<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 JUNE 30, 2000
/ / 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 August 8, 2000, there were 31,378,884 shares of the Registrant's common
stock outstanding.
<PAGE>
<TABLE>
<CAPTION>
PAGE
PART I FINANCIAL INFORMATION NUMBER
<S> <C>
ITEM 1: Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of June 30, 2000
and September 30, 1999....................................................... 3
Condensed Consolidated Statements of Operations for the three and nine
months ended June 30, 2000 and 1999.......................................... 4
Condensed Consolidated Statements of Cash Flows for the nine
months ended June 30, 2000 and 1999.......................................... 5
Notes to Condensed Consolidated Financial Statements.................................. 6
ITEM 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................................... 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
(Unaudited)
<TABLE>
<CAPTION>
June 30, September 30,
2000 1999
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................... $ 16,166,219 $ 66,786,513
Short-term investments.................................................. 211,084,740 151,000,000
Trade accounts receivable, net.......................................... 10,558,766 5,712,977
Other accounts receivable............................................... 2,686,331 3,818,410
Deferred tax asset, net................................................. 8,889,952 2,144,637
Prepaid expenses and other current assets............................... 1,517,651 750,848
------------- -------------
Total current assets................................................. 250,903,659 230,213,385
Property and equipment, net............................................... 11,566,978 3,254,594
Other assets.............................................................. 1,216,492 1,164,553
Long-term investments..................................................... 55,773,858 53,771,208
Other investments......................................................... 98,917,725 21,676,129
Deposits.................................................................. 200,000 250,000
Intangibles, net.......................................................... 163,782,232 197,929,199
------------- -------------
Total assets......................................................... $ 582,360,944 $ 508,259,068
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................ $ 2,298,996 $ 1,253,843
Accrued expenses........................................................ 4,622,186 3,139,409
Accrued compensation and benefits....................................... 1,359,698 2,425,013
Deferred revenue........................................................ 19,679,077 3,072,755
------------- -------------
Total current liabilities............................................ 27,959,957 9,891,020
Deferred revenue.......................................................... 5,370,343 530,796
Deferred tax liability.................................................... 26,213,534 16,905,877
COMMITMENTS AND CONTINGENCIES - -
Stockholders' equity:
Series A convertible preferred stock including additional paid in capital,
$0.01 par value (aggregate involuntary liquidation preference of
$300,000,000); authorized, issued and outstanding 300,000 shares at June
30, 2000 and September 30, 1999...................................... 450,832,439 450,927,510
Common stock including additional paid in capital, $0.01 par value;
authorized 499,000,000 shares, outstanding 31,319,652 shares at June 30,
2000 and 29,653,033 shares at September 30, 1999..................... 93,536,026 42,721,806
Accumulated other comprehensive income.................................. 28,378,305 2,500,337
Accumulated deficit..................................................... (49,929,660) (15,218,278)
------------- -------------
Total stockholders' equity........................................... 522,817,110 480,931,375
------------- -------------
Total liabilities and stockholders' equity........................... $ 582,360,944 $ 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 Three Months Nine Months Nine Months
Ended Ended Ended Ended
June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenue .......................................... $ 23,015,093 $ 5,726,004 $ 54,994,862 12,651,287
Costs of revenue ................................. 3,630,110 1,205,310 9,002,838 2,832,068
------------- ------------- ------------- -------------
Gross profit ................................. 19,384,983 4,520,694 45,992,024 9,819,219
Operating expenses:
Sales and Marketing .......................... 6,123,228 1,737,938 15,287,451 4,034,825
General and administrative ................... 3,799,486 2,108,632 10,028,451 3,756,141
Product development .......................... 2,737,940 904,022 6,277,352 1,938,613
Merger and acquisition related costs ......... -- -- -- 650,257
Amortization of intangibles .................. 20,359,253 2,740,763 59,965,499 2,740,763
------------- ------------- ------------- -------------
Total operating expenses ......................... 33,019,907 7,491,355 91,558,753 13,120,599
------------- ------------- ------------- -------------
Loss from operations ............................. (13,634,924) (2,970,661) (45,566,729) (3,301,380)
Interest income, net ............................. 4,298,039 2,422,248 12,284,259 3,151,426
------------- ------------- ------------- -------------
Net loss before taxes ............................ (9,336,885) (548,413) (33,282,470) (149,954)
Income tax expense ............................... 940,164 18,533 940,164 18,533
------------- ------------- ------------- -------------
Loss before cumulative effect of a change in
accounting principle ........................... (10,277,049) (566,946) (34,222,634) (168,487)
Cumulative effect on prior year of a change in
accounting principle ........................... -- -- 488,748 --
------------- ------------- ------------- -------------
Net loss ..................................... (10,277,049) (566,946) (34,711,382) (168,487)
Preferred stock dividend ......................... -- 107,000,447 -- 159,930,733
------------- ------------- ------------- -------------
Net loss applicable to common shareholders ....... (10,277,049) (107,567,393) (34,711,382) (160,099,220)
============= ============= ============= =============
Amounts per basic and diluted common share:
Net loss applicable to common shareholders
before cumulative effect of a change in
accounting principle ........................... (0.33) (4.07) (1.12) (6.23)
Cumulative effect on prior year of a change in
accounting principle ........................... -- -- (0.01) --
------------- ------------- ------------- -------------
Net loss applicable to common shareholders ... (0.33) (4.07) (1.13) (6.23)
============= ============= ============= =============
Pro forma amounts assuming the new accounting
policy is applied retroactively:
Net loss ......................................... (10,277,049) (566,946) (34,222,634) (168,487)
Net loss applicable to common shareholders per
basic and diluted common share ................. (0.33) (4.07) (1.12) (6.23)
Number of shares used in computing basic and
diluted net loss per share ..................... 31,290,624 26,401,610 30,668,756 25,668,028
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
Go2Net, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended Ended
June 30, 2000 June 30, 1999
------------- -------------
Operating activities:
<S> <C> <C>
Net loss ...................................................... $ (34,711,382) $ (168,487)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization of other assets .............. 1,960,368 617,063
Amortization of intangibles ................................ 59,965,499 2,740,763
Deferred income taxes ...................................... (998,080) (295,645)
Stock compensation ......................................... 4,530 770,921
Cumulative effect on prior year of a change in accounting
principle ................................................ 488,747 --
Changes in working capital:
Receivables .............................................. (3,678,865) (3,327,813)
Prepaid expenses, other current assets, deposits and other
assets ................................................. (829,524) (136,395)
Accrued compensation and benefits ........................ (1,068,975) 572,238
Accounts payable and accrued expenses .................... 4,203,089 1,757,487
Deferred revenue ......................................... 16,628,476 602,873
------------- -------------
Net cash provided by operating activities ....................... 41,963,883 3,133,005
Investing activities:
Purchases of marketable securities ............................ (232,624,161) (218,567,507)
Sales and maturities of marketable securities ................. 137,060,473 51,100,000
Purchases of property and equipment ........................... (9,913,529) (1,209,326)
Net cash used in business acquisitions ........................ (1,643,167) (166,098)
------------- -------------
Net cash used in investing activities ........................... (107,120,384) (168,842,931)
Financing activities:
Proceeds from exercise of options ............................. 14,387,374 6,970,157
Sale of common stock under employee stock purchase plan ....... 243,904 --
Payments on short term borrowing .............................. -- (90,616)
Sale of preferred stock, net................................... (95,071) 291,065,452
------------- -------------
Net cash provided by financing activities ....................... 14,536,207 297,944,993
------------- -------------
Net increase (decrease) in cash and cash
equivalents ................................................... (50,620,294) 132,235,067
Cash and cash equivalents at beginning
of period ..................................................... 66,786,513 941,351
------------- -------------
Cash and cash equivalents at end of period ...................... $ 16,166,219 $ 133,176,418
------------- -------------
------------- -------------
Non-cash financing and investing activities:
Dividend to preferred stockholder ............................. -- 159,930,733
Stock warrants acquired for services .......................... 4,312,396 --
Common stock issued in business acquisition ................... 23,935,718 49,032,056
Assets and liabilities recognized upon business acquisition,
excluding cash:
Receivables ............................................... 34,845 53,670
Prepaid expenses and other assets and deposits ............ 17,166 85,217
Intangibles ............................................... 24,154,893 48,891,803
Accounts payable and accrued expenses ..................... 14,969 140,292
Deferred revenue .......................................... 16,249 --
Deferred tax liability, net ............................... 260,440 --
Unrealized gain (loss) on marketable securities ............... 43,807,600 (362,940)
</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 condensed consolidated financial statements as of June 30, 2000 and
1999 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 condensed consolidated 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 June 30,
2000 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 June 30, 2000 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
$28,378,305 (net of the related tax effect of $15,429,295) reported as
accumulated other comprehensive income as of June 30, 2000. 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.
PREMIUMS 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 quarters and nine months ended June 30, 2000 and 1999.
The Company is also subject to risks related to the significant balances of
cash, cash equivalents, short-term and long-term investments. The Company has
invested approximately $15 million in iMandi Corporation and Sandbox.com during
the quarter ended June 30, 2000. At June 30, 2000, the Company held shares and
warrants of CommTouch Software LTD common stock representing approximately 13.4%
of CommTouch's outstanding common stock, held shares and warrants of
Click2Learn, Inc. common stock representing approximately 5.1% of Click2Learn's
outstanding common stock, held shares of National Discount Brokers' common stock
representing approximately 1.5% of National Discount Brokers' common stock, held
warrants of FindWhat.com common stock representing approximately 5.3% of
FindWhat.com's common stock, held shares and warrants of AskMe.com preferred and
common stock representing approximately 11.6% of AskMe.com's common stock, held
shares of iMandi Corporation convertible preferred stock representing
approximately 6.0% of iMandi's common stock on an if converted basis and held
shares of Sandbox.com convertible preferred stock representing approximately
6.1% of Sandbox.com's common stock on an if converted basis. 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.
7
<PAGE>
FINANCIAL INSTRUMENTS
The recorded amounts of financial instruments including cash equivalents,
investments, receivables, and accounts payable approximate their fair values at
June 30, 2000.
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, distribution, 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 provided. The Company has recorded deferred
revenue of $3,843,403 and $825,129 as of June 30, 2000 and September 30, 1999,
respectively, in connection with the receipt of stock purchase warrants as part
of several of its strategic arrangements. For the three and nine months ended
June 30, 2000, the Company has recorded non-cash revenue related to these
arrangements of $1,084,724 and $1,233,521, respectively. The Company did not
record any non-cash revenue for the comparable periods in 1999. All other barter
revenue for the periods presented was immaterial.
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.
8
<PAGE>
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 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 14,907,151 and
14,649,133 securities at June 30, 2000 and 1999, 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 June 30, 2000, total comprehensive loss was
$34,618,825 which consisted of net loss of $10,277,049 and unrealized holding
losses, net of tax, of $24,341,776. For the quarter ended June 30, 1999, total
comprehensive loss was $929,886 which consisted of net loss of $566,946 and
unrealized holding losses, net of tax, of $362,940. For the nine months ended
June 30, 2000, total comprehensive loss was $10,406,500, which consisted of
net loss of $34,711,382 and unrealized holding gains of $24,304,882. For the
nine months ended June 30, 1999, total comprehensive loss was $531,427, which
consisted of net loss of $168,487 and unrealized holding losses, net of tax,
of $362,940.
RECLASSIFICATIONS
Certain balances have been reclassified to conform to the current year
presentation.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board (FASB) 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 No. 137 and SFAS
No. 138, 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 March 2000, the FASB issued Interpretation No. 44 (FIN No. 44),
"Accounting for Certain Transactions Involving Stock Compensation, an
interpretation of APB Opinion No. 25." FIN No. 44 will be effective July 1,
2000. This interpretation provides guidance for applying APB Opinion No. 25
"Accounting for Stock Issued to Employees." Management has not determined the
impact that adoption of FIN No. 44 will have on the Company's financial position
or results of operations.
9
<PAGE>
In March 2000, the Emerging Issues Task Force (EITF) of the FASB reached a
consensus on Issue No. 00-2, "Accounting for Web Site Development Costs" which
provides guidance on when to capitalize versus expense costs incurred to develop
a web site. The consensus is effective for web site development costs in
quarters beginning after June 30, 2000. The Company has not yet determined the
impact, if any, this Issue will have on the Company's financial statements.
3. CHANGE IN ACCOUNTING PRINCIPLE
Prior to April 1, 2000, the Company recorded revenues from customers for
set-up fees when the service was completed. As a result of the Securities and
Exchange Commission's release of Staff Accounting Bulletin No. 101 (SAB 101),
"Revenue Recognition in Financial Statements", the Company changed its method of
recognizing the set-up fees to a straight-line basis over the estimated
period of the related service agreements. The $488,748 cumulative effect of
the change on prior year (after a reduction for income taxes of $251,780) is
included in income of the nine months ended June 30, 2000. The effect of the
change on the first and second quarters of fiscal year 2000 is as follows:
<TABLE>
<CAPTION>
Three Months Ended
December 31, 1999 March 31, 2000
----------------- --------------
<S> <C> <C>
Net loss as originally reported $ 11,306,414 $ 11,872,407
Effect of change in accounting principle 595,793 170,971
----------------- --------------
Loss before cumulative effect of a change in accounting principle 11,902,207 12,043,378
Cumulative effect on prior year of a change in accounting principle 488,748 --
----------------- --------------
Net loss as restated $ 12,390,955 $ 12,043,378
================= ==============
Amounts per common share:
Net loss as originally reported 0.38 0.39
Effect of a change in accounting principle 0.02 0.01
----------------- --------------
Loss before cumulative effect of a change in accounting principle 0.40 0.40
Cumulative effect on prior year of a change in accounting principle 0.01 --
----------------- --------------
Net loss as restated 0.41 0.40
================= ==============
</TABLE>
The effect of the change on the third quarter of fiscal year 2000 was to
increase net income $76,752 ($0.00 per share). The pro forma amounts reflect
the effect of retroactive application of SAB101 that would have been made in
1999 had the new method been in effect. There was no impact to the first,
second or third quarters of fiscal year 1999. The cumulative effect of the
change on prior year related solely to the three months ended September 30,
1999.
4. RELATED PARTY TRANSACTIONS
For the three and nine months ended June 30, 2000, the Company
recognized revenues of $230,000 and $565,000, respectively under licensing
agreements with DirectWeb, Inc., the CEO of which was a member of the
Company's Board of Directors. As of June 30, 2000 the Company had $255,000 in
accounts receivable from DirectWeb, Inc. The Company recognized revenues in
the three and nine months ended June 30, 2000 of $470,593 and $1,357,782,
respectively from Mercata and Click2Learn, Inc. under advertising, marketing,
distribution and licensing agreements. Vulcan Ventures Incorporated is a
minority shareholder in the Company and a shareholder in Mercata and
Click2Learn, Inc. The Company recognized revenues in the three and nine
months ended June 30, 2000 of $493,537 and $691,104, respectively from
AskMe.com under an advertising, marketing and distribution agreement. The
Company is a minority shareholder in AskMe.com. The Company recognized
revenues in the three and nine months ended June 30, 2000 of $1,878,276 and
$2,784,765, respectively from National Discount Brokers under an advertising,
marketing, distribution and license agreement. The Company and Vulcan
Ventures Incorporated are minority shareholders in National Discount Brokers.
The Company also recognized revenues in the three and nine months ended June
30, 2000 of $166,666 and $166,666, respectively from iMandi Corporation under
an advertising, marketing and distribution agreement. The Company and Vulcan
Ventures Incorporated are minority shareholders in iMandi Corporation. As of
June 30, 2000 the Company had $226,727 in accounts receivable from Digeo
Broadband, Inc. The Company is a minority shareholder and Vulcan Ventures
Incorporated is the majority shareholder in Digeo Broadband, Inc. Related
party transactions were immaterial for the comparable periods in 1999.
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5. SEGMENT INFORMATION
We have identified our reportable segments based on how our operations
are managed and how results are viewed by chief operating decision makers.
The accounting policies of the operating segments are the same as those
described in the 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 and
nine months ended June 30, 2000 and 1999:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Advertising Revenue $ 10,936,776 $ 4,780,120 $ 30,153,319 $ 10,410,212
Subscriptions, electronic
commerce, licenses and other
revenue 12,078,317 945,884 24,841,543 2,241,075
------------- ------------- ------------- -------------
Consolidated Revenue $ 23,015,093 $ 5,726,004 $ 54,994,862 $ 12,651,287
============= ============= ============= =============
</TABLE>
6. SUBSEQUENT EVENT
On July 26, 2000, Go2Net, Inc. (the "Company"), InfoSpace, Inc.
("InfoSpace") and Giants Acquisition Corp., a wholly-owned subsidiary of
InfoSpace ("Merger Sub"), entered into a definitive Agreement and Plan of
Reorganization (the "Reorganization Agreement"). Pursuant to the
Reorganization Agreement and subject to the terms and conditions set forth
therein, Merger Sub will be merged with and into the Company (the "Merger"),
with the Company surviving the Merger and becoming a wholly-owned subsidiary
of InfoSpace. At the effective time of the Merger, all outstanding shares of
the Company's capital stock will be exchanged for shares of InfoSpace common
stock. At the effective time of the merger, options to purchase Company
capital stock will be exchanged for options to purchase shares of InfoSpace
common stock, and the exercise price and number of shares of Company
capital stock subject to each such Company option shall be appropriately
adjusted to reflect the exchange ratio. Each share of Company common stock
will be exchanged for 1.82 shares of InfoSpace common stock. The Merger is
subject to various conditions, including clearance under the
Hart-Scott-Rodino Antitrust Improvements Act and approval both of the
Company's stockholders and InfoSpace's stockholders. The transaction will
qualify as tax-free reorganization, and the parties intend for it to be
accounted for as a pooling.
7. LEGAL PROCEEDINGS
The Company is subject to various legal proceedings and claims that arise
in the ordinary course of business. Management currently believes that resolving
these matters will not have a material adverse impact on the Company's financial
position or results of operations.
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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, shopping cart technology 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
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<PAGE>
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 in the future. Since inception, the Company has incurred
significant losses on an annual basis and, as of June 30, 2000, had an
accumulated deficit of $49,929,660. 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 and
ecommerce, seasonal trends in both Internet use and advertising placements, the
addition or loss of advertisers and licensing partners, advertising budgeting
cycles of individual advertisers, the Company's ability to execute on its
licensing strategy, 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 revenues for the three and nine months ended June 30, 2000 were
$23,015,093 and $54,994,862, respectively. Revenues for the comparable periods
in 1999 were $5,726,004 and $12,651,287, respectively. 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
Costs of revenue consist 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.
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For the three and nine months ended June 30, 2000, costs of revenue were
$3,630,110 and $9,002,838, respectively. Costs of revenue for the comparable
periods in 1999 were $1,205,310 and $2,832,068, respectively. 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 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 84.2% for the three months
ended June 30, 2000 compared to 78.9% for the comparable period in 1999. Gross
profit as a percentage of revenue was 83.6% for the nine months ended June 30,
2000 compared to 77.6% for the comparable period in 1999. 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
June 30, 2000. 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 and nine months ended June 30, 2000 were $6,123,228
and $15,287,451, respectively. Sales and marketing expenses for the comparable
periods in 1999 were $1,737,938 and $4,034,825, 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.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of compensation not otherwise attributable to product development and
sales and marketing expenses, stock compensation charges, rent expense, fees for
professional services and other general corporate purposes. General and
administrative expenses for the three and nine months ended June 30, 2000 were
$3,799,486 and $10,028,451, respectively. General and administrative expenses
for the comparable periods in 1999 were $2,108,632 and $3,756,141, respectively.
The increase was 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. 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.
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
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<PAGE>
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 and
nine months ended June 30, 2000 were $2,737,940 and $6,277,352, respectively.
Product development expenses for the comparable periods in 1999 were $904,022
and $1,938,613, respectively. The overall increase in product 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.
MERGER AND ACQUISITION RELATED EXPENSES. During the nine months ended June
30, 1999, 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 and nine months ended June 30, 2000
was $20,359,253, and $59,965,499, respectively. Amortization expense for both
the comparable periods in 1999 was $2,740,763.
INTEREST INCOME. Interest income for the three and nine months ended June
30, 2000 was $4,298,039 and $12,284,259, respectively. Interest income for the
comparable periods in 1999 was $2,422,248 and $3,151,426, respectively. Interest
income was higher in 2000 as compared to 1999 as a result of interest earned on
cash received from the sale of Preferred Stock as well as higher interest rates
in 2000.
INCOME TAXES. For the three and nine months ended June 30, 2000, the
Company recorded an income tax expense of $940,164. Income tax expense for both
the comparable periods in 1999 was $18,533.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2000, the Company's principal source of liquidity was
$227,250,959 in cash, cash equivalents and short-term investments derived
primarily from the sale of the Company's preferred and common equity securities.
As of June 30, 2000, 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 (9.50% per annum as of June 30,
2000) or LIBOR plus 1.75%. As of June 30, 2000, 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 $9,913,529 and $1,209,326 for the nine months
ended June 30, 2000 and June 30, 1999, respectively. The Company has entered
into formal commitments for capital expenditures of approximately $2,500,000
relating to the purchase of computer hardware, software, furniture and the
relocation of its main corporate offices. The Company anticipates an 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
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requirements for at least the next twelve months. Thereafter, the Company may
need to raise additional funds. The Company's ability to grow will depend in
part on the Company's ability to expand and improve its Internet operations,
expand its advertising and marketing efforts, expand and improve its Internet
user support capabilities and develop new Internet-based products and services.
In connection therewith, the Company may need to raise additional capital in the
foreseeable future from public or private equity or debt sources in order to
finance such possible growth. In addition, the Company may need to raise
additional funds in order to avail itself to unanticipated opportunities (such
as more rapid expansion, acquisitions of complementary businesses or the
development of new products or services), to react to unforeseen difficulties
(such as the loss of key personnel or the rejection by Internet users or
potential advertisers of the Company's Internet products and services) or to
otherwise respond to unanticipated competitive pressures. If additional funds
are raised through the issuance of equity securities, then the percentage
ownership of the Company's then existing stockholders will be reduced,
stockholders may experience additional and significant dilution and such equity
securities may have rights, preferences or privileges senior to those of the
Company's common stock. There can be no assurance that additional financing will
be available on terms acceptable to the Company or at all. If adequate funds are
not available or are not available on terms acceptable to the Company, the
Company may be unable to implement its business, sales or marketing plan,
respond to competitive forces or take advantage of perceived business
opportunities, which could have a material adverse effect on the Company's
business, financial condition and operating results.
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.
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 and ecommerce, 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
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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 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.
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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
June 30, 2000, approximately 79% 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 6.52% as of June 30,
2000. 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 (65 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 investments in equity instruments of
privately-held, information technology and internet service companies for
business and strategic purposes. These investments are included in other
long-term assets and are accounted for under the cost method since ownership is
less than 20% and the Company does not exert significant influence over the
operations. For these non-quoted investments, the Company's policy is to
regularly review the assumptions underlying the operating performance and cash
flow forecasts in assessing the carrying values. 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.
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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
None
ITEM 3: Defaults Upon Senior Securities
None.
ITEM 4: Submission of Matters to a Vote of Security Shareholders
None
ITEM 5: Other Information.
On July 26, 2000, Go2Net, Inc. (the "Company"), InfoSpace, Inc.
("InfoSpace") and Giants Acquisition Corp., a wholly-owned subsidiary
of InfoSpace ("Merger Sub"), entered into a definitive Agreement and
Plan of Reorganization (the "Reorganization Agreement"). Pursuant to
the Reorganization Agreement and subject to the terms and conditions
set forth therein, Merger Sub will be merged with and into the Company
(the "Merger"), with the Company surviving the Merger and becoming a
wholly-owned subsidiary of InfoSpace. At the effective time of the
Merger, all outstanding shares of the Company's capital stock will be
exchanged for shares of InfoSpace common stock. At the effective time
of the merger, options to purchase Company capital stock will be
exchanged for options to purchase shares of InfoSpace common stock,
and the exercise price and number of shares of Company capital stock
subject to each such Company option shall be appropriately adjusted to
reflect the exchange ratio. Each share of Company common stock will be
exchanged for 1.82 shares of InfoSpace common stock. The Merger is
subject to various conditions, including clearance under the
Hart-Scott-Rodino Antitrust Improvements Act and approval both of the
Company's stockholders and InfoSpace's stockholders. The transaction
will qualify as a tax-free reorganization, and the parties intend for
it to be accounted for as a pooling.
ITEM 6: Exhibits and Reports on Form 8-K
Form 8-K was filed with the SEC on July 31, 2000 with respect to the
proposed Agreement and Plan of Reorganization between the Company,
Infospace, Inc. and Giants Acquisition Corp., a wholly owned
subsidiary of Infospace, Inc.
Exhibit 27 - Financial Data Schedule
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized in the capacity so indicated.
GO2NET, INC.
Date: August 11, 2000
By: /s/ Jeff D. Bergstrom
-------------------------------------------
Jeff D. Bergstrom
Senior Vice President of Finance
(Principal Accounting Officer)
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