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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER
31, 1999 OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
COMMISSION FILE NO. 000-26521
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ASK JEEVES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3334199
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5858 HORTON STREET, SUITE 350, EMERYVILLE, CA 94608
(Address of principal executive offices and zip code)
(510) 985-7400
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $0.001
PAR VALUE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The approximate aggregate market value of voting stock held by
non-affiliates of the Registrant, based upon the last sale price of the Common
Stock on March 1, 2000 as reported by Nasdaq National Market was approximately
$1,860,035,885. Shares of Common Stock held by each officer and director and by
each person who owns 5% or more outstanding Common Stock of the Registrant have
been excluded from this computation in that such persons may be deemed to be
affiliates. Determination of affiliate status for this purpose is not a
determination of affiliate status for any other purpose.
As of January 31, 2000, the Registrant had 28,793,899 shares of Common Stock
outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of Ask Jeeves' Definitive Proxy Statement filed with the Security
and Exchange Commission (the "Commission") pursuant to Regulation 14A in
connection with the 2000 Annual Meeting are incorporated herein by reference
into Part III of this report.
Certain Exhibits filed with Ask Jeeves' Registration Statement on Form S-1,
No. 333-77539; Current Report on Form 8-K, filed with the Commission on November
18, 1999; Registration Statement on Form S-1, No. 333-95691; Current Report on
Form 8-K, filed with the Commission on February 14, 2000 and Registration
Statement on Form S-1, No. 333-30494, are incorporated by reference into Part IV
of this report.
ASK JEEVES, INC.
1999 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business.......................................... 1
Item 2. Properties........................................ 27
Item 3. Legal Proceedings................................. 28
Item 4. Submission of Matters to a Vote of Security
Holders................................................. 28
PART II
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters..................................... 29
Item 6. Selected Financial Data........................... 29
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations............... 31
Item 7A. Quantitative and Qualitative Disclosures about
Market Risk............................................. 40
Item 8. Financial Statements and Supplementary Data....... 40
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............... 40
PART III
Item 10. Directors and Executive Officers of the
Registrant.............................................. 41
Item 11. Executive Compensation........................... 45
Item 12. Security Ownership of Certain Beneficial Owners
and Management.......................................... 49
Item 13. Certain Relationships and Related Transactions... 51
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K..................................... 54
SIGNATURES.................................................. 57
PART I
ITEM 1. BUSINESS
OVERVIEW
Ask Jeeves, Inc. ("Ask Jeeves" or the "Company") has developed and deployed
an online personal service infrastructure to provide real-time access to
information, products and services. Our online personal service infrastructure
allows companies to create an intuitive interaction with their customers. We
accomplish this by connecting consumers to answers through easy-to-use services
that include automated search, natural language question answering, intelligent
advisor technology and live help. We believe that by providing consumers with a
more intuitive, relevant and flexible way to access information online,
companies will be able to maximize the returns on their Web-based strategies
through better consumer targeting and acquisition, increased conversion and
retention rates, lowered support costs and access to customer data. Key elements
of our strategy are to extend our reach in corporate markets, introduce new
technologies and services, provide customer insight, increase awareness of the
Ask Jeeves brand, expand our syndication business, and expand our international
presence.
Our online personal service infrastructure is built on proprietary
technology combined with human intelligence to create an interaction centered on
understanding users' specific needs and interests and connecting them to the
most relevant information, products and services. We introduced Jeeves Answers,
our natural language question answering service, on Ask Jeeves at Ask.com in
1997 to provide users with a more satisfying and productive experience and to
help companies better target and acquire customers. In 1998, we launched a
customized service to develop and implement Jeeves Answers on corporate Web
sites to help companies better convert and retain consumers. In 1999, we
expanded our suite of services to include Jeeves Advisor and Jeeves Live, which
permit our corporate customers to offer a decision advisory process and
real-time interaction with a live representative. In February 2000, we added
Jeeves Search, a popularity-based automated search technology that uses the
collective queries and Web site selections of users to deliver relevant results
across the Internet or on a corporate Web site. Our services are built on a
flexible, scalable architecture with an information gathering system that
collects users' questions and selections across Ask Jeeves-enabled Web sites. We
store and analyze the information we collect to improve the performance of our
services and to deliver user insight to our corporate customers.
We deliver our online personal service infrastructure through our Web
Properties and Syndication Group and our Corporate Services Group. Our Web
Properties and Syndication Group delivers potential consumers to companies' Web
sites through a combination of advertising, sponsorships, listing and shopping
services available on Ask.com and DirectHit.com. We have recently added a
syndication service, whereby we syndicate our services to generate traffic to
our Web sites. This service also includes our existing licensing arrangements
with portals, such as AltaVista and Netscape. Currently, we reach millions of
Web users through our Web Properties and Syndication Group enabling, companies
to reach a broad set of potential customers. Our Corporate Services Group
develops and maintains customized automated search, natural language question
answering, intelligent advisor and live help services on corporate Web sites. We
believe our corporate services help companies convert shoppers to buyers, reduce
support costs, gain consumer insight and improve consumer retention. The
Corporate Services Group provides these services on an outsourced basis with
little involvement from our corporate customers' technical personnel.
Our goal is to become the standard for online personal service and Web
interaction. We believe we can accomplish this by building a global brand that
represents superior online personal service. We further believe that as we
expand our services, capture more consumer data and extend our reach into the
corporate market, we will create a superior platform for consumer targeting and
conversion that will become an important part of companies' Web strategies.
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INDUSTRY BACKGROUND
The Internet has emerged as a mass-market communications medium, enabling
millions of users to obtain and share information and interact and conduct
business electronically. International Data Corporation, or IDC, estimates that
the number of Internet users will increase from approximately 196 million at the
end of 1999 to approximately 500 million by the end of 2003. In addition to its
benefits for individuals, the ubiquity of the Internet as a global
communications tool provides businesses with an attractive vehicle to target and
acquire customers, deliver product information, market and sell products and
services and provide pre-sales and post-sales support. According to IDC,
worldwide electronic commerce revenue is expected to increase from approximately
$111 billion in 1999 to more than $1.3 trillion in 2003. Additionally, Forrester
Research estimates that the dollar value of advertising on the web is expected
to increase from approximately $12.8 billion in 1999 to approximately $22.2
billion in 2004.
ONLINE CUSTOMER SERVICE IS CRITICAL
While the importance of the Internet for individuals and businesses has
drawn users at an unprecedented pace, this growth has increased competitive
pressures in online markets. The abundance of information available on the
Internet and the difficulty in accessing this information means that consumers
are often frustrated in their attempts to locate the information, products and
services they need. Companies therefore have a difficult time identifying
qualified prospects and introducing them to their products and services. Once
users arrive at a corporate Web site, companies often face difficulties in
providing a level of service that effectively answers questions, provides
education about relevant products and services and provides a high level of
support. Thus, to maintain or increase market share, many businesses are
focusing on the quality of Web-based service as a key competitive
differentiator. Whether asking about product features, checking the status of an
order or receiving help with a loan application, online customers have
traditional service needs, and they want to be assured that these needs will be
met before conducting a transaction. In the increasingly competitive electronic
commerce environment, companies that fail to address these consumer service
needs may lose sales to competitors located a mouse click away.
TRADITIONAL APPROACHES ARE INEFFICIENT
Online businesses have attempted to target, convert and retain online users
by employing a variety of customer acquisition and support tools including
search engines, e-mail response systems, and call-centers. However, standard
search engines and directory services often provide an overabundance of
irrelevant results making it difficult to provide personal interaction and
tailored answers to specific questions; e-mail responses tend to address users'
concerns too slowly and inefficiently; and call-centers are difficult to manage
and costly. As a result, users often abandon their searches causing online
businesses to lose opportunities for sales. Currently, the online conversion
rate, the percentage of visitors who complete a purchase, is approximately 2.0%,
according to Forrester Research, similar to that of unsolicited direct mailings
through conventional mail.
NEED FOR REAL-TIME PERSONAL SERVICE
Companies are searching for new methods of conducting business online. They
are focusing on increasing online conversion rates by providing timely,
personalized service to guide users through the process of finding answers and
receiving help. In addition, companies are looking for methods to increase
customer satisfaction with their products and services in order to create repeat
buyers. Also, the emergence of online vertical markets and more informed
consumers has required businesses to adopt solutions that are focused on the
particular needs of their industry. We believe that the competitive nature of
online business is leading companies to develop Web sites that fulfill a variety
of needs, including:
- attracting or delivering users;
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- providing users with easy access to requested information;
- retaining user's attention by expanding the scope of the interaction;
- enabling user's transactions;
- dealing with pre-sales and post-sales questions; and
- improving management of customer relationships by collecting and analyzing
consumer data.
We believe that companies can better target and acquire customer, achieve
higher conversion rates, lower customer service costs and increase customer
retention through:
- the combination of automated self-service systems with human intelligence
that provides a more personal experience and offers relevant answers to
specific questions;
- the efficient delivery of relevant answers by educating customer through
automated self-service with a path to real-time interaction with a live
representative; and
- cost-effective and relevant solutions that can provide varying levels of
service depending on the potential profitability of the transaction.
To rapidly adopt such services, we believe many companies will outsource the
resources and expertise necessary to quickly create and skillfully manage the
solution. We believe that the delivery of intuitive and intelligent customer
service tools designed to manage a company's real-time interactions with its
customers that can be implemented on an outsourced basis is an emerging market
opportunity.
THE ASK JEEVES SOLUTION
Ask Jeeves has developed and deployed an online personal service
infrastructure to provide real-time access to information, products and
services. Our online personal service infrastructure allows companies to create
an intuitive interaction with their customers. We accomplish this by connecting
users to answers through a suite of easy-to-use services that include automated
search, natural language question answering, intelligent advisor technology and
live help. We believe that by providing a more intuitive, relevant and flexible
way to access online information, companies will be able to maximize the returns
on their Web-based strategies through better targeting and acquisition of users,
increased conversion and retention rates, lowered support costs and access to
customer data. Our online personal service infrastructure includes Jeeves
Search, Jeeves Answers, Jeeves Advisor, Jeeves Live and Jeeves Insight, which we
deliver through our Web Properties and Syndication Group and our Corporate
Services Group.
Through our Web Properties and Syndication Group, we provide targeting
services designed to drive qualified prospects to corporate Web sites. We
accomplish this through a combination of advertising, sponsorship, listing and
shopping services available through Ask.com, DirectHit.com and our syndication
services. The benefits to companies that use our targeting services are:
- ACCESS TO USERS. We provide access to a large number of Web users. This
access offers companies the ability to target a broad set of potential
customers.
- IMPROVED TARGETING. Through our popularity-based automated search and
natural language question answering services, we are able to capture the
questions users ask and the Web sites they select to identify their needs
and preferences. We believe that this enables us to deliver highly
qualified prospects to corporate Web sites.
- DIVERSE DELIVERY SYSTEMS. Companies can use multiple channels to reach
targeted prospects, including banner advertising, sponsorship, key word
listings, directories and merchant listings.
Through our Corporate Services Group we provide customized conversion
services for corporate Web sites to manage a broad range of customer
interactions, from pre-sales to post-sales support. Our customer
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conversion services include automated search, natural language question
answering, intelligent advisor, live help and consumer information analysis.
These services are designed to convert shoppers to buyers, reduce support costs,
understand customer preferences and improve customer retention. The benefits to
companies that use our conversion services are:
- INCREASED CONVERSION RATES. Our services are designed to facilitate access
to relevant information, products and services on corporate Web sites,
thereby reducing a user's frustration level. Our services also provide
multi-level access to information with an escalation path to assist users
with complex decision-making. For high value interactions, companies can
offer a decision advisory process and real-time access to a live
representative to supplement our automated self service products. As a
result, we believe that Ask Jeeves-enabled Web sites will result in a
higher conversion of shoppers to buyers and increase repeat purchase
rates.
- REDUCED SUPPORT COSTS. By connecting users to relevant information, we
believe our online personal service infrastructure facilitates access to
information on a self-service basis, thereby reducing the costs of
customer support, including phone and e-mail interactions.
- VALUABLE CONSUMER INSIGHT. Ask Jeeves collects information about each
users' interaction to provide comprehensive reports on users' needs and
interests that our corporate customers can use to direct product
development, marketing and Web site strategies.
- FLEXIBLE SERVICES. Companies can implement the full array of our customer
conversion services or deploy them separately. Our scalable and
customizable services combine proprietary technology with human input to
varying degrees, allowing our corporate customers to tailor the level and
cost of the services offered to the value of the interaction. As our
corporate customers' needs progress, we are able to provide additional
services to manage our entire range of real-time customer interactions.
- OUTSOURCED DEVELOPMENT. By providing a stand-alone, fully outsourced
service, our customized online personal service infrastructure can be
easily developed using existing company Web content and can be maintained
with minimal impact on internal resources and without interference with
the company's other information systems.
THE ASK JEEVES STRATEGY
Our objective is to establish Ask Jeeves as the standard for online personal
service by providing companies with the services they need to improve customer
targeting, acquisition, conversion and retention. Key elements of our strategy
include the following:
EXTEND REACH IN CORPORATE MARKETS. To increase the number of companies that
use our online personal service infrastructure, we intend to expand our sales
and marketing efforts in targeted vertical markets. We believe each deployment
of our online personal service infrastructure in a particular market improves
the quality of our service and allows us to become more efficient as we extend
the service to additional companies within those markets. We intend to
complement our direct sales force by expanding existing, and entering into new,
strategic relationships with sales and implementation companies, outsourced call
centers and systems integrators. We believe these relationships will increase
our sales coverage and give us access to additional corporate customers. We
believe that as our corporate customers benefit from the implementation of our
services, they will want to obtain more services from us to provide an effective
escalation path for customer interaction on their Web sites.
INTRODUCE NEW TECHNOLOGIES AND SERVICES. We recently added popularity-based
automated search, intelligent advisor and live help technologies to our core
natural language question answering technology. We intend to continue to expand
our services and capabilities through new and existing technologies to improve
the ease, relevance and performance of our service to users and to provide a
more intuitive interaction between a company and its customers. We plan to add
technology that delivers improved
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personalization, deeper integration into enterprise systems and improved access
to information, products and services. We also plan to add richer analysis and
tracking tools to capture customer data and to improve the networking
capabilities of our knowledge bases to enable answers anywhere on the Web. We
believe that the scalability and flexibility of our technologies will allow us
to facilitate the development of additional applications and promote rapid
response to marketplace changes. In addition, we believe that our expanding
range of services coupled with our ability to provide insight into the specific
needs and interests of a company's customers, will allow us to cross-sell and
up-sell our services within existing accounts.
PROVIDE CUSTOMER INSIGHT. We plan to continue to collect Internet-wide and
Web site specific information about user questions, language and selections to
gain insight into customer needs and interests. We believe that our data related
to customer needs and interests is one of our most important assets. We plan to
improve our ability to collect, analyze and integrate this data to increase the
relevance of our services to corporate customers, including networking our
information to connect customers to the most relevant information, regardless of
where the customer or the information is on the Internet. We believe this will
enable us to increase the efficacy of our services through more focused consumer
targeting and better customer service, resulting in higher customer acquisition,
conversion and retention for our corporate customers and increased monetization
of our technology.
INCREASE AWARENESS OF THE ASK JEEVES BRAND. We will continue to pursue an
aggressive brand development strategy with the goal of making the Ask Jeeves
brand synonymous with superior online personal service. Our branding strategy
will remain centered on the Jeeves character, a friendly assistant who provides
an intuitive, relevant experience on the Web. We believe our branding strategy
will create consumer and corporate demand for the ease and relevance of the Ask
Jeeves experience, driving users to our Web properties and extending our reach
into the corporate marketplace. To drive awareness of our brand, we will
continue to employ a mix of traditional and innovative programs including print,
radio and television advertising.
EXPAND THE ASK JEEVES SYNDICATION BUSINESS. We plan to grow our syndication
business by increasing the number of companies syndicating our services and
expanding the services offered. To enable us to expand the reach of our online
personal service infrastructure, we intend to expand our syndication sales
force. We believe that additional syndication will allow us to extend the reach
of our services to a larger number of users without incurring substantial
marketing costs. We believe that we will also be able to further monetize our
online personal service infrastructure through syndication fees and increased
traffic.
EXPAND INTERNATIONAL PRESENCE. We believe there is a significant market
opportunity for the international expansion of our online personal service
infrastructure. We intend to achieve this through joint venture arrangements
with local partners, the use of local management and employees and the
implementation of language and country specific deployments of our services. To
accomplish this, we have recently formed Ask Jeeves International, Inc., a
wholly owned subsidiary of Ask Jeeves. We believe that the scalable and flexible
nature of our services will facilitate our global expansion into fast growing
international markets.
PRODUCTS AND SERVICES
Our online personal service infrastructure is designed to help companies
improve customer acquisition, increase conversion of browsers to purchasers and
reduce expensive support costs such as phone calls to call centers. We believe
that our services make interaction with the Internet more intuitive, less
frustrating and significantly more productive and help companies provide a high
quality, human-like online experience for their customers.
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PERSONAL SERVICE INFRASTRUCTURE
The Ask Jeeves' online personal service infrastructure includes the
following services:
- JEEVES ANSWERS, our question answering service, combines natural language
technology with human editorial judgment to allow Web users to ask
questions in plain English and be directed to online content containing
relevant answers. Ask Jeeves interacts with the user by presenting a
selection of dialogue questions based on the word meaning and grammar of
the original query. When the user clicks on the appropriate dialogue
question, Ask Jeeves provides a direct link to the Web page or site that
contains the answer. Companies use Jeeves Answers to help their customers
easily navigate their Web sites to find information, products and
services, and cross-sell and up-sell based on customers' queries.
- JEEVES SEARCH, automated technology recently acquired from Direct Hit,
uses popularity-based search methodology to enable a customer-driven
approach to provide relevant responses within a company's Web site or
Internet-wide. Jeeves Search aggregates and organizes online content by
tracking the information, products and services people seek, the amount of
time they spend at various Web sites, and how frequently they return. The
core of Jeeves Search is its popularity engine, which leverages a database
of more than one billion search records and employs proprietary algorithms
that dynamically rank the site selections of Internet users. Jeeves Search
assimilates this data into popularity rankings, reflecting consumer
preferences for online information. Companies can use Jeeves Search to
supplement their existing search capabilities or integrate the Jeeves
Search line of popularity, shopping, and directory products as a complete
solution. Companies use Jeeves Search to provide a broader and more
relevant set of answers to users' queries and help users quickly find
information about a company's products and services.
- JEEVES ADVISOR, our decision support service, leads the user through a
question and answer dialogue to guide real-time purchase decisions. Jeeves
Advisor asks customers questions to establish their needs and preferences
and provides them with a personalized list of recommendations, selected
product features and side-by-side comparisons. Companies can implement
Jeeves Advisor to dynamically tailor the shopping experience to the
individual needs of their customers.
- JEEVES LIVE, technology recently acquired from Net Effect, provides
real-time, text-based communication between live representatives and
users. Companies use Jeeves Live to provide real-time assistance at
selected points in the electronic commerce and electronic support cycle,
reducing frustration levels and barriers to purchase. Call centers and
other Web-based customer support companies integrate Jeeves Live with
e-mail, telecommunications, call tracking and customer management systems,
to provide businesses with a combination of technology and live
representatives. Upon selecting the live help button on a Jeeves
Live-enabled Web site, users enter into a text-based dialogue with a
service representative of our corporate customers.
- JEEVES INSIGHT captures Internet-wide and site specific information about
users' questions, language and selections to gain insight into their needs
and interests. This insight can be used for more focused targeting, better
customer service, and improved customer acquisition, conversion and
retention. Companies can use this information to tailor Web site content,
direct product development and refine marketing and sales efforts.
We deliver our online personal service infrastructure to companies through
our Corporate Services Group and Web Properties and Syndication Group.
CORPORATE SERVICES GROUP
We customize our online personal service infrastructure for corporate Web
sites to enable intuitive access to information and personalized interaction
between a company and its customers. We believe visitors to an Ask
Jeeves-enabled Web site can more readily find desired information, products and
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services, which provide more effective online interaction, help companies
increase electronic commerce, reduce support costs, build loyalty and learn
about their customers.
Companies use our services to address a broad range of interactions from
pre-sales support to electronic commerce to post-sales support. Companies can
implement our services across their entire Web site or limit the implementation
to a specific section. Companies can implement our Corporate Services separately
or deploy them together to provide an escalation path from self-service to
interaction with a live representative. We provide our services on an outsourced
basis with little involvement from our corporate customers' technical personnel.
When we begin working with a company, our professional services group
develops and implements our services on a company's Web site. As of
December 31, 1999, we had 128 professionals dedicated to providing a wide range
of professional services including application management, solution development
and installation. Our professional services teams work with our customers to
understand their specific requirements, analyze their business needs and
implement an integrated solution. We provide these services ourselves or
together with system integrators who have built consulting expertise on our
online personal service infrastructure and can implement complete solutions for
our customers.
WEB PROPERTIES AND SYNDICATION GROUP
Companies can use our online personal service infrastructure to drive
targeted users to their Web sites through advertising, sponsorship listing and
shopping services on our Web sites, including Ask.com and DirectHit.com. We also
syndicate the services on our Web sites to extend the reach of our online
personal service infrastructure.
- ASK.COM. Ask Jeeves at Ask.com, provides consumers with an easy-to-use,
human-like interface to the Web to assist them with finding relevant
answers to their questions. Ask Jeeves at Ask.com processed approximately
2.6 million questions a day in January 2000, compared to approximately
431,000 questions in January 1999. The number of users has grown from
425,000 users in September 1998 to more than 5 million in December 1999.
We have used the questions asked on Ask.com to increase our knowledge base
and enable consumers to get answers to the most frequently asked questions
on the Internet, including "Is it raining in Paris?" and "Where can I
comparison shop for cameras?" to "How do I install a modem?" and "How can
I fix a leaky faucet?" The Jeeves character featured on Ask.com serves as
a trusted assistant for our users, providing help and guidance when they
visit the Web site.
- DIRECTHIT.COM: DirectHit.com, is powered by our popularity engine which
determines the relevancy ranking of online content by anonymously
compiling information collected from the searching activity of millions of
Internet users to deliver more relevant results in response to user
queries.
- SYNDICATION: We syndicate our proprietary Jeeves Answers and Jeeves Search
services to companies seeking to provide consumers with a broad and
relevant set of answers across the Internet. The syndication of Jeeves
Answers and Jeeves Search enables us to extend the reach of our online
personal service infrastructure. Companies that syndicate our services pay
us a revenue share or licensing fee.
We believe our online personal service infrastructure provides a
non-intrusive way for companies to target and acquire customers. Companies can
target visitors to Ask.com and DirectHit.com through banner advertising, text
links, sponsorships and electronic commerce referrals.
ASK JEEVES INTERNATIONAL
We recently formed Ask Jeeves International, Inc., a wholly-owned subsidiary
of Ask Jeeves. Ask Jeeves International intends to expand through joint venture
arrangements with local partners, the use of local management and employees, and
by implementing language and country specific deployments of our
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services. Ask Jeeves International also recently formed its first country
specific joint venture, joining with Carlton Communications Plc and Granada
Media Group, the two largest commercial television companies in the United
Kingdom, to create Ask Jeeves UK. Ask Jeeves UK recently launched a service
designed to meet the specific needs and interests of users in Britain and the
Republic of Ireland. In addition, as a result of our merger with Direct Hit, we
have existing customer relationships with the following international Internet
portals: Catcha.com (Asia), UKMax.com (UK), Punto (Italy) and Scandinavia Online
(Denmark, Norway and Sweden). We intend to expand the range of services we offer
to these portals.
SALES AND MARKETING
SALES STRATEGY
Our Corporate Services Group sells our services, including Jeeves Search,
Jeeves Answers, Jeeves Advisor, Jeeves Live and Jeeves Insight, for deployment
on corporate Web sites. We target companies seeking to increase conversion and
retention rates through a direct sales force that is complemented by our account
management team. Our account management team maintains close relationships with
our corporate customers to identify and serve their ongoing needs, enabling our
sales professionals to focus on new business opportunities. We believe this
approach leads to a higher level of satisfaction for our corporate customers and
increased cross-selling and up-selling opportunities. We also sell our services
through strategic relationships with sales and implementation companies that
include PeopleSupport, Inc. and USWeb/CKS. These relationships provide us
opportunities to extend our reach by marketing and selling our services to their
existing network of customers.
Our Web Properties and Syndication Group sells advertising, sponsorship, key
word and shopping listings and syndication services. We sell primarily through a
direct sales organization and target our sales to companies seeking to
efficiently target and acquire customers online. Our direct sales force consists
of 16 people with offices in California and New York. We plan to expand our
direct sales force to increase the syndication of our Internet-wide services.
This sales team will target highly trafficked Web sites, including portals and
destination sites.
MARKETING
Our marketing program is designed to acquire new corporate customers and
drive traffic to our Web properties. We engage in a number of marketing programs
to build our brand and reach consumers and companies. These programs include
online and offline advertising, public relations, direct mail, trade shows and
ongoing customer communications programs. Our marketing group assists our sales
team by providing them with product collateral materials, customer case studies,
market surveys and customer profiles. In addition, our marketing group helps
identify and develop strategic relationship opportunities and channel
distribution relationships.
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CUSTOMERS
Our Corporate Services Group had 60 total customers for the year ended
December 31, 1999, including customers in our targeted vertical markets of
technology, financial services, telecommunications, e-tailing and healthcare.
The following is a complete, alphabetical list of our customers as of
December 31, 1999.
CORPORATE SERVICES CUSTOMERS
3D Systems, Inc.
adam.com Inc.
Airtouch Communications, Inc.
Alcatel Alsthom S.A.
American Express Company
Arthur Andersen LLP
AT Int'l. TV
Babbage's Etc. LLC
BEA Systems, Inc. (WebLogic)
Bell South Corporation
Cincinatti Bell Inc.
Collaborative Media, Inc.
(etown.com)
Compaq Computer Corporation
Convergsys
CSL (Fujitsu)
Datek Online Brokerage Services,
LLC
Dell Computer Corporation
E-MD.net
E*Trade Group, Inc.
F5 Networks, Inc.
Fidelity Brokerage Services, Inc.
Hewlett-Packard Company
IDG Books Worldwide, Inc.
Intel Corporation
Iomega Corporation
Martha Stewart Living Omnimedia,
Inc.
Micron Technology, Inc.
Microsoft Corporation
MyPoints.com, Inc.
Network Solutions, Inc.
NIKE, Inc.
The Northpoint Group
Office Depot, Inc.
OneNetNow
Oxygen Media, Inc.
PCY2000 Alliance
PeopleSupport, Inc.
PricewaterhouseCoopers LLP
Quaartz, Inc. (Timeweaver)
The Right Start, Inc.
SBC Communications Inc.
Service911.com, Inc.
Smart Harbor/KikoNet
SportsHabitat.com, Inc.
Stream International, Inc.
TD Waterhouse Investor Services,
Inc.
TELLIS Communications, Inc.
Toshiba America, Inc.
Trillium Corporation
University of Calgary
uBid, Inc.
Urban Cool Network, Inc.
US West Inc.
USWeb Corp./CKS
VerticalNet, Inc.
The Walt Disney Company/ESPN
WebTV Networks, Inc.
Williams-Sonoma, Inc.
Yahoo! Inc. (Geocities)
Our Web Properties and Syndication Group had 520 customers for the year
ended December 31, 1999. The following alphabetical list includes our ten
largest advertising and sponsorship, e-commerce and syndication customers, based
on revenues, for the fourth quarter ended December 31, 1999:
ADVERTISING E-COMMERCE SYNDICATION
- -------------------------------- -------------------------------- --------------------------------
ArtistDirect, Inc. Amazon.com, Inc. About.com, Inc.
drKoop.com, Inc. ArtistDirect, Inc. AltaVista Company
Finet Holdings Corp eToys, Inc. Infonautics Corporation
Intelligent Life Corporation KB Holdings (KB Kids)
(Bank Rate Monitor) mySimon, Inc.
Lifeminders Com Inc. Nifty Cool, Inc.
OnHealth Network Company Office Depot.com
Providian Financial Corporation Reel.com, Inc.
(Aria.com) Value America, Inc.
theglobe.com WorldRes, Inc.
uBid Inc.
Web Power
AltaVista Company and theglobe.com each accounted for approximately 10% of
total revenues, for the year ended December 31, 1998. For the year ended
December 31, 1999, no customer accounted for more than 10% of our total
revenues. In addition, in 2000 we expect that revenues associated with the
Corporate Services Group will be heavily dependent on a limited number of
customers.
TECHNOLOGY AND OPERATIONS
Ask Jeeves has developed and acquired proprietary technology to create an
online personal service infrastructure aimed at creating a unique user
experience that emphasizes ease of use, relevance, precision
9
and ability to learn. The goal of the Ask Jeeves' services is to combine the
strengths of automated natural language parsing software and popularity-based
search technology with editorially selected online content and text-based
live-help to give Web users easy access to the information they seek. Our
infrastructure also provides companies an efficient and effective means to
target prospective customers, convert browsers into shoppers, retain existing
customers and provide customer data. Our core technology was developed by Ask
Jeeves and forms the basis for our natural language question answering services.
We also acquired technology from Direct Hit and Net Effect.
JEEVES ANSWERS
Jeeves Answers, our question answering technology, matches a user's question
to a short list of dialogue questions and directs the user to corresponding
answers on the Internet. To do this, we focus on four main areas: the question
processing engine, the knowledge base creation and maintenance process, data
tracking and analysis, and the editorial process.
The Question Processing Engine, or QPE, is the engine that drives our
question answering service. The QPE uses our natural-language processing
software to parse, or identify the linguistically significant terms in, each
user question. The QPE analyzes a user's question syntactically and semantically
and reorganizes it into a structure that can be matched to our "question
templates." For example, if a user asks "Who is the king of Siam?" the service
can correctly tell that this is equivalent to "Who is the head of state of
Thailand?" a question template that is stored in the knowledge base. The
matching question templates are then displayed for the user as dialogue
questions. When the user picks a dialogue question, the QPE then extracts an
"answer template" from the knowledge base that contains the information
necessary to link the user directly to a destination on the Internet or a page
on a corporate Web site. The answer links have been editorially selected for
relevance, accuracy and credibility. A meta-search function, which generates
links to answers from several leading search engines, is included with every
response to supplement answer templates available or to provide answers when
there are no matching question templates.
Our knowledge base is a collection of question templates and answer
templates. The knowledge base is created and maintained using a set of
internally-developed proprietary tools that allow human content editors to make
editorial judgments about what questions should be included and which Web pages,
databases or other sources of information on the Internet provide the best
answer to a particular question. In addition, these tools enable editors to
automatically map sites for answers and content, making the integration of new
content into a knowledge base more efficient. The tools also help content
editors maintain the knowledge base for accuracy and quality by frequently
checking links from the knowledge base to the Web to ensure that the links are
functioning and that the content is still relevant to the question.
Our tracking and analysis store, analyze and report on all queries asked of
our online personal service infrastructure, whether from the Web Properties and
Syndication Group or the Corporate Services Group. In the process of responding
to user questions, the QPE logs all questions and the selected dialogue
questions to a "user log." We analyze this information to determine patterns in
the usage of our Web Properties and Syndication Services and our Corporate
Services. This data helps editors determine what questions should be answered
and also enables our corporate customers to identify content gaps on their Web
sites.
Our editorial process is designed to take advantage of the cognitive ability
of individuals to understand the questions people ask and to determine the
quality of the Web sites containing the answers. Our editors focus on conforming
the knowledge base to the questions most frequently asked by our users or our
corporate customers. As editors build up a base of questions, answers, terms and
phrases in a specific area of knowledge and interest, the human effort required
to add to the knowledge base diminishes.
10
JEEVES SEARCH
Jeeves Search, our popularity-based search technology and proprietary
software which we recently acquired from Direct Hit, has been designed to serve
as the foundation for a variety of scalable information organization and
aggregation applications. The core of Jeeves Search is its Popularity Engine,
which leverages a database of more than one billion search records and employs
proprietary algorithms that rank the site selections of internet users. The
Popularity Engine can be readily deployed to work with various data, such as
multi-media content and corporate Web site-specific data. It anonymously
monitors the activity of millions of Internet users on a daily basis to
systematically organize large volumes of information according to user demand.
The technology operates to create a data file of relevancy records identifying
the information, products or services that users found useful in satisfying
their requests for information. Our systems process these relevancy records and
use our proprietary mathematical algorithms to rank the information, products or
services according to user demand. These rankings are then incorporated into the
Popularity Engine and utilized in responding to the requests of subsequent
users. The Popularity Engine's modularity simplifies deployment as either a
stand-alone solution or as a complement to existing technology.
JEEVES ADVISOR
Jeeves Advisor, our decision support service, asks users questions to
establish their needs and preferences and provides them with a personalized list
of recommendations, selected product features and side-by-side comparisons. It
employs advice logic to interpret user answers in terms of importance, which it
uses in rating products to create a short list of recommendations. It also uses
this information to generate personalized lists of pros and cons for each
alternative, identifying concisely the information most useful in helping the
user choose among the alternatives. The Jeeves Advisor technology is based on a
unique synthesis of multi-attribute decision analysis and knowledge based expert
systems.
JEEVES LIVE
Jeeves Live, our Live Help service which we acquired from Net Effect,
provides real-time, text-based communication between users and live
representatives. The Live Help technology features skills-based routing,
multi-session management, real-time session escalation, transcript capture,
knowledge base integration, remote browser control and solution development
tools. The Live Help Technology is implemented as a Java-based software suite
that brings real-time interpersonal communications to online customer support
agents through a set of applications, including a client console which is
delivered to consumers through their browsers.
SCALABILITY AND OPERATIONS
Our question answering technology runs on arrays of Intel-based server
systems running Microsoft Windows NT and Internet Information Server Software.
The QPE is written in the C++ computer language and is optimized to handle high
traffic volumes. The Ask Jeeves knowledge bases are deployed on these servers as
read-only, memory mapped files. To scale our service as traffic increases, we
only need to install our QPE and knowledge base on additional servers.
Our Popularity Engine distribution servers are arrays of Intel-based server
systems running the FreeBSD operating system and Apache Web Server Software. The
software is written as C++ FastCGI modules for highest scalability and realtime
performance. The Popularity Engine Processing Servers are also Intel systems
running Windows NT as well as Sun Sparc Systems running Solaris, utilizing
Oracle back-end software. To scale as user traffic increases, we need only
install additional distribution servers. To scale as we add more data sources
such as international search or corporate databases, we add more capacity to the
Oracle systems or increase the number of systems.
11
The servers hosting Ask Jeeves and some of our customers' Web sites are
located at Frontier GlobalCenter in Palo Alto, California and AboveNet
Communications in San Jose, California. The servers hosting our popularity
engine technology are located at Exodus Communications in Waltham,
Massachusetts, Santa Clara, California, and London, England. Additionally, some
of our corporate customer Web sites are co-located with our customers' servers
at other facilities. The hosting centers provide routing and communication lines
with a variety of major Internet backbone providers, as well as continuous
monitoring and communications support. They also provide their own power
generators and multiple, redundant backup systems. We maintain significant
server over-capacity at each site so that if one hosting facility fails, the
other site can service our entire user traffic.
COMPETITION
CORPORATE SERVICES GROUP
Our Corporate Services Group competes with a number of companies that are
addressing the same need to improve automated or online customer service for
corporate clients. While various companies are addressing this problem through a
range of solutions, none competes directly with our approach of combining
automated technology with human intelligence to deliver customer service for
company Web sites. The companies that provide automated online customer products
and services against which we compete can be categorized as follows:
CATEGORY FOCUS COMPETITORS
- -------- -------------------------------- --------------------------------
Commerce & Content Shopping Advisors, Comparative Active Research Inc.,
Price Shopping Engines, Shopping Frictionless Commerce
Carts Incorporated, Interactive
Desktop Video, LLC (Vignette),
Art Technology Group, Inc.,
Interwoven, Inc., mySimon inc.,
BroadVision Inc., Interworld
Corporation
Communications Automated E-mail Response, Kana Communications, Inc., eGain
Automated E-mail Routing, Communications Corp.,
Instant Messaging and Live Brightware, Inc., Mustang.com,
Interaction Inc., Webline Communications
Corp., FaceTime Communications,
Inc., LivePerson, Inc., Aptex
Software, Inc.
Search Search, Advanced Search, Inktomi Corporation, Google
Chatterbots Inc., AltaVista Company, Verity,
Inc., Infoseek Corporation,
Autonomy, Inc., eHNC (a division
of HNC Software, Inc.), Big
Science Company, Neuromedia,
Inc., Artificial Life, Inc.
Customer Relationship Management Customer Service, Call Center Siebel Systems, Inc., Remedy
Applications, Customer Service Corporation, PeopleSoft, Inc.,
Knowledge Management Silknet Software Inc., Octane
Software, Inc., ServiceWare,
Inc., Servicesoft Technologies,
Inc., Answers.com, Primus
Knowledge Solutions, Inc.,
Advantagekbs, Inc., Nortel
Networks Corporation
Our ability to compete depends on many factors, many of which are outside of
our control. These factors include: the quality of content, the ease of use of
online services and the timing and market
12
acceptance of new and enhanced online services. We believe we compete favorably
with respect to each of these factors.
Many of our existing competitors, as well as potential new competitors, have
longer operating histories, greater name recognition, larger customer bases and
significantly greater financial, technical and marketing resources than we do.
This may allow them to devote greater resources than we can to the development
and promotion of their services. Many of these competitors offer a wider range
of services than we do. These services may attract users to our competitors'
sites and, consequently, result in a decrease of traffic to our site. These
competitors may also engage in more extensive research and development, adopt
more aggressive pricing policies and make more attractive offers to existing and
potential employees, partners, advertisers and electronic commerce partners. Our
competitors may develop products and services that are equal or superior to ours
or that achieve greater market acceptance. In addition, current and potential
competitors have established or may establish cooperative relationships among
themselves or with third parties to better address the needs of advertisers and
businesses engaged in electronic commerce. As a result, it is possible that new
competitors may emerge and rapidly acquire significant market share.
WEB PROPERTIES AND SYNDICATION GROUP
We face direct competition from companies that provide Internet-wide search
and directory services. For example, we compete with search engines, including
Excite@Home Corporation, Inktomi Corporation, Google Inc. and AltaVista Company,
for the traffic generated by Internet users seeking links to third-party content
to address their online information needs. We also compete with directory
services, such as Yahoo! Inc., Goto.com, Inc. and LookSmart, Ltd. because they
provide alternative ways for users to obtain the desired information. An
increasing number of these search and directory companies are syndicating
services to corporations, presenting additional competition for the syndication
service we recently acquired from Direct Hit.
INTELLECTUAL PROPERTY
We seek to protect our proprietary rights, but our actions may be inadequate
to protect our patents, trademarks or other proprietary rights or prevent others
from claiming violations of their proprietary rights. We have one patent
application on file with the United States Patent and Trademark Office for our
"Grammar Template Query System." We have obtained registered trademark status
for "Ask Jeeves" and have applied for registered trademark status for "Ask.com",
"Ask Jeeves for Kids", and the Ask Jeeves logo and service marks in the United
States and various foreign countries. In connection with our acquisition of Net
Effect, we acquired two pending patent applications covering aspects of the Net
Effect technology and in connection with our purchase of certain assets from
Excellerate LLC, we acquired one pending patent application covering certain
Excellerate technology. In addition, in connection with our acquisition of
Direct Hit, we received assignments of two United States patents issued to Gary
Culiss, Direct Hit's co-founder, Chief Technology Officer and Chairman, covering
certain Direct Hit technology, and two U.S. patent applications, one of which
has been allowed, covering other aspects of Direct Hit's technology. We entered
into confidentiality agreements with our employees, consultants and strategic
partners, and generally control access to and distribution of our proprietary
information. Despite our efforts to protect our proprietary rights from
unauthorized use or disclosure, parties may attempt to disclose, obtain or use
our proprietary information. The steps we have taken may not prevent
misappropriation of our proprietary information. Third parties may infringe or
misappropriate our proprietary rights, which could seriously harm our business.
The validity, enforceability and scope of protection of proprietary rights in
Internet-related industries are uncertain and still evolving.
Furthermore, third parties may assert infringement claims against us. Claims
relating to infringement of the patents, trademarks and other intellectual
property rights of third parties and any resulting litigation, should it occur,
could subject us to significant liability for damages and could result in the
13
invalidation of our proprietary rights. In addition, even if we prevail, any
litigation could be time-consuming and expensive to defend, and could result in
the diversion of management's time and attention, any of which could seriously
harm our business. Any claims from third parties may also result in limitations
on our ability to use the trademarks and other intellectual property subject to
those claims unless we enter into agreements with the third parties responsible
for those claims, which may be unavailable on commercially reasonable terms.
In July 1999, IP Learn LLC filed a complaint against us in the United States
District Court for the Northern District of California, which was amended by the
plaintiff, which alleges that aspects of the Ask Jeeves technology infringe one
or more patents alleged to be held by the plaintiff. We have answered the
complaint and discovery has begun. Additionally, in December 1999, Patrick H.
Winston and Boris Katz filed a complaint against us in the United States
District Court for the District of Massachusetts. The complaint alleges that our
technology infringes two patents alleged to be held by the plaintiffs. We have
answered the complaint, but discovery has not begun. We intend to vigorously
defend against the allegations asserted in these complaints and we believe we
have meritorious defenses to the claims.
We seek to protect our copyrights, service marks, trademarks, trade dress
and trade secrets through a combination of laws and contractual restrictions,
such as confidentiality agreements. For example, we have attempted to register
our trademarks and service marks in the United States and internationally.
However, effective trademark, service mark, copyright and trade secret
protection may not be available in every country in which our services are made
available online.
We have registered a number of Internet domain names including Ask.com, Ask
Jeeves.com, DirectHit.com and AJkids.com. Domain names generally are regulated
by Internet regulatory bodies. The relationship between regulations governing
domain names and laws protecting trademarks and similar proprietary rights is
unclear. We, therefore, could be unable to prevent third parties from acquiring
domain names that infringes or otherwise decreases the value of our trademarks
and other proprietary rights.
NEW AND EXISTING REGULATION ON THE INTERNET
We are subject to the same federal, state and local laws as other companies
conducting business on the Internet. Today there are relatively few laws
specifically directed towards online services. However, due to the increasing
popularity and use of the Internet and online services, it is possible that laws
and regulations will be adopted with respect to the Internet or online services.
These laws and regulations could cover issues such as online contracts, user
privacy, freedom of expression, pricing, fraud, content and quality of products
and services, taxation, advertising, intellectual property rights and
information security. Applicability to the Internet of existing laws governing
issues such as property ownership, copyrights and other intellectual property
issues, taxation, libel, obscenity and personal privacy is uncertain.
Several states have proposed legislation that would limit the uses of
personal user information gathered online or require online services to
establish privacy policies. The Federal Trade Commission also has recently
started a proceeding with one online service regarding the manner in which
personal information is collected from users and provided to third parties.
Changes to existing laws or the passage of new laws intended to address these
issues could directly affect the way we do business or could create uncertainty
in the marketplace. This could reduce demand for our services or increase the
cost of doing business as a result of litigation costs or increased service
delivery costs, or could otherwise harm our business. In addition, goods to
users worldwide, foreign jurisdictions may claim that we are required to comply
with their laws. In some jurisdictions, we will be required to collect
value-added taxes on our fees. Our failure to comply with foreign laws could
subject it to penalties ranging from fines to bans on our ability to offer our
services.
14
EMPLOYEES
As of December 31, 1999, we had approximately 416 employees. In addition we
expect to retain approximately 65 employees as a result of our acquisitions of
Evergreen and Direct Hit. We have never had a work stoppage, and no employees
are represented under collective bargaining agreements. We consider our
relations with our employees to be good.
RISK FACTORS
THE FOLLOWING RISK FACTORS SHOULD BE READ CAREFULLY IN CONNECTION WITH
EVALUATING OUR BUSINESS. ANY OF THE FOLLOWING RISKS COULD SERIOUSLY HARM OUR
BUSINESS AND OPERATING RESULTS OR FINANCIAL CONDITION.
OUR BUSINESS IS EXTREMELY DIFFICULT TO EVALUATE BECAUSE OUR OPERATING HISTORY IS
LIMITED.
We were incorporated in June 1996 and launched Ask Jeeves, at Ask.com, our
public Web site, in April 1997. Because of our limited operating history, it is
extremely difficult to evaluate our business and prospects. Our revenue and
income potential is unproven and our business model is constantly evolving.
Because the Internet is constantly changing, we may need to change our business
model to adapt to those changes.
In November 1999, we acquired Net Effect Systems, Inc., a provider of a live
help service that enables real-time, text-based communication between a company
and its online customers. In February 2000, we acquired Direct Hit
Technologies, Inc., a leading provider of technology that aggregates and
organizes online content to enable users to quickly find relevant and accurate
information, products and services. These acquisitions and future acquisitions
and the resulting changes in organizational structure could impose significant
burdens on our management and our employees and could result in loss of
productivity or increase attrition.
Any investment in our company must be considered in light of the problems
frequently encountered by companies in an early stage of development in new and
rapidly evolving markets. To address the risks we face, we must, among other
things:
- maintain and enhance our brand;
- expand our product and service offerings;
- increase the amount of traffic to Ask.com and DirectHit.com;
- increase the number and types of businesses that use our online personal
service infrastructure;
- increase the value of our online personal service infrastructure to our
users, customers, electronic commerce merchants and advertisers; and
- attract, integrate, retain and motivate qualified personnel.
We cannot be certain that our business strategy will be successful or that
we will successfully address these risks.
WE HAVE A HISTORY OF NET LOSSES AND EXPECT TO CONTINUE TO INCUR NET LOSSES.
We have incurred significant net losses in each fiscal quarter since our
inception, including a net loss of approximately $52.9 million for the year
ended December 31, 1999 and, as of December 31, 1999, we had an accumulated
deficit of approximately $60.6 million. We expect to have increasing net losses
and negative cash flows for the foreseeable future. The size of these net losses
will depend, in part, on the revenue growth from our advertisers, corporate
customers, syndication relationships, and electronic commerce merchants and on
our expenses. It is critical to our success that we continue to expend financial
and management resources to develop our brand loyalty through marketing and
promotion, enhance of
15
our online personal service infrastructure and expand our other services. As a
result, we expect that our operating expenses will increase significantly for
the foreseeable future. With increased expenses, we will need to generate
significant additional revenues to achieve profitability. Consequently, it is
possible that we may never achieve profitability, and even if we do achieve
profitability, we may not sustain or increase profitability on a quarterly or
annual basis in the future. If we do not achieve or sustain profitability in the
future we will be unable to continue our operations.
OUR ONLINE PERSONAL SERVICE INFRASTRUCTURE IS NOVEL AND UNPROVEN.
We will be successful only if Internet users adopt our natural-language
services and popularity-based searches as their primary method of navigating the
Internet. Internet users have a variety of search techniques, such as search
engines, available to them to navigate the Internet. Users can also rely on
methods, such as call centers, chat rooms and e-mail, rather than
difficult-to-navigate corporate Web sites, to obtain information on products and
services. It is difficult to predict the extent and rate of user adoption of our
online personal service infrastructure. We cannot assure you that widespread
acceptance of our services has occured or will occur. Visitors to our online
personal service infrastructure may use it once or twice and then revert to
traditional search techniques to navigate the Internet or choose new search
techniques.
OUR METHODS OF GENERATING REVENUE ARE RELATIVELY NEW AND LARGELY UNTESTED.
We generated approximately 57%, 34%, 5% and 4% of our revenues for the year
ended December 31, 1999 through Internet advertising, licensing to corporate
customers, electronic commerce transaction fees and syndication fees for
providing Internet-wide navigation services, respectively. Revenues from
Internet advertising will make up a significant amount of our revenues for the
foreseeable future. Since the Internet advertising market is new and rapidly
evolving, we cannot yet gauge its effectiveness as compared to traditional
advertising media. Advertisers that have traditionally relied on other
advertising media may be reluctant to advertise on the Internet believing that
Internet advertising is less effective than traditional advertising media for
promoting their products and services. Consequently, they may allocate only
limited portions of their advertising budgets to Internet advertising. Our
business could be seriously harmed if Internet advertising does not continue to
grow or if we are unsuccessful in increasing our advertising revenues.
Furthermore, we rely on a third-party advertising service, provided by
DoubleClick, Inc., to deliver advertisements to our users. If DoubleClick fails
to deliver the advertisements as contracted for, due to reliability or
performance problems, or if advertisements cannot be targeted as promised to
advertisers, our revenues will decrease.
Furthermore, we expect sales to corporate customers to constitute a growing
percentage of our revenues. As of December 31, 1999, we had provided customized
solutions to approximately 60 companies. Our online personal service
infrastructure has only been recently implemented onto these corporate Web
sites. As such, we cannot yet determine the effectiveness of our services
compared to traditional methods of customer relationship management. If we
cannot demonstrate to corporate customers that our services increase the rate at
which browsers become purchasers, improve customer satisfaction on their Web
sites and reduce expensive support costs, such as those associated with call
centers, our ability to attract and retain corporate customers may be impaired.
Our business would be seriously harmed if we are unsuccessful in increasing the
number of corporate customers.
In addition, a portion of our revenues for the foreseeable future is
expected to be derived from the facilitation of electronic commerce
transactions. The market for products and services purchased online has only
recently begun to develop and is rapidly changing. Therefore, the success of our
business depends upon the adoption of the Internet as a medium for commerce by a
broad base of customers. If this market fails to develop or develops more slowly
than expected, or if our electronic commerce services do not achieve market
acceptance, our business may suffer.
16
OUR ACQUISITIONS OF NET EFFECT SYSTEMS, INC., THE EVERGREEN PROJECT, INC. AND
DIRECT HIT TECHNOLOGIES, INC. AND ANY FUTURE ACQUISITIONS MAY BE DIFFICULT TO
INTEGRATE, DISRUPT OUR BUSINESS, DILUTE STOCKHOLDER VALUE OR DIVERT MANAGEMENT
ATTENTION.
We acquired Net Effect Systems, Inc. in November 1999, The Evergreen Project
Inc. in January 2000 and Direct Hit Technologies, Inc. in February 2000. We are
in the initial stages of integrating the products, services, technologies and
personnel from each company into Ask Jeeves. We may encounter problems
associated with the assimilation of Net Effect, Evergreen and Direct Hit
including:
- difficulties in assimilation of acquired personnel, operations,
technologies or products;
- unanticipated costs associated with the acquisitions;
- diversion of management's attention from other business concerns;
- adverse effects on our existing business relationships with our, Net
Effect, Evergreen and Direct Hit customers; and
- inability to retain employees of Net Effect, Evergreen and Direct Hit.
If we are unable to successfully integrate Net Effect, Evergreen and Direct
Hit or to create new or enhanced services, we may not achieve the anticipated
benefits from our acquisitions of Net Effect, Evergreen and Direct Hit. If we
fail to achieve the anticipated benefits from the acquisitions, we may incur
increased expenses, experience a shortfall in our anticipated revenues and we
may not obtain a satisfactory return on our investment. In addition, if any
significant number of Net Effect, Evergreen or Direct Hit employees fail to
remain employed with us, we may experience difficulties in achieving the
expected benefits of the acquisitions.
In addition, in the first quarter of 2000, we will incur a one-time charge
related to in-process research and development acquired in connection with our
recent acquisitions. Beginning in the first quarter of 2000, we will also begin
to amortize charges from assets acquired, including goodwill, from Evergreen and
Direct Hit. We expect these charges to be significant.
As part of our business strategy, we may in the future seek to acquire or
invest in additional businesses, products or technologies that we believe could
complement or expand our business, augment our market coverage, enhance our
technical capabilities or that may otherwise offer growth opportunities. These
future acquisitions could pose the same risks to our business posed by the
acquisitions described above. In addition, with future acquisitions, we could
use substantial portions of our available cash as all or a portion of the
purchase price. We could also issue additional securities as consideration for
these acquisitions, which could cause our stockholders to suffer significant
dilution.
TO MANAGE OUR GROWTH, WE NEED TO IMPROVE OUR SYSTEMS, CONTROLS AND PROCEDURES.
We have experienced and may continue to experience rapid growth, which has
placed, and could continue to place, a significant strain on our managerial,
financial and operational resources and personnel. We expect that the number of
employees, including management-level employees, will continue to increase for
the foreseeable future. We must continue to improve our operational and
financial systems and managerial controls and procedures, and we will need to
continue to expand, as well as, train and manage our workforce. We cannot be
assured that our systems, procedures or controls will be adequate to support our
operations or that we will be able to manage any growth effectively. If we do
not manage growth effectively, our business would be seriously harmed.
OUR GROWTH WILL DEPEND ON OUR ABILITY TO DEVELOP OUR BRAND.
We believe that broader brand recognition and a favorable public perception
of the Ask Jeeves brand is essential to our future success. Accordingly, we
intend to continue pursuing an aggressive brand-
17
enhancement strategy, which will include mass market advertising, promotional
programs and public relations activities. We intend to continue to incur
significant expenditures, approximately $40 to $50 million in the year 2000, on
these advertising and promotional programs and activities. These expenditures
may not result in a sufficient increase in revenues to cover such advertising
and promotional expenses. In addition, even if brand recognition increases, the
number of new users and customers may not increase. Further, even if the number
of new users increases, the amount of traffic on Ask.com and DirectHit.com and
the number of our corporate customers may not increase sufficiently to justify
the expenditures. If our brand enhancement strategy is unsuccessful, these
expenses may never be recovered and we may be unable to increase future
revenues.
WE MAY NOT BE ABLE TO EFFECTIVELY COMPETE AGAINST OUR CURRENT AND POTENTIAL
COMPETITORS.
We have a number of competitors for our online personal service
infrastructure.
CORPORATE SERVICES GROUP. We compete with a number of companies that are
addressing the same need to improve automated or online customer service for
corporate customers. For example, we compete with companies that provide
shopping advisors, such as Active Research Inc.; automated e-mail response and
live interaction, such as Kana Communications, Inc.; search technology, such as
Inktomi Corporation; and customer relationship management, such as Siebel
Systems, Inc.
WEB PROPERTIES AND SYNDICATION GROUP. We face direct competition from
companies that provide Internet-wide search and directory services. For example,
we compete with search engines, including Excite@Home Corporation, Inktomi
Corporation, Google Inc. and AltaVista Company, for the traffic generated by
Internet users seeking links to third-party content to address their online
information needs. We also compete with directory services, such as
Yahoo! Inc., Goto.com, Inc. and LookSmart, Ltd. because they provide alternative
ways for users to obtain the desired information.
Our ability to compete depends on many factors, many of which are outside of
our control. These factors include: the quality of content, the ease of use of
online services, the timing and market acceptance of new and enhanced online
services and sales and marketing efforts by our competitors and by us.
Many of our existing competitors, as well as potential new competitors, have
longer operating histories, greater name recognition, larger customer bases and
significantly greater financial, technical and marketing resources than we do.
This may allow them to devote greater resources than we can to the development
and promotion of their services. Many of these competitors offer a wider range
of services than we do. These services may attract users to our competitors'
sites and, consequently, result in a decrease in traffic to our site. These
competitors may also engage in more extensive research and development, adopt
more aggressive pricing policies and make more attractive offers to existing and
potential corporate customers, advertisers, syndicators and electronic commerce
merchants. Our competitors may develop products and services that are equal to,
or superior to, our products and services, or achieve greater market acceptance.
In addition, current and potential competitors have established or may establish
cooperative relationships among themselves or with third parties to better
address the needs of advertisers and businesses engaged in electronic commerce.
As a result, it is possible that new competitors may emerge and rapidly acquire
significant market share.
OUR RECENTLY FORMED INTERNATIONAL SUBSIDIARY MAY NOT BE SUCCESSFUL.
In the fourth quarter of 1999, we formed a wholly-owned subsidiary, Ask
Jeeves International, Inc., or AJI, for the purpose of marketing our online
personal services infrastructure outside of the United States. AJI recently
entered into a joint venture to provide our services in the United Kingdom. This
expansion into international markets will require substantial management
attention and financial resources. At this time, we have recorded no sales from
our international operations. We cannot be certain that our
18
investment in AJI and in establishing operations in other countries will produce
the desired levels of revenue. In addition, AJI is subject to other inherent
risks and problems, including:
- the impact of recessions in economies outside the United States;
- greater difficulty in accounts receivable collections;
- unexpected changes in regulatory requirements;
- difficulties and costs of staffing and managing foreign operations;
- reduced protection for intellectual property rights in some countries;
- political and economic instability;
- the introduction of the euro;
- fluctuations in currency exchange rates; and
- difficulty in maintaining effective communications due to distance,
language and cultural barriers.
Some or all of the above factors could seriously harm the results of our
operations.
OUR OPERATING RESULTS ARE VOLATILE AND DIFFICULT TO PREDICT.
You should not rely on our results of operations during any particular
quarter as an indication of our future results for a full year or any other
quarter. Our quarterly revenues and operating results have varied significantly
in the past and may vary significantly in the future due to a number of factors,
including:
- our ability to obtain new corporate customers, the length of time needed
to customize our online personal services infrastructure for corporate
customers and the timing of revenue recognition with respect to contracts
with corporate customers;
- our ability to obtain new advertising contracts, maintain existing ones
and effectively manage our advertising inventory;
- the number of users of Ask.com, DirectHit.com, Web sites syndicating our
services and the Web sites of our corporate customers;
- our ability to attract and retain advertisers and our ability to link our
electronic commerce merchants to potential customers;
- seasonal and other fluctuations in demand for our electronic commerce
services and for advertising space on Ask.com and DirectHit.com;
- our ability to develop and introduce new technology;
- announcements and new technology introductions by our competitors;
- our ability to attract and retain key personnel;
- costs relating to possible acquisitions and integration of technologies or
businesses;
- rate changes for advertising on Ask.com and DirectHit.com;
- marketing expenses and technology infrastructure costs as well as other
costs that we may incur as we expand our operations; and
- the timing of charges related to the acquisitions and any amortization of
expenses related to the acquisitions.
We have experienced lower traffic during the year-end holiday season and a
slower rate of growth during the summer months. Given our limited operating
history, user traffic on our Web site is extremely
19
difficult to forecast accurately. Moreover, obtaining new corporate customers
depends on many factors that we are not able to control, such as the allocation
of budgetary resources by potential customers. The average sales cycle for
obtaining new corporate customers has typically ranged from two to four months.
Therefore, it is difficult to predict the number of corporate customers that we
will have in the future. We may be unable to adjust spending to compensate for
an unexpected shortfall in our revenues. In addition we expect our operating
expenses to increase as we expand our engineering, sales and marketing
operations, broaden our customer support capabilities, develop new strategic
alliances, fund increased levels of research and development and build our
operational infrastructure. As a result, if we experience an unexpected
shortfall in revenues, or if our revenues do not grow faster than the increase
in these expenses, we could experience significant variations in the operating
results from quarter to quarter.
IF WE FAIL TO MEET THE EXPECTATIONS OF PUBLIC MARKET ANALYSTS AND INVESTORS, THE
MARKET PRICE OF OUR COMMON STOCK MAY DECREASE SIGNIFICANTLY.
Public market analysts and investors have not been able to develop
consistent financial models for the Internet market because of the unpredictable
rate of growth of Internet use, the rapidly changing models of doing business on
the Internet and the Internet's relatively low barriers to entry. As a result,
and because of the other risks discussed in this prospectus, it may be likely
that our actual results will not meet the expectations of public market analysts
and investors in future periods. If this occurs, the price of our common stock
will likely fall.
FAILURE TO ADD CORPORATE CUSTOMERS OR RETAIN NEW CORPORATE CUSTOMERS MAY HAVE AN
ADVERSE EFFECT ON OUR REVENUES.
In the coming year, we expect that revenues associated with corporate
customers will be dependent on a limited number of customers, comprised
primarily of corporations with large, difficult-to-navigate Web sites. If we do
not complete sales to a sufficient number of customers, our future revenues will
be seriously harmed.
Most of our corporate customer contracts have a term of one year following
the implementation of our services. As a result, if we are unable to offer value
to our customers during the term of these contracts, or if our customers choose
a competitor's service over our service, or if such customers decide to use
their own proprietary technology to develop services similar to ours, such
customers may not renew their contracts. If we do not obtain a sufficient number
of contract renewals or if such renewal contracts are obtained on terms less
favorable than the original contract, our business could be seriously harmed.
CUSTOMIZING OUR SERVICES FOR OUR CORPORATE CUSTOMERS IS LABOR INTENSIVE.
Because the customization of our services is labor intensive, it is
difficult to predict the length of the development cycle. Factors that affect
the length of the development cycle include the overall size and complexity of
the Web site, the interaction with the customer and the dynamic nature of the
content. Generally, it takes three to four months to launch a customized version
of our services. The long development cycle makes it difficult to predict the
delivery time to the customer, realize our revenue goals and manage our internal
hiring needs to meet new projects. In addition, in order to meet increased
demand by corporate customers, we may have to hire additional people and train
them in advance of orders. When we outsource development of custom knowledge
bases, we will have little control over the speed and quality of the
development. Any decline in the speed or quality of the implementation of our
custom services could seriously harm our business.
WE DEPEND ON THIRD-PARTY CONTENT.
Ask.com is designed to directly link users to a page within a third-party
Web site that contains the answer to a question asked. However, when Ask.com
attempts to direct the user to a page within the Web
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site, some companies have automatically redirected users to their home page. If
companies prevent us from directly linking our users to a page within a
third-party Web site, and if there are no comparable alternative Web sites to
which we can direct our users, the utility and attractiveness of our services to
consumers may be reduced. If this occurs, traffic on Ask.com could significantly
decrease, which would seriously harm our business.
Visitors to Ask.com use it to obtain direct access to the information,
products and services they need through the display of a third-party Web page
containing the answer to the user's question. We have little control over the
content contained on these third-party Web sites. If these third-party Web sites
do not contain high-quality, up-to-date and useful information to the user, the
utility of our service to the user will be reduced, which could seriously harm
our business.
WE MAY BE LIABLE FOR OUR LINKS TO THIRD-PARTY WEB SITES.
We could be exposed to liability with respect to the selection of
third-party Web sites that may be accessible through Ask.com and DirectHit.com.
These claims might include, among others, that by linking to Web sites operated
by third parties, we may be liable for copyright or trademark infringement or
other unauthorized actions by these third-party Web sites. Other claims may be
based on errors or false or misleading information provided on Ask.com,
including information deemed to constitute professional advice such as legal,
medical, financial or investment advice. Other claims may be based on our links
to sexually explicit Web sites and our provision of sexually explicit
advertisements when this content is displayed. Our business could be seriously
harmed due to the cost of investigating and defending these claims, even to the
extent these claims do not result in liability. Implementing measures to reduce
our exposure to this liability may require us to spend substantial resources and
limit the attractiveness of our service to users.
WE FACE RISKS RELATED TO EXPANDING INTO RELATIVELY NEW SERVICES AND BUSINESS
AREAS, IN PARTICULAR, ELECTRONIC COMMERCE.
To increase our revenues, we will need to expand our operations by promoting
new or complementary products and by expanding the breath and depth of our
services. In particular, our future success will largely depend on our ability
to substantially increase revenues through the facilitation of electronic
commerce transactions. The market for electronic commerce services is extremely
competitive. Because we only recently entered this market and we have little
experience in it, we may have limited success in this market. In January 2000,
we expanded our pilot electronic commerce program. The expansion of our
electronic commerce services may strain our management, financial and
operational resources. Our expansion into new product and service offerings may
not be timely or may not generate sufficient revenues to offset their cost. If
this occurs, our business, operating results and financial condition will be
seriously harmed.
OUR FUTURE SUCCESS DEPENDS ON OUR ABILITY TO RETAIN OUR PRESIDENT AND CHIEF
EXECUTIVE OFFICER.
Our future success depends, in part, on the continued service of Robert
Wrubel, our Chief Executive Officer. Mr. Wrubel is not bound by an employment
agreement for any specific term. Our relationship with Mr. Wrubel is at will.
Although we are the beneficiaries of a key person life insurance policy on
Mr. Wrubel's life, the loss of his services would seriously harm our business.
OUR FUTURE SUCCESS DEPENDS ON OUR ABILITY TO ATTRACT, RETAIN AND MOTIVATE HIGHLY
SKILLED EMPLOYEES.
Our future success also depends on our ability to attract, retain and
motivate highly skilled employees. Competition for employees in our industry is
intense. Additionally, it is often more difficult to attract employees once a
company's stock is publicly traded because the exercise price of equity awards
such as stock options are based on the public market, which is highly volatile.
We may be unable to attract,
21
assimilate or retain other highly qualified employees in the future. We have
experienced, and we expect to continue to experience in the future, difficulty
in hiring and retaining highly skilled employees with appropriate
qualifications.
WE WILL ONLY BE ABLE TO EXECUTE OUR BUSINESS PLAN IF INTERNET USAGE GROWS.
Our business would be adversely affected if Internet usage does not continue
to grow or grows at significantly lower rates compared to current trends. The
continued growth of the Internet depends on various factors, many of which are
outside our control. These factors include:
- the Internet infrastructure may not be able to support the demands placed
on it;
- performance and reliability of the Internet may decline as usage grows;
- security and performance concerns due to hackers and authentication
concerns with respect to the transmission over the Internet of
confidential information, such as credit card numbers, and attempts by
unauthorized computer users, so-called hackers, to penetrate online
security systems; and
- privacy concerns, including those related to the ability of Web sites to
gather user information without the user's knowledge or consent.
THE OPERATING PERFORMANCE OF OUR SYSTEMS AND SERVERS IS CRITICAL TO OUR BUSINESS
AND REPUTATION.
Any system failure, including network, software or hardware failure, that
causes an interruption in our service or a decrease in responsiveness of Ask.com
or DirectHit.com could result in reduced user traffic and reduced revenues. Our
network and server equipment for Ask.com is located at Frontier GlobalCenter in
Palo Alto, California and AboveNet Communications in San Jose, California. The
servers hosting our popularity engine technology are located at Exodus
Communications in Waltham, Massachusetts, Santa Clara, California, and London,
England. Additionally, some of our corporate customer Web sites are co-located
with our customers' servers at other facilities. Although we believe that our
current back-up methods are adequate, we cannot assure you that the back-up
servers will not fail or cause an interruption in our service.
We have experienced slower response times and interruptions in service due
to malfunction at our hosting facilities and on the Internet backbone networks,
major software upgrades at Ask Jeeves and undetected software defects. Ask.com
and DirectHit.com have had partial interruptions for periods ranging from a few
minutes to three hours. In addition, Ask.com and DirectHit.com could also be
affected by computer viruses, electronic break-ins or other similar disruptions.
If we experience outages, frequent or persistent system failures or degraded
response times, our reputation and brand could be permanently harmed. In
addition, we could lose advertising revenues during these interruptions and user
satisfaction could be negatively impacted if the service is slow or unavailable.
Our users and customers depend on Internet service providers, online service
providers and other Web site operators for access to Ask.com and DirectHit.com.
Each of these providers has experienced significant outages in the past and
could experience outages, delays and other difficulties due to system failures
unrelated to our systems.
The occurrence of an earthquake or other natural disaster or unanticipated
problems at our principal facilities or at the servers that host or back-up our
systems could cause interruptions or delays in our interactive network or a loss
of data. Our systems are vulnerable to damage or interruption from fire, flood,
power loss, telecommunications failure, break-ins, earthquake and similar
events. Our general liability insurance policies may not adequately compensate
us for losses that may occur due to interruptions in our service.
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WE MAY NOT BE ABLE TO ADAPT TO EVOLVING INTERNET TECHNOLOGIES AND CUSTOMER
DEMANDS.
To be successful, we must adapt to rapidly changing Internet technologies by
continually enhancing our products and services and introducing new services to
address our customers' changing needs. We could incur substantial development or
acquisition costs if we need to modify our services or infrastructure to adapt
to changes affecting providers of Internet services. Our business could be
seriously harmed if we incur significant costs to adapt to these changes. If we
cannot adapt to these changes, or do not sufficiently increase the features and
functionality of our products and services, our customers may switch to the
product and service offerings of our competitors. Furthermore, our competitors
or potential competitors may develop a novel method of Internet navigation that
is equal or superior to those we offer. As a result, demand for our online
personal service infrastructure may decrease.
WE MAY FACE POTENTIAL LIABILITY FOR INVASION OF PRIVACY.
We have a policy against using personally identifiable information obtained
from users of our online personal service infrastructure without the user's
permission. In the past, the Federal Trade Commission has investigated companies
that have used personally identifiable information without permission or in
violation of a stated privacy policy. If we use this information without
permission or in violation of our policy, we may face potential liability for
invasion of privacy for compiling and providing information to our corporate
customers and electronic commerce merchants.
WE NEED TO EXPAND OUR SALES AND SUPPORT ORGANIZATIONS.
We will continue to expand our advertising sales, syndication and corporate
sales operations and marketing efforts to increase market awareness and sales of
our products and services. We will need to increase our staff to support new
customers and the expanding needs of our existing customers. Competition for
highly-qualified sales personnel is intense, and we may not be able to hire the
kind and number of sales personnel we are targeting. Hiring highly-qualified
customer service and account management personnel is very competitive in our
industry due to the limited number of people available with the necessary
technical skills and understanding of the Internet.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES COULD HARM OUR BUSINESS.
Any new law or regulation pertaining to the Internet, or the application or
interpretation of existing laws, could decrease the demand for our services,
increase our cost of doing business or otherwise seriously harm our business.
There is, and will likely continue to be, an increasing number of laws and
regulations pertaining to the Internet. These laws or regulations may relate to
liability for information retrieved from or transmitted over the Internet,
online content regulation, user privacy, taxation and the quality of products
and services. Furthermore, the growth and development of electronic commerce may
prompt calls for more stringent consumer protection laws that may impose
additional burdens on electronic commerce companies as well as companies like us
that provide electronic commerce services.
We file tax returns in such states as required by law based on principles
applicable to traditional businesses. However, one or more states could seek to
impose additional income tax obligations or sales tax collection obligations on
out-of-state companies, such as ours, which engage in or facilitate electronic
commerce. A number of proposals have been made at state and local levels that
could impose such taxes on the sale of products and services through the
Internet or the income derived from such sales. Such proposals, if adopted,
could substantially impair the growth of electronic commerce and seriously harm
our profitability.
Legislation limiting the ability of the states to impose taxes on
Internet-based transactions recently has been enacted by the United States
Congress. However, this legislation, known as the Internet Tax Freedom Act,
imposes only a three-year moratorium, which commenced October 1, 1998 and ends
on October 21, 2001, on state and local taxes on electronic commerce, where such
taxes are discriminatory and Internet
23
access, unless such taxes were generally imposed and actually enforced prior to
October 1, 1998. It is possible that the tax moratorium could fail to be renewed
prior to October 21, 2001. Failure to renew this legislation would allow various
states to impose taxes on Internet-based commerce. The imposition of such taxes
could seriously harm our ability to become profitable.
In addition, we are not certain how our business may be affected by the
application of existing laws governing issues such as property ownership,
copyrights, encryption and other intellectual property issues, taxation, libel,
obscenity and export or import matters. The vast majority of such laws were
adopted prior to the advent of the Internet. As a result, they do not
contemplate or address the unique issues of the Internet and related
technologies. Changes in laws intended to address such issues could create
uncertainty in the Internet market. Such uncertainty could reduce demand for our
services or increase the cost of doing business as a result of litigation costs
or increased service delivery costs.
WE MAY FACE POTENTIAL ELECTRONIC COMMERCE-RELATED LIABILITIES AND EXPENSES.
Arrangements with electronic commerce merchants may expose us to legal risks
and uncertainties, including potential liabilities to consumers of the products
and services offered by these electronic commerce merchants. Although we carry
general liability insurance, our insurance may not cover potential claims of
this type or may not be adequate to indemnify us for all liability that may be
imposed.
Some of the risks that may result from these arrangements with businesses
engaged in electronic commerce include:
- potential liabilities for illegal activities that may be conducted by
participating merchants;
- product liability or other tort claims relating to goods or services sold
through third-party commerce sites;
- consumer fraud and false or deceptive advertising or sales practices;
- breach of contract claims relating to merchant transactions;
- claims that materials included in merchant sites or sold by merchants
through these sites infringe third-party patents, copyrights, trademarks
or other intellectual property rights, or are libelous, defamatory or in
breach of third-party confidentiality or privacy rights; and
- claims relating to any failure of merchants to appropriately collect and
remit sales or other taxes arising from electronic commerce transactions.
Even to the extent that such claims do not result in material liability,
investigating and defending such claims could seriously harm our business.
WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS AND WE MAY BE
LIABLE FOR INFRINGING THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS.
Third parties may infringe or misappropriate our patents, trademarks or
other proprietary rights, which could have a material adverse effect on our
business. We have applied for a patent on our "Grammar Template Query System"
with the United States Patent and Trademark Office. We have obtained registered
trademark status for "Ask Jeeves" in the United States, Tunisia and Norway. We
have also applied for registered trademark status for "Ask.com," "Ask Jeeves for
Kids," and our logo and service marks in the United States and various foreign
countries. Additionally, in connection with our acquisition of Direct Hit, we
received an assignment of one United States patent issued to Gary Culliss,
Direct Hit's co-founder, Chief Technology Officer and Chairman, covering aspects
of Direct Hit's technology, and three U.S. patent applications covering other
aspects of Direct Hit's technology. We do not know whether we will be able to
defend our proprietary rights since the validity, enforceability and scope of
protection of proprietary rights in Internet-related industries are uncertain
and still evolving. Because we are devoting
24
significant resources to building our brands, primarily "Ask Jeeves" and
"Ask.com," through media advertising campaigns, if we are unable to register the
trade and service marks for which we have applied, or if we are unable to defend
our intellectual property rights, our business may be seriously harmed.
In July 1999, IP Learn LLC filed a complaint against us in the United States
District Court for the Northern District of California, which was amended by the
plaintiff, which alleges that aspects of the Ask Jeeves technology infringe one
or more patents alleged to be held by the plaintiff. We have answered the
complaint and discovery has begun. Additionally, in December 1999, Patrick H.
Winston and Boris Katz filed a complaint against us in the United States
District Court for the District of Massachusetts. The complaint alleges that our
technology infringes two patents alleged to be held by the plaintiffs. We have
answered the complaint, but discovery has not begun. We intend to vigorously
defend against the allegations asserted in these complaints and we believe we
have meritorious defenses to the claims. The results of any litigation matter
are inherently uncertain. In the event of an adverse result in either of these
lawsuits, or in any other litigation with third parties that could arise in the
future with respect to intellectual property rights relevant to our products or
services, we could be required to pay substantial damages, including treble
damages if we are held to have willfully infringed, to cease the use of
infringing products or services, to expend significant resources to develop
non-infringing technology or to attempt to obtain licenses to the infringing
technology on commercially reasonable terms, if at all. In addition, litigation
frequently involves substantial expenditures and can require significant
management attention, even if we ultimately prevail. Accordingly, we cannot
assure you that these lawsuits will not seriously harm our business.
Third parties may assert infringement claims against us. From time to time
in the ordinary course of business we have been, and we expect to continue to
be, subject to claims of alleged infringement of the trademarks and other
intellectual property rights of third parties. These claims and any resultant
litigation, should it occur, could subject us to significant liability for
damages. In addition, even if we prevail, litigation could be time-consuming and
expensive to defend, and could result in the diversion of our time and
attention. Any claims from third parties may also result in limitations on our
ability to use the intellectual property subject to these claims unless we are
able to enter into agreements with the third parties making these claims.
WE COULD FACE ADDITIONAL STOCK-BASED COMPENSATION RELATED TO OUR RELATIONSHIP
WITH TRINET.
Until May 31, 1999, we used TriNet VCO, an independent professional employer
organization, to provide payroll services and employee benefits for all our
employees. Under the co-employment arrangement, we paid a percentage of
compensation per co-employee, in addition to compensation costs, to TriNet to
cover payroll processing and related taxes and insurance. On December 31, 1998,
the Financial Accounting Standards Board, or FASB, issued an Exposure Draft of a
FASB Interpretation, Accounting for Certain Transactions involving Stock
Compensation--Interpretation of APB Opinion No. 25. Such FASB Exposure Draft, if
adopted, could be interpreted to indicate that employees subject to
co-employment arrangements, would not be considered our employees for purposes
of applying APB No. 25. On April 30, 1999, we gave notice of termination of this
co-employment arrangement. If additional clarification regarding the definition
of an employee is not provided in the final pronouncement by FASB, we may be
required to establish a new measurement date for stock options granted after
December 15, 1998, to our employees for the purpose of accounting for stock
options under APB No. 25. If a new measurement date is required to be
established, we would recognize deferred stock-based compensation which would be
amortized as stock-based compensation over the remaining vesting periods of the
options. We estimate that this charge could be approximately $5.2 million in the
aggregate, which would be amortized beginning with the first quarter of fiscal
2000, and ending in 2003. Such amortization could seriously harm our operating
results.
25
WE MAY NOT BE ABLE TO SECURE ADDITIONAL FINANCING TO MEET OUR FUTURE CAPITAL
NEEDS.
We currently anticipate that our available cash resources will be sufficient
to meet our anticipated needs for working capital and capital expenditures for
at least twelve months. If we are unable to generate sufficient cash flows from
operations to meet our anticipated needs for working capital and capital
expenditures, we will need to raise additional funds to fund brand promotion,
develop new or enhanced services, respond to competitive pressures or make
acquisitions. We may be unable to obtain any required additional financing on
terms favorable to us, if at all. If adequate funds are not available on
acceptable terms, we may be unable to fund our expansion, successfully promote
our brand, develop or enhance services, respond to competitive pressures or take
advantage of acquisition opportunities, any of which could seriously harm our
business. If we raise additional funds through the issuance of equity
securities, our stockholders may experience dilution of their ownership
interest, and the newly-issued securities may have rights superior to those of
the common stock. If we raise additional funds by issuing debt, we may be
subject to limitations on our operations, including limitations on the payment
of dividends.
SUBSTANTIAL SALES OF COMMON STOCK BY OUR EXISTING STOCKHOLDERS COULD CAUSE OUR
STOCK PRICE TO FALL.
The market price of our common stock could decline as a result of sales by
our existing stockholders of shares of common stock in the market or the
perception that these sales could occur. These sales also might make it more
difficult for us to sell equity securities in the future at a time and at a
price that we deem appropriate.
PROVISIONS IN DELAWARE LAW AND OUR CHARTER, STOCK OPTION AGREEMENTS AND OFFER
LETTERS TO EXECUTIVE OFFICERS MAY PREVENT OR DELAY A CHANGE OF CONTROL.
We are subject to the Delaware anti-takeover laws regulating corporate
takeovers. These anti-takeover laws prevent Delaware corporations from engaging
in a merger or sale of more than 10% of its assets with any stockholder,
including all affiliates and associates of the stockholder, who owns 15% or more
of the corporation's outstanding voting stock, for three years following the
date that the stockholder acquired 15% or more of the corporation's assets
unless:
- the board of directors approved the transaction where the stockholder
acquired 15% or more of the corporation's assets;
- after the transaction where the stockholder acquired 15% or more of the
corporation's assets, the stockholder owned at least 85% of the
corporation's outstanding voting stock, excluding shares owned by
directors, officers and employee stock plans in which employee
participants do not have the right to determine confidentially whether
shares held under the plan will be tendered in a tender or exchange offer;
or
- on or after this date, the merger or sale is approved by the board of
directors and the holders of at least two-thirds of the outstanding voting
stock that is not owned by the stockholder.
A Delaware corporation may opt out of the Delaware anti-takeover laws if its
certificate of incorporation or bylaws so provide. We have not opted out of the
provisions of the anti-takeover laws. As such, these laws could prohibit or
delay mergers or other takeover or change of control of Ask Jeeves and may
discourage attempts by other companies to acquire us.
Our certificate of incorporation and bylaws include a number of provisions
that may deter or impede hostile takeovers or changes of control or management.
These provisions include:
- our board is classified into three classes of directors as nearly equal in
size as possible with staggered three year-terms;
- the authority of our board to issue up to 5,000,000 shares of preferred
stock and to determine the price, rights, preferences and privileges of
these shares, without stockholder approval;
26
- all stockholder actions must be effected at a duly called meeting of
stockholders and not by written consent;
- special meetings of the stockholders may be called only by the chairman of
the board, the chief executive officer or the board; and
- no cumulative voting.
These provisions may have the effect of delaying or preventing a change of
control.
Our certificate of incorporation and bylaws provide that we will indemnify
officers and directors against losses that may incur in investigations and legal
proceedings resulting from their services to us, which may include services in
connection with takeover defense measures. These provisions may have the effect
of preventing changes in our management.
In addition, our option agreements under the 1996 Stock Option plan provide
that if a change of control of Ask Jeeves occurs prior to the first anniversary
of the vesting commencement date of an option, then the vesting which would have
occurred by such anniversary shall occur. After the first anniversary of the
date of grant, these option agreements provide that the vesting of each option
shall accelerate by six months upon a change of control. As of December 31,
1999, there were 3,838,838 shares of common stock reserved for unvested options
granted under this plan. Furthermore, offer letters with our executive officers
provide for the payment of severance and acceleration of options upon the
termination of these executive officers following a change of control of Ask
Jeeves. These provisions in our stock option agreements and offer letters could
have the effect of discouraging potential takeover attempts.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and elsewhere in this Annual Report on Form 10-K
constitute forward-looking statements. These statements involve known and
unknown risks, uncertainties and other factors that may cause our actual
results, levels of activity, performance or achievements to be materially
different from any future results, levels of activity, performance or
achievements expressed or implied by such forward-looking statements. Such
factors include, among other things, those listed under "Risk Factors" and
elsewhere in this Annual Report on Form 10-K.
In some cases, you can identify forward-looking statements by terminology
such as "may," "will," "should," "could," "expects," "plans," "intends,"
"anticipates," "believes," "estimates," "predicts," "potential" or "continue" or
the negative of such terms and other comparable terminology.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements.
ITEM 2. PROPERTIES
Our headquarters are currently located in a leased facility in Emeryville,
California. The facility consists of 76,608 square feet. Our annual rent expense
under the lease is $1.9 million. The lease expires in 2004. As a result of our
acquisitions of Net Effect and Direct Hit, we have assumed leases for office
space of approximately 32,000 square feet in Natick, Massachusetts and North
Hollywood, California. These leases expire in 2002 and 2004, respectively. Our
annual rent expense under these leases is approximately $710,000.
In February 2000, we entered into a lease for additional facilities in
Oakland, California. Our initial annual lease expense under this lease is
approximately $642,000, increasing to approximately $2.0 million when we occupy
all of the leased space.
27
We have also leased smaller facilities in California, Missouri and New York,
primarily for sales and marketing personnel.
We believe that our facilities will be adequate to meet our needs for the
foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
On July 8, 1999, IPLearn, LLC filed a complaint against us in the United
States District Court for the Northern District of California (Oakland Division)
(IPLEARN, LLC V. ASK JEEVES, INC., Action No. C99-3392 SBA-ENE), which was
amended by IPLearn on August 23, 1999, alleging infringement by us of United
States Patent Nos. 5,884,302, 5,836,771 and 5,934,910 that are alleged to be
held by the plaintiff. The complaint seeks injunctive relief and unspecified
damages, including attorneys' fees. We filed an answer to the complaint on
August 30, 1999. The answer denies the allegations made in the complaint and
seeks a dismissal of the complaint, invalidation of the asserted patents and an
award to us of our costs, including attorneys' fees. The parties have begun the
discovery process in this litigation.
On December 16, 1999, Patrick H. Winston and Boris Katz filed a complaint
against us in the United States District Court for the District of Massachusetts
(PATRICK H. WINSTON AND BORIS KATZ V. ASK JEEVES, INC., Case No. 99GV12584 MLW),
alleging infringement by us of United States Patent Nos. 5,309,359 and 5,404,295
that are alleged to be held by the plaintiffs. The complaint seeks injunctive
relief and unspecified damages, including attorneys' fees. We filed an answer to
the complaint and a counterclaim for declaratory relief on January 28, 2000. The
answer denies the allegations made in the complaint and seeks a dismissal of the
complaint, invalidation of the asserted patents and an award to us of our costs,
including attorneys' fees. The parties have not yet begun the discovery process
in this litigation.
We intend to vigorously defend against the allegations asserted in these
complaints and we believe we have meritorious defenses to the claims. The
results of any litigation matter are inherently uncertain. In the event of an
adverse result in either of these lawsuits, or in any other litigation with
third parties that could arise in the future with respect to intellectual
property rights relevant to our products or services, we could be required to
pay substantial damages, including treble damages if we are held to have
willfully infringed, to cease the use of infringing products or services, to
expend significant resources to develop non-infringing technology or to attempt
to obtain licenses to the infringing technology on commercially reasonable
terms. In addition, litigation frequently involves substantial expenditures and
can require significant management attention, even if we ultimately prevail.
Accordingly, we cannot assure you that these lawsuits will not seriously harm
our business.
In the normal course of business, we are subject to various other legal
matters. While the results of litigation and claims cannot be predicted with
certainty, we believe that the final outcome of these other matters will n