<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): JUNE 23, 1998
go2net, Inc.
------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE
----------------------------------------------
(STATE OR OTHER JURISDICTION OF INCORPORATION)
0-22047 91-1710182
------- ----------
(COMMISSION (IRS EMPLOYER
FILE NUMBER) IDENTIFICATION NO.)
999 THIRD AVENUE, SUITE 4700, SEATTLE, WA 98004
----------------------------------------- -----
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(206) 447-1595
--------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NOT APPLICABLE
--------------
(FORMER NAME OR FORMER ADDRESS, IF CHANGED SINCE LAST REPORT)
<PAGE> 2
The undersigned registrant hereby reports the following items related to the
restatement of the Registrant's financial statements to reflect the acquisition
of Silicon Investor, Inc. ("SI") in a transaction accounted for as a pooling of
interests:
ITEM 5: OTHER EVENTS
go2net, Inc. ( the "Company") has given retroactive effect in the
consolidated financial statements attached as an exhibit hereto for a merger
consummated on June 23, 1998. The merger was accounted for as a pooling of
interests and the supplemental consolidated financial statements attached as an
exhibit hereto have been restated for all periods presented in accordance with
Accounting Principles Board Opinion No. 16 Paragraph 62.
ITEM 7: FINANCIAL STATEMENTS AND EXHIBITS
(a) Exhibits
27.1 Restated Financial Data Schedule for the Year Ended September 30, 1997
27.2 Restated Financial Data Schedule for the Year Ended September 30, 1996
27.3 Restated Financial Data Schedule for the period from inception to
September 30, 1995
99.1 Supplemental Consolidated Financial Statements of go2net, Inc. for
fiscal 1997 (restated to give retroactive effect to a merger accounted
for as a pooling of interests)
99.2 Supplemental Management Discussion and Analysis
99.3 Supplemental Selected Financial Data
-2-
<PAGE> 3
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
Registrant has duly caused this amendment to be signed on its behalf by the
undersigned thereunto duly authorized.
GO2NET, INC.
Date: September 18, 1998 By: /s/ Russell C. Horowitz
------------------------------------------
Russell C. Horowitz
President, Chief Executive Officer, Chief
Financial Officer and Director (Principal
Executive and Accounting Officer)
-3-
<PAGE> 1
EXHIBIT 99.1
Exhibit 27.1
GO2NET, INC.
INDEX TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
AUDITED SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
Report of Ernst & Young LLP, Independent Auditors ...................... F-2
Supplemental Consolidated Balance Sheets as of
September 30, 1996 and 1997 ........................................... F-3
Supplemental Consolidated Statements of Operations for
the period from inception to September 30, 1995, and the
years ended September 30, 1996 and 1997 ................................ F-4
Supplemental Consolidated Statements of Shareholders'
Equity (Net Capital Deficiency) for the period from
inception to September 30, 1995, and the years ended
September 30, 1996 and 1997 ............................................ F-5
Supplemental Consolidated Statements of Cash Flows for
the period ended September 30, 1995, and the years ended
September 30, 1996 and 1997 ............................................ F-6
Notes to Supplemental Consolidated Financial Statements ................ F-7
F-1
<PAGE> 2
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
go2net, Inc.
We have audited the accompanying supplemental consolidated balance sheets of
go2net,Inc. (formed as a result of the consolidation of go2net Inc. and Silicon
Investor, Inc.) as of September 30, 1996 and 1997 and the related supplemental
consolidated statements of operations, and cash flows for the years then ended
and for the period from inception (April 27, 1995) through September 30, 1995.
The supplemental consolidated financial statements give retroactive effect to
the merger of go2net, Inc. and Silicon Investor, Inc. on June 23, 1998, which
has been accounted for using the pooling of interests method as described in the
notes to the supplemental consolidated financial statements. These supplemental
consolidated financial statements are the responsibility of the management of
go2net, Inc. Our responsibility is to express an opinion on these supplemental
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the supplemental consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of go2net, Inc. at September 30, 1996 and 1997, and the consolidated
results of its operations and its cash flows for the years then ended and for
the period from inception (April 27, 1995) through September 30, 1995, after
giving retroactive effect to the merger of Silicon Investor, Inc. as described
in the notes to the supplemental consolidated financial statements, in
conformity with generally accepted accounting principles.
Seattle, Washington Ernst & Young LLP
October 23, 1997, except for paragraphs
2 and 3 of Note 1 and Note 8, as to which
the date is June 23, 1998
F-2
<PAGE> 3
GO2NET, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1997 1996
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ......................................... $10,926,781 $1,206,824
Receivables ....................................................... 99,031 -
Prepaid expenses and other assets ................................. 145,114 8,216
----------- ----------
Total current assets ...................................... 11,170,926 1,215,040
Property and equipment, net ......................................... 621,986 271,386
Intangibles ......................................................... 688,107 -
Deposits ............................................................ 307,365 -
Other assets ........................................................ 22,681 14,225
----------- ----------
Total assets .............................................. $12,811,065 $1,500,651
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses ............................ $ 151,920 $ 69,294
Notes payable to stockholders .................................... 130,081
Short term debt .................................................. 34,580 333,421
Deferred revenue ................................................. 20,637 -
----------- ----------
Total current liabilities ................................. 337,218 402,715
Stockholders' equity:
9% Cumulative Redeemable Convertible Preferred Stock,
$1.00 par value, authorized 1,000,000 shares; no
shares at September 30, 1997 and 927,500 shares at
September 30, 1996 outstanding .................................. - 1,505,000
Common stock, $0.01 par value, authorized 9,000,000
shares; 5,739,110 shares at September 30, 1997
and 2,851,797 shares at September 30, 1996 outstanding .......... 14,741,986 184,828
Less 9% Cumulative Redeemable Convertible Preferred
Stock Subscriptions receivable .................................. - (80,000)
Accumulated deficit .............................................. (2,268,139) (511,892)
----------- ----------
Total stockholders' equity ................................ 12,473,847 1,097,936
----------- ----------
Total liabilities and stockholders' equity ................ $12,811,065 $1,500,651
=========== ==========
</TABLE>
See accompanying notes.
F-3
<PAGE> 4
GO2NET, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM INCEPTION
YEAR ENDED YEAR ENDED (APRIL 27, 1995)
SEPTEMBER 30, SEPTEMBER 30, THROUGH SEPTEMBER 30,
1997 1996 1995
------------- ------------- ---------------------
<S> <C> <C> <C>
Revenue ........................................... $ 528,595 $ 8,000 $ -
Cost of revenue ................................... 228,597 7,000 -
----------- ---------- --------
Gross profit ............................ 299,998 1,000 -
Operating expenses:
Advertising and marketing ....................... $ 102,042 $ 14,255 $ -
Product development ............................. 612,923 163,408 3,818
General and administrative ...................... 1,602,791 329,594 13,635
----------- ---------- --------
Total operating expenses ................ 2,317,756 507,257 17,453
----------- ---------- --------
Loss from operations .............................. (2,017,758) (506,257) (17,453)
Interest income, net .............................. 261,511 11,818 -
----------- ---------- --------
Net loss .......................................... $(1,756,247) $ (494,439) $(17,453)
=========== ========== ========
Net loss per share ................................ $ (0.53) $ (0.26) $(145.44)
Shares used in computing basic and diluted
net loss per share .............................. 3,285,693 1,912,588 120
</TABLE>
See accompanying notes.
F-4
<PAGE> 5
GO2NET, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
PERIOD FROM INCEPTION (APRIL 27, 1995) THROUGH SEPTEMBER 30, 1995
AND YEARS ENDED SEPTEMBER 30, 1996 AND 1997
<TABLE>
<CAPTION>
CUMULATIVE REDEEMABLE
CONVERTIBLE PREFERRED COMMON STOCK SUBSCRIPTION TOTAL
-------------------------------------------------- NOTES ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT RECEIVABLE DEFICIT EQUITY
-------- ----------- --------- ----------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of common
stock by acquired ........ - - 120 $ 10 - $ (17,453) $ (17,443)
company for cash
Capital contribution by
founders of acquired
company .................. - - - 58,626 - - 58,626
-------- ----------- --------- ----------- ------- ----------- -----------
Balance at September 30,
1995 ..................... - - 120 58,636 - (17,453) 41,183
Cash received for
common stock
sold to founders ......... - - 1,390,000 13,900 - - 13,900
Issuance of common
stock at no cost ......... - - 229,100 - - - -
Sale of preferred stock .... 927,500 $ 1,505,000 - - (80,000) - 1,425,000
Ten thousand-for-one
stock split by acquired
company .................. - - 1,195,596 - - -
Issuance of common
stock by acquired
company for cash ......... - - 36,981 30,928 - 30,928
Capital contribution by
founders of acquired
company .................. - - - 81,364 - 81,364
Net loss for the year
ended September 30,
1996 ..................... - - - - - (494,439) (494,439)
-------- ----------- --------- ----------- ------- ----------- -----------
Balance at September 30,
1996 ..................... 927,500 1,505,000 2,851,797 184,828 (80,000) (511,892) 1,097,936
Payment of note
receivable ............... - - - - 80,000 - 80,000
Issuance of common
stock at no cost ......... - - 35,500 - - - -
Conversion of preferred
stock .................... (927,500) (1,505,000) 927,500 1,505,000 - - -
Sale of common stock ....... - - 75,000 150,000 150,000
Repurchase of common
stock .................... - - (13,550) (556) - - (556)
Issuance of common
stock for services
rendered ................. - - 5,000 28,000 - - 28,000
Issuance of common
stock, net of related
expenses of $1,930,788 ... - - 1,840,000 12,789,212 - - 12,789,212
Common stock issued
in connection with
acquisition of
license .................. - - 16,667 85,002 - - 85,002
Exercise of stock
options in acquired
company .................. - - 1,196 500 - - 500
Net Loss for the year
ended September 30,
1997 ..................... - - - - - (1,756,247) (1,756,247)
-------- ----------- --------- ----------- ------- ----------- -----------
Balance at September
30, 1997 ................. - - 5,739,110 $14,741,986 - $(2,268,139) $12,473,847
======== =========== ========= =========== ======= =========== ===========
</TABLE>
See accompanying notes.
F-5
<PAGE> 6
GO2NET, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM INCEPTION
(APRIL 27, 1995)
YEAR ENDED YEAR ENDED THROUGH
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1995
------------- ------------- ---------------------
<S> <C> <C> <C>
Operating activities:
Net loss .................................................... $(1,756,247) $ (494,439) $(17,453)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization ........................... 183,263 32,911 3,419
Stock compensation ...................................... 28,000 - -
Loss on sale of equipment ............................... 5,080 - -
Changes in assets and liabilities:
Prepaid expenses and other assets ....................... (136,898) (8,216) -
Receivables ............................................. (99,031) - -
Other assets ............................................ (10,781) (14,359) -
Deposits ................................................ (309,915) - (1,270)
Deferred revenue ........................................ 20,637 - -
Accounts payable and accrued expenses ................... 82,626 69,294 -
----------- ---------- --------
Net cash used in operating activities ......................... (1,993,266) (414,809) (15,304)
Investing activities:
Acquisition of property and equipment ................... (481,463) (262,978) (43,332)
Proceeds from sale of property and equipment ............ 5,494 - -
Acquisition of Intangibles .............................. (661,204) - -
----------- ---------- --------
Net cash used in investing activities ......................... (1,137,173) (262,978) (43,332)
Financing activities:
Proceeds from issuance of common stock, net ............. 12,939,712 44,828 10
Repurchase of common stock .............................. (556) - -
Capital contribution by stockholder ..................... - 81,364 58,626
Proceeds from stockholder notes ......................... - 72,543 -
Payment on stockholder notes ............................ - (89,151) -
Borrowing on line of credit ............................. 500,000 - -
Payment on line of credit ............................... (500,000) - -
Short term borrowing .................................... 223,041 350,027 -
Payment on short term borrowing ......................... (391,801) - -
Proceeds from issuance of preferred stock ............... - 1,425,000 -
Proceeds from note receivable ........................... 80,000 - -
----------- ---------- --------
Net cash provided by financing activities ..................... 12,850,396 1,884,611 58,636
----------- ---------- --------
Increase in cash and cash equivalents ......................... 9,719,957 1,206,824 -
Cash and cash equivalents at beginning of
period ...................................................... 1,206,824 - -
----------- ---------- --------
Cash and cash equivalents at end of period .................... $10,926,781 $1,206,824 $ -
=========== ========== ========
Supplemental cashflow disclosure:
Cash paid for interest: ....................................... $ 11,692 $ 2,204 $ -
</TABLE>
See accompanying notes.
F-6
<PAGE> 7
go2net, Inc.
Notes to Supplemental Consolidated Financial Statements
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
go2net, Inc. ("The Company") (http://www.go2net.com) offers a network of
technology and community-driven Web sites focused on the following categories:
personal finance, search, commerce, and games. The Company also develops
Web-related software. go2net's properties include: Silicon Investor
(http://www.techstocks.com), the Web's largest financial discussion site;
StockSite (http://www.stocksite.com), which offers proprietary articles,
portfolio tracking tools, company research and news relating to business and
finance; MetaCrawler (http://www.metacrawler.com), a search/index guide that
combines various existing search/index guides into one service (a "metasearch
engine"); Hypermart (http://www.hypermart.net), the Web's leading provider of
free business hosting services; WebMarket (http://www.webmarket.com), a one-stop
comparison shopping service; and PlaySite (http://www.playsite.com), a
Java-based multiplayer online games site.
BASIS OF PRESENTATION
On June 23, 1998, pursuant to an Agreement and Plan of Merger, dated as of April
22, 1998, by and among the Company, Silicon Acquisition Corp., Silicon Investor,
Inc. ("SI") and certain shareholders of SI the Company acquired all of the
outstanding capital stock of SI. SI (URL: http://www.techstocks.com) operates a
site on the Web focused on personal finance.
The Company issued 1,238,043 shares of common stock and assumed all outstanding
options in connection with the acquisition of SI. This transaction was accounted
for as a pooling of interests. These supplemental consolidated financial
statements notes have been prepared to reflect the restatement of all periods
presented to include the accounts of SI. The historical results of the pooled
entities reflect each of their actual operating cost structures and, as a
result, do not necessarily reflect the cost structure of the newly combined
entity. These supplemental consolidated financial statements will become the
historical financial statements of the Company after financial statements
covering the date of consummation of the business combination are issued.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original maturities of
three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets.
F-7
<PAGE> 8
go2net, Inc.
Notes to Supplemental Consolidated Financial Statements (continued)
INTANGIBLE ASSETS
Intangible assets represent license fees associated with technology sublicenses
and acquisitions and are recorded at cost. Amortization of intangibles is
recorded using the straight-line method over the useful lives. The
recoverability of carrying values of intangible assets is evaluated on a
recurring basis. For the period ended September 30, 1997, there were no
adjustments to the carrying values of intangible assets resulting from these
evaluations.
CONCENTRATION OF CREDIT RISK
Financial instruments potentially subjecting the Company to concentration of
credit risk consist primarily of cash equivalents with one financial
institution. Management believes the financial risks associated with such
deposits are minimal.
USE OF ESTIMATES
The Company's management has made a number of estimates and assumptions relating
to the reporting of assets, liabilities, and expenses to prepare these financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
REVENUE RECOGNITION
The Company derives its revenue from the sale of advertisements on short-term
contracts and barter transactions. Advertising revenues are recognized ratably
over the period in which the advertisements are displayed. Deferred revenues
result from billings in excess of recognized revenue relating to contracts.
Barter transactions are recorded at the lower of the estimated fair value of
advertisements received or the estimated fair value of the advertisements given.
Barter revenue and the related advertising is recorded based on impressions
delivered and received with the difference recorded as an advance or prepaid. As
of September 30, 1997 and 1996, respectively, the Company did not have any
advances or prepaids related to barter agreements. For the year ended September
30, 1997, the Company recognized revenues of $163,390 from barter transactions.
The company did not recognize any revenues from barter transactions for the year
ended September 30, 1996 and the period from inception to September 30, 1995.
ADVERTISING AND MARKETING EXPENSE
The Company expenses costs associated with advertising and marketing as they are
incurred.
NET LOSS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings Per Share. Statement No. 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Basic earnings per share excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All earnings per share
amounts for all periods have been restated to conform to the requirements of
Statement No. 128. The Company has excluded all convertible preferred stock,
warrants and employee stock options from the computation of basic and diluted
earnings per share because all such securities are anti-dilutive for all periods
presented. The computation of basic and
F-8
<PAGE> 9
go2net, Inc.
Notes to Supplemental Consolidated Financial Statements (continued)
diluted earnings per share is set forth in the statement of operations.
STOCK-BASED COMPENSATION
The Company grants stock options for a fixed number of shares to employees with
an exercise price equal to the fair value of the shares at the date of grant.
The Company has elected to adopt the disclosure only provisions of Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock Based
Compensation", and accordingly accounts for stock options grants in accordance
with APB Opinion No. 25, Accounting for Stock Issued to Employees. Accordingly,
the Company recognizes no compensation expense for its stock option grants.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
which establishes standards for reporting and display of income and its
components (revenue, expenses, gains, and losses) in a full set of
general-purpose financial statements. The adoption of this new accounting
standard is not expected to have a material effect on the reported net loss per
share of the Company.
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information," which changes the way public companies
report information about operating segments. SFAS No. 131, which is based on the
management approach to segment reporting, establishes requirements to report
selected segment information quarterly and to report entity-wide disclosures
about products and services, major customers, and the material countries in
which the entity holds assets and reports revenue. The adoption of this new
accounting standard is not expected to have a material effect on the reported
net loss per share of the Company.
RECLASSIFICATIONS
Certain prior years' balances have been reclassified to conform to the current
year presentation.
2. BALANCE SHEET COMPONENTS
CASH AND CASH EQUIVALENTS
The carrying value of cash and cash equivalents consisted of:
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1997 1996
------------ ------------
<S> <C> <C>
Cash ..................................... $ 120,915 $ 366,436
Money market and time deposit balances ... 10,805,866 840,388
----------- ----------
Cash and cash equivalents ................ $10,926,781 $1,206,824
=========== ==========
</TABLE>
The carrying value of the Company's cash equivalents approximate their fair
values based on quoted market prices.
F-9
<PAGE> 10
go2net, Inc.
Notes to Supplemental Consolidated Financial Statements (continued)
PROPERTY AND EQUIPMENT
A summary of property and equipment follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1997 1996
------------ ------------
<S> <C> <C>
Computer equipment ..................... $ 718,034 $266,807
Office equipment ....................... 25,100 30,484
Leasehold improvements ................. 27,540 7,221
Other .................................. -- 1,800
--------- --------
770,674 306,312
Less accumulated depreciation .......... (148,688) (34,926)
--------- --------
$ 621,986 $271,386
========= ========
</TABLE>
Depreciation expense was $125,164 and $32,911 and $3,419 for the periods ended
September 30, 1997, 1996 and 1995, respectively.
Intangibles
Capitalized license fees were $746,206 and $0 at September 30, 1997 and 1996,
respectively. Amortization of intangibles amounted to $58,099 and $0 for 1997
and 1996. Accumulated amortization at September 30, 1997 and 1996 was $58,099
and $0, respectively.
Other Assets
Trademarks and other intangibles are included with "Other Assets" and are being
amortized over a useful life of three years. Trademarks and other intangibles
were $25,140 and $12,601 as of September 30, 1997 and 1996, respectively.
Amortization of trademarks and other intangibles amounted to $4,875 and $1,404
for 1997 and 1996. Accumulated amortization at September 30, 1997 and 1996 was
$6,279 and $1,404, respectively.
3. INCOME TAXES
As of September 30, 1997 and September 30, 1996, the Company had approximately
$2,258,754 and $472,498, respectively, of net operating loss carryforwards for
federal income tax purposes, which expire beginning in 2011. Utilization of the
Company's net operating loss carry forwards may be subject to annual limitations
if there is deemed to be a change in control (Section 382).
The tax effects of temporary differences that give rise to significant portions
of deferred tax assets are presented below:
F-10
<PAGE> 11
go2net, Inc.
Notes to Supplemental Consolidated Financial Statements (continued)
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1997 1996
------------ ------------
<S> <C> <C>
Depreciation and amortization .......... $ (7,606) $ (8,006)
Net operating losses ................... 767,976 160,649
Accruals, reserves and other ........... -- 12,540
--------- --------
760,370 165,183
Less valuation allowance ............... (760,370) (165,183)
--------- --------
$ 0 $ 0
========= ========
</TABLE>
4. STOCKHOLDERS' EQUITY
9% Cumulative Convertible Redeemable Preferred Stock
In November 1996, the holders of all outstanding shares of Preferred Stock
converted their Preferred Stock into 927,500 shares of common stock.
Common Stock
The Company issued 35,500 and 229,100 shares to employees and independent
contractors in 1997 and 1996, respectively. The Company has the right, at any
time after termination of such employees' and independent contractors'
employment or service, to repurchase certain common shares at the price per
share paid by the employee or independent contractor. The Company's right to
repurchase lapses with respect to the shares held by the employees and
independent contractors over varying periods of time but generally within three
years of the purchase or issuance date. There were 108,875 shares of common
stock subject to repurchase by the Company at September 30, 1997.
During the year ended September 30, 1997, sold 75,000 shares of common stock for
$2.00 per share to a member of its Board of Directors.
In 1997, the Company issued 5,000 shares to an employee with a fair market value
of $5.60 per share. Compensation expense of $28,000 was recorded during the year
ended September 30, 1997 associated with this issuance.
In April 1997, the Company completed its initial public offering and issued
1,600,000 shares of its common stock to the public at a price of $8.00 per
share. In May 1997, pursuant to the exercise of an over-allotment option granted
to the underwriters of the Company's initial public offering, the Company issued
an additional 240,000 shares of its common stock at a price of $8.00 per share.
The Company received approximately $12.8 million of cash, net of underwriting
discounts, commissions and other offering costs.
F-11
<PAGE> 12
go2net, Inc.
Notes to Supplemental Consolidated Financial Statements (continued)
On July 15, 1997, the Company acquired PlaySite, a Java-based multi-user games
site, and certain gaming infrastructure technology from Internet Games
Corporation for $500,000 in cash and 16,667 shares of the Company's common
stock, with a value of $85,002.
5. LEASES
The Company has a noncancelable lease for its facilities. Rental expense from
this and a previous lease that expired in July 1997 amounted to approximately
$176,134 for the year ended September 30, 1997 and $48,566 for the year ended
September 30, 1996. Rental expense for the period from inception to September
30, 1995 was $6,348.
Future minimum payments under noncancelable operating leases with an initial
term of one year or more were as follows at September 30, 1997:
<TABLE>
<S> <C>
1998....................................... $ 275,714
1999....................................... 283,101
2000....................................... 283,101
2001....................................... 283,101
2002....................................... 283,101
Thereafter................................. 259,509
----------
Total Minimum Lease Payments............... $1,667,627
==========
</TABLE>
6. STOCK OPTION PLAN
In 1996, the Board of Directors adopted a Stock Option Plan under which an
aggregate of 750,000 shares of common stock were reserved for grants to
employees and members of the Board of Directors and independent contractors.
Options granted under this plan may be designated as incentive or nonqualified
at the discretion of the Plan Administrator.
The Compensation Committee of the Board of Directors determines the option price
for stock options granted under the Stock Option Plan. Incentive stock options
may be granted at not less than 100% of the fair market value per share at the
date of grant as determined by the Board of Directors or committee thereof,
except for incentive options granted to a person owning greater than 10% of the
total combined voting power of all classes of the Company's stock, for which the
exercise price of the options must be not less than 110% of the fair market
value. Stock options exercised, granted and canceled during periods ended
September 30, 1997, 1996 and 1995, are as follows:
F-12
<PAGE> 13
go2net, Inc.
Notes to Supplemental Consolidated Financial Statements (continued)
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
SHARES --------------------------- WEIGHTED
AVAILABLE NUMBER PRICE AVERAGE
FOR OF PER EXERCISE
GRANT SHARES SHARE PRICE
-------- -------- ---------- -----
<S> <C> <C> <C> <C>
Options Granted ................. -- -- -- --
Options Exercised ............... -- -- -- --
-------- -------- ---------- -----
Balance at September 30,1995 .... -- -- -- --
Initial Shares Authorized ....... 750,000
Options Granted ................. (79,500) 79,500 $ 8.00 $8.00
Options Exercised ............... -- -- -- --
Options Cancelled ............... -- -- -- --
-------- -------- ---------- -----
Balance at September ............ 670,500 79,500 $ 8.00 $8.00
30,1996
Options Granted ................. (600,646) 600,646 $.05-$8.00 $7.55
Options Exercised ............... -- (1,196) $ .05 $ .05
Options Cancelled ............... 68,177 (68,177) $.05-$8.00 $6.27
-------- -------- ---------- -----
Balance at September 30,1997 .... 138,031 610,773 $.05-$8.00 $7.73
======== ======== ========== =====
</TABLE>
Options considered exercisable as of September 30, 1997 and 1996 were 422,659
and 10,000 at weighted average exercise prices of $6.35 and $8.00 per share,
respectively. The weighted average remaining contractual life of the outstanding
options at September 30, 1997 and 1996 was 6.43 years and 5.133 years,
respectively.
Pro forma information regarding net loss and loss per share required by
Statement 123 has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted average assumptions on the
option grant date:
<TABLE>
<CAPTION>
Years Ended
----------------
1996 1997
---- ----
<S> <C> <C>
Average risk-free interest rate 4.92% 6.39%
Average expected life (in years) 2.37 2.37
Dividend yield 0% 0%
Expected volatility .548 .548
</TABLE>
There were no options granted in the period from inception (April 27, 1995) to
September 30, 1995.
F-13
<PAGE> 14
go2net, Inc.
Notes to Supplemental Consolidated Financial Statements (continued)
Under 123, if the Company had elected to recognize the compensation cost based
upon the fair value of the options granted at the grant date, net loss would
have been increased as follows (the estimated fair value of the options is
amortized to expense over the options' vesting period.)
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1997 1996
------------ ------------
<S> <C> <C>
Net loss:
As reported......................... $(1,756,247) $(494,439)
Pro forma........................... $(2,294,366) $(539,336)
Net loss per share:
As reported......................... $ (.53) $ (.26)
Pro forma........................... $ (.70) $ (.28)
</TABLE>
The Statement 123 pro forma disclosures above are not necessarily indicative of
future pro forma disclosures because of the manner in which Statement 123
calculations are phased in over time.
Subsequent to September 30, 1997, the Board of Directors approved an amendment
to the Company's 1996 Stock Option Plan to increase the number of shares
available for the grant of options thereunder from 750,000 to 1,500,000, which
is subject to shareholder approval, and the Company granted options to acquire
an additional 218,000 shares of the Company's common stock. Those options
generally vest over periods ranging from one to four years. The weighted average
exercise price for all such option grants was $7.90 per share.
7. REVOLVING CREDIT AGREEMENT
On November 20, 1996, the Company entered into a revolving credit agreement with
a bank that provides for the Company to borrow up to $750,000 at the bank's
prime lending rate (8.5% per annum as of September 30, 1997) and all amounts
outstanding under the agreement are due by November 15, 1997. No amounts were
outstanding under the line of credit at September 30, 1997.
8. MERGER
On June 23, 1998, pursuant to an Agreement and Plan of Merger, dated as of April
22, 1998, by and among the Company, Silicon Acquision Corp., Silicon Investor,
Inc. ("SI") and certain shareholders of SI, the Company acquired all of the
outstanding capital stock of SI. SI (URL: http://www.techstocks.com) operates a
site on the Web focused on personal finance.
In connection with the merger, the Company incurred approximately $715,982 in
merger-related expenses primarily for legal and other professional fees.
F-14
<PAGE> 15
go2net, Inc.
Notes to Supplemental Consolidated Financial Statements (continued)
Separate results for the combined entities for the years ended
September 30, 1997 and 1996, respectively, are as follows.
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1997 1996
------------ ------------
<S> <C> <C>
Revenues:
go2net $ 254,389 $ --
Silicon Investor 274,206 8,000
------------ ---------
$ 528,595 $ 8,000
============ =========
Net Income/(Loss):
go2net $(1,718,480) $(417,758)
Silicon Investor (37,767) (76,681)
----------- ---------
$(1,756,247) $(434,439)
=========== =========
</TABLE>
There were no significant intercompany transactions between the two companies
and no significant conforming accounting adjustments.
9. SUBSEQUENT EVENTS (UNAUDITED)
In August 1998, the Company acquired Hypermart, Inc. a provider of free Web
hosting for businesses, in a transaction accounted for as a pooling of
interests. In connection with this acquisition, the Company issued approximately
157,499 shares of Common Stock and incurred approximately $200,000 in
merger-related expenses primarily for legal and other professional fees. Because
the results of operations and financial position of Hypermart were not material
to go2net's consolidated financial statements prior to June 30, 1998, financial
information prior to the date of acquisition will not be restated.
F-15
<PAGE> 1
EXHIBIT 99.2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF SUPPLEMENTAL FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE MATTERS DISCUSSED IN THIS REPORT CONTAIN FORWARD-LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE DISCUSSED HEREIN. FACTORS THAT COULD CAUSE OR CONTRIBUTE
TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "FACTORS
AFFECTING THE COMPANY'S BUSINESS OPERATING RESULTS AND FINANCIAL CONDITION" AS
WELL AS THOSE DISCUSSED IN THIS SECTION AND ELSEWHERE IN THIS REPORT.
OVERVIEW
The Company is an interactive technology company that operates a group of Web
sites and develops software. go2net's properties include: MetaCrawler
(http://www.metacrawler.com), a search/index guide that combines various
existing search/index guides into one service (a "metasearch engine"); PlaySite
(http://www.playsite.com), a Java-based multiplayer online games site; StockSite
(http://www.stocksite.com), which offers proprietary articles, portfolio
tracking tools, company research and news relating to business and finance;
Silicon Investor, Inc. (URL: http://www.techstocks.com) the Web's leading
financial discussion site; Hypermart (http://www.hypermart.net), the Web's
leading provider of free business hosting services; WebMarket
(http://www.webmarket.com), a one-stop comparison shopping service. The go2net's
Labs division develops innovative technologies for us on the go2net sites and
for licensing to other Internet companies. The Company focuses on utilizing
innovative technologies to deliver its content and to enhance the attractiveness
and utility of its product offerings. For the fiscal year ended September 30,
1997, approximately 31% of the Company's revenues were generated from non-cash
barter transactions.
The Company has a limited operating history upon which an evaluation of the
Company and its prospects can be based. The Company anticipates that advertising
revenues from the Company's Internet sites will constitute substantially all of
the Company's revenues during the foreseeable future. The Company believes that
its success will depend upon its ability to generate revenues from advertising
and subscription fees from its Internet sites, which cannot be assured. The
Company's ability to generate revenues is subject to substantial uncertainty.
The Company's prospects must be considered in light of the risks, expenses and
difficulties frequently encountered by emerging growth companies in general, and
specifically with respect to the new and rapidly evolving market for
Internet-based products and services. To address these risks, the Company must,
among other things, effectively establish, develop and maintain relationships
with advertising customers, advertising agencies and other third parties, enter
into distribution relationships and strategic alliances to drive traffic to its
Websites, provide original and compelling products and services to Internet
users, develop and upgrade its technology, respond to competitive developments,
attract new qualified personnel and retain existing qualified personnel. There
can be no assurance that the Company will succeed in addressing such risks and
the failure to do so would have a material adverse effect on the Company's
business, financial condition and operating results. Additionally, the Company's
lack of an extensive operating history makes prediction of future operating
results difficult. Accordingly, there can be no assurance that the Company will
be able to generate significant revenues or that the Company will achieve, or
maintain, profitability or generate revenues from operations in the future.
Since inception, the Company has incurred significant losses and, as of
September 30, 1997, had an accumulated deficit of $2,268,139. The Company
currently intends to increase substantially its operating expenses in order to,
among other things, expand and improve its Internet operations, fund increased
advertising and marketing efforts, expand and improve its Internet user support
capabilities and develop new Internet technologies, applications and other
products and services.
The Company's quarterly operating results may fluctuate significantly as a
result of a variety of factors, many of which are outside of the Company's
control. Factors that may adversely affect the Company's quarterly operating
results include the level of use of the Internet, demand for advertising,
seasonal trends in both Internet use and advertising placements, the addition or
loss of advertisers, advertising budgeting
<PAGE> 2
cycles of individual advertisers, the level of use of the Company's Internet
sites, the amount and timing of capital expenditures and other costs relating to
the development, operation and expansion of the Company's Internet operations,
the introduction of new sites and services by the Company or its competitors,
price competition or pricing changes in the industry, technical difficulties or
system failures, general economic conditions and economic conditions specific to
the Internet and Internet media. In seeking to effectively execute its operating
strategy, the Company may elect from time to time to make certain advertising
and marketing or acquisition decisions that could have a material adverse effect
on the Company's business, financial condition and operating results. The
Company believes that period to period comparisons of its operating results are
not meaningful and should not be relied upon for an indication of future
performance. Due to all of the foregoing factors, it is likely that in some
future quarters, the Company's operating results may be below the expectations
of public market analysts and stockholders. In such event, the price of the
Company's Common Stock would likely be materially adversely affected.
On June 23, 1998, pursuant to an Agreement and Plan of Merger, dated as of April
22, 1998, by and among the Company, Silicon Acquisition Corp., Silicon Investor,
Inc. ("SI") and certain shareholders of SI, the Company acquired all of the
outstanding capital stock of Silicon Investor, Inc. ("SI"). Silicon Investor,
Inc. (URL: http://www.techstocks.com) operates a site on the Web focused on
personal finance SI's primary focus is its discussion community, which has over
5,000,000 messages currently in its database. SI was incorporated in April 1995
and has since attracted over 60,000 subscribers who have in certain cases paid a
membership fee to participate in SI's financial discussions and other features.
The Company issued 1,238,043 shares of common stock and assumed all outstanding
options in connections with the acquisition of Silicon Investor. This
transaction was accounted for as a pooling of interests. The supplemental
consolidated financial statements and the notes thereto have been prepared to
reflect the restatement of all periods presented to include the accounts of
Silicon Investor. The historical results of the pooled entities reflect each of
their actual operating cost structures and, as a result, do not necessarily
reflect the cost structure of the supplemental consolidated financial statements
will become the historical financial statements of the Company after financial
statements covering the date of consummation of the business combination are
issued.
RESULTS OF OPERATIONS
REVENUES
For the year ended September 30, 1997, the Company generated revenues of
$528,595, of which $365,205 represented cash revenues from advertising sales and
$163,390 represented barter transaction revenues. For the year ended September
30, 1996, the Company generated revenues of $8,000. The Company did not generate
any revenues for the period from inception to September 30, 1995. The increase
in revenues is due to the sale of advertising space on the company's WebSites
and sale of subscriptions in 1997.
COST OF REVENUES
For the year ended September 30, 1997, the Company incurred $228,597 in costs
associated with barter transactions, commissions and royalties, of which
$163,390 represented barter transaction expenses. For the year ended September
30, 1996, the Company incurred $7,000 in cost of revenues. There can be no
assurance that the Company will be able to generate sufficient revenues,
advertising or otherwise, to cover its costs of revenues. The failure to
generate sufficient revenues in order to cover its costs of revenues will result
in continued losses and will have a material adverse effect on the Company's
business, financial condition and operating results.
OPERATING EXPENSES
<PAGE> 3
Advertising and Marketing. Advertising and marketing expenses consist primarily
of public relations, travel and costs of marketing literature. Advertising and
marketing expenses incurred by the Company for the years ended September 30,
1997 and September 30, 1996 were $102,042 and $14,255, respectively. The Company
did not incur any advertising and marketing expenses for the period from
inception to September 30, 1995. The increase in advertising and marketing
expenses for the year ended 1997 is primarily due to hiring of sales and
marketing personnel and the launching of the launching of the new WebSites. The
Company intends to significantly increase its advertising and marketing expenses
in future periods.
Product Development. Product development expenses consist of expenses incurred
by the Company in the development and creation of its Internet sites and product
offerings. Product development expenses include compensation and related
expenses, costs of computer hardware and software, and the cost of acquiring,
designing, and developing Internet technologies, products and services. All of
the costs incurred to date in connection with the development of the Company's
Internet sites have been expensed. Product development expenses incurred by the
Company for the years ended September 30, 1997 and 1996 were $612,923 and
$163,408, respectively. For the period from inception to September 30, 1995, the
Company incurred $3,818 in product development expenses. The increase in product
development expenses in 1997 is the result of the increased staff required to
develop and enhance the Company's WebSites. The Company believes that
significant investments in enhancing its Internet sites and product offerings
will be necessary to be competitive. As a result, the Company may continue to
incur, or increase the level of, product development expenses.
General and Administrative. General and administrative expenses consist
primarily of compensation not otherwise attributable to development expenses,
rent expense, fees for professional services and other general expenses. General
and administrative expenses incurred by the Company for the years ended
September 30, 1997 and 1996 were $1,602,791 and $329,594, respectively. General
and administrative expenses for the period from inception to September 30, 1995
was $13,635. The increase in general and administrative expenses is due to the
increase in personnel, professional services and the relocation to new facility.
The Company expects general and administrative expenses to significantly
increase in future periods as a result of, among other things, the additional
costs of being a public company.
Interest Income. The increase in interest income is due to the funds available
for investment as a result of the Company's initial public offering. Interest
income for the year ended September 30, 1997 and 1996 was $261,511 and $11,818,
respectively. The Company did not earn any interest income in the period from
inception to September 30, 1995.
Income Taxes. The Company has not recorded an income tax expense because it has
incurred net operating losses since its inception. As of September 30, 1997, the
Company had Federal net operating loss carry forwards of approximately
$2,258,754. The Federal net operating loss carry forwards will expire beginning
in 2011 if not utilized. Utilization of the net operating losses and credits may
be subject to a substantial annual limitation due to the ownership change
limitations provided in the Internal Revenue Code of 1986, as amended, and
similar state provisions. See Note 3 of Notes to Financial Statements.
<PAGE> 4
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1997, the Company's principal source of liquidity was
$10,926,781 in cash and cash equivalents derived primarily from the Company's
initial public offering in April and May 1997, in which it issued 1,840,000
shares of its Common Stock to the public at a price of $8.00 per share. The
Company received approximately $12.8 million in cash, net of underwriting
discounts, commissions and other offering costs. As of September 30, 1997, the
Company also had a $750,000 revolving line of credit with a commercial bank,
which on December 13, 1997 was amended to a $1,000,000 revolving line of credit
that expires on December 13, 1998. All borrowings under such line of credit
accrue interest at such bank's prime annual lending rate. As of September 30,
1997, no borrowings were outstanding under this line of credit. The Company has
primarily financed its operations through the sale of equity securities.
Capital expenditures were $481,463 and $306,310 for the year ended September 30,
1997 and the period from inception through the year ended September 30, 1996,
respectively. The Company has no material commitments for capital expenditures
other than approximately $100,000 relating to the purchase of computer hardware
and software. The Company anticipates a substantial increase in its capital
expenditures in 1998 consistent with its anticipated growth.
The Company currently believes that available funds, cash flows expected to be
generated from operations, if any, and the existing line of credit will be
sufficient to fund its working capital and capital expenditures requirements for
at least the next twelve months. Thereafter, the Company may need to raise
additional funds. The Company's ability to grow will depend in part on the
Company's ability to expand and improve its Internet operations, expand its
advertising and marketing efforts, expand and improve its Internet user support
capabilities and develop new Internet-based products and services. In connection
therewith, the Company may need to raise additional capital in the foreseeable
future from public or private equity or debt sources in order to finance such
possible growth. In addition, the Company may need to raise additional funds in
order to avail itself to unanticipated opportunities (such as more rapid
expansion, acquisitions of complementary businesses or the development of new
products or services), to react to unforeseen difficulties (such as the loss of
key personnel or the rejection by Internet users or potential advertisers of the
Company's Internet products and services) or to otherwise respond to
unanticipated competitive pressures. If additional funds are raised through the
issuance of equity securities, then the percentage ownership of the Company's
then existing stockholders will be reduced, stockholders may experience
additional and significant dilution and such equity securities may have rights,
preferences or privileges senior to those of the Company's Common Stock. There
can be no assurance that additional financing will be available on terms
acceptable to the Company or at all. If adequate funds are not available or are
not available on terms acceptable to the Company, the Company may be unable to
implement its business, sales or marketing plan, respond to competitive forces
or take advantage of perceived business opportunities, which could have a
material adverse effect on the Company's business, financial condition and
operating results.
YEAR 2000 RISKS
Many currently installed computer systems and software products are coded to
accept only two-digit entries in the date code field and cannot distinguish 21st
century dates from 20th century dates. These date code fields will need to
distinguish 21st century dates from 20th century dates and, as a result, many
companies software and computer systems may need to be upgraded or replaced in
order to comply with such "Year 2000" requirements.
State of Readiness
The Company has completed its assessment of all current versions of its
information technology systems and believes they are year 2000 compliant. The
supplier of the Company's current financial and accounting software has informed
the Company that such software is year 2000 compliant. The Company has been
informed by its financial institutions that they are in the process of making
their information
<PAGE> 5
systems year 2000 compliant, and that this process will be complete by the
beginning of 1999.
Costs
To date, the Company has not incurred any material expenditures in connection
with identifying or evaluating year 2000 compliance issues. Most of its expenses
have related to the retention of an outside consultant to evaluate the Company's
financial and software, and the opportunity cost of time spent by employees of
the Company evaluating this software and year 2000 compliance matters generally.
Although the Company is not aware of any material operational issues or costs
associated with preparing its internal systems for the year 2000, there can be
no assurances that the Company will not experience serious unanticipated
negative consequences and/or material costs caused by undetected errors or
defects in the technology used in its internal systems, which are comprised
predominantly of acquired technology and the Company's own software
developments. The Company believes that internally generated funds or available
cash would be sufficient to cover the costs of year 2000 compliance. At this
time, the Company does not possess the information necessary to estimate the
potential impact of year 2000 compliance issues relating to its non-IT systems,
its vendors, its customers and other parties.
Contingency Plan
As the Company is not aware of any material year 2000 compliance issues, it has
not developed a year 2000-specific contingency plan. If year 2000 compliance
issues are discovered, the Company will evaluate the need for one or more
contingency plans relating to such issues.
FACTORS AFFECTING THE COMPANY'S BUSINESS, OPERATING RESULTS AND FINANCIAL
CONDITION
Limited Operating History; Accumulated Deficit; Anticipated Losses. The Company
was incorporated in February 1996 and as of September 30, 1997 had generated
only $365,205 in cash revenues from advertising sales. The Company has limited
operating history upon which an evaluation of the Company and its prospects can
be based. The Company anticipates that advertising revenues from the Company's
Internet sites will constitute substantially all of the Company's revenues,
during the foreseeable future. The Company believes that its success will
depend upon its ability to obtain revenues from advertising on its Internet
sites, which cannot be assured. The Company's ability to generate revenues is
subject to substantial uncertainty. The Company's prospects must be considered
in light of the risks, expenses and difficulties frequently encountered by
emerging companies in general, and specifically with respect to the new and
rapidly evolving market for Internet-based products and services. To address
these risks, the Company must, among other things, effectively establish,
develop and maintain relationships with advertising customers, advertising
agencies and other third parties, provide original and compelling products and
services to Internet users, develop and upgrade its technology, effectively
respond to competitive developments, attract new qualified personnel and retain
existing qualified personnel. There can be no assurance that the Company will
succeed in addressing such risks and the failure to do so would have a material
adverse effect on the Company's business, financial condition and operating
results. Additionally, the Company's lack of an extensive operating history
makes prediction of future operating results difficult. Accordingly, there can
be no assurance that the Company will be able to generate significant revenues
or that the Company will achieve, or maintain, profitability or generate
revenues from operations in the future. Since inception, the Company has
incurred significant losses and, as of September 30, 1997, had an accumulated
deficit of $2,268,139. The Company currently intends to increase substantially
its operating expenses in order to, among other things, expand and improve its
Internet operations, fund increased advertising and marketing efforts, expand
and improve its Internet user support capabilities and develop new Internet
technologies, products and services.
Unpredictability of Future Revenues; Potential Fluctuations in Quarterly
Operating Results. As a result of the Company's extremely limited operating
history and the emerging nature of the Internet, including Internet-based
advertising, subscription services and electronic commerce, the Company is
unable to
<PAGE> 6
forecast its expenses and revenues accurately. The Company believes that due
primarily to the relatively brief time the Internet has been available to the
general public, there has not yet been developed, implemented and demonstrated a
commercially viable business model from which to successfully operate any form
of Internet-based product and/or service business. The Company's current and
future estimated expense levels are based largely on its estimates of future
revenues and may increase because many of its significant operating expenses are
either fixed, such as rent for office space, or subject to likely increases.
Few, if any, of the Company's operating expenses can be quickly or easily
reduced, such as the laying off of personnel, in a manner which would not cause
a material adverse effect to the Company's business, financial condition and
operating results. In addition, the Company may be unable to adjust spending in
a timely manner to compensate for any unexpected expenditures; and a shortfall
in actual revenues as compared to estimated revenues would have an immediate
material adverse effect on the Company's business, financial condition and
operating results.
The Company's quarterly operating results may fluctuate significantly as a
result of a variety of factors, many of which are outside of the Company's
control. For example, the Company believes that advertising sales in traditional
media are generally lower in the first and third calendar quarters of each year
than in the second and fourth quarters and that advertising expenditures
fluctuate significantly with economic cycles. Depending on the extent to which
the Internet is accepted as an advertising medium, seasonality and cyclicality
in the level of advertising expenditures generally could become more pronounced
for Internet-based advertising. Seasonality and cyclicality in advertising
expenditures generally, or with respect to Internet-based advertising
specifically, could have a material adverse effect on the Company's business,
financial condition and operating results. Other factors that may adversely
affect the Company's quarterly operating results include the level of use of the
Internet, demand for advertising, seasonal trends in both Internet use and
advertising placements, the addition or loss of advertisers, advertising
budgeting cycles of individual advertisers, the level of use of the Company's
Internet sites, the amount and timing of capital expenditures and other costs
relating to the development, operation and expansion of the Company's Internet
operations, the introduction of new Internet sites, products and services by the
Company or its competitors, price competition or pricing changes in the
industry, technical difficulties or system failures, general economic conditions
and economic conditions specific to the Internet and Internet media. In seeking
to effectively execute its operating strategy, the Company may elect from time
to time to make certain advertising and marketing or acquisition decisions that
could have a material adverse effect on the Company's business, financial
condition and operating results. The Company believes that period to period
comparisons of its operating results are not meaningful and should not be relied
upon for an indication of future performance. Due to all of the foregoing
factors, it is likely that in some future quarters, the Company's operating
results may be below the expectations of public market analysts and
stockholders. In such event, the price of the Company's Common Stock would
likely be materially adversely affected.
Dependence on Advertising Revenue/Risks related to Sponsorships. The Company
expects to derive substantially all of its revenues in the foreseeable future
from the sale of advertising on its Internet sites. As of September 30, 1997,
the Company had generated only $365,205 in cash revenues from advertising sales.
Many of the Company's relationships with advertisers are terminable within a
short period of time. Consequently, the Company's advertising customers may move
their advertising to competing Internet sites, or from the Internet to
traditional media, quickly and at relatively low costs, thereby increasing the
Company's exposure to competing pressures and fluctuations in revenues and
operating results. In selling Internet-based advertising, the Company will
likely depend on advertising agencies, which exercise substantial control over
the placement of advertising for their clients. The Company's success will
depend on its ability to convince advertisers and advertising agencies of the
benefits of advertising on the Company's Internet sites, and on its ability to
retain, broaden and diversify its future base of advertising customers. In order
to generate significant advertising revenues, the Company will depend on the
development of a larger base of users of the Company's Internet sites possessing
demographic characteristics attractive to advertisers. If the Company is unable
to attract and retain paying advertising customers or is forced to offer lower
than anticipated advertising rates in order to attract and/or retain advertising
customers, the Company's business, financial condition and operating results
will be
<PAGE> 7
materially adversely affected and the Company may cease to be a commercially
viable enterprise.
The Company has recently entered into sponsorship arrangements with third
parties to provide sponsored services and placement on the Company's Websites in
addition to traditional banner advertising. In connection with these
arrangements, the Company may receive sponsorship fees as well as a portion of
transaction revenues received by such third party sponsors from users originated
through the Company's Websites, in return for minimum levels of user impressions
or "click throughs" to be provided by the Company. To the extent implemented,
these arrangements expose the Company to potentially significant financial
risks, including the risk that the Company fails to deliver required minimum
levels of user impressions or click throughs (in which case, these agreements
typically provide for adjustments to the fees payable thereunder or "make good"
periods) and that third party sponsors do not renew the agreements at the end of
their terms. Certain of these arrangements also require the company to integrate
sponsors' content with the Company's services, which requires the dedication of
resources and significant programming and design efforts to accomplish. There
can be no assurance that the Company will be able to attract additional sponsors
or that it will be able to renew existing sponsorship arrangements within a
particular subject matter in the Company's Websites or across the Company's
entire service. The inability of the Company to enter into further sponsorships
or advertising arrangements as a result of its exclusivity arrangements could
have a material adverse effect on the Company's business, financial condition
and operating results.
Uncertain Acceptance of the Internet as an Advertising Medium; Lack of
Measurement Standards. Use of the Internet by consumers is at a very early stage
of development and market acceptance of the Internet as a medium for
information, entertainment, commerce and advertising is subject to a high level
of uncertainty. The Company believes that its success depends upon its ability
to obtain significant revenues from its Internet operations, which will require
the development and acceptance of the Internet as an advertising medium. The
Company believes that most advertisers and advertising agencies have limited
experience with the Internet as an advertising medium and neither advertisers
nor advertising agencies have devoted a significant portion of their advertising
budgets to Internet-related advertising to date. In order for the Company to
generate advertising revenues, advertisers and advertising agencies must direct
a portion of their budgets to the Internet as a whole, and specifically to the
Company's Internet sites. There can be no assurance that advertisers or
advertising agencies will be persuaded, or able, to allocate or continue to
allocate portions of their budgets to Internet-based advertising, or if so
persuaded or able, that they will find Internet-based advertising to be more
effective than advertising in traditional media such as television, print or
radio, or in any event decide to advertise on the Company's Internet sites.
Moreover, there can be no assurance that the Internet advertising market will
develop as an attractive and sustainable medium, that the Company will achieve
market acceptance of its products or that the Company will be able to execute
its business strategy successfully.
Acceptance of the Internet among advertisers and advertising agencies will also
depend on the level of use of the Internet by consumers, which is highly
uncertain, and on the acceptance of the alternative new model of conducting
business and exchanging information presented by the Internet. Advertisers and
advertising agencies that have invested resources in traditional methods of
advertising may be reluctant to modify their media buying behavior or their
systems and infrastructure to use Internet-based advertising. Furthermore, no
standards to measure the effectiveness of Internet-based advertising have yet
gained widespread acceptance, and there can be no assurance that such standards
will be adopted or adopted broadly enough to support widespread acceptance of
Internet-based advertising. If Internet-based advertising is not widely accepted
by advertisers and advertising agencies, the Company's business, financial
condition and operating results will be materially adversely affected and the
Company may cease to be a commercially viable enterprise.
Uncertain Acceptance of the Company's Internet Products and Services. The
Company's commercial viability depends in large part upon its ability to develop
and provide on the Internet original and compelling products and services that
will successfully attract and retain users with demographic characteristics
valuable to the various advertisers and advertising agencies the Company is
targeting and
<PAGE> 8
to charge users a subscription fee for access to certain portions of such
products and services, such as Silicon Investor. There can be no assurance that
the Company's products and services will be attractive enough to a sufficient
number of Internet users to generate advertising revenues or to allow the
charging of a subscription fee for certain portions thereof. There also can be
no assurance that the Company will be able to anticipate, monitor and
successfully respond to rapidly changing consumer tastes and preferences so as
to attract a sufficient number of users to its Internet sites within the
demographics desirable to advertisers and advertising agencies or those users
who are otherwise willing to pay to access certain portions of the Company's
products and services. Internet users can freely navigate and instantly switch
among a large number of Internet sites, many of which offer competitive products
and services, making it difficult for the Company to distinguish its product
offerings and attract users. In addition, many other Internet sites offer very
specific, highly targeted products and services that may have greater appeal
than the products and services offered on the Company's Internet sites. In
addition, users of the Internet who do not use the most recent browser or
operating platform software will have greater difficulty in accessing and
navigating the Company's Internet sites than would users who use the most recent
versions of such software. Such difficulty could cause Internet users to cease
using the Company's Internet sites. If the Company is unable to develop original
and compelling Internet-based products and services in a manner that allows it
to attract, retain and expand a loyal user base desirable to advertisers and
advertising agencies or Internet users who are willing to pay to access certain
portions of such Internet-based products and services, then the Company will be
unable to generate sufficient advertising or subscription revenues, and its
business, financial condition and operating results will be materially adversely
affected and the Company may cease to be a commercially viable enterprise.
Competition. The Company competes with other Internet sites for the time and
attention of consumers and for advertising and subscription revenues.
Competition among Internet sites is intense and is expected to increase
significantly in the future. The Company's Internet sites compete against a
variety of companies that provide similar offerings through one or more media,
such as print, radio, television and the Internet. To compete successfully, the
Company must develop and deliver popular, original, entertaining, informative
and compelling product offerings to attract Internet users and to support
advertising and subscription fees. In the Company's areas of focus of search,
games, and business and finance, the Company competes with various companies
and Internet sites, such as America OnLine, Inc. GeoCities, c/net, Inc.,
Yahoo!, Excite, Inc., Infoseek Corporation, Lycos, Inc., Microsoft Corporation,
Netscape Communications Corporation, SportsLine USA, Inc., Wired Ventures,
Inc., and Xoom, Inc. Many, if not all, of these competitors also offer a wider
range of products and services than does the Company, which products and
services may be sufficiently attractive to Internet users to attract users to
their services and, consequently, dissuade them from accessing the Company's
Internet sites. If the Company is unable to continue to attract a significant
number of Internet users to its Internet sites, the Company's business,
financial condition and operating results will be materially adversely affected
and the Company may cease to be a commercially viable enterprise.
Low Barriers to Entry. The market for Internet-based products and services is
relatively new, intensely competitive and rapidly evolving. There are minimal
barriers to entry, and current and new competitors can launch new Internet sites
at a relatively low cost within relatively short time periods. In addition, the
Company competes for the time and attention of Internet users with thousands of
non-profit Internet sites operated by, among other persons, individuals,
government and educational institutions. Existing and potential competitors also
include magazine and newspaper publishers, cable television companies and
start-up ventures attracted to the Internet market. Accordingly, the Company
expects competition to persist and intensify and the number of competitors to
increase significantly in the future. Should the Company seek in the future to
attempt to expand the scope of its Internet sites and product offerings, it will
compete with a greater number of Internet sites and other companies. Because the
operations and strategic plans of existing and future competitors are undergoing
rapid change, it is extremely difficult for the Company to anticipate which
companies are likely to offer competitive products and services in the future.
There can be no assurance that the Company's Internet sites will compete
successfully.
<PAGE> 9
Competitive Factors. The Company believes that the competitive factors
attracting Internet users include, among others, the quality of presentation and
the relevance, timeliness, depth and breadth of information and services offered
by the Company. With respect to attracting advertisers and advertising agencies,
the Company believes that the competitive factors include, among others, the
number of users accessing the Company's Internet sites, the demographics of such
user base, the Company's ability to deliver focused and compelling advertising
and interactivity through its Internet sites and the overall cost-effectiveness
and value of advertising offered by the Company. In addition, the success of the
Company's business strategy depends on the sale of future Internet advertising
at premium prices, based in part on the demographic characteristics of the
Company's Internet users. With respect to attracting subscription-based users in
the future, the Company believes that the competitive factors include, among
others, the quality, uniqueness and usefulness of the products and services
provided, the price charged for such products and services and the cost and
accessibility of similar products and services through the Internet or competing
media. Given the intense competition among Internet sites and other media, there
can be no assurance that the Company will be able to compete successfully with
respect to any of these factors.
Strength of Competitors. Many, if not all, of the Company's current and
potential competitors have significantly greater financial, editorial, technical
and marketing resources, longer operating histories, greater name recognition,
and greater experience than the Company; and also have established relationships
with more advertisers and advertising agencies. Many, if not all, of such
competitors may be able to undertake more extensive marketing campaigns, adopt
more aggressive advertising and subscription price policies and devote
substantially more resources to developing Internet-based products and services
than the Company. There can be no assurance that the Company will be able to
compete successfully against current or future competitors or that competitive
pressures faced by the Company will not materially adversely affect the
Company's business, financial condition and operating results. In addition, in
response to competitive pressures, the Company may make certain pricing,
business development and/or marketing decisions, or enter into acquisitions or
new ventures that could have a material adverse effect on the Company's
business, financial condition and operating results.
Uncertain Acceptance and Maintenance of the go2net Brand. The Company believes
that establishing and maintaining the go2net brand is a critical aspect of its
efforts to attract an Internet audience and that the importance of brand
recognition will increase due to the anticipated increase in the number of
Internet sites and the relatively low barriers to entry to providing
Internet-based products and services. Promoting the go2net brand name will
depend on the Company's ability to develop and deliver original and compelling
Internet-based products and services, which it cannot assure. If Internet users
do not perceive the Company's Internet sites to be of sufficient interest and
usefulness, the Company will be unsuccessful in promoting and maintaining its
brand. To the extent the Company chooses in the future to seek to expand the
focus of its operations beyond providing its current Internet sites, the Company
risks diluting its brand, confusing users and advertisers, and decreasing the
attractiveness of its audience to advertisers. In order to attract and retain
Internet users and to promote and maintain the go2net brand in response to
competitive pressures, the Company may find it necessary to increase its budget
for developing its products and services or otherwise to increase substantially
its financial commitment to creating and maintaining a distinct brand loyalty
among users. If the Company is unable to provide Internet-based products and
services as described herein or otherwise fails to promote and maintain the
go2net brand, or the Company incurs significant expenses in an attempt to
improve its products and services or promote and maintain its brand, the
Company's business, financial condition and operating results will be materially
adversely affected and the Company may cease to be a commercially viable
enterprise.
Expansion of Operations and Managing Potential Growth. Since its inception, the
Company has grown rapidly and as of September 30, 1997 had 26 full-time
employees and 10 independent contractors. This growth has placed, and is
expected to continue to place, a significant strain on the Company's management,
physical and capital resources. It is expected that the Company will need to
hire additional key personnel in order to fully implement its business strategy.
No assurance can be given as to whether, when, if ever, and under what terms the
Company will be able to attract such new personnel. In order to manage such
growth successfully, the Company will be required to, among other things,
implement and
<PAGE> 10
manage its operational and financial systems on a timely basis and to train,
manage and expand its growing employee base. Further, the Company's management
will be required to successfully maintain relationships with various advertising
customers, advertising agencies, other Internet sites and services, Internet
service providers and other third parties and to maintain control over the
strategic direction of the Company in a rapidly changing marketplace. There can
be no assurance that the Company's current personnel, systems, procedures and
quality and accounting controls will be adequate to support the Company's future
operations, that management will be able to identify, hire, train, motivate or
manage needed and qualified personnel, or that management will be able to
identify and exploit existing and potential opportunities. If the Company is
unable to effectively manage growth, the Company's business, financial condition
and operating results will be materially adversely affected.
Need for Additional Capital to Finance Growth and Capital Requirements. The
Company expects to seek to enhance and expand its Internet sites in order to
improve its competitive position and meet the increasing demands for quality
Internet-based products and services and competitive advertising and
subscription pricing. The Company's ability to grow will depend in part on the
Company's ability to expand and improve its Internet operations, expand its
advertising and marketing efforts, expand and improve its Internet user support
capabilities and develop new Internet technologies, products and services. In
connection therewith, the Company may need to raise additional capital in the
foreseeable future from public or private equity or debt sources in order to
finance such possible growth. In addition, the Company may need to raise
additional funds in order to avail itself to unanticipated opportunities (such
as more rapid expansion, acquisitions of complementary businesses or the
development of new products or services), to react to unforeseen difficulties
(such as the loss of key personnel or the rejection by Internet users or
potential advertisers of the Company's Internet-based products and services) or
to otherwise respond to unanticipated competitive pressures. If additional funds
are raised through the issuance of equity securities, the percentage ownership
of the Company's then existing stockholders would be reduced, stockholders may
experience additional and significant dilution and such equity securities may
have rights, preferences or privileges senior to those of the holders of Common
Stock. There can be no assurance that additional financing will be available on
terms acceptable to the Company or at all. If adequate funds are not available
or are not available on terms acceptable to the Company, the Company may be
unable to implement its business, sales or marketing plan, respond to
competitive forces or take advantage of perceived business opportunities, which
could have a material adverse effect in the Company's business, financial
condition and operating results.
Dependence on Key Personnel. The Company's performance is substantially
dependent on the continued services of Russell C. Horowitz, John Keister, Paul
S. Phillips and the other members of its management team, as well as on the
Company's ability to retain and motivate its officers and key employees. Each of
Messrs. Horowitz, Keister and Phillips has entered into employment agreements
with the Company. The Company maintains a $2,000,000 "key man" life insurance
policy on the lives of each of Messrs. Keister and Phillips and a $5,000,000
"key man" life insurance policy on the life of Mr. Horowitz. The Company's
future success also depends on its continuing ability to attract and retain
highly qualified technical and managerial personnel. The development of
technologies, products and services for the Company's Internet sites requires
the services of highly skilled employees and independent contractors. The number
of such personnel available is extremely limited and competition for such
personnel among Internet and other companies is intense. There can be no
assurance that the Company will be able to retain its existing employees and
independent contractors or that it will be able to attract, assimilate or retain
sufficiently qualified personnel in the future. The inability to attract and
retain the necessary technical, managerial, design, editorial, sales and
marketing personnel could have a material adverse effect on the Company's
business, financial condition and operating results.
Limited Experience in Sales and Marketing of Advertising. None of the Company's
senior management team has any significant experience in selling advertising on
the Internet or any other medium, and few members of the Company's senior
management team have any significant experience in the Internet industry.
Achieving acceptance by potential advertisers and advertising agencies of the
Company's Internet sites as a viable marketing forum will require the Company to
develop and maintain relationships
<PAGE> 11
with key advertisers and advertising agencies, and there can be no assurance
that any such relationships will be developed, on a timely basis or at all.
Dependence on Third Parties for Internet Operations and Content Development. The
Company believes that the ability to advertise its Internet sites on other
Internet sites and the willingness of the owners and operators of such sites to
direct users to the Company's Internet sites through hypertext links are
critical to the success of the Company's Internet operations. Other Internet
sites, particularly search/index guides and other companies with strategic
ability to direct user traffic, significantly affect traffic to the Company's
Internet sites. There can be no assurance that the Company will establish or
maintain such arrangements in the future. In addition, the Company relies on the
cooperation of owners and operators of Internet sites and search/index guides in
connection with the operation of the MetaCrawler Service. There can be no
assurance that such cooperation will continue to be available on terms
acceptable to the Company or at all. The inability of the Company to include
third-party search/index guides in the MetaCrawler Service could result in the
decrease in use of the MetaCrawler Service, which would have a material, adverse
effect on the Company's business, financial condition and operating results. The
Company's ability to develop original and compelling Internet-based products and
services is also dependent on maintaining relationships with and using products
provided by third party vendors. Developing and maintaining satisfactory
relationships with third parties could become more difficult and more expensive
as competition increases among Internet sites. If the Company is unable to
develop and maintain satisfactory relationships with such third parties on terms
acceptable to the Company, or if the Company's competitors are better able to
leverage such relationships, the Company's business, financial condition and
operating results will be materially adversely affected. In these efforts, the
Company has relied, and will continue to rely substantially, on the product and
service development efforts of third parties. For example, the Company relies on
S&P Comstock, Dow Jones & Company. Inc., New York Stock Exchange, Inc., The
Nasdaq Stock Market, Inc., News Alert, SportsTicker, Edgar Online, Reuters and
Market Guide, Inc. to provide a significant portion of the information included
on the Company's Internet sites. There can be no assurance the Company will
maintain these relationships in the future. Any failure of these third parties
to provide this information to the Company could have a material adverse effect
on the Company's business, financial condition and operating results.
Dependence on Continued Growth in the Use of the Internet. Rapid growth in the
use of and interest in the Internet is a recent phenomenon, and there can be no
assurance that acceptance and use of the Internet will continue to develop or
that a sufficient base of users will emerge to support the Company's business.
Revenues from the Company's Internet operations will depend largely on the
widespread acceptance and use of the Internet as a source of information and
entertainment and as a vehicle for commerce in goods and services. The Internet
may not be accepted as a viable commercial medium for a number of reasons,
including potentially inadequate development of the necessary infrastructure,
lack of timely development of enabling technologies or lack of commercial
support for Internet-based advertising. To the extent that the Internet
continues to experience an increase in users, an increase in frequency of use or
an increase in the bandwidth requirements of users, there can be no assurance
that the Internet infrastructure will be able to support the demands placed upon
it. In addition, the Internet could lose its viability as a commercial medium
due to delays in the development or adoption of new standards and protocols
required to handle increased levels of Internet activity, or due to increased
government regulation. Changes in or insufficient availability of
telecommunications services to support the Internet also could result in slower
response times and could adversely affect use of the Internet generally and of
the Company's Internet sites in particular. If use of the Internet does not
continue to grow or grows more slowly than expected, or if the Internet
infrastructure does not effectively support growth that may occur, the Company's
business, financial condition and operating results would be materially
adversely affected.
Dependence on the MetaCrawler License. The Company and Netbot entered into a
License Agreement (the "MetaCrawler License Agreement") pursuant to which Netbot
has granted the Company an exclusive (subject to certain limited exceptions),
worldwide license to provide the MetaCrawler Service. Netbot was acquired by
Excite, Inc. in November 1997. As part of the MetaCrawler License Agreement, the
Company has the exclusive right to operate, modify and reproduce the MetaCrawler
Service (including,
<PAGE> 12
without limitation, the exclusive right to use, modify and reproduce the name
"MetaCrawler" and the MetaCrawler URL in connection with the operation of the
MetaCrawler Service). Netbot has licensed the MetaCrawler Service and the other
intellectual property rights associated therewith from UW on an exclusive basis.
The license has been granted to the Company by Netbot on an exclusive basis, but
Netbot has reserved the right to use, modify, reproduce and license the
MetaCrawler search engine for any purpose other than the provision of the
MetaCrawler Service and the license is subject to the rights of UW to use,
modify and reproduce the MetaCrawler search engine and derivatives of the
MetaCrawler site to operate Internet sites for internal purposes within the UW
domain and to use, modify and reproduce any of the licensed technologies for
research, instructional and academic purposes. The search technology underlying
the MetaCrawler Service and the MetaCrawler trademark is licensed to or owned by
Netbot and sublicensed to the Company pursuant to the MetaCrawler License
Agreement. A substantial portion of the traffic to the Company's Internet sites
is currently derived from users of the MetaCrawler Service. Although the
MetaCrawler License Agreement may be terminated by Netbot only upon a material
default by the Company thereunder, the termination of the MetaCrawler License
Agreement could have a material adverse effect on the Company's business,
financial condition and operating results. Moreover, the termination of the
License Agreement between UW and Netbot relating to Netbot's license of the
MetaCrawler Service would result in the inability of the Company to continue to
provide the MetaCrawler Service under the MetaCrawler License Agreement, which
could have a material adverse effect on the Company's business, financial
condition and operating results. In addition, any failure by the Company to
continue to provide the MetaCrawler Service for any reason could have a material
adverse effect on the Company's business, financial condition and operating
results.
Risks of New Business Areas. The long-term success of the Company's business
strategy will depend to a significant extent on the Company's ability to expand
operations beyond solely relying on Internet-based advertising revenues into
areas such as subscription-based products and services and electronic commerce,
in addition to successfully developing new Internet sites and enhancing existing
ones. There can be no assurance that the Company will be able to expand into
such areas, develop and launch any new Internet sites or enhance existing ones.
In addition, expansion into new business areas and new Internet sites may bring
the Company into direct competition with new competitors. Any expansion of
product offerings or operations, or new Internet sites developed and launched by
the Company that are not favorably received by Internet users could damage the
Company's reputation or the go2net brand. Expansion into new business areas or
the development and launching of new Internet sites will also require
significant additional expenses and programming and other resources and will
strain the Company's management, financial and operational resources.
Furthermore, any expansion of business areas and the developing and launching of
new Internet sites, as well as the enhancement of the Company's existing
Internet sites, will necessarily rely on untested business models. To date, the
Company has generated limited revenues from Internet-based advertising, and
there can be no assurance that the Company will be able to generate revenues
from these sources in the future. The Company's failure to expand its business
operations or develop and launch new Internet sites in a cost effective and
timely manner could have a material adverse effect on the Company's business,
financial condition and operating results.
From time to time, the Company may entertain new business opportunities and
ventures in a broad range of areas. For example, the Company has acquired
Silicon Investor and Hypermart. Typically, such opportunities require extended
negotiations, the outcome of which cannot be predicted. If the Company were to
enter into such a venture, the Company could be required to invest a substantial
amount of capital, which could have a material adverse effect on the Company's
financial condition and its ability to implement its existing business strategy.
Such an investment could also result in large and prolonged operating losses for
the Company. Further, such negotiations or ventures could place additional,
substantial burdens on the Company's management personnel and its financial and
operational systems. There can be no assurance that such a venture would ever
achieve profitability, and a failure by the Company to recover the substantial
investment required to launch and operate such a venture would have a material
adverse effect on the Company's business, financial condition and operating
results.
<PAGE> 13
Risks of Technological Change. The market for Internet-based products and
services is characterized by rapid technological developments, frequent new
product introductions and evolving industry standards. The emerging character of
these products and services and their rapid evolution will require that the
Company continually improve the performance, features and reliability of its
Internet-based products and services, particularly in response to competitive
offerings. There can be no assurance that the Company will be successful in
responding quickly, cost effectively and sufficiently to these developments. In
addition, the widespread adoption of new Internet technologies or standards
could require substantial expenditures by the Company to modify or adapt its
Internet sites and services and could fundamentally affect the character,
viability and frequency of Internet-based advertising, either of which could
have a material adverse effect on the Company's business, financial condition
and operating results. In addition, new Internet-based products, services or
enhancements offered by the Company may contain design flaws or other defects
that could require costly modifications or result in a loss of consumer
confidence, either of which could have a material adverse effect on the
Company's business, financial condition and operating results
Capacity Constraints and System Disruptions. The satisfactory performance,
reliability and availability of the Company's Internet sites and its computer
network infrastructure are critical to attracting Internet users and maintaining
relationships with advertising customers. The Company's Internet-based
advertising revenues will be directly related to the number of advertisement
impressions delivered by the Company. System interruptions that result in the
unavailability of the Company's Internet sites or slower response times for
users would reduce the number of advertisements delivered and reduce the
attractiveness of the Company's Internet sites to users and advertisers. The
Company may experience periodic systems interruptions from time to time in the
future. Additionally, any substantial increase in traffic on the Company's
Internet sites may require the Company to expand and adapt its computer network
infrastructure. The Company's inability to add additional computer software,
hardware and bandwidth to accommodate increased use of its Internet sites may
cause unanticipated system disruptions and result in slower response times.
There can be no assurance that the Company will be able to expand its computer
network infrastructure on a timely basis to meet increased use. Any system
interruptions or slower response times resulting from the foregoing factors
could have a material adverse effect on the Company's business, financial
condition and operating results. The Company is dependent on third parties for
uninterrupted Internet access. In addition, the Company is dependent on various
third parties for substantially all of its news and information. Loss of such
services from any one or more of such third parties may have a material adverse
effect on the Company's business, financial condition and operating results. No
assurance can be given as to whether, or on what terms, the Company would be
able to obtain such services from other third parties in the event of the loss
of any of such services.
The Company's Internet operations are vulnerable to interruption by fire,
earthquake, power loss, telecommunications failure and other events beyond the
Company's control. There can be no assurance that interruptions in service will
not materially adversely affect the Company's operations in the future. While
the Company carries business interruption insurance to compensate the Company
for losses that may occur, there can be no assurance that such insurance will be
sufficient to provide for all losses or damages incurred by the Company.
Liability for Internet Content; Government Regulations. As a publisher and a
distributor of content over the Internet, the Company faces potential liability
for defamation, negligence, copyright, patent or trademark infringement and
other claims based on the nature and content of the materials that it publishes
or distributes. In addition, the Company could be exposed to liability with
respect to the content or unauthorized duplication of material indexed in its
search services. Although the Company carries liability insurance, the Company's
insurance may not cover potential claims of this type or may not be adequate to
indemnify the Company for all liability that may be imposed. Any imposition of
liability that is not covered by insurance or is in excess of insurance coverage
could have a material adverse effect on the Company's business, financial
condition and operating results.
Although there are currently few laws and regulations directly applicable to the
Internet, it is possible that
<PAGE> 14
new laws and regulations will be adopted covering issues such as, among other
things, access, obscene or indecent communications and the pricing,
characteristics and quality of Internet products and services. As a provider of
Internet-based products and services, the Company is subject to the provisions
of existing and future federal and local legislation that could be applied to
the Company's operation. Such legislation could also dampen the growth of the
Internet generally and decrease the acceptance of the Internet as an advertising
medium, and could, thereby, have a material adverse effect on the Company's
business, financial condition and operating results.
Liability for Information Retrieved From the Internet. Materials may be printed
from or downloaded into users' computers from the Internet-based services
provided by the Company or from the Internet access or information providers
with whom the Company has a relationship. Given that materials may be
subsequently distributed to third parties, without the Company's knowledge or
consent, there is a potential that claims will be made against the Company for
defamation, negligence, copyright or trademark infringement or other theories
based on the nature and content of such materials. Such claims have been
brought, and successfully pressed, against Internet-based services in the past.
Although the Company carries liability insurance, the Company's insurance may
not cover potential claims of this type, or may not be adequate to indemnify the
Company for all liability that may be imposed. Any imposition of liability that
is not covered by insurance or is in excess of insurance coverage would have a
material adverse effect on the Company's business, financial condition and
operating results.
Security Risks. The Company has instituted certain security measures designed to
protect its Internet sites and other operations from unauthorized use and
access. Such measures cannot guarantee complete security, however, and a party
who is able to circumvent the Company's security measures could misappropriate
proprietary information or cause interruptions in the Company's Internet
operations. The Company may be required to expend significant capital and
resources to protect against the threat of such security breaches or to
alleviate problems caused by such breaches. Concerns over the security of
Internet transactions and the privacy of users may also inhibit the growth of
the Internet generally, particularly as a means of conducting commercial
transactions. To the extent that activities of the Company or any third party
contractors involve the storage and transmission of proprietary information,
such as computer software or credit card numbers, security breaches could expose
the Company to a risk of loss or litigation and possible liability. There can be
no assurance that contractual provisions attempting to limit the Company's
liability in such areas will be successful or enforceable, or that parties will
accept such contractual provisions as part of the Company's agreements.
Dependence on Licensed Technology; Protection of Intellectual Property. The
Company is dependent upon obtaining existing technology related to its
operations. To the extent new technological developments are unavailable to the
Company on terms acceptable to it or if at all, the Company may be unable to
continue to execute its business plan and its business, financial condition and
operating results would be materially adversely affected.
The success of the Company is dependent upon its ability to protect and leverage
the value, if any, of its original Internet technologies, software, content and
its trademarks, trade names, service marks, domain names and other proprietary
rights it either currently has or may have in the future. The Company has filed
service marks for its logo and name, as well as for the names of each of its
sites. In addition, given the uncertain application of existing copyright and
trademark laws to the Internet, there can be no assurance that existing laws
will provide adequate protection for the Company's technologies, sites or domain
names. Policing unauthorized use of the Company's technologies, content and
other intellectual property rights entails significant expenses and could
otherwise be difficult or impossible to do given, among other things, the global
nature of the Internet.
From time to time, the Company may be subject to legal proceedings and claims in
the ordinary course of business, including claims of alleged infringement of the
trademarks and other intellectual property of third parties by the Company or
its licensees. Such claims, even if not meritorious, could result in the
expenditure of significant financial and managerial resources. The Company is
not currently aware of
<PAGE> 15
any legal proceedings or claims that the Company believes will have,
individually or in the aggregate, a material adverse effect on the Company's
business, financial condition and operating results.
Risks Associated with Potential Acquisitions. The Company may in the future
pursue acquisitions of companies, technologies or other assets. Future
acquisitions may result in the potentially dilutive issuance of equity
securities, the incurrence of debt, the write-off of in-process research and
development or software acquisition and development costs, and the amortization
of expenses related to goodwill and other intangible assets, any of which could
have a material adverse effect on the Company's business, financial condition,
results of operations and cash flow. Future acquisitions would involve numerous
additional risks, including difficulties in the assimilation of the operations,
services, products and personnel of the acquired company, the diversion of
management's attention from other business concerns along with the risks
involved in entering markets in which the Company has little or no experience.
As of the date of this Report, the Company does not have any commitments,
agreements or understandings with regard to any material acquisition.
Susceptibility to General Economic Conditions. The Company's business, financial
condition and operating results will be subject to fluctuations based upon
general economic conditions. If there were to be a general economic downturn or
a recession, however slight, then the Company expects that business entities,
including the Company's advertisers and potential advertisers, could
substantially and immediately reduce their advertising and marketing budgets. In
addition, the Company's ability to charge subscription fees for access to
certain portions of its Internet sites or to engage in commerce via the Internet
would be adversely affected, thereby resulting in a material adverse effect on
the Company's business, financial condition and operating results.
<PAGE> 1
EXHIBIT 99.3
ITEM 6: SELECTED FINANCIAL DATA
The following table sets forth financial data and other operating information of
the Company. The selected financial data presented in the table is derived from
the financial statements of the Company, which have been audited by Ernst &
Young LLP, independent auditors. The data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements and Notes thereto included elsewhere in
this Report.
<TABLE>
<CAPTION>
PERIOD
FROM INCEPTION
YEAR ENDED YEAR ENDED (APRIL 27,1995)
SEPTEMBER 30, SEPTEMBER 30, TO SEPTEMBER 30,
1997 1996 1995
------------- ------------- ----------------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues $ 528,595 $ 8,000 $ 0
Cost of revenues 228,597 1,000 0
Operating expenses:
Advertising and marketing 102,042 14,255 0
Product development 612,923 163,408 3,818
General and administrative 1,602,791 329,594 13,635
----------- ---------- --------
Total operating expenses 2,317,756 507,257 17,453
----------- ---------- --------
Loss from operations (2,017,758) (506,257) (17,453)
Interest income 261,511 11,818 17,453
----------- ---------- --------
Net loss $(1,756,247) $ (494,439) $(17,453)
=========== ========== ========
Net loss per share $ (0.53) $ (0.26) $(145.44)
Shares used in computing net loss per share(1) 3,285,693 1,912,588 120
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1997 1996
----------- -------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents $10,926,781 $1,206,824
Working capital 10,833,708 812,325
Total assets 12,811,065 1,500,651
Total liabilities 337,218 402,715
Stockholders' equity 12,473,847 1,097,936
</TABLE>
(1) Net loss per share is calculated using the weighted average number of shares
of Common Stock outstanding during such period. See Note 1 to Financial
Statements.
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<CURRENCY> U.S DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 10,926,781
<SECURITIES> 0
<RECEIVABLES> 99,031
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 11,170,926
<PP&E> 747,150
<DEPRECIATION> 125,164
<TOTAL-ASSETS> 12,811,065
<CURRENT-LIABILITIES> 337,218
<BONDS> 0
0
0
<COMMON> 14,741,986
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 12,473,847
<SALES> 528,595
<TOTAL-REVENUES> 528,595
<CGS> 228,597
<TOTAL-COSTS> 2,317,756
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,017,758)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,017,758)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,756,247)
<EPS-PRIMARY> (.53)
<EPS-DILUTED> (.53)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<CASH> 1,206,824
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,215,040
<PP&E> 304,297
<DEPRECIATION> 32,911
<TOTAL-ASSETS> 1,500,651
<CURRENT-LIABILITIES> 402,715
<BONDS> 0
0
1,505,000
<COMMON> 184,828
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 1,500,651
<SALES> 8,000
<TOTAL-REVENUES> 8,000
<CGS> 1,000
<TOTAL-COSTS> 507,257
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (506,257)
<INCOME-TAX> 0
<INCOME-CONTINUING> (506,257)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (494,439)
<EPS-PRIMARY> (.26)
<EPS-DILUTED> (.26)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 5-MOS
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-START> APR-27-1995
<PERIOD-END> SEP-30-1995
<EXCHANGE-RATE> 1
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 43,333
<DEPRECIATION> 3,419
<TOTAL-ASSETS> 41,184
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 58,637
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 41,184
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 17,453
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (17,453)
<INCOME-TAX> 0
<INCOME-CONTINUING> (17,453)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (17,453)
<EPS-PRIMARY> (145.44)
<EPS-DILUTED> (145.44)
</TABLE>
