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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
DATE OF REPORT June 12, 1998
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YAHOO! INC.
(Exact name of registrant as specified in its charter)
0-26822
(Commission File Number)
California 77-0398689
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3420 Central Expressway
Santa Clara, California 95051
(Address of principal executive offices, with zip code)
(408) 731-3300
(Registrant's telephone number, including area code)
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ITEM 5 OTHER EVENTS
The following risk factors are included for informational purposes and
are hereby incorporated by reference in the Company's Registration Statements
on Form S-3 and S-8 filed with the Securities and Exchange Commission:
RISK FACTORS
THESE RISK FACTORS CONTAIN FORWARD-LOOKING STATEMENTS WITHIN THE MEANING
OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934, INCLUDING, WITHOUT LIMITATION, STATEMENTS
REGARDING THE COMPANY'S EXPECTATIONS, BELIEFS, INTENTIONS OR FUTURE
STRATEGIES. ALL FORWARD-LOOKING STATEMENTS INCLUDED IN THIS DOCUMENT ARE
BASED ON INFORMATION AVAILABLE TO THE COMPANY ON THE DATE HEREOF, AND THE
COMPANY ASSUMES NO OBLIGATION TO UPDATE ANY SUCH FORWARD-LOOKING STATEMENTS.
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THE
FORWARD-LOOKING STATEMENTS AS A RESULT OF THE RISK FACTORS SET FORTH BELOW.
LIMITED OPERATING HISTORY; ANTICIPATED LOSSES
The Company was incorporated in March 1995 and did not commence generating
advertising revenues until August 1995. Accordingly, the Company has a limited
operating history upon which an evaluation of the Company can be based, and its
prospects are subject to the risks, expenses and uncertainties frequently
encountered by companies in the new and rapidly evolving markets for Internet
products and services, including the Web-based advertising market. Specifically,
such risks include, without limitation, the failure to continue to develop and
extend the Yahoo! brand, the failure to develop new media properties, the
inability of the Company to maintain and increase the levels of traffic on
Yahoo! properties, the development or acquisition of equal or superior services
or products by competitors, the failure of the market to adopt the Web as an
advertising medium, the failure to successfully sell Web-based advertising
through the Company's recently developed internal sales force, potential
reductions in market prices for Web-based advertising as a result of competition
or other factors, the failure of the Company to effectively generate
commerce-related revenues through sponsored services and placements in Yahoo!
properties, the inability of the Company to effectively integrate the technology
and operations of any other acquired businesses or technologies with its
operations, such as the recent acquisition of Viaweb Inc., the failure of the
Company to successfully develop and offer personalized Web-based services, such
as e-mail services, to consumers without errors or interruptions in service, and
the inability to continue to identify, attract, retain and motivate qualified
personnel. There can be no assurance that the Company will be successful in
addressing such risks. As of March 31, 1998, the Company had an accumulated
deficit of $23,686,000. The limited operating history of the Company and the
uncertain nature of the markets addressed by the Company make the prediction of
future results of operations difficult or impossible and, therefore, the recent
revenue growth experienced by the Company should not be taken as indicative of
the rate of revenue growth, if any, that can be expected in the future. The
Company believes that period-to-period comparisons of its operating results are
not meaningful and that the results for any period should not be relied upon as
an indication of future performance. The Company currently expects to continue
to significantly increase its operating expenses to expand its sales and
marketing operations, to continue to develop and extend the Yahoo! brand, to
fund greater levels of product development, to develop and commercialize
additional media properties, and to acquire complementary businesses and
technologies. As a result of these factors, there can be no assurance that the
Company will not incur significant losses on a quarterly and annual basis.
On June 10, 1998, the Company completed the acquisition of Viaweb Inc., a
provider of software and services for hosting online stores, in exchange for
393,591 shares of the Company's Common Stock and assumption of options to
purchase an aggregate of 61,126 shares of the Company's Common Stock. Based
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upon the closing price of the Company's Common Stock on June 5, 1998, the shares
issued or issuable in the transaction had an aggregate value of approximately
$49 million. The Company anticipates that it will incur a one-time charge of
approximately $45 million in the second quarter of 1998 for acquired in-process
technology and expenses associated with the transaction. The remaining purchase
price of approximately $4 million will be allocated to acquired technology and
other intangible assets to be amortized over a three-year period. As a result of
the expense to be incurred in the second quarter of 1998, the Company
anticipates reporting a net loss for such quarter and for the year ending
December 31, 1998.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
As a result of the Company's limited operating history, the Company does not
have historical financial data for a significant number of periods on which to
base planned operating expenses. The Company derives the majority of its
revenues from the sale of advertisements under short-term contracts, which are
difficult to forecast accurately. The Company's expense levels are based in part
on its expectations concerning future revenue and, to a large extent, are fixed.
Quarterly revenues and operating results depend substantially upon the
advertising revenues received within the quarter, which are difficult to
forecast accurately. Accordingly, the cancellation or deferral of a small number
of advertising or sponsorship contracts could have a material adverse effect on
the Company's business, results of operations, and financial condition. The
Company may be unable to adjust spending in a timely manner to compensate for
any unexpected revenue shortfall, and any significant shortfall in revenue in
relation to the Company's expectations would have an immediate adverse effect on
the Company's business, operating results, and financial condition. In addition,
the Company plans to continue to significantly increase its operating expenses
to expand its sales and marketing operations, to continue to develop and extend
the Yahoo! brand, to fund greater levels of product development, and to develop
and commercialize additional media properties. To the extent that such expenses
precede or are not subsequently followed by increased revenues, the Company's
business, operating results, and financial condition will be materially and
adversely affected. As a result of these factors, there can be no assurance that
the Company will not incur significant losses in the future.
The Company's operating results may fluctuate significantly in the future as
a result of a variety of factors, many of which are outside the Company's
control. These factors include the level of usage of the Internet, demand for
Internet advertising, the addition or loss of advertisers, the level of user
traffic on Yahoo! and the Company's other online media properties, the
advertising budgeting cycles of individual advertisers, the mix of types of
advertising sold by the Company (such as the amount of targeted advertising,
which generally has higher rates), sold as a percentage of total advertising
sold, the amount and timing of capital expenditures and other costs relating to
the expansion of the Company's operations, the introduction of new products or
services by the Company or its competitors, pricing changes for Web-based
advertising, the timing of initial set-up, engineering or development fees that
may be paid in connection with larger advertising and distribution arrangements,
technical difficulties with respect to the use of Yahoo! or other media
properties developed by the Company, incurrence of costs relating to future
acquisitions, general economic conditions, and economic conditions specific to
the Internet and online media. As a strategic response to changes in the
competitive environment, the Company may from time to time make certain pricing,
service or marketing decisions, or business combinations that could have a
material adverse effect on the Company's business, results of operations, and
financial condition. Seasonality may affect the amount of customer advertising
dollars placed with the Company in the first and third calendar quarters as
advertisers historically spend less during these quarters. The Company also
expects to experience seasonality in its business, with user traffic on Yahoo!
and the Company's other online media properties being lower during the summer
and year-end vacation and holiday periods, when usage of the Web and the
Company's services typically experience slower growth or decline.
A key element of the Company's strategy is to generate advertising revenues
through sponsored services and placements by third parties in the Company's
online media properties in addition to banner
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advertising. In connection with these arrangements, the Company may receive
sponsorship fees as well as a portion of transaction revenues received by the
third-party sponsor from users originated through the Yahoo! placement, in
return for minimum levels of user impressions to be provided by the Company. To
the extent implemented, these arrangements expose the Company to potentially
significant financial risks, including the risk that the Company fails to
deliver required minimum levels of user impressions or "click throughs" (in
which case, these agreements typically provide for adjustments to the fees
payable thereunder or "make good" periods), that third-party sponsors do not
renew the agreements at the end of their term, that the arrangements do not
generate anticipated levels of shared transaction revenue, or that sponsors
default in the payment commitments in such agreements, which could result in the
Company failing to achieve anticipated revenue from the sponsorship
arrangements. In addition, because the Company has limited experience with these
arrangements, the Company is unable to determine what effect such arrangements
will have on gross margins and results of operations. Although transaction-based
fees have not to date represented a material portion of the Company's net
revenues, if and to the extent such revenues become significant, the foregoing
factors could result in greater variations in the Company's quarterly operating
results and could have a material adverse effect on the Company's business,
results of operations, and financial condition.
Due to all of the foregoing factors, in some future quarter the Company's
operating results may fall below the expectations of securities analysts and
investors. In such event, the trading price of the Company's Common Stock would
likely be materially and adversely affected.
COMPETITION
The market for Internet products and services is highly competitive and
competition is expected to continue to increase significantly. There are no
substantial barriers to entry in these markets, and the Company expects that
competition will continue to intensify.
MULTIPLE PROVIDERS OF COMPETITIVE SERVICE. The Company competes with
many other providers of online navigation, information and community
services. As the Company expands the scope of its Internet services, it will
compete directly with a greater number of Internet sites and other media
companies. Many companies offer competitive products or services addressing
Web navigation services, including, among others, America Online Inc.
(NetFind), C--NET, Inc. (Snap! Online), Digital Equipment Corporation
(AltaVista), Excite, Inc. (including WebCrawler), Infoseek Corporation,
Inktomi, Lycos, Inc. (including Tripod), Microsoft Corporation (Internet
Start), Netscape Communications Corporation (Netcenter), and Wired Ventures,
Inc. (hotbot). In addition, the Company competes with metasearch services and
software applications, such as C--NET's search.com service, that allow a user
to search the databases of several directories and catalogs simultaneously.
The Company also competes indirectly with database vendors that offer
information search and retrieval capabilities with their core database
products. In addition, many large media companies have announced that they
are contemplating Internet navigation services and are attempting to become
"gateway" sites for Web users. For example, both Time Inc. and CBS have
announced initiatives to develop Web services in order to have their Web
sites become the starting point for users navigating the Web and C--NET
recently announced that NBC has purchased an equity interest in C--NET's
Snap! Online navigational service, and that C--NET and NBC will operate the
service as a joint venture.
A large number of Web sites and online services (including, among others,
the Microsoft Network, AOL, Netscape (Netcenter), and other Web navigation
companies such as Excite, Lycos, and Infoseek) also offer informational and
community features, such as news, stock quotes, sports coverage, Yellow Pages
and email listings, weather news, chat services, bulletin board listings and
online store hosting services that are competitive with the services offered by
the Company. For example, Netscape, which experiences high levels of traffic on
its Web sites by virtue of default settings and buttons on its popular Web
browser products, recently announced an initiative to significantly enhance its
Netcenter service as a "gateway" Web site, which will involve commercial
relationships between Netscape and certain of the
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Company's competitors. A number of companies, including HotMail (which was
recently acquired by Microsoft) and WhoWhere?, offer Web-based email service
similar to those offered by the Company, and such companies have and are
expected to continue to provide such services in tandem with larger navigational
sites and online services. AOL recently announced the acquisition of Mirabilis,
a provider of "ICQ" instant Internet messaging software and services that
compete with the Company's Yahoo! Pager offering, and the ICQ user base will
provide AOL with an additional platform for distribution of AOL's other
navigation, information and communications services that compete with those of
the Company. Several companies, including large companies such as Microsoft and
AOL and their affiliates, also are developing or currently offer online
information services for local markets, which compete with the Company's
regional Yahoo! online properties. As a result of the Company's recent
acquisition of Viaweb, Inc., the Company also expects to face competition in the
market for hosting online merchant stores. The Company also faces intense
competition in international markets, including competition from U.S.-based
competitors as well as media and online companies that are already well
established in those foreign markets.
CONSOLIDATION OF PRODUCTS OFFERED BY WEB BROWSERS AND OTHER INTERNET POINTS
OF ENTRY. The Company also faces competition from providers of software and
other Internet products and services that incorporate search and retrieval
features into their offerings. For example, Web browsers offered by Netscape and
Microsoft, which are the most widely used browsers, increasingly incorporate
prominent search buttons and similar features, such as features based on "push"
technologies, that direct search traffic to competing services, including those
that may be developed or licensed by such parties, that could make it more
difficult for Internet viewers to find and use the Company's products and
services. Netscape recently announced an agreement with Excite under which
Excite will be the most prominent navigational service within the Netcenter
Website. In the future, Netscape and Microsoft and other browser suppliers may
also more tightly integrate products and services similar to the Company's into
their browsers or their browsers' pre-set home pages. In addition, entities that
sponsor or maintain high-traffic Web sites or that provide an initial point of
entry for Internet users, such as the Regional Bell Operating Companies or
Internet Service Providers ("ISPs") such as Microsoft and AOL, currently offer
and could further develop, acquire or license Internet search and navigation
functions that compete with those offered by the Company and could take actions
that make it more difficult for consumers to find and use Yahoo! services. For
example, Microsoft recently announced that it will feature and promote Internet
search engine services provided by Inktomi in the Microsoft Network and other
Microsoft online properties, and offers personalized Web services through its
Internet Start service. The Company expects that such search services may be
tightly integrated into future versions of the Microsoft operating system, the
Internet Explorer browser and other software applications, and that Microsoft
will promote such services within the Microsoft Network or through other
Microsoft affiliated end-user services such as MSNBC or WebTV Networks, Inc.
Insofar as Microsoft's Internet navigational offerings may be more conveniently
accessed by users than those of the Company, this may provide Microsoft with
significant competitive advantages that could have a material adverse effect on
the Company's business.
COMPETITION FOR ADVERTISING EXPENDITURES. The Company also competes with
online services, other Web site operators and advertising networks, as well as
traditional offline media such as television, radio and print for a share of
advertisers' total advertising budgets. The Company believes that the number of
companies selling Web-based advertising and the available inventory of
advertising space have increased substantially during recent periods.
Accordingly, the Company may face increased pricing pressure for the sale of
advertisements and reductions in the Company's advertising revenues.
PRINCIPAL COMPETITIVE FACTORS. The Company believes that the principal
competitive factors in its markets are brand recognition, ease of use,
comprehensiveness, independence, quality and responsiveness of search results,
the availability of high-quality, targeted content and focused value added
products and services, quality and brand appeal, access to end users, and, with
respect to advertisers and sponsors, the number of users, duration and frequency
of visits and user demographics. Competition among current and
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future suppliers of Internet navigational and informational services,
high-traffic Web sites and ISPs, as well as competition with other media for
advertising placements, could result in significant price competition and
reductions in advertising revenues. Additionally, the Company has faced and
expects to continue to face competition with respect to the acquisition of
strategic businesses and technologies. There can be no assurance that the
Company will be able to compete successfully or that the competitive pressures
faced by the Company will not have a material adverse effect on the Company's
business, operating results, and financial condition.
Many of the Company's existing competitors, as well as a number of potential
new competitors, have significantly greater financial, technical, marketing and
distribution resources. In addition, providers of Internet tools and services
may be acquired by, receive investments from, or enter into other commercial
relationships with larger, well-established and well-financed companies, such as
Microsoft or AOL. For example, AOL is a significant shareholder of Excite, and a
version of the Excite service (AOL NetFind) has been designated as the exclusive
Internet search service for use by AOL's subscribers. In addition, well-
established traditional media companies may acquire, invest or otherwise
establish commercial relationships with the Company's competitors, such as NBC's
recent investment in C--NET's Snap! Online service, and may use their
substantial media resources to promote and enhance such competitor's services.
Greater competition resulting from such relationships could have a material
adverse effect on the Company's business, operating results and financial
condition.
DEPENDENCE ON CONTINUED GROWTH IN USE OF THE INTERNET; TECHNOLOGICAL CHANGE
The Company's future success is substantially dependent upon continued
growth in the use of the Internet and the Web in order to support the sale of
advertising on the Company's online media properties. There can be no assurance
that communication or commerce over the Internet will become more widespread or
that extensive content will continue to be provided over the Internet. The
Internet may not prove to be a viable commercial marketplace for a number of
reasons, including lack of acceptable security technologies, potentially
inadequate development of the necessary infrastructure, such as a reliable
network backbone, or timely development and commercialization of performance
improvements, including high speed modems. In addition, to the extent that the
Internet continues to experience significant growth in the number of users and
level of use, there can be no assurance that the Internet infrastructure will
continue to be able to support the demands placed upon it by such potential
growth or that the performance or reliability of the Web will not be adversely
affected by this continued growth. If use of the Internet does not continue to
grow, or if the Internet infrastructure does not effectively support growth that
may occur, the Company's business, operating results, and financial condition
would be materially and adversely affected. The market for Internet products and
services is characterized by rapid technological developments, evolving industry
standards and customer demands, and frequent new product introductions and
enhancements. These market characteristics are exacerbated by the emerging
nature of this market and the fact that many companies are expected to introduce
new Internet products and services in the near future. Failure of the Company to
effectively adapt to technological developments could adversely affect the
Company's business, operating results, and financial condition.
DEVELOPING MARKET; UNPROVEN ACCEPTANCE OF THE COMPANY'S PRODUCTS AND MEDIA
PROPERTIES
The markets for the Company's products and media properties have only
recently begun to develop, are rapidly evolving, and are characterized by an
increasing number of market entrants who have introduced or developed
information navigation products and services for use on the Internet and the
Web. As is typical in the case of a new and rapidly evolving industry, demand
and market acceptance for recently introduced products and services are subject
to a high level of uncertainty and risk. Because the market for the Company's
products and media properties is new and evolving, it is difficult to predict
the future growth rate, if any, and size of this market. There can be no
assurance either that the market for the Company's products and media properties
will continue to develop or that demand for the Company's
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products or media properties will be sustainable. If the market develops more
slowly than expected or becomes saturated with competitors, or if the Company's
products and media properties do not sustain market acceptance, the Company's
business, operating results, and financial condition will be materially and
adversely affected.
RISKS ASSOCIATED WITH BRAND DEVELOPMENT
The Company believes that establishing and maintaining the Yahoo! brand is a
critical aspect of its efforts to attract and expand its user and advertiser
base and that the importance of brand recognition will increase due to the
growing number of Internet sites and the relatively low barriers to entry.
Promotion and enhancement of the Yahoo! brand will depend largely on the
Company's success in providing high-quality products and services, which success
cannot be assured. In order to attract and retain Internet users and to promote
and maintain the Yahoo! brand in response to competitive pressures, the Company
may find it necessary to increase substantially its financial commitment to
creating and maintaining a distinct brand loyalty among consumers. If the
Company is unable to provide high-quality products and services or otherwise
fails to promote and maintain its brand, or if the Company incurs excessive
expenses in an attempt to improve its products and services or promote and
maintain its brand, the Company's business, operating results, and financial
condition will be materially and adversely affected.
RELIANCE ON ADVERTISING REVENUES AND UNCERTAIN ADOPTION OF THE WEB AS AN
ADVERTISING MEDIUM
The Company derives substantially all of its revenues from the sale of
advertisements on its Web pages under short-term contracts. Most of the
Company's advertising customers have only limited experience with the Web as an
advertising medium, have not devoted a significant portion of their advertising
expenditures to Web-based advertising, and may not find such advertising to be
effective for promoting their products and services relative to traditional
print and broadcast media. The Company's ability to generate significant
advertising revenues will depend upon, among other things, advertisers'
acceptance of the Web as an effective and sustainable advertising medium, the
development of a large base of users of the Company's services possessing
demographic characteristics attractive to advertisers, and the ability of the
Company to continue to develop and update effective advertising delivery and
measurement systems. No standards have yet been widely accepted for the
measurement of the effectiveness of Web-based advertising, and there can be no
assurance that such standards will develop sufficiently to support Web-based
advertising as a significant advertising medium. In addition, there can be no
assurance that the advertisers will determine that banner advertising, which
comprises the majority of the Company's revenues, is an effective advertising
medium, and there can be no assurance that the Company will effectively
transition to any other forms of Web-based advertising, should they develop.
Certain advertising filter software programs are available that limit or remove
advertising from an Internet user's desktop. Such software, if generally adopted
by users, may have a materially adverse effect upon the viability of advertising
on the Internet. There also can be no assurance that the Company's advertising
customers will accept the internal and third-party measurements of impressions
received by advertisements on Yahoo! and the Company's online media properties,
or that such measurements will not contain errors. The Company relies primarily
on its internal advertising sales force for domestic advertising sales, which
involves additional risks and uncertainties, including (among others) risks
associated with the recruitment, retention, management, training, and motivation
of sales personnel. As a result of these factors, there can be no assurance that
the Company will sustain or increase current advertising sales levels. Failure
to do so will have a material adverse effect on the Company's business,
operating results, and financial position.
SUBSTANTIAL DEPENDENCE UPON THIRD PARTIES
The Company depends substantially upon third parties for several critical
elements of its business including, among others, technology and infrastructure,
content development, and distribution activities.
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TECHNOLOGY AND INFRASTRUCTURE. In May 1998, the Company and Inktomi entered
into an agreement under which Inktomi will provide text-based Web search results
to complement the Company's directory and navigational guide. The Inktomi
service is expected to be integrated during the third quarter of 1998. The
Company will depend substantially upon ongoing maintenance and technical support
from Inktomi to ensure accurate and rapid presentation of such search results to
the Company's customers. Any termination of the agreement with Inktomi or
Inktomi's failure to renew such agreement upon expiration could result in
substantial additional costs to the Company in developing or licensing
replacement technology, and could result in a loss of levels of use of the
Company's navigational services. The Company also relies principally on a
private third-party provider, Frontier GlobalCenter, Inc. ("GlobalCenter"), for
the Company's principal Internet connections. Additionally, email service
Internet connections are provided by GTE. Any disruption in the Internet access
provided by these third-party providers or any failure of these third-party
providers to handle current or higher volumes of use could have a material
adverse effect on the Company's business, operating results, and financial
condition. The Company also licenses technology and related databases from third
parties for certain elements of Yahoo! properties, including, among others,
technology underlying news, stock quotes and current financial information, chat
services, street mapping, telephone listings, and similar services. The Company
has experienced and expects to continue to experience interruptions and delays
in service and availability for such elements, such as recent interruptions in
the Company's stock quote services. Any errors, failures, or delays experienced
in connection with these third-party technologies and information services could
negatively impact the Company's relationship with users and adversely affect the
Company's brand and its business, and could expose the Company to liabilities to
third parties.
CONTENT DEVELOPMENT. A key element of the Company's strategy involves the
implementation of Yahoo!-branded media properties targeted for interest areas,
demographic groups, and geographic areas. In these efforts, the Company has
relied and will continue to rely substantially on content development and
localization efforts of third parties. For example, the Company has entered into
an agreement with Ziff-Davis pursuant to which Ziff-Davis publishes an online
publication and a print magazine under the Yahoo! brand. The Company also
expects to rely substantially on third-party affiliates, including SOFTBANK in
Japan and Korea, and Rogers Communications ("Rogers") in Canada, to localize,
maintain, and promote these services and to sell advertising in local markets.
There can be no assurance that the Company's current or future third-party
affiliates will effectively implement these properties, or that their efforts
will result in significant revenue to the Company. Any failure of these parties
to develop and maintain high-quality and successful media properties also could
result in unfavorable dilution to the Yahoo! brand. Certain of these
arrangements also require the Company to integrate third parties' content with
the Company's services, which can require the dedication of resources and
significant programming and design efforts to accomplish. In addition, the
Company has granted exclusivity provisions to certain third parties, and may in
the future grant additional exclusivity provisions. Such exclusivity provisions
may have the effect of preventing the Company, for the duration of such
exclusivity arrangements, from accepting advertising or sponsorship arrangements
within a particular subject matter with respect to portions of the Company's
network of media properties, which could have an adverse effect on the Company.
DISTRIBUTION RELATIONSHIPS. In order to create traffic for the Company's
online properties and make them more attractive to advertisers and consumers,
the Company has entered into certain distribution agreements and informal
relationships with leading Web browser providers (Microsoft and Netscape),
operators of online networks and leading Web sites, and computer manufacturers,
such as Compaq Computer and Gateway 2000. The Company believes these
arrangements are important to the promotion of the Company's online media
properties, particularly among new Web users who may first access the Web
through these browsers, services, Web sites, or computers. The Company's
business relationships with these companies consist of arrangements for the
positioning of access to Yahoo! properties on Web browsers and cooperative
marketing programs and licenses to include Yahoo! in online networks or services
offered by these parties, which are intended to increase the use and visibility
of Yahoo!. These distribution arrangements typically are not exclusive, and may
be terminated upon little or no notice. Third
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parties that provide distribution channels for the Company may also assess fees
or otherwise impose additional conditions on the listing of Yahoo! or other
online properties of the Company. Any such event could have a material adverse
effect on the Company's business, results of operations, and financial
condition.
The Company recently announced a co-branding and distribution arrangement
with MCI under which the Company will provide a Web-based online service in
conjunction with dial-up Internet access provided by MCI. In this arrangement,
the Company will depend substantially upon MCI for, among other things,
effective marketing and promotion efforts and the provision of competitive
Internet access service to customers. Any failure by MCI in these respects could
materially impair the benefits received by the Company from this arrangement,
and could negatively affect the Yahoo! brand.
ENHANCEMENT OF YAHOO! PROPERTIES AND DEVELOPMENT OF NEW PROPERTIES
To remain competitive, the Company must continue to enhance and improve the
functionality, features, and content of the Yahoo! main site, as well as the
Company's other branded media properties. There can be no assurance that the
Company will be able to successfully maintain competitive user response times or
implement new features and functions, such as new search capabilities, greater
levels of user personalization, simplified searching from the Web browser,
real-time chat and Internet paging, localized content filter and information
delivery through "push" or other methods, which will involve the development of
increasingly complex technologies. The Company also expects that personalized
information services, such as the Company's recently launched Web-based email
service, will require significantly greater expenses associated with, among
other things, increased server capacity and equipment and requirements for
additional customer support personnel and systems. To the extent such additional
expenses are not offset by additional revenues from such personalized services,
the Company's financial results will be adversely affected.
The Company's future success also depends in part upon the timely processing
of Web site listings submitted by users and Web content providers, which have
increased substantially in recent periods. The Company has from time to time
experienced significant delays in the processing of submissions, and further
delays could have a material adverse effect on the Company's goodwill among Web
users and content providers, and on the Company's business.
A key element of the Company's business strategy is the development and
introduction of new Yahoo!-branded online properties targeted for specific
interest areas, user groups with particular demographic characteristics, and
geographic areas. There can be no assurance that the Company will be successful
in developing, introducing, and marketing such products or media properties or
that such products and media properties will achieve market acceptance, enhance
the Company's brand name recognition, or increase traffic on Yahoo!'s online
properties. Furthermore, enhancements of or improvements to Yahoo! or new media
properties may contain undetected errors that require significant design
modifications, resulting in a loss of customer confidence and user support and a
decrease in the value of the Company's brand name recognition. The Company's
ability to successfully develop additional targeted media properties depends
substantially on use of Yahoo! to promote such properties. If use of Yahoo!
fails to continue to grow, the Company's ability to establish other targeted
properties would be adversely affected. Any failure of the Company to
effectively develop and introduce these properties, or failure of such
properties to achieve market acceptance, could adversely affect the Company's
business, results of operations, and financial condition.
INVESTMENTS IN AFFILIATES
The Company has made equity investments in affiliated companies that are
involved in the commercialization of Yahoo!-branded online properties, such as
versions of Yahoo! localized for foreign markets. The Company currently intends
to continue to make significant additional investments in such companies
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from time to time in the future, as well as other companies involved in the
development of technologies or services that are complementary or related to the
Company's business, such as the December 1997 investments in GeoCities and
AudioNet. These affiliated companies typically are in an early stage of
development and may be expected to incur substantial losses. As a result, the
Company has recorded and expects to continue to record a share of the losses in
such affiliates attributable to the Company's ownership, which losses have had
and will continue to have an adverse effect on the Company's results of
operations. Furthermore, there can be no assurance that any investments in such
companies will result in any return, nor can there be any assurance as to the
timing of any such return, or that the Company will not lose its entire
investment.
MANAGEMENT OF POTENTIAL GROWTH AND INTEGRATION OF ACQUISITIONS
The Company's recent growth has placed, and is expected to continue to
place, a significant strain on its managerial, operational, and financial
resources. To manage its potential growth, the Company must continue to
implement and improve its operational and financial systems and to expand,
train, and manage its employee base. The process of managing advertising within
large, high traffic Web sites such as those in the Yahoo! network is an
increasingly important and complex task. The Company relies on both internal and
licensed third-party advertising inventory management and analysis systems. To
the extent that any extended failure of the Company's advertising management
system results in incorrect advertising insertions, the Company may be exposed
to "make good" obligations with its advertising customers, which, by displacing
advertising inventory, could defer advertising revenues and thereby have a
material adverse effect on the Company's business, operating results, and
financial condition. Failure of the Company's advertising management systems to
effectively track and provide accurate and timely reports on advertising results
also could negatively affect the Company's relationships with advertisers and
thereby have an adverse effect on the Company's business. There can be no
assurance that the Company's systems, procedures, or controls will be adequate
to support the Company's operations or that Company management will be able to
achieve the rapid execution necessary to fully exploit the Company's market
opportunity. Any inability to effectively manage growth, if any, could have a
material adverse effect on the Company's business, operating results, and
financial condition.
As part of its business strategy, the Company has completed and expects to
enter into additional business combinations and acquisitions, such as the
October 1997 acquisition of Four11 and the June 1998 acquisition of Viaweb.
Acquisition transactions are accompanied by a number of risks, including, among
other things, the difficulty of assimilating the operations and personnel of the
acquired companies, the potential disruption of the Company's ongoing business,
the inability of management to maximize the financial and strategic position of
the Company through the successful incorporation of acquired technology or
content and rights into the Company's products and media properties, expenses
associated with the transactions, additional expenses associated with
amortization of acquired intangible assets, the maintenance of uniform
standards, controls, procedures and policies, the impairment of relationships
with employees and customers as a result of any integration of new management
personnel, and the potential unknown liabilities associated with acquired
businesses. There can be no assurance that the Company would be successful in
addressing these risks or any other problems encountered in connection with such
acquisitions.
RISK OF CAPACITY CONSTRAINTS AND SYSTEMS FAILURES
The Company is dependent on its ability to effectively serve a high volume
of use of its online media properties. Accordingly, the performance of the
Company's online media properties is critical to the Company's reputation, its
ability to attract advertisers to the Company's Web sites, and to achieve market
acceptance of these products and media properties. Any system failure that
causes an interruption or an increase in response time of the Company's products
and media properties could result in less traffic to the Company's Web sites
and, if sustained or repeated, could reduce the attractiveness of the Company's
<PAGE>
products and media properties to advertisers and licensees. An increase in the
volume of queries conducted through the Company's products and media properties
could strain the capacity of the software or hardware deployed by the Company,
which could lead to slower response time or system failures, and adversely
affect the number of impressions received by advertisers and thus the Company's
advertising revenues. In addition, as the number of Web pages and users
increase, there can be no assurance that the Company's products and media
properties and infrastructure will be able to scale accordingly. The Company
also faces technical challenges associated with higher levels of personalization
and localization of content delivered to users of its services, which adds
strain to the Company's development and operational resources. For example,
personalized information services, such as Web-based email services, involve
increasingly complex technical and operational challenges, and there can be no
assurance that the Company will successfully implement and scale such services
to the extent required by any growth in the number of users of such services, or
that the failure to do so will not materially and adversely affect the goodwill
of users of these services, or negatively affect the Company's brand and
reputation. The Company is also dependent upon Web browsers and Internet and
online service providers for access to its products and media properties. In
particular, a private third-party provider, GlobalCenter, provides the Company's
principal Internet connections. In the past, users have occasionally experienced
difficulties due to system failures, including failures unrelated to the
Company's systems. Additionally, Internet connections for the Company's
Web-based email services are provided by GTE. Any disruption in the Internet
access provided by these third-party providers or any failure of these
third-party providers to handle higher volumes of user traffic could have a
material adverse effect on the Company's business, operating results, and
financial condition. Furthermore, the Company is dependent on hardware suppliers
for prompt delivery, installation, and service of servers and other equipment
used to deliver the Company's products and services.
The Company's operations are susceptible to outages due to fire, floods,
power loss, telecommunications failures, break-ins, and similar events. In
addition, substantially all of the Company's network infrastructure is located
in Northern California, an area susceptible to earthquakes, which also could
cause system outages or failures. The Company does not presently have multiple
site capacity in the event of any such occurrence. Despite the implementation of
network security measures by the Company, its servers are vulnerable to computer
viruses, break-ins, and similar disruptions from unauthorized tampering with the
Company's computer systems. The Company does not carry sufficient business
interruption insurance to compensate the Company for losses that may occur as a
result of any of these events. Such events could have a material adverse effect
on the Company's business, operating results, and financial condition.
TRADEMARKS AND PROPRIETARY RIGHTS
The Company regards its copyrights, trademarks, trade dress, trade secrets,
and similar intellectual property as critical to its success, and the Company
relies upon trademark and copyright law, trade secret protection and
confidentiality and/or license agreements with its employees, customers,
partners and others to protect its proprietary rights. The Company pursues the
registration of its trademarks in the United States and internationally, and has
applied for and obtained the registration for certain of its trademarks,
including "Yahoo!" and "Yahooligans!". Effective trademark, copyright, and trade
secret protection may not be available in every country in which the Company's
products and media properties are distributed or made available through the
Internet. The Company has licensed in the past, and it expects that it may
license in the future, elements of its distinctive trademarks, trade dress, and
similar proprietary rights to third parties, including in connection with
branded mirror sites of Yahoo!, and other media properties and merchandise that
may be controlled operationally by third parties. While the Company attempts to
ensure that the quality of its brand is maintained by such licensees, no
assurances can be given that such licensees will not take actions that could
materially and adversely affect the value of the Company's proprietary rights or
the reputation of its products and media properties, either of which could have
a material adverse effect on the Company's business. Also, the Company is aware
that third parties have from time to time copied significant portions of Yahoo!
directory listings for use in competitive Internet navigational tools and
services, and there can be no assurance that the distinctive
<PAGE>
elements of Yahoo! will be protectible under copyright law. There can be no
assurance that the steps taken by the Company to protect its proprietary rights
will be adequate or that third parties will not infringe or misappropriate the
Company's copyrights, trademarks, trade dress, and similar proprietary rights.
In addition, there can be no assurance that other parties will not assert
infringement claims against the Company.
Many parties are actively developing search, indexing, and related Web
technologies at the present time. The Company believes that such parties have
taken and will continue to take steps to protect these technologies, including
seeking patent protection. As a result, the Company believes that disputes
regarding the ownership of such technologies are likely to arise in the future.
For example, the Company is aware that a number of patents have been issued in
the areas of electronic commerce and Web-based information indexing and
retrieval (including patents recently issued to one of the Company's direct
competitors), and the Company anticipates that additional third-party patents
will be issued in the future. There can be no assurance that the technology
recently acquired through the Viaweb acquisition, or any other technology
relating to the Company's business that has been or may be developed by the
Company or licensed from third parties, will not be determined to infringe one
or more third-party patents. In the event of such infringement, there can be no
assurance that the Company will be able to license such patents on reasonable
terms, if any, or that such infringement will not result in substantial monetary
liability to the Company, including substantial expenses that may be incurred in
defending against third-party patent claims regardless of the merit of such
claims.
DEPENDENCE ON KEY PERSONNEL
The Company's performance is substantially dependent on the performance of
its senior management and key technical personnel. In particular, the Company's
success depends substantially on the continued efforts of its senior management
team. The Company does not carry key person life insurance on any of its senior
management personnel. The loss of the services of any of its executive officers
or other key employees could have a material adverse effect on the business,
operating results, and financial condition of the Company.
The Company's future success also depends on its continuing ability to
attract and retain highly qualified technical and managerial personnel.
Competition for such personnel is intense and there can be no assurance that the
Company will be able to retain its key managerial and technical employees or
that it will be able to attract and retain additional highly qualified technical
and managerial personnel in the future. The inability to attract and retain the
necessary technical and managerial personnel could have a material and adverse
effect upon the Company's business, operating results, and financial condition.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES
There are currently few laws or regulations directly applicable to access to
or commerce on the Internet. Due to the increasing popularity and use of the
Internet, it is possible that a number of laws and regulations may be adopted
with respect to the Internet, covering issues such as user privacy, defamation,
pricing, taxation, content regulation, quality of products and services, and
intellectual property ownership and infringement. For example, although the
Communications Decency Act was held to be unconstitutional, there can be no
assurance that similar legislation will not be enacted in the future, and it is
possible that such legislation could expose the Company to substantial
liability. Such legislation could also dampen the growth in use of the Web
generally, decrease the acceptance of the Web as a communications and commercial
medium and require the Company to incur expense in complying with any new
regulations, and could, thereby, have a material adverse effect on the Company's
business, results of operations, and financial condition. Other nations,
including Germany, have taken actions to restrict the free flow of material
deemed to be objectionable on the Web. In addition, several telecommunications
carriers are seeking to have telecommunications over the Web regulated by the
Federal Communications Commission (the "FCC") in the same manner as other
telecommunications services. For example, America's Carriers
<PAGE>
Telecommunications Association ("ACTA") has filed a petition with the FCC for
this purpose. In addition, because the growing popularity and use of the Web has
burdened the existing telecommunications infrastructure and many areas with high
Web use have begun to experience interruptions in phone service, local telephone
carriers, such as Pacific Bell, have petitioned the FCC to regulate ISPs and
OSPs in a manner similar to long distance telephone carriers and to impose
access fees on the ISPs and OSPs. If either of these petitions is granted, or
the relief sought therein is otherwise granted, the costs of communicating on
the Web could increase substantially, potentially slowing the growth in use of
the Web, which could in turn decrease the demand for the Company's products and
media properties. A number of proposals have been made at the federal, state and
local level that would impose additional taxes on the sale of goods and services
through the Internet. Such proposals, if adopted, could substantially impair the
growth of electronic commerce, and could adversely affect the Company's
opportunity to derive financial benefit from such activities. Also, legislation
is pending in Congress that would impose liability on online service providers
such as the Company for listing or linking to third-party Web sites or hosting
third-party Web sites that include materials that infringe copyrights or other
rights of others. In addition, a number of other countries have announced or are
considering additional regulation in many of the foregoing areas. Such laws and
regulations if enacted in the United States or abroad could fundamentally impair
the Company's ability to provide Internet navigation services, or substantially
increase the cost of doing so, which would have a material adverse effect on the
Company's business, operating results, and financial condition. Moreover, the
applicability to the Internet of the existing laws governing issues such as
property ownership, copyright, defamation, obscenity, and personal privacy is
uncertain, and the Company may be subject to claims that its services violate
such laws. Any such new legislation or regulation in the United States or abroad
or the application of existing laws and regulations to the Internet could have a
material adverse effect on the Company's business, operating results, and
financial condition.
Due to the global nature of the Web, it is possible that, although
transmissions by the Company over the Internet originate primarily in the State
of California, the governments of other states and foreign countries might
attempt to regulate the Company's transmissions or prosecute the Company for
violations of their laws. There can be no assurance that violations of local
laws will not be alleged or charged by state or foreign governments, that the
Company might not unintentionally violate such law or that such laws will not be
modified, or new laws enacted, in the future. Any of the foregoing developments
could have a material adverse effect on the Company's business, results of
operations, and financial condition.
LIABILITY FOR INFORMATION SERVICES
Because materials may be downloaded by the online or Internet services
operated or facilitated by the Company and may be subsequently distributed to
others, there is a potential that claims will be made against the Company for
defamation, negligence, copyright or trademark infringement, personal injury or
other theories based on the nature and content of such materials. Such claims
have been brought, and sometimes successfully pressed, against online service
providers in the past. In addition, the Company could be exposed to liability
with respect to the selection of listings that may be accessible through the
Company's Yahoo!-branded products and media properties, or through content and
materials that may be posted by users in classifieds, message board and chat
room services offered by the Company. Such claims might include, among others,
that by providing hypertext links to Web sites operated by third parties, the
Company is liable for copyright or trademark infringement or other wrongful
actions by such third parties through such Web sites, or that the Company is
responsible for legal injury caused by statements made for or actions taken by
participants in the Company's message board services. It is also possible that
if any information provided through the Company's services, such as stock
quotes, analyst estimates or other trading information, contains errors, third
parties could make claims against the Company for losses incurred in reliance on
such information. In connection with the acquisition of Four11 Corporation, the
Company recently began offering Web-based email services, which expose the
Company to potential risks, such as liabilities or claims resulting from
unsolicited email (spamming), lost or misdirected messages, illegal or
fraudulent use of email or interruptions or delays in email service. Even to the
extent such claims
<PAGE>
do not result in liability to the Company, the Company expects to incur
significant costs in investigating and defending such claims.
The Company also from time to time enters into arrangements to offer
third-party products and services under the Yahoo! brand or via distribution on
Yahoo! properties. For example, the Company recently announced an agreement with
GeoCities under which GeoCities will offer free home page services and certain
related products to Yahoo! users. The Company also recently announced an
arrangement with AudioNet, an Internet-based broadcast network, whereby links to
AudioNet's site and content will be distributed via Yahoo! properties. These
business arrangements involve additional legal risks, such as potential
liabilities for content posted by free home page users or made available by
other third-party providers. The Company may be subject to claims concerning
such services or content by virtue of the Company's involvement in marketing,
branding or providing access to such services, even if the Company does not
itself host, operate, or provide such services. While the Company's agreements
with these parties often provide that the Company will be indemnified against
such liabilities, there can be no assurance that such indemnification, if
available, will be adequate.
POTENTIAL COMMERCE-RELATED LIABILITIES AND EXPENSES
From time to time, the Company enters into agreements with sponsors, content
providers, service providers, and merchants under which the Company is entitled
to receive a share of revenue from the purchase of goods and services by users
of the Company's online properties. Such arrangements may expose the Company to
additional legal risks and uncertainties, including (without limitation)
potential liabilities to consumers of such products and services. Although the
Company carries general liability insurance, the Company's insurance may not
cover potential claims of this type or may not be adequate to indemnify the
Company for all liability that may be imposed.
The Company recently began offering a Yahoo!-branded VISA credit card, which
includes a "rewards" program entitling card users to receive points that may be
redeemed for merchandise, such as books or music. This arrangement exposes the
Company to certain additional risks and expenses, including, without limitation,
those relating to compliance with consumer protection laws, loss of customer
data, disputes over redemption procedures and rules, products liability, sales
taxation and liabilities associated with any failure in performance by
participating merchants.
In June 1998, the Company completed the acquisition of Viaweb, a provider of
software and reporting tools for the operation of online commerce Web sites. The
Company intends to use the Viaweb technology to host and promote online stores
on behalf of third-party merchants, the operation and maintenance of which will
be largely under the independent control of such merchants. These activities
expose the Company to a number of additional risks and uncertainties, including
(without limitation) potential liabilities for illegal activities that may be
conducted by participating merchants; products liability or other tort claims
relating to goods or services sold through hosted commerce sites; consumer fraud
and false or deceptive advertising or sales practices; breach of contract claims
relating to merchant transactions; claims that materials included in merchant
sites or sold by merchants through these sites infringe third-party patents,
copyrights, trademarks or other intellectual property rights, or are libelous,
defamatory or in breach of third-party confidentiality or privacy rights; claims
relating to any failure of merchants to appropriately collect and remit sales or
other taxes arising from e-commerce transactions; and claims that may be brought
by merchants as a result of their exclusion from the Company's commerce services
or losses resulting from any downtime or other performance failures in the
Company's hosting services. Although the Company maintains liability insurance,
there can be no assurance that insurance will cover these claims or that such
coverage, if available, will be adequate. Even to the extent such claims do not
result in material liability to the Company, the Company expects to incur
significant costs in investigating and defending such claims.
<PAGE>
YEAR 2000 IMPLICATIONS
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field and cannot
distinguish 21st century dates from 20th century dates. These date code
fields will need to distinguish 21st century dates from 20th century dates
and, as a result, many companies' software and computer systems may need to
be upgraded or replaced in order to comply with such "Year 2000"
requirements. Although the Company believes that its systems are Year 2000
compliant in all material respects, there can be no assurances that the
Company's current systems and products do not contain undetected errors or
defects with Year 2000 date functions that may result in material costs to
the Company. Although the Company is not aware of any material operational
issues or costs associated with preparing its internal systems for the Year
2000, there can be no assurances that the Company will not experience serious
unanticipated negative consequences (such as significant downtime for one or
more Yahoo! Media properties) and/or material costs caused by undetected
errors or defects in the technology used in its internal systems. In
addition, the Company utilizes third-party equipment, software and content
that may not be Year 2000 compliant. Failure of such third-party equipment,
software or content to operate properly with regard to the year 2000 and
thereafter could require the Company to incur unanticipated expenses to
remedy any problems, which could have a material adverse effect on the
Company's business, results of operations and financial condition.
Furthermore, the purchasing patterns of advertisers may be affected by Year
2000 issues as companies expend significant resources to correct their
current systems for Year 2000 compliance. These expenditures may result in
reduced funds available for Web advertising or sponsorship of Web services,
which could have a material adverse effect on the Company's business, results
of operations and financial condition.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS AND EXPANSION
A key part of the Company's strategy is to develop Yahoo!-branded online
properties in international markets. The Company has developed and operates,
through joint ventures with SOFTBANK and related entities, versions of Yahoo!
localized for Japan, Germany, France, the United Kingdom, and Korea. The Company
offers a version of Yahoo! localized for Canada under an agreement with Rogers
Communications, and the Company operates localized or mirror versions of Yahoo!
through wholly-owned subsidiaries in Australia, Denmark, Italy, Norway, Sweden,
and Singapore. The Company also offers Yahoo! guides in Spanish and Mandarin
Chinese languages.
To date, the Company has only limited experience in developing localized
versions of its products and marketing and operating its products and services
internationally, and the Company relies substantially on the efforts and
abilities of its foreign business partners in such activities. The Company has
experienced and expects to continue to experience higher costs as a percentage
of revenues in connection with international online properties than domestic
online properties. If the international revenues are not adequate to offset
investments in such activities, the Company's business, operating results, and
financial condition could be materially adversely affected. The Company may
experience difficulty in managing international operations as a result of
distance as well as language and cultural differences, and there can be no
assurance that the Company or its partners will be able to successfully market
and operate its products and services in foreign markets. The Company also
believes that in light of substantial anticipated competition, it will be
necessary to move quickly into international markets in order to effectively
obtain market share, and there can be no assurance that the Company will be able
to do so. In addition to the uncertainty as to the Company's ability to continue
to generate revenues from its foreign operations and expand its international
presence, there are certain risks inherent in doing business on an international
level, such as unexpected changes in regulatory requirements, trade barriers,
difficulties in staffing and managing foreign operations, longer payment cycles,
problems in collecting accounts receivable, political instability, export
restrictions, export controls relating to encryption technology, seasonal
reductions in business activity in certain other parts of the world, and
potentially adverse tax consequences. There can be no assurance that one or more
of such factors will not have a material adverse effect on the Company's
<PAGE>
future international operations and, consequently, on the Company's business,
operating results, and financial condition.
CONCENTRATION OF STOCK OWNERSHIP
As of May 31. 1998, the present directors, executive officers, and their
respective affiliates beneficially owned approximately 58% of the outstanding
Common Stock of the Company. As of May 31, 1998, SOFTBANK beneficially owned
approximately 29% of the outstanding Common Stock of the Company. As a result of
their ownership, the directors, executive officers, greater than 5% shareholders
and their respective affiliates (including SOFTBANK) collectively are able to
control all matters requiring shareholder approval, including the election of
directors and approval of significant corporate transactions. Such concentration
of ownership may also have the effect of delaying or preventing a change in
control of the Company.
VOLATILITY OF STOCK PRICE
The trading price of the Company's Common Stock has been and may continue to
be subject to wide fluctuations in response to a number of events and factors,
such as quarterly variations in operating results, announcements of
technological innovations or new products and media properties by the Company or
its competitors, changes in financial estimates and recommendations by
securities analysts, the operating and stock price performance of other
companies that investors may deem comparable to the Company, and news reports
relating to trends in the Company's markets. In addition, the stock market in
general, and the market prices for Internet-related companies in particular,
have experienced extreme volatility that often has been unrelated to the
operating performance of such companies. These broad market and industry
fluctuations may adversely affect the trading price of the Company's Common
Stock, regardless of the Company's operating performance.
LEGAL PROCEEDINGS
In July 1997, GTE New Media Services Incorporated ("GTE New Media"), an
affiliate of GTE, filed suit in Dallas, Texas against Netscape and the Company,
in which GTE New Media made a number of claims relating to the inclusion of
certain Yellow Pages hypertext links in the Netscape Guide by Yahoo!, an online
navigational property operated by the Company under an agreement with Netscape.
In this lawsuit, GTE New Media has alleged, among other things, that by
including such links to the Yellow Pages service operated by several Regional
Bell Operating Companies (the "RBOCs") within the Guide, the Company has
tortiously interfered with an alleged contractual relationship between GTE New
Media and Netscape relating to placement of links by Netscape for a Yellow Pages
service operated by GTE New Media. GTE New Media seeks injunctive relief as well
as actual and punitive damages. In October 1997, GTE New Media brought suit in
the U.S. District Court for the District of Columbia, against the RBOCs,
Netscape, and the Company, in which GTE New Media has alleged, among other
things, that the alleged exclusion of the GTE New Media Yellow Pages from the
Netscape Guide Yellow Pages service violates federal antitrust laws, and GTE New
Media seeks injunctive relief and damages (trebled under federal antitrust laws)
from such alleged actions. The Company believes that the claims against the
Company in these lawsuits are without merit and intends to contest them
vigorously. Although the Company cannot predict with certainty the outcome of
these lawsuits or the expenses that may be incurred in defending the lawsuits,
the Company does not believe that the result in the lawsuits will have a
material adverse effect on the Company's financial position or results of
operations.
From time to time the Company has been, and expects to continue to be,
subject to other legal proceedings and claims in the ordinary course of its
business, including, among others, contractual disputes with advertisers and
content distribution providers, claims of alleged infringement of trademarks and
other intellectual property rights, and a variety of claims arising in
connection with the Company's email, message boards and other communications and
community features, such as claims alleging defamation
<PAGE>
and invasion of privacy. Such claims, even if not meritorious, could result in
the expenditure of significant financial and managerial resources. Although the
Company cannot predict the outcome of any proceeding, the Company is not
currently aware of any such legal proceedings or claims that the Company
believes will have, individually or in the aggregate, a material adverse effect
on the Company's financial position or results of operations.
ANTITAKEOVER EFFECT OF CERTAIN CHARTER PROVISIONS
The Board of Directors has the authority to issue up to 10,000,000 shares of
Preferred Stock and to determine the price, rights, preferences, privileges and
restrictions, including voting rights, of those shares without any further vote
or action by the shareholders. The rights of the holders of Common Stock may be
subject to, and may be adversely affected by, the rights of the holders of any
Preferred Stock that may be issued in the future. The issuance of Preferred
Stock may have the effect of delaying, deferring or preventing a change of
control of the Company without further action by the shareholders and may
adversely affect the voting and other rights of the holders of Common Stock. The
Company has no present plans to issue shares of Preferred Stock. Further,
certain provisions of the Company's charter documents, including provisions
eliminating the ability of shareholders to take action by written consent and
limiting the ability of shareholders to raise matters at a meeting of
shareholders without giving advance notice, may have the effect of delaying or
preventing changes in control or management of the Company, which could have an
adverse effect on the market price of the Company's Common Stock. In addition,
the Company's charter documents do not permit cumulative voting and provide
that, at such time as the Company has at least six directors, the Company's
Board of Directors will be divided into two classes, each of which serves for a
staggered two-year term, which may make it more difficult for a third-party to
gain control of the Company's Board of Directors.
SHARES ELIGIBLE FOR FUTURE SALE
As of June 10, 1998, the Company had outstanding 46,836,053 shares of
Common Stock, and options to purchase a total of approximately 11,664,648
shares of the Company's Common Stock under the Company's stock option plans,
including shares issued and options assumed in the recent acquisition of
Viaweb. Of these shares, an estimated number of 3,186,132 shares recently
issued in connection with acquisitions and investments have been or will be
available for resale pursuant to registration statements filed by the Company
with the SEC. Sales of substantial amounts of such shares in the public
market or the prospect of such sales could adversely affect the market price
of the Company's Common Stock.
