ASK JEEVES INC - 10-Q Quarterly Report

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly period ended September 30, 2002

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 000-26521

ASK JEEVES, INC.
(Exact name of registrant as specified in its charter)

Delaware		94-3334199
(State or other jurisdiction of Incorporation or organization)		(IRS Employer Identification No.)

5858 Horton St., Suite 350, Emeryville, CA 94608
(Address of principal executive offices, including zip code)

(510) 985-7400
(Registrant's telephone number, including area code)

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.

ý Yes o No

The number of shares outstanding of the registrant's Common Stock as of October 31, 2002 was 41,579,909.

ASK JEEVES, INC.

TABLE OF CONTENTS

		Page
PART I. FINANCIAL INFORMATION
Item 1.	Unaudited Condensed Consolidated Financial Statements:
	Condensed Consolidated Balance Sheets as of September 30, 2002 and December 31, 2001	3
	Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2002 and 2001	4
	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2002 and 2001	5
	Notes to the Unaudited Condensed Consolidated Financial Statements	6
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	13
Item 3.	Quantitative and Qualitative Disclosure About Market Risk	37
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	39
Item 2.	Change in Securities	39
Item 3.	Defaults Upon Senior Securities	39
Item 4.	Submission of Matters to a Vote of Securities Holders	39
Item 5.	Other Information	39
Item 6.	Exhibits and Reports on Form 8-K	39
	Signatures	43

PART I. FINANCIAL INFORMATION

Item 1. Unaudited Condensed Consolidated Financial Statements

ASK JEEVES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)

			September 30, 2002			December 31, 2001
			(Unaudited)			(Note 1)
ASSETS
Current assets:
	Cash and cash equivalents		$	26,241		$	33,125
	Short-term marketable securities			3,140			18,671
	Restricted cash and marketable securities			11,065			15,489

		Total cash, cash equivalents and marketable securities		40,446			67,285
	Accounts receivable, net			8,005			8,482
	Prepaid expenses and other current assets			3,285			2,453

		Total current assets		51,736			78,220
Restricted marketable securities				—			9,317
Property and equipment, net				12,894			17,098
Intangible assets, net				3,477			5,384
Other assets				1,726			1,319

		Total assets	$	69,833		$	111,338

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
	Accounts payable and other accrued liabilities		$	9,759		$	11,547
	Accrued compensation and related expenses			4,599			5,282
	Accrued restructuring costs			1,027			18,429
	Deferred revenue			11,058			16,069
	Deferred gain			4,884			—
	Borrowings under line of credit			11,000			11,000

		Total current liabilities		42,327			62,327
Other liabilities				340			1,797

		Total liabilities		42,667			64,124
Commitments and contingencies
Stockholders' equity:
	Convertible preferred stock, $.001 par value; 5,000,000 shares authorized; no shares issued or outstanding
	Common stock, $.001 par value; 150,000,000 shares authorized; 41,244,411 and 39,482,015 shares issued and outstanding at September 30, 2002 and December 31, 2001, respectively			724,975			722,310
	Notes receivable from stockholders			(5	)		(57	)
	Deferred stock compensation			(10	)		(98	)
	Accumulated deficit			(698,740	)		(675,432	)
	Accumulated other comprehensive income			946			491

		Total stockholders' equity		27,166			47,214

		Total liabilities and stockholders' equity	$	69,833		$	111,338

See accompanying notes to condensed consolidated financial statements.

ASK JEEVES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except share and per share data)

		Three Months Ended						Nine Months Ended
		September 30, 2002			September 30, 2001			September 30, 2002			September 30, 2001
Revenues:
	Web Properties	$	14,724		$	6,997		$	39,748		$	23,688
	Jeeves Solutions (1)		3,080			8,436			11,706			27,502

Total revenues			17,804			15,433			51,454			51,190
Cost of revenues:
	Web Properties		4,337			3,392			12,194			11,949
	Jeeves Solutions		1,353			2,559			5,009			11,112

Total cost of revenues			5,690			5,951			17,203			23,061
Gross profit			12,114			9,482			34,251			28,129
Operating expenses:
	Product development		2,758			4,818			10,603			15,831
	Sales and marketing		8,422			8,794			28,551			35,004
	General and administrative		5,065			4,983			16,179			17,608
	Stock-based compensation		17			76			86			554
	Amortization of goodwill and other intangible assets		—			235			—			22,822
	Impairment of long-lived assets		—			16,115			2,593			355,291
	Restructuring and other		470			2,178			1,330			10,241

Total operating expenses			16,732			37,199			59,342			457,351

Operating loss			(4,618	)		(27,717	)		(25,091	)		(429,222	)
Interest and other income, net			248			251			1,783			2,610

Net loss		$	(4,370	)	$	(27,466	)	$	(23,308	)	$	(426,612	)

Basic and diluted net loss per share		$	(0.11	)	$	(0.74	)	$	(0.58	)	$	(11.73	)

Weighted average shares outstanding used in computing basic and diluted net loss per share			41,087,722			37,152,718			40,522,128			36,359,274

(1) Revenues from related parties		$	1,131		$	4,776		$	5,035		$	14,641

See accompanying notes to condensed consolidated financial statements.

ASK JEEVES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)

			Nine Months Ended
			September 30, 2002			September 30, 2001
Operating activities
Net loss			$	(23,308	)	$	(426,612	)
Adjustment to reconcile net loss to net cash used in operating activities:
	Depreciation and amortization			6,604			6,659
	Compensation charge related to grants of stock options			—			2,079
	Stock-based compensation			86			554
	Amortization of goodwill and intangible assets			1,654			28,909
	Impairment charge for long-lived assets			2,593			355,291
	Other non-cash charges			—			891
	Changes in operating assets and liabilities:
		Accounts receivable		477			13,887
		Prepaid expenses and other assets		(804	)		3,772
		Accounts payable and other accrued liabilities		(6,628	)		(8,737	)
		Accrued compensation and related expenses		(947	)		130
		Accrued restructuring costs		(17,401	)		3,183
		Deferred revenue		(5,010	)		(7,221	)

Net cash used in operating activities				(42,684	)		(27,215	)
Investing activities
Purchases of property and equipment				(4,744	)		(3,022	)
Purchases of restricted marketable securities				—			(11,000	)
Proceeds from redemption of non-marketable securities				450			—
Proceeds from redemption of marketable securities				28,901			27,864
Purchases of intangible assets				—			(4,750	)
Net cash acquired from business combinations				9,563			(3,054	)

Net cash provided by investing activities				34,170			6,038
Financing activities
Issuance of common stock				1,415			1,153
Issuance of notes receivable to stockholders				—			(200	)
Repayment of notes receivable to stockholders				52			163
Borrowings under line of credit				—			11,000
Repayment of capital lease obligations				(664	)		(658	)

Net cash provided by financing activities				803			11,458

Effect of exchange rate changes on cash and cash equivalents				827			—

Decrease in cash and cash equivalents				(6,884	)		(9,719	)
Cash and cash equivalents at beginning of period				33,125			41,445

Cash and cash equivalents at end of period			$	26,241		$	31,726

Supplemental disclosure of noncash investing and financing activities
Common stock issued for acquisition of joint venture			$	1,250		$	2,225

Common stock warrants issued for technology licenses			$	—		$	184

Interest paid			$	390		$	438

See accompanying notes to condensed consolidated financial statements.

ASK JEEVES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company

Ask Jeeves, Inc. ("Ask Jeeves" or "the Company") is a leading provider of search and self-service technologies. Our proprietary natural-language capabilities combined with patented search technology create an interaction centered on understanding users' specific needs and interests and connecting them to the most relevant information, products and services.

The Company delivers its natural language question answering technologies and services through its own Web sites at Ask.com, AJKids.com and Teoma.com. Through the Company's Web Properties division, Ask Jeeves provides innovative, targeted and effective tools for reaching a broad base of highly valuable customers. The Company also syndicates services to portals, infomediaries, and content and destination sites to help companies increase e-commerce and advertising revenue.

Through its Jeeves Solutions division, the Company offers software and services that allow corporations to establish connected self service solutions that supplement the activities of call centers, contact centers and marketing departments.

The Company was incorporated in California in June 1996 and reincorporated in Delaware in June 1999.

Basis of Presentation

The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Investments in affiliates in which the Company has significant influence but does not have a controlling interest are accounted for under the equity method and investments in which the Company does not have the ability to exert significant influence are accounted for at cost. All significant intercompany transactions and balances have been eliminated upon consolidation.

The accompanying condensed consolidated financial statements as of September 30, 2002 and 2001 and for the three and nine months ended September 30, 2002 and 2001 are unaudited but include all adjustments (consisting of normal recurring adjustments and accruals) which, in the opinion of management, are necessary for a fair statement of the consolidated financial position, operating results and cash flows as of the interim date and for the periods presented. Results for the interim period ended September 30, 2002 are not necessarily indicative of results for the entire fiscal year or future periods. The condensed consolidated balance sheet at December 31, 2001 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2001.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of

revenue and expenses during the reporting period. Actual results could differ materially from those estimates.

Net Loss Per Share

Basic net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding for the period. Potentially dilutive securities have been excluded from the computation, as their effect is antidilutive. If the Company had reported net income, diluted net income per share would reflect the potential dilution of securities by adding other common stock equivalents, including stock options, warrants and convertible preferred stock, in the weighted average number of common shares outstanding for a period, if dilutive.

Reclassifications

Certain prior period balances have been reclassified to conform to the current year presentation.

2. ACQUISITION OF ASK JEEVES UK

In February 2002, the Company acquired the entire outstanding equity interests in Ask Jeeves UK. Previously, the Company held a fifty percent interest in Ask Jeeves UK, a joint venture partnership with Carlton Communications PLC and Granada Media Group Limited, that was formed to market the Company's search and self-service technologies and services in the United Kingdom. The Company acquired full ownership of Ask Jeeves UK to enhance the synergies that exist between the U.S. and U.K. operations.

The acquisition was accounted for as a purchase business combination and accordingly, the consolidated financial statements include the operating results of Ask Jeeves UK from the date of acquisition. Previously, the Company accounted for its investment in the joint venture under the equity method of accounting. The Company had recorded no value for its interest in the joint venture for accounting purposes. Therefore, the Company had not previously recognized any portion of the net losses of the joint venture. The unaudited pro forma information presented in the table below represents the combined revenue, net loss and net loss per share of the Company as if the acquisition had taken place on January 1, 2001.

	Nine Months Ended
	September 30, 2002			September 30, 2001
(in thousands, except share and per share amounts)
Revenues	$	51,524		$	51,653
Net loss	$	(24,399	)	$	(438,259	)
Net loss per share basic and diluted	$	(0.60	)	$	(11.80	)
Weighted average shares outstanding used in computing basic and diluted net loss per share		40,763,363			37,134,066

3. COMMITMENTS AND CONTINGENCIES

From time to time, the Company is subject to legal proceedings and claims in the ordinary course of business, including claims of alleged infringement of patents, trademarks, copyrights and other intellectual property rights, and a variety of claims arising in connection with the services, such as claims alleging defamation or invasion of privacy. 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.

On October 25, 2001, a putative class action lawsuit captioned Leonard Turroff, et al. vs Ask Jeeves, Inc., et al. was filed against the Company and two of our officers and directors (collectively the "Individual Defendants") in the United States District Court for the Southern District of New York. Also named as defendants were Morgan Stanley & Co., Inc., FleetBoston Robertson Stephens, Goldman Sachs & Co., U.S. Bancorp Piper Jaffray, and Dain Rauscher, Inc., the underwriters of the Company's initial public offering. The complaint alleges violations of Section 11 of the Securities Act of 1933 against all defendants, and violations of Section 15 of the Securities Act against the Individual Defendants in connection with the Company's initial public offering ("IPO"). An amended complaint was filed on December 6, 2001, which includes the same allegations in connection with Ask Jeeves' secondary offering in March 2000. The complaints seek unspecified damages on behalf of a purported class of purchasers of common stock between June 30, 1999 and December 6, 2000. We believe the claims are without merit and intend to defend the actions vigorously. However, an unfavorable outcome could have a material adverse effect on our operating results and financial position.

In May 2, 2002, a shareholder derivative lawsuit was filed in the Superior Court of California, County of Alameda, titled Brenner v. Strauch et al. The lawsuit purported to be filed on behalf of our Company, asserting claims against the officers and directors at the time of our initial public offering, or IPO. Also named as defendants were Morgan Stanley & Co., Inc., and FleetBoston Robertson Stephens, the underwriters of the Company's IPO. The complaint alleged breach of fiduciary duty, negligence an unjust enrichment of the named officers and directors, for acquiescing and/or conspiring with the underwriter defendants in underpricing the IPO. Upon Defendants' motion, the lawsuit was transferred to the U.S. District Court in Northern California. On October 31, 2002, the Court dismissed the lawsuit, with prejudice. Plaintiff has 30 days from the date of the judgment to file an appeal.

4. STOCK-BASED COMPENSATION

The following table shows the amount of stock-based compensation that would have been classified under the following categories had stock-based compensation not been separately stated on the consolidated statements of operations:

		Three Months Ended				Nine Months Ended
		September 30, 2002		September 30, 2001		September 30, 2002		September 30, 2001
(in thousands)
Cost of revenues:
	Web Properties	$	1	$	4	$	5	$	17
	Jeeves Solutions		1		5		5		17
Product development			3		11		13		313
Sales and marketing			8		35		40		130
General and administrative			4		21		23		77

	Total	$	17	$	76	$	86	$	554

5. RESTRUCTURING

In December 2000, the Company's Board of Directors approved a restructuring program aimed at streamlining its underlying cost structure to better position the Company for growth and improved operating results. During the three months ended September 30, 2002, the Company reported charges of approximately $470,000, which included severance pay and medical and other benefits. The following table sets forth the restructuring activity during the three and nine months ended September 30, 2002 and 2001, respectively (in thousands).

		Accrued Restructuring Costs, Beginning of Period		Restructuring Charges		Cash Paid			Accrued Restructuring Costs, End of Period
Three months ended September 30, 2002
Facility exit costs		$	1,182	$	—	$	(208	)	$	974
Severance and professional fees			503		470		(920	)		53

	Total	$	1,685	$	470	$	(1,128	)	$	1,027

Nine months ended September 30, 2002
Facility exit costs		$	18,119	$	—	$	(17,145	)	$	974
Severance and professional fees			310		1,330		(1,587	)		53

	Total	$	18,429	$	1,330	$	(18,732	)	$	1,027

		Accrued Restructuring Costs, Beginning of Period		Restructuring Charges		Cash Paid			Asset Write-offs			Accrued Restructuring Costs, End of Period
Three months ended September 30, 2001
Facility exit costs		$	11,168	$	1,857	$	(976	)	$	—		$	12,049
Contract terminations			—		96		—			—			96
Severance and professional fees			104		134		(69	)		—			169

	Total	$	11,272	$	2,087	$	(1,045	)	$	—		$	12,314

Nine months ended September 30, 2001
Facility exit costs		$	7,984	$	7,162	$	(3,097	)	$	—		$	12,049
Asset write-offs			—		100		—			(100	)		—
Contract terminations			—		614		(518	)		—			96
Severance and professional fees			1,148		2,264		(3,243	)		—			169

	Total	$	9,132	$	10,140	$	(6,858	)	$	(100	)	$	12,314

6. LINE OF CREDIT

The Company has a revolving line of credit with a bank in the amount of $15 million. The line of credit expires on July 1, 2003, unless extended. Borrowings under the line of credit bear fixed rate interest from the date of borrowing at LIBOR plus 0.5% (2.6% at September 30, 2002). All borrowings are collateralized by the Company's marketable securities. Borrowings under the line are subject to various covenants. As of September 30, 2002, $11.0 million was outstanding under the line of credit. Additionally, standby letters of credit of approximately $65,000, which are being maintained as security for performance under various obligations, were issued and outstanding under the line of credit.

7. BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION

For internal management reporting purposes, the Company is divided into two business segments, Web Properties and Jeeves Solutions. Results of operations for these business divisions, as provided to the Company's Chief Executive Officer (CEO) who is the Chief Operating Decision Maker, include revenues, cost of