stated at cost less
accumulated amortization. Amortization is computed using the straight-line
method over the estimated economic lives of the assets, generally three to five
years.
Computer Software for Internal Use
The Company capitalizes certain costs related to software developed or
obtained for internal use once certain criteria have been met. To date, these
amounts have not been significant.
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 consolidated
statements of operations.
Impairment of Long-Lived Assets
The Company assesses the impairment of long-lived assets when events or
changes in circumstances indicate that the carrying value of an asset may not
be recoverable. If such indicators of impairment exist and the net book value
of such assets exceeds the future undiscounted cash flows attributable to
such assets, then an impairment loss, measured as the excess, if any, of the
net book value of the assets over their fair value, is recorded.
At December 31, 2000, the Company has goodwill and other intangible assets
with an aggregate carrying
63
value of $381.6 million. These and other long-lived assets will continue to
be subject to evaluation for impairment when events or changes in
circumstances indicate that the carrying value of the assets may not be
recoverable. If a determination is made that the assets are impaired, it
could result in a significant reduction in the carrying value of such assets
and a material charge.
Revenue Recognition
The Company generally recognizes revenue when persuasive evidence of an
arrangement exists, delivery has occurred, the fee is fixed or determinable and
collectibility is probable. Revenue from ongoing service obligations is deferred
and generally recognized ratably over the period of the obligation.
A significant portion of the Company's advertising revenues from its
Web Properties Group are derived from the sale of promotional space on the
Company's online Internet properties. Services offered range from short-term
banner advertisements and sponsorships to long-term arrangements which may
include the development of co-branded, integrated websites. Revenue derived
from such arrangements is recognized during the period which the service is
provided, provided that no significant obligations remain at the end of the
period. Company obligations typically include the guarantee of a minimum
number of "impressions" or times that an advertisement appears in pages
viewed by users of the Company's online properties. To the extent the minimum
guaranteed impressions are not delivered, the Company defers recognition of
the corresponding revenue until the remaining guaranteed impressions levels
are achieved. Syndication fees consist of a fixed fee that is recognized
ratably over the contractual term, generally a twelve-month period. 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, and are recognized as services are performed. Targeting and
acquisition solution revenues are generated from targeting programs designed
to maximize the effectiveness of the Ask Jeeves' question answering and
search technologies by creating dynamic, customized environments based on
user behavior.
Revenues from our Business Solutions Group include revenue streams that
are derived from companies licensing our natural language and customer
intelligence technologies and from consulting services associated with
implementing a customized natural language question and answering solution. We
recognize consulting services, ongoing support, and licensing fees ratably over
the contractual term, generally twelve months, commencing from the
implementation of service. Amounts invoiced prior to service implementation or
provision of consulting services are recorded as deferred revenue and recognized
ratably over the contractual term, commencing upon service implementation.
Significant Customers
For the years ended December 31, 2000 and 1999, no customer accounted for
more than 10% of total revenues. For the year ended December 31, 1998, two
customers each accounted for 10% of total revenues.
Stock-Based Compensation
The Company accounts for employee stock options using the intrinsic value
method and makes the required pro forma disclosures. Compensation expense based
on the difference, if any, on the date of grant, between the estimated fair
value of the Company's stock and the exercise price of options to purchase that
stock is amortized over the vesting period of the related option using the
graded vesting method.
Advertising Costs
The Company expenses the costs of advertising as incurred. Advertising
expense for the years ended
64
December 31, 2000, 1999 and 1998 was $32,215,000, $23,824,000 and $1,092,000,
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 net loss 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.
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. In
June 2000, the FASB issued FAS 138 which significantly amends FAS 133. FAS 133,
as amended, requires that an entity recognize all derivatives as either assets
or liabilities in the Statement of Financial Position 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.
In December 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin 101, "Revenue Recognition in Financial Statements,"
("SAB 101"). SAB 101, as amended, summarizes certain of the SEC's views in
applying generally accepted accounting principles to revenue recognition and
classification in financial statements. The Company adopted SAB 101 in the
fourth quarter of 2000. The adoption of SAB 101 did not have a material impact
on its revenues or results of operations.
In March 2000, the FASB issued Interpretation No. 44 ("FIN 44"),
"Accounting for Certain Transactions Involving Stock Compensation," an
interpretation of APB No. 25. FIN 44 clarifies guidance for certain issues that
arose in the application of APB No. 25. FIN 44 is generally effective, and to be
applied prospectively, to all new awards, modifications to outstanding awards
and changes in employee status on or after July 1, 2000. The adoption of FIN 44
did not have a material impact on the Company's consolidated financial position
or results of operations.
Reclassifications
Certain prior year balances have been reclassified to conform to the
current year presentation.
2. BUSINESS COMBINATIONS
Acquisition of Direct Hit Technologies, Inc.
In February 2000, the Company acquired Direct Hit Technologies, Inc.
("Direct Hit"), a provider of search and navigation services on the Internet.
The purchase consideration consisted of 4,751,878 shares of common stock
65
with a fair 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
fair value of $25.8 million, liabilities assumed of $10.2 million and $11.2
million in acquisition costs.
The purchase consideration of the acquired assets and assumed liabilities were
allocated based on fair values as follows (in thousands):
Tangible assets .......................................... $ 16,890
Equipment ................................................ 2,455
Purchased in-process technology .......................... 10,259
Purchased technology ..................................... 19,789
Acquired workforce ....................................... 797
Goodwill ................................................. 453,140
--------
Total purchase consideration ............................. $503,330
--------
Purchased in-process technology. The amounts allocated to purchased
in-process technology were determined through established valuation techniques
in the high technology Internet industry by an independent valuation expert and
were expensed upon acquisition because technological feasibility had not been
established and no future alternative uses existed. The values assigned to
purchased in-process technology were determined by identifying the on-going
research projects for which technological feasibility had not been achieved and
assessing the state of completion of the 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 using a 25% discount rate. 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 are being amortized on a straight-line basis over periods of three to
five years.
The acquisition of Direct Hit was recorded as a purchase and
accordingly, the Consolidated Financial Statements include the operating
results of Direct Hit from the date of acquisition which occurred in February
2000. The unaudited pro forma information presented in the table below
represents the combined revenue, net loss and net loss per share of the
Company for the year ended December 31, 1999 as if the acquisition had
taken place on January 1, 1999 and includes the amortization of goodwill and
other intangible assets (in thousands).
66
Year ended
December 31, 1999
-----------------
Revenues $ 23,923
Net loss $ (168,998)
Net loss per share, basic and diluted $ (6.81)
Weighted average shares outstanding
used in computing basic and diluted net loss per share 24,798,837
Merger with Net Effect Systems, Inc.
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
when consummated. Pursuant to the Agreement, all outstanding shares of Net
Effect were exchanged for 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.
The merger was accounted for as a pooling of interests and financial
statements for all dates and periods prior to consummation of the transaction
have been restated to combine the financial position and results of operations
of the Company with the respective financial statements of Net Effect. No
adjustments were 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:
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1998 SEPTEMBER 30, 1999
----------------- ------------------
(unaudited)
Revenues:
Ask Jeeves $592 $10,302
Net Effect 208 823
-------------------------------------------
Total $800 $11,125
===========================================
Net loss:
Ask Jeeves $4,261 $24,179
Net Effect 2,545 5,007
-------------------------------------------
Total $6,806 $29,186
===========================================
Joint Ventures
In December 1999, the Company 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").
In August 2000, the Company entered into two additional joint ventures. The
Company partnered with Univision Communications, Inc to create Ask Jeeves En
Espanol, Inc. ("AJ En Espanol") and with Trans Cosmos Inc. USA Pacific
Holdings Company III to create Ask Jeeves Kabushiki Kaisha ("AJ Japan"),
(collectively "the Ventures"). The Company contributed to the joint ventures
the use of certain intellectual property within defined territories, which
had no carrying value for accounting purposes. The Company accounts for its
investment in the Ventures under the equity method of accounting. The Company
recorded no value for its interests in the Ventures for accounting purposes.
Therefore, the Company has not recognized any portion of the net losses of
the Ventures.
The Company has entered into various agreements with its joint ventures
for the license of its technology within the United Kingdom, Japan and to the
Spanish speaking market. In connection with these agreements, the Company
received initial cash payments that have been recorded as deferred revenues
and are being recognized as revenues on a straight-line basis over three to
four year periods. For the years ended December 31, 2000 and 1999, the
Company recorded revenues of $12,308,000 and $118,000, respectively, relating
to these licenses.
3. MARKETABLE SECURITIES
At December 31, 2000 and 1999, all of the Company's investments were
classified as available-for-sale. Management determines the appropriate
classification of investments at the time of purchase and re-evaluates such
designation at the end of each period. Investments with a maturity date of less
than one year from the consolidated balance sheet date are classified short-term
and are carried at fair value, based on quoted market prices. The amount of
realized gains or losses for the years ended December 31, 2000, 1999 and 1998,
was not significant.
The following tables summarize the Company's investments (in thousands):
67
Gross Gross
Amortized Unrealized Unrealized Estimated Fair
December 31, 2000 Cost Gains Losses Value
------- ------- ------- -------
Commercial paper ......................... $23,786 $-- $(28) $23,758
Municipal bonds .......................... 7,650 -- -- 7,650
US Government notes ...................... 3,996 10 -- 4,006
Corporate notes .......................... 21,675 117 -- 21,792
Asset-backed securities .................. 2,999 36 -- 3,035
-------------------------------------------------
Total available for sale securities ...... $60,106 $163 $(28) $60,241
=================================================
Classified as:
Short-term marketable securities $47,813
Marketable securities 12,428
-------
Total $60,241
=======
Gross Gross
Amortized Unrealized Unrealized Estimated Fair
December 31, 1999 Cost Gains Losses Value
------- ------- ------- -------
Commercial paper ........................... $ 1,829 $-- $(7) $ 1,822
Municipal bonds ............................ 2,000 -- -- 2,000
State notes ................................ 2,000 -- -- 2,000
US Government notes ........................ 11,987 -- (8) 11,979
Corporate notes ............................ 13,720 -- (27) 13,693
Equity securities .......................... 2,616 -- -- 2,616
---------------------------------------------------
Total available for sale securities ........ $34,152 $-- $(42) $34,110
===================================================
Classified as:
Short-term marketable securities $34,110
=======
The amortized cost and estimated fair value of investments in debt
securities at December 31, 2000, by effective maturity, were as follows (in
thousands):
Estimated Fair
Amortized Cost Value
-------------- -----
Due in 1 year or less $47,782 $47,813
Due in 1-2 years 9,325 9,393
Due in 2-5 years 2,999 3,035
------------------------
Total investments in debt securities $60,106 $60,241
========================
4. PROPERTY AND EQUIPMENT
68
Property and equipment consists of the following (in thousands):
December 31,
------------
2000 1999
-------- -------
Computer equipment and related software ............ $ 21,109 $ 7,071
Furniture and fixtures ............................. 3,217 1,172
Leasehold improvements ............................. 2,213 526
------------------------
26,539 8,769
Less accumulated depreciation and amortization ..... (7,451) (1,353)
------------------------
Property and equipment, net ........................ $ 19,088 $ 7,416
========================
Cost related to assets under capital lease obligations was $3,499,000 at
December 31, 2000 and 1999. Accumulated amortization related to assets under
capital lease obligations at December 31, 2000 and 1999 was $1,723,000 and
$543,000, respectively.
5. LEASE COMMITMENTS
In June 1999, the Company entered into a leasing agreement with an
equipment leasing company to finance equipment and internal-use 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 had 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.
The Company has entered into operating and capital leases for certain
office space and equipment which contain 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-cancelable leases with
terms in excess of one year are as follows (in thousands):
Capital Leases Operating Leases
-------------- ----------------
Years ending December 31:
2001 .................................................. $ 1,041 $ 4,979
2002 .................................................. 978 9,440
2003 .................................................. 589 9,068
2004 .................................................. -- 8,718
2005 .................................................. -- 6,686
Thereafter ............................................ -- 41,526
-----------------------
Total minimum lease payments .......................... 2,608 $80,417
=======
Less interest ......................................... (257)
-------
Present value of minimum lease payments ............... 2,351
Less current portion of capital lease obligations ..... (886)
-------
Capital lease obligations, less current portion ....... $ 1,465
=======
69
Rent expense was $4,315,000, $1,499,000 and $128,000 for the years ended
December 31, 2000, 1999 and 1998, respectively.
6. LINE OF CREDIT
The Company has available a revolving line of credit with a bank in the
amount of $25 million. The line of credit expires on July 1, 2002. Borrowings
under the line of credit bear interest at one of the following rates as selected
by the Company: LIBOR plus 0.5% or the bank's prime rate. All borrowings are
collateralized by the Company's marketable securities. Borrowings under the line
are subject to various covenants. As of December 31, 2000, 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. During the
year ended December 31, 2000, the Company recorded a foreign income tax
provision of $1.8 million related to taxes withheld from customer payments and
remitted to foreign taxing jurisdictions on the Company's behalf.
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 (in thousands):
December 31,
------------
2000 1999
---- ----
Deferred Tax Assets:
Net operating loss carryforwards ................ $ 42,343 $ 12,684
Capitalized research and development costs ...... 1,611 717
Accrued expenses ................................ 5,537 2,033
Deferred revenue ................................ 13,364 2,846
Other ........................................... 1,116 386
-------------------------
Deferred tax assets ............................. 63,971 18,666
Valuation allowance ............................. (57,246) (18,666)
-------------------------
Total deferred tax assets ....................... $ 6,725 $--
-------------------------
Deferred Tax Liabilities:
Other identified intangible assets $ (6,725) $--
-------------------------
Total deferred tax liabilities $ (6,725) $--
Net deferred tax assets $-- $--
=========================
A valuation allowance has been established and, accordingly, no benefit
has been recognized for the
70
Company's net operating losses and other deferred tax assets. The net valuation
allowance increased by $38.6 million and $16.7 million during the years ended
December 31, 2000 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.
The tax benefits associated with employee stock options provide a deferred
benefit of $14.9 million as of December 31, 2000. The deferred tax benefit
associated with the employee stock options will be credited to common stock when
realized.
At December 31, 2000, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $117.0 million, which expire in the
years 2012 through 2020. The Company also had net operating loss carryforwards
for state income tax purposes of approximately $37.0 million which expires in
the years 2004 through 2010.
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.
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 share and per share amounts in the accompanying consolidated financial
statements have been adjusted to reflect the stock split.
Common Stock Offerings
In June 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.
In March 2000, the Company completed a secondary offering of 1,715,000
shares of common stock at a purchase price per share of $76.00, which includes
underwriter's exercise of an option to purchase an additional 315,000 shares.
Net proceeds to the Company aggregated approximately $122.5 million (net of
underwriters' commission and offering expenses).
Shares Reserved for Future Issuance
At December 31, 2000, the Company has reserved shares of capital stock for
future issuance as follows:
Stock options outstanding .................... 9,291,208
Stock options available for grant ............ 2,948,843
Employee stock purchase plan ................. 232,020
----------
12,472,071
==========
71
9. RESTRUCTURING AND ASSET IMPAIRMENT
In December 2000, the Company's Board of Directors approved a
restructuring program aimed at streamlining its underlying cost structure to
better position the Company for growth and improved operating results. As
part of the restructuring program, the Company implemented a reduction in
force of approximately 152 positions. The reductions came from all areas of
the Company and, as of December 31, 2000, the majority of these terminations
were completed. As part of the restructuring, the Company determined that the
operations of the Evergreen Project, Inc, which was acquired in January 2000,
no longer fit the Company's strategic objectives and were terminated.
The Company incurred a charge of approximately $13.5 million in the
fourth quarter of the year ended December 31, 2000 relating to the
restructuring. This charge included $2.2 million related to severance and
other employee costs associated with the elimination of 152 positions and
accounting and legal costs. Costs associated with employee termination
included severance pay and medical and other benefits. All of the affected
employees had been notified as of December 31, 2000.
The charge also included approximately $8.0 million in estimated
facility exit costs and $3.3 million in non-cash asset write-downs. The
facility exit costs are associated with the consolidation of various
facilities in California and Missouri. Asset write-downs related to the
termination of the Evergreen operation included approximately $3.1 million of
goodwill and $200,000 of equipment.
The Company expects the restructuring program to be completed during
the second quarter of the year ended December 31, 2000.
The following table sets forth the restructuring activity during the
year ended December 31, 2000.
Accrued
Restructuring
costs at
Restructuring Asset December 31,
Charged to restructuring expense: Charges Cash Paid Write-offs 2000
---------------------------------------------------
(in thousands)
Facility exit costs $ 7,984 $ -- $ -- $7,984
Asset write-downs 3,279 -- 3,279 --
Severance, legal and accounting costs 2,203 1,055 -- 1,148
-------------------------------------------------
Total $13,466 $1,055 $3,279 $9,132
=================================================
Also in the fourth quarter of 2000, the Company recorded write-downs to
estimated fair value of nonmarketable investments in privately held companies
that were deemed to have had other than temporary declines in value below
their carrying value totaling $4.3 million. There were no similar write-downs
for the year ending December 31, 1999.
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.
72
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. At December 31, 2000, 346,167 shares
were available for grant under the plan.
Also in 1999, in conjuction 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 $5,594,044 for the year ended December 31, 2000.
In 2000, the Company granted equity interests in the joint ventures to
certain executives of AJI and recorded a compensation charge of $1,223,000 in
connection with these grants during the year.
11. STOCK-BASED COMPENSATION
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.
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 3,906,872 shares of common
stock for the issuance of ISOs or NSOs to employees, officers, directors, or
consultants under the 1999 Plan.
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 5,100,000 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.
Direct Hit Option Plans
Pursuant to the acquisition of Direct Hit Technologies, Inc., the Company
assumed the 1998 A & B Stock Plans of Direct Hit (the "1998 Stock Option Plan"
and the "Immediately Exercisable Incentive Stock Option Plan"), including
incentive and non-statutory stock options to purchase 331,596 shares of common
stock with exercise prices ranging from $0.01 to $34.93. The Company will not
grant any additional options under the 1998 Stock Option Plan or the Immediately
Exercisable Incentive Stock Option Plan. Options granted under the Direct Hit
Plans are exercisable over a maximum term of ten years from the date of grant
and generally vest over periods of up to four years.
73
A summary of stock option activity for all stock plans of the Company is
set forth below:
Options Outstanding
-------------------
Weighted-Average
Exercise Price
Shares Per Share
------ ---------
Outstanding at December 31, 1997 .......... 479,253 .08
Granted ............................... 3,303,417 .48
Canceled .............................. (41,228) .90
Exercised ............................. (692,955) .07
Outstanding at December 31, 1998 .......... 3,048,487 .51
Granted ............................... 6,476,331 22.87
Canceled .............................. (362,850) 8.89
Exercised ............................. (2,333,368) 2.04
Outstanding at December 31, 1999 .......... 6,828,600 $20.74
---------------------------------
Granted ............................... 6,327,356 $24.49
Canceled .............................. (2,498,547) 37.23
Exercised ............................. (1,366,201) 3.29
---------------------------------
Outstanding at December 31, 2000 .......... 9,291,208 $21.43
=================================
Vested and exercisable at December 31, 2000 1,486,371 $21.51
=================================
The weighted-average remaining contractual life of options outstanding at
December 31, 2000 and 1999 was 8.9 years and 9.2 years, respectively.
The following table summarizes the status of stock options outstanding at
December 31, 2000:
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
--------------- ----------- --------------- --------- ----------- ---------
$0.00-0.73 1,167,424 7.58 $0.56 433,322 $0.46
0.75-10.00 1,642,764 8.32 8.15 499,924 7.93
10.09-16.69 1,019,387 9.22 14.25 155,210 13.83
16.81-18.13 662,751 9.56 17.96 14,738 17.50
18.19-18.50 3,009,157 9.47 18.50 5,850 18.50
18.56-32.94 1,002,849 9.08 28.59 191,101 32.66
34.93-125.86 777,251 8.98 93.98 183,882 102.01
125.86-125.86 7,500 8.96 125.86 1,875 125.86
128.00-128.00 125 8.92 128.00 125 128.00
138.00-138.00 2,000 9.01 138.00 344 138.00
============================================================================================================
Total 9,291,208 8.92 21.43 1,486,371 21.51
============================================================================================================
Pro Forma Disclosures of the Effect of Stock-Based Compensation
74
Pro forma information regarding the results of operations and net loss per
share is determined as if the Company had accounted for its employee stock
options using the fair value method. 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 2000, 1999 and 1998, was 5.0%, 6.5% and 6.5%,
respectively. The expected life of options granted in the years ended December
31, 2000, 1999 and 1998, was 5 years each. No dividend and a volatility factor
of 1.6, 2.6 and 0.34 for 2000, 1999, and 1998, respectively, were used.
The Company has elected to use the intrinsic value method in accounting
for its employee stock options because, as discussed below, the alternative fair
value accounting requires the use of option valuation models that were not
developed for use in valuing employee stock options. Under the intrinsic value
method, 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 Black Scholes valuation model, the Company's net loss
and basic and diluted net loss per share would have been increased to the pro
forma amounts indicated below (in thousands, except per share amounts):
Year Ended December 31,
-----------------------
2000 1999 1998
---- ---- ----
Net loss, as reported ........................... $ (189,606) $ (52,929) $ (6,806)
Net loss, pro forma ............................. $ (224,154) $ (74,382) $ (7,180)
----------- -----------
Basic and diluted net loss per share, as reported $ (5.51) $ (2.64) $ (0.74)
Basic and diluted net loss per share, pro forma . $ (6.52) $ (3.71) $ (0.78)
----------- -----------
The weighted-average grant-date fair value of options granted was $24.49,
$24.14 and $0.31 for grants made during years ended December 31, 2000, 1999 and
1998, respectively.
The pro forma impact of options on the net loss for the years ended
December 31, 2000, 1999 and 1998, is not representative of the effects on net
income (loss) for future years, as future years will include the effects of
additional years of stock option grants.
12. RELATED PARTY TRANSACTIONS
During 1999, the Company provided loans to shareholders totaling
$400,000. During 2000, the Company provided additional loans totaling
$1,988,000. The loans bear interest at rates between 7.5% and 10.4%. The
loans are collateralized by various assets of the employees including shares
of the Company's common stock. During 2000, a charge to general and
administrative expense of $1,945,000 was recorded to adjust the carrying
value of the
75
notes to the fair value of the underlying collateral and to reflect certain
other adjustments with respect to such notes.
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 $151,000 and $109,000 for the years
ended December 31, 1999 and 1998, respectively. For 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 $511,000 and
$300,000 for the years ended December 31, 1999 and 1998, respectively and
recorded charges to operations in the respective periods.
13. LEGAL PROCEEDINGS
From time to time, the Company is subject to legal proceedings and claims
in the ordinary course of business, including claims of alleged infringement of
trademarks, copyrights and other intellectual property rights, and a variety of
claims arising in connection with the services, such as claims alleging
defamation or invasion of privacy. In addition, from time to time, third parties
assert patent infringement claims against the Company in the form of letters,
lawsuits and other forms of communication. Currently, the Company is engaged in
one lawsuit regarding patent issues.
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, alleged that aspects of the
Company's technology infringed three patents alleged to be held by the
plaintiff. The Company settled this lawsuit in February 2001, and an Order of
Dismissal with Prejudice was entered by the Court on February 20, 2001. Under
the terms of the settlement agreement, the Company will receive a license to
certain intellectual property owned by IP Learn, LLC. The remaining portion
of the settlement cost allocable to the future license of intellectual
property of $1.3 million will be charged to cost of revenue over a three-year
period.
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 the Company 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. The Company 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 the Company of our
costs, including attorneys' fees. The parties are in the discovery process in
this litigation.
The Company intends to vigorously defend against the allegations
asserted in this complaint and it believes it has meritorious defenses to the
claims. The results of any litigation matter are inherently uncertain. In the
event of an adverse result in this lawsuit, or in any other litigation with
third parties that could arise in the future with respect to intellectual
property rights relevant to the Company products or services, the Company
could be required to pay substantial damages, including treble damages if it
is 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 the Company ultimately prevails. Accordingly, there can be no
assurance that this lawsuit will not seriously harm our business.
14. BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION
For management reporting purposes, the Company is divided into two
business groups, the Web Properties
76
Group and the Business Solutions Group. Results of operations for these business
groups include revenues, cost of revenues and gross profit (loss) information as
provided to the Company's President, who is the Chief Operating Decision Maker.
Information as to operating expenses, operating loss and net loss is not
provided by business segment. Summarized financial information by segment for
2000, 1999 and 1998, as reported to the President is as follows (in thousands):
Year Ended December 31,
-----------------------
2000 1999 1998
---- ---- ----
Web Properties:
Revenues .......... $58,397 $ 14,564 $ 577
Cost of revenues .. 19,166 6,284 603
-------------------------------------
Gross profit (loss) $39,231 $ 8,280 $ (26)
=====================================
Business Solutions:
Revenues .......... $37,303 $ 7,463 $ 223
Cost of revenues .. 20,103 7,800 797
-------------------------------------
Gross profit (loss) $17,200 $ (337) $(574)
=====================================
The Company provides its natural language question answering technologies and
services internationally through its joint ventures. Geographic information on
revenue is as follows (in thousands):
Year Ended December 31,
-----------------------
2000 1999 1998
---- ---- ----
REVENUES:
North America $82,298 $22,027 $800
International 13,402 -- --
------------------------------------
Total $95,700 $22,027 $800
====================================
15. NET LOSS PER SHARE
77
The following table sets forth the computation of net loss per share (in
thousands, except share and per share data):
Year Ended December 31,
-----------------------
2000 1999 1998
---- ---- ----
Basic and diluted net loss per share
Numerator: Net loss $ (189,606) $ (52,929) $ (6,806)
Denominator: Weighted-average shares
common stock outstanding 35,269,508 21,000,662 9,162,624
Less: weighted average shares common
stock subject to repurchase 870,308 953,703 -
Weighted-average shares used in calculation
of basic and diluted net loss per share 34,399,200 20,046,959 9,162,624
Basic and diluted net loss per share $ (5.51) $ (2.64) $ (0.74)
=====================================================
If the Company had reported net income, the calculation of historical
diluted earnings per share would have included an additional 4,812,380,
4,450,618 and 893,352 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, 2000, 1999 and 1998, respectively. For
the years ended December 31, 2000, 1999 and 1998, a total of 1,286,697, 143,926
and 398,007 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.
16. QUARTERLY FINANCIAL DATA (UNAUDITED)
Three Months Ended
-------------------
Year Ended December 31, 2000: December 31 September 30 June 30 March 31
----------- ------------ ------- --------
Revenue $ 23,045 $ 29,029 $ 25,868 $ 17,757
Gross profit (loss) $ 13,166 $ 18,706 $ 14,743 $ 9,815
Net loss $(61,961) $(38,460) $(41,987) $(47,199)
Net loss per share - basic and diluted $ (1.74) $ (1.08) $ (1.20) $ (1.48)
Three Months Ended
-------------------
Year Ended December 31, 1999: December 31 September 30 June 30 March 31
----------- ------------ ------- --------
Revenue $ 10,902 $ 6,802 $ 2,820 $ 1,503
Gross profit (loss) $ 5,136 $ 2,911 $ 269 $ (373)
Net loss $(23,743) $(11,822) $(11,464) $ (5,899)
Net loss per share - basic and diluted $ (0.87) $ (0.44) $ (0.50) $ (0.33)
See Notes 2, 10, 13 and 14 for non-recurring quarterly items.
78
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
79
PART III
Item 10. Directors and Executive Officers of the Registrant
Ask Jeeves incorporates by reference the information set forth under the caption
"Executive Officers of the Company" in Part I hereof and the information
concerning its directors set forth under the caption "Election of Directors" in
our definitive Proxy Statement to be filed for our 2001 Annual Meeting of
Stockholders.
Item 11. Executive Compensation
Ask Jeeves incorporates by reference the information set forth under the caption
"Executive Officers of the Company" in Part I hereof and the information set
forth under the caption "Executive Compensation" in our definitive Proxy
Statement to be filed for our 2001 Annual Meeting of Stockholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Ask Jeeves incorporates by reference the information set forth under the caption
"Security Ownership of Certain Beneficial Owners and Management" in our
definitive Proxy Statement to be filed for our 2001 Annual Meeting of
Stockholders.
Item 13. Certain Relationships and Related Transactions
Ask Jeeves incorporates by reference the information set forth under the
captions "Certain Relationships and Related Transactions," and "Executive
Compensation," in our definitive Proxy Statement to be filed for our 2001 Annual
Meeting of Stockholders.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) Financial Statements
The following are filed as part of Item 8 of this Report on
Form 10-K:
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flow
Notes of Consolidated Financial Statements
Independent Auditors' Report
(2) Schedule II "Valuation and Qualifying Accounts"
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission have been
omitted because the information required to be set forth therein is not
applicable or is shown in the Financial Statements or notes thereto.
The financial statement schedule "Schedule II-Valuation and
Qualifying Accounts" is filed as part of this report and should be read in
conjunction with the consolidated financial statements.
80
(3) Exhibits
The following exhibits are filed herewith or incorporated by
reference:
Exhibit Description
- ------- -----------
3.1(1) Certificate of Incorporation of the Registrant.
3.2(1) Bylaws of the Registrant.
4.1(1) Reference is made to Exhibit 3.1.
4.2(1) Specimen Certificate for Registrant's Common Stock.
4.3(1) 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(1) 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(1) 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(1) Warrant to purchase 5,000 shares of Common Stock granted by the
Registrant to Soren Jacobsen dated as of March 11, 1999.
10.1(1) Amended and Restated 1996 Equity Incentive Plan.
10.2(1) Form of Option Agreement for the Amended and Restated 1996 Equity
Incentive Plan.
10.3.3*+ 1999 Equity Incentive Plan, As Amended and Restated.
10.4.1(1)+ Form of Option Agreement for the 1999 Equity Incentive Plan.
10.4.2*+ Form of Option Agreement for the 1999 Equity Incentive Plan, As
Amended and Restated.
10.5.1(1)+ 1999 Employee Stock Purchase Plan.
10.5.2(1)+ 1999 Employee Stock Purchase Plan, As Amended.
10.6(1) 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(1) Commercial Office Lease dated as of August 14, 1998, by and
between Eat/Work Development, L.P. and the Roda Development
Company.
10.8(1) Commercial Office Lease dated as of November 15, 1998, by and
between Eat/Work Development, L.P. and the Roda Development
Company.
10.9(1) Commercial Office Lease dated as of May 15, 1998, by and between
the Registrant and Eat/Work Development, L.P.
10.10(1) Lease Agreement dated as of January 26, 1999, by and between the
Registrant and Parker Associates.
10.11(1) 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(1) License Agreement dated as of October 2, 1998, by and between the
Registrant and Compaq Computer Corporation.
10.13(1) License and Development Agreement dated as of September 30, 1999,
by and between the Registrant and Compaq Computer Corporation.
81
10.18(1)+ Offer letter dated as of January 5, 1999, by and between the
Registrant and Frank A. Vaculin.
10.19.1(1)+ Offer letter dated as of May 22, 1998, by and between the
Registrant and Robert W. Wrubel.
10.19.2(1)+ Offer letter dated as of June 1, 1999, by and between Registrant
and Robert W. Wrubel, as amended.
10.19.3*+ Employment Agreement dated as of December 1, 2000, by and
between the Registrant and Robert W. Wrubel.
10.23(1) 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(1) 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(1) Asset Purchase Agreement dated as of April 16, 1999, by and
between the Registrant and Lumina Decision Systems, Inc.
10.26(1) Form of Indemnity Agreement by and between the Registrant and
each of its directors and executive officers.
10.27(1) Assignment and Assumption of Standard Commercial Office Lease for
EAT/Work development dated as of January 1, 1999, by and between
the Registrant and the Roda Group Development Company, LLC
(relating to 918 Parker Street, Suite A-1-1 and A-1-2, Berkeley,
CA).
10.28(1) Office Lease dated as of April 29, 1999, by and between the
Registrant and Emery Station Associates, L.L.C.
10.29(1)+ Offer Letter dated as of May 27, 1999, by and between the
Registrant and George S. Lichter.
10.30(1) Master Lease Agreement dated as of June 15, 1999, by and between
the Registrant and Comdisco, Inc.
10.31(1) Forms of Promissory Note and Stock Pledge Agreement for loans to
executive officers.
10.32(2) Agreement and Plan of Merger and Reorganization dated as of
November 19, 1999, by and among the Registrant, Net Effect
Systems, Inc. and Neutral Acquisition Corp.
82
10.33(3) Agreement and Plan of Merger and Reorganization dated as of
January 25, 2000, by and among the Registrant, Direct Hit
Technologies, Inc. and Answer Acquisition Corp.
10.35(4) Form of Registration Rights Agreement, between the Registrant and
Stockholders of Net Effect Systems, Inc.
10.36(5) Office Lease dated as of February 24, 2000, by and between the
Registrant and Oakland City Center LLC.
10.37(6) Lease Agreement dated as of May 15, 2000, by and between the
Registrant and Oakland City Center, LLC.
10.38*+ Offer Letter dated as of June 30, 1999, by and between the
Registrant and Jeffrey S. Mahl.
10.39*+ Offer Letter dated as of July 24, 2000, by and between the
Registrant and Adam Klein.
10.40*+ Offer Letter dated as of December 8, 2000, by and between the
Registrant and A. George (Skip) Battle.
21.1* Subsidiaries of the Registrant
23.1* Consent of Ernst & Young LLP, Independent Auditors.
24.1* Power of attorney. Reference is made to Page *.
- -----------
(1) Previously filed with Registrant's S-1 Registration Statement, No.
333-77539.
(2) Previously filed with Registrant's Current Report on Form 8-K, filed with
the Securities and Exchange Commission on November 18, 1999.
(3) Previously filed with Registrant's Current Report on Form 8-K, filed with
the Securities and Exchange Commission on February 14, 2000.
(4) Previously filed with Registrant's S-1 Registration Statement, No.
333-95691.
(5) Previously filed with Registrant's S-1 Registration Statement, No.
333-30494.
(6) Previously filed with Registrant's Quarterly Report on Form 10-Q, filed
with the Securities and Exchange Commission on November 14, 2000.
* Filed herewith.
+ Management contract, compensatory plan or arrangement.
(b) Reports on Form 8-K.
The following Reports on Form 8-K was filed during the quarter ended
December 31, 2000: A Report on Form 8-K dated December 29, 2000 relating to
certain press releases issued by the Registrant.
(c) See Exhibits listed under Item 14(a)(3).
(d) Not applicable. See Item 14(a)(2).
83
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Emeryville, State of California, on April 2, 2001.
84
ASK JEEVES, INC.
By: /s/ A. George (Skip) Battle
---------------------------------
A. George (Skip) Battle
Chief Executive Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below each severally constitutes and appoints A. George (Skip)
Battle, Christine M. Davis and Cynthia Pevehouse in any and all capacities,
to sign any and all amendments to this Report on Form 10-K, and to file the
same, with exhibits thereto and other documents in connection therewith, with
the Securities and Exchange Commission, hereby ratifying and confirming all
that the said attorney-in-fact, or their substitutes, may lawfully do, or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons in the capacities and on the
dates indicated:
Signature Title Date
- --------- ----- ----
A. George (Skip) Battle Chief Executive Officer and Director April 2, 2001
(Principal Executive Officer)
/s/ A. George (Skip) Battle
- ---------------------------
Stephen J. Sordello Chief Financial Officer April 2, 2001
(Principal Financial Officer)
/s/ Stephen J. Sordello
- ----------------------
Christine M. Davis Vice President and Corporate
Controller (Principal Accounting
Officer) April 2, 2001
/s/ Christine M. Davis
- ----------------------
Garrett Gruener Chairman of the Board of Directors April 2, 2001
/s/ Garrett Gruener
- ----------------------
Geoffrey Y. Yang Director April 2, 2001
/s/ Geoffrey Y. Yang
- ----------------------
85
James Kirsner Director April 2, 2001
/s/ James Kirsner
- ----------------------
Daniel J. Nova Director April 2, 2001
/s/ Daniel J. Nova
- ----------------------
Roger A. Strauch Director April 2, 2001
/s/ Roger A. Strauch
- ----------------------
86
ASK JEEVES, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Description Balance at Charge to Costs Deductions Balance at
Beginning and Expenses ---------- End of
of Period ------------ Period
---------- ------
------------------------------------- --------------------------------
Year ended December 31, 2000:
Allowance for doubtful accounts........ $1,168 $4,500 $1,041 $4,627
------------------------------------- --------------------------------
Year ended December 31, 1999:
Allowance for doubtful accounts........ $85 $1,083 $-- $1,168
------------------------------------- --------------------------------
Year ended December 31, 1998:
Allowance for doubtful accounts........ $-- $85 $-- $85
87