<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE TRANSITION PERIOD FROM TO
---------- ----------
COMMISSION FILE NUMBER 0-22047
GO2NET, INC.
------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 91-1710182
- ------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
999 Third Avenue, Suite 4700
Seattle, WA 98104
----------------------------------------
(Address of principal executive offices)
(206) 447-1595
----------------------------------------------------
(Registrant's telephone number, including area code)
Check whether the registrant: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
(1) Yes X No
------ -----
As of February 12, 1999, there were 6,344,468 shares of the Registrant's common
stock outstanding.
<PAGE> 2
PAGE
PART I FINANCIAL INFORMATION NUMBER
ITEM 1: Financial Statements
Condensed Balance Sheets as of December 31, 1998
and September 30, 1998.............................. 3
Condensed Statements of Operations for the three
months ended December 31, 1998 and 1997............. 4
Condensed Statements of Cash Flows for the three
months ended December 31, 1998 and 1997............. 5
Notes to Financial Statements................................ 6
ITEM 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations................. 8
PART II OTHER INFORMATION
ITEM 1: Legal Proceedings............................................ 13
ITEM 2: Changes in Securities........................................ 13
ITEM 3: Defaults Upon Senior Securities.............................. 13
ITEM 4: Submission of Matters to a Vote of Security Shareholders..... 13
ITEM 5: Other Information............................................ 13
ITEM 6: Exhibits and Reports on Form 8-K............................. 13
SIGNATURES................................................... 14
Exhibit 27 Financial Data Schedule...................................... 15
2
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Go2Net, Inc.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, September 30,
1998 1998
------------ -------------
(Unaudited)
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents ............................................... $ 1,181,029 $ 941,351
Short-term investments .................................................. 7,794,248 7,944,249
Receivables, net ........................................................ 1,911,367 1,402,341
Prepaid expenses ........................................................ 517,710 493,916
----------- -----------
Total current assets ................................................. 11,404,354 10,781,857
Property and equipment, net ............................................... 1,231,256 1,315,168
Other assets .............................................................. 222,954 135,164
Long-term investments ..................................................... 249,983 --
Deposits .................................................................. 253,017 303,017
----------- -----------
Total assets ......................................................... $13,361,564 $12,535,206
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses ................................... $ 1,242,939 $ 770,387
Accrued compensation and benefits ....................................... 340,610 269,240
Short term debt ........................................................ 52,344 90,616
Deferred revenue ....................................................... 1,263,571 503,798
----------- -----------
Total current liabilities ............................................ 2,899,464 1,634,041
Shareholders' equity:
Common stock, $0.01 par value, authorized 50,000,000 shares; 6,312,577 at
December 31, 1998 and 6,275,177 shares at September 30, 1998 ......... 15,696,195 15,347,048
Accumulated deficit ..................................................... (5,234,095) (4,445,883)
----------- -----------
Total shareholders' equity ........................................... 10,462,100 10,901,165
----------- -----------
Total liabilities and shareholders' equity ........................... $13,361,564 $12,535,206
=========== ===========
</TABLE>
See notes to condensed financial statements.
3
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Go2Net, Inc.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
December 31, 1998 December 31, 1997
------------------ ------------------
<S> <C> <C>
Revenue ..................................... $2,600,040 $1,109,889
Cost of revenue ............................ 688,092 348,604
---------- ----------
Gross profit ............................... 1,911,948 761,285
Operating expenses:
Sales and marketing ................... 920,883 444,995
Product development ................... 394,926 302,239
General and administrative ............ 733,561 376,205
Merger and acquisition related costs .. 650,257 --
Stock compensation .................... 70,947 35,474
---------- ----------
Total operating expenses .................... 2,770,574 1,158,913
Loss from operations ........................ (858,626) (397,628)
Interest income, net ........................ 115,772 124,905
---------- ----------
Net loss .................................... $ (742,854) $ (272,723)
========== ==========
Basic and diluted net loss per share (Note 2) $ (.12) $ (.04)
========== ==========
Number of shares used in computing basic and
diluted net loss per share .................. 6,312,577 6,070,702
</TABLE>
See notes to condensed financial statements.
4
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Go2Net, Inc.
CONDENSED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
December 31, December 31,
------------ ------------
1998 1997
------------ ------------
Operating activities:
<S> <C> <C>
Net loss ................................. $ (742,854) $ (272,723)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization ........ 173,782 161,196
Stock Compensation ................... 70,947 35,474
Changes in working capital: .............. --
Receivables ............................ (567,026) (266,818)
Prepaid expenses and other assets ...... (45,268) 29,646
Deposits ............................... (69,491) (1,003)
Deferred revenue ....................... 817,774 124,353
Accounts payable and accrued expenses .. 520,838 10,528
----------- -----------
Net cash used in operating activities ...... 158,702 (179,347)
----------- -----------
Investing activities:
Purchases of investments ................. (1,500,000) --
Sales and maturities of investments ...... 1,700,000 --
Investment in affiliates ................. (249,983)
Acquisition of property and equipment .... (86,694) (298,620)
----------- -----------
Net cash used in investing activities ...... (136,677) (298,620)
----------- -----------
Financing activities:
Proceeds from exercise of stock options 255,925 --
Proceeds from sale of common stock ...... -- 9,779
Proceeds from line of credit ............ -- 200,000
Payment on shareholder notes ............ -- (43,083)
Payment on short term borrowing .......... (38,272) (25,511)
----------- -----------
Net cash provided by financing activities. 217,653 141,185
----------- -----------
Net increase/(decrease) in cash and cash
equivalents ................................ 239,678 (336,782)
Cash and cash equivalents at beginning
of period .................................. 941,351 11,071,213
----------- -----------
Cash and cash equivalents at end of period $ 1,181,029 $10,734,431
=========== ===========
</TABLE>
See notes to condensed financial statements.
5
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GO2NET, INC.
NOTES TO FINANCIAL STATEMENTS
1. THE COMPANY AND BASIS OF PRESENTATION
Go2Net, Inc. ("The Company") (http://www.go2net.com) offers through the World
Wide Web a network of branded, technology and community-driven Web sites focused
on the following categories: personal finance, search and directory, commerce,
and games. The Company also develops Web-related software. Go2Net's properties
include: Silicon Investor (http://www.siliconinvestor.com), the Web's premier
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
metasearch service that combines various existing search/index guides into one
service; 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; PlaySite (http://www.playsite.com), a
Java-based multiplayer online games site; and 100hot (http://www.100hot.com) a
consumer Web ratings site which provides an index of the most popular sites on
the Web in various categories.
In December 1998, the Company acquired Web21, Inc. through a merger of
a wholly-owned subsidiary into Web21 in a transaction accounted for as a pooling
of interests. Web21, Inc. (URL: http://www.100hot.com) operates the 100hot Web
site which provides an index of the most popular sites on the Web in various
categories. Web21 was incorporated in 1995 and has since become one of the
leading index sites on the Web. All financial information has been retro-
actively adjusted to reflect the combined operations of the Company and Web21
(see note 3).
The unaudited condensed financial statements included herein have been
prepared by the Company in accordance with generally accepted accounting
principles and reflect all adjustments, which in the opinion of management are
necessary to fairly state the Company's financial position, result of operations
and cash flows for the periods presented.
These financial statements should be read in conjunction with the
Company's audited financial statements and related notes included in the
Company's Annual Report on Form 10-K for the year ended September 30, 1998. The
results of operations for the period ended December 31, 1998 are not necessarily
indicative of the results to be expected for any subsequent quarter or for the
entire fiscal year ending September 30, 1999.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
The Company's revenue is derived principally from the sale of
advertisements on short-term contracts. Advertising revenue is recognized
ratably in the period in which the advertisement is displayed, provided that no
significant Company obligations remain and collection of the resulting
receivable is probable. To the extent that minimum guarantees are not met, the
Company defers recognition of the corresponding revenue until the remaining
guaranteed levels are achieved.
The Company has also had longer-term advertising and commerce
sponsorship agreements. The portion of revenues that is attributable to ongoing
service obligations is generally recognized ratably over the term of the
agreements, provided that the Company does not have any significant remaining
obligations and collection of the resulting receivable is probable. Deferred
revenue is comprised of billings in excess of recognized revenue relating to
contracts.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results may differ from those estimates, and such
differences may be material to the financial statements.
Investments
The Company classifies its investments as available for sale. At
December 31, 1998 the difference between fair market value and cost was
immaterial, accordingly, unrealized gains and losses on these securities have
not been reflected in the accompanying financial statements. The cost of
securities sold is based on specific identification.
Restricted Investments
The Company has restricted investments at December 31, 1998 of
approximately $250,000. This amount consists of a restricted certificate of
deposit of $250,000 held as collateral by a financial institution as a security
deposit on the lease of the Company's corporate headquarters.
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Concentrations of Credit Risk
Financial instruments that potentially subject the Company to
concentration of credit risk consist primarily of accounts receivable at
December 31, 1998. Generally, the Company does not require collateral or other
security to support customer receivables. The Company performs periodic credit
evaluations of its customers and maintains an allowance for potential credit
losses based on historical experience and other information available to
management. Actual credit losses may differ significantly from estimated amounts
included in the allowance for doubtful accounts and such difference could be
material to the financial statements.
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 also 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. The computation of basic
and diluted earnings per share is set forth in the statement of operations.
Reclassifications
Certain prior years' balances have been reclassified to conform to the
current year presentation.
3. BUSINESS COMBINATIONS
On December 31, 1998, the Company merged with Web21 and exchanged all
of the issued and outstanding capital stock of Web21 in exchange for 335,945
shares of the Company's Common Stock. In addition, the Company assumed options
to purchase capital stock of Web21, of which 7,324 are exercisable. This
acquisition was accounted for as a pooling of interests.
In connection with the merger, the Company incurred approximately
$650,257 in merger-related expenses primarily for investment banking, legal and
other professional fees in the first quarter of 1999.
Separate results for the combined entities for the three months ended
December 31, 1998 and 1997 are as follows.
Three Months Ended Three Months Ended
December 31, 1998 December 31, 1997
------------------ ------------------
Revenues:
Go2Net $1,955,154 $ 609,276
Web21 644,886 500,613
---------- ----------
$2,600,040 $1,109,889
========== ==========
Net Income/(Loss):
Go2Net $ (241,944) $ (368,402)
Web21 (500,910) 95,679
---------- ----------
$ (742,854) $ (272,723)
========== ==========
There were no significant intercompany transactions between the two
companies and no significant conforming accounting adjustments.
7
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
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 below in
"Additional Factors that May Affect Future Results" as well as those discussed
in this section and elsewhere in this Report, and the risks discussed in the
"Additional Factors that May Affect Future Results" section included in the
Company's Annual Report on Form 10-K for the year ended September 30, 1998.
OVERVIEW
Go2Net, Inc. ("The Company") (http://www.go2net.com) offers through the World
Wide Web a network of branded, technology and community-driven Web sites focused
on the following categories: personal finance, search and directory, commerce,
and games. The Company also develops Web-related software. Go2Net's properties
include: Silicon Investor (http://www.siliconinvestor.com), the Web's premier
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
metasearch service that combines various existing search/index guides into one
service; 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, PlaySite (http://www.playsite.com), a
Java-based multiplayer online games site; and 100hot (http://www.100hot.com), a
consumer Web ratings site which provides an index of the most popular sites on
the Web in various categories.. The Go2Net's Labs division develops innovative
technologies to enhance the features and functionality of 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.
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 a majority 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 on an annual basis and,
as of December 31, 1998, had an accumulated deficit of $5,234,095. The Company
currently intends to substantially increase 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 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
8
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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.
RESULTS OF OPERATIONS
REVENUE
Total revenues for the three months ended December 31, 1998 were
$2,600,040 versus $1,109,889 for the three months ended December 31, 1997. The
increase in revenue is the result of the development and increase in usage of
the Company's Web sites over the last year resulting in an increase in
advertising sales on these sites. This increase is also the result of an
increase in subscription revenues and partnership license fees year-over-year.
COSTS OF REVENUE
Costs of revenue consists primarily of expenses associated with the
production, enhancement, maintenance and support of the Company's Web sites.
These costs consist primarily of fees paid to third parties for content included
in the online properties, Internet connection charges, equipment depreciation,
and compensation. Costs of revenue also include, for all periods presented,
expenses associated with license agreements and royalties.
For the three months ended December 31, 1998, costs of revenue were
$688,092. Costs of revenue were $348,604 for the three months ended
December 31, 1997. The increase is due primarily to increases in support and
maintenance costs as a result of the increase in traffic, along with increased
royalties associated with the increase in revenues.
GROSS PROFIT
Gross profit as a percentage of revenue was 74% for the three months
period ended December 31, 1998 compared to 69% for the comparable period in
1997. The increase in the gross profit as a percentage of revenue for the three
months ended December 31, 1998 versus the three months ended December 31, 1997,
was due primarily to the fact that revenues have increased at a faster rate than
costs to support those revenues and a favorable mix of advertising rates.
In the future, the types of advertisements sold and revenue sharing
provisions of content agreements may affect gross profit. Advertisements that
target a specific audience typically have higher gross margins than
advertisements that target a broader population. Furthermore, in certain
circumstances, the Company shares advertising revenue with third-party content
providers based upon the number of consumers directed to specific areas within
its sites. A decrease in targeted advertising sold, advertising rates or an
increase in revenue sharing obligations could adversely affect gross margins.
Changes in the subscription services and technology costs may also have
a detrimental impact on gross margins in the future. The addition of increased
products and services could increase the costs of servicing subscription
members. An increase in competition could affect the pricing of subscription
services, which could also adversely affect gross margins in the future.
OPERATING EXPENSES
The Company's operating expenses have increased since inception through
December 31, 1998. This reflects the Company's investment in infrastructure and
personnel costs to develop, market and sell its services. The Company believes
that continued expansion of its operations is essential in achieving and
maintaining market share. As a result, the Company intends to continue to
increase expenditures in all operating areas for the foreseeable future.
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Sales and Marketing. Sales and marketing expenses consist primarily of
sales and marketing personnel costs, agency and consulting fees, travel, and
promotional and advertising expenses. Sales and marketing expenses incurred by
the Company for the three months ended December 31, 1998 were $920,883. Sales
and marketing expenses for the comparable period in 1997 were $444,995. The
increase is primarily attributable to increases in advertising expenditures year
over year. Consistent with the Company's marketing efforts, the Company intends
to significantly increase its sales and marketing expenses in future periods.
Product Development. Product development expenses consist of expenses
incurred by the Company in the development of its Internet sites, as well as
enhancements to the sites. 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 three months ended December 31, 1998 were
$394,926. Product development expenses for the comparable period in 1997 were
$302,239. The Company believes that significant investments in enhancing its
Internet sites 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 corporate
purposes. General and administrative expenses for the three months ended
December 31, 1998 were $733,561. General and administrative expenses for the
comparable period in 1997 were $376,205. The increase was primarily attributable
to an increase in personnel, professional service fees, relocation to new
facilities, provision for doubtful accounts and depreciation on capital
equipment. The Company expects general and administrative expenses to
significantly increase in future periods as a result of, among other things, the
additional costs in connection with expanding the Company's infrastructure and
operations.
Merger and acquisition related expenses. During the three months ended
December 31, 1998, the Company incurred $650,257 related to the merger with
Web21, Inc. The expenses were primarily for investment banking, legal,
accounting and other professional fees. The Company may in the future, acquire
businesses, technologies, and other Web sites.
Stock compensation charges. The Company recorded compensation charges
of $70,947 for the three months ended December 31, 1998 associated with the
granting of stock options to a consultant of Web21. Compensation charges
associated with these stock options for the three months ended December 31, 1997
were $35,474.
Interest Income. Interest income for the three months ended
December 31, 1998 was $115,772. Interest income for the comparable period in
1997, was $124,905. Interest income was higher in 1997 as compared to 1998 as a
result of higher balances of invested funds.
Income Taxes. The Company has not recorded an income tax benefit
because it has incurred net operating losses since its inception.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, the Company's principal source of liquidity was
$1,181,029 in cash and cash equivalents and $7,794,248 in short-term
investments. The Company also has a $1,000,000 revolving line of credit with a
commercial bank that expires on November 6, 1999. All borrowings under such line
of credit accrue interest at such bank's prime annual lending rate. As of
December 31, 1998, no amounts were outstanding under this line of credit.
Capital expenditures were approximately $86,694 and $298,620 for the
three months ended December 31, 1998 and December 31, 1997, respectively. The
Company has no material commitments for capital expenditures other than
approximately $125,000 relating to the purchase of computer hardware and
software. The Company anticipates a substantial increase in its capital
expenditures through the remainder of fiscal 1999 consistent with its
anticipated growth.
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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 its 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-based 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 in the Company's
business, financial condition and operating results.
YEAR 2000 RISKS
The "Year 2000" issue concerns the potential exposures related to the
automated generation of business and financial misinformation resulting from the
application of computer programs which have been written using two digits,
rather than four, to define the applicable year of business transactions. The
Company has completed its review of the potential impact of year 2000 issues and
does not anticipate any significant costs, problems or uncertainties associated
with becoming 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. Further, the
Company relies upon various vendors, financial institutions, utility companies,
telecommunications service companies, delivery service companies and other
service providers who are outside of the Company's control. While the Company
has surveyed some, but not all of it's major vendors, there is no assurance that
such parties will not suffer a year 2000 business disruption, which could have a
material adverse effect on the Company's financial condition and results of
operations.
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 opportunity cost of time spent by employees of
the Company evaluating its systems and year 2000 compliance matters generally.
The Company has not developed a year 2000-specific contingency plan. If year
2000 compliance issues are discovered, the Company then will evaluate the need
for contingency plans relating to such issues.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company has a limited operating history upon which an
evaluation of the Company and its prospects can be based. The Company and its
prospects must be considered in light of the risks, expenses and difficulties
frequently encountered by companies in their early stage of development,
particularly companies in new and rapidly evolving markets. To address these
risks, the Company must, among other things, respond to competitive
developments, continue to attract, retain and motivate qualified persons and
continue to upgrade its technologies and commercialize products and services
incorporating such technologies. There can be no assurance that the Company will
be successful in addressing such risks. The limited operating history of the
Company makes the prediction of future results of operations difficult or
impossible, and therefore there can be no assurance that the Company will
achieve revenue growth or profitability.
As a result of the Company's limited operating history, the
Company does not have historical financial data for any significant period of
time on which to base planned operating expenses. The Company's expense levels
are based in part on its expectations as to future revenues and to a large
extent are fixed. Quarterly sales and operating results generally depend on
advertising revenues, which are difficult to forecast. The Company may be unable
to adjust spending in a timely manner to compensate for any unexpected revenue
shortfall. Accordingly, any significant shortfall in relation to the Company's
expectations would have an immediate adverse impact on the Company's business,
results of operations and financial condition. In addition, the Company plans to
significantly increase its operating expenses to fund greater levels of research
and development, increase its sales and marketing operations, broaden its
customer support capabilities and establish brand identity and strategic
alliances. To the extent that such expenses precede or are not subsequently
followed by increased revenues, the Company's business, results of operations
and financial condition will be materially adversely affected.
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The Company's operating results may fluctuate significantly in the
future as a result of a variety of factors, some of which are outside of the
Company's control. These factors include general economic conditions, specific
economic conditions in the Internet industry, usage of the Internet, demand for
Internet advertising, seasonal trends in advertising sales, the advertising
budgeting cycles of individual advertisers, capital expenditures and other costs
relating to the expansion of operations, costs and expenses relating to
acquisitions, the introduction of new products or services by the Company or its
competitors, the mix of services sold, the channels through which those services
are sold and pricing changes. As a strategic response to a changing competitive
environment, the Company may elect from time to time to make certain pricing,
service or marketing decisions or acquisitions that could have a material
adverse effect on the Company's business, results of operations and financial
condition. 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. The Company also expects that, in the future,
it may experience seasonality in its business, with advertising revenues being
somewhat lower during the summer and year-end vacation and holiday periods, when
usage of the Company's Internet sites and services may be expected to decline.
Due to all of the foregoing factors, it is likely that in some future quarter,
the Company's operating results may be below the expectations of public market
analysts and investors. In such event, the price of the Company's common stock
would likely be materially adversely affected.
The Company derives the majority of its revenues from the sale of
advertising, including advertisements on the Company's various Web sites. Many
of the Company's customers purchasing advertisements purchase these
advertisements on a short-term basis, and many of these customers may terminate
their commitments at any time without penalty. Consequently, there can be no
assurance that these customers will continue or increase their level of
advertising on the Company's Web sites or that these customer will not move
their advertising to competing Web sites or to other forms of media. Therefore,
there can be no assurance that the Company will be successful in maintaining or
increasing the amount of advertising on the Company's Web sites, and the failure
to do so would have a material adverse effect on the Company's business, results
of operations and financial condition.
In addition, there is intense competition in the sale of advertising on
the Web, resulting in a wide range of rates and a variety of pricing models
offered by different vendors for a variety of advertising services, which makes
it difficult to project future levels of advertising revenues and rates. It is
also difficult to predict which pricing models the industry or advertisers will
adopt. For example, advertising rates based on the number of "click throughs",
or user requests for additional information made by clicking on the
advertisement from the Company's network to the advertiser's Web pages, instead
of rates based solely on the number of impressions displayed on users' computer
screens, could materially adversely affect the Company's revenues. As a result
of these risks, there can be no assurance that the Company will be successful in
generating significant future advertising revenues from Web-based advertising,
and the failure to do so would have a material adverse effect on the Company's
business, results of operations and financial condition.
The recently completed acquisition of Web21 involves a number of risks,
which could adversely affect the Company's business, results of operations and
financial condition. For example, the assimilation of Web21's and the Company's
operations will require, among other things, the integration of Web sites and
services, coordination of research and development and sales and marketing
efforts of the sites and services. Also, the assumption of liabilities and costs
associated with the relocation of Web21 employees, as well as the distraction of
the Company's management from the day-to-day business of the Company could
adversely affect the Company's results of operations. Any failure to address
these acquisition risks could have a material adverse effect on the Company's
business, results of operations and financial condition.
The Company operates in a rapidly changing environment that involves a
number of risks and uncertainties, some of which are beyond the Company's
control. In addition to the factors discussed in this report, factors that could
cause or contribute to such differences include, but are not limited to, those
discussed in the "Additional Factors that May Affect Future Results" section
included in the Company's Annual Report on Form 10-K for the year ended
September 30, 1998.
12
<PAGE> 13
PART II OTHER INFORMATION
ITEM 1: Legal Proceedings
None.
ITEM 2: Changes in Securities
On December 31, 1998, the Company acquired all of the issued
and outstanding capital stock of Web21 in exchange for 335,945
shares of the Company's Common Stock. In addition, the Company
assumed options to purchase capital stock of Web21.
ITEM 3: Defaults Upon Senior Securities
None.
ITEM 4: Submission of Matters to a Vote of Security Holders
None.
ITEM 5: Other Information
None.
ITEM 6: Exhibits and Reports on Form 8-K
No reports on Form 8-K filed during the period.
Exhibit 27 - Financial Data Schedule
13
<PAGE> 14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GO2NET, INC.
Date: February 16, 1999
By: /s/ Russell C. Horowitz
---------------------------------------------
Russell C. Horowitz
Chief Executive Officer, Chief
Financial Officer and Director (Principal
Executive and Accounting Officer)
14
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