Back to GetFilings.com
Form
10-K
|
|
| |
United States |
| |
Securities and Exchange
Commission |
| |
Washington, D.C. 20549 |
| |
| |
Form 10-K for Annual and
Transition Reports Pursuant to |
| |
Section 13 or 15(d) of the
Securities Exchange Act of 1934 |
| |
(Mark One) |
| |
| |
þAnnual
report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 |
| |
For the fiscal year ended December 31, 2004 |
| |
| |
oTransition
report pursuant to section 13 or 15(d) of the |
| |
Securities Exchange Act of
1934 |
| |
For the transition period
from to . |
| |
| |
Commission file number
000-26521 |
| |
| |
 |
| |
| |
Exact name of registrant as specified in its
charter: Ask Jeeves,
Inc. |
| |
| |
State or Other Jurisdiction of
Incorporation: Delaware |
| |
Address of principal executive offices: |
| |
555 12th Street, Suite 500 |
| |
Oakland, CA 94607 |
| |
| |
I.R.S. Employer Identification
Number: 94-3334199 |
| |
| |
Telephone number: (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 |
| |
Preferred Stock Purchase Rights |
| |
| |
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
þ No
o
|
| |
| |
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.
o
|
| |
| |
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Exchange Act Rule 12b-2). Yes
þ No
o
|
| |
| |
On March 14, 2005, Ask Jeeves had 58,970,449 shares of
Common Stock outstanding (excluding treasury shares) and the
aggregate market value of its stock held by non-affiliates was
approximately $1.0 billion (based on 43,198,522 shares
of Common Stock held by non-affiliates and a closing price of
$23.93 per share of Common Stock on the Nasdaq National
Market). On June 30, 2004, which was the final business day
of Ask Jeeves’ most recently completed second fiscal
quarter, Ask Jeeves had 57,475,881 shares of Common Stock
outstanding and the market value of its stock held by
non-affiliates was approximately $1.8 billion (based on
45,787,721 shares of Common Stock then held by
non-affiliates and a closing price that day of $39.03 per
share of Common Stock on the Nasdaq National Market). These
market value calculations exclude shares held on the stated
dates by Ask Jeeves’ officers, directors and known 5% or
greater stockholders based on Schedule 13G filing data.
(Exclusion from these market value calculations does not imply
affiliate status for any other purpose.) |
|
|
| |
DOCUMENTS INCORPORATED BY
REFERENCE |
| |
| |
| |
Portions of Ask Jeeves’ definitive Proxy Statement to be
filed with the Securities and Exchange Commission (the
“Commission”) pursuant to Regulation 14A in
connection with the 2005 Annual Meeting of Stockholders are
incorporated by reference into Part III of this report.
Certain exhibits previously filed by Ask Jeeves with the
Commission are incorporated by reference into Part IV of
this report, as listed in the Exhibit Index. |
| |
| |
| |
The Exhibit Index begins on page 103 of this Annual
Report. |
3
Ask Jeeves, Inc.
PRELIMINARY NOTE REGARDING
OUR TRADEMARKS
Our registered trademarks in the U.S. include Ask
Jeeves®; the “Ask!” button design;
Ask.com®; Excite; the “Excite” design;
iWon; the “iWon” design; the “Jeeves” design
(a stylized depiction of our butler logo); Teoma®; the
“Teoma” design (a stylized depiction of the Teoma word
trademark) and “Search with Authority” (a phrase we
use on the Teoma.com Web site). The trademarks “Ask
Jeeves” and the “Jeeves” design are registered in
Australia, Canada, China, the European Community, France,
Germany, Japan, Korea, Mexico, Norway, Spain, and the United
Kingdom. The trademarks Excite and the “Excite” design
are registered in Argentina, Chile, Mexico and Venezuela. In
addition, the trademark iWon is registered in the European
Community and the “iWon” design is registered in
Canada, Hong Kong, Japan, Mexico and Singapore. This proxy
statement also contains trademarks and trade names of third
parties.
CAUTIONARY NOTE REGARDING
FORWARD-LOOKING STATEMENTS
In addition to historical information, this Annual Report on
Form 10-K contains forward-looking statements within the
meaning of Section 27A of the Securities Act and
Section 21E of the Exchange Act. Forward-looking statements
are those that predict or describe future events or trends and
that do not relate solely to historical matters. You can
generally identify forward-looking statements as statements
containing the words “believe,” “expect,”
“will,” “anticipate,” “intend,”
“estimate,” “project,” “assume” or
other similar expressions, although not all forward-looking
statements contain these identifying words. Our forward-looking
statements in this report include those relating to our expected
establishment of a Spanish search site and other European sites;
our planned investments in marketing and in developing new
features for our search sites, portals and Fun Web Products; our
planned research and development expenditures to improve our
Teoma algorithm and computer infrastructure; and our planned
expansion of AJinteractive’s delivery, billing and tracking
systems. All other statements in this report regarding our
future strategy, future operations, projected financial
position, estimated future revenues, projected costs, future
prospects, and results that might be obtained by pursuing
management’s current plans and objectives are also forward
looking statements. You should not place undue reliance on our
forward-looking statements because the matters they describe are
subject to known and unknown risks, uncertainties and other
unpredictable factors, many of which are beyond our control. Our
forward-looking statements are based on the information
currently available to us and speak only as of the date on which
this report was filed with the SEC. We expressly disclaim any
obligation to issue any updates or revisions to our
forward-looking statements, even if subsequent events cause our
expectations to change regarding the matters discussed. Over
time, our actual results, performance or achievements will
likely differ from the anticipated results, performance or
achievements that are expressed or implied by our
forward-looking statements, and such differences might be
significant and materially adverse to our stockholders. Many
important factors that could cause such a difference are
described in this Annual Report under the captions
“Competition,” “Intellectual Property
Rights,” “Regulation of the Internet” and
“Risk Factors,” which you should review carefully.
Please consider our forward-looking statements in light of those
risks as you read this report.
4
Ask Jeeves, Inc.
Part I
ITEM 1. BUSINESS
Overview
We provide information search and retrieval services to computer
users through a diverse portfolio of Web sites, downloadable
applications and distribution networks. On our Ask Jeeves brand
sites—Ask.com in the U.S., Ask.co.uk in the
U.K. and Ask.jp (a joint venture) in Japan—users
submit queries and our algorithmic search engine, Teoma,
responds by generating a list of Web sites likely to offer the
most authoritative content. Our proprietary Web brands also
include three content-rich portals (Excite.com, iWon.com
and MyWay.com) and several other search sites. We
earn revenue primarily by displaying paid listings and other
advertisements on our proprietary sites. We also generate
advertising revenue by distributing ads and search services
across two networks of third-party Web sites: the MaxOnline
advertising network and the Ask Jeeves syndication network. We
pay fees to these networked sites in order to reach their users
with our ads and services. Our proprietary technologies include
Teoma, natural language processing software, portal technology
and ad-serving processes.
Our strategic goal is to become a leading provider of
differentiated search solutions to users, advertisers,
publishers and partners. We are pursuing this goal using a
multiple brand strategy.
We are based in Oakland, California, with offices in several
cities throughout the United States, as well as in London,
England and Dublin, Ireland. Our Ask Jeeves Japan joint venture
is headquartered in Tokyo, Japan.
Our Business
We earn revenue primarily as users click on advertisements we
display as they navigate the Internet. We refer to users’
Internet activity as Web “traffic” and, in general,
the more Web traffic we can attract, the more advertising
revenue we will generate. As detailed on the following pages, we
attract Web traffic in two main ways:
|
|
|
| |
• |
Proprietary Traffic. First and foremost, we attract Web
traffic to our own sites. We refer to users’ activity on
our sites as “proprietary” Web traffic and the revenue
it generates as “proprietary” revenue. From an
operational perspective, we “control” our proprietary
traffic because we control some of the key variables (such as
content, services and promotion) that, in the aggregate,
determine the rate at which new users will try our sites and the
frequency with which they will return. |
| |
| |
• |
Network Traffic. Second, we pay to reach Web traffic that
third parties have attracted to their own sites and services.
For example, we have contracts in place with several website
publishers giving us the right to deliver graphic advertisements
for display on their sites to their users. After the ad is
displayed, we collect a fee from the advertiser and remit a
portion of it to the website publisher, as a traffic acquisition
cost. We have similar arrangements in place for delivery of
search results and other items. Our “network” consists
of all of the third-party websites (and other publishers) to
whom we pay traffic acquisition fees. Our gross margins from
monetizing network traffic tend to be lower than from
proprietary traffic as a result of the traffic acquisition fees
we pay to the network publishers. |
Each of these sources of revenue is discussed in greater detail,
below.
5
Ask Jeeves, Inc.
Proprietary Traffic
We seek to attract Web traffic by satisfying users’ demand
for Internet search services. Recognizing that different people
prefer to search for information in different ways, we make our
search services available from a variety of access points and
through multiple brands. Each brand delivers a differentiated
user experience in the hope that each user will judge one of our
brands to be the most intuitive and satisfying way to find
information online. We believe that the ways in which people
search, and thus the alternatives we offer, can be divided into
two main categories as follows:
|
|
|
| |
• |
Destination Search. Destination searches occur when an
Internet user navigates to a search site, such as
Ask.com, in order to submit his or her query on that
particular site. To attract destination searchers to our branded
sites we employ advertising campaigns and seek to improve the
user experience, among other strategies. |
| |
| |
• |
Convenience Search. Convenience searches, by contrast,
occur when queries are submitted using any search box that
happens to be easily available to the user. For example, when a
search topic occurs to a user who previously downloaded our
Smiley Central application (which comes with its own toolbar),
he or she might take advantage of the search box conveniently
located in that toolbar, rather than taking the time to click
over to a destination search site. Convenience searchers might
not know or care which search engine brand they are utilizing;
their choice of search provider is often determined by search
box proximity. We attract convenience searches through the
search boxes displayed on our portals, toolbars and other
downloadable applications. |
We attempt to monetize search queries by delivering a results
Web page that includes keyword-targeted advertisements (in
addition to the search engine results and other elements).
Keyword ads appear on the results page in response to certain
words in the user’s query. Advertisers select the keywords
that will cause their ads to be displayed. Most keyword ads take
the form of short textual units that include a link to the
advertiser’s Web site; we generically refer to these text
ads as “paid listings.” We sometimes also display
graphic keyword ads (which we call “Branded Response”).
Keyword ads are a popular choice among Internet advertisers, in
part because they enable advertisers to deliver their messages
at the moment viewers are most likely to be interested—when
users are actively searching for information related to the
advertiser’s product or service. Unlike traditional
non-targeted Web advertisements, which can be intrusive or
annoying, keyword ads are often useful to the user and thus can
be more effective for advertisers. Another reason that keyword
ads appeal to advertisers is that, typically, advertisers are
not charged for keyword ads unless they get results. That is,
most keyword ads are sold on a price-per-click, or PPC, basis
(also known as cost-per-click, or CPC, pricing); as a result,
the advertiser does not pay unless the ad successfully attracts
a user’s click. (Occasionally keyword ads are sold on a
cost-per-action, or CPA, basis, where the advertiser does not
pay unless the user clicks on the ad and takes a designated
action on the advertiser’s site.) Many advertisers see
pay-for-performance advertising online as a significant step
forward, compared to traditional media where advertisers are
charged regardless of an ad’s performance (and often cannot
accurately judge the ad’s effectiveness).
We identify keyword-targeted ads as “sponsored”
content on all of our results pages and display them separately
from the algorithmic search results. Although a few types of
keyword ads are sold to advertisers by our direct sales force,
we obtain almost all of our paid listings from third-party
providers. Several paid listing providers are available in the
market, including Google Inc., Yahoo! Search Marketing Solutions
(formerly known as Overture Services, Inc.) and FindWhat.
Currently, Google Inc. is our primary supplier of paid listings.
Google administers contracts with hundreds of thousands of
advertisers, who bid to have their paid listings appear on
participating search result pages
6
Ask Jeeves, Inc.
in response to keywords they select. We transmit each query to
Google (or another paid listing provider), which immediately
transmits paid listings back to us for display. This ad-serving
process occurs independently of, but concurrently with, the
search engine process that will generate Web results for the
same query. When we deliver a user’s click on a paid
listing supplied by Google, Google bills the advertiser and
shares a portion of that revenue with us. Our paid listing
supply agreement with Google is scheduled to expire on
December 31, 2007, unless renewed by mutual agreement.
Our proprietary revenues arise from the following brands, each
of which is discussed in more detail, below:
|
|
|
| |
• |
Ask Jeeves brand search sites; |
| |
| |
• |
other destination search sites (Teoma.com, Bloglines.com,
AJKids.com); |
| |
| |
• |
search toolbars (MyWebSearch and MySearch); |
| |
| |
• |
desktop applications (our Fun Web Products); and |
| |
| |
• |
our portals (iWon.com, Excite.com and MyWay.com). |
Ask Jeeves Brand Sites
Our “Ask Jeeves” brand search sites—Ask.com
in the U.S., Ask.co.uk in the U.K. and Ask.jp
(a joint venture) in Japan—utilize our proprietary
algorithmic search technology, Teoma, to generate the
Web-results list. These sites differ from other search engines
in a number of ways:
|
|
|
| |
• |
Advanced Results Ranking. All major search engines rank a
relevant page based on how many other sites link to it. Our
Teoma technology goes one step further. In the Teoma results
list, a site’s rank is based on whether other sites linking
to it are themselves respected within the pertinent
subject-matter community on the Web. For example, Teoma would
rank a baseball site higher if it receives links from other Web
sites specifically geared toward baseball fans, placing less
emphasis on links from general sports or portal sites.
Teoma’s approach is analogous to seeking the best answer by
asking experts within a specific subject community about which
site they believe is the best resource for that subject. In this
way, Teoma seeks to rank the most authoritative pages first.
(See “—Technology,” below, for a more detailed
explanation of our search algorithm.) |
| |
| |
• |
Related Topics. Teoma’s ability to perceive clusters
of related sites on the Web also enables it to present users
with a list of Related Topic suggestions. For example, if a user
searches on “Soprano,” Teoma presents Related Topic
links for “Soprano Singers” and “Soprano’s
TV Show.” Clicking any Related Topic link narrows the
results list to sites on that topic. |
| |
| |
• |
Natural Language Processing. Our natural language
processing technology enables Teoma to accept and process
queries written in natural language, as well as keyword searches. |
| |
| |
• |
Binoculars. Many of our Teoma results links are presented
with a small “binoculars” logo. Using this patent
pending site-preview tool, users can view a pop-up preview of
the underlying site to judge its usefulness, without ever
leaving our results page. (Binoculars are not available for
previewing paid listings.) |
| |
| |
• |
Smart Answers. In addition to the Teoma results,
Ask.com and Ask.co.uk also display Smart Search
results in response to many popular query topics. Our Smart
Search function delivers the information the user is seeking
right on the results page. For example, if a user enters
“Italian restaurants in Brooklyn, NY,” our Smart
Search function will display names, addresses and |
7
Ask Jeeves, Inc.
|
|
|
| |
|
telephone numbers of local Brooklyn Italian restaurants,
together with links to a street map showing each
restaurant’s location. We believe these direct answers help
people find information faster and thereby improve their search
experience. Smart Search content is currently available for
several query types, including local business listings and
reviews, stock quotes, famous people, pictures, movies, weather,
maps and driving directions, white pages listings, ZIP codes,
local times, flight delays, snow conditions at ski resorts,
definitions and wedding registries. |
| |
| |
• |
Smart Product Search. We also offer “Smart Product
Search,” which enables users to easily compare product
prices across multiple Web merchants. We generally license our
Smart Search and Smart Product Search content from third parties. |
| |
| |
• |
MyJeeves Personalization Tools. Both Ask.com and
Ask.co.uk offer a free personalization feature called
MyJeeves (or MyAskJeeves in the U.K.) which allows users to
collect, organize, search and share their own “personal
Web.” Users collect pages by clicking a button next to each
search result. Once results are saved, MyJeeves enables users to
organize them into folders, print them, share them via email,
and add notes to them. The resulting set of Web pages and notes
is searchable within MyJeeves (separately from our overall Web
index), allowing each user to create his or her own personal Web
index. Registered users can access MyJeeves from any
Internet-enabled computer and receive additional storage for
their personal Web documents. |
Other Destination Search Sites
Our other branded search sites include Teoma.com,
Bloglines.com, AJKids.com and MyWebSearch.com.
Search Toolbars
We offer several branded search toolbars, which users can
download and install in their Web browsers free of charge. These
toolbars enable users to run a search using our services from
anywhere on the Web without first clicking over to one of our
Web sites. Several of our toolbars offer additional benefits
such as pop-up blocking and quick access to personalized portal
content. Branded toolbars are available from most of our branded
sites.
Our most popular toolbars are MyWebSearch and MySearch. These
toolbars allow users to run their search using one of several
popular search algorithms—currently Ask Jeeves (Teoma),
Google or Yahoo!—or using Looksmart’s Web directory.
In each case, we control the results page and, thus, even if a
competitor’s technology is selected to provide the
algorithmic Web results, we generate revenue from the paid
listings and other advertising displays on the results page.
We recently launched a beta version of our Ask Jeeves Desktop
Search Bar, which enables users to search for emails and other
files on their own computers, as well as searching the Web.
Users can download these toolbars for free from our Web sites.
We also distribute a toolbar as part of our Fun Web Products
downloadable application, discussed below.
Desktop Applications (our Fun Web Products)
We promote our MyWebSearch toolbar by distributing it as part of
a free downloadable application that adds several
features—our Fun Web Products—to users’
computers. These features are designed to make online activities
more personal, interesting and fun for users. For example, the
features include Smiley Central (which allows users to add
humorous emoticons to emails and instant messages), Popular
Screensavers (which provides a library of rotating images and
allows users to display their own images or videos as
screensavers) and History Swatter (which allows users to easily
delete their Web
8
Ask Jeeves, Inc.
browsing histories). We make this
application available free of charge from several sites
(including FunWebProducts.com) and under several names
(including Smiley Central, Popular Screensavers and History
Swatter). We benefit from users’ subsequent use of the
search toolbar.
Portals
We operate several branded portal Web sites with search
functionality. Our portals attract users by offering a mix of
information and entertainment together with internet services
such as email, portfolio tracking, games and message boards.
Examples of our portal content include news, weather, shopping
comparisons and horoscopes. We generally license these content
feeds from third-party providers. Users of each portal can
register to receive personalized features, which tend to
increase user satisfaction and thereby increase usage of the
sites. Our proprietary portals include:
|
|
|
| |
• |
iWon. iWon.com is an entertainment portal with a
user loyalty program built around cash and other sweepstakes
prizes. The more times that registered users search through the
iWon search box (or utilize other features of the site) the more
chances they have to win the daily $10,000 prize, an annual
$1.0 million prize and less frequent larger prizes. |
| |
| |
• |
MyWay. MyWay.com is a portal that appeals to users
wanting fast and clean content delivery. It offers users a mix
of content modules and free email accounts, all built around a
prominent search box. MyWay is free from banner ads, pop-up ads,
and rich-media ads. |
| |
| |
• |
Excite. Excite.com is a content-rich portal that
seeks to attract users by aggregating news, sports, weather and
entertainment content and providing e-mail, stock portfolio
tracking and other useful services. We own the U.S. rights
to The Excite Network’s portal assets; however, we do not
own the international rights and we do not control the Excite
search results page. |
We display both content-targeted and non-targeted ads, such as
banners, towers and pop-ups, on our Excite and iWon portals.
Content-targeted ads are similar to paid listings in that they
appear in response to the user’s current interests.
However, unlike paid listings, which are produced by keywords in
the user’s search query, content-targeted ads appear on a
Web page in response to the page’s other content. For
example, next to a news story about the Wimbledon Championships,
we might display an ad for tennis rackets. With this type of ad
product, advertisers bid on topics, rather than keywords. We
generally obtain content-targeted ads from a third-party
provider, namely Google Inc. Our content-targeted ad supply
agreement with Google is scheduled to expire on August 31,
2007, unless renewed by mutual agreement.
Network Revenues
In general, the more users to whom we deliver search results
(and ads and other revenue-generating services), the more
overall revenues we will generate. Recognizing this, we approach
third-party sites (and other third parties with loyal customer
bases) offering to pay them a fee for the right to deliver our
services to their users. We sometimes refer to those third
parties as our network “partners.” The fees we pay to
our network partners are often calculated as a portion of the
revenue we earn by delivering services to their users, according
to contractual revenue-sharing formulas. We record these fees as
traffic acquisition costs (within cost of revenues). As a result
of these revenue-sharing obligations, we generally earn lower
gross margins on network revenues than on proprietary revenues.
Our network revenues arise from the following main categories:
|
|
|
| |
• |
Search Box Placement Agreements. We enter into
agreements with third-party Web site publishers and programmers
allowing or requiring them to add one of our search boxes to
their |
9
Ask Jeeves, Inc.
|
|
|
| |
|
Web sites or applications. These
boxes make a site more attractive to users, generate some
revenue for the site’s publisher and are relatively simple
for the third-party site to implement, because a user who enters
a query is taken to a results page that we serve and control.
The results page includes algorithmic results and
keyword-targeted paid listings. We generally share our resulting
ad revenue (net of amounts retained by our paid listing
provider) with the third-party site, but occasionally we pay a
flat fee to the third party.
|
| |
| |
• |
Ask Jeeves Syndication Network. Some portals, meta-search
providers and other third-party sites seek to incorporate our
search results into other content on their sites. We enter into
syndication agreements with these third-party Web site
publishers to deliver, or “syndicate,” Teoma’s
algorithmic search results (along with keyword-targeted paid
listings and, in some cases, Branded Response ads) to results
pages they control. We generally share our resulting ad revenue
(net of amounts retained by our paid listing provider) with the
third-party site. Depending upon the terms of the arrangement,
we may also charge the publisher a fee for the algorithmic
results. Members of the Ask Jeeves Syndication Network currently
include Lycos, InfoSpace, BellSouth, Mamma.com and CNET
Networks, among dozens of other sites. |
| |
| |
• |
Toolbar Distribution Arrangements. We have distribution
arrangements in place with several third-party application
providers, such as Weatherbug, to bundle our MySearch toolbar
with their popular downloadable applications. Users seeking to
download the application receive our toolbar as well. We
generally share the search revenue generated by toolbar usage
(net of amounts retained by our paid listing provider) with the
third-party application provider. |
| |
| |
• |
Co-Branded Portals. We operate a customized portal for
Dell, Inc. at Dell.MyWay.com using the content modules
and technology we developed for our own sites. We share the ad
revenues generated by the portal with Dell, including results
page ad revenues generated by searches originating from the
co-branded portal. |
| |
| |
• |
MaxOnline Advertising Network and AJinteractive Services.
Our Internet advertising division, AJinteractive, offers
advertisers the ability to run their ads across the third-party
Web sites in our MaxOnline advertising network, among other
services. This advertising inventory is primarily graphical,
including banners, towers, rich media, pop-ups, pop-unders and
other formats. The sites in MaxOnline’s network are
classified into 10 subject-groupings, called
“channels”—such as automotive, business and
lifestyle—and advertisers select one or more channels on
which to run their ads (or they may designate specific networked
sites on which their ads will appear). We bill the advertisers,
take the collection risk, and pay a traffic acquisition fee to
the third-party sites. AJinteractive also offers lead generation
services, email promotions and other specialized services, all
of which we classify as network activity (except when provided
through our proprietary sites). |
Sales and Marketing
We actively market our key brands and services to users,
advertisers and potential partners, as follows:
|
|
|
| |
• |
Ask Jeeves Brand Search Sites. During 2004, we marketed
our flagship sites in the U.S. and the U.K. by emphasizing
users’ ability to search with keywords or questions and by
promoting Ask Jeeves as a good choice for everyday search engine
needs. We spread these messages through online, print,
out-of-home and television campaigns (with television limited to
the U.K. in 2004) as well as through targeted marketing such as
a Macy’s Thanksgiving Day Parade balloon and strategic
public relations. These tactics, combined with positive word of
mouth, encouraged new users to |
10
Ask Jeeves, Inc.
|
|
|
| |
|
try our Ask Jeeves search sites. We plan to increase our
marketing investment in 2005, including limited
U.S. television campaigns starting in the first quarter. |
| |
| |
• |
iWon Portal and Fun Web Products. We promote our iWon
entertainment portal and our Fun Web Products through
more-or-less continuous online and email marketing campaigns
through various media outlets. Interested users click on the ads
and arrive at a registration page, in the case of iWon, or a
download page, in the case of our Fun Web Products. |
| |
| |
• |
Online Advertising Opportunities—AJinteractive. Our
Internet advertising division, AJinteractive, offers a mix of
online advertising products and related services to advertisers
through our direct sales force. For example, AJinteractive is
the exclusive provider of two types of keyword-targeted ads on
our search results pages—graphic units called Branded
Response and text units called Premier Listings. These ads
generally appear above the paid listings sourced from our
third-party providers. Similarly, AJinteractive’s sales
force markets advertising opportunities on our portals and
across the MaxOnline network. They also offer lead generation
services, sweepstakes, email list management and other
specialized promotions and services. |
| |
| |
• |
Syndicated Search and Co-Branding Opportunities. Our
business development staff markets our specialized syndication
services and portal co-branding opportunities directly to
potential network partners. |
International
Operations
Currently, we conduct international operations in Europe and
Asia.
Europe
We have been operating a search site, Ask.co.uk, in the
United Kingdom for five years, initially through The Ask Jeeves
U.K. Partnership, which was a joint venture. We acquired full
ownership of the venture in February 2002.
In 2003, we established Ask Jeeves Europe, Ltd., with offices in
Dublin, Ireland to host and operate Ask.co.uk. As
operator of the site, Ask Jeeves Europe currently provides
Internet search services to our users within the United Kingdom
and Ireland. Another U.K. subsidiary with offices in London, Ask
Jeeves Internet, Ltd., serves as the sales and marketing arm of
Ask Jeeves Europe.
In the first half of 2005 we plan to launch an Ask Jeeves brand
search site in Spain through a newly created Spanish subsidiary,
with additional European sites to follow later in the year.
Asia
Ask Jeeves Japan is a joint venture between us and Trans Cosmos
Inc. USA, which is a subsidiary of a Japanese customer service
and information technology support provider. The joint venture
was established in August 2000 to market our products and
services in Japan and launched Ask.jp, a Japanese
language search engine utilizing our Teoma search technology, in
late 2004. As of December 31, 2004, we own approximately
47 percent of the voting securities of this joint venture.
Accordingly, we do not include the results of Ask Jeeves Japan
in our consolidated financial statements but instead record our
interest therein on our balance sheet as an equity investment
and on our statement of operations as income (loss) from joint
ventures. We have granted to the joint venture an exclusive
license to our current and future products and services in Japan
and for the Japanese-speaking market. Under this grant, we
received a non-recurring license payment in the third quarter of
2000.
11
Ask Jeeves, Inc.
Technology
Use of Algorithmic Search Engines
Algorithmic Internet search engines are sophisticated software
programs that enable computer users to locate information on the
Internet quickly and easily. In very general terms, they utilize
a two-step process. First, the search engine (or a related
program called a “spider”) crawls across the Web,
methodically following every link and indexing the content of
every page. When a user submits a search query, the engine looks
up the query topic in its index and returns a list of relevant
Web pages to the user. We believe that over the past few years
an increasing number of Internet users have adopted algorithmic
search engines as a primary method of navigating the Web.
Typically, each commercial search engine maintains a
publicly-accessible home page on the Web. Users navigate to that
page and submit a query by typing it into a data-entry field, or
“search box.” The query is received through the
Internet and processed by the search engine’s servers.
Within seconds a results page is displayed on the user’s
Web browser with convenient hypertext links to relevant sites.
Typically, each link is accompanied by a snippet of text from
the indexed site and the user selects the most appealing link by
clicking on it.
Importantly, each search engine ranks the results according to
its own criteria, attempting to list the most relevant sites
first. We believe that one important determinant of users’
overall satisfaction with a search engine is whether or not it
consistently returns the most relevant link among the top Web
results.
Although ranking methods differ greatly between search engines,
in one procedural respect they are very similar: they determine
a site’s rank, in large part, by analyzing the links it
receives from other sites in the index (they implicitly assume
that a site will be relevant to the user if other sites are
linking to it). Some of our competitors conclude that the more
links a site receives, the higher it should rank, which is in
essence a popularity test. In contrast, as described below, our
Teoma algorithm places more emphasis on where those links come
from and less emphasis on the overall number of incoming links.
Our Teoma Search Technology
Our Teoma algorithm is designed to return search results with
the most authoritative sites listed first. By contrast, as
mentioned above, many other Internet search algorithms present
the most popular sites first, based on how many links they
receive from other sites, without investigating the source of
those links. Teoma’s approach—known as Expert Rank/
Subject Specific Popularity—evaluates a site’s
relevance based on how many links it receives from other sites
on the same topic. For example, in response to a search
for “Brad Pitt,” Teoma would rank the relevant sites
in its index based on how many links they receive from other Web
sites specifically featuring the actor, placing less emphasis on
links from general film sites and Web directories.
In order to calculate a site’s Expert Rank, Teoma first
categorizes the Web into naturally occurring
“communities,” or groups of sites that relate to the
same topic. Every site in a community may be relevant to the
query topic, but only some are authoritative. Next, Teoma
determines which of those relevant pages are likely to be the
most authoritative on the user’s search topic by analyzing
the relationships between sites within the community. Teoma
ranks each site according to the number of same-community pages
that reference it, among hundreds of other criteria. Finally,
Teoma returns a results list with the most authoritative sites
ranked first. Teoma’s Expert Rank approach is analogous to
asking experts on a certain topic about which site they believe
is the best resource for that topic. To
12
Ask Jeeves, Inc.
our knowledge, Teoma is the only search technology that seeks to
estimate a Web site’s level of authority, rather than its
popularity, when ranking search results.
Teoma’s ability to perceive clusters of related sites on
the Web also enables it to present users with a list of
“Related Topic” suggestions (which appear to the right
of the results list on Ask.com). For example, if a user
searches on “Disney,” Teoma presents Related Topic
links for “Disney Cartoons” (classic animated images)
as well as “Disney Channel” (a cable TV offering) and
“Disney World” (a theme park), among other topics.
Clicking any Related Topic link narrows the results list to
sites on that topic.
Teoma powers the search results on Ask.com, Ask.co.uk, Ask.jp
and Teoma.com. We also syndicate Teoma results (and
Related Topics) to sites in our syndication network.
Other Proprietary Technologies
Our other proprietary technologies include:
|
|
|
| |
• |
Natural Language Processing. Using Natural Language
Processing, we are able to better understand the context of what
our users are asking and return more relevant search results,
smart answers and related topic suggestions. |
| |
| |
• |
Ad Serving Technology. Our AdVision ad server is designed
to serve static and rich-media advertising across our
proprietary and network Web sites. A custom templating system
allows for integration with the various publishing and
advertising technologies in use by our network partners and
customers. We expect this flexibility will enable us to provide
quick turnaround and efficient campaign fulfillment even as the
internet advertising marketplace continues to evolve. |
| |
| |
• |
Portal Technology. Our portal technologies deliver
dynamic (changing from time to time), personalized content to a
broad user audience. The technologies are designed to offer
users a rich content set in numerous categories including:
weather forecasts, television listings, movie show times,
financial information, news from various providers and
interactive games. A proprietary personalization server stores
user settings to provide a custom experience throughout the
portals. Our portals support both registered and unregistered
users. The technology also supports communication tools like
email, calendar and notepad. Our iWon.com portal is also
designed to record usage points, where each click rewards the
user with a configurable amount of entries into a
daily/weekly/monthly/annual sweepstakes. Our Excite.com
server architecture supports personalized home pages and
offers users a robust email platform including premium services
for the upgraded larger web storage. Myway.com is built
on a customizable platform that will support additional
co-branded portals with the same look and feel, as well as
expected amounts of customization to fit the needs of individual
co-branding partners. |
We obtain new technologies through both acquisitions and
internal development. In our recent acquisition of Trustic
(Bloglines), for example, we obtained software for searching,
organizing and displaying content received through the
increasingly popular RSS (really simple syndication) protocol.
Similarly, in our 2004 acquisition of Tukaroo we obtained
software for searching emails and desktop files. We developed
the MyJeeves personalization platform in house. We also utilize
internally developed systems for tracking Website usage and
search engine performance, for accepting, routing and billing
online advertising, and for several administrative functions.
13
Ask Jeeves, Inc.
Scalability and
Operations
Our Teoma search technology runs on large clusters of
Intel-based server systems running the Linux operating system.
The hardware environment is scalable and, in our view, cost
effective. It has been optimized to provide fast, real-time
performance. The system is highly automated, secure and
replicated to provide redundancy and failover capabilities at
what we believe is a sufficient level.
Our natural-language processing engine runs on clusters of
Intel-based server systems running Microsoft Windows 2003. The
Ask Jeeves knowledge bases are deployed on these servers as
read-only, memory mapped files. The Question Processing Engine,
or QPE, is written in the C++ computer language and is optimized
to handle high traffic volumes. To scale our service as traffic
increases, we install our QPE and knowledge base on additional
servers.
Our Popularity technology distribution and processing servers
are clusters of Intel-based server systems running the Linux
operating system and Apache Web Server Software. The software is
written as C++ FastCGI modules for scalability and real-time
performance. To scale as user traffic or data sources increase,
we install additional distribution and processing servers, as
needed.
Our Portal technology runs on clusters of Intel-based server
systems running the Linux operating system using Apache Web
Server Software and Java. The sites have been set up such that
each portal feature has its own independent cluster, which makes
each group both scalable and more manageable. The backend
database applications for content, user registration and
personalization run on SPARC server systems using the Solaris
operating system. These environments are made up of Oracle, BDE,
and MySql databases. All servers are built with a failover
contingency at the operating system and application level to
allow for uninterrupted user experience in the event of many
types of environmental or application issues.
Our Ad-Serving technology runs on clusters of Intel-based server
systems running the Linux operating system using Apache Web
Server software. The software is built on C and C++ modules that
we expect will provide optimal performance, scalability and
customization as well as PERL scripts for the user interface and
cluster management. The backend databases run on SPARC server
systems on the Solaris operating system. All database servers
are clustered, so that in the event that the primary server
fails, all data can be switched over to the backup server to
maintain high availability.
The data centers hosting our proprietary Web sites are located
at MCI in Massachusetts and New Jersey, MFN/ AboveNet in
California and England, Qwest in New Jersey, Esat
Telecommunications in Ireland and Equinox in Japan. The data
centers provide distinct networks across many major Internet
backbone providers, as well as continuous monitoring and
security. They also provide continuous N+1 power generation, UPS
and HVAC. We maintain server over-capacity at each location such
that if one hosting facility fails, another can service our user
traffic.
Competition
Our ability to compete depends on numerous factors, many of
which are outside our control. Some 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 to the development and promotion of their services
than we can to ours. Our competitors may develop products and
services that are equal or superior to ours or that achieve
greater market acceptance. Many of our competitors offer a wider
range of services than we do, which could attract our customers
to competitive search sites, and consequently, result in less
traffic to our Web sites and fewer monetized queries.
14
Ask Jeeves, Inc.
In our efforts to attract search engine users, to syndicate
search technologies, and to attract network partners and
advertisers we compete against operators of destination search
sites and search-centric portals, search technology providers
and online advertising networks such as:
|
|
|
| |
• |
Google Inc.; |
| |
| |
• |
Microsoft Corp. (operator of The Microsoft Network
(MSN) portal and provider of MSN Search); |
| |
| |
• |
Time Warner Inc. (operator of the America Online
(AOL) portal and parent company of Advertising.com); |
| |
| |
• |
Yahoo! Inc. (operator of the Yahoo! portal and parent company of
Yahoo! Search Marketing Solutions (formerly known as Overture
Services, Inc.)); and |
| |
| |
• |
other smaller companies. |
Our financial success depends upon our ability to attract Web
traffic to our Web properties and to monetize that traffic. We
believe that our ability to compete effectively with other
search engines and portals for Web traffic depends on:
|
|
|
| |
• |
the relevance and authority of our search results; |
| |
| |
• |
the ease of use of our search services, the quality of our
content, and the utility of our other online features; |
| |
| |
• |
the utility of new features we introduce on our sites, such as
Smart Answers, Binoculars and MyJeeves (and the frequency with
which users utilize them); and |
| |
| |
• |
the speed with which we match others’ innovations. |
We believe our proprietary Web sites compete favorably with
respect to each of these factors. However, our competitors may
engage in more extensive research and development efforts, adopt
more aggressive pricing policies and make more attractive offers
to existing and potential employees, advertisers and electronic
commerce partners. 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.
See “Risk Factors” for further discussion of some of
the risks we face related to competition.
Intellectual Property
Rights
We seek to protect our intellectual property rights, but we face
the risk that our actions might be inadequate to protect our
patents, copyrights, trademarks or other proprietary rights. We
rely upon trademark, patent and copyright law, trade secret
protection and confidentiality or license agreements with our
employees, customers, partners and others to help protect our
proprietary rights.
We have been granted nine United States patents and have
twenty-two patent applications pending with the United States
Patent and Trademark Office for various aspects of our
natural-language search, database search and Web-wide search
technologies, which power our proprietary Web sites. We
generally seek to apply for patents or for other appropriate
statutory protection when we develop valuable new or improved
technology. The status of any patent involves complex legal and
factual questions, and the breadth of claims allowed is
uncertain. Accordingly, we cannot be certain that any patent
application filed by us will result in a patent being issued, or
that our patents, and any patents
15
Ask Jeeves, Inc.
that may be issued in the future, will afford adequate
protection against competitors with similar technology. We
similarly face the risk that any patents issued to us might be
infringed or designed around by others.
We have entered into an agreement with The Wodehouse No. 3
Trust concerning our use of the Jeeves name and butler logo. The
Wodehouse No. 3 Trust is successor in interest to the late
author, P.G. Wodehouse, who published a number of works
that included a butler character named “Jeeves.” Under
the agreement we make quarterly payments to The Wodehouse
No. 3 Trust. By its terms, the agreement is perpetual
unless terminated by us on 30 days notice. Upon any
termination we would retain only such rights to use the Jeeves
name as are provided by applicable trademark and unfair
competition law, which may be limited. Our right to continue to
use the butler logo would not be restricted by any termination.
We have been issued registered trademarks in the
U.S. covering certain goods or services associated with:
|
|
|
| |
• |
“Ask Jeeves”; |
| |
| |
• |
the “Ask!” button design; |
| |
| |
• |
“Ask.com”; |
| |
| |
• |
“Excite”; |
| |
| |
• |
the “Excite” design; |
| |
| |
• |
iWon; |
| |
| |
• |
the iWon design; |
| |
| |
• |
the “Jeeves” design, a stylized depiction of our
butler logo; |
| |
| |
• |
“Maxonline” |
| |
| |
• |
“MySearch” |
| |
| |
• |
“Teoma”; |
| |
| |
• |
“Teoma” design; and |
| |
| |
• |
“Search with Authority,” a phrase we use on the
Teoma.com Web site. |
In addition, the trademarks “Ask Jeeves” and the
“Jeeves” design are registered in Australia, Canada,
China, the European Community, France, Germany, Japan, Korea,
Mexico, Norway, Spain and the United Kingdom. The trademarks
Excite and the “Excite” design are registered in
Argentina, Chile, Mexico and Venezuela. In addition, the
trademark iWon is registered in the European Community and the
“iWon” design is registered in Canada, Hong Kong,
Japan, Mexico and Singapore. We do not know whether we will be
able to defend our proprietary rights because 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,” “Ask.com,”
“Excite,” “iWon” and “Teoma,” 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.
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
16
Ask Jeeves, Inc.
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.
Regulation of the
Internet
The legal environment of the Internet is evolving rapidly in the
United States and elsewhere. The manner in which existing laws
and regulations will be applied to the Internet in general, and
how they will relate to Ask Jeeves’ business in particular,
is unclear in many cases. For example, we often cannot be
certain how existing laws on the following topics will apply in
the online context: privacy, defamation, pricing, advertising,
taxation, gambling, sweepstakes, promotions, content regulation,
quality of products and services, and intellectual property
ownership and infringement.
Several laws have already been adopted at the national level in
the U.S. and the U.K. and by U.S. states in which we
operate that could have an impact on our business. These laws
include the following:
|
|
|
| |
• |
The CAN-SPAM Act of 2003 and similar laws adopted by a number of
states are intended to regulate unsolicited commercial
electronic mail, create criminal penalties for unmarked
sexually-oriented material and emails containing fraudulent
headers, and control other abusive online marketing practices. |
| |
| |
• |
The USA Patriot Act is intended to give the government greater
ability to conduct surveillance on the Internet by allowing it
to intercept communications regarding terrorism and computer
fraud and abuse. |
| |
| |
• |
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 Privacy Protection Act and the
Prosecutorial Remedies and Other Tools to End Exploitation of
Children Today Act of 2003 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. |
| |
| |
• |
Under the U.K. Data Protection Act and the implementation
legislation of the European Union Data Protection Directive in
other jurisdictions, a failure to ensure that all processing of
personal information is justified and accurate or a transfer of
personal information to a country without adequate privacy
protections could result in criminal or civil penalties. Such
legislation may impose significant additional costs on our
business or subject us to additional liabilities. |
| |
| |
• |
The European Union Directive on privacy and electronic
communications of 2002 bans all electronic messages for direct
marketing without prior opt-in consent from the addressee, and
opt-out consent suffices only where certain exceptions are met.
Failure to comply may result in substantial liability. |
| |
| |
• |
The State of California has adopted statutes that require online
services to report certain breaches of the security of personal
data, and to report to California consumers when their personal
data might be disclosed to direct marketers. |
17
Ask Jeeves, Inc.
To resolve some of the remaining legal uncertainty, we expect
new laws and regulations to be adopted over time that will that
will be directly applicable to the Internet and to our
activities. Any existing or new legislation applicable to Ask
Jeeves could expose us to substantial liability, including
significant expenses necessary to comply with such laws and
regulations, and could dampen the growth in use of the Internet
in general.
On our Web sites, we post our privacy policies and practices
concerning the use and disclosure of user data. Any failure by
us to comply with our posted privacy policies, Federal Trade
Commission requirements or other domestic or international
privacy-related laws and regulations could result in proceedings
by governmental or regulatory bodies that could potentially harm
our business, results of operations and financial condition. In
this regard, there are a large number of legislative proposals
before the European Union, as well as before the United States
Congress and various state legislative bodies regarding privacy
issues related to our business. It is not possible to predict
whether or when such legislation may be adopted, and certain
proposals, if adopted, could harm our business through a
decrease in user registrations and revenues. These decreases
could be caused by, among other possible provisions, the
required use of disclaimers or other requirements before users
can utilize our services.
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 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 harm our business, operating results
and financial condition. We may be subject to legal liability
for our online services. We direct users to 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, sweepstakes 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 may be threatened against us for aiding and abetting,
defamation, negligence, copyright or trademark infringement, or
other theories based on the nature and content of information to
which we provide links or that may be posted online.
Employees
Our future success is substantially dependent on the performance
of our senior management and key technical personnel, and our
continuing ability to attract and retain highly qualified
technical and managerial personnel. As of December 31,
2004, we had 505 employees. No employees are represented under
collective bargaining agreements. We consider our relations with
our employees to be good.
See “Risk Factors” for a further discussion of some of
the risks we face related to our employees.
Web Site Access to Our Periodic
SEC Reports
Our primary Internet address is www.ask.com. Corporate
information can be located by clicking on the “about”
link in the lower left-hand corner. None of the information on
any of our Web sites is part of this report. We make our
periodic SEC Reports (Forms 10-Q and Forms 10-K) and
current reports (Form 8-K) available free of charge through
our Web site as soon as reasonably practicable after they are
filed electronically with the SEC. We may from time to time
provide important disclosures to investors by posting them in
the investor relations section of our Web site, as allowed by
SEC rules. These disclosures may include amendments to and
waivers of our Code of Ethics, which appears as an exhibit to
this Annual Report.
18
Ask Jeeves, Inc.
Materials we file with the SEC may be read and copied at the
SEC’s Public Reference Room at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Information on the operation of the
Public Reference Room may be obtained by calling the SEC at
1-800-SEC-0330. The SEC also maintains an Internet Web site at
www.sec.gov that contains reports, proxy and information
statements, and other information regarding our company that we
file electronically with the SEC.
Corporate Information
We were incorporated in 1996 in California and reincorporated in
Delaware in 1999. Our principal executive offices are located at
555 12th Street, Suite 500, Oakland, California 94607 and
our telephone number at that address is (510) 985-7400. We
have other offices in several U.S. cities, as well as in
London, England and Dublin, Ireland. Our Ask Jeeves Japan joint
venture has offices in Tokyo, Japan. Our corporate Web site is
located at http://www.Ask.com. None of the information on
any of our Web sites is part of this report.
We created AJinteractive in the third quarter of 2004 by
combining the sales forces and ad products of Ask Jeeves, The
Excite Network and MaxOnline. MaxOnline LLC was formed when L90,
Inc. (a public company) merged with DoubleClick Media, Inc. (a
subsidiary of DoubleClick) in 2002 to form MaxWorldwide (a
public company). In mid-2003, the assets of MaxWorldwide’s
Internet marketing division were contributed to a newly-formed
entity, MaxOnline LLC, which was acquired by Focus Interactive,
Inc. (a private company also known as The Excite Network, Inc.).
Focus Interactive had purchased domestic rights to certain
Excite assets from the Excite@Home bankruptcy estate. MaxOnline
and The Excite Network became wholly-owned, indirect
subsidiaries of Ask Jeeves when we acquired Focus
Interactive’s parent company, Interactive Search Holdings,
Inc. in mid-2004.
ITEM 2. PROPERTIES
Our corporate headquarters are located in downtown Oakland,
California, where we have an eight-year lease for
55,803 rentable square feet on two floors near the City
Center complex at 555 Twelfth Street.
We also lease facilities for sales, research and development and
other support functions in offices in several cities throughout
the United States, as well as in London, England and Dublin,
Ireland. See Note 6 of the notes to our consolidated
financial statements for information regarding our lease
obligations.
We believe that our facilities will be adequate to meet our
needs for at least the next 12 months.
ITEM 3. LEGAL
PROCEEDINGS
From time to time, we are subject to legal proceedings and
claims in the ordinary course of business, including claims of
alleged infringement of patents, trademarks, copyrights and
other intellectual property rights, and a variety of claims
arising in connection with our services, such as claims alleging
defamation or invasion of privacy.
For a description of our material legal proceedings, please
refer to Note 14 (Commitments and Contingencies) and
Note 19 (Subsequent Events) of our Consolidated Financial
Statements, included elsewhere in this annual report.
ITEM 4. SUBMISSION OF
MATTERS TO A VOTE OF SECURITYHOLDERS
No matters were submitted to a vote of security holders during
the fourth quarter of 2004.
19
Ask Jeeves, Inc.
Part II
|
|
| ITEM 5. |
MARKET FOR REGISTRANT’S
COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER REPURCHASES OF EQUITY SECURITIES |
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 intra-day sale prices for
our common stock as reported on the Nasdaq National Market:
| |
|
|
|
|
|
|
|
|
| | |
| |
|
High | |
|
Low | |
|
2003
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$ |
7.48 |
|
|
$ |
2.42 |
|
|
Second Quarter
|
|
|
14.80 |
|
|
|
6.83 |
|
|
Third Quarter
|
|
|
22.75 |
|
|
|
12.81 |
|
|
Fourth Quarter
|
|
|
22.18 |
|
|
|
15.91 |
|
|
2004
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$ |
36.86 |
|
|
$ |
18.37 |
|
|
Second Quarter
|
|
|
44.66 |
|
|
|
32.70 |
|
|
Third Quarter
|
|
|
38.50 |
|
|
|
22.74 |
|
|
Fourth Quarter
|
|
|
39.00 |
|
|
|
21.52 |
|
|
2005
|
|
|
|
|
|
|
|
|
|
First Quarter (through March 14, 2005)
|
|
$ |
30.88 |
|
|
$ |
21.20 |
|
| |
At the close of business on March 14, 2005, the number of
stockholders of record of our common stock was 760.
Recent Sales of Unregistered
Securities
On May 6, 2004, in exchange for all of the issued and
outstanding capital stock of Interactive Search Holdings, Inc.,
or ISH, we paid approximately $144.0 million in cash and
issued 9,093,590 shares of Ask Jeeves, Inc. common stock to
the prior stockholders of ISH (of which, 157,640 were restricted
shares subject to vesting under the terms of ISH’s stock
option plans) and we assumed stock options to purchase up to
206,238 shares of Ask Jeeves, Inc. common stock. Those
options had originally been granted by ISH to its employees. The
weighted average exercise price of the replacement options, all
of which are subject to vesting conditions, was $8.752 per
share. The total purchase cost of ISH was approximately
$395.1 million. We issued the common stock (including the
restricted stock) and the replacement options under the
exemption from registration provided by Section 3(a)(10) of
the Securities Act in reliance upon a securities issuance permit
granted to us pursuant to Section 25142 of the California
Corporations Code by the Department of Corporations of the State
of California. The Department issued the permit following a
hearing that considered the fairness of the terms and conditions
of the issuance and exchange and at which all persons to whom we
proposed to issue such securities had the right to appear. We
subsequently filed a Registration Statement on Form S-8 to
register the issuance of shares of Ask Jeeves common stock upon
exercise of the replacement stock options from time to time.
Dividend Policy
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.
20
Ask Jeeves, Inc.
|
|
| ITEM 6. |
SELECTED CONSOLIDATED FINANCIAL
DATA |
The consolidated selected financial data set forth below
presents the financial results of Ask Jeeves, Inc. and our
consolidated subsidiaries and should be read in conjunction with
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” and our Consolidated
Financial Statements and the related notes included elsewhere in
this annual report. The consolidated statements of operations
data set forth below for the years ended December 31, 2004,
2003 and 2002 and the consolidated balance sheets data set forth
below as of December 31, 2004 and 2003, are derived from
and qualified by reference to our audited financial statements
included elsewhere in this annual report. The consolidated
operating information set forth below for the years ended
December 31, 2001 and 2000 and the consolidated balance
sheets data as of December 31, 2002, 2001 and 2000 are
derived from and qualified by reference to our audited financial
statements, which are not included or incorporated by reference
in this annual report. Our historical results are not
necessarily indicative of results for any future period.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| (in thousands, except per share information) |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
2000 | |
| | |
|
Consolidated Statements of
Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
261,327 |
|
|
$ |
107,292 |
|
|
$ |
65,048 |
|
|
$ |
51,569 |
|
|
$ |
71,799 |
|
|
Income (loss) from continuing operations
|
|
|
52,445 |
|
|
|
24,785 |
|
|
|
(10,856 |
) |
|
|
(409,764 |
) |
|
|
(166,462 |
) |
|
Earnings per Share—Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$ |
0.97 |
|
|
$ |
0.56 |
|
|
$ |
(0.27 |
) |
|
$ |
(11.06 |
) |
|
$ |
(4.84 |
) |
|
Earnings per Share—Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$ |
0.80 |
|
|
$ |
0.45 |
|
|
$ |
(0.27 |
) |
|
$ |
(11.06 |
) |
|
$ |
(4.84 |
) |
| |
|
Revenues from related parties
|
|
$ |
2,740 |
|
|
$ |
4,525 |
|
|
$ |
6,189 |
|
|
$ |
18,991 |
|
|
$ |
12,308 |
|
| |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| (in thousands) |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
2000 | |
| | |
|
Consolidated Balance Sheet
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and marketable securities
|
|
$ |
109,702 |
|
|
$ |
180,648 |
|
|
$ |
33,440 |
|
|
$ |
51,796 |
|
|
$ |
87,836 |
|
|
Restricted cash and marketable securities
|
|
$ |
580 |
|
|
$ |
104 |
|
|
$ |
11,065 |
|
|
$ |
24,806 |
|
|
$ |
17,130 |
|
|
Total assets
|
|
$ |
544,409 |
|
|
$ |
212,255 |
|
|
$ |
72,176 |
|
|
$ |
111,338 |
|
|
$ |
537,867 |
|
|
Long-term obligations
|
|
$ |
115,460 |
|
|
$ |
115,000 |
|
|
$ |
— |
|
|
$ |
573 |
|
|
$ |
1,465 |
|
|
Total liabilities
|
|
$ |
166,273 |
|
|
$ |
139,047 |
|
|
$ |
42,899 |
|
|
$ |
64,124 |
|
|
$ |
72,099 |
|
|
Total stockholders’ equity
|
|
$ |
378,136 |
|
|
$ |
73,208 |
|
|
$ |
29,277 |
|
|
$ |
47,214 |
|
|
$ |
465,768 |
|
| |
|
|
| ITEM 7. |
MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS |
The following discussion should be read in conjunction with
our financial statements and the related notes contained
elsewhere in this Annual Report on Form 10-K. All
statements in the following discussion which are not reports of
historical information or descriptions of current accounting
policy are forward-looking statements. Please consider our
forward-looking statements in light of the risks referred to in
this report’s introductory cautionary note.
BUSINESS OVERVIEW
We provide information search and retrieval services to computer
users free of charge through a diverse portfolio of Web sites,
downloadable applications and distribution networks. On our Ask
Jeeves brand sites—Ask.com in the U.S., Ask.co.uk
in the U.K. and Ask.jp (a joint venture) in
Japan—users submit
21
Ask Jeeves, Inc.
queries and our algorithmic search
engine, Teoma, responds by generating a list of Web sites likely
to offer the most authoritative content. Our proprietary Web
brands also include three content-rich portals (Excite.com,
iWon.com and MyWay.com) and several other search
sites. We earn revenue primarily by displaying paid listings and
other advertisements on our proprietary sites. We also generate
advertising receipts by distributing ads and search services
across two networks of third-party Web sites: the MaxOnline
advertising network and the Ask Jeeves syndication network.
These network sites share their Web traffic with us and, in
exchange, we share a portion of our related advertising receipts
with them. Our proprietary technologies include Teoma, natural
language processing software, portal technology and ad-serving
processes.
Our strategic goal is to become a leading provider of
differentiated search solutions to users, advertisers,
publishers and partners. We are pursuing this goal using a
multiple brand strategy.
Recent Events
Notable events since the filing of our last quarterly report
regarding the quarter ended September 30, 2004, include the
following:
|
|
|
| |
• |
Lycos joins the Ask Jeeves Syndication Network. On
March 2, 2005 we announced that Lycos has selected our
algorithmic search technology to provide search services on
Lycos.com. |
| |
| |
• |
Bloglines Acquisition. On February 8, 2005, we
announced our acquisition of all of the outstanding capital
stock of Trustic, Inc., the company that owns and operates
Bloglines at www.bloglines.com. Bloglines is a free
online service for searching, subscribing, publishing and
sharing RSS (Really Simple Syndication) feeds, Web logs (known
as “blogs”) and rich Web content. We expect that
Bloglines will continue to operate as an independent brand in
the Ask Jeeves portfolio. Bloglines indexes millions of live Web
content elements—news feed and blog articles, images, audio
and video—and is available in English, Chinese, French,
German, Japanese, Portuguese and Spanish. |
| |
| |
• |
Desktop Search Toolbar Beta Launch. On December 15,
2004, we released a beta desktop search toolbar application.
This tool enables users to search the word-processing documents,
presentations, spreadsheets, photos, music and video files,
applications and email messages on their computers. It also
allows users to search the Web. Unlike the desktop search
products of some of our competitors, our toolbar is accessible
offline, allows users to preview many popular file types from
the results list, and integrates into every Windows file open
box. This accessibility allows users to utilize our search
technology to find the file they need to attach to an email or
to insert into a document. The product is available for free on
Ask.com. |
Key Priorities for
2005
With our family of differentiated brands, we believe we offer
clear value propositions to users, advertisers and publishers.
By improving our offerings to all three groups in 2005, we will
seek to increase our share of the market for internet
advertising. With that as our strategic focus, our key
priorities for 2005 are:
|
|
|
| |
• |
Growing our Reach & Frequency. The first
initiative is to increase our sites’ reach and frequency
(that is, to attract more users to our sites and applications,
and to persuade them to use our services more often). To improve
our reach, we plan to increase the visibility of our products by
increasing our marketing efforts. Most of the incremental
marketing will promote our Ask Jeeves brand sites and, in the
first quarter, will include print ads and television spots in
the U.S. These ads will be designed to broaden our appeal
as the most authoritative place to |
22
Ask Jeeves, Inc.
|
|
|
| |
|
search. To improve our frequency, we plan to add innovative and
differentiated features to our search sites, as well as
introducing improvements to some of our existing features (as we
did in 2004 for related search and news search). We will also
invest in our portals, because increased portal usage should
lead to increased convenience search queries. Similarly, we will
launch new Fun Web Products over the next several months (such
as My Fun Cards, which we launched at www.MyFunCards.com
around Valentines Day 2005) to grow our installed toolbar base,
which should also lead to increased convenience search queries. |
| |
| |
• |
Investing in our Teoma Technology. The second initiative
is continued investment in our core search technology, Teoma. We
believe that Teoma’s ability to rank search results
according to their relevance is as good as, if not better than,
the other search technologies currently in the market.
Specifically, we believe that Teoma is more likely than other
search engines to include the most authoritative sites at the
top of the results list; and we plan to improve Teoma so as to
sharpen this differentiation. In order to support further
international expansion, we plan to upgrade our foreign language
indices. We plan to enlarge our research & development
teams and invest in our computer infrastructure so as to pursue
these technology goals. |
| |
| |
• |
Building AJinteractive’s Systems. The third
initiative is to improve AJinteractive’s systems and
product offerings in order to expand our relationships with
advertisers. Currently, AJinteractive sells to approximately
1,400 advertisers. We plan to put new and improved delivery,
billing and tracking systems in place to improve the services we
offer our current advertisers. Once that foundation is in place,
we expect to be better positioned to market AJinteractive to a
wider class of advertisers. |
| |
| |
• |
International Expansion. The final initiative is to
expand internationally. We plan to launch search sites in
several European markets, with a Spanish site launching first.
We intend to promote these sites through public relations, word
of mouth, downloadable applications and strategic partnerships
in the target markets. |
CRITICAL ACCOUNTING
POLICIES
The preparation of financial statements and related disclosures
in conformity with accounting principles generally accepted in
the United States (known as GAAP) requires us to make certain
estimates, judgments and assumptions that affect the amounts
reported in the Consolidated Financial Statements and
accompanying notes. We believe that the estimates, judgments and
assumptions upon which we rely are reasonable based upon
information available to us at the time that these estimates,
judgments and assumptions were made. These estimates, judgments
and assumptions can affect the reported amounts of assets and
liabilities as of the date of the financial statements, as well
as the reported amounts of revenues and expenses during the
periods presented. To the extent there are material differences
between these estimates, judgments or assumptions and actual
results, our financial statements will be affected. Our
accounting policies and estimates that we believe are the most
critical to a full understanding and evaluation of our reported
financial results include those relating to:
|
|
|
| |
• |
revenue recognition; |
| |
| |
• |
allowances for doubtful accounts; |
| |
| |
• |
legal contingencies; |
| |
| |
• |
income taxes; and |
| |
| |
• |
impairment of long-lived assets. |
23
Ask Jeeves, Inc.
Each of these critical accounting policies is described in more
detail below. Our management has reviewed these critical
accounting policies and related disclosures with our Audit
Committee. See the Notes to our Consolidated Financial
Statements, which contain additional information regarding our
accounting policies and other disclosures required by GAAP.
Revenue Recognition
We generate revenue from the following main sources:
|
|
|
| |
• |
sales, syndication and display of paid listings, branded
advertising and other syndicated services; |
| |
| |
• |
sales of paid inclusion products; |
| |
| |
• |
licensing of our search technologies; and |
| |
| |
• |
AJinteractive advertising sales and services. |
We recognize revenue in accordance with current generally
accepted accounting principles. Revenue recognition requirements
are very complex and are subject to change. Our revenue
recognition policy is one of our critical accounting policies
because revenue is a key component of our results of operations
and is based on complex rules which require us to make judgments
and estimates. In all cases, revenue is recognized only when all
of the following criteria are satisfied:
|
|
|
| |
• |
persuasive evidence of an arrangement exists; |
| |
| |
• |
the service has been performed or delivered (or revenue is
recognized over the period in which the service is delivered); |
| |
| |
• |
the price is fixed or determinable; and |
| |
| |
• |
collectibility of the resulting receivable is reasonably assured. |
If we doubt the collectibility of revenue at the time the
service is performed or delivered, we defer recognizing the
revenue until it is received in cash.
Paid Listings, Branded Advertising and other Syndicated
Services
There are several pricing plans for Internet advertisements, and
the way in which we earn ad revenue varies among them. Depending
upon the pricing terms, we might earn revenue every time a
graphic ad is displayed (referred to as cost per thousand
impressions, or CPM, pricing), every time a user clicks on an ad
(referred to as cost per click, or CPC, pricing), every time a
user indicates interest in the advertised topic (referred to as
cost per lead, or CPL, pricing) or every time a user
clicks-through on the ad and takes a specified action on the
destination site (referred to as cost per action, or CPA,
pricing).
We generate revenue primarily when users click on the paid
listings and other advertisements on our search results pages.
Although some types of ads (such as banners and towers) are sold
by our direct sales force, we obtain the majority of our paid
listings from third-party providers, primarily Google Inc.
Google administers contracts with hundreds of thousands of
advertisers, who bid to have their paid listings appear on
participating search results pages (in response to designated
keywords). We display paid listings from Google on almost all of
the results pages we control and we syndicate them to some of
the third-party sites in our syndication network.
Paid listings are normally priced on a price per click, or PPC,
basis (also known as cost-per-click, or CPC, pricing), which
means that advertisers are charged only if the ad gets
results—only if their paid
24
Ask Jeeves, Inc.
listing attracts a user’s click. When we deliver a
user’s click to a paid listing supplied by Google, Google
bills the advertiser and shares a portion of its resulting paid
listing fee with us. Our right to payment from Google is not
contingent upon Google’s ability to collect the fee from
its advertisers and we recognize paid listing revenue from
Google as soon as we deliver the user’s click. We recognize
the advertiser’s paid listing fee as revenue, net of
amounts retained by Google. In cases where the user’s click
is generated by a third-party site to which we syndicate paid
listings, we continue to recognize our entire receivable amount
from Google as revenue and record our revenue-sharing payment to
the third-party site as a Web-traffic acquisition cost (within
cost of revenues). Our paid listing supply agreements with
Google are scheduled to expire on December 31, 2007, unless
renewed by mutual agreement.
As with paid listings, we recognize revenue from
content-targeted ads on a price per click
(PPC) revenue-sharing basis, net of amounts retained by the
third-party ad provider.
In addition to paid listings, our branded advertising ranges
from keyword-targeted graphic units, which we offer as our
Branded Response product, to content-targeted and non-targeted
advertising units such as banners, towers, buttons and pop-ups,
which appear primarily on our portals and MaxOnline network
sites. With these products, advertisers generally pay to have
their ads displayed over a designated period of time, so branded
advertising is generally sold on a cost per thousand
impressions, or “CPM,” basis. We recognize revenue
derived from CPM arrangements during the period in which the
advertising impressions are delivered, provided that no
significant obligations remain and collection of the resulting
receivable is probable. Our obligations typically include a
guaranteed minimum number of “impressions” or times
that an advertisement appears. To the extent the minimum
guaranteed impressions are not delivered, we continue to run the
ad and defer recognition of the corresponding revenue until the
remaining guaranteed impression level is achieved.
We sell some branded advertising for which the advertiser pays
only if the user clicks on the ad and goes on to take another
action on the destination Web site. This arrangement is known as
cost per action, or “CPA,” pricing. We recognize
revenue from CPA arrangements when a user takes an action on the
destination Web site, provided that collection of the resulting
receivable is probable.
We obtain some of our paid listing and branded advertising
inventory directly, when ads are sold to advertisers by our
direct sales force, while others are obtained from our
third-party providers, primarily Google. We display ads from
both sources on our sites and syndicate ads from both sources to
third-party sites, in which case we share our ad revenues with
the third party. If our direct sales force sells the ad and we
syndicate it for display on a third-party site, we recognize the
ad revenue on a gross basis in accordance with the criteria set
forth in Emerging Issues Task Force Issue No. 99-19. Such
criteria include factors such as whether we act as the primary
obligor in the arrangement, perform a significant portion of the
service, set the pricing, and retain the credit risk. If we
instead procure the paid listing from a third-party provider
such as Google and display it on one of our sites or for users
of one of our toolbars, we receive revenue-sharing fees from the
provider and recognize that revenue net of any amounts retained
by the provider. Whether we acquired the advertisement from a
paid listings provider or originated the ad sale using our own
sales force, if we go on to syndicate the ad to a third-party
site we record the revenue-sharing fees we pay to the third
party site as Web-traffic acquisition cost (within cost of
revenues).
Paid Inclusion
Until the second quarter of 2004, we offered paid inclusion
products, which provided an opportunity for Web sites to ensure
that they were included in our search index. Although we have
ceased offering any paid inclusion products, we will continue to
recognize paid inclusion revenue until the termination
25
Ask Jeeves, Inc.
of all existing paid inclusion service periods. We recognize
paid inclusion revenue using either of two methods. First, for
paid inclusion products that were priced on a “per
URL” basis, we collected the revenues in advance and
recognized them over the appropriate service period, which is
typically one year. Second, for paid inclusion products that
were priced on a CPC basis, we recognized the revenue when the
click is delivered.
Licensing
In the third quarter of 2000, we licensed our search technology
to our Japanese joint venture (in which we hold a minority
interest) and received a non-recurring license payment. We
recorded this payment as deferred revenue and recognized it as
revenue on a straight-line basis over a four-year period. This
license revenue reached the end of its amortization period
during the third quarter of 2004 and recognition of the revenue
ended.
AJinteractive
Our AJinteractive division generates revenue from ad sales and
under commission-based and service fee-based contracts. We
recognize these revenues in the period the advertising is
delivered, provided collection of the resulting receivable is
reasonably assured. We record revenue earned from
commission-based contracts on a net basis, which reflects the
amount of commissions earned by our company. For service
fee-based contracts, we are obligated to pay a fee to the Web
publishers for ads placed on their Web sites. We include those
fees in cost of revenue. Additionally, under service fee-based
contracts, we collect payment, and bear the risk of loss, for
ads sold. Consequently, we record revenue earned from service
fee-based contracts on a gross basis, net of an allowance for
advertiser credits, which are estimated and established in the
period in which services are provided.
Allowances for Doubtful
Accounts
We make judgments as to our ability to collect outstanding
receivables and provide allowances for the portion of
receivables when collection becomes doubtful. Provisions are
made based upon a specific review of all significant outstanding
invoices. For those invoices not specifically reviewed,
provisions are provided at differing rates, based upon the age
of the receivable. In determining these percentages, we analyze
our historical collection experience and current economic
trends. If the historical data we use to calculate the allowance
provided for doubtful accounts does not reflect the future
ability to collect outstanding receivables, additional
provisions for doubtful accounts may be needed and our future
results of operations could be adversely impacted.
We also record a provision for estimated revenue adjustments in
the same period as the related revenues are recorded. These
estimates are based on historical analysis of credit memo data
and other factors. If the historical data we use to calculate
these estimates does not properly reflect future uncollectible
revenue, then a change in the allowances would be made in the
period in which such a determination is made and revenues in
that period could be impacted.
Legal Contingencies
We are currently involved in various claims and legal
proceedings. Periodically, we review the status of each
significant matter and assess our potential financial exposure.
If the potential loss from any claim or legal proceeding is
considered probable and the amount can be estimated, we accrue a
liability for the estimated loss. Because of uncertainties
related to these matters, accruals are based only on the best
information available at the time. As additional information
becomes available, we reassess the potential liability related
to our pending claims and litigation and may revise our
estimates. Such revisions in the
26
Ask Jeeves, Inc.
estimates of the potential liabilities could have a material
impact on our future results of operations and financial
position. See Note 14 (Commitments and Contingencies) and
Note 19 (Subsequent Event) of Notes to Consolidated
Financial Statements for a description of our material legal
proceedings.
Income Taxes
We are subject to income taxes in both the U.S. and numerous
foreign jurisdictions. Significant judgment is used in
evaluating our tax positions and determining our consolidated
income tax provision. Uncertainties may arise with respect to
the tax treatment of certain transactions, transfer pricing
arrangements among related entities, and segregation of foreign
and domestic income and expense. Although we believe our
estimates are reasonable, we cannot be certain that the final
tax outcome of these matters will not be different than that
which is reflected in our historical income tax provisions and
accruals. Such differences could have a material effect on our
income tax provision in the period in which such determination
is made.
Due to uncertainty surrounding when or if we will realize the
benefits of our deferred tax assets (primarily from our net
operating loss carryforwards), we have recorded a 100% valuation
allowance on our domestic net deferred tax assets. Any decrease
in the valuation allowance could materially reduce our income
tax provision in the period in which such determination is made.
We have not established a valuation allowance against the
deferred tax assets arising in certain foreign tax
jurisdictions. Operations within these jurisdictions currently
generate sufficient taxable income to make the realization of
these deferred tax assets more likely than not.
We provide for United States income taxes on the earnings of our
foreign subsidiaries unless they are considered indefinitely
invested outside the United States. We currently intend to
reinvest all of our foreign earnings in the activities of our
foreign operations, and accordingly no US income tax has been
provided on such earnings. At December 31, 2004, the
cumulative earnings upon which United States income taxes have
not been provided are approximately $12.4 million. The
income tax that would arise if these items were repatriated is
approximately $2.7 million, some or all of which may be
reduced by NOL’s or foreign tax credits.
Impairment of Long-Lived
Assets
Goodwill
Our long-lived assets include goodwill and other intangible
assets. Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets,
requires that goodwill be tested for impairment at the reporting
unit level (operating segment or one level below an operating
segment) on an annual basis and between annual tests in certain
circumstances. Application of the goodwill impairment test
requires judgment, including the identification of reporting
units, assigning assets and liabilities to reporting units,
assigning goodwill to reporting units, and determining the fair
value of each reporting unit. Significant judgments required to
estimate the fair value of reporting units include estimating
future cash flows, determining appropriate discount rates and
other assumptions. Changes in these estimates and assumptions
could materially affect the determination of fair value for each
reporting unit. Any impairment losses recorded in the future
could have a material adverse impact on our financial condition
and results of operations. The goodwill recorded in our
Consolidated Financial Statements as of December 31, 2004
was $264.9 million. No goodwill was recorded in 2003 and
2002. Based on impairment tests performed, there was no
impairment of goodwill in fiscal 2004.
27
Ask Jeeves, Inc.
Intangible and Other Long Lived Assets
Statement of Financial Accounting Standards No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets, requires that we record an impairment charge on
finite-lived intangibles or long-lived assets to be held and
used when we determine that the carrying value of intangible
assets and long-lived assets may not be recoverable. Based on
the existence of one or more indicators of impairment, we
measure any impairment of intangibles or long-lived assets based
on a projected discounted cash flow method using a discount rate
determined by our management to be commensurate with the risk
inherent in our business model. Our estimates of cash flows
require significant judgment based on our historical results and
anticipated results and are subject to many factors. Any
impairment losses recorded in the future could have a material
adverse impact on our financial condition and results of
operations.
Recent Accounting
Pronouncements
In December 2004, the Financial Accounting Standards Board
(FASB) enacted Statement of Financial Accounting Standards
123 — revised 2004 (SFAS 123R), Share-Based
Payment, which replaces Statement of Financial Accounting
Standards 123 (SFAS 123), Accounting for Stock-Based
Compensation, and supersedes APB Opinion No. 25
(APB 25), Accounting for Stock Issued to Employees.
SFAS 123R requires the measurement of all employee
share-based payments to employees, including grants of employee
stock options, using a fair-value-based method and the recording
of such expense in our consolidated statements of income. The
accounting provisions of SFAS 123 are effective for periods
beginning after June 15, 2005. We are required to adopt
SFAS 123R in the third quarter of fiscal 2005. The pro
forma disclosures previously permitted under SFAS 123 no
longer will be an alternative to financial statement
recognition. See Note 1 in our Notes to Consolidated
Financial Statements for the pro forma net income and net income
per share amounts for the years 2002 through 2004, as if we had
used a fair-value-based method similar to the methods required
under SFAS 123R to measure compensation expense for
employee stock incentive awards. Although we have not yet
determined whether the adoption of SFAS 123R will result in
amounts that are similar to the current pro forma disclosures
under SFAS 123, we are evaluating the requirements under
SFAS 123R and expect the adoption to have a significant
adverse impact on our consolidated statements of income and net
income per share.
RESULTS OF OPERATIONS
On May 28, 2003, we entered into an agreement to sell
certain assets used in our Jeeves Solutions division to Kanisa
Inc. (“Kanisa”). The sale of such assets closed on
July 1, 2003, at which time we ceased offering Jeeves
Solutions products and services to corporate customers.
Accordingly, the results of operations relating to that division
are discussed in the section entitled “Income (Loss) from
Discontinued Operations” below.
Revenues
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| (dollars in thousands) |
|
2004 | |
|
Change | |
|
2003 | |
|
Change | |
|
2002 | |
| | |
|
Revenue
|
|
$ |
261,327 |
|
|
|
143.6 |
% |
|
$ |
107,292 |
|
|
|
64.9 |
% |
|
$ |
65,048 |
|
| |
Total revenues for 2004 grew 143.6% as compared with 2003. A
portion of the growth in 2004 is attributable to the addition of
the properties acquired with our purchase of Interactive Search
Holdings, Inc., or ISH, which we acquired May 6, 2004. This
acquisition allowed us to reach new users through different
access points, including search-only destination sites,
downloadable applications and portals. Additionally, revenues
were favorably affected by increased usage of our Web sites,
which we refer to as
28
Ask Jeeves, Inc.
our Web traffic. Queries grew 106% from 2003 to 2004 reflecting
both organic and acquisition-related growth.
Revenues by Category and Geographic Region
We classify our revenues into the following two categories:
|
|
|
| |
• |
Proprietary. The Proprietary category includes revenue
arising from advertising on sites that we own, where the traffic
is within our control. These include the “Ask” branded
properties, our portal properties (other than the co-branded
portals) and our Fun Web Products. |
| |
| |
• |
Network. The Network category includes revenue arising
from advertising on sites that we do not control, or to Web
traffic for which we pay an access fee. This category includes
our syndication network, co-branded portals, MySearch toolbar
distribution arrangements and our MaxOnline advertising network. |
We also classify our revenues as arising from North America,
Europe or Asia.
The table below presents our revenues for each category and our
total revenue, split between North America, Europe and Asia for
each the three years ended December 31, 2004.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (dollars in thousands) |
|
2004 | |
|
Change | |
|
2003 | |
|
Change | |
|
2002 | |
| | |
|
Proprietary:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
North America
|
|
$ |
131,956 |
|
|
|
128.8 |
% |
|
$ |
57,667 |
|
|
|
81.2 |
% |
|
$ |
31,827 |
|
| |
Europe
|
|
|
52,179 |
|
|
|
59.3 |
% |
|
|
32,748 |
|
|
|
81.0 |
% |
|
|
18,090 |
|
| |
| |
|
Total Proprietary
|
|
|
184,135 |
|
|
|
103.7 |
% |
|
|
90,415 |
|
|
|
81.1 |
% |
|
|
49,917 |
|
| |
|
Network:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
North America
|
|
|
74,419 |
|
|
|
502.5 |
% |
|
|
12,352 |
|
|
|
16.7 |
% |
|
|
10,584 |
|
| |
Europe
|
|
|
33 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
Asia
|
|
|
2,740 |
|
|
|
(39.4 |
%) |
|
|
4,525 |
|
|
|
(0.5 |
%) |
|
|
4,547 |
|
| |
| |
|
Total Network
|
|
|
77,192 |
|
|
|
357.4 |
% |
|
|
16,877 |
|
|
|
11.5 |
% |
|
|
15,131 |
|
| |
| |
|
Total Revenues
|
|
$ |
261,327 |
|
|
|
143.6 |
% |
|
$ |
107,292 |
|
|
|
64.9 |
% |
|
$ |
65,048 |
|
| |
|
Total:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
North America
|
|
|
206,375 |
|
|
|
194.7 |
% |
|
|
70,019 |
|
|
|
65.1 |
% |
|
|
42,411 |
|
| |
Europe
|
|
|
52,212 |
|
|
|
59.4 |
% |
|
|
32,748 |
|
|
|
81.0 |
% |
|
|
18,090 |
|
| |
Asia
|
|
|
2,740 |
|
|
|
(39.4 |
%) |
|
|
4,525 |
|
|
|
(0.5 |
%) |
|
|
4,547 |
|
| |
| |
|
Total Revenues
|
|
$ |
261,327 |
|
|
|
143.6 |
% |
|
$ |
107,292 |
|
|
|
64.9 |
% |
|
$ |
65,048 |
|
| |
Proprietary revenues experienced strong growth in 2004 as
compared with 2003. Proprietary revenue growth was driven in
roughly equal share by the addition of new properties through
acquisition in North America and increases in traffic to and
monetization of our original websites in North America and
Europe. Traffic and monetization of our original properties
continued to increase driving nearly 50 percent year over year
growth in revenues. New properties also contributed
significantly to revenue during 2004, in particular the addition
of MyWebSearch and the iWon portal.
Network revenue growth in 2004 was driven largely by the
acquisition of new businesses as compared with 2003 revenues.
During 2004 we added the MySearch business, where users can
access search through toolbars that they choose to download,
which was the most significant component in the increase in
revenues. Additionally, we acquired the MaxOnline network which
allows advertisers to run their ads across third-party Web sites
in a number of subject channels. Finally, the Ask Jeeves
Syndication Network continues to develop with revenues nearly
doubling on a year over year basis.
29
Ask Jeeves, Inc.
Partially offsetting these sources of revenue was a decrease in
revenues from licensing revenues in our Japanese joint venture,
for which the amortization period of the license ended during
the year.
In 2003 as compared with 2002, proprietary revenues grew
significantly as we experienced growth in both traffic and
pricing, in particular with paid listing products. New
advertisers entered the paid placement marketplace contributing
to the improvements. Additionally, as compared with 2002, we
benefited from higher revenue sharing terms from our principal
paid listing providers. For 2003 as compared with 2002, network
revenues were slightly higher reflecting modest growth in the
Ask Jeeves Syndication Network.
For 2005, we intend to seek revenue growth by increasing traffic
to our Web sites. We intend to seek increased Web traffic by
increasing our marketing efforts where we are planning an
increase in advertising spending of approximately
40 percent year over year. Additionally, we plan to
continue to invest in our core technologies, both domestically
and internationally. We anticipate that by improving the
relevance of our search results we will increase user
satisfaction and therefore, usage of our sites.
Gross Margin
Gross profit consists of total revenues less cost of revenues.
Gross margin means gross profit expressed as a percentage of
total revenue.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| (dollars in thousands) |
|
2004 | |
|
Change | |
|
2003 | |
|
Change | |
|
2002 | |
| | |
|
Gross Profit
|
|
$ |
185,174 |
|
|
|
116.9 |
% |
|
$ |
85,375 |
|
|
|
86.6 |
% |
|
$ |
45,746 |
|
| |
Gross Margin
|
|
|
70.9 |
% |
|
|
|
|
|
|
79.6 |
% |
|
|
|
|
|
|
70.3 |
% |
| |
Cost of revenues consists primarily of costs related to traffic
acquisition for our network sites and the delivery of our search
results. Costs to acquire traffic for our network sites include
revenue-based payments and similar arrangements with
third-parties who direct traffic to those sites. Costs related
to delivering our search results include depreciation of Web
site equipment, hosting and ad server management, salaries and
related personnel costs and amortization charges related to
technology acquired in some of our business combinations.
Gross margin percentage in 2004 decreased relative to 2003
primarily due to the additions to the network businesses, such
as MySearch and MaxOnline, acquired during the year. The margin
profile of the network business is different from that of the
proprietary business due to traffic acquisition costs, or the
portion of revenue earned that we share with our network
partners. The addition of these businesses resulted in a higher
portion of total revenues coming from network traffic which
impacted gross margins. During 2004, cost of revenues included
approximately $38.7 million in network traffic acquisitions
costs compared to $5.8 million in 2003, reflecting an
increase in costs from the additional network businesses we
acquired from early May 2004. Further, gross margins were
impacted by the addition of the amortization of acquired
technology of approximately $9.0 million.
For 2003 as compared with 2002, gross margin increased primarily
due to the increase in proprietary revenue, which grew faster
than costs. On a dollar basis, cost of revenues increased
$2.6 million to $21.9 million in 2003 as compared with
2002, reflecting increased traffic acquisition costs associated
with the higher levels of traffic, partially offset by decreases
in compensation-related costs and facilities charges relating to
our restructuring activities.
We expect gross margin percentage in 2005 to be slightly lower
as compared with 2004, reflecting the inclusion of the network
business and the amortization of acquired technology for the
full year.
30
Ask Jeeves, Inc.
Operating Expenses
Operating expenses consist of product development, sales and
marketing, general and administrative and amortization of other
intangible assets.
Product Development Expenses
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| (dollars in thousands) |
|
2004 | |
|
Change | |
|
2003 | |
|
Change | |
|
2002 | |
| | |
|
Product development
|
|
$ |
24,060 |
|
|
|
62.9 |
% |
|
$ |
14,768 |
|
|
|
11.0 |
% |
|
$ |
13,301 |
|
| |
Percentage of total revenues
|
|
|
9.2 |
% |
|
|
|
|
|
|
13.8 |
% |
|
|
|
|
|
|
20.4 |
% |
| |
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.
Product development expenses increased on a dollar basis but
decreased as a percentage of revenue during 2004 as compared to
2003 for several reasons. Compensation and related expenses
increased as we significantly grew our research and development
team in order to expand our Teoma technology and add new
features on our Web sites. To a lesser extent, the increases
were attributable to increased depreciation expense due to the
purchase of computer-related assets used to expand our index as
well as a nominal increase due to the addition of ISH operations.
Compared to 2002, product development expenses in 2003 increased
on a dollar basis due to compensation-related expenses increases
as we grew our research and development team in order to expand
our Teoma technology and add new features on our Web sites.
Higher compensation-related expenses were partially offset by a
reduction in the use of consultants for product development
activities.
During 2005, we expect to continue to invest in our core
technologies. More than half of our planned hires are targeted
in the technology area and we plan to increase capital spending
by approximately 50 percent as we continue to expand our
search technology both domestically and internationally.
Sales and Marketing Expenses
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| (dollars in thousands) |
|
2004 | |
|
Change | |
|
2003 | |
|
Change | |
|
2002 | |
| | |
|
Sales and marketing
|
|
$ |
69,047 |
|
|
|
116.4 |
% |
|
$ |
31,902 |
|
|
|
22.8 |
% |
|
$ |
25,973 |
|
| |
Percentage of total revenues
|
|
|
26.4 |
% |
|
|
|
|
|
|
29.7 |
% |
|
|
|
|
|
|
39.9 |
% |
| |
Sales and marketing expenses consist primarily of advertising,
promotional and public relations expenditures, as well as
salaries, commissions and related personnel expenses of our
sales force.
During 2004, sales and marketing expenses increased compared to
2003, but decreased as a percentage of revenue. Costs increased
on a dollar basis primarily as a result of the acquisition of
ISH, but decreased as a percentage of total revenues as a result
of higher revenue growth compared to sales and marketing
expenses. We spent advertising dollars for user acquisition
costs related to the ISH toolbars. Further, sweepstakes and
prizes won by users on iWon.com are included in sales and
marketing. Also, compensation expenses increased as we grew our
sales force and paid higher levels of compensation due to
revenue growth as well as due to the addition of the ISH sales
force and marketing activities associated with their operations.
31
Ask Jeeves, Inc.
On a dollar basis, sales and marketing spending increased for
2003 compared to 2002. In 2003 we launched several marketing
campaigns including print ads, radio spots, and online and out
of home advertising. These marketing campaigns were focused on
promoting both branding and traffic generation. Further, as
revenue grew in 2003 compared to 2002, we saw an increase in
sales commissions and other incentive compensation.
We plan to significantly expand our marketing efforts, including
television advertising for Ask.com, in 2005. We are
planning an increase in advertising of over 40 percent year
over year.
General and Administrative Expenses
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| (dollars in thousands) |
|
2004 | |
|
Change | |
|
2003 | |
|
Change | |
|
2002 | |
| | |
|
General and administrative
|
|
$ |
27,396 |
|
|
|
44.0 |
% |
|
$ |
19,025 |
|
|
|
25.5 |
% |
|
$ |
15,163 |
|
| |
Percentage of total revenues
|
|
|
10.5 |
% |
|
|
|
|
|
|
17.7 |
% |
|
|
|
|
|
|
23.3 |
% |
| |
General and administrative expenses consist of costs for general
corporate functions, as well as depreciation and other
facilities charges. Also included is the provision for doubtful
accounts, various accounting, investor relations and legal costs
associated with operating our business, and administrative
function salaries.
We experienced a dollar increase in general and administrative
expenses during 2004 compared to the prior year, but experienced
a decrease in general and administrative expenses as a
percentage of revenue over the same period. Salaries and related
expenses, as well as consultant fees, increased as we hired more
employees and consultants to help support the overall growth of
the company. Further, legal and insurance fees increased, as
well as professional service fees related to consultants hired
to help us meet Sarbanes-Oxley compliance requirements. Finally,
we increased our spending on management training programs. On a
dollar basis, general and administrative expenses increased in
2003 compared to 2002 due to several factors. First, we
increased the use of consultants in 2003 particularly in the
area of personnel development. Also, general and administrative
salaries and incentive compensation increased as we expanded
headcount to manage the growing business and rewarded employees
for the company’s performance.
We expect general and administrative expenses as a percentage of
revenue to decrease slightly in 2005.
Amortization of Other Intangible Assets
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, |
| (dollars in thousands) |
|
2004 | |
|
Change | |
|
2003 |
|
Change | |
|
2002 |
| |
|
Amortization of other intangibles assets
|
|
$ |
8,663 |
|
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
— |
|
| |
Percentage of total revenues
|
|
|
3.3 |
% |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
| |
During the second quarter of 2004, we completed the acquisitions
of ISH and Tukaroo, which resulted in the creation of
amortizable intangible assets, as described in
“Acquisitions,” below.
Impairment of Long-Lived
Assets
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| (dollars in thousands) |
|
2004 |
|
Change | |
|
2003 | |
|
Change | |
|
2002 | |
| | |
|
Impairment of long-lived assets
|
|
$ |
— |
|
|
|
(100.0 |
%) |
|
$ |
702 |
|
|
|
(72.9 |
%) |
|
$ |
2,592 |
|
| |
Percentage of total revenues
|
|
|
— |
|
|
|
|
|
|
|
0.7 |
% |
|
|
|
|
|
|
4.0 |
% |
| |
32
Ask Jeeves, Inc.
During 2003 and 2002, we wrote off computer equipment, software,
and furniture and fixtures that we disposed of or were no longer
in use, resulting in charges of $702,000 and $2.2 million,
respectively. Additionally, during 2002, we recorded impairment
charges totaling $252,000 primarily related to acquired
intangible assets of the discontinued E-tours product. There
were no similar charges in 2004.
Restructuring Costs
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| (dollars in thousands) |
|
2004 |
|
Change | |
|
2003 |
|
Change | |
|
2002 | |
| | |
|
Restructuring Costs
|
|
$ |
— |
|
|
|
— |
|
|
$ |
— |
|
|
|
(100.0 |
%) |
|
$ |
1,653 |
|
| |
Percentage of total revenues
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
2.5 |
% |
| |
During 2002, we implemented restructuring actions to better
align our cost structure with our anticipated level of business
activity. Those actions resulted in restructuring charges
related to workforce reductions. There were no similar charges
in 2003 or 2004.
Gain on Acquisition and
Dissolution of Joint Ventures
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| (dollars in thousands) |
|
2004 |
|
Change | |
|
2003 | |
|
Change | |
|
2002 | |
| | |
|
Gain on acquisition and dissolution of joint ventures
|
|
$ |
— |
|
|
|
(100.0 |
%) |
|
$ |
6,356 |
|
|
|
552.6 |
% |
|
$ |
974 |
|
| |
During 2003, we recognized a gain of $6.1 million
representing the fair value of net assets we recorded in excess
of the consideration paid upon the acquisition of the remaining
outstanding equity interests in our joint venture, Ask Jeeves
U.K. This amount had been deferred due to a contingent payment
obligation in our agreement with our former partners. Further,
we recognized a gain of $232,000 relating to the final
dissolution of the accounts of Ask Jeeves en Espanol (our
Spanish language joint venture with Univision Communications,
Inc.), following the wind-up of operations.
During 2002, we recognized a gain of $974,000 representing the
remaining balance of deferred license fees paid to us by Ask
Jeeves U.K., for a licensing arrangement that was terminated
when we acquired the entity. The gain was recognized as other
income.
Interest Income, Net
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| (dollars in thousands) |
|
2004 | |
|
Change | |
|
2003 | |
|
Change | |
|
2002 | |
| | |
|
Interest income, net
|
|
$ |
1,098 |
|
|
|
(16.2 |
%) |
|
$ |
1,311 |
|
|
|
(14.3 |
%) |
|
$ |
1,530 |
|
| |
Interest income relates primarily to interest earned on fixed
income securities net of the amortization of capitalized
issuance costs related to the convertible subordinated notes we
sold in 2003. Interest income tends to correlate with the
average balance of those investments and prevailing interest
rates. Interest income in 2004 decreased from 2003 due to a
decrease in securities held in interest-bearing accounts. We
liquidated a significant amount of our marketable securities
during the second quarter of 2004 to fund the ISH acquisition.
The decrease in interest income in 2003 over 2002 is due to the
amortization of our capitalized issuance costs. Amortization of
these costs totaled $407,000 for 2003. Without including this
amortization, interest income in 2003 increased $188,000 from
2002 as our average balance of funds held in interest-earning
investments increased. Net proceeds from the sale of the
convertible subordinated notes are being held in marketable
securities.
33
Ask Jeeves, Inc.
Interest Expense
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| (dollars in thousands) |
|
2004 | |
|
Change | |
|
2003 | |
|
Change | |
|
2002 | |
| | |
|
Interest expense
|
|
$ |
(173 |
) |
|
|
4.8 |
% |
|
$ |
(165 |
) |
|
|
(65.5 |
%) |
|
$ |
(478 |
) |
| |
Interest expense arises primarily from interest accruing on
outstanding borrowings under our line of credit and under our
capital leases. During 2004 we assumed new capital leases when
we purchased ISH and recorded interest expense on those leases.
As such, interest expense was slightly up compared to 2003.
During 2003 we repaid the outstanding borrowings under our line
of credit, and paid off the remaining obligation under an older
capital lease. As a result, interest expense decreased.
Other Income, Net
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| (dollars in thousands) |
|
2004 | |
|
Change | |
|
2003 | |
|
Change | |
|
2002 | |
| | |
|
Other income, net
|
|
$ |
191 |
|
|
|
(2.6 |
%) |
|
$ |
196 |
|
|
|
263.0 |
% |
|
$ |
54 |
|
| |
Other income includes gains and losses from foreign currency
transactions and the disposal of assets, as well as realized
gains and losses from investments. Other income, net was
relatively flat from 2003 to 2004.
During 2003 we recognized $300,000 in other income relating to
professional services provided to our Japanese joint venture.
This income was partially outweighed by foreign currency losses
from our operations in European countries.
Income Tax Provision
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, |
| (dollars in thousands) |
|
2004 | |
|
Change | |
|
2003 | |
|
Change | |
|
2002 |
| |
|
Income tax provision
|
|
$ |
4,679 |
|
|
|
147.4 |
% |
|
$ |
1,891 |
|
|
|
— |
|
|
$ |
— |
|
| |
We recorded an income tax provision in the amount of
$4.7 million in 2004 relating primarily to taxable foreign
income from our international operations as well as alternative
minimum tax (AMT) in the United States. The provision differs
from the amount computed by applying the statutory federal rate
principally due to the utilization of federal and state net
operating loss carryforwards. The provisions increased from 2003
due to an increase in taxable foreign income in our
international operations, and additional U.S. income
subject to AMT.
Income (Loss) from Discontinued
Operations
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| (dollars in thousands) |
|
2004 | |
|
Change | |
|
2003 | |
|
Change | |
|
2002 | |
| | |
|
Income (loss) from discontinued operations
|
|
$ |
716 |
|
|
|
(43.4 |
%) |
|
$ |
1,264 |
|
|
|
112.1 |
% |
|
$ |
(10,447 |
) |
| |
On July 1, 2003, we completed the sale of certain assets
used in our Jeeves Solutions business to Kanisa, Inc. pursuant
to an Asset Purchase Agreement dated May 28, 2003, by and
between us and Kanisa. Accordingly, the results of operations
relating to this division have been reclassified in our
financial statements as a discontinued operation.
During 2003, we recorded a gain of $2.5 million
representing the excess of the purchase consideration received
at closing over the book value of the assets sold, as well as
the remaining amount of deferred license fees applicable to
Jeeves Solutions. In exchange for the sale of such assets, we
received
34
Ask Jeeves, Inc.
$3.4 million in cash at the closing and a promissory note
for up to $750,000. During 2004, Kanisa paid $731,000 in partial
satisfaction of the promissory note.
Total revenues related to the discontinued operations were
$4.2 million, and $9.1 million for the years ended
December 31, 2003, and 2002, respectively. The results of
operations have been reclassified as loss from discontinued
operations in the Consolidated Statement of Operations for all
dates and periods presented.
We recorded a loss on discontinued operations of
$1.2 million during 2003. Operating expenses decreased
$11.6 million from 2002, primarily from our cost cutting
efforts. Further, revenues in 2003 were $4.2 million
compared to $9.1 million in 2002. As a result of the sale
of the division on July 1, 2003, we only recorded six
months of revenue compared to the twelve months of revenue we
recorded in 2002.
During 2002, we recorded a loss on discontinued operations of
$10.4 million.
Seasonality and Quarterly
Fluctuations in Operating Results
Our operating results may fluctuate significantly in the future
as a result of a variety of factors, many of which are beyond
our control. Factors that may adversely affect our results of
operations include:
|
|
|
| |
• |
our ability to attract and retain advertisers and our ability to
link our partners to potential customers; |
| |
| |
• |
the number of queries on our Web sites; |
| |
| |
• |
our ability to effectively manage our advertising inventory; |
| |
| |
• |
rate changes for advertising on our Web sites; |
| |
| |
• |
marketing expenses and technology infrastructure costs as well
as other costs that we may incur as we expand our operation; |
| |
| |
• |
seasonal and other fluctuations in demand for our services and
for advertising space on our Web sites; |
| |
| |
• |
our ability to develop and introduce new technology; |
| |
| |
• |
announcements and new technology introductions by our
competitors; |
| |
| |
• |
the potential for foreign exchange losses; |
| |
| |
• |
our ability to attract and retain key personnel; and |
| |
| |
• |
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 continues 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 the summer vacation period.
Additionally, the seasonality of traffic on our proprietary
sites corresponds with overall Internet usage. Mirroring general
Internet use trends, we expect that queries on our sites will be
strongest in the first and fourth fiscal quarters and weakest in
the third quarter. These trends reflect greater usage during the
school year and less usage during holidays and the summer
vacation period. Furthermore, seasonality in the retail industry
may also affect the prices advertisers are willing to bid for
keywords.
35
Ask Jeeves, Inc.
Seasonality in Internet usage is likely to cause quarterly
fluctuations in our results of operations and could harm our
business.
ACQUISITIONS
On May 6, 2004, we completed the acquisition of all of the
outstanding capital stock of Interactive Search Holdings, Inc.
(ISH), an online search and media company. The acquisition
increased our market share and provided additional channels of
distribution for our search services. These factors contributed
to a purchase price in excess of the fair value of ISH’s
net tangible and intangible assets acquired, and as a result, we
have recorded goodwill in connection with this transaction. The
results of ISH’s operations have been included in our
consolidated financial statements since the date of the
acquisition.
The total purchase cost for ISH of approximately
$395.1 million consists of the following (in thousands
except share data):
| |
|
|
|
|
|
| | |
|
Common stock (9,093,590 shares at $25.73 per share)
|
|
$ |
233,978 |
|
|
Vested Stock options (206,238 shares, at fair value)
|
|
|
4,766 |
|
|
Cash
|
|
|
143,984 |
|
|
Transaction costs
|
|
|
12,404 |
|
| |
| |
Total purchase cost
|
|
$ |
395,132 |
|
| |
The value of the common stock issued was determined based on the
average market price of our common shares over the period
commencing two days before and ending two days after the date on
which the terms of the acquisition agreement were publicly
announced. The fair value of the stock options was determined as
of the same date using the Black-Scholes option valuation model.
The total purchase cost of the acquisition of ISH has been
allocated to assets and liabilities based on management’s
estimate of their fair value together with the use of valuation
studies performed by a third party. The excess of the purchase
consideration over the fair value of the net assets acquired has
been allocated to goodwill. During the third and fourth quarter
of fiscal 2004, certain adjustments, corrections, and
reclassifications to the allocation of the purchase cost of ISH
were made. These items resulted in a decrease to goodwill of
$7.1 million. None of these items affected the results of
operations for the year ended December 31, 2004. The
following table summarizes the estimated fair values of the
assets acquired and liabilities assumed (in thousands):
| |
|
|
|
|
|
|
| | |
|
Cash and cash equivalents
|
|
$ |
28,178 |
|
|
Other tangible assets
|
|
|
23,912 |
|
|
Amortizable intangible assets:
|
|
|
|
|
| |
Developed/core technology
|
|
|
3,785 |
|
| |
User base
|
|
|
30,608 |
|
| |
Advertiser and distribution partner relationships
|
|
|
61,479 |
|
| |
Trade names
|
|
|
5,105 |
|
|
Goodwill
|
|
|
264,898 |
|
| |
| |
|
Total assets acquired
|
|
|
417,965 |
|
|
Liabilities assumed
|
|
|
(27,547 |
) |
|
Deferred stock-based compensation (stockholders’ equity)
|
|
|
4,714 |
|
| |
| |
|
Total
|
|
$ |
395,132 |
|
| |
Amortizable intangible assets consist of developed technology,
user base, advertiser and distribution partner relationships and
trade names, with useful lives not exceeding five years.
Goodwill represents
36
Ask Jeeves, Inc.
the excess of the purchase price over the fair value of the net
tangible and intangible assets acquired, and is not deductible
for income tax purposes. Goodwill will not be amortized for
financial reporting purposes and will be tested for impairment,
at least annually.
Net deferred tax assets related to the acquisition of
Interactive Search Holdings had been fully offset by a valuation
allowance.
LIQUIDITY AND CAPITAL
RESOURCES
We consider all cash and highly liquid investments with an
original maturity of less than three months at the date of
purchase to be cash equivalents. Our primary recurring sources
of cash are collections from advertisers (and from our paid
listing providers) and proceeds from the exercise of employee
stock options. The primary uses of cash are payroll (salaries,
bonuses and benefits), general operating expenses (marketing and
facilities) and capital expenditures. The following table
presents our cash, cash equivalents and marketable securities,
and related data, as of December 31, 2004 and 2003 (dollars
in thousands).
| |
|
|
|
|
|
|
|
|
| |
|
December 31, | |
|
December 31, | |
| |
|
2004 | |
|
2003 | |
| | |
|
Cash, cash equivalents and marketable securities
|
|
$ |
109,702 |
|
|
$ |
180,648 |
|
|
Current ratio*
|
|
|
3.4 |
|
|
|
10.7 |
|
|
Days sales outstanding
|
|
|
63 |
|
|
|
41 |
|
| |
|
|
| * |
Calculated excluding deferred revenue |
During the year ended December 31, 2004, cash, cash
equivalents, and marketable securities declined by
$70.9 million from $180.6 million at December 31,
2003 to $109.7 million at December 31, 2004 (of which
cash and cash equivalents comprised $80.5 million). The
decline was caused primarily by our acquisition of ISH on
May 6, 2004, for which we paid $144.0 million in cash,
issued approximately 9.1 million shares of common stock and
assumed options to purchase approximately 200,000 shares of
common stock.
Net cash provided by operating activities of $68.7 million
for the year ended December 31, 2004 resulted primarily
from income from continuing operations of $52.4 million
adjusted for non-cash items, including depreciation and
amortization of $9.8 million, amortization of intangible
assets of $18.4 million and changes in working capital.
Net cash used in investing activities of $36.2 million
resulted primarily from business acquisitions, net of cash
acquired of $127.4 million and purchases of property and
equipment of $19.5 million. Partially offsetting these
expenditures was the proceeds from the redemption of marketable
securities of $130.2 million.
Net cash provided by financing activities of $9.7 million
resulted primarily from our issuance of common stock, mainly
from the exercise of stock options. During the third quarter of
2004, we paid down a note payable of $2.1 million.
We have a revolving line of credit with a bank in the amount of
$15.0 million. The line of credit expires on July 1,
2005. Borrowings under the line of credit bear interest at LIBOR
plus 0.4%. All borrowings and letters of credit are
collateralized by an equal amount of our marketable securities.
The line of credit agreement contains various covenants. As of
December 31, 2004, no borrowings were outstanding. Standby
letters of credit of approximately $61,000 were issued and
outstanding under the line of credit, which are being maintained
as security for performance under lease obligations. Should we
choose not to renew the line of credit, we do not believe our
business would be harmed. Our
37
Ask Jeeves, Inc.
wholly-owned subsidiary, ISH, has additional standby letters of
credit totaling $580,000, which are being maintained as security
for a capital lease and office space.
On June 8, 2004, we filed a universal shelf registration
statement on Form S-3 with the Securities and Exchange
Commission, or SEC. The registration statement was declared
effective by the SEC on July 26, 2004 and will permit (but
not require) us to offer and sell up to $400.0 million of
common stock, preferred stock, depositary shares, debt
securities or warrants from time to time in one or more public
offerings. The terms of any such future offerings will be
established at the time of each offering.
In June 2003, we issued $115.0 million aggregate principal
amount of zero coupon convertible subordinated notes, due
June 1, 2008. The notes were sold at face value and our net
proceeds were $111.5 million, net of costs of issuance of
$3.5 million. We issued the notes for general corporate
purposes, including potential future acquisitions. The notes are
convertible by the holders into shares of our common stock at
any time at a conversion price of $16.90 per share subject
to certain adjustments. This is equivalent to a conversion rate
of approximately 59.1716 shares per $1,000 principal amount
of notes. Upon conversion, we have the right, subject to certain
conditions, to deliver cash (or a combination of cash and
shares) in lieu of shares of our common stock. The notes are
subordinated in right of payment to all existing and future
senior indebtedness, as defined in the indenture. The holders of
the notes may require us to repurchase all or a portion of the
notes, subject to specified exceptions, upon the occurrence of a
change in control. We may choose to pay the repurchase price in
cash, shares of our common stock, shares of the surviving
corporation or a combination thereof. We may not redeem the
notes prior to the maturity date.
Our existing cash and marketable securities balances may decline
during 2005 in the event of a weakening in our business, or
changes in our planned cash outlays. However, based upon our
current business plan and revenue prospects, we anticipate that
our existing cash and marketable securities will be sufficient
to fund our anticipated needs for working capital and capital
expenditures for at least the next twelve months. Cash from
operations could be affected by various risks and uncertainties,
including, but not limited to the risks detailed in the section
“Risk Factors.” Additionally, cash and marketable
securities balances may be used to fund strategic acquisitions
of other companies, international expansion or products and
technologies that are complementary to our business.
On an ongoing basis, we will need to generate sufficient cash
flow from operations to meet our anticipated needs for working
capital and capital expenditures, and repayment of our
convertible notes if not converted into stock, or we will need
to raise additional capital. However, if 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.
Off Balance Sheet
Arrangements
As of December 31, 2004, our only unconsolidated subsidiary
is Ask Jeeves Japan, which generally provides Ask Jeeves’
services within a defined geographic region. We do not have
majority voting rights or majority residual interests in the
assets or income of any off balance sheet entities, including
Ask Jeeves Japan. Further, we have not guaranteed any
obligations of unconsolidated entities nor do we have any
commitment or intent to provide additional funding to any such
entities. Accordingly, we are not materially exposed to any
market, credit, liquidity or financing risk that could arise
from engaging in such relationships.
38
Ask Jeeves, Inc.
We do not have any relationships with unconsolidated entities or
financial partnerships, such as entities often referred to as
structured finance or special purpose entities, which would have
been established for the purpose of facilitating off-balance
sheet arrangements or other contractually narrow or limited
purposes.
Contractual
Obligations
The following table summarizes our contractual obligations in
specified categories at December 31, 2004, and the effect
such obligations are expected to have on our liquidity and cash
flows in future periods (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Less than | |
|
|
|
|
|
|
| |
|
Total | |
|
1 year | |
|
1-3 years | |
|
4-5 years | |
|
Thereafter | |
| | |
|
Convertible subordinated notes due June 1, 2008*
|
|
$ |
115,000 |
|
|
$ |
— |
|
|
$ |
115,000 |
|
|
$ |
— |
|
|
$ |
— |
|
|
Capital leases
|
|
|
1,170 |
|
|
|
710 |
|
|
|
460 |
|
|
|
— |
|
|
|
— |
|
|
Non-cancelable operating leases
|
|
|
20,927 |
|
|
|
3,681 |
|
|
|
5,835 |
|
|
|
5,343 |
|
|
|
6,068 |
|
| |
| |
Total
|
|
$ |
137,097 |
|
|
$ |
4,391 |
|
|
$ |
121,295 |
|
|
$ |
5,343 |
|
|
$ |
6,068 |
|
| |
|
|
| * |
The notes are convertible at any time prior to maturity into
shares of our common stock at a conversion price of
$16.90 per share, subject to certain adjustments. In the
event of such conversion, we will have the right to deliver cash
(or a combination of cash and shares of common stock) in lieu of
shares of our common stock. |
39
Ask Jeeves, Inc.
Risk
Factors
This annual report contains forward-looking statements that
are subject to risks and uncertainties. Our actual results could
differ materially from those anticipated by our forward-looking
statements. Among the important factors that might cause such a
difference are the risks described below. You should carefully
consider the risks described below before making any investment
decision in our securities; however, the risks described below
are not the only ones we face. Additional risks not presently
known to us or that we currently deem immaterial might also
impair our business operations. Our business, financial
condition or results of operations could be materially and
adversely affected by any of these risks. The trading price of
our common stock or other securities might decline due to any of
these risks, and you might lose all or part of your
investment.
Risks Related to our
Business
Rapid industry change might
affect our profitability.
Although we became profitable in the fourth quarter of 2002, and
have remained profitable since that time, we cannot assure
investors that we will remain profitable or cash flow positive.
Moreover, we might not be able to increase our operating
profitability on a quarterly or annual basis. The Internet
search industry is rapidly evolving and very turbulent. New
search technologies could emerge that make our services
comparatively less useful or new business methods could
otherwise emerge that divert Web traffic away from our sites.
Rapid change such as this makes it difficult for us to forecast
our results accurately, particularly over longer periods, and
might cause our profitability to decline significantly.
Investors should not place undue reliance on our forecasts. To
increase profits, we will need to generate revenue growth while
continuing to control our expenses. We face the risk that our
costs might increase substantially in the future. Indeed, we
believe it is critical that we continue to expend financial and
management resources to develop our brand loyalty through
marketing and promotion, to enhance our search technologies and
to expand our brands and services. If we fail to attract Web
traffic or control costs, our annual net losses could resume, in
which case we would eventually need to obtain additional
financing or cease operations.
We derive a significant
percentage of our revenue from our targeted-advertising supply
arrangements with Google Inc. Any early termination,
non-renewal, breach or other performance deterioration under
these contracts could harm our results of operations.
We have entered into several agreements with Google Inc.
pursuant to which Google supplies paid listings and other
services to some of our Web sites. We derive a significant
percentage of our revenue from these agreements. For the year
ended December 31, 2004, our revenue from Google under
these agreements comprised 69% of our total revenues. These
agreements include the following:
|
|
|
| |
• |
In 2002, Ask Jeeves, Inc. entered into an agreement with Google
Inc., to participate in Google’s sponsored links program
(subsequently renamed AdWords). Under this agreement, Google
sells paid listings to hundreds of thousands of advertisers and
we display their paid listings on specified U.S. Ask Jeeves
and Teoma brand Web sites in response to keywords in users’
search queries. Google’s advertisers pay a fee whenever
users click on the paid listings. Under this agreement, we also
syndicate Google’s paid listings, together with our search
results, to third-party Web sites in the Ask Jeeves Syndication
Network. In exchange for making the Web traffic on these various
sites available to Google’s advertisers, we share in the
revenue generated from those advertisers. This
U.S. agreement with Google was scheduled to terminate in
September 2005 (but allowed for termination for convenience by
either party during September or October |
40
Ask Jeeves, Inc.
|
|
|
| |
|
of 2004). On July 26, 2004, this agreement was amended and
restated to, among other changes, extend its scheduled term
until December 31, 2007. |
| |
| |
• |
In May 2003, one of our European subsidiaries entered into an
agreement with a Google subsidiary to display Google’s paid
listings on our Ask Jeeves’ brand U.K. Web site, replacing
a previous paid listing provider. We share in the revenue
generated when users click on those paid listings. This
agreement with Google was scheduled to terminate in May 2005. On
July 26, 2004, this agreement was amended to, among other
changes, extend its scheduled term until December 31, 2007. |
| |
| |
• |
In May 2003, Focus Interactive, Inc. (formerly known as The
Excite Network, Inc.), a wholly-owned subsidiary of ISH, entered
into an agreement with Google. (We acquired full ownership of
Focus Interactive in May 2004 upon our acquisition of ISH.)
Under this agreement, Google supplies both paid listings and
search results to specified Web sites owned and operated by
Focus Interactive. Focus pays a fee for the search results and
shares in the revenue generated by the paid listings. The
initial term of this agreement was scheduled to expire
August 31, 2007. On July 26, 2004, this agreement was
amended to, among other changes, extend its scheduled term until
December 31, 2007. |
| |
| |
• |
In September 2003, Focus Interactive entered into an agreement
with Google to participate in its content-targeted ad program
(subsequently renamed AdSense). Under this agreement, Google
supplies content-targeted ads to some of the Web sites owned and
operated by Focus Interactive and the parties share in the
revenue generated by those ads. Content-targeted ads are similar
to paid listings in that they are selected for display based
upon the user’s current interests. However, paid listings
are textual links selected for display on a search results page
based on keywords in the user’s search query; whereas
content-targeted ads may appear on any type of Web page and are
selected for display based upon the subject matter of that page
(which Google attempts to determine by crawling, hand-mapping,
spotting keywords or other means) and might appear in text,
audio, video, graphic or some other format. The term of this
agreement is scheduled to expire August 31, 2007. |
If our contracts with Google are not renewed by mutual agreement
of the parties, or if Google fails to perform under these
contracts or if they are terminated for any other reason, we
would need to find another suitable provider or otherwise
replace the lost revenues. Although alternate paid listing
providers—such as Yahoo! Search Marketing Solutions
(formerly known as Overture Services, Inc.) and
FindWhat.com—are currently available in the market, the
paid listing market has experienced recent consolidation (for
example, Espotting Media merged with FindWhat.com), and we face
the risk that we might be unable to negotiate equally
advantageous terms with the remaining providers. Even if we were
to negotiate equally advantageous terms, we would face the risk
that such providers might supply us with less-relevant links
(which would be less likely to attract clicks and thus less
likely to generate revenue).
Similarly, if Google’s performance under these contracts
unexpectedly deteriorates we will earn less revenue from our
relationship with it. Performance deterioration could occur:
|
|
|
| |
• |
if Google were to change its relevance-ranking procedures such
that it started delivering paid listings that are less relevant
to the user’s query (and thus less likely to attract the
user’s click); |
| |
| |
• |
if Google were to experience service level interruptions due to
causes beyond its control; or |
| |
| |
• |
if Google’s advertiser base were to diminish to such an
extent that Google’s could no longer provide adequate
coverage against the keywords in our users’ queries. |
41
Ask Jeeves, Inc.
If Google’s performance under our contracts with it were to
deteriorate due to any of the above (or other) causes, our
results of operations could be harmed.
Finally, if our ability to generate Web traffic for paid
listings and content-targeted ads decreases, we will not
continue to receive the same level of revenues from Google
notwithstanding our continued contractual relationship.
If the performance of our search
toolbar distribution channels declines, or if our distributors
decide not to renew our distribution arrangements at the end of
the applicable contract terms, we will likely experience reduced
search volume and lower advertising revenue.
A material portion of our revenue is generated by searches
originating from our search toolbars. We distribute our search
toolbars to the public through a variety of channels, including
through downloadable software bundles distributed by
third-parties. We face the risk that our distribution channels
might not continue to produce new toolbar installations at the
rates experienced in the recent past due to any number of
causes, such as increasing competition for inclusion in the most
popular downloadable software bundles, increasing public
suspicion that any downloadable application might contain
spyware or adware, and the increased legal difficulties faced by
key elements of some software bundles such as peer-to-peer file
sharing applications. We are experiencing some of these problems
and we face a risk that these problems will become worse. We
also face a risk that our distributors will not renew our
distribution agreements at the end of the applicable contract
terms. Any decline in the effective toolbar installation rate we
generate will likely cause us to experience reduced query volume
and lower advertising revenue.
We expect our operating expenses
to continue to increase as we invest in increasing brand loyalty
through marketing and promotion, enhancing our search
technologies, developing our media properties and acquiring
other businesses.
We currently expect that our operating expenses will continue to
increase as we continue to invest in:
|
|
|
| |
• |
increasing brand loyalty through marketing and promotion
(including print and television campaigns in 2005); |
| |
| |
• |
enhancing our search technologies; |
| |
| |
• |
improving and expanding our portal content and our fun web
products; |
| |
| |
• |
increased funding of product development; |
| |
| |
• |
international expansion; |
| |
| |
• |
developing and commercializing additional media
properties; and |
| |
| |
• |
acquiring and integrating complementary businesses and
technologies. |
We face a risk that these investments will not result in
commensurate increases in our Web traffic or revenues. If our
expenses increase at a greater pace than our revenues, our
operating results will likely be harmed.
Our business model is still
evolving along with the business models of our competitors, and
it is difficult to predict our future competitive
position.
Our advertising revenue and gross margin performance currently
depend on our ability to attract search traffic and the mix of
proprietary traffic and network traffic. These factors changed
substantially in 2004 as we acquired ISH and altered our
business model to take advantage of the opportunities it
42
Ask Jeeves, Inc.
provided. It is likely that our business model will continue to
change in the future, in response to technological change,
strategic innovations, acquisition opportunities or other
factors. In particular, strategies for driving Web traffic to
destination search sites and for increasing search toolbar
installations (as well as counter-strategies for diverting
traffic and reducing installations) are rapidly emerging and
evolving. It is still difficult to predict which practices, if
any, will emerge as industry standards and whether we will be
positioned to make use of the most effective new strategies that
do emerge. This uncertainty makes it difficult to project
long-term Web traffic and revenue per query trends.
Similarly, we regularly seek to optimize our revenue per query
and other metrics by experimentally changing the advertising
implementation and other operational variables on our Web sites.
We face a risk that benefits observed in a test environment
might not be realized when the changes are implemented across
all users (particularly for changes that initially result in
lower monetization with an expectation of offsetting longer term
benefits).
If we cannot maintain the
popularity of our search services among Internet users, our
business will be significantly harmed.
Our proprietary search sites will be successful only if a
critical mass of Internet users regularly uses our search
services as a method of navigating the Internet. Internet users
have a variety of other search options, including other search
engines and subject-matter directories, available to them to
find information on the Web. Our search technologies, including
our Teoma technology, are novel. It is difficult to predict the
rate at which users will sample our services and the extent to
which they will adopt them as their search technology. Even in
the case of repeat users, it is difficult to know whether they
return to our Web sites because they are satisfied with our
offerings or because they are dissatisfied with the
alternatives. At any time, users of our services might revert to
prior search techniques or choose new search techniques
altogether. Widespread acceptance of our search technologies and
services might not occur. If we cannot maintain the popularity
of our search engine among Internet users, our business will be
significantly harmed.
If we fail to compete
effectively against Google, Yahoo!, MSN, AOL and other smaller
companies, we will lose market share.
We compete against some of the world’s largest internet
media companies in the following areas, each of which is
intensely competitive and rapidly changing.
|
|
|
| |
• |
Destination Search Traffic. Destination searches occur
when an Internet user navigates to a search engine site, such as
Ask.com, in order to submit his or her query on that
particular site. We seek to attract destination search traffic
primarily by delivering world-class search services that users
will find intuitive and satisfying, and also through advertising
campaigns, site innovations, and other initiatives designed to
enhance public opinion of Ask Jeeves brand search. In these
efforts, we compete against other branded search site operators
such as Google Inc. and Microsoft, which is promoting its new
MSN Search as a destination search site. |
| |
| |
• |
Convenience Search Traffic. Convenience searches occur
when an Internet user submits a query through any easily
available search box. We seek to attract convenience search
traffic by operating three search-centric portals
(Excite.com, iWon.com and MyWay.com) and by
distributing search toolbars together with our Fun Web Products
and other popular downloadable applications. Our portals compete
against the portals operated by Yahoo! Inc., America Online
(AOL) (a division of Time Warner Inc.) and the Microsoft Network
(MSN), as well as against other engaging, or “sticky,”
sites that display competitive search boxes. Our |
43
Ask Jeeves, Inc.
|
|
|
| |
|
desktop search toolbar competes against Google’s Desktop
Search product, Yahoo!’s Desktop Search and MSN’s
Deskbar as well as other products offered by smaller
competitors. Our Internet search toolbars and Fun Web Products
compete against an increasing number of diverse downloadable
applications that include search functionality, such as
Yahoo!’s “Companion Bar” and MSN’s
“Toolbar Suite.” Microsoft has also announced that it
plans to integrate expanded search functionality into the next
version of the Windows operating system. |
| |
| |
• |
Search Syndication and Advertising Networks. In our
efforts to attract third-party Web site publishers to join our
search syndication network and our MaxOnline advertising
network, we compete against the search and advertising services
offered by Google Inc. and Yahoo! Search Marketing Solutions
(formerly known as Overture Services, Inc.), as well as against
other online advertising networks such as FindWhat, Kanoodle,
Advertising.com (owned by Time Warner Inc.) and several smaller
providers. In our efforts to establish direct relationships with
advertisers we compete against those same online advertising
networks as well as against non-Internet media publishers and
traditional advertising agencies. |
Some of our existing competitors such as Google, Yahoo!, AOL and
MSN (as well as potential new competitors), have longer
operating histories, greater name recognition, larger customer
bases and significantly greater technical and financial
resources than we do. These competitors have in the past and
likely will in the future use their experience and resources
against us in a variety of competitive ways, including by making
key acquisitions, running more visible marketing campaigns,
investing more aggressively in research and development and
expanding their search indices to new areas of offline content.
For example, both Google and Yahoo! recently started indexing
the content of certain TV programs; and Google has announced
plans to index scholarly journals as well as to digitize and
index the permanent collections of five U.S. libraries.
Further, Google has been steadily expanding its service
offerings beyond search into complementary services, such as a
web-based email service, a Web log service, a picture
organization tool and movie ticket sales. It is difficult to
predict the rate at which users will sample such competitive
services, however over time the availability of such services
from our competitors might erode our Web traffic.
In addition, some of our competitors do not monetize queries as
aggressively as we have in the past. For example, we attempt to
optimize the layout of paid listings relative to Web results
(and other elements) on our search result pages so as to
maximize revenue over time. Consequently, the sponsored elements
on our result pages tend to be relatively more prominent than on
some of our competitors’ pages. If we were to adjust our
balance (for example by reducing monetization efforts per query)
in order to increase user frequency over time, our revenues
might decline, at least in short run, with no assurance of
commensurate gains over the long run.
Moreover, vertical integration appears to be increasing in the
Internet search and advertising industry. For example, in the
past few years, Yahoo! has acquired several search engines
(Inktomi, AltaVista and AllTheWeb) as well as Overture Services,
Inc., a provider of search services, paid listings and related
advertising. Similarly, as mentioned above, Google administers
its own advertising networks and is expanding into services
beyond pure search. Vertically integrated search providers, like
Yahoo! Inc. and Google Inc. have greater resources and
functionality, and might be able to inhibit our access to
advertisers or end users.
44
Ask Jeeves, Inc.
Some of our competitors provide
Internet access, operating systems, online services or computer
hardware to our users. To the extent such providers exploit
their position to impair users’ continued access to our
search services, our search traffic might fall, perhaps
significantly.
Accessing the Internet requires various resources, such as
computer hardware, an operating system, an Internet service
provider, and an Internet browser. Some of our competitors
happen to be suppliers of those resources. For example, MSN is
an Internet service provider and Yahoo! collaborates with
another Internet service provider, SBC, to provide services to
SBC’s subscribers. In those roles, our competitors occupy
positions of trust with the users. We face the risk that our
competitors might exploit that trust to our disadvantage, such
as by encouraging users to uninstall our search toolbars and
install their own. Similarly, we face a risk that other computer
manufacturers or other providers of Internet access, operating
systems, online services or browsers might decide to enter the
search market and leverage their privileged position for their
own benefit. Microsoft, in particular, has recently developed
its own search algorithm and has announced that the next version
of Windows will include expanded search functionality. To the
extent that any such actions by our competitors occur or
continue, we will likely experience reduced query volume and
lower advertising revenue.
Our growth will depend on our
ability to attract and retain new users through effective
promotional campaigns.
We believe that favorable perceptions of our search and portal
brands are essential to our future success. Accordingly, we
intend to continue pursuing brand-enhancement strategies, which
may include mass market and multimedia advertising, promotional
programs and public relations activities. As with any public
awareness campaign, we face the risk that our expenditures might
not lead to the desired result; that is, we might experience no
net increase in our brand recognition, brand loyalty, number of
new users, or Web site traffic. Furthermore, even if such
increases occur, they might not be sufficiently large to justify
the expenditures. If we are unable to promote brand awareness
and loyalty, we are unlikely to attract new users and our
existing user base might shrink through attrition.
If we are unable to develop,
acquire or otherwise provide our users with access to new search
products and portal enhancements as rapidly and successfully as
our competitors, we might be unable to maintain user
satisfaction with our search and portal sites.
In the highly competitive, consolidating, and rapidly changing
Internet environment, our future success depends in large part
on our ability to develop, acquire or otherwise provide our
users with access to popular new technologies and product
enhancements as quickly as our competitors. Our recent efforts
in this regard include our 2004 internal development of the
MyJeeves service and our 2005 acquisition of technology from
Trustic. However, our competitors continue to commit substantial
resources to service innovations. If we fail to develop,
acquire, or otherwise make important new technologies and
product enhancements available to our users as rapidly or
successfully as our competitors, we might lose market share and
never recoup our development or acquisition costs.
Recent acquisitions and any
future acquisitions might disrupt our business, dilute
stockholder value, divert management attention or be difficult
to integrate.
In mid 2004, we acquired Interactive Search Holdings, or ISH,
which nearly doubled the size of our company, as well as
Tukaroo, Inc., a small private company. In early 2005, we
acquired the stock of another small, privately-held company,
Trustic (Bloglines.com). 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.
The integration of ISH’s operations with our own required
significant
45
Ask Jeeves, Inc.
management attention and, in some respects, is still ongoing.
This and any future acquisitions might disrupt our internal
operations or otherwise require excessive management attention,
which could negatively affect other corporate initiatives. The
potential risks of any acquisition include:
|
|
|
| |
• |
difficulties in assimilating and integrating acquired personnel,
systems, operations, technologies or products; |
| |
| |
• |
adverse effects on our current employees and the inability to
retain employees of acquired companies; |
| |
| |
• |
unanticipated costs associated with acquisitions; |
| |
| |
• |
diversion of management’s attention from other business
concerns and potential disruption of our ongoing business; |
| |
| |
• |
adverse effects on our existing business relationships with our
customers; |
| |
| |
• |
potential patent or trademark infringement by acquired
technologies; |
| |
| |
• |
use of substantial portions of our available cash as all or a
portion of the purchase price; and |
| |
| |
• |
dilution of our current stockholders due to issuances of
additional securities as consideration for acquisitions. |
If we experience any of the above problems, or are otherwise
unable to integrate future acquired companies successfully or to
create new or enhanced services, we might not achieve the
anticipated benefits from our acquisitions. If we fail to
achieve the anticipated benefits from the acquisitions, we might
incur increased expenses and experience a shortfall in our
anticipated revenues and we might not obtain a satisfactory
return on our investment. In addition, if a significant number
of employees of acquired companies fail to remain employed with
us, we may experience difficulties in achieving the expected
benefits of the acquisitions.
We also might spend significant management time and costs in
pursuing acquisitions that do not come to fruition.
If we fail to maintain effective
internal financial and managerial systems, controls and
procedures, our results of operations may be harmed.
Our past business realignment and reductions in workforce placed
a significant strain on our managerial staff, financial controls
and operational resources as our employees assumed greater
responsibilities and learned to manage their increased workload
with reduced resources. Although we added additional staff and
resources since becoming profitable, we encountered additional
challenges which again stretched our management resources very
thin. In particular, our effort to review and revise our
internal controls in anticipation of the first Internal Control
Report (which is included in this annual report) placed a
significant strain on our managerial resources and caused us to
delay business initiatives that we would have otherwise
undertaken. Integrating the internal control systems of ISH (and
our other corporate acquisitions) with our own was also time
consuming and resource intensive. We continue to evaluate our
operational and financial systems and our managerial controls
and procedures to determine what changes, if any, might help us
to manage our current operations better. We face the risk that
our systems, procedures and controls might not remain adequate
to support our operations or to maintain accountability for our
assets. Any such failure could harm our results of operations.
46
Ask Jeeves, Inc.
Our current international
operations expose us to several risks and our planned
international expansion efforts in 2005 might lose
money.
Currently, we operate a separate Web site, Ask.co.uk,
located in Dublin, Ireland, that provides Internet search
services to our users in the United Kingdom and Ireland. In
addition, we hold a 47% interest in Ask Jeeves Japan, a joint
venture operating a recently-launched Japanese-language Web
search site with Japan-specific content.
During 2005, we expect to establish local language search sites
in several European markets, starting with Spain. Each site will
likely be supported by a small office of local employees.
Establishing foreign operations is a significant investment that
might not produce desired returns. However, our competitors are
expanding their operations internationally, thus if we do not
expand internationally we risk losing market share.
Like our current foreign operations, our future expansion
efforts will be subject to risks associated with all
international operations, including:
|
|
|
| |
• |
the impact of business cycles and downturns in economies outside
the United States; |
| |
| |
• |
longer payment cycles and greater difficulty in accounts
receivable collections; |
| |
| |
• |
time and resources required to comply with foreign regulatory
requirements; |
| |
| |
• |
unexpected changes in regulatory requirements; |
| |
| |
• |
difficulties and costs of staffing and managing foreign
operations; |
| |
| |
• |
challenges of complying with local labor laws; |
| |
| |
• |
potential tax liabilities if our transfer-pricing practices are
successfully challenged by the tax authorities of the nations in
which we operate; |
| |
| |
• |
reduced protection for intellectual property rights in some
countries; |
| |
| |
• |
unanticipated tax costs associated with the cross-border use of
intangible assets; |
| |
| |
• |
political and economic instability; |
| |
| |
• |
fluctuations in currency exchange rates; |
| |
| |
• |
difficulty in maintaining effective communications with
employees and customers due to distance, language and cultural
barriers; |
| |
| |
• |
lower brand recognition for Ask Jeeves and the Jeeves character
in non-English speaking countries; |
| |
| |
• |
lower per capita Internet usage in many foreign countries, for a
variety of reasons including lower disposable incomes, lack of
adequate telecommunications and computer infrastructure and
concerns regarding online security for e-commerce
transactions; and |
| |
| |
• |
competition in international markets from a broad range of
competitors. |
If we are unable to enhance the
content and services of our portal Web sites over time, our user
base may decline and our attractiveness to advertisers may
diminish.
We operate proprietary portal sites (at Excite.com, MyWay.com
and iWon.com) and implement and manage co-branded
portal sites for third parties. We intend to introduce
additional or enhanced content and services on these portals in
the future in order to retain our current users, attract new
47
Ask Jeeves, Inc.
users and remain attractive to advertisers. Our reputation and
brands could be adversely affected if we introduce content or a
service that is not favorably received. We have in the past and
may continue in the future to experience difficulties that delay
the introduction of new content or services. Further, new
content and services have in the past and might in the future
contain errors that we discover only after they are introduced,
requiring us to disable them while we modify their design to
correct these errors. Implementing enhancements to our web site
is costly and requires significant time from our engineering
personnel. Any delays we experience in implementing enhancements
to our portals might reduce our user base and diminish our
attractiveness to advertisers. If we are unable to continue to
enhance the features and functionality of our portal sites on a
timely and cost-effective basis to meet evolving user demands
and compete effectively with other portals, or if these
enhancements do not achieve widespread market acceptance, our
existing user base might not visit our portal Web sites as
frequently. Our failure to grow our user base or frequency of
visits to our portal sites might diminish our attractiveness to
advertisers.
Our email terms of service prohibit our users from sending
so-called “spam” email using their accounts on our
portals. Nonetheless, from time to time, spam email has
originated from the email accounts of our portal users,
sometimes caused by viruses that infect a user’s computer
and cause it to send email without the user’s knowledge or
active participation. We act diligently and aggressively to
enforce our email policies and to prevent spammers from
utilizing our users’ accounts in that way. However, as a
result of such spam originating from our servers, third-party
internet service providers (or other mail service providers)
have, from time to time, blocked their account holders from
receiving any email, even legitimate email, sent from our
servers. These events decrease the utility of our email service
to users and, should they continue over time, the registered
user base of our portals might decline.
Sweepstakes regulations might
limit our ability to conduct sweepstakes on
iWon.com
or limit
participation in our sweepstakes, which would adversely affect
our business model.
The business model of our iWon portal and certain other products
we distribute is premised upon our ability to operate
sweepstakes. Sweepstakes are subject to the gambling, lottery
and disclosure laws of various jurisdictions in which we offer
our sweepstakes. Currently, iWon sweepstakes are open to
residents of the U.S. and Canada (other than Quebec). Although
we outsource the operation of certain aspects of our sweepstakes
to SCA Promotions, an independent sweepstakes execution company,
and we believe that we operate our sweepstakes in compliance
with current laws and regulations in all applicable
jurisdictions, we might not be in full compliance and these laws
and regulations might change in the future. If new laws or
regulations are adopted that proscribe or limit our ability to
conduct sweepstakes online through our iWon Web site (or other
products) or significantly limit the range of individuals who
can participate in our sweepstakes, the long term ability of our
iWon portal (or these products) to generate revenues would be
severely undermined. From time to time, Congress and state
legislatures and regulatory agencies announce initiatives aimed
at the sweepstakes industry in general or regulating Internet
sweepstakes in particular. We believe that additional laws and
regulations are likely to be enacted, but we cannot predict what
they will be or what effect they might have. If we expand our
sweepstakes business model internationally, we may be subject to
additional international sweepstakes regulation. Additionally,
the Internet is a relatively new medium for sweepstakes, and it
is difficult to predict how existing laws and regulations will
be applied to our businesses.
48
Ask Jeeves, Inc.
Risks Related to Operating in
our Industry
A decrease in expenditures by
advertisers and direct marketers or a downturn in the economy
could cause our advertising revenues to decline significantly in
any given period.
We generate our revenue almost entirely from advertising,
directly or indirectly. We sell ads on our portals and search
sites, we sell and syndicate ads for display across the
MaxOnline advertising network and the Ask Jeeves Syndication
Network, we provide other direct marketing services through
AJinteractive and we display ads supplied to us by Google’s
AdWords and AdSense Programs. We believe that a large portion of
our advertising revenue is derived from ad purchases by Web
publishers, direct marketers, advertisers and advertising
agencies. Expenditures by those advertisers and direct marketers
tend to be cyclical, reflecting overall economic conditions as
well as budgeting and buying patterns. We expect our ad revenues
to continue to exhibit cyclicality. Although online advertising
spending is generally expected to increase over the next few
years, we face the risk that online advertising spending might
increase slower than predicted, or not at all, or that our
market share for online ad dollars might decline. As a result of
these risks, our revenues from marketing and advertising
services might not increase or might decline significantly in
any given period.
New technologies could block our
ads, which would harm our business.
Technologies might be developed that users could use to block
the display of our ads, or allow users to preview the pages to
which price-per-click ads lead without clicking on the ads. Most
of our revenues are derived from fees paid to us (or to our paid
listing providers) by advertisers in connection with the display
of ads on portals and in connection with clicks on
price-per-click ads on our search result pages. As a result,
ad-blocking technology or page preview technology could
adversely affect our operating results.
Index spammers could harm the
integrity of web search results, which could damage our
reputation and cause our users to be dissatisfied with our
services.
There is an ongoing and increasing effort by “index
spammers” to develop ways to manipulate the results lists
of leading search engines in order to make the spammers’
sites appear near the top of the results lists. For example, our
Teoma search technology ranks a Web page’s authority based
in part on the relevance of the Web sites that link to it, and
spammers often link a group of Web sites together in an attempt
to cause Teoma to over-estimate a site’s authority and
thereby increase its ranking in the results list. We take this
problem very seriously because providing relevant and
authoritative information to users is critical to our success.
This problem also affects Google and Yahoo!, which provide
search results on some of our sites (including
MySearch.com). If we or our competitors are unable to
develop more sophisticated algorithms that are not influenced by
index spam, our reputation for delivering relevant information
could be diminished and the usefulness of Internet search
engines, in general, could fall. Either result could cause a
decline in our user traffic which, in turn, would result in
lower proprietory and network revenues.
The operating performance of
computer systems and Web servers is critical to our business and
reputation.
Any system failure, including network, software or hardware
failure due to a computer virus, malicious users (sometimes
called hackers) or otherwise, that causes an interruption in our
service or a decrease in our responsiveness could result in
reduced user traffic on our Web sites and reduced revenues for
our business.
49
Ask Jeeves, Inc.
We have network and server equipment located at MCI in
Massachusetts and New Jersey, MFN/ AboveNet in California and
England, Qwest in New Jersey, Esat Telecommunications in Ireland
and Equinox in Japan. Although we believe that our current
back-up methods are adequate, we face the risk that our back-up
servers might fail or might cause an interruption in our service.
We have experienced slower response times and interruptions in
service due to malfunction at our hosting facilities and on the
Internet backbone networks, major software upgrades on our Web
sites and undetected software defects. These Web site
interruptions have lasted for periods ranging from a few minutes
to three hours. In addition, our Web sites also could be
affected by computer viruses, electronic break-ins or other
similar disruptions. If we continue to experience outages,
frequent or persistent system failures or degraded response
times, user satisfaction would decrease, we would likely lose
advertising revenues and our reputation and brands could be
permanently harmed.
Our users 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, a
terrorist attack, or unanticipated problem at our principal
facilities or at the servers that host or backup 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 insurance policies might not adequately
compensate us for losses that may occur due to interruptions in
our service.
The presence or perception of
click-fraud in the market might reduce our ad
revenues.
A majority of our revenue arises from ads that are sold to
advertisers on a price-per-click (or PPC) basis, meaning that
the advertiser pays a fixed fee every time a user clicks on the
ad. This pricing model is vulnerable to so-called
“click-fraud,” which occurs when clicks are submitted
on PPC ads by a party who is motivated solely by a desire to
generate revenue for the Internet site displaying the ad (or for
the online advertising network syndicating the ad). Although we
and our paid listing providers have systems in place that seek
to detect systematic click-fraud, these systems might not be
able to detect all instances of click-fraud. Recently a
purported class action lawsuit was filed against us and several
other internet media companies offering PPC advertising
(including Google and Yahoo!) seeking to recover amounts
allegedly overcharged to advertisers as a result of fraudulent
clicks. Although we intend to defend this lawsuit vigorously, if
advertisers come to perceive click-fraud as a widespread and
pervasive problem, regardless of its true extent, their
evaluation of PPC ads’ effectiveness—and thus their
willingness to purchase PPC ads—might decline. Any
reduction in the growth rate of PPC advertising online will
likely cause a corresponding reduction in our revenues.
Our long-term success depends
upon the growth and acceptance of Internet advertising as an
effective alternative to traditional advertising
media.
We compete with traditional media including television, radio
and print, in addition to other high-traffic Web sites, for a
share of advertisers’ total advertising expenditures. We
face the risk that advertisers might find Internet advertising
to be less effective than traditional media at promoting their
products or services 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.
50
Ask Jeeves, Inc.
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, particularly internationally. 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.
Legal actions may be initiated
against us seeking to hold us liable for our links to, or
advertising for, third-party Web sites.
Our Internet search services are designed to link users directly
to a page within a third-party Web site that contains a response
to a user’s query. We also display ads linking to relevant
commercial Web sites. These direct links might expose us to
legal actions seeking to hold us liable for the content of those
third-party Web sites. These actions might claim, for example,
that we should be liable for copyright or trademark infringement
or other unauthorized actions by the third-party Web site.
Although defenses are available to many claims for copyright
infringement under the Digital Millennium Copyright Act, they
require us to follow specified procedures, which we might fail
to follow precisely. Other claims may be based on errors or
false or misleading information provided through our Web sites,
including information deemed to constitute legal, medical,
financial, investment or other professional 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. And still other claims may be based on allegations
that we link to sites engaged in illegal conduct. For example,
along with Google, Yahoo! and other search companies, we are
currently defending a purported class action lawsuit premised on
our past display of ads for online gambling sites. We do not
believe that such claims generally have legal merit, but
defending against any such legal actions can be expensive and
distract management. 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.
Growth in the keyword-targeted
advertising market might be slowed by the application of
trademark laws.
When advertisers purchase keyword-targeted internet advertising,
they pay to have their graphic ad or textual paid listing appear
on a search response page whenever a user includes the
advertiser’s designated keyword(s) in his or her search
query. Recently a lawsuit was filed against Google and against
us alleging that defendants’ sale of advertising triggered
by keywords identical to plaintiff’s trademark infringes
that trademark. The plaintiff is seeking an injunction and an
unspecified amount of damages. We face a risk that trademark law
might confer upon the owner of the trademark the exclusive right
to select such trademark as a keyword when purchasing
keyword-targeted advertising. Such a result might reduce the
overall market for keyword advertising, and might result in
lower advertising revenue than would otherwise be generated.
Disruption of our ad serving
arrangements due to system failures or capacity constraints
could harm our reputation.
In 2004, our AJinteractive ad sales division began serving
banner, tower and interstitial ads to its advertising network
utilizing our AdVision technologies. These ad management
technologies reside in data centers in multiple locations in the
United States. Continued and uninterrupted performance of these
technologies is critical to AJinteractive’s ad serving
success. Network partners and advertisers may become
dissatisfied by any system failure that interrupts our ability
to provide our services to them, including failures affecting
our ability to deliver advertisements without significant delay
to the viewer or our ability to deliver an advertiser’s
online marketing campaign as scheduled. Sustained or repeated
51
Ask Jeeves, Inc.
system failures would reduce the attractiveness of
AJinteractive’s products and services to customers and
could result in contract terminations or damages resulting from
claims or litigation, thereby reducing revenue. Slower response
time or system failures may also result from straining the
capacity of our technology due to an increase in the volume of
advertising delivered through AJinteractive’s servers. To
the extent that we do not effectively address any capacity
constraints or system failures at AJinteractive, our reputation
would be adversely affected.
Spyware and adware concerns
might result in reduced revenue from our toolbars or search
services.
Recently, public concern has arisen regarding so-called
“spyware” (programs that surreptitiously monitor
users’ behavior) and “adware” (programs that
cause advertising to pop-up on the user’s computer based on
the user’s online activity). These programs are often
installed on users’ computers either without their consent
or without their full understanding as users’ navigate the
Internet. Concern over spyware and adware might cause users to
distrust unknown Web sites and to be less inclined to use the
Internet, in general, or to be less inclined to visit new or
unknown Web sites, in particular. Either result could decrease
search engine usage and thus lead to a decline in our Web
traffic and our ad revenues.
Moreover, in response to spyware and adware concerns, several
programs are available that claim to identify and remove spyware
and adware from users’ computers. Our toolbars do not
contain spyware or adware. However, some of our search toolbars
have, from time to time, been identified by these programs as
spyware or adware. We actively seek to persuade the authors of
the anti-spyware and anti-adware programs that our toolbars
should not be included on their lists. However, to the extent
that we are not successful, or to the extent that new
anti-spyware and anti-adware programs classify our toolbars as
spyware or adware, our goodwill might be harmed and users of
those programs might uninstall our toolbars. Loss of goodwill or
a decline in our installed user base could cause our Web
traffic, and thus our ad revenues, to decline.
If we do not adapt our search
services for users of cell phones, PDAs and similar devices, we
might lose market share as users increasingly use handheld
devices to access the Internet.
In the coming years, the number of individuals who access the
Internet through devices other than a personal computer is
expected to increase. These alternative devices include personal
digital assistants, known as PDAs, cellular telephones and
television set-top devices. The low resolution, functionality
and memory currently associated with some of these alternative
devices might prevent or impede their users from accessing our
graphics-rich Web services. It could also impair our ability to
monetize the user traffic, even if we launch services targeted
at handheld devices. Recently, some of our competitors have
launched services for users of handheld devices. Unless we
successfully launch versions of our Web search service and
popular portal contents that are easily accessible through these
alternative devices, we face a risk of losing market share as
users make increasing use of these alternative devices to access
the Internet.
Our ability to remain profitable
might depend on continued growth of Internet use.
Our revenue model depends in large part on the volume of
Internet user traffic to our Web sites. Our international
expansion plans will be harmed if Internet usage does not
continue to grow in our overseas markets or grows at
significantly lower rates compared to expected trends. The
continued
52
Ask Jeeves, Inc.
growth of the Internet internationally is subject to various
risks, many of which are outside our control. These risks
include the following in each market:
|
|
|
| |
• |
the Internet infrastructure might not be able to support the
demands placed on it; |
| |
| |
• |
performance and reliability of the Internet might decline as
usage grows and disruptions caused by malicious users or hackers
increases; |
| |
| |
• |
users might hesitate to engage in online commerce because they
feel insecure transmitting confidential information, such as
credit card numbers, over the Internet; and |
| |
| |
• |
users’ privacy concerns might lead them to reduce Internet
use so as to prevent Web sites from gathering user information
without the user’s knowledge or consent. |
Our business might suffer if any
of our key executives discontinues employment with us.
Our future success depends to a large extent on the services of
our key managerial employees. Although we have signed offer
letters with our executives, we have not entered into formal
employment agreements with them and we do not maintain key
person life insurance. If we are unable to retain our executive
officers or key management personnel or attract additional
qualified management in the future, our business might be
materially harmed.
Our success depends on our
ability to attract and retain skilled technical
employees.
Our success depends on our ability to attract, retain and
motivate highly skilled employees. Competition for employees
with skills in search technology is intense. We have
experienced, and we expect to continue to experience, difficulty
in hiring and retaining highly skilled employees with
appropriate qualifications. If we fail to attract, retain and
motivate highly-skilled employees, our business will be harmed.
We may face potential liability,
loss of users and damage to our reputation for violation of
privacy policies.
Each of our various Web sites has a policy in place governing
our use of any personally identifiable information we might
obtain from users of that site. 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. Similarly, under the U.K. Data Protection
Act and the E.U. Data Protection Directive, a failure to ensure
that personal information is accurate and secure or a transfer
of personal information to a country without adequate privacy
protections could result in criminal or civil penalties. If we
use personally identifiable information without permission or in
violation of our policies, we may face potential liability.
Privacy concerns relating to our
products and services could damage our reputation.
From time to time, concerns might be expressed about whether our
ad products and Internet services compromise the privacy of
users or others. Concerns about our collection, use or sharing
of personal information or other privacy-related matters could
damage our reputation and operating results, even if those
concerns are unfounded or even if our activities are permitted
by our privacy policies and by law.
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
53
Ask Jeeves, Inc.
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 was enacted by the United States
Congress. However, this legislation, known as the Internet Tax
Freedom Act, imposed only a three-year moratorium on state and
local taxes on electronic commerce, where such taxes are
discriminatory, unless such taxes were generally imposed and
actually enforced prior to October 1, 1998. The
legislation, which commenced October 1, 1998 and was to
have expired on October 21, 2001, has since been given a
five-year extension by the House of Representatives. It is
unclear which steps the legislature will take next, and failure
to continue 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 electronic commerce
marketplace and impair our ability to remain profitable.
In addition, we are not certain how our business might be
affected by the application to Internet commerce 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.
Several recent federal laws could have an impact on our
business. The Digital Millennium Copyright Act is intended, in
part, to limit the liability of eligible 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 Privacy Protection Act and
the Prosecutorial Remedies and Other Tools to End Exploitation
of Children Today Act of 2003 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.
Due to the nature of the Web, it is possible that the
governments of other states and foreign countries might attempt
to regulate Web transmissions or prosecute us for violations of
their laws. We might unintentionally violate such laws, such
laws might be modified and new laws might be enacted in the
future. Any such developments (or developments stemming from
enactment or modification of other laws) could increase the
costs of regulatory compliance for us or force us to change our
business practices.
54
Ask Jeeves, Inc.
Third parties might bring
intellectual property infringement claims against us that would
be expensive to defend and, if successful, could subject us to
significant liability and block us from using key
technology.
From time to time in the ordinary course of business we have
been subject to claims of alleged infringement of the
trademarks, patents, 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 might also result in limitations on
our ability to use the intellectual property subject to these
claims unless we are able to enter into license agreements that
might not be available on reasonable terms, or at all.
Risks Related to Accounting
Matters
The employee compensation
practices we adopt in response to new option expensing rules
might reduce our ability to attract qualified new employees,
diminish our cash available for marketing, product development
and other uses, and cause our profits and stock price to
decline.
We currently account for the issuance of stock options to
employees using the intrinsic value method under Accounting
Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees. As a result we generally recognize no
compensation cost for employee stock options. Commencing in the
third quarter of 2005, however, we will be required to begin
accounting for the fair value of stock options granted to
employees as compensation expense under FASB Statement
No. 123, revised 2004 (SFAS 123(R)), Share-Based
Payment, which is a revision of FASB Statement No. 123
(SFAS 123), Accounting for Stock-Based Compensation.
Our management and the compensation committee of our board of
directors have not yet decided how our compensation practices
will change in response to the new accounting requirements.
However, we might decide to decrease the number of employee
stock options granted to existing and prospective new employees.
Such a reduction could affect our ability to retain existing
employees and attract qualified candidates. In order to prevent
any net decrease in their overall compensation packages, we
might decide to make corresponding increases in the cash
compensation we pay to current and prospective new employees. An
increase in employee wages and salaries would diminish our cash
available for marketing, product development and other uses and
might cause our GAAP profits to decline. Any of these effects
might cause the market price of our stock to decline,
particularly if investors conclude that any resulting decrease
in reported profits from and after the third quarter of 2005 was
caused by operational problems rather than by accounting rule
changes.
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.
Over the last several years, the accounting profession has
issued several standards and interpretations relating to revenue
recognition. For example, the Emerging Issues Task Force, or
EITF, reached a consensus on Issue No. 00-21, Revenue
Arrangements with Multiple Deliverables, and the Securities
and Exchange Commission staff issued Staff Accounting Bulletin,
or SAB, No. 104, Revenue Recognition, which explains
how the SEC staff believes existing revenue recognition rules
should be applied. We believe that our current revenue
recognition policies comply with EITF 00-21 and
SAB 104.
The accounting profession continues to discuss revenue
recognition standards with the objective of providing guidance
on potential interpretations. These discussions and the issuance
of interpretations, once finalized, could lead to unanticipated
changes in our current revenue accounting practices, which
55
Ask Jeeves, Inc.
could cause us to recognize lower revenues. These changes may
extend sales cycles, increase administrative costs and otherwise
harm our business.
Risks Related to the Capital
Markets
We might not be able to secure
additional financing to meet our future capital needs.
If we are unable to generate sufficient cash flows from
operations to cover our expenses and capital expenditures, we
will need to raise additional funds. We may require additional
funding, for example, to fund brand promotion, develop new or
enhanced products and services, respond to competitive pressures
or make acquisitions. We might be unable to obtain any required
additional financing on terms favorable to us, or at all. If
adequate funds are not available on acceptable terms, we might
be unable to fund our expansion, successfully promote our brand,
develop or enhance products and services, respond to competitive
pressures or take advantage of acquisition opportunities, any of
which could seriously harm our business. In 2004, the SEC
declared effective our shelf registration statement that will
permit (but not require) us to offer and sell up to
$400.0 million of common stock, preferred stock, depositary
shares, debt securities or warrants from time to time in one or
more public offerings. The terms of any such future offerings
will be established at the time of each offering. If we raise
additional funds through the issuance of equity securities, our
stockholders might experience dilution of their ownership
interest, and the newly issued securities might have rights
superior to those of the common stock. If we raise additional
funds by issuing debt, its terms may impose limitations on our
operations, including limitations on the payment of dividends.
If we do not sustain profitability in the future and are unable
to obtain additional financing, then we will eventually be
unable to continue our operations.
Our stock price might 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. Our stock price may be subject
to wide fluctuations in response to a variety of factors,
including:
|
|
|
| |
• |
actual or anticipated variations in quarterly operating results
and announcements of technological innovations; |
| |
| |
• |
new products or services offered by us or our competitors; |
| |
| |
• |
changes in financial estimates by securities analysts; |
| |
| |
• |
changes in research coverage by securities analysts; |
| |
| |
• |
conditions or trends in the Internet search and advertising
industries; |
| |
| |
• |
any announcement by us of significant acquisitions, strategic
partnerships, joint ventures or capital commitments; |
| |
| |
• |
additions or departures of key personnel; |
| |
| |
• |
sales by current holders of our common stock and general
financial conditions and investor sentiment regarding Internet
companies generally; and |
| |
| |
• |
other events that may be beyond our control. |
In addition, the Nasdaq National Market, where many publicly
held Internet companies are traded, has periodically experienced
extreme price and volume fluctuations. These fluctuations may be
unrelated or
56
Ask Jeeves, Inc.
disproportionate to the operating performance of these
companies. These broad market and industry factors may harm 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 could
result in substantial costs and a diversion of management’s
attention and resources. Additionally, volatility or a lack of
positive performance in our stock price may adversely affect our
ability to retain key employees, all of whom have been granted
stock options.
If we fail to meet the
expectations of public market analysts and investors, the market
price of our common stock might 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 particular
Internet sites, the rapidly changing models of doing business on
the Internet and the Internet’s relatively low barriers to
entry, among other factors. As a result, and because of the
other risks noted in this discussion, our actual results might
not meet the expectations of public market analysts and
investors in future periods. If this occurs, the price of our
common stock will likely decrease.
Future sales of our stock could
affect our stock’s market price.
If our stockholders sell substantial amounts of our common
stock, including shares sold by directors or officers and shares
issued upon the exercise of outstanding options or in connection
with acquisitions, the market price of our common stock could
fall. 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 severance benefits
agreements with executive officers might prevent or delay a
change of control.
We are subject to the Delaware anti-takeover laws regulating
corporate takeovers. These anti-takeover laws prevent Delaware
corporations from engaging in a merger or sale of more than 10%
of its assets with any stockholder, including all affiliates and
associates of the stockholder, who owns 15% or more of the
corporation’s outstanding voting stock, for three years
following the date that the stockholder acquired 15% or more of
the corporation’s assets unless:
|
|
|
| |
• |
the board of directors approved the transaction in which the
stockholder acquired 15% or more of the corporation’s
assets; |
| |
| |
• |
after the transaction in which the stockholder acquired 15% or
more of the corporation’s assets, the stockholder owned at
least 85% of the corporation’s outstanding voting stock,
excluding shares owned by directors, officers and employee stock
plans in which employee participants do not have the right to
determine confidentially whether shares held under the plan will
be tendered in a tender or exchange offer; or |
| |
| |
• |
on or after this date, the merger or sale is approved by the
board of directors and the holders of at least two-thirds of the
outstanding voting stock that is not owned by the stockholder. |
A Delaware corporation may opt out of the Delaware anti-takeover
laws if its certificate of incorporation or bylaws so provide.
We have not opted out of the provisions of the anti-takeover
laws. Accordingly, 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.
57
Ask Jeeves, Inc.
Our certificate of incorporation and bylaws include a number of
provisions that may deter or impede hostile takeovers or changes
of control or management. These provisions include:
|
|
|
| |
• |
our board is classified into three classes of directors as
nearly equal in size as possible with staggered three year-terms; |
| |
| |
• |
the authority of our board to issue up to 5,000,000 shares
of preferred stock and to determine the price, rights,
preferences and privileges of these shares, without stockholder
approval; |
| |
| |
• |
all stockholder actions must be effected at a duly called
meeting of stockholders and not by written consent; |
| |
| |
• |
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 of directors or by
holders of shares entitled to cast not less than 50% of the
votes of the meeting; and |
| |
| |
• |
except under limited circumstances, no cumulative voting is
allowed. |
These provisions may have the effect of delaying or preventing a
change of control. In addition, certain material agreements
contain change in control provisions that may discourage or
delay attempts to acquire us.
Furthermore, in April 2001, we adopted a stockholder rights plan
and declared a dividend distribution of one right for each
outstanding share of common stock to stockholders of record as
of May 7, 2001. Each right entitles the holder to purchase
one unit consisting of one one-thousandth of a share of our
Series A Junior Participating Preferred Stock for
$20 per unit. Under certain circumstances, if a person or
group acquires 15% or more of our outstanding common stock,
holders of the rights (other than the person or group triggering
their exercise) will be able to purchase, in exchange for the
$20 exercise price, shares of our common stock or of any company
into which we are merged having a value of $40. The rights
expire on May 7, 2011 unless extended by our board of
directors. Because the rights may substantially dilute the stock
ownership of a person or group attempting to take us over
without the approval of our board of directors, our rights plan
could make it more difficult for a third party to acquire us or
a significant percentage of our outstanding capital stock
without first negotiating with our board of directors regarding
such acquisition.
Severance benefit letter agreements 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 could also
have the effect of discouraging potential takeover attempts.
Risks Related to our
Subordinated Convertible Notes
Our stock price has been
volatile historically and may continue to fluctuate widely
regardless of our actual operating performance. Significant
volatility in the price of our common stock will likely cause
the price of the notes to fluctuate significantly, which may
make it difficult for holders to resell the notes or the shares
of our common stock issuable upon conversion of the notes when
desired or at attractive prices.
In mid-2003 we issued $115 million aggregate principal
amount of zero coupon convertible subordinated notes due
June 1, 2008. A description of the terms of the notes
appears under the caption “Description of Notes” in
the resale prospectus we filed with the SEC under
Rule 424(b)(3) on November 21, 2003. Because the notes
are convertible into shares of our common stock, volatility or
depressed prices for our common stock could have a similar
effect on the trading price of the notes. Holders who receive
common stock upon conversion also will be subject to the risk of
volatility and depressed prices of our common stock. In
addition, the existence of the notes may encourage short
58
Ask Jeeves, Inc.
selling in our common stock by market participants because the
conversion of the notes could depress the price of our common
stock, and the short selling could also put downward pressure on
the market price of our common stock.
The notes are subordinated and
there are no financial covenants in the indenture.We may be
unable to repay our obligations under the notes.
The notes are unsecured and subordinated in right of payment in
full to all of our existing and future senior debt. Because the
notes are subordinated to our senior debt, in the event of
(1) our liquidation or insolvency, (2) a payment
default on our designated senior debt, (3) a covenant
default on our designated senior debt (as defined in
“Description of Notes—Subordination of Notes” in
the resale prospectus), or (4) acceleration of the notes
due to an event of default, we will make payments on the notes
only after our senior debt has been paid in full. After paying
our senior debt in full, we might not have sufficient assets
remaining to pay any or all amounts due on the notes.
Our subsidiaries are separate legal entities and have no
obligation to make any payments on the notes or make any funds
available for payment on the notes, whether by dividends, loans
or other payments. The payment of dividends and the making of
loans and advances to us by our subsidiaries may be subject to
statutory or contractual restrictions and are dependent upon the
earnings of our subsidiaries. Our subsidiaries have not
guaranteed the payment of the notes. Our right to receive assets
of any of our subsidiaries upon their liquidation or
reorganization, and a noteholder’s right to participate in
these assets, will be effectively subordinated to the claims of
that subsidiary’s creditors. Consequently, the notes are
effectively subordinated to all liabilities, including trade
payables, of any of our subsidiaries and any subsidiaries that
we may in the future acquire or establish, except to the extent
that we are recognized as a creditor of such subsidiary, in
which case our claims would still be subordinate to any security
interests in the assets of such subsidiary and any debt of such
subsidiary senior to that held by us.
As of December 31, 2004, (i) we had $22.1 million
of senior debt outstanding consisting primarily of operating
leases, and (ii) our subsidiaries had no outstanding
indebtedness and approximately $10.5 million of other
liabilities, including trade payables, but excluding
intercompany liabilities, to which the notes are effectively
subordinated. Neither we nor our subsidiaries are prohibited or
limited from incurring debt or acting as guarantors of debt for
others in whom we or our subsidiaries may have an interest under
the indenture. Our ability to pay our obligations on the notes
could be adversely affected by our or our subsidiaries’
incurrence of additional indebtedness or other liabilities. We
and our subsidiaries may from time to time incur additional
indebtedness and other liabilities, including senior debt. See
“Description of Notes—Subordination of Notes” in
the resale prospectus.
We significantly increased our
leverage as a result of the sale of the notes.
In connection with the sale of the notes, we incurred
$115.0 million of indebtedness, which substantially
increased our principal payment obligations. The degree to which
we are leveraged could materially and adversely affect our
ability to obtain financing for working capital, acquisitions or
other purposes and could make us more vulnerable to industry
downturns and competitive pressures.
We do not expect a public market
for the notes to develop.
There currently is no organized public trading market for the
notes in as much as they are not listed on any exchange and
there can be no assurance as to (1) the liquidity of any
market for the notes that may develop; (2) the ability of
the holders to sell their notes; or (3) the prices at which
holders of the notes would be able to sell their notes. If
markets were to exist, the notes could trade at prices higher
59
Ask Jeeves, Inc.
or lower than their initial purchase prices depending on many
factors. If an active market for the notes fails to develop or
be sustained, the trading price of the notes could decline
significantly. We do not intend to apply for listing of the
notes on any securities exchange or for quotation on The Nasdaq
National Market.
We might not have the ability to
repurchase the notes in cash if a holder exercises its
repurchase right upon the occurrence of a change in
control.
Holders of the notes have the right to require us to redeem the
notes upon the occurrence of a change in control prior to
maturity as described under the heading “Description of
Notes—Purchase of Notes at Your Option Upon a Change in
Control” in the resale prospectus. We might not have
sufficient funds to make the required repurchase in cash at such
time or the ability to arrange necessary financing on acceptable
terms. In addition, our ability to repurchase the notes in cash
might be limited by law or the terms of other agreements
relating to our indebtedness outstanding at the time. We have
the ability under the terms of the notes to pay the repurchase
price in shares of our common stock, regardless of whether we
have cash available, but doing so might be highly dilutive.
60
Ask Jeeves, Inc.
|
|
| ITEM 7A. |
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK |
Interest Rate Sensitivity
We are exposed to interest rate, market and credit risk and
related changes in the market values of our investment
portfolio. Our investment portfolio consists primarily of high
credit quality US, state and municipal government, corporate,
asset-backed, and agency debt instruments. Investments in both
fixed and floating rate securities have some degree of interest
rate risk. Fixed rate securities may have their fair market
value adversely impacted by increases in interest rates.
Floating rate securities may produce less income than
anticipated if interest rates fall. As a result, changes in
interest rates may cause us to incur losses in principal if we
are forced to sell securities that have declined in market value
or may result in lower than anticipated investment income. Our
investment portfolio is categorized as available-for-sale and
accordingly is presented at fair value on the balance sheet.
We manage our exposure to interest rate, market and credit risk
in the investment portfolio with investment policies and
procedures that limit such variables as term, credit rating and
the amount of credit exposure to any one issue, issuer and type
of instrument. We have not used derivative financial instruments
in our investment portfolio.
During the year ended December 31, 2004, the effects of
changes in interest rates on the fair market value of our
marketable investment securities and our earnings were not
material. Further, we believe that the impact on the fair market
value of our securities and our earnings from a hypothetical 10%
change in interest rates would not be significant.
We do not use derivative financial instruments in our investment
portfolio to manage interest rate risk. We place our investments
in instruments that meet high credit quality standards, as
specified in our investment policy guidelines, which limits the
amount of credit exposure to any one issue, issuer or type of
instrument.
Foreign Currency Exchange Risk
The majority of our revenue, expense and capital purchasing
activities are transacted in U.S. dollars. However, since a
significant portion of our operations occurs outside of the
U.S., we enter into transactions in other currencies, including
the British pound and the Euro. We currently do not hedge our
exposure to foreign exchange rate fluctuations. However, in
order to limit such exposure some contracts of our international
operations are denominated in U.S. dollars and certain cash
balances are maintained in U.S. dollars. Our international
business is subject to risks typical of an international
business, including but not limited to differing economic
conditions, changes in political climate, differing tax
structures, transfer pricing risks, other regulations and
restrictions and foreign exchange rate volatility, particularly
the exchange rate between the British pound and the
U.S. dollar. Changes in these or other factors could harm
our business, operating results and financial condition.
61
Ask Jeeves, Inc.
|
|
| ITEM 8. |
FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA |
Index
to Consolidated Financial Statements
| |
|
|
|
|
| |
|
Page | |
| | |
|
Report of Independent Registered Public Accounting Firm
|
|
|
63 |
|
|
Consolidated Balance Sheets
|
|
|
64 |
|
|
Consolidated Statements of Operations
|
|
|
65 |
|
|
Consolidated Statements of Stockholders’ Equity
|
|
|
66 |
|
|
Consolidated Statements of Cash Flows
|
|
|
67 |
|
|
Notes to Consolidated Financial Statements
|
|
|
68 |
|
| |
62
Ask Jeeves, Inc.
Report
of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of Ask Jeeves, Inc.
We have audited the accompanying consolidated balance sheets of
Ask Jeeves, Inc. as of December 31, 2004 and 2003, and the
related consolidated statements of operations,
stockholders’ equity, and cash flows for each of the three
years in the period ended December 31, 2004. Our audits
also included the financial statement schedule included in
Item 15(a)(2) of the Company’s Annual Report on
Form 10-K for the year ended December 31, 2004. 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.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (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 provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Ask Jeeves, Inc. at December 31, 2004
and 2003, and the consolidated results of its operations and its
cash flows for each of the three years in the period ended
December 31, 2004, 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.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of Ask Jeeves, Inc.’s internal control over
financial reporting as of December 31, 2004, based on
criteria established in Internal Control— Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission and our report dated March 10, 2005
expressed an unqualified opinion thereon.
San Francisco, California
March 10, 2005
63
Ask Jeeves, Inc.
Consolidated
Balance Sheets
| |
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, |
|
December 31, |
| (in thousands, except share and per share data) |
|
2004 |
|
2003 |
| |
|
Assets
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
| |
Cash and cash equivalents
|
|
$ |
80,452 |
|
|
$ |
36,673 |
|
| |
Marketable securities
|
|
|
29,250 |
|
|
|
143,975 |
|
| |
| |
|
Total cash, cash equivalents and marketable securities
|
|
|
109,702 |
|
|
|
180,648 |
|
| |
Accounts receivable, net of allowance for doubtful accounts of
$1,463 and $1,437 at December 31, 2004 and 2003,
respectively
|
|
|
44,911 |
|
|
|
12,062 |
|
| |
Prepaid expenses and other current assets
|
|
|
8,535 |
|
|
|
3,299 |
|
| |
| |
|
Total current assets
|
|
|
163,148 |
|
|
|
196,009 |
|
|
Property and equipment, net
|
|
|
22,761 |
|
|
|
10,933 |
|
|
Goodwill
|
|
|
264,898 |
|
|
|
— |
|
|
Intangible assets, net
|
|
|
87,887 |
|
|
|
831 |
|
|
Deferred tax asset, net
|
|
|
295 |
|
|
|
— |
|
|
Other long-term assets, net
|
|
|
5,420 |
|
|
|
4,482 |
|
| |
| |
|
Total assets
|
|
$ |
544,409 |
|
|
$ |
212,255 |
|
| |
|
Liabilities and
Stockholders’ Equity
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
| |
Accounts payable
|
|
$ |
7,153 |
|
|
$ |
1,825 |
|
| |
Accrued compensation and related expenses
|
|
|
8,245 |
|
|
|
5,137 |
|
| |
Accrued marketing expenses
|
|
|
5,010 |
|
|
|
1,272 |
|
| |
Accrued restructuring costs
|
|
|
383 |
|
|
|
1,167 |
|
| |
Accrued costs of revenue
|
|
|
10,400 |
|
|
|
1,486 |
|
| |
Other accrued liabilities
|
|
|
16,003 |
|
|
|
7,467 |
|
| |
Deferred revenue(1)
|
|
|
2,583 |
|
|
|
5,367 |
|
| |
Current portion of capital lease obligation
|
|
|
710 |
|
|
|
— |
|
| |
| |
|
Total current liabilities
|
|
|
50,487 |
|
|
|
23,721 |
|
|
Convertible subordinated notes
|
|
|
115,000 |
|
|
|
115,000 |
|
|
Capital lease obligations, less current portion
|
|
|
460 |
|
|
|
— |
|
|
Other liabilities
|
|
|
326 |
|
|
|
326 |
|
| |
| |
|
Total liabilities
|
|
|
166,273 |
|
|
|
139,047 |
|
| |
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
| |
Convertible preferred stock, $.001 par value;
5,000,000 shares authorized; no shares issued or outstanding
|
|
|
— |
|
|
|
— |
|
| |
Common stock, $.001 par value; 150,000,000 shares
authorized; 58,480,762 and 46,616,445 shares issued and
outstanding at December 31, 2004 and 2003, respectively
|
|
|
994,971 |
|
|
|
740,845 |
|
| |
Deferred stock compensation
|
|
|
(3,722 |
) |
|
|
— |
|
| |
Accumulated deficit
|
|
|
(617,525 |
) |
|
|
(670,686 |
) |
| |
Accumulated other comprehensive income
|
|
|
4,412 |
|
|
|
3,049 |
|
| |
| |
|
Total stockholders’ equity
|
|
|
378,136 |
|
|
|
73,208 |
|
| |
| |
|
Total liabilities and stockholders’ equity
|
|
$ |
544,409 |
|
|
$ |
212,255 |
|
| |
|
|
| (1) |
Includes amounts from related parties of $0 and $2,740 at
December 31, 2004 and 2003, respectively |
See accompanying notes to consolidated financial statements.
64
Ask Jeeves, Inc.
Consolidated
Statements of Operations
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, |
| (in thousands, except share and per share data) |
|
2004 |
|
2003 |
|
2002 |
| |
|
Revenues
|
|
$ |
261,327 |
|
|
$ |
107,292 |
|
|
$ |
65,048 |
|
|
Cost of revenues
|
|
|
76,153 |
|
|
|
21,917 |
|
|
|
19,302 |
|
| |
|
Gross profit
|
|
|
185,174 |
|
|
|
85,375 |
|
|
|
45,746 |
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Product development
|
|
|
24,060 |
|
|
|
14,768 |
|
|
|
13,301 |
|
| |
Sales and marketing
|
|
|
69,047 |
|
|
|
31,902 |
|
|
|
25,973 |
|
| |
General and administrative
|
|
|
27,396 |
|
|
|
19,025 |
|
|
|
15,163 |
|
| |
Amortization of other intangible assets
|
|
|
8,663 |
|
|
|
— |
|
|
|
— |
|
| |
Impairment of long-lived assets
|
|
|
— |
|
|
|
702 |
|
|
|
2,592 |
|
| |
Restructuring costs
|
|
|
— |
|
|
|
— |
|
|
|
1,653 |
|
| |
| |
|
Total operating expenses
|
|
|
129,166 |
|
|
|
66,397 |
|
|
|
58,682 |
|
| |
|
Operating income (loss)
|
|
|
56,008 |
|
|
|
18,978 |
|
|
|
(12,936 |
) |
|
Gain on acquisition and dissolution of joint ventures
|
|
|
— |
|
|
|
6,356 |
|
|
|
974 |
|
|
Interest income, net
|
|
|
1,098 |
|
|
|
1,311 |
|
|
|
1,530 |
|
|
Interest expense
|
|
|
(173 |
) |
|
|
(165 |
) |
|
|
(478 |
) |
|
Other income, net
|
|
|
191 |
|
|
|
196 |
|
|
|
54 |
|
| |
|
Income (loss) before income tax provision
|
|
|
57,124 |
|
|
|
26,676 |
|
|
|
(10,856 |
) |
|
Income tax provision
|
|
|
4,679 |
|
|
|
1,891 |
|
|
|
— |
|
| |
|
Income (loss) from continuing operations
|
|
|
52,445 |
|
|
|
24,785 |
|
|
|
(10,856 |
) |
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Loss from discontinued operations
|
|
|
— |
|
|
|
(1,218 |
) |
|
|
(10,447 |
) |
| |
Gain on sale of discontinued operations, net of taxes
|
|
|
716 |
|
|
|
2,482 |
|
|
|
— |
|
| |
|
Income (loss) from discontinued operations
|
|
|
716 |
|
|
|
1,264 |
|
|
|
(10,447 |
) |
|
Net income (loss)
|
|
$ |
53,161 |
|
|
$ |
26,049 |
|
|
$ |
(21,303 |
) |
| |
|
Earnings per Share—Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Income (loss) from continuing operations
|
|
$ |
0.97 |
|
|
$ |
0.56 |
|
|
$ |
(0.27 |
) |
| |
Income (loss) from discontinued operations
|
|
$ |
0.01 |
|
|
$ |
0.03 |
|
|
$ |
(0.25 |
) |
| |
| |
Net income (loss) per share
|
|
$ |
0.98 |
|
|
$ |
0.59 |
|
|
$ |
(0.52 |
) |
| |
|
Weighted average shares outstanding used in computing basic net
income (loss) per share
|
|
|
54,050,461 |
|
|
|
44,233,461 |
|
|
|
40,698,137 |
|
| |
|
Earnings per Share—Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Income (loss) from continuing operations
|
|
$ |
0.80 |
|
|
$ |
0.45 |
|
|
$ |
(0.27 |
) |
| |
Income (loss) from discontinued operations
|
|
$ |
0.01 |
|
|
$ |
0.03 |
|
|
$ |
(0.25 |
) |
| |
| |
Net income (loss) per share
|
|
$ |
0.81 |
|
|
$ |
0.48 |
|
|
$ |
(0.52 |
) |
| |
|
Weighted average shares outstanding used in computing diluted
net income (loss) per share
|
|
|
65,811,066 |
|
|
|
54,773,229 |
|
|
|
40,698,137 |
|
| |
|
Revenues from related parties
|
|
$ |
2,740 |
|
|
$ |
4,525 |
|
|
$ |
6,189 |
|
| |
See accompanying notes to consolidated financial statements.
65
Ask Jeeves, Inc.
Consolidated
Statements of Stockholders’ Equity
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Accumulated | |
|
|
|
|
| |
|
|
|
Shareholder | |
|
Deferred | |
|
|
|
Other | |
|
Total | |
|
|
| |
|
Common Stock | |
|
Notes | |
|
Stock | |
|
Accumulated | |
|
Comprehensive | |
|
Stockholders’ | |
|
Comprehensive | |
| in thousands, except share data |
|
Shares | |
|
Amount | |
|
Receivable | |
|
Compensation | |
|
Deficit | |
|
Income | |
|
Equity | |
|
Income (Loss) | |
| | |
|
Balances at December 31, 2001
|
|
|
39,482,015 |
|
|
$ |
722,310 |
|
|
$ |
(57 |
) |
|
$ |
(98 |
) |
|
$ |
(675,432 |
) |
|
$ |
491 |
|
|
$ |
47,214 |
|
|
|
|
|
| |
Issuance of common stock under Employee Stock Purchase Plan
|
|
|
433,540 |
|
|
|
488 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
488 |
|
|
|
|
|
| |
Issuance of common stock upon exercise of stock options and
warrants
|
|
|
1,004,292 |
|
|
|
1,124 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,124 |
|
|
|
|
|
| |
Issuance of common stock in connection with business combinations
|
|
|
774,792 |
|
|
|
1,250 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,250 |
|
|
|
|
|
| |
Repurchase of common stock
|
|
|
(224,742 |
) |
|
|
(243 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(243 |
) |
|
|
|
|
| |
Issuance of restricted common stock
|
|
|
14,168 |
|
|
|
501 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
501 |
|
|
|
|
|
| |
Amortization of deferred stock compensation
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
91 |
|
|
|
— |
|
|
|
— |
|
|
|
91 |
|
|
|
|
|
| |
Adjustment related to shareholder notes receivable
|
|
|
(65,731 |
) |
|
|
(64 |
) |
|
|
57 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(7 |
) |
|
|
|
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Unrealized losses on marketable securities
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(430 |
) |
|
|
(430 |
) |
|
$ |
(430 |
) |
| |
Foreign currency translation adjustment
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
592 |
|
|
|
592 |
|
|
|
592 |
|
| |
Net loss
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(21,303 |
) |
|
|
— |
|
|
|
(21,303 |
) |
|
|
(21,303 |
) |
| |
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(21,141 |
) |
| |
|
Balances at December 31, 2002
|
|
|
41,418,334 |
|
|
|
725,366 |
|
|
|
— |
|
|
|
(7 |
) |
|
|
(696,735 |
) |
|
|
653 |
|
|
|
29,277 |
|
|
|
|
|
| |
Issuance of common stock under Employee Stock Purchase Plan
|
|
|
230,040 |
|
|
|
630 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
630 |
|
|
|
|
|
| |
Issuance of common stock upon exercise of stock options and
warrants
|
|
|
4,201,145 |
|
|
|
12,707 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
12,707 |
|
|
|
|
|
| |
Issuance of restricted common stock
|
|
|
766,926 |
|
|
|
967 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
967 |
|
|
|
|
|
| |
Income tax benefit from stock option exercises
|
|
|
— |
|
|
|
1,175 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,175 |
|
|
|
|
|
| |
Amortization of deferred stock compensation
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
7 |
|
|
|
— |
|
|
|
— |
|
|
|
7 |
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Unrealized gains on marketable securities
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
77 |
|
|
|
77 |
|
|
|
77 |
|
| |
Foreign currency translation adjustment
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,319 |
|
|
|
2,319 |
|
|
|
2,319 |
|
| |
Net income
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
26,049 |
|
|
|
— |
|
|
|
26,049 |
|
|
|
26,049 |
|
| |
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,445 |
|
| |
|
Balances at December 31, 2003
|
|
|
46,616,445 |
|
|
|
740,845 |
|
|
|
— |
|
|
|
— |
|
|
|
(670,686 |
) |
|
|
3,049 |
|
|
|
73,208 |
|
|
|
|
|
| |
Issuance of common stock under Employee Stock Purchase Plan
|
|
|
193,540 |
|
|
|
1,152 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,152 |
|
|
|
|
|
| |
Issuance of common stock upon exercise of stock options and
warrants
|
|
|
2,577,252 |
|
|
|
11,576 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
11,576 |
|
|
|
|
|
| |
Issuance of restricted common stock
|
|
|
6,000 |
|
|
|
683 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
683 |
|
|
|
|
|
| |
Issuance of common stock in connection with business combinations
|
|
|
9,093,590 |
|
|
|
238,744 |
|
|
|
— |
|
|
|
(4,714 |
) |
|
|
— |
|
|
|
— |
|
|
|
234,030 |
|
|
|
|
|
| |
Repurchase of common stock
|
|
|
(6,065 |
) |
|
|
(229 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(229 |
) |
|
|
|
|
| |
Income tax benefit from stock option exercises
|
|
|
— |
|
|
|
2,200 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,200 |
|
|
|
|
|
| |
Amortization of deferred stock compensation
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
992 |
|
|
|
— |
|
|
|
— |
|
|
|
992 |
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Unrealized losses on marketable securities
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(241 |
) |
|
|
(241 |
) |
|
|
(241 |
) |
| |
Foreign currency translation adjustment
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,604 |
|
|
|
1,604 |
|
|
|
1,604 |
|
| |
Net income
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
53,161 |
|
|
|
— |
|
|
|
53,161 |
|
|
|
53,161 |
|
| |
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
54,524 |
|
| |
|
Balances at December 31, 2004
|
|
|
58,480,762 |
|
|
$ |
994,971 |
|
|
$ |
— |
|
|
$ |
(3,722 |
) |
|
$ |
(617,525 |
) |
|
$ |
4,412 |
|
|
$ |
378,136 |
|
|
|
|
|
| |
See accompanying notes to consolidated financial statements.
66
Ask Jeeves, Inc.
Consolidated
Statements of Cash Flows
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, |
| (in thousands) |
|
2004 |
|
2003 |
|
2002 |
| |
|
Operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$ |
52,445 |
|
|
$ |
24,785 |
|
|
$ |
(10,856 |
) |
|
Adjustment to reconcile income (loss) from continuing operations
to net cash provided by (used in) in operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Loss from discontinued operations
|
|
|
— |
|
|
|
(1,218 |
) |
|
|
(10,447 |
) |
| |
|
Depreciation and amortization
|
|
|
9,788 |
|
|
|
7,122 |
|
|
|
8,736 |
|
| |
|
Loss on disposal of assets
|
|
|
— |
|
|
|
321 |
|
|
|
3 |
|
| |
|
Stock compensation
|
|
|
1,675 |
|
|
|
39 |
|
|
|
592 |
|
| |
|
Amortization of other assets
|
|
|
18,387 |
|
|
|
2,523 |
|
|
|
2,183 |
|
| |
|
Non-cash restructuring charge
|
|
|
— |
|
|
|
— |
|
|
|
1,140 |
|
| |
|
Non-cash charge for impairment of long-lived assets
|
|
|
— |
|
|
|
702 |
|
|
|
2,593 |
|
| |
|
Non-cash charge for adjustments to shareholder notes receivable
|
|
|
— |
|
|
|
— |
|
|
|
(64 |
) |
| |
|
Gain on acquisition of joint venture
|
|
|
— |
|
|
|
(6,124 |
) |
|
|
(974 |
) |
| |
|
Income tax benefit from stock option exercises
|
|
|
2,200 |
|
|
|
1,175 |
|
|
|
— |
|
| |
|
Deferred tax asset
|
|
|
(295 |
) |
|
|
— |
|
|
|
— |
|
| |
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Accounts receivable
|
|
|
(14,856 |
) |
|
|
(2,508 |
) |
|
|
(1,072 |
) |
| |
|
|
Prepaid expenses and other assets
|
|
|
(3,397 |
) |
|
|
(757 |
) |
|
|
275 |
|
| |
|
|
Accounts payable
|
|
|
(366 |
) |
|
|
299 |
|
|
|
(3,908 |
) |
| |
|
|
Accrued compensation and related expenses
|
|
|
(1,468 |
) |
|
|
1,769 |
|
|
|
(1,383 |
) |
| |
|
|
Accrued marketing expenses
|
|
|
2,706 |
|
|
|
912 |
|
|
|
(1,141 |
) |
| |
|
|
Accrued restructuring costs
|
|
|
(786 |
) |
|
|
(741 |
) |
|
|
(17,661 |
) |
| |
|
|
Other accrued liabilities
|
|
|
5,853 |
|
|
|
2,924 |
|
|
|
(2,635 |
) |
| |
|
|
Deferred revenue
|
|
|
(3,202 |
) |
|
|
(5,423 |
) |
|
|
(4,305 |
) |
| |
|
Net cash provided by (used in) operating activities
|
|
|
68,684 |
|
|
|
25,800 |
|
|
|
(38,924 |
) |
| |
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(19,476 |
) |
|
|
(7,875 |
) |
|
|
(5,287 |
) |
|
Purchases of restricted marketable securities
|
|
|
— |
|
|
|
(39 |
) |
|
|
— |
|
|
Purchases of marketable securities
|
|
|
(50,445 |
) |
|
|
(138,136 |
) |
|
|
(2,622 |
) |
|
Maturities of marketable securities
|
|
|
34,177 |
|
|
|
— |
|
|
|
— |
|
|
Redemption of non-marketable securities
|
|
|
— |
|
|
|
— |
|
|
|
450 |
|
|
Redemption of restricted marketable securities
|
|
|
— |
|
|
|
11,000 |
|
|
|
13,741 |
|
|
Redemption of marketable securities
|
|
|
130,215 |
|
|
|
— |
|
|
|
15,101 |
|
|
Sale of discontinued operation
|
|
|
716 |
|
|
|
2,482 |
|
|
|
— |
|
|
Acquisitions of developed technology
|
|
|
(3,750 |
) |
|
|
— |
|
|
|
— |
|
|
Business combinations, net of cash acquired
|
|
|
(127,631 |
) |
|
|
— |
|
|
|
10,904 |
|
| |
|
Net cash provided by (used in) investing activities
|
|
|
(36,194 |
) |
|
|
(132,568 |
) |
|
|
32,287 |
|
| |
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock
|
|
|
12,728 |
|
|
|
13,337 |
|
|
|
1,612 |
|
|
Repurchase of common stock
|
|
|
(229 |
) |
|
|
— |
|
|
|
(243 |
) |
|
Issuance of convertible subordinated notes, net
|
|
|
— |
|
|
|
111,744 |
|
|
|
— |
|
|
Repayment of notes receivable to stockholders
|
|
|
— |
|
|
|
— |
|
|
|
57 |
|
|
Repayment of note payable
|
|
|
(2,144 |
) |
|
|
— |
|
|
|
— |
|
|
Repayment of borrowings under line of credit
|
|
|
— |
|
|
|
(11,000 |
) |
|
|
— |
|
|
Repayment of capital lease obligations
|
|
|
(670 |
) |
|
|
(572 |
) |
|
|
(893 |
) |
| |
|
Net cash provided by financing activities
|
|
|
9,685 |
|
|
|
113,509 |
|
|
|
533 |
|
| |
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
1,604 |
|
|
|
2,319 |
|
|
|
592 |
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
43,779 |
|
|
|
9,060 |
|
|
|
(5,512 |
) |
|
Cash and cash equivalents at beginning of year
|
|
|
36,673 |
|
|
|
27,613 |
|
|
|
33,125 |
|
| |
|
Cash and cash equivalents at end of year
|
|
$ |
80,452 |
|
|
$ |
36,673 |
|
|
$ |
27,613 |
|
| |
|
Supplemental disclosure of
non-cash investing and financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Common stock issued for business combinations
|
|
$ |
238,744 |
|
|
$ |
— |
|
|
$ |
1,250 |
|
| |
Interest paid
|
|
$ |
173 |
|
|
$ |
165 |
|
|
$ |
478 |
|
| |
Income taxes paid
|
|
$ |
1,515 |
|
|
$ |
— |
|
|
$ |
— |
|
| |
See accompanying notes to consolidated financial statements.
67
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 information search and retrieval
services to users free of charge through a diverse portfolio of
Web sites, downloadable applications and distribution networks.
On the Company’s Ask Jeeves brand sites—Ask.com
in the U.S., Ask.co.uk in the U.K. and Ask.jp
(a joint venture) in Japan—users submit queries and the
Company’s algorithmic search engine, Teoma, responds by
generating a list of Web sites likely to offer the most
authoritative content. The Company’s proprietary Web brands
also include three content-rich portals (Excite.com, iWon.com
and MyWay.com) and several other search sites. The
Company earns revenue primarily by displaying paid listings and
other advertisements on its proprietary sites; and also
generates advertising receipts by distributing ads and search
services across two networks of third-party Web sites: the
MaxOnline advertising network and the Ask Jeeves syndication
network. The Company pays fees to these network sites in order
to reach their users with its ads and services. The
Company’s proprietary technologies include Teoma, its
natural language processing software, portal technology and
ad-serving processes.
Ask Jeeves’ strategic goal is to become a leading provider
of differentiated search solutions to users, advertisers,
publishers and partners. The Company is pursuing this goal using
a multiple brand strategy.
Until July 1, 2003, the Company operated through two
divisions, Web Properties and Jeeves Solutions. On July 1,
2003, the Company sold certain assets used in the Jeeves
Solutions business to Kanisa Inc. (“Kanisa”), at which
time the Company ceased offering Jeeves Solutions software and
services.
On May 6, 2004, Ask Jeeves acquired Interactive Search
Holdings, Inc. (“ISH”), which became a wholly-owned
subsidiary of the Company. ISH operates several portals and
search sites and develops and distributes desktop applications.
See Note 2 Business Combinations.
Basis of Presentation
The accompanying consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. All
significant intercompany transactions and balances have been
eliminated upon consolidation.
The investment in the Ask Jeeves Japan joint venture (in which
the Company has significant influence but does not have a
controlling voting interest or a majority interest in the
assets, obligations or results of operations) is accounted for
under the equity method. Investments in which the Company does
not have the ability to exert significant influence are
accounted for at cost.
Certain prior period balances have been reclassified to conform
to the current year presentation. The reclassifications did not
affect previously reported net income.
68
Ask Jeeves, Inc.
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. For the
Company, such estimates include revenue recognition, allowances
for doubtful accounts, legal contingencies, accounting for
income taxes but are not limited to, impairment of goodwill, and
impairment of long-lived assets. Actual results could differ
materially from those estimates.
Cash and Cash
Equivalents
The Company considers all cash and highly liquid investments
with an original maturity term of less than three months at the
date of purchase to be cash equivalents. Highly liquid
investments included in cash and cash equivalents include
commercial paper and short-term U.S., state and government
securities.
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 four major
financial institutions.
Marketable Securities
The Company’s marketable securities are primarily comprised
of U.S., state and municipal government securities and corporate
debt securities. Marketable securities are primarily held in the
custody of two major financial institutions. The specific
identification method is used to determine the cost of
securities sold. At December 31, 2004 and 2003, all of the
Company’s marketable securities were 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).
The Company performs periodic reviews of its investments for
impairment which is other than temporary. Impairment write-downs
if required, create a new carrying value for investments and the
Company does not record subsequent increases in fair value in
excess of the new carrying value.
Allowances for Doubtful
Accounts
The Company makes judgments as to its ability to collect
outstanding receivables and provides an allowance for the
portion of receivables when collection becomes doubtful.
Provisions are made based upon a specific review of all
significant outstanding invoices. For those invoices not
specifically reviewed, provisions are provided at differing
rates, based upon the age of the receivable. In determining
these percentages, the Company has analyzed its historical
collection experience and current economic trends.
The Company also records a provision for returns and revenue
adjustments in the same period as the related revenues are
recorded. These estimates are based on historical analysis of
credit memo data and other factors.
Concentrations, Credit Risk and
Credit Risk Evaluations
Concentrations of Revenue
During the years ended December 31, 2004, 2003 and 2002,
paid listing revenues from one provider accounted for 69%, 55%
and 15% of revenues from continuing operations, respectively.
This provider accounted for 38% and 39% of gross accounts
receivable as of December 31, 2004 and 2003, respectively.
The Company’s paid listing agreements with this provider
are scheduled to terminate December 31, 2007, unless
renewed by mutual agreement.
69
Ask Jeeves, Inc.
Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash and cash
equivalents, short-term marketable securities, and trade
receivables. Cash and cash equivalents consist principally of
demand deposit and money market accounts, and commercial paper.
Marketable securities consist primarily of U.S., state and
municipal government securities and corporate debt securities
with strong credit ratings. Cash and cash equivalents and
marketable securities are held at three major financial
institutions 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 in the United
States and United Kingdom. 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 two to five years.
Leasehold improvements are amortized over the shorter of the
useful life of the asset or the lease term. Incentives provided
by the lessor to the Company in connection with operating lease
agreements are capitalized as tenant improvements and deferred
rental obligations and amortized over the respective lease
terms. Incentives deemed to be assets of the lessor are excluded
from the accounts of the Company. Additionally, it is the
Company’s policy to capitalize certain costs for
internal-use software incurred during the application
development stage, in accordance with Statement of Position
98-1, Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use. Amortization begins once the
software is ready for its intended use.
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
Goodwill
The Company’s long-lived assets include goodwill and other
intangible assets. Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets,
requires that goodwill be tested for impairment at the reporting
unit level (operating segment or one level below an operating
segment) on an annual basis and between annual tests in certain
circumstances. Application of the goodwill impairment test
requires judgment, including the identification of reporting
units, assigning assets and liabilities to reporting units,
assigning goodwill to reporting units, and determining the fair
value of each reporting unit. Significant judgments required to
estimate the fair value of reporting units include estimating
future cash flows, determining appropriate discount rates and
other assumptions. Changes in these estimates and assumptions
could materially affect the determination of fair value for each
reporting unit. Any impairment losses recorded in the future
could have a material adverse impact on
70
Ask Jeeves, Inc.
our financial condition and results of operations. The Company
performed its annual impairment test on October 1, 2004 and
found no indicators of impairment.
Intangible Assets
Statement of Financial Accounting Standards No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets, requires that the Company record an impairment
charge on finite-lived intangibles or long-lived assets to be
held and used when the Company determines that an indicator
exists and the carrying value of intangible assets and
long-lived assets may not be recoverable. Based on the existence
of one or more indicators of impairment, the Company measures
any impairment of intangibles or long-lived assets based on the
difference between book value of the asset and fair value as
determined using a projected discounted cash flow method using a
discount rate determined by its management to be commensurate
with the risk inherent in its business model. The Company’s
estimate of cash flows requires significant judgment based on
its historical results and anticipated results and are subject
to many factors. Any impairment losses recorded in the future
could have a material adverse impact on the Company’s
financial condition and results of operations.
Revenue Recognition
Ask Jeeves generates revenue from the following main sources:
|
|
|
| |
• |
sales, syndication and display of paid listings, branded
advertising and other syndicated services; |
| |
| |
• |
sales of paid inclusion products; |
| |
| |
• |
licensing of search technologies; and |
| |
| |
• |
AJinteractive advertising sales and services. |
The Company recognizes revenue in accordance with current
generally accepted accounting principles. The Company’s
revenue recognition policy is a critical accounting policy
because revenue is a key component of its results of operations
and is based on complex rules which require the Company to make
judgments and estimates. In all cases, revenue is recognized
only when all of the following criteria are satisfied:
|
|
|
| |
• |
persuasive evidence of an arrangement exists; |
| |
| |
• |
the service has been performed or delivered (or revenue is
recognized over the period in which the service is delivered); |
| |
| |
• |
the price is fixed or determinable; and |
| |
| |
• |
collectibility of the resulting receivable is reasonably assured. |
If the Company doubts the collectibility of revenue at the time
the service is performed or delivery occurs, it defers
recognizing the revenue until it is received in cash.
Paid Listings, Branded Advertising and other Syndicated
Services
There are several pricing plans for Internet advertisements, and
the way in which the Company earns ad revenue varies among them.
Depending upon the pricing terms, the Company earns revenue
every time a graphic ad is displayed (referred to as cost per
thousand impressions, or CPM, pricing), every time a user clicks
on an ad (referred to either as price per click (PPC) or cost
per click (CPC) pricing), every time a user indicates interest
in the advertised topic (referred to as cost per lead, or CPL,
pricing) or every time a user clicks-through on the ad and takes
a specified action on the destination site (referred to as cost
per action, or CPA, pricing).
71
Ask Jeeves, Inc.
The Company generates revenue primarily by displaying paid
listings and other advertisements on its search results pages.
Although some types of ads (such as banners and towers) are sold
by its direct sales force, the Company obtains the majority of
its paid listings from third-party providers, primarily Google
Inc. Google administers contracts with hundreds of thousands of
advertisers, who bid to have their paid listings appear on
participating search results pages (in response to designated
keywords). The Company displays paid listings from Google on
almost all of the results pages it controls and it syndicates
them to some of the third-party sites in its syndication network.
Paid listings are normally priced on a price per click, or PPC,
basis (also known as cost-per-click, or CPC, pricing), which
means that advertisers are charged only if the ad gets
results—only if their paid listing attracts a user’s
click. When the Company delivers a user’s click to a paid
listing supplied by Google, Google bills the advertiser and
shares a portion of its resulting paid listing fee with the
Company. The Company’s right to payment from Google is not
contingent upon Google’s ability to collect the fee from
its advertisers and the Company recognizes paid listing revenue
from Google as soon as it delivers the user’s click. The
Company recognizes the advertiser’s paid listing fee as
revenue, net of amounts retained by Google. In cases where the
user’s click is generated by a third-party site to which
the Company syndicates paid listings, the Company continues to
recognize its entire receivable amount from Google as revenue
and records its revenue-sharing payment to the third-party site
as a Web-traffic acquisition cost (within cost of revenues). The
Company’s paid listing supply agreements with Google are
scheduled to expire on December 31, 2007, unless renewed by
mutual agreement.
As with paid listings, the Company recognizes revenue from
content-targeted ads on a price per click
(PPC) revenue-sharing basis, net of amounts retained by the
third-party ad provider.
In addition to paid listings, the Company’s branded
advertising ranges from keyword-targeted graphic units, which it
offers as its Branded Response product, to content-targeted and
non-targeted advertising units such as banners, towers, buttons
and pop-ups, which appear primarily on its portals and MaxOnline
network sites. With these products, advertisers generally pay to
have their ads displayed over a designated period of time, so
branded advertising is generally sold on a cost per thousand
impressions, or “CPM,” basis. The Company recognizes
revenue derived from CPM arrangements during the period in which
the advertising impressions are delivered, provided that no
significant obligations remain and collection of the resulting
receivable is probable. The Company’s obligations typically
include a guaranteed minimum number of “impressions”
or times that an advertisement appears. To the extent the
minimum guaranteed impressions are not delivered, the Company
continues to run the ad and defer recognition of the
corresponding revenue until the remaining guaranteed impression
level is achieved.
The Company sells some branded advertising for which the
advertiser pays only if the user clicks on the ad and goes on to
take another action on the destination Web site. This
arrangement is known as cost per action, or “CPA,”
pricing. The Company recognizes revenue from CPA arrangements
when a user takes an action on the destination Web site,
provided that collection of the resulting receivable is probable.
The Company obtains some of its paid listing and branded
advertising inventory directly, when ads are sold to advertisers
by its direct sales force, while others are obtained from its
third-party providers, primarily Google. The Company displays
ads from both sources on its sites and syndicates ads from both
sources to third-party sites, in which case it shares its ad
revenues with the third party. If its direct sales force sells
the ad and syndicates it for display on a third-party site, the
Company recognizes the ad revenue on a gross basis in accordance
with the criteria set forth in Emerging Issues Task Force Issue
No. 99-19, Reporting Revenue Gross as a Principal versus
Net as an Agent. Criteria include factors
72
Ask Jeeves, Inc.
such as whether the Company acts as the primary obligor in the
arrangement, performs a significant portion of the service, sets
the pricing, and retains the credit risk. If the Company instead
procures the paid listing from a third-party provider such as
Google and displays it on one of its sites or for users of one
of its toolbars, it receives revenue-sharing fees from the
provider and recognizes that revenue net of any amounts retained
by the provider. Whether the Company acquired the advertisement
from a paid listings provider or originated the ad sale using
its own sales force, if it goes on to syndicate the ad to a
third-party site it records the revenue-sharing fees it pays to
the third party site as Web-traffic acquisition cost (within
cost of revenues).
Paid Inclusion
Until the second quarter of 2004, the Company offered paid
inclusion products, which provided an opportunity for Web sites
to ensure that they were included in its search index. Although
the Company has ceased offering any paid inclusion products, the
Company will continue to recognize paid inclusion revenue until
the termination of all existing paid inclusion service periods.
The Company recognizes paid inclusion revenue using either of
two methods. First, for paid inclusion products that were priced
on a “per URL” basis, the Company collected the
revenues in advance and recognizes them over the appropriate
service period, which is typically one year. Second, for paid
inclusion products that were priced on a CPC basis, the Company
recognizes the revenue when the click is delivered.
Licensing
In the third quarter of 2000, the Company licensed its search
technology to its Japanese joint venture (in which it holds a
minority interest) and received a non-recurring license payment.
The Company recorded this payment as deferred revenue and
recognized it as revenue on a straight-line basis over a
four-year period. This license revenue reached the end of its
amortization period during the third quarter of 2004 and
recognition of the revenue ended.
AJinteractive
The Company’s AJinteractive division generates revenue from
ad sales and under commission-based and service fee-based
contracts. It recognizes these revenues in the period the
advertising is delivered, provided collection of the resulting
receivable is probable. It records revenue earned from
commission-based contracts on a net basis, which reflects the
amount of commissions earned by the Company. For service
fee-based contracts, the Company is obligated to pay a fee to
the Web publishers for ads placed on its Web sites. The Company
includes those fees in cost of revenue. Additionally, under
service fee-based contracts, it collects payments, and bears the
risk of loss, for ads sold. Consequently, the Company records
revenue earned from service fee-based contracts on a gross
basis, net of an allowance for advertiser credits, which are
estimated and established in the period in which services are
provided.
Stock-Based
Compensation
The Company accounts for employee stock options using the
intrinsic value method and makes the required pro forma
disclosures as if the fair value method had been used.
Compensation expense based on the difference, if any, on the
measurement date (generally the date of grant), between the 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.
The Company amortizes its stock-based compensation under
APB 25 using a straight-line basis over the remaining
vesting term of the related options. The Company calculates the
estimated value of its stock-
73
Ask Jeeves, Inc.
based compensation under SFAS 123 using a multiple option
approach and amortizes the related expense using an accelerated
(“attribution”) method over the vesting term of the
options as required by SFAS Interpretation 28,
Accounting for Stock Appreciation Rights and Other Variable
Stock Option or Award Plans (an interpretation of APB Opinions
No. 15 and 25).
Pro Forma Disclosures of the
Effect of Stock-Based Compensation
Pro forma information regarding the results of operations and
net income (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 was 3.6% for 2004, 2.9% for 2003 and
5.0% for 2002. The expected life of options granted in the years
ended December 31, 2004, 2003 and 2002, was 7.3 years,
7.6 years, and 10.0 years, respectively. No dividend
and a volatility factor of .8, 1.1, and 1.2 for 2004, 2003, and
2002, 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 income
(loss) and basic and diluted net income (loss) per share would
have been increased or decreased to the pro forma amounts
indicated below (in thousands, except per share amounts):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| | |
|
Net income (loss), as reported
|
|
$ |
53,161 |
|
|
$ |
26,049 |
|
|
$ |
(21,303 |
) |
|
Add:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock compensation expense included in reported net income
|
|
|
992 |
|
|
|
6 |
|
|
|
77 |
|
|
Deduct:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based employee compensation expense determined under
fair value based method for ESPP
|
|
|
(718 |
) |
|
|
(408 |
) |
|
|
(300 |
) |
|
Total stock-based employee compensation expense determined under
fair value based method for stock options
|
|
|
(31,707 |
) |
|
|
(8,300 |
) |
|
|
(3,442 |
) |
| |
|
Net income (loss), pro forma
|
|
$ |
21,728 |
|
|
$ |
17,347 |
|
|
$ |
(24,968 |
) |
| |
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic, as reported
|
|
$ |
0.98 |
|
|
$ |
0.59 |
|
|
$ |
(0.52 |
) |
|
Basic, pro forma
|
|
$ |
0.40 |
|
|
$ |
0.39 |
|
|
$ |
(0.61 |
) |
|
Diluted, as reported
|
|
$ |
0.81 |
|
|
$ |
0.48 |
|
|
$ |
(0.52 |
) |
|
Diluted, pro forma
|
|
$ |
0.33 |
|
|
$ |
0.32 |
|
|
$ |
(0.61 |
) |
| |
74
Ask Jeeves, Inc.
The weighted-average grant-date fair value of options granted
was $22.50, $8.78, and $1.37, for grants made during years ended
December 31, 2004, 2003 and 2002, respectively.
Advertising Costs
The Company expenses the costs of advertising as incurred.
Advertising expense of continuing operations for the years ended
December 31, 2004, 2003 and 2002 was $20.0 million,
$6.3 million and $1.3 million, respectively.
Income Taxes
The Company uses the asset and 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. The Company currently has substantial
US net operating loss carryforwards. The Company has recorded a
100% valuation allowance against its US net deferred tax assets
due to uncertainty of their ultimate realization. The Company
has not established a valuation allowance against the deferred
tax assets arising in certain foreign tax jurisdictions. Based
on expected future operating results in these jurisdictions, the
Company believes that realization of these deferred tax assets
is more likely than not.
Foreign Currency
Translation
The functional currency of Ask Jeeves U.K. is the British pound.
The financial statements of this subsidiary are translated to
U.S. dollars using rates of exchange at the balance sheet
date for assets and liabilities, and average rates of exchange
for the year of revenues, costs and expenses. Translation gains
(losses) are deferred and accumulated in accumulated other
comprehensive income as a component of stockholders’
equity. Net gains and losses resulting from foreign exchange
transactions are included in the consolidated statements of
operations.
The functional currency of Ask Jeeves Europe is the
U.S. dollar. Gains and losses resulting from foreign
currency transactions are included in current results of
operations.
Net Income (Loss) Per
Share
Basic net income (loss) per share is computed by dividing net
income (loss) for the period by the weighted average number of
common shares outstanding during the period. Diluted net income
(loss) per share is computed by dividing net income (loss) by
the weighted average number of common shares outstanding during
the period, plus the dilutive effect of outstanding stock
options, warrants, and convertible subordinated notes.
Potentially dilutive securities have been excluded from the
computation of diluted net loss per share as their effect is
antidilutive.
Recent Accounting
Pronouncements
In December 2004, the FASB issued FASB Statement No. 123,
revised 2004 (SFAS 123(R)), Share-Based Payment,
which is a revision of FASB Statement No. 123
(SFAS 123), Accounting for Stock-Based Compensation.
SFAS 123(R) supersedes APB 25 and amends FASB
Statement No. 95, Statement of Cash Flows.
Generally, the approach in SFAS 123(R) is similar to the
approach described in SFAS 123. However, SFAS 123(R)
requires all share-based payments to employees, including
grants of employee stock options, to be recognized in the income
statement based on their fair values. Pro forma disclosure
75
Ask Jeeves, Inc.
is no longer an alternative. SFAS 123(R) permits public
companies to adopt its requirements using one of two methods:
|
|
| • |
A “modified prospective” method in which compensation
cost is recognized beginning with the effective date
(a) base on the requirements of SFAS 123(R) for all
share-based payments granted after the effective date and
(b) based on the requirements of SFAS 123(R) for all
awards granted to employees prior to the effective date of
SFAS 123(R) that remain unvested on the effective date. |
| |
| • |
A “prospective” method which includes the requirements
of the modified prospective method described above, but also
permits entities to restate based on the amounts previously
recognized under SFAS 123(R) for purposes of pro forma
disclosures either (a) all prior periods presented or
(b) prior interim periods of the year of adoption. |
SFAS 123(R) must be adopted no later than the first interim
period after June 15, 2005. Early adoption will be
permitted in periods in which financial statements have not yet
been issued. The Company expects to adopt SFAS 123(R)
beginning with the first interim period after June 15,
2005. Although it has not completed its evaluation of the impact
of this accounting pronouncement, the adoption of
SFAS 123(R) is expected to have a material adverse effect
on the Company’s consolidated financial position and
results of operations.
As permitted by SFAS 123, the Company currently accounts
for share-based payments to employees using APB 25’s
intrinsic value method and, as such, generally recognizes no
compensation cost for employee stock options. Accordingly, the
adoption of SFAS 123(R)’s fair value method will have
a significant impact on the Company’s result of operations,
although it will have no impact on its overall cash position.
Although the Company has not completed its evaluation of the
impact of this accounting pronouncement, had the Company adopted
SFAS 123(R) in prior periods, the impact of that standard
would have approximated the impact of SFAS 123 as described
in the disclosure of pro forma net income and earnings per share
in Note 1 to the Consolidated Financial Statements.
SFAS 123(R) also requires the benefits of tax deductions in
excess of recognized compensation cost to be reported as a
financing cash flow, rather than as an operating cash flow as
required under current literature. This requirement will reduce
net operating cash flows and increase net financing cash flows
in periods after adoption. While the Company cannot estimate
what those amounts will be in the future (because they depend
on, among other things, when employees exercise stock options),
there were no amounts recognized in prior periods for such
excess tax deductions in the Company’s reported operating
cash flows.
2. BUSINESS
COMBINATIONS
Acquisition of Interactive
Search Holdings
On May 6, 2004, the Company completed its acquisition of
all of the outstanding capital stock of Interactive Search
Holdings, Inc. (ISH), an online search and media company. The
acquisition significantly increased the Company’s market
share and provided additional channels of distribution for the
Company’s search services. These factors contributed to a
purchase price in excess of the fair value of ISH’s net
tangible and intangible assets acquired, and as a result, the
Company has recorded goodwill in connection with this
transaction.
76
Ask Jeeves, Inc.
The total purchase cost for ISH of approximately
$395.1 million consists of the following (in thousands,
except share data):
| |
|
|
|
|
| |
|
Common stock (9,093,590 shares at $25.73 per share)
|
|
$ |
233,978 |
|
|
Vested Stock options (206,238 shares, at fair value)
|
|
|
4,766 |
|
|
Cash
|
|
|
143,984 |
|
|
Transaction costs
|
|
|
12,404 |
|
| |
| |
|
$ |
395,132 |
|
| |
The value of the common stock issued was determined based on the
average market price of the Company’s common shares over
the period two days before and after the terms of the
acquisition were agreed to and announced. The fair value of the
stock options was determined as of the same date using the
Black-Scholes option valuation model using the following
assumptions: risk-free interest rate of 3.7%, expected life of
4.3 years and a volatility factor of 1.1. No dividend was
assumed.
The total purchase cost of the acquisition of ISH has been
allocated to assets and liabilities based on management’s
determination of their fair values together with the use of
valuation studies performed by a third party. The excess of the
purchase consideration over the fair value of the net assets
acquired has been allocated to goodwill. During the third and
fourth quarter of fiscal 2004, certain adjustments, corrections,
and reclassifications to the allocation of the purchase cost of
ISH were made. These items resulted in a decrease to goodwill of
$7.1 million. None of these items affected the results of
operations for either of the quarters ended September 30,
2004 or December 31, 2004. The following table summarizes
the estimated fair values of the assets acquired and liabilities
assumed and the estimated lives of the amortizable intangible
assets (in thousands, except lives):
| |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Estimated |
| |
|
Amount |
|
Lives |
| |
|
Cash and cash equivalents
|
|
$ |
28,178 |
|
|
|
|
|
|
Other tangible assets
|
|
|
23,912 |
|
|
|
|
|
|
Amortizable intangible assets:
|
|
|
|
|
|
|
|
|
| |
Developed/core technology
|
|
|
3,785 |
|
|
|
3 years |
|
| |
User Base
|
|
|
30,608 |
|
|
|
3 years |
|
| |
Advertiser and distribution partner relationships
|
|
|
61,479 |
|
|
|
5 years |
|
| |
Trade names
|
|
|
5,105 |
|
|
|
5 years |
|
|
Goodwill
|
|
|
264,898 |
|
|
|
|
|
| |
| |
|
Total assets acquired
|
|
|
417,965 |
|
|
|
|
|
| |
|
Liabilities assumed and incurred
|
|
|
(27,547 |
) |
|
|
|
|
|
Deferred stock-based compensation (stockholders’ equity)
|
|
|
4,714 |
|
|
|
|
|
| |
| |
|
Total
|
|
$ |
395,132 |
|
|
|
|
|
| |
Goodwill represents the excess of the purchase price over the
fair value of the net tangible and intangible assets acquired.
The net purchase price paid for ISH was based on historical as
well as expected performance metrics. ISH had a relatively short
business history and was unprofitable in every year prior to
2002. As a result, the predominant portion of purchase price was
based on the expected financial performance of ISH, and not the
net asset value on the books at the time of the acquisition.
This resulted in a significant amount of the purchase price
being allocated to goodwill. Goodwill is not deductible for
income tax purposes and will not be amortized for financial
reporting purposes. Further, it will be tested for impairment,
at least annually.
77
Ask Jeeves, Inc.
In conjunction with the acquisition, the Company accrued
$1.1 million related to involuntary termination benefits.
The amount includes severance, COBRA and outplacement services.
Further, the Company accrued $1.3 million related to lease
buy-outs for vacated properties formerly occupied by ISH
employees.
Net deferred income tax assets related to the acquisition of
Interactive Search Holdings had been fully offset by a valuation
allowance.
The results of ISH’s operations have been included in the
Company’s consolidated financial statements since
May 6, 2004, the date of the acquisition. The following
unaudited pro forma financial information for Ask Jeeves, Inc.,
presented in the table below, represents the combined revenue,
net income and net income per share of the Company for the years
ended December 31, 2004, 2003 and 2002, respectively, as if
the acquisition of ISH had occurred on the first day of the
periods presented, including the amortization of identified
intangible assets (in thousands, except per share data).
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| | |
|
Revenue
|
|
$ |
314,158 |
|
|
$ |
192,160 |
|
|
$ |
113,062 |
|
|
Income (loss) from continuing operations
|
|
$ |
50,842 |
|
|
$ |
12,845 |
|
|
$ |
(30,195 |
) |
|
Income (loss) from continuing operations per share—basic
|
|
$ |
0.95 |
|
|
$ |
0.25 |
|
|
$ |
(0.62 |
) |
|
Income (loss) from continuing operations per share—diluted
|
|
$ |
0.78 |
|
|
$ |
0.20 |
|
|
$ |
(0.62 |
) |
| |
Joint Ventures
Ask Jeeves U.K.
In February 2002, the Company acquired the entire outstanding
equity interests in Ask Jeeves U.K. Previously, the Company held
a fifty percent interest in Ask Jeeves U.K., a joint venture
partnership with Carlton Communications PLC and Granada Media
Group Limited, that was formed to market the Company’s
search and self-service technologies and services in the United
Kingdom. The Company acquired full ownership of Ask Jeeves U.K.
to enhance the synergies that exist between the U.S. and U.K.
operations. The total consideration paid for the acquisition of
Ask Jeeves U.K. included cash of $1.2 million and
774,792 shares of Ask Jeeves common stock with a fair value
of $1.3 million. The assets recorded in the transaction
consisted of cash of $7.0 million, accounts receivables of
$1.9 million and other current assets of $800,000 and the
assumption of liabilities of $750,000 and transaction expenses
of approximately $450,000. At the time of the acquisition, Ask
Jeeves U.K. had an obligation to pay to Ask Jeeves license and
maintenance fees applicable to future periods totaling in excess
of $10.5 million. The partners in the Ask Jeeves UK
partnership, excluding Ask Jeeves, had an obligation to fund
payment of these license fees and other ongoing operating losses
through capital contributions and a bank loan facility
guarantee. Ask Jeeves did not have, nor did it ever have, a
commitment or intent to provide additional funding or guarantees
of any obligations. Ask Jeeves U.K. had reported a loss of
£18.4 million and £11.4 million in fiscal
years 2000 and 2001, respectively.
During 2002, the Company recognized a gain of $974,000
representing the remaining balance of deferred license fees paid
to it by Ask Jeeves U.K., for a licensing arrangement that was
terminated when the Company acquired the entity. The gain was
recognized as other income.
During 2003, the Company recognized a gain of $6.1 million
in connection with the acquisition of Ask Jeeves U.K. This
amount represents the fair value of net assets the Company
recorded in excess of the consideration paid upon the
acquisition of the remaining outstanding equity interests in its
joint venture which was deferred due to a contingent payment
obligation in the Company’s agreement with its former
partners. The gain was recognized as other income when the
contingent payment obligation to the former partners expired in
March 2003.
78
Ask Jeeves, Inc.
The acquisition was accounted for as a purchase business
combination and accordingly, the consolidated financial
statements include the operating results of Ask Jeeves U.K. from
the date of acquisition. Previously, the Company accounted for
its investment in the joint venture under the equity method of
accounting. The Company had recorded no value for its interest
in the joint venture for accounting purposes. Therefore, the
Company had not previously recognized any portion of the net
losses of the joint venture. The unaudited pro forma information
presented in the table below represents the combined revenue,
net loss, and net loss per share of the Company as if the
acquisition had taken place on January 1, 2002.
| |
|
|
|
|
| |
|
For Year Ended |
| |
|
December 31, |
| (in thousands, except share and per share amounts) |
|
2002 |
| |
|
Revenues
|
|
$ |
65,117 |
|
|
Loss from continuing operations
|
|
$ |
(11,947 |
) |
|
Net loss
|
|
$ |
(22,394 |
) |
|
Net loss per share basic and diluted
|
|
$ |
(0.55 |
) |
|
Weighted average shares outstanding used in computing basic and
diluted net loss per share
|
|
|
40,698,137 |
|
| |
Ask Jeeves Japan
Ask Jeeves Japan, a joint venture with Trans Cosmos Inc. USA, a
subsidiary of a Japanese customer service and information
technology support provider, was established to launch a
Japanese language version of Ask.com, create Japanese
specific content for the Japanese Ask.com Web site, and
to market Jeeves Solutions products and services to the Japanese
marketplace. The Company owns approximately 47 percent of
the voting securities of this joint venture. In connection with
the establishment of Ask Jeeves Japan, Ask Jeeves granted the
joint venture an exclusive license to the Company’s current
and future products and services in Japan and for the
Japanese-speaking market.
The Company has entered into various agreements with these joint
ventures for the license and support of its technology within
the United Kingdom, Japan and to the Spanish speaking market. In
connection with these agreements, the Company received cash
payments, all of which were funded by the Company’s joint
venture partners, that were recorded as deferred revenues and to
the extent not already realized are being recognized as revenues
on a straight-line basis over three to four year periods. For
the years ended December 31, 2004, 2003 and 2002, the
Company recorded revenues of $2.7 million,
$4.5 million, and $6.2 million, respectively, relating
to these license arrangements.
3. MARKETABLE
SECURITIES
At December 31, 2004 and 2003, all of the Company’s
marketable securities are classified as available-for-sale.
Management determines the appropriate classification of
marketable securities at the time of purchase and re-evaluates
such designation at the end of each period. Marketable
securities are carried at fair value, based on quoted market
prices. The specific-identification method is used to determine
the costs of securities sold. For the years ended
December 31, 2004 and 2003, gross realized gains were
$101,000 and $2,000, respectively.
79
Ask Jeeves, Inc.
The following tables summarize the Company’s marketable
securities (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Gross |
|
Gross |
|
|
| |
|
Amortized |
|
Unrealized |
|
Unrealized |
|
Estimated |
| December 31, 2004 |
|
Cost |
|
Gains |
|
Losses |
|
Fair Value |
| |
|
Commercial paper
|
|
$ |
1,591 |
|
|
$ |
— |
|
|
$ |
(1 |
) |
|
$ |
1,590 |
|
|
Municipal bonds
|
|
|
1,003 |
|
|
|
— |
|
|
|
(3 |
) |
|
|
1,000 |
|
|
US Government and Agency notes
|
|
|
15,388 |
|
|
|
— |
|
|
|
(70 |
) |
|
|
15,318 |
|
|
Corporate notes
|
|
|
11,251 |
|
|
|
— |
|
|
|
(28 |
) |
|
|
11,223 |
|
|
Asset-backed securities
|
|
|
700 |
|
|
|
— |
|
|
|
(1 |
) |
|
|
699 |
|
| |
|
Total available for sale securities
|
|
$ |
29,933 |
|
|
$ |
— |
|
|
$ |
(103 |
) |
|
$ |
29,830 |
|
| |
|
Classified as:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Short-term marketable securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
29,189 |
|
| |
Short-term restricted marketable securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61 |
|
|
Long-term restricted marketable securities (included in other
long-term assets) |
|
|
|
|
|
|
|
|
|
|
580 |
|
| |
| |
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
29,830 |
|
| |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Gross |
|
Gross |
|
|
| |
|
Amortized |
|
Unrealized |
|
Unrealized |
|
Estimated |
| December 31, 2003 |
|
Cost |
|
Gains |
|
Losses |
|
Fair Value |
| |
|
Municipal bonds
|
|
$ |
4,011 |
|
|
$ |
3 |
|
|
$ |
— |
|
|
$ |
4,014 |
|
|
US Government notes
|
|
|
119,954 |
|
|
|
120 |
|
|
|
(1 |
) |
|
|
120,073 |
|
|
Corporate notes
|
|
|
19,427 |
|
|
|
24 |
|
|
|
(10 |
) |
|
|
19,441 |
|
|
Asset-backed securities
|
|
|
549 |
|
|
|
2 |
|
|
|
— |
|
|
|
551 |
|
| |
|
Total available for sale securities
|
|
$ |
143,941 |
|
|
$ |
149 |
|
|
$ |
(11 |
) |
|
$ |
144,079 |
|
| |
|
Classified as:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term marketable securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
143,975 |
|
|
Long-term restricted marketable securities (included in other
long-term assets) |
|
|
|
|
|
|
|
|
|
|
104 |
|
| |
| |
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
144,079 |
|
| |
The amortized cost and fair value of marketable securities in
debt securities at December 31, 2004, by effective
maturity, were as follows (in thousands):
| |
|
|
|
|
|
|
|
|
| |
|
Amortized |
|
Estimated |
| |
|
Cost |
|
Fair Value |
| |
|
Due in 1 year or less
|
|
$ |
28,233 |
|
|
$ |
28,134 |
|
|
Due in 1-2 years
|
|
|
1,700 |
|
|
|
1,696 |
|
| |
|
Total investments in debt securities
|
|
$ |
29,933 |
|
|
$ |
29,830 |
|
| |
Restricted marketable securities in the amount of $641,000 are
being maintained as security for performance under standby
letters of credit. See Note 7.
80
Ask Jeeves, Inc.
4. PROPERTY AND
EQUIPMENT
Property and equipment consists of the following (in thousands):
| |
|
|
|
|
|
|
|
|
| |
|
December 31, |
| |
|
2004 |
|
2003 |
| |
|
Computer equipment and related software
|
|
$ |
50,724 |
|
|
$ |
30,715 |
|
|
Furniture and fixtures
|
|
|
3,748 |
|
|
|
3,408 |
|
|
Leasehold improvements
|
|
|
3,799 |
|
|
|
2,509 |
|
| |
|
Total
|
|
|
58,271 |
|
|
|
36,632 |
|
|
Less accumulated depreciation and amortization
|
|
|
(35,510 |
) |
|
|
(25,699 |
) |
| |
|
Property and equipment, net
|
|
$ |
22,761 |
|
|
$ |
10,933 |
|
| |
Depreciation expense from continuing operations for the three
years ended December 31, 2004, was $9.8 million,
$6.9 million, and $8.3 million, respectively.
5. INTANGIBLE
ASSETS
Intangible assets consist of the following (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, |
|
Estimated |
| |
|
2004 |
|
2003 |
|
Lives |
| |
|
Acquired technology
|
|
$ |
7,535 |
|
|
$ |
9,365 |
|
|
3 years |
|
User base
|
|
|
30,608 |
|
|
|
— |
|
|
3 years |
|
Distribution relationships
|
|
|
61,479 |
|
|
|
— |
|
|
5 years |
|
Trade names
|
|
|
5,105 |
|
|
|
— |
|
|
5 years |
| |
|
Total intangibles
|
|
|
104,727 |
|
|
|
9,365 |
|
|
|
|
Accumulated amortization
|
|
|
(16,840 |
) |
|
|
(8,534 |
) |
|
|
| |
|
Total intangible assets, net
|
|
$ |
87,887 |
|
|
$ |
831 |
|
|
|
| |
Amortization expense from continuing operations for the years
ended December 31, 2004, 2003, and 2002 was
$17.7 million, $2.1 million, and $2.2 million,
respectively.
The table below represents the estimated aggregate amortization
expense for each of the next five years (in thousands):
| |
|
|
|
|
| Year |
|
Amount |
| |
|
2005
|
|
$ |
29,087 |
|
|
2006
|
|
|
29,364 |
|
|
2007
|
|
|
21,188 |
|
|
2008
|
|
|
13,594 |
|
|
2009
|
|
|
4,654 |
|
| |
|
Total
|
|
$ |
97,887 |
|
| |
6. LEASE
COMMITMENTS
The Company has entered into operating leases and capital leases
for certain office space and equipment that contain renewal
options. Capital lease obligations for equipment represent the
present value of future minimum lease payments under the
agreements. The Company has options to purchase the leased
assets at the end of the lease at a Fair Market Value determined
by the mutual agreement of the lessor and the Company.
81
Ask Jeeves, Inc.
The future minimum lease payments under all capital leases and
non-cancelable operating leases with terms in excess of one year
at inception are as follows (in thousands):
| |
|
|
|
|
|
|
|
|
| Years ending December 31: |
|
Capital Leases |
|
Operating Leases |
| |
|
2005
|
|
|
$ 773 |
|
|
|
$ 3,681 |
|
|
2006
|
|
|
481 |
|
|
|
3,083 |
|
|
2007
|
|
|
|
|
|
|
2,752 |
|
|
2008
|
|
|
|
|
|
|
2,654 |
|
|
2009
|
|
|
|
|
|
|
2,689 |
|
|
Thereafter
|
|
|
|
|
|
|
6,068 |
|
| |
|
Total minimum lease payments
|
|
|
$1,254 |
|
|
|
$20,927 |
|
|
Less interest
|
|
|
(84 |
) |
|
|
— |
|
| |
|
Present value of minimum lease payments
|
|
|
$1,170 |
|
|
|
$20,927 |
|
| |
|
Less current portion of capital lease obligations
|
|
|
(710 |
) |
|
|
|
|
| |
|
Capital lease obligations, less current portion
|
|
|
$460 |
|
|
|
|
|
| |
Rent expense from continuing operations was $4.9 million,
$2.8 million, and $2.7 million, for the years ended
December 31, 2004, 2003 and 2002, respectively. Sublease
rental income for the years ended December 31, 2004, 2003
and 2002 was $439,000, $740,000, and $573,000, respectively.
There are no aggregate future minimum rentals to be received
under non-cancelable subleases as of December 31, 2004.
7. LINE OF CREDIT
The Company has a revolving line of credit with a bank in the
amount of $15.0 million. The line of credit expires on
July 1, 2005. Borrowings under the line of credit bear
fixed rate interest from the date of borrowing at LIBOR plus
0.4%. All borrowings and letters of credit under the credit
facility are collateralized by an equal amount of the
Company’s marketable securities. Borrowings under the line
are subject to various covenants. As of December 31, 2004,
no borrowings were outstanding under the line of credit. Standby
letters of credit of approximately $61,000, which are being
maintained as security for performance under various
obligations, were issued and outstanding under the credit
facility.
Further, the Company’s wholly-owned subsidiary, ISH, has
additional standby letters of credit totaling $580,000, which
are being maintained as security for a capital lease and office
space.
8. CONVERTIBLE SUBORDINATED
NOTES
In June 2003, the Company issued $115.0 million aggregate
principal amount of zero coupon convertible subordinated notes,
due June 1, 2008. The notes were sold at face value and the
net proceeds to the Company were $111.5 million, net of
costs of issuance of $3.5 million, which have been recorded
as other assets and are being amortized in the Consolidated
Statements of Operations over the contractual term of the notes
to interest income. The fair value of the convertible
subordinated notes was $200.5 million at December 31,
2004, based on recent trading activity.
The notes are convertible at the option of the holders into
shares of the Company’s common stock at any time at an
initial conversion price of $16.90 per share subject to
certain adjustments. This is equivalent to a conversion rate of
approximately 59.1716 shares per $1,000 principal amount of
notes. Upon conversion, the Company has the right subject to
certain conditions to deliver cash (or a combination of cash and
shares) in lieu of shares of its common stock.
82
Ask Jeeves, Inc.
The notes are subordinated in right of payment to all existing
and future senior indebtedness, as defined in the indenture. The
holders of the notes may require the Company to repurchase all
or a portion of the notes, subject to specified exceptions, upon
the occurrence of a change in control. The Company may choose to
pay the repurchase price in cash, shares of its common stock,
shares of the surviving corporation or a combination thereof.
The Company may not redeem the notes prior to the maturity date.
The shares that would be issued if the notes were converted into
common stock are included in the calculation of diluted earnings
per share.
9. PROVISION FOR INCOME
TAXES
The jurisdictional components of income (loss) before provision
for income taxes are as follows (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, |
| |
|
2004 |
|
2003 |
|
2002 |
| |
|
U.S.
|
|
$ |
56,571 |
|
|
$ |
10,759 |
|
|
$ |
(27,394 |
) |
|
International
|
|
|
1,284 |
|
|
|
17,290 |
|
|
|
6,091 |
|
| |
|
Income (loss) before income tax provision
|
|
$ |
57,855 |
|
|
$ |
28,049 |
|
|
$ |
(21,303 |
) |
| |
|
Allocated to:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Continuing operations
|
|
$ |
57,124 |
|
|
$ |
26,676 |
|
|
$ |
(10,856 |
) |
| |
Discontinued operations
|
|
|
731 |
|
|
|
1,373 |
|
|
|
(10,447 |
) |
| |
| |
|
Income (loss) before income tax provision
|
|
$ |
57,855 |
|
|
$ |
28,049 |
|
|
$ |
(21,303 |
) |
| |
The current income tax provisions for the years ended
December 31, are (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
| |
|
2004 |
|
2003 |
| |
|
Current:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$ |
925 |
|
|
$ |
200 |
|
|
State and local
|
|
|
(14 |
) |
|
|
50 |
|
|
Foreign
|
|
|
3,783 |
|
|
|
1,750 |
|
| |
| |
|
Subtotal
|
|
$ |
4,694 |
|
|
$ |
2,000 |
|
| |
|
Deferred:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$ |
— |
|
|
$ |
— |
|
|
State and local
|
|
|
— |
|
|
|
— |
|
|
Foreign
|
|
|
— |
|
|
|
— |
|
| |
| |
|
Subtotal
|
|
$ |
— |
|
|
$ |
— |
|
| |
| |
|
Total Income Tax Provision
|
|
$ |
4,694 |
|
|
$ |
2,000 |
|
| |
|
Allocated to:
|
|
|
|
|
|
|
|
|
| |
Continuing operations
|
|
$ |
4,679 |
|
|
$ |
1,891 |
|
| |
Discontinued operations
|
|
|
15 |
|
|
|
109 |
|
| |
| |
|
Total income tax provision
|
|
$ |
4,694 |
|
|
$ |
2,000 |
|
| |
83
Ask Jeeves, Inc.
The Company’s effective rate for income taxes differs from
the United States statutory rate, as reflected in the following
reconciliation:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, |
| |
|
2004 |
|
2003 |
|
2002 |
| |
|
United States statutory tax rate
|
|
|
35.0 |
% |
|
|
35.0 |
% |
|
|
35.0 |
% |
|
Foreign earnings taxed at rates higher/(lower) than the United
States statutory tax rate
|
|
|
0.1 |
% |
|
|
(15.3 |
)% |
|
|
0.0 |
% |
|
Net operating losses and loss carryforwards
|
|
|
(27.5 |
)% |
|
|
(12.6 |
)% |
|
|
(35.0 |
)% |
|
Other
|
|
|
0.5 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
| |
| |
Effective income tax rate
|
|
|
8.1 |
% |
|
|
7.1 |
% |
|
|
0.0 |
% |
| |
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. The components of the deferred
income taxes are as follows (in thousands):
| |
|
|
|
|
|
|
|
|
| |
|
Year Ended |
| |
|
December 31, |
| |
|
2004 |
|
2003 |
| |
|
Deferred Tax Assets:
|
|
|
|
|
|
|
|
|
|
Net operating losses and carryforwards
|
|
$ |
160,056 |
|
|
$ |
92,705 |
|
|
Capitalized research and development costs
|
|
|
3,703 |
|
|
|
3,174 |
|
|
Accrued expenses
|
|
|
6,573 |
|
|
|
4,959 |
|
|
Depreciation & amortization
|
|
|
7,362 |
|
|
|
— |
|
|
Deferred revenue
|
|
|
268 |
|
|
|
1,407 |
|
|
Income tax credits
|
|
|
3,719 |
|
|
|
2,890 |
|
|
Deferred taxes in foreign subsidiaries
|
|
|
295 |
|
|
|
— |
|
| |
|
Deferred tax assets
|
|
|
181,976 |
|
|
|
105,135 |
|
|
Valuation allowance
|
|
|
(143,511 |
) |
|
|
(105,135 |
) |
| |
|
Total deferred tax assets
|
|
$ |
38,465 |
|
|
$ |
— |
|
|
Deferred Tax Liabilities:
|
|
|
|
|
|
|
|
|
|
Purchased intangibles
|
|
$ |
37,743 |
|
|
$ |
— |
|
|
Other
|
|
|
427 |
|
|
|
— |
|
| |
|
Total deferred tax liabilities
|
|
|
38,170 |
|
|
|
— |
|
| |
|
Net deferred tax assets
|
|
$ |
295 |
|
|
$ |
— |
|
| |
A valuation allowance has been established and, accordingly, no
benefit has been recognized for the Company’s federal and
state net operating losses and other deferred tax assets. The
net valuation allowance increased by $38.4 million and
$14.4 million during the years ended December 31, 2004
and 2003, respectively. The Company believes that, based on a
number of factors, the available objective evidence creates
sufficient uncertainty regarding the realizability of its
domestic deferred tax assets such that a full valuation
allowance has been recorded. These factors include the
Company’s cumulative tax losses in recent years and current
projected tax losses. The Company will continue to assess the
realizability of the deferred tax assets based on actual and
forecasted operating results. The Company has not established a
valuation allowance against the deferred tax assets arising in
certain foreign tax jurisdictions. Operations within these
jurisdictions currently generate sufficient taxable income to
make the realization of the deferred tax assets more likely than
not.
Federal and state net operating loss (NOL) carryforwards
resulting from the exercise of employee stock options provided a
deferred benefit of $51.5 million as of December 31,
2004. Such deferred tax benefit has been offset by a valuation
allowance and will be credited to stockholders’ equity when
realized. A tax benefit of approximately $2.2 million,
associated with the exercise of employee stock options, was
credited to stockholder’s equity in 2004.
84
Ask Jeeves, Inc.
At December 31, 2004, the Company had NOL’s for
federal income tax purposes of approximately
$411.0 million, which expire in the years 2013 through
2025. The Company also had net operating loss carryforwards for
California state income tax purposes of approximately
$88.6 million that expire in the years 2005 through 2015.
California suspended the use of NOL’s for the tax years
2002 and 2003.
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.
Applicable U.S. income taxes have not been provided on
approximately $12.4 million of undistributed earnings of
foreign subsidiaries as of December 31, 2004 since these
earnings are considered indefinitely invested. The income tax
that would arise if these items were repatriated is
approximately $2.7 million, some or all of which may be
reduced by NOL’s or foreign tax credits.
The Company has evaluated the impact of recent changes in
federal tax law allowing the repatriation of foreign earnings at
preferential income tax rates. The Company has decided not to
repatriate its foreign earnings at this time. The earnings will
remain offshore and will be used to fund foreign investment
opportunities as they arise.
10. STOCKHOLDERS’
EQUITY
Stockholder Rights
Plan
In April 2001, the Company adopted a stockholder rights plan and
declared a dividend distribution of one right for each
outstanding share of common stock to stockholders of record as
of May 7, 2001. Each right entitles the holder to purchase
one unit consisting of one one-thousandth of a share of our
Series A Junior Participating Preferred Stock for
$20 per unit. Under certain circumstances, if a person or
group acquires 15% or more of the Company’s outstanding
common stock, holders of the rights (other than the person or
group triggering their exercise) will be able to purchase, in
exchange for the $20 exercise price, shares of the
Company’s common stock or of any company into which Ask
Jeeves is merged having a value of $40. The rights expire on
May 7, 2011 unless extended by the Company’s board of
directors.
Shares Reserved for Future
Issuance
At December 31, 2004, the Company has reserved shares of
common stock for future issuance as follows:
| |
|
|
|
|
|
| |
|
Stock options outstanding
|
|
|
8,309,393 |
|
|
Stock options available for grant
|
|
|
6,652,908 |
|
|
Employee stock purchase plan
|
|
|
576,503 |
|
|
Convertible subordinated notes
|
|
|
6,804,733 |
|
| |
| |
Total
|
|
|
22,343,537 |
|
| |
1996 Equity Incentive
Plan
Under the Company’s 1996 Equity Incentive Plan (“1996
Plan”), as amended, 3,641,060 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
85
Ask Jeeves, Inc.
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 15,312,756 shares of common stock for the issuance
under the 1999 Plan, which provides for the grant of ISOs to
employees, and of ISOs, NSOs and rights to acquire restricted
stock to employees, directors, and consultants of the Company
and its affiliates. The plan provides that the shares reserved
for issuance shall be increased annually by the lesser of seven
percent of the total number of shares of common stock
outstanding, three million shares, or such smaller number of
shares as determined by the Board.
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
2,142,978 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 their entry into the applicable
two-year offering period or the last day of the applicable
six-month purchase period. The plan provides that the shares
reserved for issuance shall be increased annually by the lesser
of one percent of the total number of shares of common stock
outstanding, 400,000 shares, or such smaller number of
shares as determined by the Board of Directors. At
December 31, 2004, 576,503 shares were available for
grant under the plan.
1999 Non-Qualified Equity
Incentive Plan
In October 1999, the Company adopted the 1999 Non-Qualified
Equity Incentive Plan. The Company has reserved a total of
7,700,000 shares of common stock authorized for issuance
under the 1999 Non-Qualified Equity Incentive Plan, which
provides for the grant of non-statutory stock options, rights to
purchase restricted stock and stock bonuses to employees,
members of the Board of Directors, and consultants of the
Company and its affiliates.
86
Ask Jeeves, Inc.
A summary of stock option activity for all stock option plans of
the Company is set forth below:
| |
|
|
|
|
|
|
|
|
|
| |
|
Options Outstanding |
| |
|
|
| |
|
|
|
Weighted-Average |
| |
|
|
|
Exercise Price |
| |
|
Shares |
|
Per Share |
| |
|
Outstanding at December 31, 2001
|
|
|
10,050,717 |
|
|
$ |
10.60 |
|
| |
Granted
|
|
|
4,577,607 |
|
|
|
1.42 |
|
| |
Canceled
|
|
|
(3,242,434 |
) |
|
|
13.04 |
|
| |
Exercised
|
|
|
(884,356 |
) |
|
|
1.09 |
|
| |
|
Outstanding at December 31, 2002
|
|
|
10,501,534 |
|
|
$ |
6.72 |
|
| |
Granted
|
|
|
2,576,100 |
|
|
|
9.83 |
|
| |
Canceled
|
|
|
(1,609,584 |
) |
|
|
17.51 |
|
| |
Exercised
|
|
|
(4,064,683 |
) |
|
|
3.13 |
|
| |
|
Outstanding at December 31, 2003
|
|
|
7,403,367 |
|
|
$ |
7.51 |
|
| |
Granted
|
|
|
3,929,205 |
|
|
|
29.19 |
|
| |
Canceled
|
|
|
(445,927 |
) |
|
|
22.11 |
|
| |
Exercised
|
|
|
(2,577,252 |
) |
|
|
4.52 |
|
| |
|
Outstanding at December 31, 2004
|
|
|
8,309,393 |
|
|
$ |
17.89 |
|
| |
|
Vested and exercisable at December 31, 2004
|
|
|
2,599,060 |
|
|
$ |
12.71 |
|
| |
The weighted-average remaining contractual life of options
outstanding at December 31, 2004 and 2003 was 8.3 and
8.2 years, respectively.
During the year ended December 31, 2004, 6,000 shares
of restricted stock were issued under the 1999 Equity Incentive
Plan in satisfaction of a bonus obligation. As of
December 31, 2004, restricted share grants of 50,000
remained unvested, and vest at the earlier of the
employee’s qualifying termination or death, or
September 19, 2006. During the year ended December 31,
2003, the Company incurred stock-based compensation charges of
$32,000 resulting from grants of stock options.
The weighted-average grant-date fair value of restricted stock
was $38.28 and $21.67 for awards made during the years ended
December 31, 2004 and 2003, respectively.
The following table summarizes the status of stock options
outstanding at December 31, 2004:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Options Outstanding | |
|
Options Exercisable | |
| |
|
| |
|
| |
| |
|
|
|
Weighted Average | |
|
|
|
|
|
Weighted Average | |
| Range of | |
|
Number | |
|
Remaining Contractual | |
|
Weighted Average | |
|
Number | |
|
Exercise Price | |
| Exercise Prices | |
|
Outstanding | |
|
Life (in Years) | |
|
Exercise Price | |
|
Exercisable | |
|
per Share | |
| | |
| $ |
0.003 - 1.21 |
|
|
|
1,524,023 |
|
|
|
7.12 |
|
|
$ |
1.04 |
|
|
|
795,187 |
|
|
$ |
1.03 |
|
| |
1.25 - 2.55 |
|
|
|
912,350 |
|
|
|
6.76 |
|
|
|
2.07 |
|
|
|
661,969 |
|
|
|
2.09 |
|
| |
2.65 - 3.31 |
|
|
|
93,623 |
|
|
|
7.14 |
|
|
|
3.17 |
|
|
|
46,409 |
|
|
|
3.22 |
|
| |
3.31 - 6.93 |
|
|
|
1,104,809 |
|
|
|
8.22 |
|
|
|
6.85 |
|
|
|
248,030 |
|
|
|
6.79 |
|
| |
7.14 - 18.70 |
|
|
|
856,614 |
|
|
|
7.74 |
|
|
|
16.41 |
|
|
|
420,946 |
|
|
|
15.31 |
|
| |
19.09 - 25.78 |
|
|
|
1,296,848 |
|
|
|
9.43 |
|
|
|
23.44 |
|
|
|
97,283 |
|
|
|
21.92 |
|
| |
25.84 - 31.69 |
|
|
|
833,733 |
|
|
|
9.53 |
|
|
|
26.76 |
|
|
|
2,731 |
|
|
|
29.29 |
|
| |
31.80 - 36.36 |
|
|
|
833,724 |
|
|
|
9.32 |
|
|
|
35.26 |
|
|
|
91,519 |
|
|
|
35.17 |
|
| |
36.60 - 116.38 |
|
|
|
852,169 |
|
|
|
8.51 |
|
|
|
48.11 |
|
|
|
233,486 |
|
|
|
72.43 |
|
| |
138.00 - 138.00 |
|
|
|
1,500 |
|
|
|
5.01 |
|
|
|
138.00 |
|
|
|
1,500 |
|
|
|
138.00 |
|
| |
| |
|
|
|
|
8,309,393 |
|
|
|
8.26 |
|
|
$ |
17.89 |
|
|
|
2,599,060 |
|
|
$ |
12.71 |
|
| |
87
Ask Jeeves, Inc.
11. RESTRUCTURING AND
FACILITY EXIT CHARGES
In the year ended December 31, 2002, the Company incurred
restructuring charges of approximately $2.5 million
relating to workforce reductions and facilities exit costs.
During the second and third quarters, the Company implemented
workforce reductions totaling approximately 102 positions and
resulting in charges of $1.4 million for severance pay and
medical and other benefits. Additionally, in the fourth quarter,
the Company revised its assumptions relating to its ability to
sublease vacated facilities, resulting in facilities exit
charges totaling $1.1 million.
In the year ended December 31, 2003, the Company incurred
restructuring charges of $466,000 in connection with the
termination of certain employees of the discontinued Jeeves
Solutions division.
The Company reported no additional restructuring charges during
2004.
The following table sets forth the restructuring activity during
the years ended December 31, 2004, 2003 and 2002 (in
thousands).
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Accrued | |
|
|
|
|
|
|
|
Accrued | |
| |
|
Restructuring | |
|
|
|
|
|
|
|
Restructuring | |
| |
|
Costs at | |
|
|
|
|
|
|
|
Costs at | |
| |
|
January 1, | |
|
Restructuring | |
|
Cash | |
|
|
|
December 31, | |
| 2004 Charged to restructuring expense: |
|
2004 | |
|
Charges | |
|
Paid | |
|
Adjustment | |
|
2004 | |
| | |
|
Facility exit costs
|
|
$ |
1,133 |
|
|
$ |
— |
|
|
$ |
(750 |
) |
|
$ |
— |
|
|
$ |
383 |
|
|
Severance and professional fees
|
|
|
34 |
|
|
|
— |
|
|
|
— |
|
|
|
(34 |
) |
|
$ |
— |
|
| |
|
Total
|
|
$ |
1,167 |
|
|
$ |
— |
|
|
$ |
(750 |
) |
|
$ |
(34 |
) |
|
$ |
383 |
|
| |
|
Allocated to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$ |
1,167 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
383 |
|
|
Discontinued operations
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
| |
|
Total
|
|
$ |
1,167 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
383 |
|
| |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Accrued | |
|
|
|
|
|
|
|
Accrued | |
| |
|
Restructuring | |
|
|
|
|
|
|
|
Restructuring | |
| |
|
Costs at | |
|
|
|
|
|
|
|
Costs at | |
| |
|
January 1, | |
|
Restructuring | |
|
Cash | |
|
Asset | |
|
December 31, | |
| 2003 Charged to restructuring expense: |
|
2003 | |
|
Charges | |
|
Paid | |
|
Write-offs | |
|
2003 | |
| | |
|
Facility exit costs
|
|
$ |
1,883 |
|
|
$ |
— |
|
|
$ |
(750 |
) |
|
$ |
— |
|
|
$ |
1,133 |
|
|
Severance and professional fees
|
|
|
24 |
|
|
|
466 |
|
|
|
(456 |
) |
|
|
— |
|
|
|
34 |
|
| |
|
Total
|
|
$ |
1,907 |
|
|
$ |
466 |
|
|
$ |
(1,206 |
) |
|
$ |
— |
|
|
$ |
1,167 |
|
| |
|
Allocated to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$ |
1,892 |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
$ |
1,167 |
|
|
Discontinued operations
|
|
|
15 |
|
|
|
466 |
|
|
|
|
|
|
|
|
|
|
|
— |
|
| |
|
Total
|
|
$ |
1,907 |
|
|
$ |
466 |
|
|
|
|
|
|
|
|
|
|
$ |
1,167 |
|
| |
88
Ask Jeeves, Inc.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Accrued | |
|
|
|
|
|
|
|
Accrued | |
| |
|
Restructuring | |
|
|
|
|
|
|
|
Restructuring | |
| |
|
Costs at | |
|
|
|
|
|
|
|
Costs at | |
| |
|
January 1, | |
|
Restructuring | |
|
|
|
Asset | |
|
December 31, | |
| 2002 Charged to restructuring expense: |
|
2002 | |
|
Charges | |
|
Cash Paid | |
|
Write-offs | |
|
2002 | |
| | |
|
Facility exit costs
|
|
$ |
18,119 |
|
|
$ |
1,098 |
|
|
$ |
(17,334 |
) |
|
$ |
— |
|
|
$ |
1,883 |
|
|
Severance and professional fees
|
|
|
310 |
|
|
|
1,372 |
|
|
|
(1,658 |
) |
|
|
— |
|
|
|
24 |
|
| |
|
Total
|
|
$ |
18,429 |
|
|
$ |
2,470 |
|
|
$ |
(18,992 |
) |
|
$ |
— |
|
|
$ |
1,907 |
|
| |
|
Allocated to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$ |
18,346 |
|
|
$ |
1,653 |
|
|
|
|
|
|
|
|
|
|
$ |
1,892 |
|
|
Discontinued operations
|
|
|
83 |
|
|
|
817 |
|
|
|
|
|
|
|
|
|
|
|
15 |
|
| |
|
Total
|
|
$ |
18,429 |
|
|
$ |
2,470 |
|
|
|
|
|
|
|
|
|
|
$ |
1,907 |
|
| |
During 2003 and 2002, the Company wrote off computer equipment,
software, and furniture and fixtures that the Company disposed
of or were no longer in use, resulting in changes of $702,000
and $2.2 million, respectively.
During 2002, the Company recorded an impairment charge of
$252,000 related to the intangible assets of E-tours, as the
Company discontinued offering this service.
During the third quarter of 2003, the Company incurred facility
exit costs totaling $585,000 related to the cessation of use of
leased premises. The charge was recorded to the Consolidated
Statement of Operations in the following categories (in
thousands):
| |
|
|
|
|
| |
|
Cost of revenue
|
|
$ |
44 |
|
|
Product development
|
|
|
229 |
|
|
Sales and marketing
|
|
|
198 |
|
|
General and administrative
|
|
|
114 |
|
| |
|
Total
|
|
$ |
585 |
|
| |
|
|
| 12. |
EMPLOYEE BENEFIT PLANS |
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. In 2004,
the Company began matching employee 401(k) contributions.
The Company matches $0.50 for every $1.00 that employees
contribute into their 401(k) Plan, up to $2,000 per
calendar year. Of this amount, 25% of the match will become
vested for each full year of service, until fully vested after
completing four years of service.
|
|
| 13. |
RELATED PARTY
TRANSACTIONS |
During the year ended December 31, 2002, in connection with
note settlements the Company recorded recoveries of amounts
previously charged-off totaling approximately $64,000. There
were no related party transactions for the years ended
December 31, 2003 and 2004.
Included in revenue are amounts from related parties of
$2.7 million, $4.5 million, and $6.2 million for
the years ended December 31, 2004, 2003, and 2002,
respectively. During 2003, the Company also recorded $300,000 in
other income related to professional services provided to its
Japanese joint venture.
89
Ask Jeeves, Inc.
|
|
| 14. |
COMMITMENTS AND
CONTINGENCIES |
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 patents, trademarks, copyrights and
other intellectual property rights, and a variety of claims
arising in connection with its services, such as claims alleging
defamation or invasion of privacy.
On October 25, 2001, a putative class action lawsuit
captioned Leonard Turroff, et al. vs Ask Jeeves, Inc.,
et al. was filed against the Company and two of the
Company’s officers and directors (collectively the
“Individual Defendants”) in the United States District
Court for the Southern District of New York. Also named as
defendants were Morgan Stanley & Co., Inc., FleetBoston
Robertson Stephens, Goldman Sachs & Co.,
U.S. Bancorp Piper Jaffray, and Dain Rauscher, Inc., the
underwriters of the Company’s initial public offering, or
IPO. The complaint alleges violations of Section 11 of the
Securities Act of 1933 against all defendants, and violations of
Section 15 of the Securities Act against the Individual
Defendants in connection with the Company’s IPO. An amended
complaint was filed on December 6, 2001, which includes the
same allegations in connection with Ask Jeeves’ second
public offering in March 2000. The complaints seek unspecified
damages on behalf of a purported class of purchasers of common
stock between June 30, 1999 and December 6, 2000. This
case is similar to, and has been coordinated with, over three
hundred other cases filed in the Southern District Court of New
York concerning the IPO market of the late 1990’s. In June
2003, a proposed settlement of this litigation was structured
between the plaintiffs, the issuer defendants in the
consolidated actions, the issuer officers and directors named as
defendants, and the issuers’ insurance companies. On
June 24, 2003, a special committee of the Company’s
board of directors approved the Company’s participation in
this settlement and on July 9, 2003, the Individual
Defendants approved the settlement. In June 2004, the proposed
settlement was submitted to the court for preliminary approval.
The underwriter defendants formally objected to the settlement
on July 14, 2004. The plaintiffs and issuer defendants
separately filed replies to the underwriter defendants’
objections on August 4, 2004. The court granted the
preliminary approval motion on February 15, 2005, subject
to certain modifications and directed the parties to report back
to the court regarding the modifications. If the parties are
able to agree upon the required modifications, and such
modifications are acceptable to the court, notice will be given
to all class members of the settlement, a “fairness”
hearing will be held and if the court determines that the
settlement is fair to the class members, the settlement will be
approved. If the settlement is ultimately approved by the court,
the Company expects that the costs and expenses of the
settlement will be paid by the Company’s insurers, who will
be reimbursed by the Company up to the amount of the
Company’s $1.0 million insurance retention.
Accordingly, the Company has accrued that amount on its
consolidated balance sheet. Any payments beyond that amount will
be made by the Company’s insurance carriers up to the
limits of the relevant policies. If the settlement does not
occur, and the litigation against the Company continues, the
Company believes it has meritorious defenses and intends to
defend the case vigorously.
On January 27, 2004, a lawsuit was filed in the United
States District Court for the Southern District of New York
captioned American Blind and Wallpaper, Inc. v. Google,
Inc., et al., in which Ask Jeeves, Inc., America
Online, Inc., Netscape Communications Corporation, Compuserve
Interactive Services, Inc., and EarthLink, Inc. were also named
as defendants. On February 27, 2004, the Company was served
with an Amended Complaint in the matter. The Complaint alleges
trademark infringement, false representation, and dilution under
the Lanham Act and other claims arising from defendants’
alleged unlawful use of plaintiff’s trademarks.
Plaintiff’s claims are based on the allegations that
defendants sell keywords identical to plaintiff’s marks to
various third parties and by manipulating search results,
90
Ask Jeeves, Inc.
consumers are unwittingly diverted to competitors’ products
and services. The plaintiff seeks injunctive relief and an
unspecified amount of damages. The Company has tendered this
suit to Google for indemnification pursuant to the terms of the
Advertising Services Agreement, dated July 17, 2002,
between Ask Jeeves and Google, and Google has agreed to
indemnify the Company to the extent the claims relate to Google
paid listings. Google filed a motion to dismiss the case on the
grounds that the plaintiffs have failed to state a valid claim
upon which relief could be granted, the plaintiffs filed an
opposing brief and, on September 17, 2004, the court held a
hearing on the motion, at which the judge took the parties’
arguments under submission. The judge has not yet ruled on
Google’s motion to dismiss.
On July 29, 2003, Focus Interactive filed a legal action
against InfoSpace, Inc. in New York State court, Westchester
County captioned Focus Interactive, Inc. v. InfoSpace,
Inc., Index No. 03/11873 (Sup. Court Westchester County
New York) (“NY Action”) seeking a declaration as to
the respective rights and obligations of the parties under an
Internet Services Agreement (“ISA”) between Focus
Interactive and InfoSpace and seeking damages as a result of
InfoSpace’s ISA-related demands. (The Company acquired full
ownership of Focus Interactive, Inc., formerly known as The
Excite Network, Inc., on May 6, 2004 upon its acquisition
of ISH.) On September 22, 2003, InfoSpace filed a lawsuit
against Focus Interactive in Washington State captioned
InfoSpace Sales LLC v. Focus Interactive, Inc.,
Index No. 03-2-36 176-3SEA (Sup. Court Wash., King County)
(“Washington Action”) asserting claims and seeking
damages for (i) breach of contract (the ISA);
(ii) breach of the duty of good faith and fair dealing in
performing the ISA; (iii) unfair business practices under
Washington Rev. Code § 19.86.020 that affect the
public interest; (iv) misrepresentation and fraud in the
inducement; and (v) a declaratory judgment seeking a
declaration that Focus Interactive’s threatened actions
would constitute breaches of Focus Interactive’s
obligations to InfoSpace under the ISA, the covenant of good
faith and fair dealing recognized by Washington law, and the
Wash. Rev. Code § 19.86.020. Focus’ motion to
dismiss the Washington Action was granted. InfoSpace filed an
appeal in the Court of Appeals of the State of Washington.
Briefing is not yet complete on this appeal in Washington. On
September 29, 2003, InfoSpace moved to dismiss the New York
Action on the grounds that a declaratory judgment was improper
and on forum non conveniens grounds. Focus opposed the motion
and on January 7, 2004, the New York Supreme Court denied
InfoSpace’s motion to dismiss in its entirety. On
February 11, 2004, InfoSpace filed a Notice of Appeal of
the Supreme Court decision to the Appellate Division of the New
York Supreme Court for the Second Judicial Department. No
briefing has yet occurred on this New York appeal. On
January 23, 2004, InfoSpace answered the Complaint in
the NY Action and filed counterclaims similar to the claims
asserted in the Washington Action. A trial date has been set in
the NY Action. The parties have engaged in settlement
negotiations, though the Company faces the risk that the
settlement negotiations might not be successful.
On August 3, 2004, a lawsuit was filed in the Superior
Court of the State of California, County of San Francisco
captioned Mario Cisneros et al. vs. Yahoo! Inc.,
et al., in which Ask Jeeves, Inc., Google, Inc., Yahoo!
Inc., and several other Internet media companies are named as
defendants. The complaint alleges that the defendants engaged in
unfair business practices and aided, abetted and conspired with
operators of illegal online gambling enterprises by selling and
displaying ads for online gambling operations that allegedly
violate California law. The complaint purports to be brought on
behalf of the general public and a class of all California
residents who incurred losses in the prior four years at any
illegal Internet gambling site allegedly advertised on
defendants’ Web pages. The complaint seeks declaratory and
injunctive relief prohibiting Ask Jeeves and the other
defendants from selling or displaying such ads. The complaint
also seeks to hold Ask Jeeves and the other defendants liable
for an unspecified amount of monetary restitution equal to
(i) all of the revenue that defendants allegedly
91
Ask Jeeves, Inc.
earned by displaying ads for illegal gambling operations;
(ii) all of the gambling losses suffered by persons using
computers in California to access the advertised sites;
(iii) all other revenues received by the gambling site
operators from such computer users; and (iv) certain State
taxes and fees allegedly avoided by the gambling site operators.
The complaint was filed against Internet media companies and
does not specifically name the gambling site operators
themselves as defendants. Defendants, including Ask Jeeves, have
filed a motion to strike plaintiffs’ claims for restitution
of gambling losses and a demurrer to the entire complaint based
on defendants’ belief that plaintiffs lack standing to
bring the action (i.e., they do not presently engage in the type
of conduct that is challenged in this action). The court has set
a hearing on these motions for January 27, 2005.
In management’s opinion, resolution of these matters is not
expected to have a material adverse impact on the Company’s
results of operations, cash flows or financial position.
However, depending on the amount and timing, an unfavorable
resolution of these matters could materially and adversely
affect the Company’s future results of operations, cash
flows or financial position.
Indemnifications
In the ordinary course of business, the Company may provide
indemnifications of varying scope and terms to customers,
vendors, lessors, business partners and other parties with
respect to certain matters, including, but not limited to,
losses arising out of the Company’s breach of such
agreements, services to be provided by the Company, or from
intellectual property infringement claims made by third parties.
In addition, the Company has entered into indemnification
agreements with its directors and certain officers that will
require the Company, among other things, to indemnify them
against certain liabilities that may arise by reason of their
status or service as directors or officers. The Company
maintains director and officer insurance, which may cover
certain liabilities arising from its obligation to indemnify its
directors, and officers and former directors, officers and
employees of acquired companies, in certain circumstances.
It is not possible to determine the maximum potential amount
under these indemnification agreements due to the limited
history of prior indemnification claims and the unique facts and
circumstances involved in each particular agreement. Many such
indemnification agreements are not subject to maximum loss
clauses. Historically, the Company has not incurred material
costs as a result of obligations under these agreements and it
has not accrued any liabilities related to such indemnification
obligations in its financial statements.
|
|
| 15. |
BUSINESS SEGMENT AND GEOGRAPHIC
INFORMATION |
The Company offers advanced Internet search technology to the
public through advertiser-supported sites on the World Wide Web.
The Company provides its search technologies and services
internationally, both directly and through its joint venture.
Attribution of revenues by geographic region is based on the
country in which the customer is domiciled.
The Company’s chief operating decision-maker reviews
financial information presented on a consolidated basis,
accompanied by disaggregated information about revenues for
purposes of evaluating financial performance and allocating
resources. There are no segment managers who are held
accountable for operations and operating results for levels or
components below the consolidated unit level. Accordingly, the
Company considers itself to be in a single reporting segment and
operating unit structure.
92
Ask Jeeves, Inc.
Geographic information on revenues from continuing operations
and property and equipment, net of accumulated depreciation, are
presented below (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| | |
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
North America
|
|
$ |
206,375 |
|
|
$ |
70,019 |
|
|
$ |
42,411 |
|
| |
Europe
|
|
|
52,212 |
|
|
|
32,748 |
|
|
|
18,090 |
|
| |
Asia
|
|
|
2,740 |
|
|
|
4,525 |
|
|
|
4,547 |
|
| |
| |
Total
|
|
$ |
261,327 |
|
|
$ |
107,292 |
|
|
$ |
65,048 |
|
| |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| | |
|
Property and Equipment, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
North America
|
|
$ |
21,809 |
|
|
$ |
10,518 |
|
|
$ |
10,790 |
|
| |
Europe
|
|
|
952 |
|
|
|
415 |
|
|
|
132 |
|
| |
Asia
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
| |
Total
|
|
$ |
22,761 |
|
|
$ |
10,933 |
|
|
$ |
10,922 |
|
| |
16. NET INCOME (LOSS) PER
SHARE
The following table sets forth the computation of net income
(loss) per share (in thousands, except share and per share data):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| | |
|
Basic and diluted net income (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Numerator: Net income (loss)
|
|
$ |
53,161 |
|
|
$ |
26,049 |
|
|
$ |
(21,303 |
) |
| |
| |
Denominator: Weighted-average shares common stock outstanding
|
|
|
54,051,711 |
|
|
|
44,238,909 |
|
|
|
40,745,809 |
|
| |
Less: weighted average shares common stock subject to repurchase
|
|
|
(1,250 |
) |
|
|
(5,448 |
) |
|
|
(47,672 |
) |
| |
| |
Weighted-average shares used in calculation of basic net income
(loss) per share
|
|
|
54,050,461 |
|
|
|
44,233,461 |
|
|
|
40,698,137 |
|
| |
Weighted-average effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Warrants
|
|
|
— |
|
|
|
39,785 |
|
|
|
— |
|
| |
|
Employee stock purchase plan
|
|
|
5,668 |
|
|
|
— |
|
|
|
— |
|
| |
|
Weighted average restricted common stock
|
|
|
50,000 |
|
|
|
481,379 |
|
|
|
— |
|
| |
|
Employee stock options
|
|
|
4,900,204 |
|
|
|
6,149,755 |
|
|
|
— |
|
| |
|
Convertible subordinated notes
|
|
|
6,804,733 |
|
|
|
3,868,849 |
|
|
|
— |
|
| |
| |
Weighted-average shares used in calculation of diluted net
income (loss) per share
|
|
|
65,811,066 |
|
|
|
54,773,229 |
|
|
|
40,698,137 |
|
| |
| |
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Basic
|
|
$ |
0.98 |
|
|
$ |
0.59 |
|
|
$ |
(0.52 |
) |
| |
| |
|
Diluted
|
|
$ |
0.81 |
|
|
$ |
0.48 |
|
|
$ |
(0.52 |
) |
| |
If the Company had reported net income for the year ended
December 31, 2002, the calculation of historical diluted
earnings per share would have included an additional 1,480,922
common equivalent shares related to the outstanding stock
options and warrants not included above (determined using the
treasury stock method). For the three years ended
December 31, 2004, a total of 2,442,925, 1,383,205, and
4,597,853 common equivalent shares related to outstanding stock
options and warrants (determined using the treasury stock
method) have been excluded from the calculation of historical
93
Ask Jeeves, Inc.
diluted earnings per share as their
respective exercise prices were more than the average market
value for the respective periods.
17. DISCONTINUED
OPERATIONS
On May 28, 2003, the Company entered into an agreement to
sell certain assets used in the Jeeves Solutions division to
Kanisa Inc. (“Kanisa”). The sale of such assets closed
on July 1, 2003 at which time the Company ceased offering
Jeeves Solutions products and services to corporate customers.
The assets sold included, among other things, tangible personal
property, intellectual property and customer and business
contracts.
In the third quarter of 2003, the Company recorded a gain of
approximately $2.5 million, net of estimated income taxes
of $109,000, representing the excess of the purchase
consideration received at closing over the book value of the
assets sold, as well as the remaining amount of deferred license
fees applicable to Jeeves Solutions. In exchange for the sale of
such assets, the Company received $3.4 million in cash at
the closing and a promissory note for up to $750,000, which was
payable one year from the date of closing. During 2004, Kanisa
paid $731,000 in partial satisfaction of the promissory note.
The proceeds were recorded as additional gain on the transaction.
Total revenues related to the discontinued operations were
$4.2 million, and $9.1 million for the years ended
December 31, 2003, and 2002, respectively. The results of
operations have been reclassified as a loss from discontinued
operations in the Consolidated Statement of Operations for all
dates and periods presented.
|
|
| 18. |
QUARTERLY FINANCIAL DATA
(UNAUDITED) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended | |
| 2004 (in thousands) |
|
December 31 | |
|
September 30 | |
|
June 30 | |
|
March 31 | |
| | |
|
Revenue
|
|
$ |
86,103 |
|
|
$ |
75,654 |
|
|
$ |
60,341 |
|
|
$ |
39,229 |
|
|
Gross profit
|
|
$ |
59,111 |
|
|
$ |
50,640 |
|
|
$ |
42,264 |
|
|
$ |
33,159 |
|
|
Operating income
|
|
$ |
18,111 |
|
|
$ |
12,005 |
|
|
$ |
11,994 |
|
|
$ |
13,898 |
|
|
Income from continuing operations
|
|
$ |
17,163 |
|
|
$ |
10,342 |
|
|
$ |
11,561 |
|
|
$ |
13,379 |
|
|
Net income
|
|
$ |
17,499 |
|
|
$ |
10,722 |
|
|
$ |
11,561 |
|
|
$ |
13,379 |
|
|
Earnings per Share—Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$ |
0.29 |
|
|
$ |
0.18 |
|
|
$ |
0.22 |
|
|
$ |
0.29 |
|
|
Income from discontinued operations
|
|
$ |
.01 |
|
|
$ |
0.01 |
|
|
$ |
— |
|
|
$ |
— |
|
| |
|
Net income
|
|
$ |
0.30 |
|
|
$ |
0.19 |
|
|
$ |
0.22 |
|
|
$ |
0.29 |
|
| |
|
Earnings per Share—Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$ |
0.25 |
|
|
$ |
0.15 |
|
|
$ |
0.18 |
|
|
$ |
0.23 |
|
|
Income from discontinued operations
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
| |
|
Net income
|
|
$ |
0.25 |
|
|
$ |
0.15 |
|
|
$ |
0.18 |
|
|
$ |
0.23 |
|
| |
94
Ask Jeeves, Inc.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended | |
| 2003 (in thousands) |
|
December 31 | |
|
September 30 | |
|
June 30 | |
|
March 31 | |
| | |
|
Revenue
|
|
$ |
31,834 |
|
|
$ |
27,176 |
|
|
$ |
25,568 |
|
|
$ |
22,714 |
|
|
Gross profit
|
|
$ |
26,176 |
|
|
$ |
21,920 |
|
|
$ |
20,082 |
|
|
$ |
17,197 |
|
|
Operating income
|
|
$ |
7,786 |
|
|
$ |
3,931 |
|
|
$ |
4,780 |
|
|
$ |
2,481 |
|
|
Income from continuing operations
|
|
$ |
7,638 |
|
|
$ |
3,839 |
|
|
$ |
4,857 |
|
|
$ |
8,451 |
|
|
Net income
|
|
$ |
7,638 |
|
|
$ |
6,321 |
|
|
$ |
4,399 |
|
|
$ |
7,691 |
|
|
Earnings per Share—Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$ |
0.16 |
|
|
$ |
0.09 |
|
|
$ |
0.11 |
|
|
$ |
0.20 |
|
|
Income (loss) from discontinued operations
|
|
|
— |
|
|
$ |
0.05 |
|
|
$ |
(0.01 |
) |
|
$ |
(0.02 |
) |
| |
|
Net income
|
|
$ |
0.16 |
|
|
$ |
0.14 |
|
|
$ |
0.10 |
|
|
$ |
0.18 |
|
| |
|
Earnings per Share—Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$ |
0.13 |
|
|
$ |
0.07 |
|
|
$ |
0.09 |
|
|
$ |
0.17 |
|
|
Income (loss) from discontinued operations
|
|
|
— |
|
|
$ |
0.04 |
|
|
$ |
(0.01 |
) |
|
$ |
(0.01 |
) |
| |
|
Net income
|
|
$ |
0.13 |
|
|
$ |
0.11 |
|
|
$ |
0.08 |
|
|
$ |
0.16 |
|
| |
See Notes 2, 5 and 11 for a description of certain
quarterly items.
|
|
| 19. |
SUBSEQUENT EVENTS
(UNAUDITED) |
On February 17, 2005, a lawsuit was filed in the Circuit
Court of Miller County, Arkansas captioned Lane’s Gifts
and Collectibles et al. vs. Yahoo! Inc. et al., in
which Ask Jeeves, Inc., Google Inc., Yahoo! Inc., America Online
and several other Internet media companies are named as
defendants. The complaint alleges that the defendants
overcharged advertisers by billing and collecting fees for
price-per-click (PPC) advertising in response to clicks
that defendants knew were not generated by bona fide consumers.
It further alleges that defendants engaged in an industry-wide
conspiracy to conceal the alleged overcharges from advertisers
in order to increase the size of the PPC advertising market. The
complaint purports to be a nationwide class action on behalf of
all advertisers that have been overcharged for PPC advertising.
The complaint seeks to hold Ask Jeeves and the other defendants
liable for the amount of the alleged overcharges, together with
prejudgment interest, attorneys’ fees and such other
amounts as the court may determine. Ask Jeeves was served this
complaint on February 28, 2005 and it is currently being
evaluated by the Company’s attorneys. Ask Jeeves believes
it has meritorious defenses and intends to defend the case
vigorously.
In management’s opinion, resolution of this matter is not
expected to have a material adverse impact on the Company’s
results of operations, cash flows or financial position.
However, depending on the amount and timing, an unfavorable
resolution of these matters could materially and adversely
affect the Company’s future results of operations, cash
flows or financial position.
95
Ask Jeeves, Inc.
|
|
| ITEM 9. |
CHANGES IN AND DISAGREEMENTS
WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE |
None.
|
|
| ITEM 9A. |
CONTROLS AND
PROCEDURES |
Our Disclosure Controls and Procedures
Under the supervision and with the participation of our
management, including our principal executive officer and
principal financial officer, we conducted an evaluation of the
effectiveness of the design and operation of our disclosure
controls and procedures, as defined in Rule 13a-15(e) under
the Securities Exchange Act of 1934, as amended, as of the end
of the period covered by this report, which we refer to as the
Evaluation Date. Based on this evaluation, our principal
executive officer and principal financial officer concluded that
our disclosure controls and procedures were effective as of the
Evaluation Date such that the information relating to Ask
Jeeves, including our consolidated subsidiaries, required to be
disclosed in our SEC reports:
|
|
|
| |
• |
is recorded, processed, summarized and reported within the time
periods specified in SEC rules and forms, and |
| |
| |
• |
is accumulated and communicated to our management, including our
principal executive officer and principal financial officer, as
appropriate to allow timely decisions regarding required
disclosure. |
Management’s Report on Internal Control over Financial
Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term
is defined in Rules 13a-15(f) and 15d-15(f) under the
Securities Exchange Act of 1934, as amended. Management
conducted an evaluation of the effectiveness of our internal
control over financial reporting as of December 31, 2004.
Management’s evaluation was based on the framework set
forth by the Committee of the Sponsoring Organizations of the
Treadway Commission (“COSO”) in Internal
Control— Integrated Framework. Based on this
evaluation, management has concluded that, as of
December 31, 2004, our internal control over financial
reporting was effective. Our independent registered public
accounting firm, Ernst & Young LLP, has audited
management’s assessment of our internal control over
financial reporting, as stated in their report which is included
herein.
Inherent Limitations on Effectiveness of Controls
Our management does not expect that our disclosure controls and
procedures or our internal controls will prevent all error and
all fraud. A control system, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance
that the objectives of the control system are met. Further, the
design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent
limitations in all control systems, no evaluation of controls
can provide absolute assurance that all control issues and
instances of fraud, if any, within the Company have been
detected.
96
Ask Jeeves, Inc.
Report of Independent Registered Public Accounting Firm on
Internal Control Over Financial Reporting
The Board of Directors and Stockholders of Ask Jeeves, Inc.
We have audited management’s assessment, included in the
accompanying Management’s Report on Internal Control over
Financial Reporting, that Ask Jeeves, Inc. maintained effective
internal control over financial reporting as of
December 31, 2004. Management’s assessment was based
on criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria).
Ask Jeeves, Inc.’s management is responsible for
maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control
over financial reporting. Our responsibility is to express an
opinion on management’s assessment and an opinion on the
effectiveness of the company’s internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
management’s assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that Ask Jeeves,
Inc. maintained effective internal control over financial
reporting as of December 31, 2004, is fairly stated, in all
material respects, based on the COSO criteria. Also, in our
opinion, Ask Jeeves, Inc. maintained, in all material respects,
effective internal control over financial reporting as of
December 31, 2004, based on the COSO criteria.
97
Ask Jeeves, Inc.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Ask Jeeves, Inc. as of
December 31, 2004 and 2003, and the related consolidated
statements of operations, stockholders’ equity and cash
flows for each of the three years in the period ended
December 31, 2004 of Ask Jeeves, Inc. and our report dated
March 10, 2005 expressed an unqualified opinion thereon.
San Francisco, California
March 10, 2005
|
|
| ITEM 9B. |
OTHER INFORMATION |
None.
98
Ask Jeeves, Inc.
Part III
|
|
| ITEM 10. |
DIRECTORS AND EXECUTIVE OFFICERS
OF THE REGISTRANT |
The information required by this item will appear in the
definitive Proxy Statement circulated by our board of directors
in connection with our 2005 Annual Meeting of Stockholders,
which will be filed with the SEC no later than April 30,
2005, and is hereby incorporated by reference to that filing.
|
|
| ITEM 11. |
EXECUTIVE COMPENSATION |
The information required by this item will appear in the
definitive Proxy Statement circulated by our board of directors
in connection with our 2005 Annual Meeting of Stockholders,
which will be filed with the SEC no later than April 30,
2005, and is hereby incorporated by reference to that filing.
|
|
| ITEM 12. |
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT |
The information required by this item will appear in the
definitive Proxy Statement circulated by our board of directors
in connection with our 2005 Annual Meeting of Stockholders,
which will be filed with the SEC no later than April 30,
2005, and is hereby incorporated by reference to that filing.
|
|
| ITEM 13. |
CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS |
The information required by this item will appear in the
definitive Proxy Statement circulated by our board of directors
in connection with our 2005 Annual Meeting of Stockholders,
which will be filed with the SEC no later than April 30,
2005, and is hereby incorporated by reference to that filing.
|
|
| ITEM 14. |
PRINCIPAL ACCOUNTING FEES AND
SERVICES |
The information required by this item will appear in the
definitive Proxy Statement circulated by our board of directors
in connection with our 2005 Annual Meeting of Stockholders,
which will be filed with the SEC no later than April 30,
2005, and is hereby incorporated by reference to that filing.
99
Ask Jeeves, Inc.
Part IV
|
|
| ITEM 15. |
EXHIBITS AND FINANCIAL STATEMENT
SCHEDULES |
|
|
| (a)(1) |
Financial
Statements. The following are filed as part of
Item 8 of this annual report on Form 10-K: |
|
|
| |
Consolidated Balance Sheets |
| |
Consolidated Statements of Operations |
| |
Consolidated Statements of Stockholders’ Equity |
| |
Consolidated Statements of Cash Flow |
| |
Notes to Consolidated Financial Statements |
| |
Reports of Independent Registered Public Accounting Firm |
|
|
| (2) |
Financial
Schedules. Schedule II
“Valuation and Qualifying Accounts” appears below. 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 our consolidated
financial statements or notes thereto. The financial statement
schedule below should be read in conjunction with the
consolidated financial statements in Item 8 of this annual
report on Form 10-K. |
ASK JEEVES, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Balance at | |
|
Charge to | |
|
|
|
Balance at | |
| |
|
Beginning | |
|
Costs and | |
|
|
|
End of | |
| |
|
of Period | |
|
Expenses | |
|
Deductions | |
|
Period | |
| | |
|
Year ended December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Allowance for doubtful accounts
|
|
$ |
1,437 |
|
|
$ |
899 |
|
|
$ |
873 |
|
|
$ |
1,463 |
|
| |
Continuing Ops:
|
|
|
1,437 |
|
|
|
|
|
|
|
|
|
|
|
1,463 |
|
| |
Discontinued Ops:
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
Year ended December 31, 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Allowance for doubtful accounts
|
|
$ |
1,945 |
|
|
$ |
391 |
|
|
$ |
899 |
|
|
$ |
1,437 |
|
| |
Continuing Ops:
|
|
|
1,593 |
|
|
|
|
|
|
|
|
|
|
|
1,437 |
|
| |
Discontinued Ops:
|
|
|
352 |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
Year ended December 31, 2002:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Allowance for doubtful accounts
|
|
$ |
1,813 |
|
|
$ |
491 |
|
|
$ |
359 |
|
|
$ |
1,945 |
|
| |
Continuing Ops:
|
|
|
1,032 |
|
|
|
|
|
|
|
|
|
|
|
1,593 |
|
| |
Discontinued Ops:
|
|
|
781 |
|
|
|
|
|
|
|
|
|
|
|
352 |
|
| |
|
|
| (b) |
Exhibits. The
exhibits listed on the Exhibit Index (following the
Signatures section of this report) are included, or incorporated
by reference, in this annual report. |
100
Ask Jeeves, Inc.
Signatures
and Powers of Attorney
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 Oakland, State of
California, on March 15, 2005.
|
|
| |
|
| |
Steven Berkowitz |
| |
Chief Executive Officer |
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose
signature appears below each severally constitutes and appoints
Steven Berkowitz, Steven J. Sordello, Scott T. Bauer
and Brett M. Robertson, and each of them acting
individually without the others, 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 and schedules 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 on
behalf of the registrant and in the capacities and on the dates
indicated:
| |
|
|
|
|
| Signature |
|
Title |
|
Date |
| |
| |
/s/ A. George (Skip)
Battle
A.
George (Skip) Battle |
|
Executive Chairman of the Board of Directors
|
|
March 15, 2005 |
| |
/s/ Steven Berkowitz
Steven
Berkowitz |
|
Chief Executive Officer and Director (Principal Executive
Officer)
|
|
March 15, 2005 |
| |
/s/ Steven J. Sordello
Steven
J. Sordello |
|
Executive Vice President and Chief Financial Officer (Principal
Financial Officer)
|
|
March 15, 2005 |
| |
/s/ Scott T. Bauer
Scott
T. Bauer |
|
Vice President and Corporate Controller (Principal Accounting
Officer)
|
|
March 15, 2005 |
| |
/s/ David S. Carlick
David
S. Carlick |
|
Director
|
|
March 15, 2005 |
| |
/s/ James Casella
James
Casella |
|
Director
|
|
March 15, 2005 |
101
Ask Jeeves, Inc.
| |
|
|
|
|
| Signature |
|
Title |
|
Date |
| |
| |
/s/ Joshua Goldman
Joshua
Goldman |
|
Director
|
|
March 15, 2005 |
| |
/s/ Garrett Gruener
Garrett
Gruener |
|
Director
|
|
March 15, 2005 |
| |
/s/ James Kirsner
James
Kirsner |
|
Director, Chair of the Audit Committee
|
|
March 15, 2005 |
| |
/s/ Geoffrey Y. Yang
Geoffrey
Y. Yang |
|
Director
|
|
March 15, 2005 |
102
Ask Jeeves, Inc.
Exhibit
Index
Pursuant to Item 601(a)(2) of Regulation S-K, this
Exhibit Index immediately precedes the exhibits.
The following exhibits are included, or incorporated by
reference, in this annual report on Form 10-K (and are
numbered in accordance with Item 601 of
Regulation S-K). Headings are for ease of reference only.
| |
|
|
|
|
| Exhibit No. | |
|
Description |
| |
| |
|
|
|
Plans of Acquisition,
Reorganization, Arrangement, Liquidation or Succession |
| |
2.1 |
|
|
Agreement and Plan of Merger, dated June 29, 1999, by and
between Ask Jeeves, Inc. and AJ Merger Corporation (previously
filed as Exhibit 2.1 to the Registrant’s Annual Report
on Form 10-K, filed March 12, 2003, and incorporated
herein by reference). |
| |
2.2 |
|
|
Agreement and Plan of Merger and Reorganization, dated as of
November 19, 1999, by and among Ask Jeeves, Inc., Net
Effect Systems, Inc. and Neutral Acquisition Corp. (previously
filed as Exhibit 2.1 to the Registrant’s Current
Report on Form 8-K, filed November 18, 1999, and
incorporated herein by reference). |
| |
2.3 |
|
|
Agreement and Plan of Merger and Reorganization, dated as of
January 25, 2000, by and among Ask Jeeves, Inc., Direct Hit
Technologies, Inc. and Answer Acquisition Corp. (previously
filed as Exhibit 2.1 to the Registrant’s Current
Report on Form 8-K, filed February 14, 2000, and
incorporated herein by reference). |
| |
2.4 |
|
|
Agreement and Plan of Merger and Reorganization, dated as of
September 10, 2001, by and among Ask Jeeves, Inc., Answer
Acquisition Corp. No. 2, and Teoma Technologies, Inc., and
solely with respect to Article X, Hawk Holdings, LLC, as
Stockholders’ Agent, and Chase Manhattan Bank and Trust,
N.A., as Escrow Agent (previously filed as Exhibit 2.1 to
the Registrant’s Current Report on Form 8-K, filed
September 17, 2001, and incorporated herein by reference). |
| |
2.5 |
|
|
Agreement and Plan of Reorganization, dated March 3, 2004,
by and among Ask Jeeves, Inc., Interactive Search Holdings,
Inc., Aqua Acquisition Corp. and Aqua Acquisition Holdings LLC
(previously filed as Exhibit 2.1 to the Registrant’s
Current Report on Form 8-K, filed March 5, 2004, and
incorporated herein by reference). |
| |
|
|
|
Charter Documents |
| |
3.1.1 |
|
|
Certificate of Incorporation of AJ Merger Corporation,
predecessor of Ask Jeeves, Inc. (previously filed as
Exhibit 3.1 to the Registrant’s Form S-1, filed
April 30, 1999, and incorporated herein by reference). |
| |
3.1.2 |
|
|
Amended and Restated Certificate of Incorporation of Ask Jeeves,
Inc., dated July 6, 1999 (previously filed as
Exhibit 3.1.2 to the Registrant’s Annual Report on
Form 10-K, filed March 12, 2003, and incorporated
herein by reference). |
| |
3.1.3 |
|
|
Certificate of Correction of Amended and Restated Certificate of
Incorporation of Ask Jeeves, Inc., dated as of April 6,
2001 (previously filed as Exhibit 3.1.3 to the
Registrant’s Annual Report on Form 10-K, filed
March 12, 2003, and incorporated herein by reference). |
| |
3.1.4 |
|
|
Certificate of Designation of Series A Junior Participating
Preferred Stock of Ask Jeeves, Inc. (previously filed as
Exhibit 3.1 to the Registrant’s Current Report on
Form 8-K, filed May 10, 2001, and incorporated herein
by reference). |
| |
3.1.5 |
|
|
Certificate of Ownership and Merger Merging Net Effects Systems,
Inc. and Direct Hit Technologies, Inc. with and into Ask Jeeves,
Inc., dated as of December 28, 2000 (previously filed as
Exhibit 2.4 to the Registrant’s Annual Report on
Form 10-K, filed March 12, 2003, and incorporated
herein by reference). |
103
Ask Jeeves, Inc.
| |
|
|
|
|
| Exhibit No. | |
|
Description |
| |
| |
|
|
|
Bylaws |
| |
3.2 |
|
|
Bylaws of Ask Jeeves, Inc. (previously filed as Exhibit 3.4
to the Registrant’s Form S-1, filed April 30,
1999, and incorporated herein by reference). |
| |
3.2.2 |
|
|
Certificate of Amendment of Bylaws of Ask Jeeves, Inc., adopted
on October 30, 2003 (previously filed as Exhibit 3.2.2
to the Registrant’s Annual Report on Form 10-K, filed
March 1, 2004, and incorporated herein by reference) |
| |
|
|
|
Instruments Defining the Rights
of Security Holders |
| |
4.1 |
|
|
Specimen Common Stock Certificate of Ask Jeeves, Inc.
(previously filed as Exhibit 4.2 to the Registrant’s
Amendment No. 2 to Form S-1, filed June 7, 1999,
and incorporated herein by reference). |
| |
4.2.1 |
|
|
Rights Agreement (commonly called a “poison pill
plan”), dated as of April 26, 2001, between Ask
Jeeves, Inc. and Fleet National Bank, N.A. (previously filed as
Exhibit 4.1 to the Registrant’s Current Report on
Form 8-K, filed May 10, 2001, and incorporated herein
by reference). |
| |
4.2.2 |
|
|
Form of Rights Certificate issuable in certain circumstances
under the Rights Agreement (filed as Exhibit B to the
Rights Agreement, dated as of April 26, 2001, between Ask
Jeeves, Inc. and Fleet National Bank, N.A., previously filed as
Exhibit 4.1 to the Registrant’s Current Report on
Form 8-K, filed May 10, 2001, and incorporated herein
by reference). |
| |
4.3.1 |
|
|
Indenture (relating to the Zero Coupon Subordinated Convertible
Notes of Ask Jeeves, Inc.), dated as of June 4, 2003, by
and between Ask Jeeves, Inc. and The Bank of New York, as
Trustee (previously filed as Exhibit 4.3.1 to the
Registrant’s Form S-3 registration statement, filed
September 19, 2003, and incorporated herein by reference). |
| |
4.3.2 |
|
|
Form of Zero Coupon Convertible Subordinated Note of Ask Jeeves,
Inc. (included within Exhibit 4.3.1). |
| |
4.4 |
|
|
Form of Stock Resale Agreement, dated March 3, 2004,
between Ask Jeeves, Inc. and each of the following (stockholders
of Interactive Search Holdings, Inc.), separately: Bain Capital
Fund VI, L.P.; BCIP Associates II; BCIP
Trust Associates II; BCIP Associates II-B; BCIP
Trust Associates II-B; BCIP Associates II-C; PEP
Investments PTY LTD.; Sankaty High Yield Asset Partners, L.P.;
Sankaty High Yield Partners II, L.P.; Brookside Capital
Partners Fund L.P.; BCI-I, LLC; BCI-II, LLC; RGIP, LLC;
William Daugherty; J.P. Morgan Partners (BHCA), L.P.; Jonas
Steinman; Viacom Inc.; Frank William Daugherty, III 2004
GRAT; and Jonas L. Steinman 2004 GRAT (previously filed as
Exhibit 10.3 to the Registrant’s Current Report on
Form 8-K, filed March 5, 2004, and incorporated herein
by reference). |
| |
|
|
|
Equity Compensation Plan
Documents |
| |
10.1.1.1† |
|
|
1996 Equity Incentive Plan (previously filed as
Exhibit 10.1 to the Registrant’s Form S-1, filed
April 30, 1999, and incorporated herein by reference). |
| |
10.1.1.2† |
|
|
Form of Option Agreement for the 1996 Equity Incentive Plan
(previously filed as Exhibit 10.2 to the Registrant’s
Form S-1, filed April 30, 1999, and incorporated
herein by reference). |
| |
10.1.2.1† |
|
|
1999 Equity Incentive Plan, adopted April 16, 1999 and
approved by Stockholders on May 21, 1999 and May 25,
2000 (composite plan document reflecting amendments adopted
through May 15, 2003) (previously filed as Exhibit 4.1
to the Registrant’s Form S-8, filed May 15, 2003,
and incorporated herein by reference). |
| |
10.1.2.2† |
|
|
Appendix A to the 1999 Equity Incentive Plan, effective as
of January 1, 2004 (relating to the automatic option grant
program for eligible directors), including the form of Eligible
Director Option Agreement (previously filed as
Exhibit 10.1.2.2 to the Registrant’s Quarterly Report
on Form 10-K, filed August 9, 2004, and incorporated
herein by reference). |
| |
10.1.2.3†* |
|
|
Form of Stock Option Grant Notice for the 1999 Equity Incentive
Plan and the 1999 Non-Qualified Equity Incentive Plan. |
| |
10.1.2.4† |
|
|
Form of Option Agreement for the 1999 Equity Incentive Plan
(previously filed as Exhibit 99.2 to the Registrant’s
Form S-8, filed November 15, 2001, and incorporated
herein by reference). |
| |
10.1.2.5† |
|
|
Form of Addendum to Stock Option Agreement applicable to certain
grants under the 1999 Equity Incentive Plan from the Registrant
to each of A. George (Skip) Battle, Steven Berkowitz,
Steven Sordello, Heather Staples and Claudio Pinkus (previously
filed as exhibit 10.1.2.4 to the Registrant’s
Form 10-Q filed August 5, 2003 and incorporated herein
by reference). |
104
Ask Jeeves, Inc.
| |
|
|
|
|
| Exhibit No. | |
|
Description |
| |
| |
10.1.3.1† |
|
|
1999 Non-Qualified Equity Incentive Plan, as Amended through
January 10, 2001 (previously filed as Exhibit 99.4 to
the Registrant’s Form S-8, filed November 15,
2001, and incorporated herein by reference). |
| |
10.1.3.2† |
|
|
Form of Option Agreement for the 1999 Non-Qualified Equity
Incentive Plan (previously filed as Exhibit 99.5 to the
Registrant’s Form S-8, filed November 15, 2001,
and incorporated herein by reference). |
| |
10.1.3.3† |
|
|
2002 UK Approved Rules for Grants under the 1999 Non-Qualified
Equity Plan (the “UK Sub Plan”), as adopted by the
Registrant on January 13, 2003 (previously filed as
Exhibit 10.1.3.3 to the Registrant’s Form 10-Q,
filed May 2, 2003, and incorporated herein by reference). |
| |
10.1.4† |
|
|
1999 Employee Stock Purchase Plan, as amended through
May 25, 2000 (previously filed as Exhibit 99.3 to the
Registrant’s Form S-8, filed November 15, 2001,
and incorporated herein by reference). |
| |
|
|
|
Other Compensation-Related
Agreements |
| |
10.2.1.1† |
|
|
Offer letter dated as of December 8, 2000, by and between
Ask Jeeves, Inc. and A. George (Skip) Battle (previously
filed as Exhibit 10.40 to the Registrant’s Annual
Report on Form 10-K, filed April 2, 2001, and
incorporated herein by reference). |
| |
10.2.1.2† |
|
|
Offer letter of New Terms of Employment, dated April 3,
2001, by and between Ask Jeeves, Inc. and A. George (Skip)
Battle (previously filed as Exhibit 10.41 to the
Registrant’s Quarterly Report on Form 10-Q, filed
August 14, 2001, and incorporated herein by reference). |
| |
10.2.1.3† |
|
|
Severance Benefits Letter Agreement, dated as of
November 14, 2002, by and between Ask Jeeves, Inc. and
A. George (Skip) Battle (previously filed as
Exhibit 10.2.3.3 to the Registrant’s Annual Report on
Form 10-K, filed March 12, 2003, and incorporated
herein by reference). |
| |
10.2.1.4† |
|
|
Severance Benefits Letter Agreement, dated January 19,
2005, by and between Ask Jeeves, Inc. and A. George (Skip)
Battle (previously filed as Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K, filed
January 25, 2005 and incorporated herein by reference). |
| |
10.2.2.1† |
|
|
Promissory Note, dated March 15, 2001, by and between Ask
Jeeves, Inc. and Steven J.Sordello (previously filed as
Exhibit 10.43 to the Registrant’s Quarterly Report on
Form 10-Q, filed August 14, 2001, and incorporated
herein by reference). |
| |
10.2.2.2† |
|
|
Severance Benefits Letter Agreement, dated as of
November 14, 2002, by and between Ask Jeeves, Inc. and
Steven J. Sordello (previously filed as
Exhibit 10.2.4.2 to the Registrant’s Annual Report on
Form 10-K, filed March 12, 2003, and incorporated
herein by reference). |
| |
10.2.2.3† |
|
|
Addendum to Stock Option Agreement regarding the April 1,
2003 stock option grant under the 1999 Equity Incentive Plan
from the Registrant to Steven J. Sordello (previously filed
as Exhibit 10.2.4.3 to the Registrant’s Quarterly
Report on Form 10-Q, filed August 5, 2003, and
incorporated herein by reference). |
| |
10.2.2.4† |
|
|
Restricted Stock Award Agreement under the 1999 Equity Incentive
Plan by and between Ask Jeeves, Inc. and Steven J.
Sordello, dated September 30, 2003 (previously filed as
Exhibit 10.2.4.4 to the Registrant’s Quarterly Report
on Form 10-Q, filed November 4, 2003, and incorporated
herein by reference). |
| |
10.2.2.5† |
|
|
Severance Benefits Letter Agreement, dated January 19,
2005, by and between Ask Jeeves, Inc. and Steve Sordello
(previously filed as Exhibit 10.3 to the Registrant’s
Current Report on Form 8-K, filed January 25, 2005 and
incorporated herein by reference). |
| |
10.2.3.1† |
|
|
Offer letter dated April 23, 2001, by and between Ask
Jeeves, Inc. and Steven Berkowitz (previously filed as
Exhibit 10.42 to the Registrant’s Quarterly Report on
Form 10-Q, filed August 14, 2001, and incorporated
herein by reference). |
| |
10.2.3.2† |
|
|
Severance Benefits Letter Agreement, dated as of
November 14, 2002, by and between Ask Jeeves, Inc. and
Steven Berkowitz (previously filed as Exhibit 10.2.6.2 to
the Registrant’s Annual Report on Form 10-K, filed
March 12, 2003, and incorporated herein by reference). |
| |
10.2.3.3† |
|
|
Restricted Stock Award Agreement under the 1999 Equity Incentive
Plan by and between Ask Jeeves, Inc. and Steven Berkowitz, dated
September 30, 2003 (previously filed as
Exhibit 10.2.6.3 to the Registrant’s Quarterly Report
on Form 10-Q, filed November 4, 2003, and incorporated
herein by reference). |
105
Ask Jeeves, Inc.
| |
|
|
|
|
| Exhibit No. | |
|
Description |
| |
| |
10.2.3.4† |
|
|
Severance Benefits Letter Agreement, dated January 19,
2005, by and between Ask Jeeves, Inc. and Steve Berkowitz
(previously filed as Exhibit 10.2 to the Registrant’s
Current Report on Form 8-K, filed January 25, 2005 and
incorporated herein by reference). |
| |
10.2.4.1† |
|
|
Incentive Agreement, entered into as of January 2, 2001, by
and between Ask Jeeves, Inc. and Claudio Pinkus (previously
filed as Exhibit 10.45.1 to the Registrant’s Annual
Report on Form 10-K, filed February 28, 2002, and
incorporated herein by reference). |
| |
10.2.4.2† |
|
|
Amendment to Incentive Agreement, dated June 18, 2001, by
and between Ask Jeeves, Inc. and Claudio Pinkus (previously
filed as Exhibit 10.45.2 to the Registrant’s Annual
Report on Form 10-K, filed February 28, 2002, and
incorporated herein by reference). |
| |
10.2.4.3† |
|
|
Second Amendment to Incentive Agreement, entered into as of
August 29, 2001, by and between Ask Jeeves, Inc. and
Claudio Pinkus (previously filed as Exhibit 10.45.3 to the
Registrant’s Annual Report on Form 10-K, filed
February 28, 2002, and incorporated herein by reference). |
| |
10.2.4.4† |
|
|
Third Amendment to Incentive Agreement, entered into as of
November 17, 2001, by and between Ask Jeeves, Inc. and
Claudio Pinkus (previously filed as Exhibit 10.45.4 to the
Registrant’s Annual Report on Form 10-K, filed
February 28, 2002, and incorporated herein by reference) |
| |
10.2.4.5† |
|
|
Severance Benefits Letter Agreement, dated as of
November 14, 2002, by and between Ask Jeeves, Inc. and
Claudio Pinkus (previously filed as Exhibit 10.2.7.5 to the
Registrant’s Annual Report on Form 10-K, filed
March 12, 2003, and incorporated herein by reference). |
| |
10.2.4.6† |
|
|
Severance Agreement by and between Ask Jeeves, Inc. and Claudio
Pinkus, dated August 28, 2003 (previously filed as
Exhibit 10.2.7.6 to the Registrant’s Quarterly Report
on Form 10-Q, filed November 4, 2003, and incorporated
herein by reference). |
| |
10.2.5.1† |
|
|
Form of Indemnity Agreement by and between Ask Jeeves, Inc. and
each of its then-current directors and executive officers
(previously filed as Exhibit 10.27 to the Registrant’s
Amendment No. 1 to Form S-1, filed May 10, 1999,
and incorporated herein by reference). |
| |
10.2.5.2† |
|
|
Form of Indemnification Agreement, entered into in May 2003 (or
subsequently) between Ask Jeeves, Inc. and each of
A. George (Skip) Battle, David Carlick, Joshua Goldman,
Garrett Gruener, James Kirsner, Geoffrey Y. Yang, Scott
Bauer, Steve Berkowitz, Adrian Cox, Jim Diaz, Paul Gardi, Scott
Garell, John Scott Lomond, Tuoc Luong, Claudio Pinkus, Brett
Robertson, Steve Sordello, Heather Staples and Mark Stein
(previously filed as Exhibit 10.2.8.2 to the
Registrant’s Form 10-Q, filed August 5, 2003 and
incorporated herein by reference). |
| |
10.2.6.1† |
|
|
Offer Letter dated November 25, 2002 by and between Ask
Jeeves, Inc. and Brett M. Robertson (previously filed as
Exhibit 10.2.9.2 to the Registrant’s Quarterly Report
on Form 10-Q, filed May 3, 2004, and incorporated
herein by reference). |
| |
10.2.6.2† |
|
|
Severance Benefits Letter Agreement, dated as of
December 3, 2002, by and between Ask Jeeves, Inc. and
Brett M. Robertson (previously filed as
Exhibit 10.2.9.1 to the Registrant’s Annual Report on
Form 10-K, filed March 12, 2003, and incorporated
herein by reference). |
| |
10.2.6.3† |
|
|
Severance Benefits Letter Agreement, dated January 19,
2005, by and between Ask Jeeves, Inc. and Brett M.
Robertson (previously filed as Exhibit 10.4 to the
Registrant’s Current Report on Form 8-K, filed
January 25, 2005 and incorporated herein by reference). |
| |
10.2.7† |
|
|
Severance Benefits Letter Agreement, dated as of
November 14, 2002, by and between Ask Jeeves, Inc. and
Heather J. Staples (previously filed as
Exhibit 10.2.10.1 to the Registrant’s Annual Report on
Form 10-K, filed March 12, 2003, and incorporated
herein by reference). |
| |
10.2.8.1† |
|
|
Offer Letter dated October 27, 2003 by and between Ask
Jeeves Internet Ltd. and Adrian Cox (previously filed as
Exhibit 10.2.12.1 to the Registrant’s Quarterly Report
on Form 10-Q, filed May 3, 2004, and incorporated
herein by reference). |
| |
10.2.8.2† |
|
|
Severance Benefits Letter Agreement, dated January 25,
2005, by and between Ask Jeeves Internet Ltd., Ask Jeeves, Inc.
and Adrian Cox (previously filed as Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K, filed
January 27, 2005 and incorporated herein by reference). |
| |
10.2.9.1† |
|
|
Offer letter dated April 30, 2004 by and between Ask
Jeeves, Inc. and F. William Daugherty, III (previously
filed as Exhibit 10.5 to the Registrant’s Current
Report on Form 8-K, filed July 20, 2004, and
incorporated herein by reference). |
106
Ask Jeeves, Inc.
| |
|
|
|
|
| Exhibit No. | |
|
Description |
| |
| |
10.2.9.2 |
|
|
Non-Competition Agreement, dated March 3, 2004, between Ask
Jeeves, Inc. and F. William Daugherty, III (previously
filed as Exhibit 10.4 to the Registrant’s Current
Report on Form 8-K, filed March 5, 2004, and
incorporated herein by reference). |
| |
10.2.10.1† |
|
|
Offer letter dated April 30, 2004 by and between Ask
Jeeves, Inc. and Jonas Steinman (previously filed as
Exhibit 10.6 to the Registrant’s Current Report on
Form 8-K, filed July 20, 2004, and incorporated herein
by reference). |
| |
10.2.10.2 |
|
|
Non-Competition Agreement, dated March 3, 2004, between Ask
Jeeves, Inc. and Jonas Steinman (previously filed as
Exhibit 10.4 to the Registrant’s Current Report on
Form 8-K, filed March 5, 2004, and incorporated herein
by reference). |
| |
10.2.11†* |
|
|
Resolution adopted by the Board of Directors of Ask Jeeves, Inc.
at a meeting November 4, 2004 regarding director compensation. |
| |
10.2.12†* |
|
|
Ask Jeeves Executive Management Cash Bonus Plan. |
| |
10.2.13†* |
|
|
Summary Sheet of bonus payments and compensation changes for Ask
Jeeves’ Named Executive Officers. |
| |
|
|
|
Material
U.S. Leases |
| |
10.3.1 |
|
|
Office Lease dated as of April 29, 1999, by and between Ask
Jeeves, Inc. and Emery Station Associates, L.L.C. (previously
filed as Exhibit 10.28 to the Registrant’s Amendment
No. 2 to Form S-1, filed June 7, 1999, and
incorporated herein by reference). |
| |
10.3.2 |
|
|
Master Lease Agreement dated as of June 15, 1999, by and
between Ask Jeeves, Inc. and Comdisco, Inc. (previously filed as
Exhibit No. 4 to the Registrant’s Amendment
No. 4 to Form S-1, filed June 29, 1999, and
incorporated herein by reference). |
| |
10.3.3 |
|
|
Lease Amendment and Termination Agreement, made February 4,
2002, by and between Ask Jeeves, Inc., as Tenant, and Oakland
City Center LLC, as Landlord (previously filed as
Exhibit 10.48 to the Registrant’s Annual Report on
Form 10-K, filed February 28, 2002, and incorporated
herein by reference). |
| |
10.3.4 |
|
|
Lease (for Ask Jeeves’ new headquarters space in Oakland,
CA) dated as of June 30, 2004, by and between Ask Jeeves,
Inc. and 555 Twelfth Street Venture, LLC (previously filed as
Exhibit 10.3.4 to the Registrant’s Quarterly Report on
Form 10-K, filed August 9, 2004, and incorporated
herein by reference). |
| |
10.3.5.1 |
|
|
Lease (for Ask Jeeves’ offices in Irvington, NY), dated
July 27, 1999 by and between Focus Interactive, Inc.
(formerly known as CTC Bulldog, Inc.) and Bridge Street
Properties LLC (previously filed as Exhibit 10.1.1 to the
Registrant’s Current Report on Form 8-K, filed
July 20, 2004, and incorporated herein by reference). |
| |
10.3.5.2 |
|
|
Amended Lease (for Ask Jeeves’ offices in Irvington, NY),
dated September 22, 2002, by and between Focus Interactive,
Inc. (formerly known as iWon, Inc.) and Bridge Street Properties
LLC (previously filed as Exhibit 10.1.2 to the
Registrant’s Current Report on Form 8-K, filed
July 20, 2004, and incorporated herein by reference). |
| |
|
|
|
Ask Jeeves U.K.
Agreements |
| |
10.4.1 |
|
|
Agreement Relating to the Sale and Purchase of the Entire Issued
Share Capital of Carlton & Granada Internet Limited,
dated as of February 7, 2002, by and among the Registrant,
Carlton Communications PLC, Granada Media Group Limited,
Carlton & Granada Internet Limited, Ask Jeeves (Jersey)
Limited and Ask Jeeves International, Inc. (previously filed as
Exhibit 2.1 to the Registrant’s Form S-3, filed
March 6, 2002, and incorporated herein by reference). |
| |
10.4.2 |
|
|
Further Supplemental Partnership Deed relating to Ask Jeeves UK,
dated February 14, 2002, by and among the Registrant,
Carlton Communications PLC, Granada Media Group Limited,
Carlton & Granada Internet Limited, Ask Jeeves (Jersey)
Limited, Ask Jeeves International Inc. and Ask Jeeves UK
(previously filed as Exhibit 10.49 to the Registrant’s
Quarterly Report on Form 10-Q, filed April 30, 2002,
and incorporated herein by reference). |
107
Ask Jeeves, Inc.
| |
|
|
|
|
| Exhibit No. | |
|
Description |
| |
| |
10.4.3 |
|
|
Tax Deed relating to the acquisition of the entire issued share
capital of Carlton & Granada Internet Limited, dated
March 6, 2002, by and among the Registrant, Carlton
Communications PLC and Granada Media Group Limited (previously
filed as Exhibit 10.50 to the Registrant’s Quarterly
Report on Form 10-Q, filed April 30, 2002, and
incorporated herein by reference). |
| |
10.4.4 |
|
|
Underlease, dated March 15, 2000, by and between
City & General (West End) Limited and the Ask Jeeves UK
Partnership (previously filed as Exhibit 10.4.4 to the
Registrant’s Annual Report on Form 10-K, filed
March 12, 2003, and incorporated herein by reference). |
| |
|
|
|
Ask Jeeves Japan Joint Venture
Agreements |
| |
10.5.1‡ |
|
|
Joint Venture Agreement by and between Trans Cosmos Inc. USA
Pacific Holdings Company III, and Ask Jeeves International,
Inc., dated as of August 31, 2000 (previously filed as
Exhibit 10.5.1 to the Registrant’s Annual Report on
Form 10-K, filed March 12, 2003, and incorporated
herein by reference). |
| |
10.5.2.1‡ |
|
|
Distribution and License Agreement by and between Ask Jeeves
International, Inc., the Registrant, Transcosmos, inc. and Ask
Jeeves Kabushiki Kaisha (also known as A.J.J. Co., Ltd., in
English) (“AJ Japan”), dated as of August 31,
2000 (previously filed as Exhibit 10.5.2.1 to the
Registrant’s Annual Report on Form 10-K, filed
March 12, 2003, and incorporated herein by reference). |
| |
10.5.2.2‡ |
|
|
Amendment No. 1 to the Distribution and License Agreement
by and between Ask Jeeves International, Inc. and AJ Japan,
dated as of December 1, 2000 (previously filed as
Exhibit 10.5.2.2 to the Registrant’s Annual Report on
Form 10-K, filed March 12, 2003, and incorporated
herein by reference). |
| |
10.5.2.3‡ |
|
|
Amendment No. 2 to the Distribution and License Agreement
by and between Ask Jeeves International, Inc. and AJ Japan,
dated as of January 1, 2002 (previously filed as
Exhibit 10.5.2.3 to the Registrant’s Annual Report on
Form 10-K, filed March 12, 2003, and incorporated
herein by reference). |
| |
10.5.2.4‡ |
|
|
First Amended and Restated Distribution and License Agreement by
and between Ask Jeeves International, Inc., AJ Japan, the
Registrant and Trans Cosmos, Inc., dated as of June 1, 2003
(previously filed as Exhibit 10.5.2.4 to the
Registrant’s Quarterly Report on Form 10-Q, filed
November 8, 2004, and incorporated herein by reference). |
| |
10.5.3‡ |
|
|
Hosted Services Agreement by and between Ask Jeeves
International, Inc. and AJ Japan, dated August 23, 2004
(previously filed as Exhibit 10.5.3 to the
Registrant’s Quarterly Report on Form 10-Q, filed
November 8, 2004, and incorporated herein by reference). |
| |
|
|
|
Warrants to Purchase Common
Stock of the Registrant |
| |
10.6.1 |
|
|
Warrant to purchase 15,000 shares of Common Stock
granted by the Registrant to Antenna Group Provided, dated as of
June 30, 1998 (previously filed as Exhibit 4.3 to the
Registrant’s Amendment No. 1 to Form S-1, filed
May 10, 1999, and incorporated herein by reference). |
| |
10.6.2 |
|
|
Warrant to purchase 105,000 shares of Common Stock
granted by the Registrant to Boris Katz, dated as of
July 26, 2001 (previously filed as Exhibit 4.7 to the
Registrant’s Annual Report on Form 10-K, filed
February 28, 2002, and incorporated herein by reference). |
| |
10.6.3 |
|
|
Warrant to purchase 70,000 shares of Common Stock
granted by the Registrant to Patrick Winston, dated as of
July 26, 2001 (previously filed as Exhibit 4.8 to the
Registrant’s Annual Report on Form 10-K, filed
February 28, 2002, and incorporated herein by reference). |
108
Ask Jeeves, Inc.
| |
|
|
|
|
| Exhibit No. | |
|
Description |
| |
| |
|
|
|
Registration Rights
Agreements |
| |
10.7.1 |
|
|
Form of Registration Rights Agreement, between Ask Jeeves, Inc.
and Stockholders of Net Effect Systems, Inc. (previously filed
as Exhibit 10.35 to the Registrant’s Amendment
No. 1 to Form S-1, filed February 23, 2000, and
incorporated herein by reference). |
| |
10.7.2 |
|
|
Registration Rights Agreement, dated September 10, 2001, by
and between Ask Jeeves, Inc. and the multiple parties listed
therein (previously filed as Exhibit 10.44 to the
Registrant’s Current Report on Form 8-K, filed
September 17, 2001, and incorporated herein by reference). |
| |
10.7.3 |
|
|
Registration Rights Agreement (relating to the Zero Coupon
Subordinated Convertible Notes), dated as of June 4, 2003,
by and between Ask Jeeves, Inc. and Credit Suisse First Boston
LLC, as initial purchaser (previously filed as
Exhibit 10.7.3 to the Registrant’s Form S-3
registration statement, filed September 19, 2003, and
incorporated herein by reference). |
| |
|
|
|
Agreements with Google
Inc. |
| |
10.8.1.1‡ |
|
|
Advertising Services Agreement, dated July 17, 2002, by and
between Ask Jeeves, Inc. and Google Inc. (previously filed as
Exhibit 10.52 to the Registrant’s Quarterly Report on
Form 10-Q, filed August 14, 2002, and incorporated
herein by reference). |
| |
10.8.1.2‡ |
|
|
Amendment Number One to Advertising Services Agreement, dated
October 23, 2002, by and between Ask Jeeves, Inc. and
Google Inc. (previously filed as Exhibit 10.8.2 to the
Registrant’s Annual Report on Form 10-K, filed
March 12, 2003, and incorporated herein by reference). |
| |
10.8.1.3‡ |
|
|
Amended and Restated Advertising Services Agreement, dated
July 26, 2004, by and between Ask Jeeves, Inc. and Google
Inc. (previously filed as Exhibit 10.8.1.3 to the
Registrant’s Quarterly Report on Form 10-Q, filed
November 8, 2004, and incorporated herein by reference). |
| |
10.8.1.4‡* |
|
|
Amendment Number One, dated November 10, 2004, to Amended
and Restated Advertising Services Agreement by and between Ask
Jeeves, Inc. and Google Inc. |
| |
10.8.2.1‡ |
|
|
Google Services Agreement, dated May 15, 2003, by and
between the Ask Jeeves UK Partnership and Google Technology,
Inc. (previously filed as Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K dated
May 15, 2003, filed May 29, 2003, and incorporated
herein by reference). |
| |
10.8.2.2‡ |
|
|
First Amendment to Google Services Agreement and Order Form,
dated July 26, 2004, by and between Ask Jeeves Europe
Limited (as assignee of the Ask Jeeves UK Partnership) and
Google Technology, Inc. (previously filed as
Exhibit 10.8.2.2 to the Registrant’s Quarterly Report
on Form 10-Q, filed November 8, 2004, and incorporated
herein by reference). |
| |
10.8.2.3‡* |
|
|
Second Amendment, dated November 24, 2004, to Google
Services Agreement and Order Form by and between Ask Jeeves
Europe Limited (as assignee of the Ask Jeeves UK Partnership)
and Google Technology, Inc. |
| |
10.8.3.1‡ |
|
|
Google Services Agreement and related Order Form, dated
May 23, 2003, by and between Google Technology Inc. and
Focus Interactive, Inc. (formerly known as The Excite Network,
Inc.) (previously filed as Exhibit 10.3.1 to the
Registrant’s Current Report on Form 8-K, filed
July 20, 2004, and incorporated herein by reference). |
| |
10.8.3.2‡ |
|
|
Amendment No. 1 to Google Order Form (amending the Order
Form dated May 23, 2003), dated September 19, 2003, by
and between Google Inc. and Focus Interactive, Inc. (previously
filed as Exhibit 10.3.2 to the Registrant’s Current
Report on Form 8-K, filed July 20, 2004, and
incorporated herein by reference). |
| |
10.8.3.3‡ |
|
|
Amendment Number One to Google Services Agreement, dated
July 26, 2004, by and between Focus Interactive, Inc. and
Google Inc. (previously filed as Exhibit 10.8.3.3 to the
Registrant’s Quarterly Report on Form 10-Q, filed
November 8, 2004, and incorporated herein by reference). |
| |
10.8.3.4‡* |
|
|
Amendment Number Two, dated December 15, 2004, to Google
Services Agreement by and between Focus Interactive, Inc. and
Google Inc. |
| |
10.8.4‡ |
|
|
Google Services Agreement (Content Targeting), dated
September 19, 2003, by and between Google Inc. and Focus
Interactive, Inc. (previously filed as Exhibit 10.4 to the
Registrant’s Current Report on Form 8-K, filed
July 20, 2004, and incorporated herein by reference). |
109
Ask Jeeves, Inc.
| |
|
|
|
|
| Exhibit No. | |
|
Description |
| |
| |
|
|
|
Miscellaneous Material
Agreements |
| |
10.9.1‡ |
|
|
Agreement by and between Ask Jeeves, Inc. and The Wodehouse
No. 3 Trust, dated as of January 1, 2000 (previously
filed as Exhibit 10.9 to the Registrant’s Annual
Report on Form 10-K, filed March 12, 2003, and
incorporated herein by reference). |
| |
10.9.2‡ |
|
|
First Amendment to Agreement by and between Ask Jeeves, Inc. and
The Wodehouse No. 3 Trust, dated as of May 9, 2003
(previously filed as Exhibit 10.9.2 to the
Registrant’s Form 10-Q filed August 5, 2003 and
incorporated herein by reference). |
| |
10.10.1‡ |
|
|
DART Service Agreement for Publishers by and between DoubleClick
Inc. and Ask Jeeves, Inc., effective as of March 31, 1999
(previously filed as Exhibit 10.10.1 to the
Registrant’s Annual Report on Form 10-K, filed
March 12, 2003, and incorporated herein by reference). |
| |
10.10.2‡ |
|
|
Addendum No. 1 to DART Service Agreement for Publishers by
and between DoubleClick Inc. and Ask Jeeves, Inc., effective as
of October 1, 2000 (previously filed as
Exhibit 10.10.2 to the Registrant’s Annual Report on
Form 10-K, filed March 12, 2003, and incorporated
herein by reference). |
| |
10.10.3‡ |
|
|
Addendum No. 2 to DART Service Agreement for Publishers by
and between DoubleClick Inc. and Ask Jeeves, Inc., effective as
of March 30, 2001 (previously filed as Exhibit 10.10.3
to the Registrant’s Annual Report on Form 10-K, filed
March 12, 2003, and incorporated herein by reference). |
| |
10.10.4‡ |
|
|
DFP Extension Addendum No. 3 to DART Service Agreement for
Publishers by and between DoubleClick Inc. and Ask Jeeves, Inc.,
effective as of November 1, 2002 (previously filed as
Exhibit 10.10.4 to the Registrant’s Annual Report on
Form 10-K, filed March 12, 2003, and incorporated
herein by reference). |
| |
10.10.5.1 |
|
|
DoubleClick Master Services Agreement (the
“U.S. Master Agreement”) by and between
DoubleClick, Inc. and Ask Jeeves, Inc., dated February 27,
2004 (previously filed as Exhibit 10.10.5.1 to the
Registrant’s Quarterly Report on Form 10-Q, filed
May 3, 2004, and incorporated herein by reference). |
| |
10.10.5.2‡ |
|
|
DART Services Attachment for Publishers (the “DFP
Attachment” to the U.S. Master Agreement) by and
between DoubleClick, Inc. and Ask Jeeves, Inc., dated
February 27, 2004 (previously filed as
Exhibit 10.10.5.2 to the Registrant’s Quarterly Report
on Form 10-Q, filed May 3, 2004, and incorporated
herein by reference). |
| |
10.10.6.1 |
|
|
DoubleClick European Master Services Agreement (the
“European Master Agreement”) by and between
DoubleClick, Inc. and Ask Jeeves Europe, Ltd., dated
February 27, 2004 (previously filed as
Exhibit 10.10.6.1 to the Registrant’s Quarterly Report
on Form 10-Q, filed May 3, 2004, and incorporated
herein by reference). |
| |
10.10.6.2‡ |
|
|
DART Services Attachment for Publishers (the “DFP
Attachment” to the European Master Agreement) by and
between DoubleClick, Inc. and Ask Jeeves Europe, Ltd., dated
February 27, 2004 (previously filed as
Exhibit 10.2.9.2 to the Registrant’s Quarterly Report
on Form 10-Q, filed May 3, 2004, and incorporated
herein by reference). |
| |
10.11 |
|
|
Asset Purchase Agreement dated May 28, 2003 (relating to
the disposition of the Jeeves Solutions assets) by and between
Ask Jeeves, Inc., as seller, and Kanisa Inc., as buyer,
(previously filed as Exhibit 10.1 to the Registrant’s
Current Report on Form 8-K dated May 28, 2003, filed
May 29, 2003, and incorporated herein by reference). |
| |
10.12.2 |
|
|
Form of Standstill Agreement, dated March 3, 2004, between
Ask Jeeves, Inc. and each of the following (stockholders of
Interactive Search Holdings, Inc.), separately: Bain Capital
Fund VI, L.P.; BCIP Associates II; BCIP
Trust Associates II; BCIP Associates II-B; BCIP
Trust Associates II-B; BCIP Associates II-C; PEP
Investments PTY LTD.; Sankaty High Yield Asset Partners, L.P.;
Sankaty High Yield Partners II, L.P.; Brookside Capital
Partners Fund L.P.; BCI-I, LLC; BCI-II, LLC; RGIP, LLC;
William Daugherty; J.P. Morgan Partners (BHCA), L.P.; Jonas
Steinman; Frank William Daugherty, III 2004 GRAT; and
Jonas L. Steinman 2004 GRAT (previously filed as
Exhibit 10.2 to the Registrant’s Current Report on
Form 8-K, filed March 5, 2004, and incorporated herein
by reference). |
| |
10.13.1‡ |
|
|
S&P Comstock Information Distribution License Agreement,
dated January 13, 2000, by and between S&P ComStock,
Inc. and Focus Interactive, Inc. (formerly known as iWon, Inc.)
(previously filed as Exhibit 10.2.1 to the
Registrant’s Current Report on Form 8-K, filed
July 20, 2004, and incorporated herein by reference). |
110
Ask Jeeves, Inc.
| |
|
|
|
|
| Exhibit No. | |
|
Description |
| |
| |
10.13.2‡ |
|
|
Amendment Number 1 to Information Distribution License
Agreement, dated December 5, 2001, by and between S&P
ComStock Inc. and Focus Interactive, Inc. (formerly known as
iWon, Inc.) (previously filed as Exhibit 10.2.2 to the
Registrant’s Current Report on Form 8-K, filed
July 20, 2004, and incorporated herein by reference). |
| |
10.13.3‡ |
|
|
Amendment Number 2 to Information Distribution License
Agreement, dated December 5, 2001, by and between S&P
ComStock Inc. and Focus Interactive, Inc. (formerly known as
iWon, Inc. and as The Excite Network, Inc.) (previously filed as
Exhibit 10.2.3 to the Registrant’s Current Report on
Form 8-K, filed July 20, 2004, and incorporated herein
by reference). |
| |
|
|
|
Code of Ethics |
| |
14.1 |
|
|
Code of Ethics of the Registrant, as currently in effect
(previously filed as Exhibit 14.1 to the Registrant’s
Annual Report on Form 10-K, filed March 1, 2004, and
incorporated herein by reference). |
| |
|
|
|
Significant
Subsidiaries |
| |
21.1* |
|
|
List of significant subsidiaries of Ask Jeeves, Inc. |
| |
|
|
|
Auditor’s Consent |
| |
23.1* |
|
|
Consent of Independent Registered Public Accounting Firm
(Ernst & Young LLP) |
| |
|
|
|
Certifications |
| |
31.1* |
|
|
Certification of Steven Berkowitz under Section 302 of the
Sarbanes-Oxley Act of 2002. |
| |
31.2* |
|
|
Certification of Steven J. Sordello under Section 302
of the Sarbanes-Oxley Act of 2002. |
| |
32.1* |
|
|
Certifications under Section 906 of the Sarbanes-Oxley Act
of 2002. |
|
|
|
| |
† |
Denotes a management contract or compensatory plan. |
| |
‡ |
Portions of this exhibit were omitted and filed separately with
the U.S. Securities and Exchange Commission pursuant to a
request for confidential treatment. |
111
Ask Jeeves, Inc.