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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q
----------------
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
COMMISSION FILE NUMBER 000-26365
----------------
GOTO.COM, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-4652060
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
140 WEST UNION STREET
PASADENA, CALIFORNIA 91103
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
TELEPHONE: (626) 685-5600
(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.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
45,532,469 shares of Common Stock, $0.0001 par value, as of September 30, 1999
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GOTO.COM, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
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<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Balance Sheets as of September 30, 1999 and December 31, 1998.................................... 3
Condensed Statements of Operations for the three and nine months ended September 30, 1999 and 1998......... 4
Condensed Statements of Cash Flows for the nine months ended September 30, 1999 and 1998................... 5
Notes to Condensed Financial Statements.................................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 9
Item 3. Quantitative and Qualitative Disclosures About Market Risks................................................ 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.......................................................................................... 21
Item 2. Changes in Securities and Use of Proceeds.................................................................. 21
Item 6. Exhibits and Reports on Form 8-K........................................................................... 21
Signatures.............................................................................................................. 22
Index to Exhibits....................................................................................................... 23
</TABLE>
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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GOTO.COM, INC.
CONDENSED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .................................. $ 32,967 $ 16,357
Short-term investments ..................................... 78,221 --
Accounts receivable, net ................................... 2,623 356
Other receivables .......................................... 765 90
Prepaid expenses and other ................................. 888 60
Prepaid marketing expenses ................................. 4,392 1,741
--------- ---------
Total current assets ......................................... 119,856 18,604
Property and equipment, net .................................. 7,605 1,336
Long-term investments ........................................ 4,962 --
Other assets ................................................. 8 29
--------- ---------
Total assets ................................................. $ 132,431 $ 19,969
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ........................................... $ 7,310 $ 2,816
Accrued expenses ........................................... 2,711 282
Deferred revenue ........................................... 1,334 181
Current portion of debt .................................... 126 --
Current portion of capital lease obligations ............... 730 110
--------- ---------
Total current liabilities .................................... 12,211 3,389
Long-term debt ............................................... 35 --
Long-term capital lease obligations .......................... 951 183
STOCKHOLDERS' EQUITY:
Convertible Preferred Stock; $0.0001 par value, 10,000
shares authorized:
Series A Preferred Stock;
Shares issued and outstanding-- none and 471 for
September 30, 1999 and December 31, 1998, respectively -- 212
Series B and C Preferred Stock;
Shares issued and outstanding-- none and 19,022 for
September 30, 1999 and December 31, 1998, respectively -- 28,433
Common Stock, $0.0001 par value, 200,000 shares
authorized:
Shares issued and outstanding-- 45,532 and 10,444
for September 30, 1999 and December 31, 1998,
respectively ......................................... 5 1
Additional paid-in capital on Common Stock .............. 158,707 3,212
Deferred compensation ................................... (3,307) (1,318)
Accumulated deficit ..................................... (36,165) (14,143)
Accumulated other comprehensive loss .................... (6) --
--------- ---------
Total stockholders' equity ................................... 119,234 16,397
--------- ---------
Total liabilities and stockholders' equity ................... $ 132,431 $ 19,969
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed
financial statements.
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GOTO.COM, INC.
CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS; UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
1999 1998 1999 1998
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Revenue...................................... $ 8,428 $ 185 $ 13,511 $ 242
Cost of revenue.............................. 1,940 596 4,242 707
-------- -------- -------- --------
Gross profit (loss).......................... 6,488 (411) 9,269 (465)
Operating expenses:
Marketing, sales and service............... 9,852 3,697 20,209 4,990
General and administrative................. 4,122 511 8,101 926
Product development........................ 1,155 302 2,654 620
Amortization of deferred compensation...... 586 525 2,986 911
-------- -------- -------- --------
15,715 5,035 33,950 7,447
-------- -------- -------- --------
Loss from operations......................... (9,227) (5,446) (24,681) (7,912)
Other income:
Interest income, net....................... 1,605 139 2,133 188
Other income............................... -- -- 526 --
-------- -------- -------- --------
Loss before provision for income taxes....... (7,622) (5,307) (22,022) (7,724)
Provision for income taxes................... -- -- -- --
-------- -------- -------- --------
Net loss..................................... $ (7,622) $ (5,307) $(22,022) $ (7,724)
========== ======== ======== ========
Pro forma basic and diluted net loss per share $ (0.18) $ (0.24) $ (0.60) $ (0.48)
Historical basic and diluted net loss per share $ (0.18) $ (0.51) $ (0.95) $ (0.76)
Weighted average shares used to compute
pro forma basic and diluted net loss per
share........................................ 42,985 22,420 36,415 15,998
Weighted average shares used to compute
historical basic and diluted net loss per
share........................................ 42,985 10,404 23,065 10,197
</TABLE>
The accompanying notes are an integral part of these condensed
financial statements.
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GOTO.COM, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS; UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
-----------------
1999 1998
------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ............................................... $ (22,022) $ (7,724)
Adjustments to reconcile net loss to net cash
used in
operating activities:
Amortization of deferred stock option compensation . 2,986 911
Other common stock and warrants expense ............. 247 299
Depreciation and amortization ....................... 1,361 158
Changes in operating assets and liabilities:
Accounts receivable ................................. (2,267) 5
Other receivables ................................... (675) (17)
Prepaid expenses and other .......................... (830) (1,512)
Prepaid marketing expenses .......................... (2,651) --
Accounts payable and accrued expenses ............... 6,923 1,648
Deferred revenues ................................... 1,153 --
--------- ---------
Net cash used in operating activities .................. (15,775) (6,232)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term and long-term investments, net (83,189) --
Capital expenditures for property and equipment ...... (6,844) (1,413)
--------- ---------
Net cash used in investing activities .................. (90,033) (1,413)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of Common Stock, net ........ 96,662 2
Proceeds from the issuance of Preferred Stock .......... 24,969 14,138
Proceeds from lease line ............................... 1,203 330
Repayments under lease line ............................ (340) --
Repayment of debt ...................................... (76) --
Proceeds from stockholder funding ...................... -- 2,500
--------- ---------
Net cash provided by financing activities .............. 122,418 16,970
Net increase in cash and cash equivalents .............. 16,610 9,325
Cash and cash equivalents at beginning of period ....... 16,357 87
--------- ---------
Cash and cash equivalents at end of period ............. 32,967 9,412
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed
financial statements.
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GOTO.COM, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. THE COMPANY, BASIS OF PRESENTATION
GoTo.com, Inc. (the Company or GoTo.com) was incorporated on September 15,
1997, in the State of Delaware and officially launched its Web site on June 1,
1998. GoTo.com has created and operates an online marketplace that facilitates
introductions between consumers who search the Internet for information,
products or services using keyword terms and advertisers who bid in an ongoing
auction for priority placement in the search results for those keywords.
Advertisers competitively bid on keyword search terms that are most relevant to
their business offerings. Advertisers are rank-ordered in search results based
on bid amounts, which are expressed as the amount the advertiser pays GoTo.com
for each consumer click-through to the advertiser's Web site. The advertiser
with the highest bid is listed first in the search results, with the remaining
advertisers appearing in descending bid amount order. Priority placement
increases the likelihood that a consumer will click through to the advertiser's
Web site. Consumers access GoTo.com at our branded stand-alone Web site and
through Web sites that participate in the search syndication network. The
Company operates in one reportable business segment.
The accompanying unaudited condensed 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, results of operations and cash flows for the periods shown. The
results of operations for such periods are not necessarily indicative of the
results expected for a full year or for any future period.
Short-term and long-term investments consist of corporate debt securities
and certificate of deposits that have original maturities ranging from 4 months
to 24 months. GoTo.com has classified all corporate debt securities and
certificate of deposits as available-for-sale. Available-for-sale securities are
carried at fair value, with unrealized gains and losses included in "accumulated
other comprehensive loss" as a separate component of stockholders' equity net of
applicable income taxes. As of September 30, 1999, the fair value of these
securities approximated cost and the unrealized holding losses of approximately
$6,000 were not material. Realized gains and losses and declines in value judged
to be other-than-temporary on available-for-sale securities are included in
other income.
Property and equipment is stated at cost. Property and equipment consists
of computer hardware, computer software, which includes costs incurred in the
application development stage for computer software developed for internal use,
and furniture and fixtures. Depreciation is provided using the straight-line
method based upon estimated useful lives of the assets, which range from two to
five years. Leasehold improvements are recorded at cost. Amortization is
provided using the straight-line method over the shorter of the term of the
related lease or estimated useful lives of the assets.
These financial statements should be read in conjunction with the
consolidated financial statements and related notes included in the Company's
prospectus dated June 18, 1999.
2. INITIAL PUBLIC OFFERING, CONVERSION OF PREFERRED STOCK
In June 1999, the Company completed its initial public offering and issued
6,900,000 shares of its common stock at a price of $15.00 per share. The Company
received approximately $94.8 million in cash, net of underwriting discounts,
commissions and other offering costs. Simultaneously with the closing of the
initial public offering, each outstanding share of Series A, B, C and D
Preferred Stock was automatically converted into one share of common stock.
3. EARNINGS (LOSS) PER SHARE COMPUTATION
Historical basic and diluted net loss per share is computed using the
weighted average number of shares of common stock outstanding excluding the
unvested portion of stock issued in connection with the exercise of such options
subject to repurchase. The effect of outstanding stock options, convertible
preferred stock and unvested stock are excluded from the calculation of
historical diluted net loss per share for the periods presented as their
inclusion would be antidilutive.
Pro forma basic and diluted net loss per share is computed using the
historical weighted average number of shares of common stock outstanding plus
the weighted average number of shares resulting from the assumed conversion of
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all outstanding convertible preferred stock as though such conversion occurred
at the beginning of the period or original date of issuance, if later. The
effect of outstanding stock options and unvested stock are excluded from the
calculation of pro forma diluted net loss per share for the periods presented as
their inclusion would be antidilutive.
Options to purchase approximately 2.5 million and 4.9 million shares of
common stock were outstanding as of September 30, 1999 and 1998, respectively.
In addition, as of September 30, 1999, there were approximately 2.3 million
shares of unvested common stock outstanding that were issued in connection with
the exercise of options and are subject to repurchase.
The following table sets forth the computation of historical basic and
diluted net loss per share and pro forma basic and diluted net loss per share
for the periods indicated (in thousands, except per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- -------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Numerator:
Net loss ................................................ $ (7,622) $ (5,307) $(22,022) $ (7,724)
======== ======== ======== ========
Denominator:
Denominator for historical basic and
diluted calculation--Weighted average shares ............ 42,985 10,404 23,065 10,197
======== ======== ======== ========
Weighted average effect of pro forma securities:
Series A Preferred Stock ................................ -- 471 302 321
Series B Preferred Stock ................................ -- 8,312 5,326 4,402
Series C Preferred Stock ................................ -- 3,233 6,862 1,078
Series D Preferred Stock ................................ -- -- 860 --
--------- -------- ------- ---------
Denominator for pro forma basic and diluted calculation . 42,985 22,420 36,415 15,998
======== ======== ======== ========
Pro forma basic and diluted net loss per share ............ $ (0.18) $ (0.24) $(0.60) $ (0.48)
======== ======== ======== ========
Historical basic and diluted net loss per share ........... $ (0.18) $ (0.51) $(0.95) $ (0.76)
======== ======== ======== ========
</TABLE>
4. LITIGATION
On February 18, 1999, GoTo.com sued The Walt Disney Company and certain of
its affiliates, including Infoseek Corporation, in the United States District
Court for the Central District of California, alleging violation of federal
trademark law and unfair competition. The lawsuit is based upon these companies'
use of a "GO" design mark to provide Internet services, including a search
engine in connection with their "Go Network." GoTo.com is seeking to prevent
these companies from using the "GO" design mark as well as other remedies.
The defendants have asserted counterclaims against GoTo.com. GoTo.com
believes that the proposed counterclaims are without merit and will defend
against them vigorously.
5. AGREEMENT WITH NETSCAPE COMMUNICATIONS
GoTo.com and Netscape Communications, a subsidiary of America Online, Inc.
entered into a one-year agreement beginning July 1, 1999 under which GoTo.com
will become a leading search provider for Netscape's Net Search program.
GoTo.com is obligated to make minimum payments totaling $10,250,000 over the
term of the agreement.
6. AGREEMENT WITH MICROSOFT CORPORATION
Our agreement with Microsoft Corporation expired on September 30, 1999,
although we have continued to receive traffic from this source. We were notified
on November 4, 1999 that Microsoft Corporation had decided to discontinue their
current Premier Search Program, which includes other search services, and
because this program has been terminated, Microsoft Corporation will cease to
deliver traffic to us during the fourth quarter of 1999, perhaps during the
month of November 1999. Even though we currently anticipate growth from other
existing and new traffic sources, since 20 to 25 percent of our current traffic
is from the Premier Search Program, if we are unable to replace this traffic
with other sources it may materially, adversely impact our revenue. In addition,
we do not anticipate our historical growth rate to continue.
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7. RELATED PARTY TRANSACTIONS
During 1998, GoTo.com shared facilities and received certain management
services including certain accounting, payroll processing, access to shared
local area computer communications network, and general business insurance from
Bill Gross' idealab!, which is an affiliate of idealab! Holdings, L.L.C., a
significant stockholder of GoTo.com. Bill Gross' idealab! charged a management
fee for the use of its facilities and the services provided. During 1998 and
through January 1999, Bill Gross' idealab! provided certain payroll processing
services for GoTo.com and charged a fee for those services. On February 1, 1999,
GoTo.com entered into a lease with Bill Gross' idealab! for office space. The
lease is cancelable with a 90 day written notice. GoTo.com also uses a shared
local area computer communications network. In 1999, GoTo.com entered into a
lease agreement with Bill Gross' idealab! for additional office space. The term
of the agreement is from August 1999 through January 2000. The total management
and leasing fee associated with both facilities was approximately $226,000 and
$75,000 during the nine-month period ended September 30, 1999 and year ended
December 31, 1998, respectively. Management believes these amounts are
materially representative of the fair value of services provided. From inception
through March 1, 1998, Bill Gross, GoTo.com's founder and a principal of
idealab! Holdings, L.L.C., was the President and Chief Executive Officer of
GoTo.com and received no compensation for his service. The value of these
services was not material to the financial statements. During March 1998,
certain stockholders provided temporary funding of $2.5 million to GoTo.com
which carried no interest. In early May 1998 this funding was contributed to
GoTo.com in return for Series B Preferred Stock.
8. SUBSEQUENT EVENT
GoTo.com and EarthLink entered into a two-year agreement beginning January
1, 2000 under which GoTo.com will become the default search engine on
EarthLink's Internet service provider's Personal Start Page, EarthLinks's Web
site and EarthLink's Finance Center personal finance portal. GoTo.com is
obligated to make minimum payments totaling $10 million over the term of the
agreement.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIS DOCUMENT CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. WE USE WORDS SUCH AS "ANTICIPATES," "BELIEVES," "PLANS,"
"EXPECTS," "FUTURE" AND "INTENDS" AND SIMILAR EXPRESSIONS TO IDENTIFY
FORWARD-LOOKING STATEMENTS. YOU SHOULD NOT PLACE UNDUE RELIANCE ON THESE
FORWARD-LOOKING STATEMENTS, WHICH APPLY ONLY AS OF THE DATE OF THIS DOCUMENT.
OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE IN OUR FORWARD-LOOKING
STATEMENTS FOR MANY REASONS, INCLUDING WITHOUT LIMITATION THE RISKS DESCRIBED IN
"RISKS THAT COULD AFFECT OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS,"
BELOW AND ELSEWHERE IN THIS DOCUMENT AND THOSE RISKS DESCRIBED IN "RISK FACTORS"
IN OUR REGISTRATION STATEMENT NO. 333-76415, AS AMENDED, FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION.
OVERVIEW
GoTo.com has created and operates an online marketplace that introduces
consumers who search the Internet using keyword terms to advertisers who bid in
an ongoing auction for priority placement in the search results for those
keywords. Each advertiser pays GoTo.com the amount of its bid whenever a
consumer clicks on the advertiser's search listings in the search results.
Advertisers must pay for each click-through, so they bid only on keywords
relevant to their offerings. Further, GoTo.com search result pages are not
filled with multiple banner advertisements, which allows these pages to load
quickly, and a search on the GoTo.com service leads directly to a list of 40
results per page. Consequently, we believe GoTo.com offers consumers quick and
easy search and relevant search results. In addition, the GoTo.com marketplace
enables each advertiser to choose the bid amount and advertisement placement
that is optimal for its business, which we believe provides advertisers with a
cost-effective way to target consumers. Consumers access the GoTo.com search
service at our Web site and through what we call the "search syndication
network," a network of Web sites that have integrated the GoTo.com search
service into their sites or that direct consumer traffic to our site.
A growing number of consumers using the GoTo.com search service at Web
sites across the Internet increases the incentive for advertisers to bid in the
GoTo.com marketplace. In turn, a breadth of relevant advertiser links increases
the value to consumers of using the GoTo.com search service. Consequently, we
believe a large and active base of advertisers, consumers and network affiliates
in our marketplace can stimulate growth in bidding, searches and paid
click-through transactions.
The number of paid introductions in our marketplace, that is, the number
of consumers clicking on paid search results that were bid on by our
advertisers, was more than 54 million for the quarter ended September 30, 1999.
Historically, we had 2 million paid introductions in the quarter ended September
30, 1998; 7 million paid introductions in the quarter ended December 31, 1998;
15 million paid introductions in the quarter ended March 31, 1999; and 31
million paid introductions in the quarter ended June 30, 1999. We believe the
results for the periods prior to the three-month period ended September 30, 1998
are not relevant as our service was in its initial stage. In order to continue
to grow revenues we will need to increase our advertiser base to increase the
number of paid listings. We will also need to increase our consumer base to
increase the number of click-throughs. Our agreement with Microsoft Corporation
expired on September 30, 1999, although we have continued to receive traffic
from this source. We were notified on November 4, 1999 that Microsoft
Corporation had decided to discontinue their current Premier Search Program,
which includes other search services, and because this program has been
terminated, Microsoft Corporation will cease to deliver traffic to us during the
fourth quarter of 1999, perhaps during the month of November 1999. Even though
we currently anticipate growth from other existing and new traffic sources,
since 20 to 25 percent of our current traffic is from the Premier Search
Program, if we are unable to replace this traffic with other sources it may
materially, adversely impact our revenue. In addition, we do not anticipate our
historical growth rate to continue. Our growth rate and results depend on our
ability to continue to increase the number of advertisers who use our service,
the amount our advertisers spend on our service and the number of consumers who
use our service. We anticipate these variables to fluctuate, affecting our
growth rate and results.
The average price per paid introduction was $0.14 for the quarter ended
September 30, 1999. This price results from advertisers' ongoing, online, real
time bidding for priority placement. Historically, the average price per paid
introduction was $0.03 for the quarter ended September 30, 1998; $0.05 for the
quarter ended December 31, 1998; $0.08 for the quarter ended March 31, 1999; and
$0.11 for the quarter ended June 30, 1999. We believe the results for the
periods prior to the three-month period ended September 30, 1998 are not
relevant because our service was only in its initial stage. Since we operate an
ongoing auction for priority placement, it is difficult to forecast the future
growth of the average price per paid introduction, as the advertiser, rather
than GoTo.com determines the price each advertiser pays.
GoTo.com was incorporated in September of 1997 and has a limited operating
history. We launched a proof-of-concept version of our search service in the
fiscal year ended December 31, 1997. Our pay-for-performance service was
announced in February 1998, and following further proof-of-concept testing, was
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officially launched on June 1, 1998. GoTo.com has devoted significant resources
to launching its search service, including developing an infrastructure and
building a management team. GoTo.com's losses for the year ended December 31,
1998 and the nine months ended September 30, 1999 were approximately $14.0
million and approximately $22.0 million, respectively.
Our revenue consists of search listing advertisements and banner
advertisements. For the quarter ended September 30, 1999, banner advertisement
revenue constituted less than 10 percent of our revenue. Search listing
advertisement revenue is determined by multiplying the number of click-throughs
on paid search results by the amounts bid for applicable keywords. Search
listing revenue is recognized when earned based on click-through activity to the
extent that the advertiser has deposited sufficient funds with us or collection
is probable. Banner advertisement revenue is recognized when earned under the
terms of the contractual arrangement with the advertiser or advertising agency,
provided that collection is probable.
We believe that our search service will be more attractive to advertisers
as more consumers use it for their search needs and more attractive to consumers
as more advertisers bid for placement in our search results. A significant
component of our expenses consists of costs incurred to attract consumers to our
service. To date, we have primarily attracted consumers through online and
offline marketing, including radio and outdoor advertising as well as
advertising on the Internet. We expect to continue to rely upon these sources
for a significant proportion of consumer searches conducted on our service. Our
future success is dependent upon reducing our consumer acquisition costs and
increasing the revenue we derive from this traffic.
RESULTS OF OPERATIONS
REVENUE
Revenue consists of search listing advertisements and banner
advertisements. For the quarter ended September 30, 1999, banner advertisement
revenue constituted less than 10 percent of our revenue. Revenue was
approximately $8.4 million for the quarter ended September 30, 1999 compared to
approximately $185,000 for the quarter ended September 30, 1998. Revenue was
approximately $13.5 million for the nine months ended September 30, 1999
compared to approximately $242,000 for the nine months ended September 30, 1998.
The increase was the result of continued growth of our marketplace and the
corresponding participants, our advertisers and the number of consumers using
our product. Although we have experienced rapid growth from September 30, 1998
to September 30, 1999, we do not anticipate our historical revenue growth rate
to continue. Also, our agreement with Microsoft Corporation expired on September
30, 1999, although we have continued to receive traffic from this source. We
were notified on November 4, 1999 that Microsoft Corporation had decided to
discontinue their current Premier Search Program, which includes other search
services, and because this program has been terminated, Microsoft Corporation
will cease to deliver traffic to us during the fourth quarter of 1999, perhaps
during the month of November 1999. Even though we currently anticipate growth
from other existing and new traffic sources, since 20 to 25 percent of our
current traffic is from the Premier Search Program, if we are unable to replace
this traffic with other sources it may materially, adversely impact our revenue.
In addition, we do not anticipate our historical growth rate to continue.
COST OF REVENUE
Cost of revenue consists primarily of fees paid to outside service
providers that provide and manage our unpaid listings and costs associated with
maintaining our Web site. Costs associated with maintaining our Web site include
salaries of related personnel, depreciation of Web site equipment, co-location
charges for our Web site equipment and software license fees. Cost of revenue
was approximately $1.9 million for the quarter ended September 30, 1999 compared
to approximately $596,000 for the quarter ended September 30, 1998. Cost of
revenue was approximately $4.2 million for the nine months ended September 30,
1999 compared to approximately $707,000 for the nine months ended September 30,
1998. The increase was primarily due to the increased fees paid to outside
service providers, increased database and hardware capacity requirements and an
increase in the number of personnel required to support our Web site. We
anticipate cost of revenue to continue to increase as our traffic and number of
advertisers increase.
MARKETING, SALES AND SERVICE EXPENSES
Marketing, sales and service expenses consist primarily of our advertising
and promotional expenditures such as online links from other Web sites, banner
advertisements on other sites and public relations, as well as payroll and
related expenses for personnel engaged in marketing, customer service and sales
functions. Marketing, sales and service expenses were approximately $9.9 million
for the quarter ended September 30, 1999 compared to approximately $3.7 million
for the quarter ended September 30, 1998. Marketing, sales and service expenses
were approximately $20.2 million for the nine months ended September 30, 1999
compared to approximately $5.0 million for the nine months ended September 30,
1998. The increase was primarily due to increased distribution of our search
service and the hiring of additional personnel for marketing, sales and service
functions. We believe that continued investment in marketing, sales and service
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and in the increased distribution of our search service is critical to attaining
our strategic objectives and as a result, expect these costs to continue to
increase in the future.
GENERAL AND ADMINISTRATIVE
General and administrative expenses consist primarily of payroll and
related expenses for executive and administrative personnel; facilities;
professional services, including legal; insurance and other general corporate
expenses. General and administrative expenses were approximately $4.1 million
for the quarter ended September 30, 1999 compared to approximately $511,000 for
the quarter ended September 30, 1998. General and administrative expenses were
approximately $8.1 million for the nine months ended September 30, 1999 compared
to approximately $926,000 for the nine months ended September 30, 1998. The
increase was the result of increased headcount and related expenses associated
with the hiring of additional personnel and increased professional services. We
expect general and administrative expenses to continue to increase as we expand
our staff and incur additional costs related to the growth of our business. In
addition, these expenses will vary based on the outcome of our litigation with
The Walt Disney Company and certain of its affiliates.
PRODUCT DEVELOPMENT
Product development expenses consist primarily of payroll and related
expenses for personnel responsible for development of features and functionality
for our service as well as costs incurred in the preliminary project and
post-implementation stage of computer software developed for internal use.
Product development expenses were approximately $1.2 million for the quarter
ended September 30, 1999 compared to approximately $302,000 for the quarter
ended September 30, 1998. Product and development expenses were approximately
$2.7 million for the nine months ended September 30, 1999 compared to
approximately $620,000 for the nine months ended September 30, 1998. The
increase was a result of increased staffing and associated costs relating to
enhancing features and functionality to our Web site and search service. We
believe our continued investment in product development is critical to attaining
our strategic objectives and as a result, expect product development expenses to
continue to increase in the future.
AMORTIZATION OF DEFERRED COMPENSATION
Certain stock options granted during the six-month period ended June 30,
1999 and the year ended December 31, 1998 have been considered to be
compensatory for financial accounting purposes. Total compensation resulting
from these stock options amounted to approximately $7.5 million. This amount
represents the difference between the exercise price of the stock options and
the deemed fair value of our common stock at the time of the grants or
issuances. Compensation associated with these stock options is amortized and
expensed over the applicable vesting periods using a graded methodology.
Approximately $586,000 and $525,000 was amortized and charged to operations for
the quarters ended September 30, 1999 and 1998, respectively. Approximately $3.0
million and $911,000 was amortized and charged to operations for the nine months
ended September 30, 1999 and 1998, respectively.
INTEREST INCOME, NET
Interest income, net consists primarily of earnings on our cash, cash
equivalents and short-term and long-term investments, net of interest expense
attributable to leased equipment and debt. Interest income, net was
approximately $1.6 for the quarter ended September 30, 1999 compared to
approximately $139,000 for the quarter ended September 30, 1998. Interest
income, net was approximately $2.1 million for the nine months ended September
30, 1999 compared to approximately $188,000 for the nine months ended September
30, 1998. The increase was primarily due to increased earnings on cash, cash
equivalents, and short-term and long-term investments in available-for-sale
securities, which increased as a result of our initial public offering.
OTHER INCOME
Other income of approximately $526,000 for the nine months ended September
30, 1999 was due to amounts received from a company in settlement of the early
termination of a distribution agreement.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities totaled approximately $15.8 million
and $ 6.2 million for the nine months ended September 30, 1999 and 1998,
respectively. The increase was due primarily to net losses for the period
partially offset by the increase in the accounts payable and accrued expenses
balances and the increase in amortization of deferred stock option compensation.
Net cash used in investing activities totaled approximately $90.0 million and
$1.4 million for the nine months ended September 30, 1999 and 1998,
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respectively. The increase resulted from purchases of short-term and long-term
investments and capital expenditures for properties and equipment. Net cash
provided by financing activities totaled approximately $122.4 million and $17.0
million for the nine months ended September 30, 1999 and 1998, respectively. The
increase was due primarily to the issuance of common stock through our initial
public offering and the issuance of preferred stock.
On April 14, 1999, we issued 3,628,447 shares of preferred stock for $6.89
per share and received proceeds of approximately $25 million.
On June 18, 1999, we issued 6.9 million shares of common stock through our
initial public offering for $15 per share and received approximately $94.8
million in cash, net of underwriting discounts, commissions and other offering
costs.
Our principal sources of liquidity consisted of cash, cash equivalents and
short-term investments of approximately $111.2 million as of September 30, 1999
and approximately $16.4 million as of December 31, 1998. We also carry long-term
investments of approximately $5.0 million, which we believe is liquid. Although
we have no material long-term commitments for capital expenditures, we
anticipate an increase in our capital expenditures consistent with anticipated
growth of operations, infrastructure and personnel.
We believe that the net proceeds from our initial public offering will be
sufficient to meet our anticipated liquidity needs for working capital
expenditures for at least the next 12 months. We may seek additional capital
through the issuance of debt or equity depending upon the results of operations,
market conditions or unforeseen opportunities. Our future liquidity and capital
requirements will depend upon numerous factors. The pace of expansion of our
operations will affect our capital requirements. We may also have increased
capital requirements in order to respond to competitive pressures. In addition,
we may need additional capital to fund acquisitions of complementary products,
technologies or businesses. Our forecast of the period of time through which our
financial resources will be adequate to support our operations is a
forward-looking statement that involves risks and uncertainties and actual
results could vary materially as a result of the factors described above. If we
require additional capital resources, we may seek to sell additional equity or
debt securities or obtain a bank line of credit. The sale of additional equity
or convertible debt securities could result in additional dilution to our
stockholders. There can be no assurance that any financing arrangements will be
available in amounts or on terms acceptable to us, if at all.
YEAR 2000 COMPLIANCE
We cannot assure you that we will not experience unanticipated negative
consequences from year 2000 problems, including material costs caused by
undetected errors or defects in the technology used in our internal systems.
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. Beginning in the year
2000, these code fields will need to accept four digit entries to distinguish
the year 2000 and 21st century dates from other 20th century dates. As a result,
computer systems and/or software products used by many companies may need to be
upgraded to solve this problem.
Our online services and their associated and supporting tools, Web sites
and infrastructure were designed and developed to be year 2000 compliant. Our
internal systems, including those used to deliver our services, utilize
third-party hardware and software. We have and continue to contact the vendors
of these infrastructure products in order to gauge their year 2000 compliance.
Based on vendors' representations received thus far, we believe that the
third-party hardware and software we use is year 2000 compliant, although we
have not heard from all of these vendors.
To date, we have spent less than an estimated $10,000 to address year 2000
issues. We presently estimate that the total remaining cost of addressing year
2000 issues will not be material. These estimates were derived utilizing a
number of assumptions, including the assumption that we have already identified
any significant year 2000 issues. However, these assumptions may not be
accurate, and actual results could differ materially from those anticipated. In
view of our year 2000 review and remediation efforts to date, the recent
development of our services, the recent installation of our information
technology equipment and systems, we do not consider contingency planning to be
necessary at this time. We believe that the most likely worst case scenario is
that the Internet fails and we are unable to offer our services.
If we discover that certain of our services need modification, or certain
of our third-party hardware and software is not year 2000 compliant, we will try
to make modifications to our services and systems on a timely basis. We do not
believe that the cost of these modifications will materially affect our
operating results. However, we cannot assure you that we will be able to modify
these products, services and systems in a timely, cost-effective and successful
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manner and the failure to do so could have a material adverse effect on our
business and operating results.
Year 2000 compliance issues also could cause a significant number of
companies, including our current advertisers, to reevaluate their current system
needs and, as a result, consider switching to other systems and means of
advertising. This could result in a material adverse effect on our business,
operating results and financial condition. Also, during the next three months
there is likely to be an increased advertiser focus on addressing year 2000
compliance issues, creating the risk that advertisers may reallocate
expenditures to fix year 2000 problems of existing systems. Although we have not
experienced these effects to date, if advertisers defer Internet advertising and
commerce and related services because of such a reallocation, it would adversely
affect our business and operating results.
RISKS THAT COULD AFFECT OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GoTo.com's business, financial condition and results of operations could be
impacted by a number of factors, including without limitation the following
factors.
WE HAVE A LIMITED OPERATING HISTORY.
GoTo.com was founded in September of 1997, officially launched its service
on June 1, 1998 and has a limited operating history. An investor in our common
stock must consider the risks and difficulties frequently encountered by early
stage companies in new and rapidly evolving markets. These risks include our:
o complete dependence on online advertising and consumer search services
with only limited market acceptance;
o need to develop and upgrade our infrastructure, including internal
controls, transaction processing systems, data storage and retrieval
systems and Web site;
o need to manage changing operations; and
o dependence upon and need to hire and retain key personnel.
We cannot assure you that the GoTo.com service will retain its existing, or
attract new, advertisers, consumers and Web sites that include the GoTo.com
search service on their sites or that direct consumer traffic to the GoTo.com
Web site, which we call "network affiliates." We also cannot assure you that
GoTo.com will achieve significant additional revenues or improve operating
margins in future periods. There can be no assurance that GoTo.com's service
will achieve commercial success and, if it does not, the price of our common
stock will decline.
WE HAVE A HISTORY OF LOSSES AND EXPECT FUTURE LOSSES.
We have not achieved profitability. We expect to incur net losses for the
foreseeable future and may never become profitable. We incurred a net loss of
approximately $22.0 million and $14.0 million for the nine months ended
September 30, 1999 and for the year ended December 31, 1998, respectively, and
as of September 30, 1999, we had an accumulated deficit of approximately $36.2
million.
Our limited operating history makes it difficult to forecast our future
operating results. Although our revenue has grown in recent quarters, we cannot
be certain that this growth will continue. We expect to continue to increase our
marketing, sales and service, product development and general and administrative
expenses. As a result we will need to generate significant additional revenue
and/or raise additional funds to achieve profitability. If we do achieve
profitability, we cannot be certain that we will sustain or increase it.
OUR QUARTERLY FINANCIAL RESULTS ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS.
We believe that quarter-to-quarter comparisons of our operating results are
not a good indication of our future performance. It is likely that in some
future quarter our operating results may be below the expectations of public
market analysts and investors and, as a result of these or other factors, the
price of our common stock may fall. Our operating results have varied widely in
the past, and we expect that they will continue to vary significantly from
quarter-to-quarter due to a number of factors, including:
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o demand for our online services by advertisers and consumers, including
the number of searches performed by consumers and the rate at which they
click-through to paid search listing advertisements;
o prices paid by advertisers using the GoTo.com service, which are not
determined by GoTo.com;
o our costs of attracting consumers to the GoTo.com Web site, including
costs of receiving exposure on third-party Web sites and advertising
costs;
o costs related to agreements with suppliers of consumer traffic to our
service and professional services;
o loss of these agreements;
o the mix of paying vs. non-paying search results on the GoTo.com service;
o our ability to significantly increase our distribution channels;
o the amount and timing of operating costs and capital expenditures
relating to expansion of our operations;
o costs and delays in introducing new GoTo.com services and improvements
to existing services;
o changes in the growth rate of Internet usage and acceptance by
consumers of electronic commerce;
o technical difficulties, system failures or Internet downtime;
o government regulations related to the Internet;
o our ability to upgrade and develop our information technology systems
and infrastructure;
o costs related to acquisitions of technologies or businesses; and
o general economic conditions, as well as those specific to the Internet
and related industries.
As a result of our limited operating history, it is difficult to accurately
forecast our revenue, and we have limited meaningful historical financial data
upon which to base planned operating expenses. We plan to significantly increase
our operating expenses to expand our marketing and sales operations, broaden our
customer support capabilities and fund greater levels of product development. We
base our current and future expense levels on our operating plans and estimates
of future revenue, and our expenses are relatively fixed. Revenue and operating
results are difficult to forecast because they generally depend upon the volume
of the searches conducted on our service, the amounts bid by advertisers for
keyword search listings on the service and the number of advertisers that bid on
the service, none of which are under our control. As a result, we may be unable
to adjust our spending in a timely manner to compensate for any unexpected
revenue shortfall. We also may be unable to increase our spending and expand our
operations in a timely manner to adequately meet user demand to the extent it
exceeds our expectations.
OUR SUCCESS DEPENDS UPON ACHIEVING A LARGE AND ACTIVE BASE OF ADVERTISERS AND
CONSUMERS.
Our ability to increase the volume of transactions on our service and the
amounts bid by our advertisers is dependent upon achieving market acceptance
from more advertisers and consumers using our service. Most potential
advertisers have only limited experience advertising on the Internet and have
not devoted a significant portion of their advertising expenditures to Internet
advertising. Advertising through priority placement on our search service in
particular has been introduced only recently, and we cannot predict the level of
its acceptance as an advertising medium. Our service may not achieve significant
acceptance by consumers. Among other things, because our service prioritizes
search results based on advertising bids associated with keywords rather than on
algorithmic or other traditional search and retrieval technologies, consumers
may perceive our results to be less objective than those provided by traditional
search methods. Failure to achieve and maintain a large and active base of
advertisers and consumers would seriously harm our business.
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WE DEPEND ON A LIMITED NUMBER OF SOURCES TO DIRECT CONSUMERS TO OUR SERVICE TO
CONDUCT SEARCHES.
The consumers who conduct searches on our service come from a limited
number of sources. Our sources for consumers conducting searches are providers
of Internet browsers such as Netscape Communicator and Microsoft Internet
Explorer; aggregators of search offerings of various providers; our Web site;
banner advertising; and the search syndication network. Our agreement with
Microsoft Corporation expired on September 30, 1999, although we have continued
to receive traffic from this source. We were notified on November 4, 1999 that
Microsoft Corporation had decided to discontinue their current Premier Search
Program, which includes other search services, and because this program has been
terminated, Microsoft Corporation will cease to deliver traffic to us during the
fourth quarter of 1999, perhaps during the month of November 1999. Even though
we currently anticipate growth from other existing and new traffic sources,
since 20 to 25 percent of our current traffic is from the Premier Search
Program, if we are unable to replace this traffic with other sources it may
materially, adversely impact our revenue. In addition, we do not anticipate our
historical growth rate to continue. Although sources of consumer traffic to our
service fluctuate, in any given month we typically depend upon one or a few of
these sources for a significant majority of traffic and searches conducted on
our service. We generally obtain traffic from these sources through short-term
agreements. There can be no assurance that we will be successful in renewing any
of these agreements or entering into new distribution agreements on commercially
acceptable terms.
OUR FUTURE SUCCESS IS DEPENDENT UPON FURTHER DEVELOPING AND ENHANCING THE SEARCH
SYNDICATION NETWORK.
We believe that our future success in penetrating our target markets
depends in part on our ability to further develop and maintain relationships
with network affiliates, who collectively form what we call the "search
syndication network." These network affiliates provide their users with GoTo.com
search capabilities on their sites or direct their traffic to our Web site. We
believe these relationships are important in order to facilitate broad market
acceptance of our service and enhance our sales. Our future ability to attract
consumers to our service is dependent upon the growth of the search syndication
network, which is new and unproven. Our agreements with network affiliates are
generally terminable at will by either party at any time. If we are unable to
successfully develop and maintain relationships with network affiliates in our
search syndication network, our business will be damaged.
WE ARE DEPENDENT UPON OTHER COMPANIES WHO SUPPLY SERVICES TO US.
We also depend on non-distribution related relationships. For example,
following the paid advertising search results offered to consumers on our
service, we offer search results provided by Inktomi Corporation. We rely on
Inktomi as the sole source of these additional search results, which constitute
a very high percentage of the search results displayed by GoTo.com. We also rely
on 24/7 Media, Inc. to provide advertising sales for us as well as for some
participants in the search syndication network. The loss of either of these key
relationships, which are maintained under short-term agreements, could damage
our business. If we are unable to develop future key relationships or maintain
and enhance our existing relationships, our business will be damaged.
OUR INDUSTRY IS HIGHLY COMPETITIVE, AND WE CANNOT ASSURE YOU THAT WE WILL BE
ABLE TO COMPETE EFFECTIVELY.
The market for Internet products, services and advertising is new, rapidly
evolving and intensely competitive. GoTo.com currently or potentially competes
with many other providers of Web directories, search and information services,
as well as traditional media, for consumer attention and advertising
expenditures. We expect competition to intensify in the future. Barriers to
entry may not be significant, and current and new competitors may be able to
launch new Web sites at a relatively low cost. Accordingly, we believe that our
success will depend heavily upon achieving significant market acceptance before
our competitors and potential competitors introduce competing services.
GoTo.com competes with online services, other Web sites and advertising
networks such as DoubleClick Inc., 24/7 Media, Inc. and NetGravity, Inc., as
well as traditional offline media such as television, radio and print for a
share of advertisers' total advertising budgets. We believe that the number of
companies selling Web-based advertising and the available inventory of
advertising space has recently increased substantially. Accordingly, GoTo.com
may face increased pricing pressure for the sale of advertisements and direct
marketing opportunities, which could adversely affect our business and operating
results.
GoTo.com also competes with providers of Web directories, search and
information services, all of whom offer advertising, including, among others,
America Online, Inc. (AOL.com, Netfind and Netscape Netcenter), Ask Jeeves,
Inc., CNET, Inc. (Snap), Excite, Inc. (including WebCrawler and Magellan),
Inktomi Corporation, LookSmart, Ltd., AltaVista, Google, Inc., Lycos, Inc.
(including HotBot), OpenDirectory, Inc., Microsoft Corporation (LinkExchange,
Inc. and msn.com), The Walt Disney Company/Infoseek Corporation (including the
Go Network) and Yahoo! Inc. In addition, we expect that other companies will
offer directly competing services in the future.
Many of these competitors, as well as potential entrants into our market,
have longer operating histories, larger customer or user bases, greater brand
recognition and significantly greater financial, marketing and other resources
than we do. Many of these current and potential competitors can devote
substantially greater resources to promotion and Web site and systems
development than we can. In addition, as the use of the Internet and other
online services increases, larger, well-established and well-financed entities
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may continue to acquire, invest in or form joint ventures with providers of Web
directories, search and information services or advertising solutions, and
existing providers of Web directories, search and information services or
advertising solutions may continue to consolidate. In addition, providers of
Internet browsers and other Internet products and services who are affiliated
with providers of Web directories and information services in competition with
the GoTo.com service may more tightly integrate these affiliated offerings into
their browsers or other products or services. Any of these trends would increase
the competition we face and could adversely affect our business and operating
results.
WE ARE DEPENDENT UPON MAINTAINING AND EXPANDING OUR COMPUTER AND COMMUNICATIONS
SYSTEMS.
Our failure to achieve or maintain high capacity data transmission without
system downtime and achieve improvements to our transaction processing systems
and network infrastructure would adversely affect our business and results of
operations. We believe that our current transaction-processing systems and
network infrastructure are insufficient to support our future growth. Although
we are enhancing and expanding our transaction-processing systems and network
infrastructure, we have experienced periodic systems interruptions and
infrastructure failures, which we believe will continue to occur.
WE MUST MAINTAIN AND CONTINUE TO UPGRADE OUR NEW FINANCIAL AND ACCOUNTING
SYSTEMS.
If we are not able to maintain our new financial and accounting systems and
upgrade those systems in accordance with our growth, we may not have adequate,
accurate or timely financial information. Failure to have adequate, accurate or
timely financial information would harm our business and could lead to
volatility in our stock price. We are in the process of upgrading certain sales
databases used for finance, sales and account management. If we grow rapidly, we
will face additional challenges in upgrading and maintaining these systems.
OUR ADVERTISING REVENUE IS CONCENTRATED AMONG A LIMITED NUMBER OF ADVERTISERS.
If our major advertisers were to substantially cut back advertising or stop
using our services, our business would be seriously harmed. A significant
majority of our total revenue is derived from a small proportion of our
advertisers. We believe that a substantial amount of revenue from advertising
sales in any given future period may come from a relatively small number of
advertisers. We do not have formal contractual relationships with many of our
advertisers and when we do have contracts, most are terminable at any time by
the advertiser. As a result, we cannot assure you that any of our advertisers
will purchase advertising from us in the future.
CONTINUED ADOPTION OF THE INTERNET AS A METHOD OF CONDUCTING BUSINESS IS
NECESSARY FOR OUR FUTURE GROWTH.
The failure of the Internet to continue to develop as a commercial and
business medium would adversely affect our business. The widespread acceptance
and adoption of the Internet by traditional businesses for conducting business
and exchanging information is likely only if the Internet provides these
businesses with greater efficiencies and improvements.
FAILURE TO EXPAND INTERNET INFRASTRUCTURE COULD LIMIT OUR FUTURE GROWTH.
The recent growth in Internet traffic has caused frequent periods of
decreased performance, and if Internet usage continues to grow rapidly, the
Internet's infrastructure may not be able to support these demands and its
performance and reliability may decline. Consequently, the emergence and growth
of the market for our services depends upon improvements being made to the
entire Internet as well as to our individual advertisers' and consumers'
networking infrastructures to alleviate overloading and congestion.
INCREASED SECURITY RISKS OF ONLINE COMMERCE MAY DETER FUTURE USE OF OUR
SERVICES.
Concerns over the security of transactions conducted on the Internet and
the privacy of consumers may also inhibit the growth of the Internet and other
online services generally, and online commerce in particular. Our failure to
prevent security breaches could significantly harm our business and results of
operations. Anyone who is able to circumvent our security measures could
misappropriate proprietary information, cause interruptions in our operations or
damage our brand and reputation. We do not believe that our data repositories,
financial systems and other technology resources are secure from security
breaches or sabotage and we occasionally experience attempts at "hacking" or
security breaches. We may be required to incur significant costs to protect
against security breaches or to alleviate problems caused by breaches. Any
well-publicized compromise of security could deter people from using the
Internet to conduct transactions that involve transmitting confidential
information or downloading sensitive materials, which would adversely affect the
business of our advertisers and, accordingly, our business.
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WE FACE THE RISKS OF SYSTEM FAILURES.
We currently do not have a disaster recovery plan in effect and do not have
fully redundant systems for our services at an alternate site. A disaster such
as fire, flood, earthquake, power loss, telecommunications failure, break-in,
sabotage or a similar event could severely damage our business and results of
operations because our services could be interrupted for an indeterminate length
of time.
WE HAVE EXPERIENCED SIGNIFICANT GROWTH IN OUR BUSINESS IN RECENT PERIODS, AND
ANY FAILURE TO MANAGE THIS GROWTH COULD DAMAGE OUR BUSINESS.
Our ability to successfully offer products and services and implement our
business plan in a rapidly evolving market requires an effective planning and
management process. We have increased, and plan to continue to increase, the
scope of our operations. These expansion efforts could be expensive and put a
strain on management, and, if we do not manage growth properly, it could
adversely affect our business. We will need to expand our infrastructure, which
will include hiring certain key employees and continuing to increase our
headcount. Hiring key employees, in particular, has historically been difficult,
and we cannot assure you that we will be able to successfully attract and retain
a sufficient number of qualified personnel.
OUR EXECUTIVE OFFICERS AND CERTAIN KEY PERSONNEL ARE CRITICAL TO OUR BUSINESS,
AND THESE OFFICERS AND KEY PERSONNEL MAY NOT REMAIN WITH US IN THE FUTURE.
Our future success depends upon the continued service of our executive
officers and other key technology, marketing, sales and support personnel. None
of our officers or key employees is bound by an employment agreement for any
specific term. If we lost the services of one or more of our key employees, or
if one or more of our executive officers or employees decided to join a
competitor or otherwise compete directly or indirectly with us, this could have
a significant adverse effect on our business and could cause the price of our
stock to decline.
WE ARE EXPOSED TO RISKS ASSOCIATED WITH CREDIT CARD FRAUD.
We have suffered losses and may continue to suffer losses as a result of
orders placed with fraudulent credit card data, even though the associated
financial institution approved payment of the orders. Under current credit card
practices, a merchant is liable for fraudulent credit card transactions when, as
is the case with the transactions we process, that merchant does not obtain a
cardholder's signature. A failure to adequately control fraudulent credit card
transactions would adversely affect our business and could cause a decline in
our stock price.
WE FACE RISKS OF CLAIMS FROM THIRD PARTIES FOR INTELLECTUAL PROPERTY
INFRINGEMENT AND OTHER MATTERS THAT COULD ADVERSELY AFFECT OUR BUSINESS.
Our services operate in part by making Internet services and content
available to our users. This creates the potential for claims to be made against
us, either directly or through contractual indemnification provisions with third
parties. These claims might, for example, be made for defamation, negligence,
copyright, trademark or patent infringement, personal injury, invasion of
privacy or other legal theories. We receive correspondence alleging some of
these types of claims from time to time. Any claims could result in costly
litigation and be time consuming to defend, divert management's attention and
resources, cause delays in releasing new or upgrading existing services or
require us to enter into royalty or licensing agreements. Royalty or licensing
agreements, if required, may not be available on acceptable terms, if at all.
There can be no assurance that our services do not infringe the intellectual
property rights of third parties. A successful claim of infringement against us
and our failure or inability to license the infringed or similar technology
could adversely affect our business.
WE ARE ENGAGED IN LITIGATION WITH THE WALT DISNEY COMPANY AND CERTAIN OF ITS
AFFILIATES THAT COULD SERIOUSLY HARM OUR BUSINESS.
We are engaged in litigation that will be expensive to pursue and will be
distracting to our management and other employees. Any adverse developments
resulting from this litigation could seriously harm our business. We believe
that The Walt Disney Company and certain of its affiliates, including Infoseek
Corporation, are infringing our GoTo.com logo. On February 18, 1999, we sued
these companies and two affiliated companies in the United States District Court
for the Central District of California alleging violation of federal trademark
law and unfair competition. Our lawsuit is based on the use by these companies
of a "GO" design mark to provide Internet services, including a search engine in
connection with their "Go Network." We are seeking to prevent these companies
from using this "GO" design mark as well as other remedies. We cannot assure you
that the outcome of this litigation
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will be favorable to us. For example, we may not prevail and be able to stop
these companies from causing confusion among consumers and advertisers through
continued use of the "GO" design mark. The defendants have asserted
counterclaims against GoTo.com. GoTo.com believes that the proposed
counterclaims are without merit and will defend against them vigorously. An
unfavorable result could affect the value of the GoTo.com logo.
WE MAY NOT BE ABLE TO PROTECT OUR INTERNET DOMAIN NAME OR INTELLECTUAL PROPERTY
RIGHTS UPON WHICH OUR BUSINESS RELIES.
We are aware that certain other companies are using or may have plans to
use the terms "GoTo," "Go," "Go2" and variations of these terms as part of a
company name, domain name, trademark or service mark. In addition, we have
received notice from companies claiming superior rights to marks such as these.
We cannot assure you that additional companies will not claim such superior
rights or that we will not be subject to infringement claims. A successful
infringement claim by the owner of a mark including "GoTo" or a variation could
require us to change our name, which would be expensive and disruptive to our
business. Further, despite our efforts to protect our proprietary rights,
unauthorized parties may attempt to copy or otherwise obtain and use our
services, technology and other intellectual property, and we cannot be certain
that the steps we have taken will prevent any misappropriation or confusion
among consumers and advertisers.
Our success and ability to compete also are substantially dependent upon
our internally developed technology and data resources, which we protect through
a combination of copyright, trade secret and trademark law. We have no patents
issued to date on our technology. There can be no assurance that we will
adequately be able to protect our technology and data resources.
WE MAY NEED ADDITIONAL CAPITAL WHICH COULD DILUTE THE OWNERSHIP INTEREST OF
INVESTORS.
We require substantial working capital to fund our business. If we raise
additional funds through the issuance of equity, equity-related or convertible
debt securities, these securities may have rights, preferences or privileges
senior to those of the rights of our common stock, and our stockholders may
experience additional dilution. We cannot be certain that additional financing
will be available to us on favorable terms when required, or at all. Since our
inception, we have experienced negative cash flow from operations and expect to
experience significant negative cash flow from operations in the future. We
currently anticipate that the net proceeds from our initial public offering,
together with our available funds, will be sufficient to meet our anticipated
needs for working capital and capital expenditure through at least the next 12
months. However, we may need to raise additional funds prior to the expiration
of this period or at a later date.
POTENTIAL ACQUISITIONS COULD BE DIFFICULT TO INTEGRATE, DISRUPT OUR BUSINESS,
DILUTE STOCKHOLDER VALUE AND ADVERSELY AFFECT OUR OPERATING RESULTS.
We may make investments in or acquire complementary products, technologies
and businesses. These acquisitions and investments could disrupt our ongoing
business, distract our management and employees and increase our expenses. If we
acquire a company, we could face difficulties in assimilating that company's
personnel and operations. In addition, the key personnel of the acquired company
may decide not to work for us. Acquisitions of additional services or
technologies also involve risks of incompatibility and the need for integration
into our existing services and marketing, sales and support efforts. If we
finance the acquisitions by issuing equity securities, this could dilute our
existing stockholders. Any amortization of goodwill or other assets, or other
charges resulting from the costs of these acquisitions, could adversely affect
our operating results.
POTENTIAL YEAR 2000 PROBLEMS COULD ADVERSELY AFFECT OUR BUSINESS.
We cannot assure you that we will not experience unanticipated negative
consequences from year 2000 problems, including material costs caused by
undetected errors or defects in the technology used in our internal systems.
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. Beginning in the year
2000, these code fields will need to accept four digit entries to distinguish
the year 2000 and 21st century dates from other 20th century dates. As a result,
computer systems and/or software products used by many companies may need to be
upgraded to solve this problem.
Our online services and their associated and supporting tools, Web sites
and infrastructure were designed and developed to be year 2000 compliant. Our
internal systems, including those used to deliver our services, utilize
third-party hardware and software. We have begun the process of contacting the
vendors of these infrastructure products in order to gauge their year 2000
compliance. Based on vendors' representations received thus far, we believe that
the third-party hardware and software we use is year 2000 compliant, although we
have not heard from all of these vendors.
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<PAGE> 19
To date, we have spent less than an estimated $10,000 to address year 2000
issues. We presently estimate that the total remaining cost of addressing year
2000 issues will not be material. These estimates were derived utilizing a
number of assumptions, including the assumption that we have already identified
any significant year 2000 issues. However, these assumptions may not be
accurate, and actual results could differ materially from those anticipated. In
view of our year 2000 review and remediation efforts to date, the recent
development of our services, and the recent installation of our information
technology equipment and systems, we do not consider contingency planning to be
necessary at this time. We believe that the most likely worst case scenario is
that the Internet fails and we are unable to offer our services.
If we discover that certain of our services need modification, or certain
of our third-party hardware and software is not year 2000 compliant, we will try
to make modifications to our services and systems on a timely basis. We do not
believe that the cost of these modifications will materially affect our
operating results. However, we cannot assure you that we will be able to modify
these products, services and systems in a timely, cost-effective and successful
manner and the failure to do so could have a material adverse effect on our
business and operating results.
Year 2000 compliance issues also could cause a significant number of
companies, including our current advertisers; to reevaluate their current system
needs and, as a result, consider switching to other systems and means of
advertising. This could result in a material adverse effect on our business,
operating results and financial condition.
OUR MARKET MAY UNDERGO RAPID TECHNOLOGICAL CHANGE AND OUR FUTURE SUCCESS WILL
DEPEND ON OUR ABILITY TO MEET THE CHANGING NEEDS OF OUR INDUSTRY.
If new industry standards and practices emerge in the Internet and online
advertising industry, our existing services, technology and systems may become
obsolete. Our future success will depend on our ability to:
o license and internally develop leading technologies useful in our
business;
o enhance our existing services;
o develop new services and technologies that address the increasingly
sophisticated and varied needs of prospective consumers; and
o respond to technological advances and emerging industry standards and
practices on a cost-effective and timely basis.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES MAY DAMAGE OUR BUSINESS.
The laws and regulations applicable to the Internet and our services are
evolving and unclear and could damage our business. There are currently few laws
or regulations directly applicable to access to, or commerce on, the Internet.
Due to the increasing popularity and use of the Internet, it is possible that
laws and regulations may be adopted, covering issues such as user privacy,
defamation, pricing, taxation, content regulation, quality of products and
services, and intellectual property ownership and infringement. Such legislation
could expose GoTo.com to substantial liability as well as dampen the growth in
use of the Internet, decrease the acceptance of the Internet as a communications
and commercial medium, or require GoTo.com to incur significant expenses in
complying with any new regulations.
WE MAY INCUR LIABILITIES FOR THE ACTIVITIES OF USERS OF OUR SERVICE.
The law relating to the liability of providers of online services for
activities of their users is currently unsettled and could damage our business.
We do not carry insurance that will indemnify us for liability for activities of
our users. We cannot assure you that GoTo.com will successfully avoid civil or
criminal liability for unlawful activities carried out by users of our service.
The imposition upon GoTo.com of potential liability for unlawful activities of
users of our service could require us to implement measures to reduce our
exposure to such liability, which may require us, among other things, to spend
substantial resources or to discontinue certain service offerings. Any costs
incurred as a result of such liability or asserted liability could damage our
business.
WE HAVE BROAD DISCRETION TO OUR CAPITAL AND HOW WE INVEST THESE PROCEEDS MAY NOT
YIELD A FAVORABLE RETURN.
Our management can spend our capital in ways with which the stockholders
may not agree.
19
<PAGE> 20
WE CANNOT ASSURE YOU THAT OUR STOCK PRICE WILL NOT DECLINE.
The trading market price of our common stock may decline. In addition, an
active public market for GoTo.com's common stock may not develop or be
sustained.
FUTURE SALES OF OUR COMMON STOCK MAY DEPRESS OUR STOCK PRICE.
If our stockholders sell substantial amounts of common stock in the public
market, including shares issued upon the exercise of outstanding options, the
market price of our common stock could fall. The approximately 45.5 million
shares of common stock outstanding as of September 30, 1999 will be available
for sale in the public market as follows:
APPROXIMATE NUMBER OF SHARES DATE OF AVAILABILITY FOR SALE
---------------------------- -----------------------------
7.2 million (includes 6.9 million
IPO shares) Currently Available
34.6 million December 15, 1999
3.7 million Between December 22, 1999
and May 5, 2000
The above table assumes the effectiveness of certain lock-up arrangements
with GoTo.com's underwriters in its initial public offering, under which the
stockholders have agreed not to sell or otherwise dispose of their shares of
common stock. The table also includes approximately 2.3 million shares which, as
of September 30, 1999, are subject to repurchase by GoTo.com and transfer
restrictions as a result of vesting agreements.
Most of the shares that will be available for sale as of or after December
15, 1999 will be subject to certain volume limitations because they are held by
affiliates of GoTo.com. In addition, we cannot assure you that the underwriters
will not remove these lock-up restrictions prior to December 15, 1999 without
prior notice.
OUR CHARTER DOCUMENTS AND CHANGE OF CONTROL SEVERANCE AGREEMENTS WITH OUR
MANAGEMENT WILL MAKE IT MORE DIFFICULT TO ACQUIRE US.
Provisions of our Amended and Restated Certificate of Incorporation and
Bylaws could make it more difficult for a third party to acquire us, even if
doing so would be beneficial to our stockholders. For example, our board of
directors is divided into three classes, with one class being elected each year
by our stockholders, which generally makes it more difficult for stockholders to
replace a majority of directors and obtain control of our board. In addition,
stockholder meetings may be called only by our board of directors, the chairman
of the board and the president, advanced notice is required prior to stockholder
proposals, and stockholders may not act by written consent. Further, we have
authorized preferred stock that is undesignated, making it possible for the
board of directors to issue preferred stock with voting or other rights or
preferences that could impede the success of any attempt to change control of
GoTo.com.
Delaware law also could make it more difficult for a third party to acquire
us. Specifically, Section 203 of the Delaware General Corporation Law may have
an anti-takeover effect with respect to transactions not approved in advance by
the board of directors, including discouraging attempts that might result in a
premium over the market price for the shares of common stock held by our
stockholders.
In addition, we have entered into change of control severance agreements
with members of our senior management providing for certain benefits, including
acceleration of option vesting, to these members if they are terminated other
than for cause following an acquisition of GoTo.com. These agreements could make
us less attractive to a third party who may want to acquire us because they will
make any replacement of management more expensive.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's exposure to market risk for interest rate changes relates
primarily to its investment portfolio. The Company had no derivative financial
instruments as of September 30, 1999 or December 31, 1998. The Company places
its investment portfolio in high credit quality instruments, which are spread to
many issues. The Company's investments are principally confined to our cash and
cash equivalents and available-for-sale securities.
20
<PAGE> 21
PART II. OTHER INFORMATION
ITEM 1.LEGAL PROCEEDINGS
On February 18, 1999, GoTo.com sued The Walt Disney Company and certain of
its affiliates, including Infoseek Corporation, in the United States District
Court for the Central District of California, alleging violation of federal
trademark law and unfair competition. The lawsuit is based upon these companies'
use of a "GO" design mark to provide Internet services, including a search
engine in connection with their "Go Network." GoTo.com is seeking to prevent
these companies from using the "GO" design mark as well as other remedies.
The defendants have asserted counterclaims against GoTo.com. GoTo.com
believes that the proposed counterclaims are without merit and will defend
against them vigorously.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On June 23, 1999, the Company completed the sale of 6,900,000 shares of its
common stock, par value $0.0001 per share, at a per share price to the public of
$15.00 in a firm commitment underwritten public offering. The offering was
effected pursuant to a Registration Statement on Form S-1 (Registration No.
333-76415), which the Securities and Exchange Commission declared effective on
June 17, 1999. The net offering proceeds to GoTo.com after deducting expenses
were approximately $94,800,000.The Company invested all of the approximately
$94,800,000 of the proceeds from the offering toward purchases in investment
grade short-term and long-term investments.
SALES OF UNREGISTERED SECURITIES
From July 1, 1999 to July 12, 1999, an aggregate of 14,760 shares of common
stock were issued upon exercise of options under GoTo.com's 1998 Stock Plan with
exercise prices ranging from $ 0.15 to $ 12.00.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
27 Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended September 30,
1999.
21
<PAGE> 22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 8, 1999 GOTO.COM, INC.
By: /s/ TODD TAPPIN
--------------------------------
Todd Tappin
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
22
<PAGE> 23
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- -----------
27 Financial Data Schedule
23
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM GOTO.COM
INC. FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 32,967
<SECURITIES> 78,221
<RECEIVABLES> 2,763
<ALLOWANCES> 140
<INVENTORY> 0
<CURRENT-ASSETS> 119,856
<PP&E> 9,217
<DEPRECIATION> 1,612
<TOTAL-ASSETS> 132,431
<CURRENT-LIABILITIES> 12,211
<BONDS> 0
0
0
<COMMON> 5
<OTHER-SE> 119,229
<TOTAL-LIABILITY-AND-EQUITY> 119,234
<SALES> 13,511
<TOTAL-REVENUES> 13,511
<CGS> 4,242
<TOTAL-COSTS> 33,950
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 140
<INTEREST-EXPENSE> 162
<INCOME-PRETAX> (22,022)
<INCOME-TAX> 0
<INCOME-CONTINUING> (22,022)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (22,022)
<EPS-BASIC> (0.60)
<EPS-DILUTED> (0.60)
</TABLE>
