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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
COMMISSION FILE NUMBER 000-26365
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GOTO.COM, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 95-4652060
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
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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 [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
45,565,521 shares of Common Stock, $.0001 par value, as of June 30, 1999
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GOTO.COM, INC.
TABLE OF CONTENTS
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PAGE NO.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Balance Sheets as of June 30, 1999 and December
31, 1998.................................................. 2
Condensed Statements of Operations for the three and six
months ended June 30, 1999 and 1998....................... 3
Condensed Statements of Cash Flows for the six months ended
June 30, 1999 and 1998.................................... 4
Notes to Condensed Financial Statements..................... 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 20
Item 2. Changes in Securities and Use of Proceeds................... 20
Item 4. Submission of Matters to a Vote of Security Holders......... 21
Item 6. Exhibits and Reports on Form 8-K............................ 22
Signatures............................................................. 23
Index to Exhibits...................................................... 24
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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GOTO.COM, INC.
CONDENSED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
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JUNE 30, DECEMBER 31,
1999 1998
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(UNAUDITED)
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CURRENT ASSETS:
Cash and cash equivalents................................. $129,309 $ 16,357
Accounts receivable, net.................................. 1,286 356
Other receivables......................................... 78 90
Prepaid expenses and other................................ 139 60
Prepaid marketing expenses................................ 1,704 1,741
-------- --------
Total current assets........................................ 132,516 18,604
Property and equipment, net................................. 5,584 1,336
Other assets................................................ 21 29
-------- --------
Total assets................................................ $138,121 $ 19,969
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 8,457 $ 2,816
Accrued expenses.......................................... 1,288 282
Deferred revenue.......................................... 797 181
Current portion of debt................................... 122 --
Current portion of capital lease obligations.............. 507 110
-------- --------
Total current liabilities................................... 11,171 3,389
Long-term debt.............................................. 68 --
Long-term capital lease obligations......................... 799 183
Commitments and contingencies
STOCKHOLDERS' EQUITY:
Convertible Preferred Stock; $.0001 par value, 10,000
shares authorized:
Series A Preferred Stock;
Shares issued and outstanding--none and 471 for June
30, 1999 and December 31, 1998, respectively........ -- 212
Series B and C Preferred Stock;
Shares issued and outstanding--none and 19,022 for
June 30, 1999 and December 31, 1998, respectively... -- 28,433
Common Stock, $.0001 par value, 200,000 shares
authorized:
Shares issued and outstanding--45,566 and 10,444 for
June 30, 1999 and December 31, 1998, respectively... 5 1
Additional paid-in capital on Common Stock............. 158,582 3,212
Deferred compensation.................................. (3,961) (1,318)
Accumulated deficit.................................... (28,543) (14,143)
-------- --------
Total stockholders' equity.................................. 126,083 16,397
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Total liabilities and stockholders' equity.................. $138,121 $ 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)
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THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1999 1998 1999 1998
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Revenue............................................ $ 3,632 $ 19 $ 5,083 $ 57
Cost of revenue.................................... 1,345 101 2,302 111
------- ------- --------- ---------
Gross profit (loss)................................ 2,287 (82) 2,781 (54)
Operating expenses:
Marketing, sales and service..................... 5,743 1,119 10,357 1,293
General and administrative....................... 2,424 236 3,979 415
Product development.............................. 979 150 1,499 318
Amortization of deferred compensation............ 1,103 154 2,400 386
------- ------- --------- ---------
10,249 1,659 18,235 2,412
------- ------- --------- ---------
Loss from operations............................... (7,962) (1,741) (15,454) (2,466)
Other income:
Interest income, net............................. 396 48 528 49
Other income..................................... 526 -- 526 --
------- ------- --------- ---------
Loss before provision for income taxes............. (7,040) (1,693) (14,400) (2,417)
Provision for income taxes......................... -- -- -- --
------- ------- --------- ---------
Net loss........................................... $(7,040) $(1,693) $ (14,400) $ (2,417)
======= ======= ========= =========
Pro forma basic and diluted net loss per share..... $ (0.20) $ (0.11) $ (0.43) $ (0.19)
Historical basic and diluted net loss per share.... $ (0.46) $ (0.16) $ (1.10) $ (0.24)
Weighted average shares used to compute pro forma
basic and diluted net loss per share............. 35,823 15,718 33,147 12,878
Weighted average shares used to compute historical
basic and diluted net loss per share............. 15,264 10,352 13,121 10,185
</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)
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SIX MONTHS ENDED
JUNE 30
1999 1998
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(14,400) $(2,417)
Adjustments to reconcile net loss to net cash used in
operating activities:
Amortization of deferred stock option compensation..... 2,400 386
Other common stock and warrants expense................ 180 209
Depreciation and amortization.......................... 551 59
Changes in operating assets and liabilities:
Accounts receivable.................................... (930) 22
Other receivables...................................... 12 --
Prepaid expenses and other............................. (81) (12)
Prepaid marketing expenses............................. 37 --
Accounts payable and accrued expenses.................. 6,647 1,176
Deferred revenues...................................... 616 --
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Net cash used in operating activities..................... (4,968) (577)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for property and equipment........... (4,551) (723)
-------- -------
Net cash used in investing activities..................... (4,551) (723)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of Common Stock................ 96,536 2
Proceeds from the issuance of Preferred Stock............. 24,969 4,070
Proceeds from lease line.................................. 1,203 --
Repayments under lease line............................... (190) --
Repayment of debt......................................... (47) --
Proceeds from stockholder funding......................... -- 2,500
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Net cash provided by financing activities................. 122,471 6,572
-------- -------
Net increase in cash and cash equivalents................. 112,952 5,272
Cash and cash equivalents at beginning of period.......... 16,357 87
-------- -------
Cash and cash equivalents at end of period................ $129,309 $ 5,359
======== =======
</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 have 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 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.
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
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.
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Options to purchase 2,426,309 and 4,138,551 shares of common stock were
outstanding as of June 30, 1999 and 1998, respectively. In addition, as of June
30, 1999, there were 2,735,746 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):
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THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30
1999 1998 1999 1998
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Numerator:
Net loss......................................... $(7,040) $(1,693) $(14,400) $(2,417)
======= ======= ======== =======
Denominator:
Denominator for historical basic and diluted
calculation -- Weighted average shares........ 15,264 10,352 13,121 10,185
Weighted average effect of pro forma securities:
Series A Preferred Stock......................... 435 471 453 246
Series B Preferred Stock......................... 7,665 4,895 7,988 2,447
Series C Preferred Stock......................... 9,879 -- 10,295 --
Series D Preferred Stock......................... 2,580 -- 1,290 --
------- ------- -------- -------
Denominator for pro forma basic and diluted
calculation................................... 35,823 15,718 33,147 12,878
======= ======= ======== =======
Pro forma basic and diluted net loss per share..... $ (0.20) $ (0.11) $ (0.43) $ (0.19)
Historical basic and diluted net loss per share.... $ (0.46) $ (0.16) $ (1.10) $ (0.24)
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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. SUBSEQUENT EVENT
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.
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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 have
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 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, easy 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
reached more than 31 million for the quarter ended June 30, 1999 at an average
price of $0.11.
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
officially launched on June 1, 1998. Our service has achieved only limited
market acceptance to date. 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 six months ended June 30, 1999 were approximately $14.0 million and
approximately $14.4 million, respectively.
Our revenue consists of search listing advertisements and banner
advertisements. For the quarter ended June 30, 1999, banner advertisement
revenue constituted less than 10% 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.
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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 June 30, 1999, banner advertisement
revenue constituted less than 10 percent of our revenue. Revenue was
approximately $3.6 million for the quarter ended June 30, 1999 compared to
approximately $19,000 for the quarter ended June 30, 1998. Revenue was
approximately $5.1 million for the six months ended June 30, 1999 compared to
approximately $57,000 for the six months ended June 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. We
expect that search listing advertisement revenue will represent an increasing
percentage of total revenues in future periods.
COST OF REVENUE
Cost of revenue consists primarily of costs associated with maintaining our
Web site and fees paid to outside service providers that provide and manage our
unpaid listings and banner advertisements. 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 $1.3 million for the quarter ended June
30, 1999 compared to approximately $101,000 for the quarter ended June 30, 1998.
Cost of revenue was approximately $2.3 million for the six months ended June 30,
1999 compared to approximately $111,000 for the six months ended June 30, 1998.
The increase was primarily due to the 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 expense were approximately $5.7 million
for the quarter ended June 30, 1999 compared to approximately $1.1 million for
the quarter ended June 30, 1998. Marketing, sales and service expenses were
approximately $10.4 million for the six months ended June 30, 1999 compared to
approximately $1.3 million for the six months ended June 30, 1998. The increase
was primarily due to increased distribution of our search service and additional
personnel for marketing, sales and service functions. We believe that continued
investment in marketing, sales and service and in the increased distribution of
our service is critical to attaining our strategic objective and as a result,
expect these costs to continue increasing in the future.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses consist primarily of payroll and
related expenses for executive and administrative personnel; facilities;
professional services, including consulting; travel and other general corporate
expenses. General and administrative expenses were approximately $2.4 million
for the quarter ended June 30, 1999 compared to approximately $236,000 for the
quarter ended June 30, 1998. General and administrative expenses were
approximately $4.0 million for the six months ended June 30, 1999 compared to
approximately $415,000 for the six months ended June 30, 1998. The increase was
the result
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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.
PRODUCT DEVELOPMENT EXPENSES
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 license fees for software used in product development
and depreciation for related equipment. Product development expenses were
approximately $1.0 million for the quarter ended June 30, 1999 compared to
approximately $150,000 for the quarter ended June 30, 1998. Product and
development expenses were approximately $1.5 million for the six months ended
June 30, 1999 compared to approximately $318,000 for the six months ended June
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 increasing in the future.
AMORTIZATION OF DEFERRED COMPENSATION
Certain stock options granted during the quarter ended June 30, 1999, the
quarter ended March 31, 1999 and the year ended December 31, 1998 have been
considered to be compensatory for financial accounting purposes. Total
compensation of these stock options amounted to approximately $7.6 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 $1.1 million and $154,000 was amortized and charged to operations
for the quarters ended June 30, 1999 and 1998, respectively. Approximately $2.4
million and $386,000 was amortized and charged to operations for the six months
ended June 30, 1999 and 1998, respectively.
INTEREST INCOME, NET
Interest income, net consists primarily of earnings on our cash and cash
equivalents, net of interest expense attributable to equipment leased, debt and
any taxes. Interest income, net was approximately $396,000 for the quarter ended
June 30, 1999 compared to approximately $48,000 for the quarter ended June 30,
1998. Interest income, net was approximately $528,000 for the six months ended
June 30, 1999 compared to approximately $49,000 for the six months ended June
30, 1998. The increase was primarily due to increased earnings on cash and cash
equivalents, which increased as a result of our initial public offering.
OTHER INCOME
Other income of approximately $526,000 for the three and six months ended
June 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 $5.0 million
and $577,000 for the six months ended June 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 $4.6 million and $723,000 for the six
months ended June 30, 1999 and 1998, respectively. The increase resulted from
capital expenditures for properties and equipment. Net cash provided by
financing activities totaled approximately $122.5 million and $6.6 million for
the six months ended June 30, 1999 and 1998, respectively. The increase was due
primarily to the issuance of common
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stock through our initial public offering and the issuance of preferred stock
during the second quarter of 1999.
On April 14, 1999, we issued 3,628,447 shares of preferred stock for $6.89
per share and received gross 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 and cash equivalents
of approximately $129.3 million as of June 30, 1999 and approximately $16.4
million as of December 31, 1998. 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 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.
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.
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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. Also, during the next six 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:
- complete dependence on online advertising and consumer search services
with only limited market acceptance;
- need to develop and upgrade our infrastructure, including internal
controls, transaction processing systems, data storage and retrieval
systems and Web site;
- need to manage changing operations; and
- dependence upon and need to hire 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 $14.0 million and $14.4 million for the year ended December 31,
1998 and the six months ended June 30, 1999, respectively, and as of June 30,
1999, we had an accumulated deficit of approximately $28.5 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.
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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:
- 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;
- prices paid by advertisers using the GoTo.com service, which are not
determined by GoTo.com;
- our costs of attracting consumers to the GoTo.com Web site, including
costs of receiving exposure on third-party Web sites and advertising
costs;
- costs related to agreements with suppliers of consumer traffic to our
service and professional services;
- loss of these agreements;
- the mix of paying vs. non-paying search results on the GoTo.com service;
- our ability to significantly increase our distribution channels;
- the amount and timing of operating costs and capital expenditures
relating to expansion of our operations;
- costs and delays in introducing new GoTo.com services and improvements to
existing services;
- changes in the growth rate of Internet usage and acceptance by consumers
of electronic commerce;
- technical difficulties, system failures or Internet downtime;
- government regulations related to the Internet;
- our ability to upgrade and develop our information technology systems and
infrastructure;
- costs related to acquisitions of technologies or businesses; and
- 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
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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.
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. 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
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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), Askjeeves, Inc.,
CNET, Inc. (Snap), Excite, Inc. (including WebCrawler and Magellan), Inktomi
Corporation, LookSmart, Ltd., Lycos, Inc. (including HotBot), 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
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 ARE IN THE PROCESS OF IMPLEMENTING NEW FINANCIAL AND ACCOUNTING SYSTEMS WHICH
MAY NOT WORK AS EXPECTED.
If we fail to successfully implement and integrate new financial reporting
and information systems, or we are not able to scale these systems 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 implementing new financial and accounting reporting software. In
connection with this implementation, we have encountered difficulties
integrating the new software with certain of our other information systems.
Additionally, 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
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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.
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.
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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. The lawsuit is at a
preliminary stage, and we cannot assure you that the outcome of this litigation
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. In addition, these companies could file
counterclaims or separate lawsuits or other proceedings against us, possibly
seeking to prevent us from using the GoTo.com logo or other relief. An
unfavorable result could affect the value of or even prevent us from using the
GoTo.com logo.
The defendants have asserted counterclaims against GoTo.com. GoTo.com
believes that the proposed counterclaims are without merit and will defend
against them vigorously.
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WE MAY NOT BE ABLE TO PROTECT OUR INTERNET DOMAIN NAME OR INTELLECTUAL PROPERTY
RIGHTS UPON WHICH OUR BUSINESS RELIES.
The Internet domain name we use, "GoTo.com," is an extremely important part
of our business and we may not be able to protect it. We may be unable to
acquire or maintain relevant domain names in all countries in which we conduct
business. We may be unable to prevent third parties from acquiring domain names
that are similar to, infringe upon or otherwise decrease the value of our
trademarks and other proprietary rights. Third parties have acquired domain
names that include "goto" or varieties thereof both in the United States and
elsewhere.
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'
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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, 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:
- license and internally develop leading technologies useful in our
business;
- enhance our existing services;
- develop new services and technologies that address the increasingly
sophisticated and varied needs of prospective consumers; and
- 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
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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.
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 45.6 million
shares of common stock outstanding as of June 30, 1999 will be available for
sale in the public market as follows:
<TABLE>
<CAPTION>
APPROXIMATE NUMBER OF SHARES DATE OF AVAILABILITY FOR SALE
- ---------------------------------- ----------------------------------
<S> <C>
7.2 million June 30, 1999
34.7 million December 15, 1999
3.7 million Between December 22, 1999
and May 5, 2000
</TABLE>
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 2.7 million shares which, as
of June 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.
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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 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. Donaldson, Lufkin & Jenrette, Salomon Smith Barney, Thomas Weisel
Partners LLC and DLJdirect Inc. were the lead underwriters for the offering.
Linda Fayne Levinson, a director of GoTo.com, is a principal of Global Retail
Partners, L.P., which is an affiliate of Donaldson, Lufkin & Jenrette.
Upon the closing of the offering, all outstanding shares of preferred stock
were automatically converted into 23,121,594 shares of common stock of GoTo.com.
Following the closing, GoTo.com filed an Amended and Restated Certificate of
Incorporation with the Delaware Secretary of State, which eliminated the
previously authorized preferred stock, authorized 10,000,000 shares of
undesignated preferred stock and increased the authorized common stock to
200,000,000 shares.
Of the $103,500,000 in aggregate proceeds raised in connection with the
offering, (i) $7,245,000 was paid to underwriters in connection with
underwriting discounts, and (ii) approximately $1,455,000 was paid by GoTo.com
in connection with offering expenses, printing fees, filing fees and legal fees.
The net offering proceeds to GoTo.com after deducting the foregoing expenses
were approximately $94,800,000.
SALES OF UNREGISTERED SECURITIES
From April 1, 1999 through June 30, 1999, GoTo.com issued unregistered
securities to a limited number of persons as described below:
1. On April 14, 1999, GoTo.com issued 3,628,447 shares of Series D
Preferred Stock to The Goldman Sachs Group, L.P., idealab! Holdings,
L.L.C., entities affiliated with idealab! Capital Management I, LLC,
entities and individuals affiliated with Draper Fisher Jurvetson,
entities affiliated with Moore Capital Management, Inc., entities
affiliated with Global Retail Partners, L.P., Kline Hawkes California
SBIC, L.P., entities affiliated with Integral Capital Partners, and to
other investors at a per share price of $6.89, for an aggregate offering
price of $25,000,000.
2. From April 1, 1999 through June 30, 1999, GoTo.com granted stock options
to purchase 1,698,032 shares of Common Stock at exercise prices ranging
from $2.50 to $12.00 per share to employees and consultants pursuant to
its 1998 Stock Plan.
3. From April 1, 1999 through June 30, 1999, an aggregate of 2,017,467
shares of Common Stock were issued upon exercise of options under
GoTo.com's 1998 Stock Plan.
4. From April 1, 1999 through June 30, 1999, an aggregate of 100,141 shares
of Common Stock were issued upon the conversion of outstanding warrants
to purchase Common Stock.
20
<PAGE> 22
No underwriters were engaged in connection with the foregoing sales of
securities. The sales of securities listed in items 1 and 4 above were made in
reliance upon the exemptions from registration in Section 4(2) of the Securities
Act of 1933 for transactions not involving a public offering. Issuances of
options and shares upon exercise of options to GoTo.com's employees and
consultants listed in items 2 and 3 were made under Rule 701 promulgated under
the Securities Act of 1933.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 6, 1999, GoTo.com submitted several matters to a vote of its
security holders through an Action by Written Consent. The following is a brief
description of the matters voted upon and a statement of the number of votes
cast for and against and the number of abstentions. There were no broker non-
votes with respect to any matter.
1. To approve GoTo.com's Amended and Restated Certificate of Incorporation,
which, among other things, creates a series of preferred stock known as
Series D Preferred Stock, consisting of 3,628,447 shares.
FOR: 31,768,944 AGAINST: None ABSTAIN: 1,150,523
2. To approve and consent to the sale and issuance of up to 3,628,447
shares of GoTo.com's Series D Preferred Stock at a purchase price of
$6.89 per share, for an aggregate purchase price of $25,000,000.
FOR: 31,768,944 AGAINST: None ABSTAIN: 1,150,523
3. To approve the reservation of an additional 1,500,000 shares of
GoTo.com's common stock for issuance under its 1998 Stock Plan.
FOR: 31,768,944 AGAINST: None ABSTAIN: 1,150,523
On June 1, 1999, GoTo.com submitted several matters to a vote of its
security holders through an Action by Written Consent. The following is a brief
description of the matters voted upon and a statement of the number of votes
cast for and against and the number of abstentions. There were no broker non-
votes with respect to any matter.
1. To approve GoTo.com's Amended and Restated Certificate of Incorporation,
to be filed and become effective immediately prior to the closing of
GoTo.com's initial public offering.
FOR: 25,883,049 AGAINST: None ABSTAIN:12,734,931
2. To approve GoTo.com's Amended and Restated Bylaws, effective and
contingent upon the closing of GoTo.com's initial public offering.
FOR: 25,883,049 AGAINST: None ABSTAIN: 12,734,931
3. To approve and adopt a new 1999 Employee Stock Purchase Plan and to
reserve a total of 2,000,000 shares of GoTo.com Common Stock for
issuance under the plan.
FOR: 25,883,049 AGAINST: None ABSTAIN: 12,734,931
4. To approve an amendment to GoTo.com's 1998 Stock Plan and to reserve an
additional 1,000,000 shares of GoTo.com Common Stock for issuance under
the plan, effective and contingent upon the closing of GoTo.com's
initial public offering.
FOR: 25,883,049 AGAINST: None ABSTAIN: 12,734,931
5. To elect each of the following persons as directors of GoTo.com, in the
Class appearing opposite their name:
Class I: Jeffrey Brewer, Timothy Draper and Robert Kavner
Class II: William Elkus and William Gross
21
<PAGE> 23
Class III: Linda Fayne Levinson and Alan Colner
FOR: 25,883,049 AGAINST: None ABSTAIN: 12,734,931
6. To approve a form of Indemnification Agreement that provides for the
indemnification of GoTo.com's officers and directors to the maximum
extent permitted under Delaware law.
FOR: 25,883,049 AGAINST: None ABSTAIN: 12,734,931
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended June 30, 1999.
22
<PAGE> 24
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: August 13, 1999 GOTO.COM, INC.
By: /s/ TODD TAPPIN
--------------------------------------
Todd Tappin
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
23
<PAGE> 25
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
24
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM GOTO.COM
INC. FORM 10-Q FOR THE PERIOD ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 129,309
<SECURITIES> 0
<RECEIVABLES> 1,386
<ALLOWANCES> 100
<INVENTORY> 0
<CURRENT-ASSETS> 132,516
<PP&E> 6,399
<DEPRECIATION> 815
<TOTAL-ASSETS> 138,121
<CURRENT-LIABILITIES> 11,171
<BONDS> 0
0
0
<COMMON> 5
<OTHER-SE> 126,078
<TOTAL-LIABILITY-AND-EQUITY> 126,083
<SALES> 5,083
<TOTAL-REVENUES> 5,083
<CGS> 2,302
<TOTAL-COSTS> 18,235
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 94
<INCOME-PRETAX> (14,400)
<INCOME-TAX> 0
<INCOME-CONTINUING> (14,400)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (14,400)
<EPS-BASIC> (0.20)
<EPS-DILUTED> (0.20)
</TABLE>
