<PAGE> 1
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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 JUNE 30, 2000
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)
74 NORTH PASADENA AVENUE 3RD FLOOR
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.
52,191,438 shares of Common Stock, $0.0001 par value, as of June 30, 2000
================================================================================
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GOTO.COM, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of June 30, 2000 and December 31, 1999............3
Condensed Consolidated Statements of Operations for the three and six months
ended June 30, 2000 and 1999............................................................4
Condensed Consolidated Statements of Cash Flows for the six months ended
June 30, 2000 and 1999..................................................................5
Notes to Condensed Consolidated Financial Statements.......................................6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.....10
Item 3. Quantitative and Qualitative Disclosures About Market Risks...............................24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.........................................................................24
Item 2. Changes in Securities and Use of Proceeds.................................................24
Item 4. Submission of Matters to a Vote of Security Holders.......................................24
Item 6. Exhibits and Reports on Form 8-K..........................................................25
Signatures............................................................................................26
</TABLE>
2
<PAGE> 3
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GOTO.COM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
--------- ----------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ............................... $ 22,485 $ 11,914
Short-term investments .................................. 75,223 93,409
Accounts receivable, net ................................ 5,095 2,927
Prepaid expenses and other .............................. 1,301 851
Prepaid marketing expenses .............................. 344 2,034
--------- ---------
Total current assets ...................................... 104,448 111,135
Property and equipment, net ............................... 24,232 12,703
Intangible assets, net .................................... 380,161 --
Long-term investments ..................................... 2,533 4,932
Other assets .............................................. 696 742
--------- ---------
Total assets .............................................. $ 512,070 $ 129,512
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ........................................ $ 6,261 $ 10,465
Accrued expenses ........................................ 9,979 2,562
Deferred revenue ........................................ 2,641 2,058
Current portion of debt ................................. 68 131
Current portion of capital lease obligations ............ 831 754
--------- ---------
Total current liabilities ................................. 19,780 15,970
Other long-term liabilities ............................... 994 --
Long-term capital lease obligations ....................... 407 768
STOCKHOLDERS' EQUITY:
Common Stock, $0.0001 par value,
200,000 shares authorized:
Shares issued and outstanding - 52,191 and 45,519
as of June 30, 2000 and December 31, 1999,
respectively .......................................... 5 5
Additional paid-in capital on Common Stock .............. 586,825 158,799
Deferred compensation, net .............................. (1,723) (2,584)
Accumulated deficit ..................................... (94,230) (43,405)
Unrealized losses on short-term and long-term investments 12 (41)
--------- ---------
Total stockholders' equity ................................ 490,889 112,774
--------- ---------
Total liabilities and stockholders' equity ................ $ 512,070 $ 129,512
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE> 4
GOTO.COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS; UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenue .............................................. $ 21,011 $ 3,632 $ 38,226 $ 5,083
Cost of revenue (A) .................................. 2,813 1,345 5,418 2,302
--------- --------- --------- ---------
Gross profit ......................................... 18,198 2,287 32,808 2,781
Operating expenses:
Marketing, sales and service (A) ................... 18,267 5,743 34,581 10,357
General and administrative (A) ..................... 8,055 2,424 14,322 3,979
Product development (A) ............................ 4,262 979 6,463 1,499
Amortization of deferred compensation (A) .......... 375 1,103 800 2,400
Write-off of acquired in-process research
and development .................................. -- -- 7,550 --
Amortization of intangible assets .................. 30,578 -- 44,532 --
--------- --------- --------- ---------
61,537 10,249 108,248 18,235
--------- --------- --------- ---------
Loss from operations ................................. (43,339) (7,962) (75,440) (15,454)
Other income:
Interest income, net ............................... 1,511 396 3,058 528
Other income ....................................... 21,512 526 21,557 526
--------- --------- --------- ---------
Net loss ............................................. $ (20,316) $ (7,040) $ (50,825) $ (14,400)
========= ========= ========= =========
Pro forma basic and diluted net loss per share ....... $ (0.42) $ (0.20) $ (1.09) $ (0.43)
========= ========= ========= =========
Historical basic and diluted net loss per share ...... $ (0.42) $ (0.46) $ (1.09) $ (1.10)
========= ========= ========= =========
Weighted average shares used to compute
pro forma basic and diluted net loss per share ..... 48,007 35,823 46,657 33,147
========= ========= ========= =========
Weighted average shares used to compute
historical basic and diluted net loss per share .... 48,007 15,264 46,657 13,121
========= ========= ========= =========
(A) If deferred compensation were allocated to expense
categories, it would be allocated as follows:
Cost of revenue .................................... $ 1 $ 5 $ 3 $ 11
Marketing, sales and service ....................... 148 310 251 416
General and administrative ......................... 214 740 509 1,816
Product development ................................ 12 48 37 157
--------- --------- --------- ---------
Total amortization of deferred compensation ...... $ 375 $ 1,103 $ 800 $ 2,400
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE> 5
GOTO.COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS; UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------------
2000 1999
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ............................................ $ (50,825) $ (14,400)
Adjustments to reconcile net loss to net cash used in
operating activities:
Amortization of deferred stock option compensation 800 2,400
Accretion of discounts from the purchase of
short-term and long-term investments ............ (797) --
Other common stock and warrants expense ........... -- 180
Write-off of acquired in-process research
and development ................................. 7,550 --
Depreciation and amortization ..................... 3,097 551
Intangible amortization ........................... 44,532 --
Changes in operating assets and liabilities:
Accounts receivable ............................... (2,144) (930)
Other receivables ................................. (40) 12
Prepaid expenses and other ........................ (317) (81)
Prepaid marketing expenses ........................ 1,691 37
Accounts payable and accrued expenses ............. (1,291) 6,647
Deferred revenues ................................. 583 616
--------- ---------
Net cash provided by (used in) operating activities ... 2,839 (4,968)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds of short-term and long-term investments, net 21,436 --
Capital expenditures for property and equipment ..... (13,123) (4,551)
Net cash used in acquisition ........................ (863) --
Other assets ........................................ (542) --
--------- ---------
Net cash provided by (used in) investing activities ... 6,908 (4,551)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of Common Stock .......... 1,930 96,536
Proceeds from the issuance of Preferred Stock ....... -- 24,969
Proceeds from lease line ............................ -- 1,203
Repayments under lease line ......................... (339) (190)
Repayment of debt ................................... (767) (47)
--------- ---------
Net cash provided by financing activities ............. 824 122,471
Net increase in cash and cash equivalents ........... 10,571 112,952
Cash and cash equivalents at beginning of period .... 11,914 16,357
--------- ---------
Cash and cash equivalents at end of period .......... $ 22,485 $ 129,309
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE> 6
GOTO.COM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY, BASIS OF PRESENTATION
GoTo.com, Inc. (the Company or GoTo) operates an online marketplace that
introduces consumers and businesses who search the Internet to advertisers who
provide products, services and information. Advertisers participating in our
marketplace include retail merchants, wholesale and service businesses and
manufacturers. We facilitate these introductions through our search service,
which enables advertisers to bid in an ongoing auction for priority placement in
our search results. Priority placement means that the search results appear on
the page ranked in descending order of bid price, with the highest bidder's
listing appearing first. Each advertiser pays GoTo the amount of its bid
whenever a consumer clicks on the advertiser's listing in our search results.
Advertisers pay GoTo for each click-through, so advertisers bid only on keywords
relevant to the products, services or information that they offer. Because each
advertiser chooses the bid amount and advertisement placement that is optimal
for its business, we believe the GoTo marketplace provides advertisers with a
cost-effective way to target consumers. Consumers access the GoTo search service
primarily through our affiliates, a network of Web sites that have integrated
the GoTo search service into their sites or that direct consumer traffic to our
site. Consumers can also access the GoTo search service through the GoTo Web
site. GoTo also operates an online comparison shopping service called "GoTo (TM)
Shopping" (see Note 6), which allows the consumers the ability to better locate
their desired products by automating product comparison across multiple
attributes. By enabling consumers to search at the product level, GoTo (TM)
Shopping creates more targeted, and therefore highly valuable, advertising
opportunities for our advertisers. GoTo also operates an online resource for
auctions called "GoTo (TM) Auctions" (see Note 6), which allows consumers to
search for products and services at more than 200 auction sites and B2B
exchanges across the Internet, enables sellers to easily manage their postings
and distributes its services through affiliate Web sites, much like the GoTo
search service and GoTo (TM) Shopping. As with Web search, we offer GoTo (TM)
Shopping and GoTo (TM) Auctions through our affiliate network as well as at our
Web site, providing consumers with multiple points of access to, and advertisers
with multiple points of distribution for, the advertisers' products. The Company
operates in one reportable business segment.
GoTo was incorporated on September 15, 1997 in the state of Delaware and
officially launched its service on June 1, 1998.
The preparation of financial statements, in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities, and the reported amounts of
revenues and expenses. Actual results could differ materially from those
estimates.
The accompanying unaudited condensed consolidated 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, except for
the write-off of approximately $7.6 million of in-process research and
development associated with GoTo's acquisition of Cadabra, Inc. (Cadabra), (see
Note 6). 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
fiscal year 1999 Form 10-K.
2. COMPREHENSIVE INCOME (LOSS)
The Company accounts for comprehensive income (loss) using Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income."
SFAS No. 130 establishes standards for reporting comprehensive income and its
components in financial statements. Comprehensive income, as defined therein,
refers to revenues, expenses, gains and losses that are not included in net
income (loss) but rather are recorded directly in stockholders' equity. Total
comprehensive loss for the quarter ended June 30, 2000 approximated net loss.
6
<PAGE> 7
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 that is 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.
Options to purchase approximately 5.2 million and 2.4 million shares of
common stock were outstanding as of June 30, 2000 and 1999, respectively. In
addition, as of June 30, 2000, there were approximately 3.4 million shares of
unvested common stock outstanding, which are subject to repurchase by GoTo. 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999 2000 1999
------------- -------- ------------- --------
<S> <C> <C> <C> <C>
Numerator:
Net loss ..................................... $(20,316) $ (7,040) $(50,825) $(14,400)
======== ======== ======== ========
Denominator:
Denominator for historical basic and diluted
Calculation -- Weighted average shares .... 48,007 15,264 46,657 13,121
======== ======== ======== ========
Weighted average effect of pro forma securities:
Series A Preferred Stock ..................... -- 435 453
Series B Preferred Stock ..................... -- 7,665 7,988
Series C Preferred Stock ..................... -- 9,879 10,295
Series D Preferred Stock ..................... -- 2,580 1,290
-------- -------- -------- --------
Denominator for pro forma basic and diluted
Calculation ............................... 48,007 35,823 46,657 33,147
======== ======== ======== ========
Pro forma basic and diluted net loss per share . $ (0.42) $ (0.20) $ (1.09) $ (0.43)
======== ======== ======== ========
Historical basic and diluted net loss per share $ (0.42) $ (0.46) $ (1.09) $ (1.10)
======== ======== ======== ========
</TABLE>
4. LITIGATION
On May 25, 2000, GoTo settled its trademark infringement lawsuit against
The Walt Disney Company. Pursuant to a settlement agreement, Disney paid GoTo
$21.5 million, which is included in other income, and Disney has also agreed to
permanently discontinue its use of the disputed Go Network logo and the
replacement logo. GoTo will continue to use the logo it has used since 1997. In
addition, Disney agreed to dismiss its counterclaim against GoTo.
5. RELATED PARTY TRANSACTIONS
During 1998 and through January 1999, Bill Gross' idealab!, which, with
its affiliate, idealab! Holdings, L.L.C., is a significant stockholder of GoTo,
provided certain services to GoTo, such as Internet connection and email
services. During February 1999 and July 1999, GoTo entered into two lease
agreements with Bill Gross' idealab!, which were effective through January 2000.
Subsequently, GoTo entered into an arrangement with Bill Gross' idealab! for
approximately 58,000 square feet of office space with total lease payments of
approximately $7.1 million commencing on January 15, 2000, terminating on
October 31, 2004. Total fees for leasing and management services were
approximately $916,000 and $138,000 for the six months ended June 30, 2000 and
1999, respectively. Management believes these amounts are materially
representative of the fair value of services received.
7
<PAGE> 8
During the six months ended June 30, 2000, GoTo recorded approximately
$211,000 of search listing advertising revenue from Bill Gross' idealab! During
the six months ended June 30, 2000, GoTo also recorded approximately $143,000 of
search listing and banner revenue from Cadabra prior to the closing of GoTo's
acquisition of Cadabra on January 31, 2000. Cadabra began advertising its Web
site on GoTo's marketplace on December 17, 1999 and ceased advertising on GoTo
on January 13, 2000. Management believes the amounts paid by Cadabra were
materially representative of the fair value of advertising services provided.
On March 3, 2000, GoTo entered into a Stockholder Agreement with Bill
Gross' idealab!, which provides, among other things, that Bill Gross' idealab!
will not and will cause its affiliates not to, directly or indirectly, except
with the prior written consent of our Board of Directors and, without
limitation, a majority of our directors who are not, and have not been for the
previous twelve months, affiliates of Bill Gross' idealab! or any of its
affiliates or associates:
- become a beneficial owner of 35% or more of the outstanding
common stock of GoTo;
- transfer beneficial ownership of any common stock of GoTo except
(A) pursuant to the terms of a merger, consolidation or
liquidation of, or tender offer or other business combination
transaction with respect to GoTo, in each case approved by our
Board of Directors and, without limitation, by a majority of our
directors who are not, and have not been for the previous twelve
months, affiliates of Bill Gross' idealab! or any of its
affiliates or associates; (B) pro rata distributions by certain
of the affiliated venture funds of Bill Gross' idealab! of
shares of common stock of GoTo to their limited partners
consistent with past practice, or (C) other transfers to third
parties, provided that any such third party (together with any
of its affiliates and associates) would not, to the knowledge of
Bill Gross' idealab! after inquiry, following the completion of
such transfer, beneficially own 15% or more of the outstanding
common stock of GoTo; or
- knowingly assist or advise, or knowingly provide or arrange
financing to facilitate, another person or entity, or group of
persons or entities acting in concert, to become the beneficial
owner of 15% or more of the outstanding common stock of GoTo
Further, the Stockholder Agreement also provides that, until March 3,
2002, so long as Bill Gross' idealab! is the beneficial owner of at least 20% of
the outstanding common stock of GoTo, GoTo will not, without the prior written
consent of Bill Gross' idealab!, adopt a "shareholder rights plan" (commonly
referred to as a "poison pill"); provided, however, that if, in the good faith
judgment of our Board, after consideration of its fiduciary duties, adoption of
such a shareholder rights plan would be in the best interests of our
stockholders, we may adopt such a shareholder rights plan without the consent of
Bill Gross' idealab! so long as the percentage thresholds set forth in such plan
are no more restrictive to Bill Gross' idealab! than the terms of the
Stockholder Agreement. If we adopt a shareholder rights plan, the Stockholder
Agreement will terminate and be of no further force or effect.
6. ACQUISITIONS
Cadabra
On January 31, 2000, GoTo acquired Cadabra, an online comparison
shopping service. Pursuant to the Agreement and Plan of Reorganization, GoTo
acquired all of the outstanding shares of capital stock and assumed all
outstanding options to acquire shares of capital stock of Cadabra, for $8.0
million in cash and 3,283,672 shares of GoTo common stock, including 214,833
shares to be issued upon the exercise of options assumed by GoTo. The
acquisition was accounted for as a purchase. Under the purchase method of
accounting, the purchase price is allocated to the assets acquired and
liabilities assumed based on their estimated fair values as determined by GoTo
at the date of the acquisition. The operations of Cadabra have been included in
our results of operations since the date of the acquisition. The total purchase
price of the acquisition was approximately $263.1 million and consisted of cash
of $8.0 million; GoTo common stock of $252.5 million valued at the closing price
of GoTo's common stock on the date the exchange ratio was set, net of expected
proceeds from the exercise of Cadabra stock options assumed by GoTo; and
acquisition costs of $2.6 million, primarily for investment banking, legal and
accounting costs. Of the purchase price, $7.6 million was assigned to in-process
research and development which was expensed immediately following the
consummation of the acquisition, $6.0 million was assigned to the value of
purchased technology and other intangibles and will be amortized on a
straight-line basis over three years and $4.4 million was allocated to the net
tangible assets. The excess purchase price over the estimated fair value of the
assets acquired and liabilities assumed has been allocated to goodwill in the
amount of $245.1 million and will be amortized on a straight-line basis over
three years. The projects identified as in-process research and development are
those that are currently underway, that will require additional effort to
establish technological feasibility and have no alternative future use. The
projects are expected to add features that will enhance the operating
capabilities of the service. At the acquisition date, these projects were
approximately 80% complete and will require
8
<PAGE> 9
additional total expected costs of approximately $2.0 million to complete,
consisting principally of personnel related costs. These projects are expected
to be completed during fiscal year 2000. To determine the value of in-process
research and development, the expected future cash flows, including costs to
reach technological feasibility, were discounted at an after-tax rate of 25%,
taking into account risks related to the characteristics and applications of the
technology, existing and future markets, and assessments of the life cycle stage
of the technology. GoTo obtained an independent appraisal to derive the purchase
price allocation.
AuctionRover
On May 3, 2000, GoTo acquired AuctionRover, an online resource for
auctions. Pursuant to the Agreement and Plan of Reorganization, GoTo acquired
all of the outstanding shares of capital stock and assumed all outstanding
options to acquire shares of capital stock of AuctionRover for 3,470,588 shares
of GoTo common stock, including 521,408 shares to be issued upon the exercise of
options assumed by GoTo. The acquisition was accounted for as a purchase. The
operations of AuctionRover have been included in our results of operations since
the date of acquisition. Based on the price of GoTo common stock on the date the
exchange ratio was set, the purchase price was valued at approximately $174.2
million, which consisted of GoTo common stock of $173.7 million, net of expected
proceeds from the exercise of stock options assumed by GoTo and including
acquisition costs of approximately $500,000 for legal and accounting services.
The purchase price was determined by arms-length negotiations between the
parties. Timothy Draper, who was a director GoTo at the time of the AuctionRover
acquisition, is affiliated with certain entities, that were principal
stockholders of AuctionRover. GoTo intends to continue to operate AuctionRover's
business. Of the purchase price, $6.7 million was assigned to the value of
purchased technology and other intangible assets and will be amortized on a
straight-line basis over three years and $600,000 was allocated to the net
tangible assets. The excess purchase price over the estimated fair value of the
assets acquired and liabilities assumed has been allocated to goodwill in the
amount of $167.0 million and will be amortized on a straight-line basis over
three years. GoTo assumed a line of credit with an outstanding balance of
approximately $700,000, which GoTo paid off in the current quarter.
The following unaudited pro forma financial information presents the
combined results of operations of GoTo, Cadabra and AuctionRover as if the
acquisitions had occurred as of the beginning of each period presented, after
giving effect to certain adjustments, including amortization of goodwill and
intangible assets, but excludes the non-recurring charge for the write-off of
in-process research and development associated with the Cadabra acquisition. The
pro forma financial information does not necessarily reflect the results of
operations that would have occurred had the Company, Cadabra and AuctionRover
constituted a single entity during such periods.
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
June 30, 2000 June 30, 1999
---------------- ----------------
<S> <C> <C>
Revenue .......................... $ 38,092 $ 5,331
Net loss ......................... (80,292) (85,893)
Pro forma net loss per share ..... (1.67) (2.32)
Historical net loss per share .... $ 1.67) $ (5.04)
</TABLE>
9
<PAGE> 10
ITEM 2. 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.
OVERVIEW
GoTo operates an online marketplace that introduces consumers and
businesses who search the Internet to advertisers who provide products, services
and information. Advertisers participating in our marketplace include retail
merchants, wholesale and service businesses and manufacturers. We facilitate
these introductions through our search service, which enables advertisers to bid
in an ongoing auction for priority placement in our search results. Priority
placement means that the search results appear on the page ranked in descending
order of bid price, with the highest bidder's listing appearing first. Each
advertiser pays GoTo the amount of its bid whenever a consumer clicks on the
advertiser's listing in our search results. Advertisers pay GoTo for each
click-through, so advertisers bid only on keywords relevant to the products,
services or information that they offer. Because each advertiser chooses the bid
amount and advertisement placement that is optimal for its business, we believe
the GoTo marketplace provides advertisers with a cost-effective way to target
consumers. Consumers access the GoTo search service primarily through our
affiliates, a network of Web sites that have integrated the GoTo search service
into their sites or that direct consumer traffic to our site. Consumers can also
access the GoTo search service through the GoTo Web site. GoTo also operates an
online comparison shopping service called "GoTo (TM) Shopping" (see Note 6),
which allows the consumers the ability to better locate their desired products
by automating product comparison across multiple attributes. By enabling
consumers to search at the product level, GoTo (TM) Shopping creates more
targeted, and therefore highly valuable, advertising opportunities for our
advertisers. GoTo also operates an online resource for auctions called "GoTo
(TM) Auctions" (see Note 6), which allows consumers to search for products and
services at more than 200 auction sites and B2B exchanges across the Internet,
enables sellers to easily manage their postings and distributes its services
through affiliate Web sites, much like the GoTo search service and GoTo (TM)
Shopping. As with Web search, we offer GoTo (TM) Shopping and GoTo (TM) Auctions
through our affiliate network as well as at our Web site, providing consumers
with multiple points of access to, and advertisers with multiple points of
distribution for, the advertisers' products.
A large and growing number of consumers using the GoTo search service at
our Web site and at our affiliates' Web sites across the Internet increases the
incentive for advertisers to bid in the GoTo marketplace. In turn, a breadth of
relevant advertiser links increases the value to consumers of using the GoTo
search service. Consequently, we believe a large and active base of advertisers,
consumers and affiliates in our marketplace can stimulate growth in bidding,
searches and paid introductions.
Our revenue consists of search listing advertisements and banner
advertisements. The Company has no barter transactions. For the quarter ended
June 30, 2000, 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.
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Our revenue is determined primarily by the number of paid introductions,
that is the result of the number of times consumers click on advertisers' search
listing advertisements, multiplied by the bid price for those listings. The
number of paid introductions for each of the last eight fiscal quarters is as
follows:
<TABLE>
<CAPTION>
NUMBER OF PAID INTRODUCTIONS FOR THE QUARTER ENDED
---------------------------- ---------------------
<S> <C>
93 million............................. June 30, 2000
88 million............................. March 31, 2000
73 million............................. December 31, 1999
54 million............................. September 30, 1999
31 million............................. June 30, 1999
15 million............................. March 31, 1999
7 million............................. December 31, 1998
2 million............................. September 30, 1998
</TABLE>
The average price per paid introduction results from advertisers' online
bidding for priority placement in the search results. The average price per paid
introduction for each of the last eight fiscal quarters is as follows:
<TABLE>
<CAPTION>
AVERAGE PRICE PER PAID INTRODUCTION FOR THE QUARTER ENDED
----------------------------------- ---------------------
<S> <C>
$0.21.................................... June 30, 2000
0.19.................................... March 31, 2000
0.17.................................... December 31, 1999
0.14.................................... September 30, 1999
0.11.................................... June 30, 1999
0.08.................................... March 31, 1999
0.05.................................... December 31, 1998
$0.03.................................... September 30, 1998
</TABLE>
We believe the quarterly number of paid introductions and average price
per paid introduction listed above are not necessarily indicative of future
results and that the periods prior to the three-month period ended September 30,
1998 are not relevant because our service was only in its initial stage. It is
difficult to forecast the future growth of the average price per paid
introduction, as advertisers, rather than GoTo, determine the price paid. 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.
GoTo was incorporated in September 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 (TM) service was
announced in February 1998, and following further proof-of-concept testing, was
officially launched in June 1998. We launched GoTo (TM) Shopping during the
month of February 2000 and GoTo (TM) Auctions during the month of May 2000. GoTo
has devoted significant resources to launching its search service, including
developing an infrastructure and building a management team. GoTo's losses for
the six months ended June 30, 2000 and the years ended December 31, 1999 and
1998 were approximately $50.8 million, $29.3 million and $14.0 million,
respectively.
We believe that the GoTo search service, GoTo (TM) Shopping, and GoTo
(TM) Auctions will be more attractive to advertisers as more consumers use them
for their search needs and more attractive to consumers as more advertisers bid
for placement in our search, shopping and auction results. A significant
component of our expenses consists of costs incurred to attract consumers to our
service. We primarily attract consumers through our affiliate network. 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
increasing the revenue we derive from this traffic.
As a result of our acquisitions of Cadabra and AuctionRover, we believe
our cost of revenue; marketing, sales and service expenses; general and
administrative expenses and product development expenses will increase as we
integrate and expand our shopping and auction services. Further, these products
have limited histories and it is difficult to forecast revenues, expenses and
therefore the total potential loss. In addition, we will incur significant
additional charges resulting from the amortization of goodwill and other
acquired intangible assets.
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<PAGE> 12
Acquisitions
On January 31, 2000, GoTo acquired Cadabra, an online comparison
shopping service. Pursuant to the Agreement and Plan of Reorganization, GoTo
acquired all of the outstanding shares of capital stock and assumed all
outstanding options to acquire shares of capital stock of Cadabra, for $8.0
million in cash and 3,283,672 shares of GoTo common stock, including 214,833
shares to be issued upon the exercise of options assumed by GoTo. The
acquisition was accounted for as a purchase. Under the purchase method of
accounting, the purchase price is allocated to the assets acquired and
liabilities assumed based on their estimated fair values as determined by GoTo
at the date of the acquisition. The operations of Cadabra have been included in
our results of operations since the date of the acquisition. The total purchase
price of the acquisition was approximately $263.1 million and consisted of cash
of $8.0 million; GoTo common stock of $252.5 million valued at the closing price
of GoTo's common stock on the date the exchange ratio was set, net of expected
proceeds from the exercise of Cadabra stock options assumed by GoTo; and
acquisition costs of $2.6 million, primarily for investment banking, legal and
accounting costs. Of the purchase price, $7.6 million was assigned to in-process
research and development which was expensed immediately following the
consummation of the acquisition, $6.0 million was assigned to the value of
purchased technology and other intangibles and will be amortized on a
straight-line basis over three years and $4.4 million was allocated to the net
tangible assets. The excess purchase price over the estimated fair value of the
assets acquired and liabilities assumed has been allocated to goodwill in the
amount of $245.1 million and will be amortized on a straight-line basis over
three years. The projects identified as in-process research and development are
those that are currently underway, that will require additional effort to
establish technological feasibility and have no alternative future use. The
projects are expected to add features that will enhance the Web site scraping
ability and operating capabilities of the service. At the acquisition date,
these projects were approximately 80% complete and will require additional
expected costs of approximately $2.0 million to complete, consisting principally
of personnel-related costs. These projects are expected to be completed during
fiscal year 2000. To determine the value of in-process research and development,
the expected future cash flows, including costs to reach technological
feasibility, were discounted at an after-tax rate of 25%, taking into account
risks related to the characteristics and applications of the technology,
existing and future markets, and assessments of the life cycle stage of the
technology. GoTo obtained an independent appraisal to derive the purchase price
allocation.
On May 3, 2000, GoTo acquired AuctionRover, an online resource for
auctions. Pursuant to the Agreement and Plan of Reorganization, GoTo acquired
all of the outstanding shares of capital stock and assumed all outstanding
options to acquire shares of capital stock of AuctionRover for 3,470,588 shares
of GoTo common stock, including 521,408 shares to be issued upon the exercise of
options assumed by GoTo. Based on the price of GoTo common stock on the date the
exchange ratio was set, the purchase price was valued at approximately $174.2
million, which consisted of GoTo common stock of $173.7 million, net of expected
proceeds from the exercise of stock options assumed by GoTo and including
acquisition costs of approximately $500,000 for legal and accounting services.
The purchase price was determined by arms-length negotiations between the
parties. Timothy Draper, a former director of GoTo, is affiliated with certain
entities that were principal stockholders of AuctionRover. GoTo intends to
continue to operate AuctionRover's business. Of the purchase price, $6.7
million was assigned to the value of purchased technology and other intangible
assets and will be amortized on a straight-line basis over three years and
$600,000 was allocated to the net tangible assets. The excess purchase price
over the estimated fair value of the assets acquired and liabilities assumed has
been allocated to goodwill in the amount of $167.0 million and will be amortized
on a straight-line basis over three years.
International Expansion
We plan to launch our service in the United Kingdom during the fourth
quarter of this year and our German-speaking marketplace during the first half
of 2001. Our international expansion will require continued investment, and we
expect to incur significant costs to build internal infrastructure and grow
advertiser and affiliate bases. Therefore, our strategy is to align with
partners that may accelerate the timing of expansion, provide key distribution
channels for our products and provide additional financing. At this stage the
structure of potential partnerships is not known, but it is intended that the
partners will take an equity position in GoTo's international ventures, which
would potentially reduce the start-up losses that we would record. If
appropriate partnerships with terms acceptable to us are not obtained, our share
of international start-up costs may be higher.
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<PAGE> 13
RESULTS OF OPERATIONS
Revenue. Revenue primarily consists of search listing advertisements and
banner advertisements. GoTo has no barter transactions. For the quarter ended
June 30, 2000, banner advertisement revenue constituted less than 10 percent of
our revenue. Revenue was approximately $21.0 million for the quarter ended June
30, 2000 compared to approximately $3.6 million for the quarter ended June 30,
1999. Revenue was approximately $38.2 million for the six months ended June 30,
2000 compared to approximately $5.1 million for the six months ended June 30,
1999. 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 have experienced rapid growth from the quarter ended June 30,
1999 through the quarter ended June 30, 2000; however, we do not anticipate our
historical revenue growth rate to continue as a percentage of growth as
expressed on a year-to-year or quarter-to-quarter comparison basis. Our growth
is dependent on obtaining additional traffic. For the quarter ended June 30,
2000, approximately 15% of our overall traffic came from the browsers,
Microsoft's Internet Explorer and Netscape. Although we entered into a one-year
agreement with Microsoft on January 21, 2000 for continued traffic from their
Internet Explorer 4 and Internet Explorer 5 browsers, we expect Microsoft to
deliver a diminishing level of traffic to us in 2000 compared to 1999, and
anticipate that we eventually will receive no traffic from Internet Explorer 4
and Internet Explorer 5. Our agreement with Netscape was recently renewed and
will expire on June 30, 2001. Even though we currently anticipate growth in
traffic from existing and new affiliates, we must renew our affiliate agreements
or replace this traffic with other sources and grow our advertising base,
otherwise our revenue may be materially, adversely affected.
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 $2.8 million for the quarter ended June
30, 2000 compared to approximately $1.3 million for the quarter ended June 30,
1999. Cost of revenue was approximately $5.4 million for the six months ended
June 30, 2000 compared to approximately $2.3 million for the six months ended
June 30, 1999. 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. Marketing, sales and service expenses
consist primarily of our advertising and promotional expenditures, such as
online links from other Web sites associated with our affiliate network, banner
advertisements on other sites and offline media advertising, as well as payroll
and related expenses for personnel engaged in marketing, customer service and
sales functions. Marketing, sales and service expenses were approximately $18.3
million for the quarter ended June 30, 2000 compared to approximately $5.7
million for the quarter ended June 30, 1999. Marketing, sales and service
expenses were approximately $34.6 million for the six months ended June 30, 2000
compared to approximately $10.4 million for the six months ended June 30, 1999.
The increase was primarily due to increased distribution of our search service,
the hiring of additional personnel for marketing, sales and service functions
and our print and television media advertising campaign in the fourth quarter of
1999, which extended into the first quarter of 2000. We believe that continued
investment in marketing, sales and service and in the increased distribution of
our services 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; and professional services, including legal, insurance and
other general corporate expenses. General and administrative expenses were
approximately $8.1 million for the quarter ended June 30, 2000 compared to
approximately $2.4 million for the quarter ended June 30, 1999. General and
administrative expenses were approximately $14.3 million for the six months
ended June 30, 2000 compared to approximately $4.0 million for the six months
ended June 30, 1999. 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.
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 $4.3 million
for the quarter ended June 30, 2000 compared to approximately $1.0 million for
the quarter ended June 30, 1999. Product development expenses were approximately
$6.5 million for the six months ended June 30, 2000 compared to approximately
$1.5 million for the six months ended June 30, 1999. The increase was a result
of increased staffing and associated costs relating to enhancing features and
functionality to our Web site and search service. The increase was offset by
capitalization of certain costs under Statement of Position 98-1, "Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use," of
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<PAGE> 14
approximately $846,000 and $1.5 million during the quarter ended June 30, 2000
and the six months ended June 30, 2000, respectively. 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
from the inception of GoTo through our initial public offering have been
considered to be compensatory for financial accounting purposes. Total
compensation resulting from these stock options amounted to approximately $7.4
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, adjusted for the return of unvested options or the
repurchase of restricted stock resulting from employee terminations.
Compensation associated with these stock options is amortized and expensed over
the applicable vesting periods using a graded methodology. Approximately
$375,000 and $1.1 million were amortized and charged to operations for the
quarters ended June 30, 2000 and 1999, respectively. Approximately $800,000 and
$2.4 million were amortized and charged to operations for the six months ended
June 30, 2000 and 1999, respectively.
Acquisition-Related Charges. On January 31, 2000, GoTo acquired Cadabra.
The total purchase price of the acquisition was approximately $263.1 million, of
which $7.6 million was assigned to in-process research and development which was
expensed immediately following the consummation of the acquisition, $6.0 million
was assigned to the value of purchased technology and other intangible assets
and will be amortized on a straight-line basis over three years and $4.4 million
was allocated to the net tangible assets. The excess purchase price over the
estimated fair value of the assets acquired and liabilities assumed has been
allocated to goodwill in the amount of $245.1 million and will be amortized on a
straight-line basis over three years. On May 3, 2000, GoTo also acquired
AuctionRover. The total purchase price was approximately $174.2 million, of
which $6.7 million was assigned to the value of purchased technology and other
intangible assets and will be amortized on a straight-line basis over three
years and $600,000 was allocated to the net tangible assets. The excess purchase
price over the estimated fair value of the assets acquired and liabilities
assumed has been allocated to goodwill in the amount of $167.0 million and will
be amortized on a straight-line basis over three years. In the quarter ended
June 30, 2000, GoTo incurred charges for the amortization of goodwill and
intangible assets totaling approximately $30.6 million. In the six months ended
June 30, 2000, GoTo incurred charges totaling approximately $52.1 million, which
included approximately $7.6 million for the write-off of in-process research and
development and approximately $44.5 million for the amortization of goodwill and
other intangible assets. We expected acquisition-related costs to increase
slightly in future quarters because the goodwill and other intangible assets
related to the acquisition of AuctionRover only began amortizing in May 2000.
Other Income. Other income consists primarily of the settlement of
litigation with The Walt Disney Company and earnings on our cash, cash
equivalents and short-term and long-term investments, net of interest expense
attributable to leased equipment and debt. Other income was approximately $23.0
million for the quarter ended June 30, 2000 compared to approximately $922,000
for the quarter ended June 30, 1999. Other income was approximately $24.6
million for the six months ended June 30, 2000 compared to approximately $1.1
million for the six months ended June 30, 1999. The increase was primarily due
to the settlement of litigation with Disney, pursuant to which Disney paid GoTo
$21.5 million and the 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.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities totaled approximately $2.8
million and net cash used in operating activities totaled approximately $5.0
million for the six months ended June 30, 2000 and 1999, respectively. The
increase was due primarily to acquisition-related charges partially offset by
net losses for the six months ended June 30, 2000. Net cash provided by
investing activities totaled approximately $6.9 million for the six months ended
June, 2000, and net cash used in investing activities totaled approximately $4.6
million for the six months ended June 30, 1999. The increase resulted from
proceeds from maturities or sales of short-term and long-term investments, which
was partially offset by capital expenditures for property and equipment. Net
cash provided by financing activities totaled approximately $824,000 and $122.5
million for the six months ended June 30, 2000 and 1999, respectively.
Our principal sources of liquidity consisted of cash, cash equivalents
and short-term investments of approximately $97.7 million as of June 30, 2000
and approximately $105.3 million as of December 31, 1999. We also carry
long-term investments of approximately $2.5 million as of June 30, 2000, which
we believe is liquid. We believe that our cash reserves are sufficient to
sustain operations through the next 12 months, however, unknown factors may
require us to seek additional capital. Such unknown factors may include, among
other things, competitive pressure, higher cost of intellectual capital, higher
costs to accommodate increases in capacity and acquisitions.
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<PAGE> 15
We may seek additional capital through the issuance of debt or equity
depending upon our 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. 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.
RISKS THAT COULD AFFECT OUR FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
WE HAVE A LIMITED OPERATING HISTORY.
GoTo was founded in September 1997, officially launched its service in
June 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;
- dependence upon and need to hire and retain key personnel; and
- ability to integrate acquisitions, including, but not limited
to, the acquisitions of Cadabra in January 2000 and AuctionRover
in May 2000.
We cannot assure you that the GoTo service will retain its existing, or
attract new, advertisers, consumers and Web sites that include the GoTo services
on their sites or that direct consumer traffic to the GoTo Web site, which we
call "affiliates." We also cannot assure you that GoTo will achieve significant
additional revenues or improve operating margins in future periods. There can be
no assurance that GoTo's services will continue to 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 $50.8 million and $14.4 million for the six months ended June
30, 2000 and 1999, respectively, and as of June 30, 2000, we had an accumulated
deficit of approximately $94.2 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. In addition, the amortization of goodwill and other intangible assets
related to our acquisitions of Cadabra and AuctionRover will be significant, and
any similar expense for future acquisitions could negatively affect our
earnings. As a result, we will need to generate significant additional revenue
to achieve profitability and in the absence of significant additional revenue,
we may need to raise additional funds. 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 BECAUSE
OF MANY FACTORS, AND ANY OF THESE COULD ADVERSELY AFFECT OUR STOCK PRICE.
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 or significantly fluctuate. Our operating
results have varied
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<PAGE> 16
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 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 services, which are
not determined by GoTo;
- our costs of attracting consumers to GoTo's services 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 our agreements with suppliers of consumer traffic;
- the mix of paying vs. non-paying results on the GoTo services;
- our ability to significantly increase our distribution channels;
- seasonality, typical of our industry, which in the past has been
lower in the first and third quarters of our fiscal year;
- the amount and timing of operating costs and capital
expenditures relating to expansion of our operations;
- costs and delays in introducing new GoTo services and
improvements to existing services;
- costs related to the integration of acquisitions, including the
integration of Cadabra and AuctionRover;
- consumers may access advertisers through our search, shopping
and auction services and, during the initial integration of
Cadabra and AuctionRover, the prices advertisers pay for
shopping and auction listings may be lower than those paid for
Web search listing, which may result in lower revenue per each
paid introduction;
- 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.
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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 members of
our affiliate network, including providers of Internet browsers such as Netscape
Communicator and Microsoft Internet Explorer, aggregators of search offerings of
various providers, Internet Service Providers, our Web site, and banner
advertising. We entered into a one-year agreement with Microsoft Corporation for
continued traffic from their Internet Explorer 4 and Internet Explorer 5
browser, which commenced on January 21, 2000. This source is expected to deliver
a diminishing level of traffic to us in 2000 compared to 1999, and we expect
that we will eventually receive no traffic from this source. In addition, our
agreement with Netscape will expire on June 30, 2001. 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. For the quarter ended June 30, 2000,
approximately 91% of all of GoTo's traffic came from our affiliates. Of GoTo's
total traffic, approximately 15% of the total traffic came from the browsers,
Microsoft's Internet Explorer and Netscape, approximately 76% of the total
traffic came from other affiliates and the remaining 9% of the total traffic
came directly to the GoTo Web site. We generally obtain traffic from the
browsers and other affiliates 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 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 services. 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 services in
particular has been introduced only recently, and we cannot predict the level of
its acceptance as an advertising medium. Our services may not achieve
significant acceptance by consumers. Among other things, because our services
prioritize 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.
OUR FUTURE SUCCESS IS DEPENDENT UPON FURTHER DEVELOPING AND ENHANCING THE
AFFILIATE 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
affiliates, who provide their users with GoTo services 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 services and enhance our
sales. Our future ability to attract consumers to our services is dependent upon
the growth of our affiliate network, which is new and unproven. Our agreements
with some of our affiliates are generally terminable at will by either party at
any time. The loss of our agreements with our existing affiliates could damage
our business. If we are unable to successfully develop and maintain
relationships with affiliates, our business will be damaged.
WE MAY HAVE DIFFICULTY IMPLEMENTING GOTO (TM) SHOPPING AND GOTO (TM) AUCTIONS,
AND CONSUMERS AND ADVERTISERS MAY NOT ADOPT EITHER GoTo (TM) SHOPPING OR GoTo
(TM) AUCTIONS.
We intend to extend our pay-for-placement model for Web search to GoTo
(TM) Shopping and GoTo (TM) Auctions, which services were acquired in recent
acquisitions. GoTo (TM) Shopping permits advertisers to bid for placement in
search results generated from a consumer's search for products. GoTo (TM)
Auctions allows GoTo to carry listings of major auction sites. We may not be
able to successfully implement this model for GoTo (TM) Shopping or GoTo (TM)
Auctions. Moreover, advertisers may not accept this model as a means to sell
their products. Failure to successfully implement GoTo (TM) Shopping or GoTo
(TM) Auctions, or to achieve market acceptance of GoTo (TM) Shopping or GoTo
(TM) Auctions on a cost-effective basis could have a significant adverse affect
on our results of operations and the price of our stock.
WE CANNOT ASSURE YOU THAT OUR STOCK PRICE WILL NOT DECLINE OR WILL NOT BE
EXTREMELY VOLATILE.
The price of our common stock may decline or may be extremely volatile.
Since our initial public offering in June 1999, the per share closing price of
our common stock has ranged from a low of $10.3125 as of July 11, 2000 to a high
of $114.50 as of November 15, 1999. In addition, an active public market for
GoTo's common stock may not continue.
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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 search
service, we offer search results provided by Inktomi Corporation. We currently
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. For
example, Inktomi results were shown on approximately 66% of June 2000 searches.
Our agreement with Inktomi expires in May 2003. The loss of this or any other
key relationship 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 currently or potentially
competes with many other providers of Web directories, search, shopping, auction
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 competes with online services, other Web sites and advertising
networks such as DoubleClick Inc. and 24/7 Media, 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 substantially increased. Accordingly, GoTo may face increased pricing
pressure for the sale of advertisements and direct marketing opportunities,
which could adversely affect our business and operating results.
GoTo also competes with providers of Web directories, search, shopping,
auction and information services, all of whom offer services competitive with
GoTo, including, among others, AltaVista, Amazon.com, Inc., America Online, Inc.
(AOL.com, Netfind and Netscape Netcenter), Ask Jeeves, Inc., AuctionWatch,
Bidder's Edge, CNET, Inc. (including mySimon Inc.), DealTime.com, Excite@Home,
Inc. (including WebCrawler and Magellan), Google, Inc., Inktomi Corporation,
LookSmart, Ltd., Lycos, Inc. (including HotBot), Microsoft Corporation
(LinkExchange, Inc. and msn.com), NBCi, OpenDirectory, Inc., ShopNow.com Inc.
(bottomdollar.com), The Walt Disney Company (Go.com) 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, shopping, auction and information services or advertising
solutions, and existing providers of Web directories, search, shopping, auction
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 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 occasional systems
interruptions and infrastructure failures, which we believe will continue to
occur.
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<PAGE> 19
WE MUST MAINTAIN AND CONTINUE TO UPGRADE OUR NEW FINANCIAL AND ACCOUNTING
SYSTEMS.
If we are not able to maintain or continue to automate our sales,
financial and accounting systems and processes, and upgrade those systems in
accordance with our growth, including the integration of any acquired companies'
systems and data, 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. If we
grow rapidly, we will face additional challenges in upgrading and maintaining
these systems.
A SIGNIFICANT PORTION OF OUR 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 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 depend 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. Our operations depend upon our ability to maintain
and protect our computer systems, all of which are located in our principal
headquarters in Pasadena, California and at two offsite locations, both managed
by third parties. One is managed by GlobalCenter, in Sunnyvale, California and
the other by Qwest Communications International, Inc., in Burbank, California.
Pasadena, Sunnyvale and Burbank exist on or near known earthquake fault zones.
The occurrence of a natural disaster or unanticipated problems at our principal
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<PAGE> 20
headquarters or at the third-party facility could cause interruptions or delays
in our business, loss of data or render us unable to provide our services. In
addition, failure by the third-party facility to provide the data communications
capacity required by us, as a result of human error, natural disaster or other
operational disruptions, could cause interruptions in our service. The
occurrence of any or all of these events could adversely affect our reputation,
brand and business, which could cause the price of our common stock to decline.
WE HAVE EXPERIENCED SIGNIFICANT GROWTH IN OUR BUSINESS, 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.
WE MAY BE UNABLE TO EXECUTE OUR BUSINESS MODEL IN INTERNATIONAL MARKETS.
A key component of our strategy is to expand our operations into
selected international markets. We plan to launch our service in the United
Kingdom during the fourth quarter of this year and in Germany during the first
half of 2001. Our strategy is to align with partners that will accelerate the
timing of expansion, provide key distribution channels for our products and
provide additional financing. At this stage the structure of potential
partnerships are not known, but it is intended that the partners will take an
equity position in us, which may reduce the start-up losses that we would incur.
If appropriate partnerships with terms acceptable to us are not obtained, our
share of international start-up costs may be higher. To date, we have not
developed localized versions of our products or operated internationally, and we
may be unable to execute our business model in these markets. Further, foreign
providers of competing online services may have a substantial advantage over us
in attracting users in their country due to more established branding in that
country, greater knowledge with respect to the cultural differences of users
residing in that country and/or their focus on a single market. We expect to
continue to experience higher costs as a percentage of revenues in connection
with the development and maintenance of international online services.
International markets we have selected may not develop at a rate that supports
our level of investment. In particular, international markets typically have
been slower than domestic markets in adopting the Internet as an advertising and
commerce medium.
In pursuing our international expansion strategy, we face several additional
risks, including:
- lower per capita Internet usage in many countries abroad, due to
a variety of causes such as lower disposable incomes, lack of
telecommunications and computer infrastructure and questions
regarding adequate on-line security for e-commerce transactions;
- relatively small Internet markets in some countries, which may
prevent us from aggregating sufficient traffic and advertising
revenues and scaling our business model in those countries;
- our potential inability to aggregate a large amount of Internet
traffic and find and develop relationships with international
advertising and distribution partners;
- competition in international markets from a broad range of
competitors, including Yahoo!, LookSmart, Alta Vista and other
United States and foreign search engines, content aggregators
and portals, some of which have greater local experience than we
do;
- difficulties in recruiting qualified and knowledgeable staff and
in building locally relevant products and services, which could
prevent us from aggregating a large advertiser base;
- higher costs of doing business in foreign countries;
- trade barriers and unexpected changes and differences in
regulatory, tax and legal requirements applicable to Internet
services; and
- longer payment cycles and foreign currency fluctuations.
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<PAGE> 21
One or more of these factors could have a material adverse effect on our
future international operations and, consequently, on our business, operating
results and financial condition.
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.
MANY OF OUR ADVERTISERS ARE EMERGING INTERNET COMPANIES THAT REPRESENT CREDIT
RISKS.
Some of our advertisers have limited operating histories, are operating
at a loss, have limited cash reserves or have limited access to capital. If any
significant part of our customer base experiences financial difficulties, is not
commercially successful or is unable to pay our advertising fees for any reason,
our business could materially suffer.
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. Allegations are made against us from time to
time concerning these types of claims. 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 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, "www.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 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
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<PAGE> 22
including "GoTo," "Go," "Go2" or a variation could require us to change our name
or our logo, 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.
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 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 choose to raise additional funds prior to
the expiration of this period or at a later date.
THE ACQUISITIONS OF CADABRA AND AUCTIONROVER COULD BE DIFFICULT TO INTEGRATE,
DISRUPT OUR BUSINESS, DILUTE STOCKHOLDER VALUE AND ADVERSELY AFFECT OUR
OPERATING RESULTS.
We completed the acquisitions of Cadabra and AuctionRover in 2000. We
are in the process of integrating Cadabra's and AuctionRover's products,
technology and personnel, and the process may be delayed, disrupt our ongoing
business, cost more than expected and distract management. None of Cadabra's or
AuctionRover's personnel is subject to an employment agreement for any specific
term. If we lost the services of any of the key personnel of either Cadabra or
AuctionRover, it could have a significant adverse effect on the integration of
Cadabra and AuctionRover and on our business.
OTHER 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.
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, database protection, pricing, taxation, content regulation, quality
of products and services, and intellectual property
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<PAGE> 23
ownership and infringement. Such legislation could expose GoTo 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 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 will successfully avoid civil or
criminal liability for unlawful activities carried out by users of our service.
The imposition upon GoTo 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 USE 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.
FUTURE SALES OF OUR COMMON STOCK BY OUR STOCKHOLDERS 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. Up to approximately 52.2
million shares of common stock outstanding at June 30, 2000 may be available for
sale in the public market, except for 3.3 million shares that are subject to
repurchase by GoTo and transfer restrictions as a result of vesting agreements.
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.
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.
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. 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.
Furthermore, in March 2000, we entered into a Stockholder Agreement with
Bill Gross' idealab!, which limits Bill Gross' idealab!'s and its affiliates'
ability to beneficially own 35% or more of our outstanding common stock, to
transfer shares of our common stock or to knowingly assist or advise, or
knowingly provide or arrange financing to facilitate any other person or entity
to beneficially own 15% or more of our outstanding common stock.
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<PAGE> 24
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
GoTo's exposure to market risk for interest rate changes relates
primarily to its investment portfolio. GoTo had no derivative financial
instruments as of June 30, 2000 or December 31, 1999. GoTo places its investment
portfolio in high quality credit instruments, which are spread to many issuers.
GoTo's investments are principally confined to cash equivalents and
available-for-sale debt securities.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On May 25, 2000, GoTo settled its trademark infringement lawsuit against
The Walt Disney Company. Pursuant to a settlement agreement, Disney paid GoTo
$21.5 million, which is included in other income, and Disney has also agreed to
permanently discontinue its use of the disputed Go Network logo and the
replacement logo. GoTo will continue to use the logo it has used since 1997. In
addition, Disney agreed to dismiss its counterclaim against GoTo.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the quarter ended June 30, 2000, GoTo used approximately $15.9
million of the proceeds from its initial public offering to fund on-going
operations and capital expenditures for computer hardware, software and
leasehold improvements.
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
At the annual meeting of stockholders held on May 25, 2000, the
following proposals were adopted by the margins indicated:
(1) To elect two directors to hold office for a term of three years
until the annual meeting of stockholders in the year 2001 (Class
I directors):
<TABLE>
<CAPTION>
Votes For Votes Withheld
---------- --------------
<S> <C> <C>
Jeffrey S. Brewer 37,691,775 2,324,909
Robert Kavner 39,943,160 73,524
</TABLE>
William Gross and William Elkus continue serving as directors
until the annual meeting of stockholders in the year 2001 (Class
II directors). Linda Fayne Levinson and Ted Meisel continue
serving as directors until the annual meeting of stockholders in
the year 2002 (Class III directors).
(2) To amend the 1998 Stock Plan to (i) increase the number of shares
reserved for issuance by an additional 5,000,000 shares and (ii)
increase the percentage of the annual increase in the number of
shares reserved for issuance from 4% of the outstanding shares on
such date to 5% of the outstanding shares on such date.
<TABLE>
<CAPTION>
Votes For Votes Against Abstain Broker Non-Votes
---------- ------------- ------- ----------------
<S> <C> <C> <C> <C>
31,646,496 1,498,198 37,391 6,834,599
</TABLE>
(3) Ratification of appointment of Ernst & Young LLP as the GoTo's
independent auditors for the 2001 fiscal year.
<TABLE>
<CAPTION>
Votes For Votes Against Abstain Broker Non-Votes
---------- ------------- ------- ----------------
<S> <C> <C> <C> <C>
40,000,261 9,656 6,767 0
</TABLE>
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<PAGE> 25
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.
The Company filed a Current Report on Form 8-K dated May 8, 2000 to
report under Item 2 thereof the acquisition of AuctionRover. This report
includes the required Pro Forma Information and Financial Statements required
under Form 8-K.
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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 1, 2000 GOTO.COM, INC.
By: /s/ TODD TAPPIN
---------------------------------
Todd Tappin
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
26
