<PAGE>
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, 1999
/ / 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 10, 2000 there were 30,566,354 shares of the Registrant's common
stock outstanding.
<PAGE>
<TABLE>
<CAPTION>
PAGE
NUMBER
<S> <C>
PART I FINANCIAL INFORMATION
ITEM 1: Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of December 31, 1999
and September 30, 1999........................................ 3
Condensed Consolidated Statements of Operations for the three
months ended December 31, 1999 and 1998....................... 4
Condensed Consolidated Statements of Cash Flows for the three
months ended December 31, 1999 and 1998....................... 5
Notes to Condensed Consolidated Financial Statements................... 6
ITEM 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 12
ITEM 3: Quantitative and Qualitative Disclosures about Market Risk............. 18
PART II OTHER INFORMATION
ITEM 1: Legal Proceedings...................................................... 19
ITEM 2: Changes in Securities and Use of Proceeds.............................. 19
ITEM 3: Defaults Upon Senior Securities........................................ 19
ITEM 4: Submission of Matters to a Vote of Security Shareholders............... 19
ITEM 5: Other Information...................................................... 19
ITEM 6: Exhibits and Reports on Form 8-K....................................... 19
SIGNATURES............................................................. 20
Exhibit 27 Financial Data Schedule................................................ 21
</TABLE>
2
<PAGE>
Go2Net, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 1999
------------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ........................ $ 66,364,315 $ 66,786,513
Short-term investments ........................... 170,591,000 151,000,000
Trade accounts receivables, net .................. 6,887,981 5,712,977
Other accounts receivable ........................ 3,609,120 3,818,410
Deferred tax asset, net .......................... 2,374,484 2,144,637
Prepaid expenses and other assets ................ 666,128 750,848
------------- -------------
Total current assets ..................... 250,493,028 230,213,385
Property and equipment, net ........................ 3,879,449 3,254,594
Other assets ....................................... 1,093,764 1,164,553
Long-term investments .............................. 44,659,793 53,771,208
Investments in affiliates .......................... 92,151,301 21,676,129
Deposits ........................................... 250,000 250,000
Intangibles, net ................................... 198,981,373 197,929,199
------------- -------------
Total assets ............................. $ 591,508,708 $ 508,259,068
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................ $ 878,609 $ 1,253,843
Accrued expenses ................................ 2,989,570 3,139,409
Accrued compensation and benefits ............... 938,275 2,425,013
Deferred revenue ................................ 6,688,740 3,072,755
------------- -------------
Total current liabilities ................ 11,495,194 9,891,020
Deferred revenue ................................... 479,355 530,796
Deferred tax liability ............................. 38,499,559 16,905,877
Commitments and contingencies
Stockholders' equity:
Preferred stock .................................. 450,872,103 450,927,510
Common stock ..................................... 67,748,463 42,721,806
Accumulated other comprehensive income ........... 48,938,726 2,500,337
Accumulated deficit .............................. (26,524,692) (15,218,278)
------------- -------------
Total stockholders' equity ............... 541,034,600 480,931,375
------------- -------------
Total liabilities and stockholders'
equity................................. $ 591,508,708 $ 508,259,068
============= =============
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
Go2Net, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------
DECEMBER 31, 1999 DECEMBER 31, 1998
----------------- -----------------
<S> <C> <C>
Revenue $ 14,002,230 $ 2,600,040
Cost of revenue 2,356,691 688,092
------------ ------------
Gross Profit 11,645,539 1,911,948
Operating expenses:
Sales and marketing 3,587,917 920,883
General and administrative 3,317,673 804,508
Product development 1,365,915 394,926
Merger related costs - 650,257
Amortization of intangibles 19,425,479 -
------------ ------------
Total operating expenses 27,696,984 2,770,574
------------ ------------
Loss from operations (16,051,445) (858,626)
Interest income, net 3,897,124 115,772
------------ ------------
Loss before taxes (12,154,321) (742,854)
Income tax benefit 847,907 -
------------ ------------
Net loss $(11,306,414) $ (742,854)
============ ============
Basic and diluted net loss per common share $ (0.38) $ (0.03)
Shares used in computing basic and
diluted net loss per common share 30,035,238 25,250,308
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
Go2Net, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------
DECEMBER 31, 1999 DECEMBER 31, 1998
----------------- -----------------
<S> <C> <C>
Operating activities:
Net loss..................................................... $(11,306,414) $ (742,854)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation and amortization............................. 284,976 173,782
Intangible amortization................................... 19,425,479 -
Deferred income taxes .................................... (2,534,371) -
Stock compensation ....................................... 2,689 70,947
Changes in working capital, net:
Receivables .............................................. (930,869) (567,026)
Prepaid expenses and other assets......................... 163,050 (114,759)
Deferred revenue ......................................... 3,548,295 817,774
Accounts payable and accrued expenses .................... 1,150,086 472,552
Accrued compensation and benefits ........................ (1,490,398) 48,286
------------ ------------
Net cash provided by operating activities ..................... 8,312,523 158,702
Investing activities:
Purchases of available for sale investments ................. (50,627,798) (1,500,000)
Maturities of available for sale investments ................ 39,819,573 1,700,000
Investment in affiliates .................................... - (249,983)
Acquisition of property and equipment ....................... (970,583) (86,694)
Net cash used in acquisition ................................ (1,302,288) -
------------ ------------
Net cash used in investing activities ......................... (13,081,096) (136,677)
Financing activities:
Expenses from issuance of preferred stock ................... (55,407) -
Proceeds from exercise of stock options and stock
purchase plan ............................................. 4,401,782 255,925
Payments on short term borrowing ............................ - (38,272)
------------ ------------
Net cash provided by financing activities ..................... 4,346,375 217,653
------------ ------------
Net increase (decrease) in cash and cash equivalents........... (422,198) 239,678
Cash and cash equivalents at beginning of period............... 66,786,513 941,351
------------ ------------
Cash and cash equivalents at end of period .................... $ 66,364,315 $ 1,181,029
============ ============
Supplemental cash flow information:
Common stock issued in acquisition........................... $ 18,935,718 $ -
Assets and liabilities recognized upon business
acquisition, excluding cash:
Receivables .............................................. 34,845 -
Prepaid expenses and other assets and deposits ........... 17,166 -
Intangibles .............................................. 19,154,893 -
Accounts payable and accrued expenses .................... 14,969 -
Deferred revenue ......................................... 16,249 -
Deferred tax liability, net .............................. 260,440 -
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
GO2NET, INC AND SUBSIDIARIES.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. THE COMPANY AND BASIS OF PRESENTATION
Go2Net, Inc. (including its subsidiaries, "Go2Net" or the "Company") offers
through the World Wide Web a network of branded properties and aggregated
content in the categories of search and directory, small business and electronic
commerce services, personal finance and multi-player games. The Company also
offers electronic commerce solutions to online merchants by providing payment
authorization and other services to small and medium-sized businesses. The
Company is using its proprietary, scaleable technology platform to develop
private label portal and ecommerce content solutions for strategic partners to
extend the distribution of its products and services.
The financial statements as of December 31, 1999 and 1998 have been prepared
by the Company pursuant to the rules and regulations of the Securities and
Exchange Commission (the "SEC"). These statements are unaudited and, in the
opinion of management, include all adjustments (consisting of normal recurring
adjustments and accruals) necessary to present fairly the results of the periods
presented. The balance sheet at September 30, 1999 has been derived from the
audited financials statements at that date. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been omitted pursuant to such
SEC rules and regulations.
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, 1999. The results of
operations for the period ended December 31, 1999 are not necessarily indicative
of the results to be expected for any subsequent quarter or for the entire
fiscal year ending September 30, 2000.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the financial statements of
Go2Net, Inc. and its wholly-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less at purchase to be cash equivalents. The Company has not
experienced losses on its cash equivalent investments.
INVESTMENTS
Investment securities at December 31, 1999 consist of municipal and
corporate debt and equity securities. The Company's securities are classified as
available-for-sale and are recorded at fair value. Unrealized holding gains and
losses, net of the related tax effect, on available-for-sale securities are
excluded from earnings and are reported as a separate component of other
comprehensive income until realized. The Company had unrealized holding gains of
$46,438,389 (net of the related tax effect of $23,637,758) reported as other
comprehensive income for the quarter ended December 31, 1999. Realized gains and
losses from the sale of available-for-sale securities are determined on a
specific identification basis.
A decline in the market value of any available-for-sale security below cost
that is deemed to be other than temporary results in a reduction in carrying
amount to fair value. The impairment is charged to earnings and a new cost basis
for the security is established. Premiums and discounts are amortized or
accreted over the life of the related security as an adjustment to yield using
the effective interest method. Dividend and interest income are recognized when
earned.
6
<PAGE>
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of three to seven
years. Leasehold improvements are stated at cost and are amortized over their
useful lives or the lease term, whichever is shorter.
INTANGIBLE ASSETS
Intangible assets consist of goodwill, which represents costs in excess of
the fair value of the net assets acquired, and identifiable intangibles.
Intangible assets are amortized on a straight-line basis over their estimated
useful lives of three years. The Company assesses the recoverability of
intangible assets by determining whether the amortization of the intangible
balance over its remaining life can be recovered through undiscounted future
operating cash flows of the acquired operations. The amount of intangible asset
impairment, if any, is measured based on projected discounted future operating
cash flows using a discount rate reflecting the Company's average cost of funds.
The assessment of the recoverability of intangible assets will be impacted if
estimated future operating cash flows are not achieved.
OTHER ASSETS
Other assets consist of the costs associated with licensed technology,
domain names, trademarks and security deposits and are recorded at cost.
Amortization of other assets is recorded using the straight-line method over the
shorter of useful lives, generally one to three years, or the term of the
agreement.
PREMIUM ON WARRANTS
Premiums associated with warrants for common stock are amortized over the
term of the warrant.
CONCENTRATION OF CREDIT RISK
The Company performs ongoing credit evaluations of its customers' financial
conditions and generally does not require collateral on accounts receivable. The
Company maintains allowances for credit losses and such losses have been within
management's expectations.
No single customer accounted for greater than 10% of total revenues during
the quarter ended December 31, 1999.
The Company is also subject to risks related to the significant balances of
cash, cash equivalents, short-term and long-term investments. At December 31,
1999, the Company held shares and warrants of CommTouch common stock
representing approximately 13.9% of Commtouch's outstanding common stock and
shares and warrants of Click2Learn's common stock representing approximately
5.8% of Click2Learn's outstanding common stock. If there is a permanent decline
in the value of these securities below cost, the decline will be reported in the
Company's statement of operations. The Company's remaining portfolio, however,
is diversified and consists primarily of highly rated money market funds and
short and long-term investment-grade securities.
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 reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
FINANCIAL INSTRUMENTS
The recorded amounts of financial instruments including cash equivalents,
investments, receivables, and accounts payable approximate their fair values
at December 31, 1999.
7
<PAGE>
REVENUE RECOGNITION
The Company derives its revenue from the sale of advertisements primarily on
short-term contracts and ecommerce, subscription and license fees.
Advertising revenues are recognized over the period in which the
advertisements are displayed. Deferred revenues result from billings in excess
of recognized revenue relating to contracts.
The Company's ecommerce and license revenues are derived principally from
product licensing, set-up, gateway and transaction fees from the use of its
products. The Company also derives revenues from subscriptions and memberships.
All revenues are generally recognized as the related services are performed,
upon product delivery, or over the term of the subscription or membership,
provided that no significant Company obligations remain and collection of the
receivable is probable. In cases where there are significant remaining
obligations, the Company defers such revenue until those obligations are
satisfied. Fees from maintenance and support of the Company's products,
including revenues bundled with the initial licensing fees, are deferred and
recognized over the service period.
Barter transactions are recorded at the lower of the estimated fair value of
the goods or services/ advertisements received or the estimated fair value of
the goods or services/advertisements given. Barter revenue was immaterial for
the quarter ended December 31, 1999.
PRODUCT DEVELOPMENT
Costs incurred in the design and development of new products and
enhancements to existing products and Internet technology applications are
charged to expense as incurred.
Statement of Financial Accounting Standards (SFAS) No. 86, "Accounting for
the Costs of Computer Software to be Sold, Leased or Otherwise Marketed,"
requires capitalization of certain software development costs subsequent to the
establishment of technological feasibility. Based upon the Company's product
development process, technological feasibility is established upon completion of
a working model. Costs incurred by the Company between completion of the working
model and the point at which the product is ready for general release have been
insignificant.
ADVERTISING AND MARKETING EXPENSE
The Company expenses costs associated with advertising and marketing as they
are incurred.
INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
STOCK-BASED COMPENSATION
The Company accounts for its stock option plans for employees in accordance
with the provisions of Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees", and related interpretations. As
such, compensation expense related to fixed employee stock options is recorded
only if, on the date of grant, the fair value of the underlying stock exceeded
the exercise price. The Company has adopted the disclosure-only requirements of
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation", which allows entities to continue to apply the
provisions of APB Opinion No. 25 for
8
<PAGE>
transactions with employees and provide pro forma net income and pro forma
earnings per share disclosures as if the fair-value based method of accounting
in SFAS No. 123 had been applied to employee stock option grants.
NET LOSS PER SHARE
In accordance with SFAS No. 128, "Earnings Per Share", the Company has
reported both basic and diluted net income per common share for each period
presented. Basic income per common share is computed on the basis of the
weighted-average number of common shares outstanding for the year. Diluted
income per common share is computed on the basis of the weighted-average number
of common shares plus dilutive potential common shares outstanding. Dilutive
potential common shares are calculated under the treasury stock method.
Securities that could potentially dilute basic income per common share consist
of outstanding stock options and convertible preferred stock. As the Company had
a net loss attributable to common shareholders in each of the periods presented,
basic and diluted net loss per share are the same. There were 16,824,142 and
4,133,080 securities at December 31, 1999 and 1998, respectively, that could
potentially dilute basic earnings per share (EPS) in the future that were not
included in the computation of diluted EPS because to do so would have been
anti-dilutive for the periods presented.
COMPREHENSIVE INCOME
For the quarter ended December 31, 1999 total comprehensive income was
$35,131,975 which consisted of net loss of $11,306,414 and unrealized holding
gains, net of tax, of $46,438,389. For the quarter ended December 31, 1998 total
comprehensive loss was $742,854 which equaled the net loss for the quarter.
RECLASSIFICATIONS
Certain balances have been reclassified to conform to the current year
presentation.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board issued Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities (SFAS No. 133) in
June 1998. This statement establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the balance sheet
and measure those instruments at fair value. If certain conditions are met, a
derivative may be specifically designated as a hedge. The accounting for changes
in the fair value of a derivative depends on the intended use of the derivative
and the resulting designation. SFAS No. 133, as amended by SFAS 137, is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
The adoption of this statement is not expected to have a material impact on the
Company's consolidated financial statements.
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued AICPA Statement of Position
98-1 ("SOP 98-1") "Accounting for the Costs of Software Developed or Obtained
for Internal Use" which was adopted by the Company on October 1, 1999. SOP 98-1
provides guidance in capitalizing software that is developed in-house or
purchased. The adoption of SOP 98-1 did not have a material impact on the
Company's financial statements.
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin No. 101 ("SAB 101") "Revenue Recognition in Financial
Statements" which the Company expects to adopt no later than October 1, 2000.
SAB 101 provides guidance on revenue recognition issues. The Company has not yet
determined the impact, if any, SAB 101 is expected to have on the Company's
financial statements.
2. RELATED PARTY TRANSACTIONS
For the quarter ended December 31, 1999, the Company recognized
revenues of $155,000 under licensing agreements with DirectWeb, Inc., the CEO of
which was a member of the Board of Directors. The Company also recognized
revenues in the quarter ended December 31, 1999 of $453,072 from Mercata and
Click2Learn under advertising, marketing, distribution and licensing agreements.
Vulcan Ventures Incorporated is a minority shareholder in the Company and the
majority shareholder in Mercata and Click2Learn, Inc. As of December 31,
9
<PAGE>
1999 the Company had $274,612 in accounts receivable from Broadband Partners.
The Company is a minority shareholder and Vulcan Ventures Incorporated is the
majority shareholder in Broadband Partners.
3. BUSINESS COMBINATION
On October 22, 1999, the Company acquired FreeYellow.com, Inc.
(http://www.freeyellow.com/) in exchange for 334,161 shares of the Company's
common stock and $1 million in cash. The total consideration was valued at
approximately $19.9 million as of October 22, 1999.
The above acquisition was accounted for under the purchase method of
accounting, and accordingly, the purchase price was allocated to the acquired
company's assets acquired and liabilities assumed based on their respective fair
values and the results of operations of the acquired company is included in the
Company's consolidated financial statements since the date of acquisition.
A summary of the consideration paid and liabilities assumed for the
above acquisition is as follows:
<TABLE>
<CAPTION>
<S> <C>
Stock $18,935,718
Cash 1,000,000
Direct acquisition costs 157,636
Deferred tax liability 260,440
Accrued liabilities assumed 31,218
-----------
Total $20,385,012
===========
</TABLE>
The consideration paid and liabilities assumed were allocated as
follows:
<TABLE>
<CAPTION>
<S> <C>
Cash acquired $ 20,472
Other current assets acquired 43,845
Other assets 8,166
Intangibles 20,312,529
-----------
Total $20,385,012
===========
</TABLE>
Intangibles consist of identified intangibles such as trade names,
customer relationships, workforce-in-place and developed technology and goodwill
equal to the excess of the purchase price over the fair value of identifiable
tangible and intangible assets acquired. Intangibles are being amortized using
the straight-line method over the estimated useful lives of 3 years.
The following unaudited pro forma financial information presents the
combined results of operations of the Company and FreeYellow.com, Inc. if the
acquisition had occurred as of the beginning of the Company's 2000 fiscal year,
after giving effect to certain adjustments, including amortization of goodwill.
FreeYellow.com had no activity for the three months ended December 31, 1998. The
pro forma financial information does not necessarily reflect the results of
operations that would have occurred had the Company and FreeYellow.com, Inc.
constituted a single entity during such periods.
<TABLE>
<CAPTION>
Three months ended
December 31, 1999
-----------------
<S> <C>
Revenue $ 14,075,607
Net loss $(11,666,374)
Loss per share $ (0.39)
</TABLE>
4. SEGMENT INFORMATION
We have identified our reportable segments based on how our operations
are managed and how results are viewed by management. The accounting policies of
the operating segments are the same as those described in the
10
<PAGE>
summary of significant accounting policies. The Company does not track
expenses, operating income or assets by operating segments. Consequently, we
do not disclose expenses, operating income or assets by operating segments.
There have been no transactions between segments. The following results are
broken out by our operating segments for the three months ended December 31,
1999 and 1998:
<TABLE>
<CAPTION>
Three months ended Three months ended
December 31, 1999 December 31, 1998
------------------ ------------------
<S> <C> <C>
Advertising revenue $8,790,213 $2,186,153
Subscriptions, electronic commerce,
license and other revenue 5,212,017 413,887
----------- ----------
Consolidated revenue $14,002,230 $2,600,040
=========== ==========
</TABLE>
11
<PAGE>
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 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, 1999.
OVERVIEW
Go2Net, Inc. (including its subsidiaries, "Go2Net" or the "Company")
offers through the World Wide Web a network of branded properties and aggregated
content in the categories of search and directory, small business and electronic
commerce services, personal finance and multi-player games. The Company also
offers electronic commerce solutions to online merchants by providing payment
authorization and other services to small and medium-sized businesses. The
Company is using its proprietary, scaleable technology platform to develop
private label portal and ecommerce content solutions for strategic partners to
extend the distribution of its products and services. Go2Net's branded Web
properties offered through the Go2Net Network include:
- Go2Net Personal (www.go2net.com), which provides users with a
comprehensive Internet start page offering customizable news, discussion
and portfolio information as well as direct access to Go2Net's own
finance, search and directory, free Web hosting, shopping, auction and
multiplayer games sites;
- MetaCrawler (www.metacrawler.com) and Dogpile (www.dogpile.com), the Web's
leading providers of metasearch services, which simultaneously query a
variety of search engines and directory services;
- Silicon Investor (www.siliconinvestor.com), the Web's premier financial
discussion community which also offers proprietary articles, portfolio
tracking tools, company research, charting and analytics and business and
finance news;
- The HyperMart Network, consisting of HyperMart (www.hypermart.net),
Virtual Avenue (www.virtualave.net) and FreeYellow.com
(www.freeyellow.com), the Web's leading providers of free hosting services
for small businesses;
- Authorize.Net (www.authorize.net), a leading payment authorization service
for online businesses;
- Haggle Online (www.haggle.com), a provider of Web based person to person
auction services;
- WebMarket (www.webmarket.com), a one-stop comparison shopping service;
- 100Hot (www.100hot.com), a leading directory of the Web's most popular
sites; and
- PlaySite (www.playsite.com), a Java-based multiplayer games site.
The Company has a limited operating history upon which an evaluation
of its prospects can be based. The Company anticipates that advertising
revenues from Internet sites and transaction based processing fees will
constitute a significant portion of the revenues during the foreseeable
future. The Company believes that its success will depend upon its ability to
generate revenues from advertising, subscription fees and transaction fees
from its Internet sites,
12
<PAGE>
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
in the future. Since inception, the Company has incurred significant losses on
an annual basis and, as of December 31, 1999, had an accumulated deficit of
$26,524,692. 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, costs and expenses
relating to acquisitions, 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 implement 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.
RESULTS OF OPERATIONS
REVENUE
Total revenue for the three months ended December 31, 1999 was
$14,002,230. Revenue for the comparable period in 1998 was $2,600,040. 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 the
number of advertisers purchasing advertising banners on the Company's Web sites,
an increase in sponsorship advertising revenue, and an increase in sales of
targeted advertisements with higher rates. This increase is also the result of
an increase in subscription revenues, partnership license fees and ecommerce
transaction fees year-over-year.
COSTS OF REVENUE
Cost 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, personnel costs,
equipment depreciation, and overhead allocations. Costs of revenue also include,
for all periods presented, expenses associated with license agreements and
royalties for revenue sharing agreements and other services.
For the three months ended December 31, 1999, costs of revenue were
$2,356,691. Costs of revenue for the comparable period in 1998 were $688,092.
The increase is due primarily to increases in support and
13
<PAGE>
maintenance costs as a result of the increase in traffic, along with increased
royalties associated with the increase in revenue.
Costs of revenue in future periods are expected to increase in absolute
dollars and may increase as a percentage of revenues as the Company increases
costs to support expanded services and content.
GROSS PROFIT
Gross profit as a percentage of revenue was 83% for the three months
ended December 31, 1999 compared to 74% for the comparable period in 1998. The
increase in the gross profit in absolute dollars and as a percentage of
revenue was due primarily to the fact that revenues have increased at a faster
rate than costs to support those revenues.
In the future, the types of advertisements sold and revenue sharing
provisions of content agreements may affect gross margins. Advertisements that
target a specific audience typically have higher gross margins than
advertisements which target a broader demographic. 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.
Increases in service and content offerings will also adversely affect
gross margins. Furthermore, pursuant to the provisions of certain agreements
with content providers, the Company shares advertising revenues upon select
co-branded pages within its network. An increase in targeted advertising rates
or an increase in the Company's advertising revenue within these co-branded
areas could adversely affect gross margins in the future.
OPERATING EXPENSES
The Company's operating expenses have increased since inception through
December 31, 1999. 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 operations is essential to achieving and maintaining
market share. As a result, the Company intends to continue to increase
expenditures in all operating areas for the foreseeable future.
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, 1999 and 1998
were $3,587,917 and $920,883, respectively. The increase is primarily
attributable to the hiring of additional sales staff, increased commissions
associated with higher sales, and expenses associated with the Company's
expanded marketing and public relations campaign. The Company intends to
significantly increase its sales and marketing expenses in future periods.
PRODUCT DEVELOPMENT. Product development expenses consist of costs
incurred by the Company in its development and creation 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, 1999 and 1998 were $1,365,915 and $394,926, respectively. The overall
increase in research and development expenses was primarily due to increased
engineering staffing to continue to develop and enhance the Company's expanded
product offerings. 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,
stock compensation charges, rent expense, fees for professional services and
other general corporate purposes. General and administrative expenses for the
three months ended December 31, 1999 and 1998 were $3,317,673 and $804,508,
respectively. The increase was
14
<PAGE>
primarily attributable to an increase in personnel and facilities costs to
support the Company's growth. In addition, general overhead costs increased
along with the Company's growth. Included in general and administrative
expenses are stock compensation charges associated with the granting of stock
options to a consultant and employees. Compensation charges associated with
these stock options for the three months ended December 31, 1999 and 1998 were
$2,689 and $70,947, respectively. These charges relate to the assumption of
stock options granted to consultants and employees of companies acquired and
accounted for as pooling of interest business combinations. The Company
anticipates that its general and administrative expenses may continue to
increase in absolute dollars as the Company expands its administrative and
executive staff, adds infrastructure and integrates acquired technologies and
businesses.
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.
AMORTIZATION OF INTANGIBLES. Goodwill and other purchased intangibles
represent the excess of the purchase price over the fair value of tangible
assets acquired. The Company is amortizing goodwill and identifiable intangibles
relating to acquisitions over a life of three years. Amortization expense
incurred by the Company for the three months ended December 31, 1999 was
$19,425,479. There was no amortization expense for the comparable period in
1998.
INTEREST INCOME. Interest income for the three months ended December
31, 1999 and 1998 was $3,897,124 and $115,772, respectively. Interest income
was higher in 1999 as compared to 1998 as a result of interest earned on cash
received from the sale of Preferred Stock.
INCOME TAXES. For the three months ended December 31, 1999, the Company
recorded an income tax benefit of $847,907. For the three months ended December
31, 1998, the Company did not recognize an income tax benefit or expense.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, the Company's principal source of liquidity was
$236,955,315 in cash, cash equivalents and short term investments derived
primarily from the sale of the Company's preferred and common equity
securities. As of December 31, 1999, the Company also had a $15,000,000
revolving line of credit that expires on August 30, 2000. All borrowings under
such line of credit accrue interest at either the bank's prime lending rate
(8.50% per annum as of December 31, 1999) or LIBOR plus 1.75%. As of December
31, 1999, 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 approximately $970,583 and $86,694 for the three
months ended December 31, 1999 and 1998, respectively. The Company has no
material commitments for capital expenditures other than approximately
$250,000 relating to the purchase of computer hardware, software and the
relocation of its main corporate offices. The Company anticipates a
substantial increase in its capital expenditures through the remainder of
fiscal 2000 consistent with its anticipated growth. Additionally, the Company
will continue to evaluate possible acquisitions of, or investments in
businesses, products, and technologies that are complementary to those of the
Company, which may require the use of cash.
The Company maintains an investment portfolio consisting of interest bearing
securities with an average maturity of less than two years. These securities are
subject to interest rate risk and will fall in value if market interest rates
increase. Because the Company has the ability to hold its fixed income
investments until maturity, it does not expect its operating results or cash
flows to be affected to any significant degree by a sudden change in market
interest rates on its securities portfolio.
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
15
<PAGE>
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
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
has not to date incurred 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's
major vendors have not suffered a year 2000 business disruption to date, such a
disruption 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 did not develop 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.
16
<PAGE>
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.
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 a significant portion 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 customers 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 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, 1999.
17
<PAGE>
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary objective of the Company's investment activities is to
preserve the principal while at the same time maximizing yields without
significantly increasing risk. To achieve this objective, the Company maintains
its portfolio of cash equivalents and short-term investments in a variety of
securities, including both municipal and corporate obligations and money market
funds. As of December 31, 1999, approximately 84% of the Company's total
portfolio matures in one year or less, with the remainder maturing in less than
three years. The average interest rate on the entire portfolio was approximately
6.33% as of December 31, 1999. The interest bearing securities are subject to
interest rate risk and, accordingly, sharp changes in interest rates can affect
the fair value of these securities. After a review of the Company's marketable
investment securities, the Company believes that in the event of a hypothetical
ten percent (63 basis point) increase in interest rates, the resulting decrease
in fair market value of the securities would be insignificant to the financial
statements.
INVESTMENT RISK. The Company has an investment in equity instruments of a
privately-held, information technology company for business and strategic
purposes. This investment is included in other long-term assets and is accounted
for under the cost method since ownership is less than 20% and the Company does
not exert significant influence over its operations. For this non-quoted
investment, the Company's policy is to regularly review the assumptions
underlying the operating performance and cash flow forecasts in assessing the
carrying value. The Company identifies and records impairment losses on
long-lived assets when events and circumstances indicate that such assets might
be impaired. To date, no such impairment has been recorded. The Company invests
in short-term and long-term equity instruments of primarily publicly-held,
information technology companies for business and strategic purposes. Such
investments, are subject to significant fluctuations in fair market value due to
the general volatility of the stock market and stock prices of information
technology companies in particular.
18
<PAGE>
PART II OTHER INFORMATION
ITEM 1: Legal Proceedings.
From time to time, the Company is subject to legal proceedings
and claims in the ordinary course of business. The Company is
not currently involved in any legal proceedings that it
believes could have, either individually or in aggregate, a
material adverse effect on its business or financial
condition.
ITEM 2: Changes in Securities and use of proceeds
The Company issued Common Stock in connection with an
acquisition as detailed in Note 3 - "Business Combinations" in
the Notes to Financial Statements pursuant to Section 4(2) of
the Securities Exchange Act of 1933.
ITEM 3: Defaults Upon Senior Securities
None.
ITEM 4: Submission of Matters to a Vote of Security Shareholders
None
ITEM 5: Other Information.
On October 22, 1999, the Company entered into an agreement and
plan of merger with respect to the acquisition of
FreeYellow.com, Inc. See notes to financial statements -
Business Combinations
ITEM 6: Exhibits and Reports on Form 8-K
Form 8-K was filed with the SEC on November 5, 1999 with
respect to the acquisition of FreeYellow.com.
Form 8-K/A was filed with the SEC on October 18, 1999 under
Item 2 with respect to the financial statements of Dogpile
LLC.
Exhibit 27 - Financial Data Schedule
19
<PAGE>
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 11, 2000
By: /s/ Russell C. Horowitz
-----------------------------------------
Russell C. Horowitz
Chief Executive Officer, Chief Financial
Officer and Director (Principal Executive
and Accounting Officer)
20
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<PERIOD-START> OCT-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 66,364,315
<SECURITIES> 170,591,000
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