EXHIBIT 99.1
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Shareholders
Net Effect Systems, Inc. (Formerly Extratis Corporation)
In our opinion, the accompanying balance sheets and the related statements of
operations, changes in shareholders' equity and cash flows present fairly, in
all material respects, the financial position of Net Effect Systems, Inc.,
formerly Extratis Corporation, (the "Company"), at December 31, 1997 and 1998,
and the results of its operations and its cash flows for the years then ended,
in conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Woodland Hills, California
March 22, 1999, except for note 9,
as to which the date is November 19, 1999.
NET EFFECT SYSTEMS, INC.
(FORMERLY EXTRATIS CORPORATION
BALANCE SHEETS
DECEMBER 31 SEPTEMBER 30,
------------------------------- ---------------
1997 1998 1999
------------ ------------- --------------
(UNAUDITED)
Assets:
Cash ................................................... $ 62,229 $ 2,877,968 $ 6,128,073
Accounts receivable .................................... 4,667 57,682 147,385
Prepaid and other current assets ....................... 3,500 6,447 184,174
------------ ------------- --------------
Total current assets ....................... 70,396 2,942,097 6,459,632
Property and equipment, net ............................ -- 43,444 418,324
Other assets ........................................... -- 139,698 115,307
------------ ------------- --------------
Total assets ............................... $ 70,396 $ 3,125,239 $ 6,993,263
------------ ------------- --------------
------------ ------------- --------------
Liabilities and Stockholders' Equity:
Accounts payable ....................................... $ -- $ 222,807 $ 200,594
Accrued liabilities .................................... 45,591 147,810 799,211
Accrued marketing expenses ............................. -- -- 265,000
Deferred revenue ....................................... -- 29,286 126,270
------------ ------------- --------------
Total current liabilities ................. 45,591 399,903 1,391,075
Commitments and contingencies(Note 6)
Shareholders' equity:
Series A convertible preferred stock, $.01 par
value, noncumulative 1,000,000 shares
authorized, 440,000 issued and outstanding ........... 4,400 4,400 4,400
Series B convertible preferred stock, $0.01 par
value, noncumulative 6,750,000 shares
authorized, 6,371,360 issued and outstanding ......... -- 63,714 63,714
Series C convertible preferred stock, $0.01 per
value, noncumulative 4,594,595 shares
authorized, 4,198,920 issued and outstanding ......... -- -- 41,989
Common stock, $0.01 par value, 10,000,000
shares authorized, 2,000,000 and 1,850,000 and
1,908,685 shares issued and outstanding at
December 31, 1997, 1998 and September 30, 1999 ....... 20,000 18,500 19,087
Additional paid-in capital ............................. 277,267 5,463,813 13,301,679
Accumulated deficit .................................... (276,862) (2,825,091) (7,828,681)
------------ ------------- --------------
Total stockholders' equity ............... 24,805 2,725,336 5,602,188
------------ ------------- --------------
Total liabilities and stockholders'
equity .................................. $ 70,396 $ 3,125,239 $ 6,993,263
------------ ------------- --------------
------------ ------------- --------------
The accompanying notes are an integral part of these financial statements.
NET EFFECT SYSTEMS, INC.
(FORMERLY EXTRATIS CORPORATION
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------ ---------------------------------
1997 1998 1998 1999
------------- --------------- ------------ ------------
(UNAUDITED)
Revenue .......................... $ 22,603 $ 207,739 $ 75,550 $ 823,407
Cost of revenues: ................ -- 340,698 52,133 957,818
------------- --------------- ------------ ------------
Gross profit (loss) .............. 22,603 (132,959) 23,417 (134,411)
Operating expenses:
Product development .............. 120,916 608,273 358,347 1,852,341
Sales and marketing .............. 76,705 687,262 365,080 2,065,607
General and administrative ....... 102,372 1,223,063 644,402 1,135,926
------------- --------------- ------------ ------------
Total operating expenses .......... 299,993 2,518,598 1,367,829 5,053,874
------------- --------------- ------------ ------------
Operating loss .................... (277,390) (2,651,557) (1,344,412) (5,188,285)
Interest income .................. 1,328 107,623 66,255 182,820
------------- --------------- ------------ ------------
Loss before provision for (5,005,465)
income tax ...................... (276,062) (2,543,934) (1,278,157)
Provision for income tax .......... 800 800 800 1,616
------------- --------------- ------------ ------------
Net loss .......................... $ (276,862) $(2,544,734) $(1,278,957) $(5,007,081)
------------- --------------- ------------ ------------
------------- --------------- ------------ ------------
The accompanying notes are an integral part of these financial statements.
NET EFFECT SYSTEMS, INC.
(FORMERLY EXTRATIS CORPORATION)
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
SERIES A SERIES B SERIES C
CONVERTIBLE PREFERRED CONVERTIBLE PREFERRED
CONVERTIBLE PREFERRED STOCK STOCK COMMON STOCK
----------------------- --------------------- --------------------- -------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
----------- ----------- ----------- --------- --------- ---------- ----------- -------
Issuance of shares........... 440,000 $ 4,400 2,000,000 $20,000
Net loss.....................
----------- ----------- ----------- --------- --------- ---------- ----------- --------
Balance at December 31, 1997. 440,000 $ 4,400 -- $ -- -- $ -- 2,000,000 $20,000
----------- ----------- ----------- --------- --------- ---------- ----------- --------
Redemption of common stock... (150,000) $(1,500)
Issuance of shares........... 6,371,360 $ 63,714
Net loss.....................
----------- ----------- ----------- --------- --------- ---------- ----------- --------
Balance at December 31, 1998. 440,000 $ 4,400 6,371,360 $ 63,714 -- $ -- 1,850,000 $18,500
----------- ----------- ----------- --------- --------- ---------- ----------- --------
Issuance of shares (unaudited) 4,198,920 $41,989 20,560 $ 206
Net loss (unaudited).........
Exercise of stock options
(unaudited).................. 38,125 $ 381
Recognition of compensatory
stock options expense
(unaudited)..................
Settlement of legal fees
(unaudited)..................
----------- ----------- ----------- --------- --------- ---------- ----------- --------
Balance at September 30, 1999
(unaudited).................. 440,000 $ 4,400 6,371,360 $ 63,714 4,198,920 $ 41,989 1,908,685 $19,087
----------- ----------- ----------- --------- --------- ---------- ----------- --------
----------- ----------- ----------- --------- --------- ---------- ----------- --------
ADDITIONAL TOTAL
PAID-IN ACCUMULATED SHAREHOLDERS'
CAPITAL DEFICIT EQUITY
------------- ------------ --------------
Issuance of shares........... $ 277,267 $ 301,667
Net loss..................... $ (276,862) $ (276,862)
----------- ------------ ------------
Balance at December 31, 1997. $ 277,267 $ (276,862) $ 24,805
----------- ------------ ------------
Redemption of common stock... $ (3,495) $ (4,995)
Issuance of shares........... $ 5,186,546 $ 5,250,260
Net loss..................... $(2,544,734) $(2,544,734)
----------- ------------ ------------
Balance at December 31, 1998. $ 5,463,813 $(2,825,091) $ 2,725,336
------------ ------------ ------------
Issuance of shares (unaudited) $ 7,744,310 $ 7,786,505
Net loss (unaudited)......... $(5,007,081) $(5,007,081)
Exercise of stock options
(unaudited).................. $ 3,464 $ 3,845
Misc. reclass adjustment
(unaudited).................. $ (3,491) $ 3,491
Recognition of compensatory
stock options expense
(unaudited).................. $ 134,667 $ 134,667
Settlement of legal fees
(unaudited).................. $ (41,084) $ (41,084)
------------ ------------ ------------
Balance at September 30, 1999
(unaudited).................. $13,301,679 $(7,828,681) $ 5,602,188
------------ ------------ ------------
------------ ------------ ------------
The accompanying notes are an integral part of these financial statements.
NET EFFECT SYSTEMS, INC.
(FORMERLY EXTRATIS CORPORATION)
STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER
YEAR ENDED DECEMBER 31, 30,
------------------------------- ------------------------------
1997 1998 1998 1999
------------- ------------ ----------- ------------
(UNAUDITED)
Cash flows from operating activities:
Net loss ........................................... $ (276,862) $(2,544,734) $(1,278,957) $(5,007,081)
Adjustments to reconcile net income to net
Cash used in operating activities:
Depreciation and amortization ...................... -- 12,573 3,329 35,862
Increase in accounts receivable .................. (4,667) (53,015) (119,820) (89,703)
Increase in prepaid and other current
Assets ......................................... (3,500) (2,947) (7,619) (127,727)
Increase/Decrease in other assets ................ -- (139,698) (22,617) 24,391
Increase in accounts payable ..................... -- 222,807 103,840 (22,213)
Increase/Decrease in accrued liabilities
and other ....................................... 45,591 102,219 (30,561) 916,401
Increase in deferred revenue and customer
Deposits ....................................... -- 29,286 106,650 96,984
------------- ------------ ----------- ------------
Net cash used in operating activities .................. (239,438) (2,373,509) (1,245,755) (4,173,086)
------------- ------------ ----------- ------------
Cash flows from investing activities:
Issuance of note receivable .......................... -- -- -- (50,000)
Purchases of property and equipment .................. -- (170,649) (125,716) (410,742)
Sale of property and equipment ....................... -- 114,632 -- --
------------- ------------ ----------- ------------
Net cash used in investing activities .................. -- (56,017) (125,716) (460,742)
------------- ------------ ----------- ------------
Cash flows from financing activities:
Proceeds from the issuance of common stock ......... 81,667 -- -- 18,504
Proceeds from the issuance of Series A
Convertible preferred stock ..................... 220,000 -- -- --
Proceeds from the issuance of Series B
Convertible preferred stock ..................... -- 5,250,260 5,250,260 --
Proceeds from the issuance of Series C
Convertible preferred stock ..................... -- -- -- 7,768,001
Proceeds from stock options exercised .............. -- -- -- 3,845
Settlement of legal fees ........................... -- -- -- (41,084)
Noncash compensatory stock option expense .......... -- -- -- 134,667
Redemption of common stock ......................... -- (4,995) (4,995) --
------------- ------------ ----------- ------------
Net cash provided by financing activities ............. 301,667 5,245,265 5,245,265 7,883,933
------------- ------------ ----------- ------------
Net increase in cash and cash equivalents ............. 62,229 2,815,739 3,873,794 3,250,105
Cash at beginning of period ........................... -- 62,229 62,229 2,877,968
Cash at end of period ................................. $ 62,229 $ 2,877,968 $ 3,936,023 $ 6,128,073
------------- ------------ ----------- ------------
------------- ------------ ----------- ------------
The accompanying notes are an integral part of these financial statements.
NET EFFECT SYSTEMS, INC.
(FORMERLY EXTRATIS CORPORATION)
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND ORGANIZATION:
Net Effect Systems, Inc. (formerly Extratis Corporation) (the
"Company") designs, develops, markets and supports innovative
enterprise-wide, scalable on line customer support software. The
Company's software enables the user to harness the power of the
Internet to provide real-time, text based customer support with
one-to-one interaction and one-to-many capabilities to maximize the
productivity of customer support functions within an organization.
Extratis Corporation was incorporated on April 28, 1997 under the laws
of the State of California. On September 25, 1998, Extratis Corporation
completed its re-incorporation in the State of Delaware and merger with
its newly created subsidiary Net Effect Systems, Inc.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Use of Estimates
In the normal course of preparing financial statements in conformity
with generally accepted accounting principles, management is required
to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period.
Accordingly, actual results could differ from those estimates.
Unaudited Interim Financial Information
The accompanying interim financial statements as of September 30, 1999
and for the nine months ended September 30, 1998 and 1999, are
unaudited. The unaudited interim financial statements have been
prepared on the same basis as the annual financial statements, and in
the opinion of management, reflect all adjustments, which include only
normal recurring adjustments, necessary to present fairly the Company's
financial position at September 30, 1999, its results of operations and
cash flows for the nine months then ended September 30, 1998 and 1999.
The financial data and other information disclosed in these notes to
the financial statements related to this period is unaudited. The
results for the nine months ended September 30, 1999 and are not
necessarily indicative of the results to be expected for the year
ending December 31, 1999.
Cash and Cash Equivalents
The Company considers highly liquid investments with an original
maturity of three months or less to be cash equivalents. Such
investments are valued at cost, which approximates market value.
Revenue Recognition and Deferred Revenue
The Company recognizes revenue from the sale of its software upon
receipt of an executed sales agreement and shipment to the customer
provided there are no vendor obligations to be fulfilled and
collectibility is probable. Services revenue includes support,
education and consulting services. The Company provides software
support and product upgrades to its customer through separately priced
agreements. These support revenues are deferred and recognized on a
straight-line basis over the term of the contract. Revenues from
technical training and consulting services are recognized as these
services are provided to customers.
Product Development
Product development costs are expensed as incurred. Statement of
Financial Accounting Standards No. 86, "Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed," requires
capitalization of certain software development costs subsequent to the
establishment of technological feasibility. Based upon the Company's
product development process, technological feasibility is established
upon completion of a working model. Costs incurred by the Company
between completion of the working model and the point at which the
product is ready for general release have been insignificant.
Income Taxes
The Company utilizes the liability method of accounting for income
taxes. Under this method, deferred tax liabilities and assets are
determined based on the difference between the financial statement and
the tax basis of assets and liabilities using enacted tax rates in
effect for the period in which the differences are expected to reverse.
Valuation allowances are established, when necessary, to reduce
deferred tax assets to the amount expected to be realized.
Stock-based Compensation
The Company accounts for stock-based employee compensation arrangements
in accordance with the provisions of Accounting Principles Board
("APB") No. 25, "Accounting for Stock Issued to Employees," and
complies with the disclosure requirements of SFAS No. 123, "Accounting
for Stock-Based Compensation." Under APB No. 25, compensation cost, if
any, is recognized over the respective vesting period based on the
difference, on the date of grant, between the fair value of the
Company's common stock and the grant price.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This statement establishes standards for the reporting and
display of comprehensive income and its components in a full set of
general-purpose financial statements. Comprehensive income generally
represents all changes in shareholders' equity during the period except
those resulting from investments by, or distributions to, shareholders.
SFAS No. 130 is effective for fiscal years beginning after December 15,
1997 and requires restatement of earlier periods presented. SFAS No.
130 has no impact on the company's financial statements as the Company
has no other elements of comprehensive income other than net income.
3. CONCENTRATIONS OF CREDIT RISK:
Financial instruments, which subject the Company to concentrations of
credit risk, consist primarily of cash and cash equivalents, and trade
accounts receivable. The Company maintains cash and cash equivalents
with various domestic financial institutions. The Company performs
periodic evaluations of the relative credit standing of these
institutions. From time to time, the Company's cash balances with any
one financial institution may exceed Federal Deposit Insurance
Corporation insurance limits.
The Company's revenue for 1997, 1998 and the nine months ended
September 30, 1999 was from software sales, consulting and support
services to two, four and twelve customers, respectively.
4. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED,
--------------------------- -------------
1997 1998 SEPTEMBER 30,
------------ ---------- -------------
Computer equipment ....................... $ -- $ 31,017 $ 303,670
Furniture and equipment .................. -- 25,000 40,363
Leasehold improvements ................... -- -- 122,726
Less accumulated depreciation and
Amortization ......................... -- (12,573) (48,435)
------------ ---------- -------------
Total .............................. $ -- $ 43,444 $ 418,324
------------ ---------- -------------
------------ ---------- -------------
5. INCOME TAXES:
The primary component of temporary differences, which give rise to
deferred tax assets, is related to net operating loss carryforward. The
gross deferred tax assets were $110,758 and $1,016,428 at 1997 and
1998, respectively. Due to the limited operating history of the Company
and the losses incurred to date, management believes a full valuation
allowance for the deferred tax assets are necessary. The valuation
allowance increased by $905,670 during 1998.
At December 31, 1997 and 1998, the Company had Federal taxable net
operating loss of $276,862 and $2,544,734, respectively.
The Federal net operating loss carry forwards will begin to expire in
December 31, 2017.
As a result of the Company's operating losses, the provision for income
taxes in the accompanying financial statements reflects the current
minimum California State franchise tax liability of $800 for each year
ending 1997 and 1998.
6. COMMITMENTS AND CONTINGENCIES:
LEASES
The Company leases its facility, certain computer and office equipment
under non-cancelable operating leases with terms ranging up to six
years. The future minimum lease obligations under non-cancelable
operating leases at December 31, 1998 are as follows:
1999 $193,514
2000 740,359
2001 492,255
2002 448,709
2003 448,709
Thereafter 224,355
---------
$2,547,901
Lease expense for the nine months ended September 30, 1998 and 1999
amounted to $51,113 and $256,478, respectively. Lease expense for the
years ended December 31, 1997 and 1998 amounted to $6,049 and $47,115,
respectively.
EMPLOYMENT AGREEMENTS
The Company maintains employment agreements with certain executive
officers of the Company. The employment agreements provide for minimum
salary levels, incentive compensation and severance benefits, among
other items.
7. SHAREHOLDER'S EQUITY:
SERIES A CONVERTIBLE PREFERRED STOCK
Series A Convertible Preferred Stock has the same voting and dividend
participation rights as common stock, and has a preference in
liquidation over common stock. Under the terms of stock agreements, all
Series A Preferred Stock maybe converted to common stock upon the
consummation of an initial public offering in accordance with their
terms or if the holders of such preferred shares approve the
conversion.
SERIES B CONVERTIBLE PREFERRED STOCK
In June 1998, the Company issued 6,371,360 shares of Series B
Convertible Preferred Stock for $5,250,260 or $0.824 per share to raise
capital for further expansion. The Series B Convertible Preferred Stock
has the same voting and dividend participation rights as common stock,
and has a preference in liquidation over common stock.
SERIES C CONVERTIBLE PREFERRED STOCK
In April 1999, the Company issued 3,928,650 shares of Series C
Convertible Preferred Stock. In May 1999, the Company issued an
additional 270,270 shares of Series C Convertible Preferred Stock. A
total of 4,198,920 shares were issued at $1.85 per share, raising a
total of $7,768,002 for further expansion. The Series C Convertible
Preferred Stock has the same voting and dividend participation rights
as common stock, and has a preference in liquidation over common stock.
COMMON STOCK OPTIONS
The Company's Stock Option Plan, adopted in February 1998, and amended
in June 1998, authorized the granting of incentive and nonqualified
stock options. The Board of Directors approved and the shareholders
ratified up to an aggregate of 4,553,000 shares for issuance under this
plan. Options granted under the Plan may be Incentive Stock Options or
Non-statutory
Stock Options, as determined by the Administrator at the
time of grant. Stock Purchase Rights may also be granted under the
Plan. Options granted as Incentive Stock Options shall have an exercise
price no less than 100% of the Fair Market Value on date of grant.
Options granted as Non-statutory Stock Options shall have an exercise
price of no less than 85% of Fair Market Value on the date of grant. As
of December 31, 1998, no options granted pursuant to the Plan have been
exercised.
The following is a summary of stock option activity during fiscal 1998
and during the nine-months ended September 30, 1999:
RANGE OF EXERCISE
SHARES PRICE
----------- -----------------
Outstanding, December 31, 1997 .................. -- --
----------- -----------------
Granted ...................................... 3,787,154 $0.10 to $0.25
Canceled ..................................... -- --
Exercised .................................... -- --
-----------
Outstanding, December 31, 1998 .................. 3,787,154 $0.10 to $0.25
-----------
Granted ...................................... 779,032 $0.25 to $0.90
Canceled ..................................... (878,710) $0.10 to $0.90
Exercised .................................... (38,125) $0.10 to $0.15
-----------
Outstanding, September 30, 1999 ................. 3,649,351 $0.10 to $0.90
-----------
-----------
Options exercisable at September 30, 1999 ....... 976,188 $0.10 to $0.20
Options available for future grant .............. 865,524 --
8. CONVERTIBLE NOTES:
In January 1998, the Company entered into three convertible notes
payable agreements in exchange for $250,000 in cash. As part of these
agreements, the note holders had the right to convert the notes payable
into a predetermined number of shares of preferred stock during the
next round of financing and in addition were issued warrants expiring
on January 28, 2003 allowing the note holders to purchase up to 303,398
additional shares of Series B Convertible Preferred Stock at $0.824 per
share (see Note 7). The notes became due and payable on June 15, 1998
and were converted into 303,398 shares of Series B Convertible
Preferred Stock with the same rights as the other Series B Convertible
Preferred Stock holders as noted above.
9. SUBSEQUENT EVENT (UNAUDITED):
In April 1999, the Company authorized the sale and issuance of
4,594,595 shares of Series C Preferred Stock at $1.85 per share. The
Company received approximately $7,300,000 related to this financing.
On November 19, 1999, Ask Jeeves, Inc. Inc. entered into an Agreement
and Plan of Merger ("Agreement") with Net Effect Systems, Inc. Pursuant
to the Agreement, all outstanding shares of Net Effect Systems, Inc.
were converted into 1,631,880 million shares of Ask Jeeves, Inc. Common
Stock, and options to purchase Net Effect Systems, Inc. Common Stock
were converted into options to purchase 497,342 shares of Ask Jeeves,
Inc. Common Stock. The merger will be accounted for as a pooling of
interests.