10-Q 1 a10-q.txt 10-Q 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.

2 Go2Net, Inc. and Subsidiaries CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

See notes to condensed consolidated financial statements. 3 Go2Net, Inc. and Subsidiaries CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

See notes to condensed consolidated financial statements. 4 Go2Net, Inc. and Subsidiaries CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

See notes to condensed consolidated financial statements. 5 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 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 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 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 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:

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. 10 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:

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. 11 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 12 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. 13 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 14 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 15 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 16 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. 17 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. 18 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 19 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) 20

GO2NET INC 10-Q