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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: October 20, 1998
---------------------------
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)
<PAGE>
The Registrant hereby amends its Report on Form 8-K/A filed with the
Securities and Exchange Commission on November 19, 1998.
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On October 9, 1998, Yahoo! Inc., a California corporation ("Yahoo!"),
entered into an Agreement and Plan of Merger ("Agreement") by and among
Yahoo!, YO Acquisition Corporation, a wholly-owned subsidiary of Yahoo!, and
Yoyodyne Entertainment, Inc., a Delaware corporation ("Yoyodyne") and
privately-held, direct marketing services company. Pursuant to the
Agreement, on October 20, 1998 all outstanding shares of Yoyodyne capital
stock were converted into 234,460 shares of Yahoo! Common Stock, and options
and warrants to purchase Yoyodyne capital stock were converted into options
and warrants to purchase 46,162 shares of Yahoo! Common Stock. All
outstanding options to purchase Yoyodyne stock will be assumed by Yahoo! and
converted into options to purchase Yahoo! Common Stock, and all outstanding
warrants to purchase Yoyodyne stock will be assumed by Yahoo! and converted
into warrants to purchase Yahoo! Common Stock. The merger will be accounted
for as a pooling of interests.
Yahoo! has filed a registration statement on Form S-3 with the
Securities and Exchange Commission on November 19, 1998 (which will be
amended on January 22, 1999) to permit the resale of the outstanding shares
issued in the Merger and shares issuable upon exercise of warrants assumed in
the Merger. Yahoo! has also filed a registration statement on Form S-8 with
the Securities and Exchange Commission dated October 23, 1998 with respect to
the issuance of shares upon exercise of options assumed in the Merger.
After discussions with the Staff at the Securities and Exchange
Commission (the "Staff"), Yahoo! has adjusted the allocation of the purchase
price related to the June 1998 acquisition of Viaweb Inc. Although Yahoo!,
with the concurrence of its independent accountants, believes that its
original accounting treatment was in accordance with generally accepted
accounting principles, it has accepted the Staff's view with respect to these
matters. As a result, Exhibit 99.1 of Item 7c of the Company's Current
Report on Form 8-K/A originally filed on November 19, 1998 is amended to read
as follows:
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ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(c) EXHIBITS.
<TABLE>
<S> <C>
2.1 (1) Agreement and Plan of Merger dated as of October 9, 1998, by and
among Yahoo! Inc., YO Acquisition Corporation, and Yoyodyne
Entertainment, Inc.
2.2 (1) Amendment to the Agreement and Plan of Merger dated as of October
19, 1998, by and among Yahoo! Inc., YO Acquisition Corporation,
and Yoyodyne Entertainment, Inc.
99.1 Supplementary Consolidated Financial Statements of Yahoo! Inc.
(restated)
</TABLE>
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(1) Previously filed.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
YAHOO! INC.
Date: January 21, 1999 By: /s/ Gary Valenzuela
----------------------------------------
Gary Valenzuela
Senior Vice President, Finance and
Administration, and Chief Financial Officer
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YAHOO! INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Number Description
- -------------- -----------
<S> <C>
2.1 (1) Agreement and Plan of Merger dated as of October 9,
1998, by and among Yahoo! Inc., YO Acquisition
Corporation, and Yoyodyne Entertainment, Inc.
2.2 (1) Amendment to the Agreement and Plan of Merger dated as
of October 19, 1998, by and among Yahoo! Inc., YO
Acquisition Corporation, and Yoyodyne Entertainment,
Inc.
99.1 Supplementary Consolidated Financial Statements of
Yahoo! Inc. (restated)
</TABLE>
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(1) Previously filed.
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EXHIBIT 99.1
YAHOO! INC.
INDEX TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Management's Discussion and Analysis of Financial Condition and Results of Operations 1
Report of Independent Accountants 13
Supplementary Consolidated Balance Sheets as of September 30, 1998 (restated and
unaudited) and December 31, 1997 and 1996 14
Supplementary Consolidated Statements of Operations for the nine months ended
September 30, 1998 (restated and unaudited) and 1997 (unaudited) and for the
years ended December 31, 1997, 1996, and 1995 15
Supplementary Consolidated Statements of Shareholders' Equity for the nine months
ended September 30, 1998 (restated and unaudited) and for the years ended
December 31, 1997, 1996, and 1995 16
Supplementary Consolidated Statements of Cash Flows for the nine months ended
September 30, 1998 (restated and unaudited) and 1997 (unaudited) and for the
years ended December 31, 1997, 1996, and 1995 17
Notes to Supplementary Consolidated Financial Statements 18
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
EXCEPT FOR HISTORICAL INFORMATION, THE DISCUSSION IN THIS REPORT
(INCLUDING, WITHOUT LIMITATION, THE DISCUSSION UNDER THE HEADING "RESULTS OF
OPERATIONS") CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
DISCUSSED HEREIN. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES
INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED BELOW, AND THE RISKS DISCUSSED
UNDER THE CAPTION, "RISK FACTORS" IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1997 (A COPY OF WHICH IS AVAILABLE AT
WWW.SEC.GOV OR UPON REQUEST FROM THE COMPANY).
OVERVIEW
Yahoo! Inc. (the "Company") is a global Internet media company that
offers a network of branded World Wide Web (the "Web") programming that
serves millions of users daily. As the first online navigational guide to the
Web, www.yahoo.com is the single largest guide in terms of traffic,
advertising, household and business user reach, and is one of the most
recognized brands associated with the Internet. Yahoo! Inc. provides targeted
Internet resources and communications services for a broad range of
audiences, based on demographic, key-subject and geographic interests. The
Company was incorporated in California on March 5, 1995 and commenced
operations on that date. In August 1995, the Company commenced selling
advertisements on its Web pages and recognized its initial revenues. In April
1996, the Company completed its initial public offering.
On June 10, 1998, the Company completed the acquisition of all
outstanding shares of Viaweb, a provider of software and services for hosting
online stores, through the issuance of 787,182 shares of Yahoo! Common Stock.
All outstanding options to purchase Viaweb common stock were converted into
options to purchase 122,252 shares of Yahoo! Common Stock. The acquisition
was accounted for as a purchase in accordance with APB Opinion No. 16. Under
the purchase method of accounting, the purchase price is allocated to the
assets acquired and liabilities assumed based on their estimated fair values
at the date of the acquisition. Results of operations for Viaweb have been
included with those of the Company for periods subsequent to the date of
acquisition.
The total purchase price of the acquisition was $48,559,000
including acquisition expenses of $1,750,000. Of the purchase price,
$15,000,000 was assigned to in-process research and development and expensed
upon the consummation of the acquisition. The purchase price was allocated to
the assets acquired and liabilities assumed based on their estimated fair
values.
As a result of discussions with the Staff, the Company has adjusted
the allocation of the purchase price originally reported. Among the factors
considered in discussions with the Staff in determining the amount of the
allocation of the purchase price to in-process research and development were
various factors such as estimating the stage of development of each
in-process research and development project at the date of acquisition,
estimating cash flows resulting from the expected revenues generated from
such projects, and discounting the net cash flows, in addition to other
assumptions. The remaining identified intangibles, including the value of
purchased technology and other intangibles will be amortized on a
straight-line basis over three and seven years, respectively. Amortization
expense of purchased technology and other intangible assets was $1,250,000
and $869,000, respectively, during the quarter ended September 30, 1998 and
was $1,667,000 and $1,159,000, respectively, for the nine month period then
ended. A deferred tax liability has been recognized for the difference
between the assigned values for book purposes and the tax bases of assets in
accordance with the provisions of Statement of Financial Accounting Standard
No. 109.
In addition, other factors were considered in discussions with the
Staff in determining the value assigned to purchased in-process technology
such as research projects in areas supporting the on-line store technology
(including significant enhancement to the ability of the product to support
multiple users and multiple servers), developing functionality to support the
ability to process credit card orders, and enhancing the product's user
interface developing functionality that would allow the product to be used
outside of the United States.
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If none of these projects is successfully developed, the Company's
sales and profitability may be adversely affected in future periods.
Additionally, the failure of any particular individual project in-process
could impair the value of other intangible assets acquired. The Company
expects to begin to benefit from the purchased in-process technology in late
1998.
On October 20, 1998, the Company acquired Yoyodyne Entertainment,
Inc. ("Yoyodyne"), a privately-held, direct marketing services company. Under
the terms of the acquisition, which will be accounted for as a pooling of
interests, the Company exchanged 280,622 shares of Yahoo! Common Stock and
options and warrants to purchase Yahoo! Common Stock for all of Yoyodyne's
outstanding shares, options, and warrants. The supplementary consolidated
financial information as of September 30, 1998 (restated) and December 31,
1997 and 1996 and for nine months ended September 30, 1998 (restated) and
1997 and the years ended December 31, 1997, 1996, and 1995 reflects the
Company's consolidated financial position and the results of operations as if
Yoyodyne was a wholly-owned subsidiary of the Company since inception.
The Company's revenues are derived principally from the sale of
banner advertisements on short-term contracts. The Company's standard rates
for advertising currently range from approximately $0.02 per impression for
general rotation to approximately $0.08 per impression for highly targeted
audiences and properties. To date, the duration of the Company's advertising
commitments has ranged from one week to two years. During 1997, the Company
also began selling a combination of sponsorship and banner advertising
contracts. In general, these sponsorship advertising contracts have longer
terms than standard banner advertising contracts (ranging from three months
to two years) and also involve more integration with Yahoo! services, such as
the placement of buttons which provide users with direct links to the
advertiser's Web site. Advertising revenues on both banner and sponsorship
contracts are recognized ratably over the period in which the advertisement
is displayed, provided that no significant Company obligations remain and
collection of the resulting receivable is probable. Company obligations
typically include guarantees of minimum number of "impressions," or times
that an advertisement appears in pages viewed by users of the Company's
online properties. To the extent minimum guaranteed impressions are not met,
the Company defers recognition of the corresponding revenues until the
remaining guaranteed impression levels are achieved. The Company also earns
additional revenue on sponsorship contracts for fees relating to the design,
coordination, and integration of the customer's content and links into Yahoo!
online properties. These fees are recognized as revenue once the related
activities have been performed and the customer's web links are available on
Yahoo! online properties. A number of the Company's agreements provide that
Yahoo! receive revenues from electronic commerce transactions. These revenues
are recognized by the Company upon notification from the advertiser of
revenues earned by Yahoo! and, to date, have not been significant.
During 1997, the Company entered into certain agreements with
Netscape Communications Corporation ("Netscape") under which the Company has
developed and operates an Internet information navigation service called
"Netscape Guide by Yahoo!" (the "Guide"), and was designated as a "Premier
Provider" of domestic and international search and navigational services
within the Netscape Web site. The Co-Marketing agreement provides that
revenue from advertising on the Guide, which is managed by the Company, is to
be shared between the Company and Netscape. Under the terms of the Trademark
License agreement, the Company made a one-time non-refundable trademark
license fee payment of $5,000,000 in March 1997, which is being amortized
over the initial two-year term, which commenced in May 1997. Under the terms
of the Co-Marketing agreement as amended in June 1997, the Company also
provided Netscape with a minimum of up to $4,660,000 in guarantees against
shared advertising revenues in the first year of the agreement, subject in
the first year to a minimum level of gross revenue being met, and up to a
minimum of $15,000,000 in the second year of the agreement, subject in the
second year to certain minimum levels of impressions being reached on the
Guide. Actual payments will relate directly to the overall revenue and
impressions recognized from the Guide. Under the terms of the Premier
Provider agreements, the Company is required to make minimum payments in cash
of $6,100,000 and is obligated to provide $1,600,000 in the Company's
advertising services in return for certain minimum guaranteed exposures over
the course of the one-year term of the agreements. To the extent that the
minimum guaranteed exposures are exceeded, the Company is obligated to remit
to Netscape additional payments.
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In August 1996, the Company entered into agreements with Visa
International Service Association ("VISA") and another party (together, the
"Visa Group") to establish a limited liability company, Yahoo! Marketplace
L.L.C., to develop and operate a navigational service focused on information
and resources for the purchase of consumer products and services over the
Internet. During July 1997, prior to the completion of significant business
activities and public launch of the property, the Company and VISA entered
into an agreement under which the Visa Group released the Company from
certain obligations and claims. In connection with this agreement, Yahoo!
issued 1,398,962 shares of Yahoo! Common Stock to the Visa Group, for which
the Company recorded a one-time, non-cash, pre-tax charge of $21,245,000 in
the second quarter ended June 30, 1997.
During 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.
On October 20, 1997, the Company completed the acquisition of Four11
Corporation, a privately-held online communications and Internet directory
company. Under the terms of the acquisition, which was accounted for as a
pooling of interests, the Company exchanged 3,011,440 shares of Yahoo! Common
Stock for all of Four11's outstanding shares and assumed 296,672 options and
warrants to purchase Yahoo! Common Stock. During the quarter ended December
31, 1997, the Company recorded a one-time charge of $3,850,000 for the
acquisition. These costs consisted of investment banking fees, legal and
accounting fees, redundancy costs, and certain other expenses directly
related to the acquisition. The supplementary consolidated financial
statements for the three years ended December 31, 1997 and the accompanying
notes reflect the Company's financial position and the results of operations
as if Four11 was a wholly-owned subsidiary of the Company since inception.
CERTAIN RISK FACTORS
Yahoo! 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 or any other acquired businesses or technologies with its
operations, such as the recent acquisition of Four11 Corporation, the failure
of the Company to successfully develop and offer personalized Web-based
services, such as e-mail services, to consumers without errors or
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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 December 31, 1997, the Company had an accumulated deficit of
$32,963,000. 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. 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. The Company also has fixed expenses in the form of advertising
revenue guarantees of up to $18,500,000 over the next 15 months relating to
the Netscape Guide By Yahoo!, which subject the Company to additional risk in
the event that advertising revenues from this property are not sufficient to
offset guaranteed payments and related operating expenses. 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
on a quarterly and annual basis 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
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. The Company also has experienced, and
expects to continue 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. Additionally, seasonality may also 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.
A key element of the Company's strategy is to generate additional
advertising revenues through sponsored services and placements by third
parties in Yahoo! online properties in addition to banner advertising. In
connection with these arrangements, the Company may receive sponsorship fees
as well as
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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 and that third party sponsors do not renew the
agreements at the end of their term. 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 significant 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.
The market for Internet products and services is highly competitive
and competition is expected to continue to increase significantly. In
addition, the Company expects the market for Web-based advertising, to the
extent it continues to develop, to be intensely competitive. There are no
substantial barriers to entry in these markets, and the Company expects that
competition will continue to intensify. Although the Company currently
believes that the diverse segments of the Internet market will provide
opportunities for more than one supplier of products and services similar to
those of the Company, it is possible that a single supplier may dominate one
or more market segments, including well-established companies such as
Microsoft. The Company competes with many other providers of online
navigation, information and community services. The Company also competes
with online services and other Web site operators, 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.
There can be no assurance that the Company will be able to compete
successfully against its current or future competitors or that competition
will not have a material adverse effect on the Company's business, operating
results, 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 an event, the trading price of the Company's
Common Stock would likely be materially and adversely affected.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
NET REVENUES. Net revenues were $70,450,000, $21,490,000, and $1,620,000 for
the years ended December 31, 1997, 1996, and 1995, respectively. The
increases from year to year are due primarily to the increasing number of
advertisers purchasing space on Yahoo! and the Company's other online media
properties. Approximately 2,600 customers advertised on Yahoo! and the
Company's other online media properties during 1997 as compared to
approximately 700 in 1996. Additionally, the Company began selling
sponsorship contracts during 1997 which also contributed to the increase in
net revenues. International revenues have accounted for less than 10% of net
revenues in the years ended December 31, 1997, 1996, and 1995. Barter
transactions have also accounted for less than 10% of net revenues in the
years ended December 31, 1997, 1996, and 1995. There can be no assurance that
customers will continue to purchase advertising on the Company's Web pages or
that market prices for Web-based advertising will not decrease due to
competitive or other factors.
COST OF REVENUES. Cost of revenues consists of the expenses associated with
the production and usage of Yahoo! and the Company's other online media
properties. These costs primarily consist of fees paid to third parties for
content included on the Company's properties, Internet connection charges,
prize awards, equipment depreciation, and compensation. Cost of revenues were
$10,885,000 for the year ended December 31, 1997, or 15% of net revenues as
compared to $4,722,000, or 22% of net revenues and $281,000, or 17% of net
revenues for the years ended December 31, 1996 and 1995, respectively. The
absolute dollar increases in cost of revenues from year to year are primarily
attributable to an increase in the quantity of content available on Yahoo!
and the Company's other online media properties, and the increased usage of
these properties. The Company anticipates that its content and Internet
connection
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expenses will increase with the quantity and quality of content available on
Yahoo! and the Company's other online media properties, and increased usage
of these properties. As measured in page views (defined as electronic page
displays), the Company delivered an average of approximately 65 million page
views per day in December 1997 compared with an average of approximately 20
million page views per day in December 1996 and an average of approximately 6
million page views per day in February 1996. Yahoo! Japan, an unconsolidated
joint venture of the Company which began operations in April 1996, is
included in these page views figures and accounted for an average of
approximately 5 million per day in December 1997 and an average of
approximately 1.4 million per day in December 1996. The Company anticipates
that its content and Internet connection expenses will continue to increase
in absolute dollars for the foreseeable future.
SALES AND MARKETING. Sales and marketing expenses were $45,778,000 for the
year ended December 31, 1997, or 65% of net revenues. For the years ended
December 31, 1996 and 1995, sales and marketing expenses were $16,168,000 and
$935,000, or 75% and 58% of net revenues, respectively. Sales and marketing
expenses consist primarily of advertising and other marketing related
expenses (which include Netscape Premier Provider costs), compensation, sales
commissions, and travel costs. The year-to-year increases in absolute dollars
are primarily attributable to increases in compensation expense associated
with an increase in sales and marketing personnel related to the addition of
a direct sales force which the Company began building in the fourth quarter
of 1996; an increase in advertising costs associated with the Company's
aggressive brand building strategy; an increase in the total costs incurred
from the Netscape search programs; the addition of and growth in the various
international subsidiaries including France, Germany, and the United Kingdom
during 1996 and Singapore, Australia, Korea, Sweden, Denmark, and Norway
during 1997; and an increase in sales commissions associated with the
increase in revenues. The Company anticipates that sales and marketing
expenses in absolute dollars will increase in future periods as it continues
to pursue an aggressive brand building strategy and continues to build its
direct sales organization.
PRODUCT DEVELOPMENT. Product development expenses were $12,082,000, or 17% of
net revenues for the year ended December 31, 1997 compared to $5,700,000 and
$340,000, or 27% and 21% of net revenues for the years ended December 31,
1996 and 1995, respectively. Product development expenses consist primarily
of employee compensation relating to developing and enhancing the features
and functionality of Yahoo! and the Company's other online media properties.
The year-to-year increases in absolute dollars are primarily attributable to
increases in the number of engineers that develop and enhance Yahoo! and the
Company's other online media properties. To date, all internal product
development costs have been expensed as incurred. Acquired technology for
which technological feasibility has been established, including the
technology purchased in the Company's 1997 acquisition of NetControls for
$1,400,000, is capitalized and amortized over its useful life. The Company
believes that significant investments in product development are required to
remain competitive. As a consequence, the Company intends to incur increased
product development expenditures in absolute dollars in future periods.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were
$7,392,000, or 10% of net revenues for the year ended December 31, 1997
compared to $5,834,000 and $1,153,000, or 27% and 71% of net revenues for the
years ended December 31, 1996 and 1995, respectively. General and
administrative expenses consist primarily of compensation and fees for
professional services. The year-to-year increases in absolute dollars are
primarily attributable to increases in staffing and usage of professional
services. The Company believes that the absolute dollar level of general and
administrative expenses will increase in future periods, as a result of
increased staffing and fees for professional services.
OTHER--NON-RECURRING COSTS. During July 1997, the Company and VISA entered
into an agreement under which the Visa Group released the Company from
certain obligations and claims. In connection with this agreement, Yahoo!
issued 1,398,962 shares of Yahoo! Common Stock to the Visa Group, for which
the Company recorded a one-time, non-cash, pre-tax charge of $21,245,000 in
the second quarter ended June 30, 1997. In conjunction with the October 1997
acquisition of Four11 Corporation, the Company recorded a one-time charge of
$3,850,000 which consisted of investment banking fees, legal and accounting
fees, redundancy costs, and certain other expenses directly related to the
acquisition.
6
<PAGE>
INVESTMENT INCOME, NET. Investment income, net of expense, was $4,535,000 for
the year ended December 31, 1997 as compared to $3,967,000 for the year ended
December 31, 1996. The increase of $568,000 from 1996 to 1997 is primarily
attributable to a higher average investment balance as a result of private
and public offering proceeds received during March and April of 1996.
Investment income in future periods may fluctuate as a result of fluctuations
in average cash balances maintained by the Company and changes in the market
rates of its investments.
MINORITY INTERESTS IN OPERATIONS OF CONSOLIDATED SUBSIDIARIES. Minority
interests in operations of consolidated subsidiaries were $727,000 and
$540,000 for the years ended December 31, 1997 and 1996, respectively. The
increase from 1996 to 1997 is primarily attributable to the staggered launch
dates of the joint ventures. Yahoo! Europe operations began during the third
quarter of 1996 and Yahoo! Korea operations started in the third quarter of
1997 and both subsidiaries are still in the early stages of development. The
Company expects that minority interests in operations of consolidated
subsidiaries in the aggregate will continue to fluctuate in future periods as
a function of the results from consolidated subsidiaries. When, and if, the
consolidated subsidiaries become profitable, the minority interests
elimination on the statement of operations will have an adverse effect on the
Company's net results.
INCOME TAXES. No provision for federal and state income taxes has been
recorded as the Company has incurred net operating losses through December
31, 1997. At December 31, 1997, the Company had approximately $58,300,000 of
federal net operating loss carryforwards for tax reporting purposes which may
offset future taxable income; such carryforwards will expire beginning in
2010. Some of these loss carryforwards are subject to limitation on
utilization in future years due to a change in ownership. Additionally, the
Company has approximately $26,200,000 of California net operating loss
carryforwards for tax reporting purposes which will expire beginning in 2003.
Deferred tax assets and related valuation allowances totaled $29,179,000 of
which approximately $18,600,000 relate to certain U.S. operating loss
carryforwards resulting from the exercise of employee stock options, the tax
benefit of which, when recognized, will be accounted for as a credit to
additional paid-in capital rather than a reduction of the income tax
provision.
NET LOSS. The Company recorded net losses of $25,520,000, $6,427,000, and
$1,016,000, or $0.29, $0.08, and $0.02 per share for the years ended December
31, 1997, 1996, and 1995, respectively. Excluding the effect of the one-time,
non-cash, pre-tax charge of $21,245,000 recorded during the second quarter of
1997 for the restructuring of the Yahoo! Marketplace agreements with the Visa
Group and the one-time charge of $3,850,000 recorded during the fourth
quarter of 1997 for costs incurred for the acquisition of Four11, the
Company's net loss was $425,000.
LIQUIDITY AND CAPITAL RESOURCES FOR THE YEARS ENDED DECEMBER 31, 1997, 1996,
AND 1995
Yahoo! invests predominantly in instruments that are highly liquid,
of quality investment grade, and predominantly have maturities of less than
one year with the intent to make such funds readily available for operating
purposes. At December 31, 1997, the Company had cash and cash equivalents and
investments in marketable securities totaling $108,045,000 compared to
$106,695,000 at December 31, 1996. For the year ended December 31, 1997, cash
provided by operating activities was $480,000 compared to cash used for
operating activities of $2,394,000 and $444,000 for the years ended December
31, 1996 and 1995, respectively.
Capital expenditures for the years ended December 31, 1997, 1996,
and 1995 totaled $6,722,000, $3,442,000, and $255,000, respectively, and are
expected to continue to increase in future periods as a result of the
Company's growth. Capital expenditures have generally been comprised of
purchases of computer hardware and software as well as furniture and
leasehold improvements related to leased facilities.
For the year ended December 31, 1997, cash provided by financing
activities of $9,621,000 was primarily due to proceeds of $6,409,000 from the
issuance of Common Stock under the Company's stock option and employee stock
purchase plans. Additionally, proceeds of $999,000 were received from
minority investors in consolidated joint ventures. For the year ended
December 31, 1996, cash provided by
7
<PAGE>
financing activities of $107,156,000 was primarily due to the March 1996
issuance of 5,100,000 shares of Mandatorily Redeemable Convertible Series C
Preferred Stock for aggregate proceeds of $63,750,000, the April 1996 initial
public offering of 8,970,000 shares of Common Stock for net proceeds of
$35,106,000, and other issuances of Common Stock. Additionally, proceeds of
$1,050,000 were received from minority investors in consolidated joint
ventures. For the year ended December 31, 1995, cash provided by financing
activities of $6,866,000 was primarily due to proceeds of $6,004,000 from the
issuance of Convertible Preferred Stock.
The Company currently has no material commitments other than those
under the Netscape Co-Marketing agreement, the Netscape Premier Provider
agreements, and operating lease agreements. Under the terms of the amended
Co-Marketing agreement, the Company has remaining fixed expenses in the form
of advertising revenue guarantees of up to $3,500,000 over the next three
months, subject to a minimum level of gross revenue being met during the
first year of the agreement, and up to $15,000,000 in the second year,
subject to certain minimum levels of advertising impressions being reached on
the Guide. Under the terms of the Premier Provider agreements, the Company
has minimum expense obligations of $2,917,000 at December 31, 1997, of which
$550,000 is to be paid for with the Company's advertising services. The
Company has experienced a substantial increase in its capital expenditures
and operating lease arrangements since its inception, which is consistent
with increased staffing, and anticipates that this will continue in the
future. 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. Management believes existing cash and investments will be sufficient to
meet the Company's operating requirements for at least the next twelve
months; however, the Company may sell additional equity or debt securities or
obtain credit facilities. The sale of additional securities could result in
additional dilution to the Company's shareholders.
RESULTS OF OPERATIONS FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 1998
(RESTATED) AND 1997
NET REVENUES. Net revenues were $54,576,000 and $126,860,000 for the three
and nine month periods ended September 30, 1998, respectively, which
represent increases of 192% and 189% when compared with the corresponding
periods in 1997. The increases are due primarily to the increasing number of
advertisers purchasing space on Yahoo! online media properties as well as
larger and longer term purchases by certain advertisers. Approximately 1,950
customers advertised on Yahoo! online media properties during the quarter
ended September 30, 1998 as compared to approximately 1,200 during the third
quarter of 1997. No one customer accounted for 10% or more of revenues during
the three or nine month periods ended September 30, 1998 and 1997.
International revenues have accounted for less than 10% of net revenues
during the three and nine month periods ended September 30, 1998 and 1997.
Barter revenues also represented less than 10% of net revenues during those
periods. Advertising purchases by SOFTBANK, a 30% shareholder of the Company
at September 30, 1998, and its related companies accounted for approximately
8% and 4% of net revenues in the three and nine month periods ended September
30, 1998 as compared to 4% and 5% in the corresponding periods in fiscal
1997. Contracted prices on these orders are comparable to those given to
other major customers of the Company. There can be no assurance that
customers will continue to purchase advertising on the Company's Web pages,
that advertisers will not make smaller and shorter term purchases, or that
market prices for Web-based advertising will not decrease due to competitive
or other factors. Additionally, while the Company has experienced strong
revenue growth during the first three quarters of 1998, management does not
believe that this level of revenue growth will be sustained in future periods.
COST OF REVENUES. Cost of revenues consist of the expenses associated with
the production and usage of Yahoo! online media properties. These costs
primarily consist of fees paid to third parties for content included on the
Company's online media properties, Internet connection charges, amortization
of purchased technology, prize awards, equipment depreciation, and
compensation. Cost of revenues were $7,525,000 and $17,603,000 for the three
and nine month periods ended September 30, 1998, respectively, or 14% of net
revenues, as compared to $2,675,000 and $7,095,000, or 14% and 16% of net
revenues, in the corresponding periods in fiscal 1997. The absolute dollar
increase in cost of revenues is primarily attributable to an increase in the
quantity of content available on Yahoo! online media properties, the
increased usage of these properties, and the amortization of the technology
purchased in the Viaweb
8
<PAGE>
acquisition. The Company anticipates that its content and Internet connection
expenses will increase with the quantity and quality of content available on
the Yahoo! online media properties, and increased usage of these properties.
As measured in page views (defined as electronic page displays), the Company
delivered an average of 144 million page views per day in September 1998
compared with an average of 50 million page views per day in September 1997.
Yahoo! Japan, an unconsolidated joint venture of the Company which began
operations in April 1996, is included in these page views figures and
accounted for an average of approximately 11 million page views per day in
September 1998 and an average of over 4 million page views per day in
September 1997. The Company anticipates that its content and Internet
connection expenses will continue to increase in absolute dollars for the
foreseeable future. The Company currently anticipates cost of revenues will
be in the range of 10% to 13% of net revenues for the fourth quarter of 1998.
SALES AND MARKETING. Sales and marketing expenses were $24,425,000 for the
quarter ended September 30, 1998, or 45% of net revenues as compared to
$12,346,000, or 66% of net revenues for the quarter ended September 30, 1997.
For the nine months ended September 30, 1998, sales and marketing expenses
were $61,853,000, or 49% of net revenues as compared to $30,002,000, or 68%
of net revenues for the nine months ended September 30, 1997. Sales and
marketing expenses consist primarily of advertising and other marketing
related expenses (which include Netscape Premier Provider/Distinguished
Provider and other distribution costs), compensation and employee-related
expenses, and sales commissions. The increase in absolute dollars from the
year ago periods is primarily attributable to an increase in advertising and
distribution costs associated with the Company's aggressive brand-building
strategy, increases in compensation expense associated with growth in sales
and marketing personnel, and expansion in the international subsidiaries with
the addition of subsidiaries during or subsequent to the quarter ended
September 30, 1997 in Australia, Denmark, Italy, Korea, Norway, Singapore,
and Sweden. The Company also added Yahoo! guides in Spanish and Mandarin
Chinese languages during the quarter ended June 30, 1998. The Company
anticipates that sales and marketing expenses in absolute dollars will
increase in future periods as it continues to pursue an aggressive
brand-building strategy through advertising and distribution and continues to
build its direct sales organization. As a percentage of net revenues, the
Company currently anticipates that sales and marketing expenses may increase
slightly from the third quarter to the fourth quarter of 1998.
PRODUCT DEVELOPMENT. Product development expenses were $5,739,000 for the
quarter ended September 30, 1998, or 11% of net revenues as compared to
$3,164,000, or 17% of net revenues for the quarter ended September 30, 1997.
For the nine months ended September 30, 1998, product development expenses
were $15,665,000, or 12% of net revenues as compared to $8,285,000, or 19% of
net revenues for the nine months ended September 30, 1997. Product
development expenses consist primarily of employee compensation relating to
developing and enhancing the features and functionality of Yahoo! online
media properties. The increase in absolute dollars is primarily attributable
to increases in the number of engineers that develop and enhance Yahoo!
online media properties. To date, all internal product development costs have
been expensed as incurred. The Company believes that significant investments
in product development are required to remain competitive. Consequently, the
Company expects to incur increased product development expenditures in
absolute dollars in future periods. As a percentage of net revenues, the
Company currently anticipates that product development expenses will
approximate current levels during the fourth quarter of 1998.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were
$2,872,000 for the quarter ended September 30, 1998, or 5% of net revenues as
compared to $1,838,000, or 10% of net revenues for the quarter ended
September 30, 1997. For the nine months ended September 30, 1998, general and
administrative expenses were $7,635,000, or 6% of net revenues as compared to
$5,229,000, or 12% of net revenues for the nine months ended September 30,
1997. General and administrative expenses consist primarily of compensation
and fees for professional services, and the increase in absolute dollars is
primarily attributable to increases in these areas. The Company believes that
the absolute dollar level of general and administrative expenses will
increase in future periods, as a result of an increase in personnel and
increased fees for professional services. As a percentage of net revenues,
the Company currently anticipates that general and administrative expenses
will approximate current levels during the fourth quarter of 1998.
9
<PAGE>
AMORTIZATION OF INTANGIBLES. As part of the Viaweb acquisition, the Company
recorded an intangible asset related to goodwill in the amount of
$24,332,000. This asset is being amortized over a seven year period beginning
in June 1998.
OTHER--NONRECURRING COSTS. During June 1998, the Company completed the
acquisition of all outstanding shares of Viaweb through the issuance of
787,182 shares of Yahoo! Common Stock. All outstanding options to purchase
Viaweb common stock were converted into options to purchase 122,252 shares of
Yahoo! Common Stock. During the quarter ended June 30, 1998, the Company
recorded a nonrecurring charge of $15,000,000 for in-process research and
development that had not yet reached technological feasibility and had no
alternative future use.
During July 1997, prior to the completion of significant business
activities and public launch of the Yahoo! Marketplace, the Company and VISA
entered into an agreement under which the Visa Group released the Company
from certain obligations and claims. In connection with this agreement, the
Company issued 1,398,962 shares of Yahoo! Common Stock to the Visa Group, for
which the Company recorded a one-time, non-cash, pre-tax charge of
$21,245,000 in the second quarter ended June 30, 1997.
In conjunction with the October 1998 acquisition of Yoyodyne
Entertainment, Inc., the Company expects to record a one-time charge of
approximately $2,000,000 in the fourth quarter of 1998 relating to expenses
incurred with the transaction.
INVESTMENT INCOME, NET. Investment income, net of expense, was $5,166,000 for
the quarter ended September 30, 1998. For the quarter ended September 30,
1997, investment income was $1,138,000. Investment income for the nine months
ended September 30, 1998 was $8,437,000 as compared to $3,780,000 for the
nine months ended September 30, 1997. The increase in investment income from
the year ago periods was attributable to a higher average investment balance,
principally due to proceeds of $250,000,000 received by the Company on July
14, 1998 from a private placement of shares to SOFTBANK. Investment income
for the fourth quarter of 1998 is expected to increase slightly over third
quarter investment income as a higher average investment balance will be
offset by lower interest rates.
MINORITY INTERESTS IN OPERATIONS OF CONSOLIDATED SUBSIDIARIES. Minority
interests in losses from operations of consolidated subsidiaries were $10,000
for the quarter ended September 30, 1998 as compared to $247,000 for the same
period in 1997. Minority interests for the nine months ended September 30,
1998 were $365,000 as compared to $631,000 for the nine months ended
September 30, 1997. The 1998 minority interest is attributable to operations
in the European and Korean joint ventures. Minority interest from the year
ago periods is attributable to losses in the European and other joint
ventures. The Company expects that minority interests in operations of
consolidated subsidiaries in the aggregate will continue to fluctuate in
future periods as a function of the results from consolidated subsidiaries.
When, and if, the consolidated subsidiaries become profitable, the minority
interests adjustment on the statement of operations will reduce the Company's
net income by the minority partners' share of the subsidiaries' net income.
INCOME TAXES. Based on the current estimate of operating results and certain
other factors, the Company expects its effective tax rate, before the effect
of the non-deductible charges of $15,000,000 for acquired in-process research
and development and amortization of intangible assets, will approximate 27%
for fiscal year 1998 (using a 25% tax rate for the fourth quarter of 1998).
Before the effect of these charges, the tax rate for the nine months ended
September 30, 1998 was approximately 28%. This rate is lower than the
statutory U.S. federal rate due primarily to the utilization of net operating
loss carryforwards, the utilization of research and development credits, and
the change in the valuation allowance on deferred tax assets. The Company
continues to provide a valuation allowance on certain deferred tax assets
which relate principally to foreign and acquired domestic net operating loss
carryforwards. When realized, the tax benefit of the deferred tax assets
attributable to the exercise of employee stock options will be accounted for
as a credit to additional paid-in capital rather than a reduction of the
income tax provision. As of September 30, 1998, $8,675,000 has been
recognized as a credit to additional paid-in capital. Deferred tax assets
related to employee stock option exercises are currently expected to increase
through fiscal year 1998.
10
<PAGE>
NET INCOME (LOSS). The Company recorded net income of $12,771,000 or $0.11
per share diluted for the quarter ended September 30, 1998 compared to net
income of $65,000 or $0.00 per share diluted for the quarter ended September
30, 1997. Excluding the effect of the amortization of $1,250,000 and $869,000
from the purchased technology and intangible assets purchased in the Viaweb
acquisition, the Company earned $14,890,000 or $0.13 per share diluted for
the quarter ended September 30, 1998. For the nine months ended September 30,
1998, the Company recorded net income of $7,065,000 or $0.06 per share
diluted. Excluding the effect of the nonrecurring charge of $15,000,000
incurred in connection with the acquisition of Viaweb and the amortization of
$1,667,000 and $1,159,000 from the related purchased technology and
intangible assets, the Company earned $24,890,000 or $0.23 per share diluted.
For the nine months ended September 30, 1997, the Company recorded a net loss
of $23,579,000 or $0.27 per share. Excluding the effect of the nonrecurring
charge of $21,245,000 incurred in connection with the Visa agreement, the
Company lost $2,334,000 or $0.03 per share.
LIQUIDITY AND CAPITAL RESOURCES FOR THE INTERIM PERIODS ENDED SEPTEMBER 30,
1998 (RESTATED) AND 1997
Yahoo! invests predominantly in debt instruments that are highly
liquid, of high-quality investment grade, and predominantly have maturities
of less than one year with the intent to make such funds readily available
for operating purposes. At September 30, 1998, the Company had cash and cash
equivalents and investments in marketable debt securities totaling
$432,463,000 compared to $108,045,000 at December 31, 1997.
For the nine months ended September 30, 1998, cash provided by
operating activities of $68,008,000 was primarily due to earnings, before the
nonrecurring charge of $15,000,000, increases in deferred revenue (due to
invoicing and cash receipts in excess of revenue) and accrued liabilities,
and tax benefits from stock option plans. For the nine months ended September
30, 1997, cash used in operating activities of $5,178,000 was primarily due
to increases in prepaid expenses and other assets, which resulted primarily
from a $5,000,000 one-time non-refundable license payment to Netscape under
the Netscape Guide by Yahoo! agreement and a $2,900,000 payment to Netscape
under the international Netscape Net Search program agreement, and an
increase in accounts receivable, partially offset by increases in accrued
liabilities and deferred revenue.
Cash used in investing activities was $237,428,000 for the nine
months ended September 30, 1998. Purchases (net of sales and maturities) of
investments in marketable securities and other assets during the period were
$231,200,000 and capital expenditures totaled $6,461,000. Capital
expenditures have generally been comprised of purchases of computer hardware
and software as well as leasehold improvements related to leased facilities,
and are expected to increase in future periods. Cash provided by investing
activities was $21,192,000 for the nine months ended September 30, 1997.
Sales and maturities (net of purchases) of investments in marketable
securities during the period were $25,648,000 and capital expenditures
totaled $4,157,000.
For the nine months ended September 30, 1998, cash provided by
financing activities of $267,974,000 was due primarily to the issuance of
Common Stock to SOFTBANK in the amount of $250,000,000 during July 1998 and
the issuance of Common Stock pursuant to the exercise of stock options. For
the nine months ended September 30, 1997, cash provided by financing
activities of $6,466,000 was due to the issuance of Common Stock pursuant to
the exercise of stock options, proceeds received under lease obligations, and
proceeds received from minority investors.
The Company currently has no material commitments other than those
under operating lease agreements. The Co-Marketing agreement with Netscape
was terminated in May 1998 and the Premier Provider agreements have expired.
The Company has experienced a substantial increase in its capital
expenditures and operating lease arrangements since its inception, which is
consistent with increased staffing, and anticipates that this will continue
in the future. 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. Management believes
11
<PAGE>
existing cash and investments will be sufficient to meet the Company's
operating requirements for at least the next twelve months; however, the
Company may sell additional equity or debt securities or obtain credit
facilities. The sale of additional securities could result in additional
dilution to the Company's shareholders.
12
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Yahoo! Inc.
In our opinion, the consolidated balance sheets and the related consolidated
statements of operations, of shareholders' equity and of cash flows (which
statements are not presented separately herein) present fairly, in all
material respects, the financial position of Yahoo! Inc. and its subsidiaries
at December 31, 1997 and 1996, and the results of their operations and their
cash flows for the years ended December 31, 1997, 1996, and 1995, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
As described in Notes 1 and 10 to the supplementary consolidated financial
statements, on October 20, 1998, Yahoo! Inc. merged with Yoyodyne
Entertainment, Inc. in a transaction accounted for as a pooling of interests.
The accompanying supplementary consolidated financial statements give
retroactive effect to the merger of Yahoo! Inc. with Yoyodyne Entertainment,
Inc.
In our opinion, based on our audits, the accompanying supplementary
consolidated balance sheets and the related supplementary consolidated
statements of operations, of shareholders' equity and of cash flows present
fairly, in all material respects, the financial position of Yahoo! Inc. and
its subsidiaries at December 31, 1997 and 1996, and the results of their
operations and their cash flows for the years ended December 31, 1997, 1996,
and 1995, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
San Jose, California
January 9, 1998,
except as to the pooling of interests with
Yoyodyne Entertainment, Inc. which is
as of October 20, 1998.
13
<PAGE>
YAHOO! INC.
SUPPLEMENTARY CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
------------- ----------------------------------
1998 1997 1996
------------- ------------- -------------
(unaudited)
(restated)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 162,238,000 $ 63,571,000 $ 34,296,000
Short-term investments in marketable securities 226,710,000 27,772,000 62,651,000
Accounts receivable, net of allowance of
$4,312,000 (unaudited), $2,598,000, and $665,000 21,061,000 11,163,000 5,200,000
Prepaid expenses 3,872,000 5,982,000 422,000
------------- ------------- -------------
Total current assets 413,881,000 108,488,000 102,569,000
Long-term investments in marketable debt securities 43,515,000 16,702,000 9,748,000
Long-term investments in marketable equity securities 18,359,000 - -
Property and equipment, net 11,031,000 7,364,000 3,159,000
Other assets 45,395,000 10,958,000 729,000
------------- ------------- -------------
$ 532,181,000 $ 143,512,000 $ 116,205,000
------------- ------------- -------------
------------- ------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,468,000 $ 5,256,000 $ 1,725,000
Accrued expenses and other current liabilities 24,026,000 12,685,000 4,870,000
Deferred revenue 30,564,000 5,085,000 2,102,000
Due to related parties 1,127,000 1,412,000 1,082,000
------------- ------------- -------------
Total current liabilities 64,185,000 24,438,000 9,779,000
------------- ------------- -------------
Commitments and contingencies (Notes 8 and 9)
Deferred tax liability 6,000,000 - -
Minority interests in consolidated subsidiaries 951,000 716,000 510,000
------------- ------------- -------------
Shareholders' equity:
Preferred Stock, $0.001 par value; 10,000,000 shares authorized;
none issued - - -
Common Stock, $0.00033 par value; 450,000,000 shares authorized;
98,043,685 (unaudited), 90,203,917, and 82,763,001 issued and
outstanding 23,000 20,000 18,000
Additional paid-in capital 476,412,000 151,744,000 113,404,000
Accumulated deficit (26,965,000) (32,963,000) (7,443,000)
Unrealized gains on available-for-sale securities, net of tax 11,905,000 - -
Cumulative translation adjustment (330,000) (443,000) (63,000)
------------- ------------- -------------
Total shareholders' equity 461,045,000 118,358,000 105,916,000
------------- ------------- -------------
$ 532,181,000 $ 143,512,000 $ 116,205,000
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these supplementary consolidated
financial statements.
14
<PAGE>
YAHOO! INC.
SUPPLEMENTARY CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Nine Months Ended September 30, Year Ended December 31,
------------------------------- --------------------------------------------
1998 1997 1997 1996 1995
------------ ------------ ------------ ------------ ------------
(unaudited) (unaudited)
(restated)
<S> <C> <C> <C> <C> <C>
Net revenues $126,860,000 $ 43,866,000 $ 70,450,000 $ 21,490,000 $ 1,620,000
Cost of revenues 17,603,000 7,095,000 10,885,000 4,722,000 281,000
------------ ------------ ------------ ------------ ------------
Gross profit 109,257,000 36,771,000 59,565,000 16,768,000 1,339,000
------------ ------------ ------------ ------------ ------------
Operating expenses:
Sales and marketing 61,853,000 30,002,000 45,778,000 16,168,000 935,000
Product development 15,665,000 8,285,000 12,082,000 5,700,000 340,000
General and administrative 7,635,000 5,229,000 7,392,000 5,834,000 1,153,000
Amortization of intangibles 1,159,000 - - - -
Other - non-recurring costs 15,000,000 21,245,000 25,095,000 - -
------------ ------------ ------------ ------------ ------------
Total operating expenses 101,312,000 64,761,000 90,347,000 27,702,000 2,428,000
------------ ------------ ------------ ------------ ------------
Income (loss) from operations 7,945,000 (27,990,000) (30,782,000) (10,934,000) (1,089,000)
Investment income, net 8,437,000 3,780,000 4,535,000 3,967,000 73,000
Minority interests in operations
of consolidated subsidiaries 365,000 631,000 727,000 540,000 -
------------ ------------ ------------ ------------ ------------
Income (loss) before income taxes 16,747,000 (23,579,000) (25,520,000) (6,427,000) (1,016,000)
Provision for income taxes 9,682,000 - - - -
------------ ------------ ------------ ------------ ------------
Net income (loss) $ 7,065,000 $(23,579,000) $(25,520,000) $ (6,427,000) $ (1,016,000)
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Net income (loss) per share:
Basic $ 0.08 $ (0.27) $ (0.29) $ (0.08) $ (0.02)
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Diluted $ 0.06 $ (0.27) $ (0.29) $ (0.08) $ (0.02)
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Weighted average common shares and
equivalents used in per share
calculation:
Basic 90,144,000 86,569,000 87,336,000 78,650,000 54,734,000
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Diluted 110,318,000 86,569,000 87,336,000 78,650,000 54,734,000
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these supplementary consolidated
financial statements.
15
<PAGE>
YAHOO! INC.
SUPPLEMENTARY CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Preferred Stock Common Stock
--------------------------------- ------------------------------
Shares Amount Shares Amount
------------ --------------- ------------ -------------
<S> <C> <C> <C> <C>
Issuance of Common Stock in
connection with the formation
of the Company - $ - 31,159,060 $ 1,000
Issuance of Series A and B
Convertible Preferred Stock at
$0.20 and $1.97 per share,
respectively 7,738,072 8,000 - -
Issuance of Common Stock for
employee stock plans and other - - 1,687,342 -
Net loss - - - -
----------- --------------- ---------- -------------
Balance at December 31, 1995 7,738,072 8,000 32,846,402 1,000
Issuance of Convertible
Series C Preferred Stock at
$12.50 per share 5,100,000 5,000 - -
Sale of Common Stock, net of
issuance costs of $1,192,000 - - 8,970,000 3,000
Conversion of Convertible Preferred
Stock to Common Stock (12,838,072) (13,000) 38,514,216 13,000
Issuance of Common Stock,
net of issuance costs - - 943,251 -
Issuance of Common Stock
pursuant to exercise of options - - 1,489,132 1,000
Compensation expense on option
grants and warrant issuances - - - -
Net loss - - - -
Foreign currency translation
adjustment - - - -
----------- --------------- ---------- -------------
Balance at December 31, 1996 - - 82,763,001 18,000
Issuance of Common Stock pursuant
to exercise of warrants - - 697,456 -
Issuance of Common Stock for
acquisitions and investments - - 230,492 -
Issuance of Common Stock pursuant
to Visa Group Agreement - - 1,398,962 1,000
Issuance of Common Stock for
employee stock plans and other - - 5,114,006 1,000
Write-up of investment in
Yahoo! Japan - - - -
Compensation and other expense on
option grants and warrant issuances - - - -
Net loss - - - -
Foreign currency translation
adjustment - - - -
----------- --------------- ---------- -------------
Balance at December 31, 1997 - - 90,203,917 20,000
Issuance of Common Stock pursuant
to exercise of warrants (unaudited) - - 85,656 -
Issuance of Common Stock for
acquisitions and investments (unaudited) - - 1,058,136 -
Sale of Common Stock, net of
issuance costs (unaudited) - - 2,726,880 1,000
Issuance of Common Stock for
employee stock plans (unaudited) - - 3,969,096 2,000
Compensation expense on
option grants (unaudited) - - - -
Tax benefits from stock option
plans (unaudited) - - - -
Net income (unaudited) - - - -
Accumulated deficit from
acquisition (unaudited) - - - -
Unrealized gains on available-for-sale
securities, net of tax (unaudited) - - - -
Foreign currency translation
adjustment (unaudited) - - - -
----------- --------------- ---------- -------------
Balance at September 30, 1998 - $ - 98,043,685 $ 23,000
(unaudited and restated)
----------- --------------- ---------- -------------
----------- --------------- ---------- -------------
</TABLE>
<TABLE>
<CAPTION>
Unrealized
Additional Gains on Cumulative
Paid-in Accumulated Securities, Translation
Capital Deficit net Adjustment Total
------------- ----------- ------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Issuance of Common Stock in
connection with the formation
of the Company $ 2,000 $ - $ - $ - $ 3,000
Issuance of Series A and B
Convertible Preferred Stock at
$0.20 and $1.97 per share,
respectively 5,996,000 - - - 6,004,000
Issuance of Common Stock for
employee stock plans and other 984,000 - - - 984,000
Net loss - (1,016,000) - - (1,016,000)
------------- ----------- ------------- ------------- --------------
Balance at December 31, 1995 6,982,000 (1,016,000) - - 5,975,000
Issuance of Convertible
Series C Preferred Stock at
$12.50 per share 63,745,000 - - - 63,750,000
Sale of Common Stock, net of
issuance costs of $1,192,000 35,103,000 - - - 35,106,000
Conversion of Convertible Preferred
Stock to Common Stock - - - - -
Issuance of Common Stock,
net of issuance costs 7,368,000 - - - 7,368,000
Issuance of Common Stock
pursuant to exercise of options 9,000 - - - 10,000
Compensation expense on option
grants and warrant issuances 197,000 - - - 197,000
Net loss - (6,427,000) - - (6,427,000)
Foreign currency translation
adjustment - - - (63,000) (63,000)
------------- ----------- ------------- ------------- --------------
Balance at December 31, 1996 113,404,000 (7,443,000) - (63,000) 105,916,000
Issuance of Common Stock pursuant
to exercise of warrants - - - - -
Issuance of Common Stock for
acquisitions and investments 6,400,000 - - - 6,400,000
Issuance of Common Stock pursuant
to Visa Group Agreement 21,049,000 - - - 21,050,000
Issuance of Common Stock for
employee stock plans and other 7,515,000 - - - 7,516,000
Write-up of investment in
Yahoo! Japan 1,700,000 - - - 1,700,000
Compensation and other expense on
option grants and warrant issuances 1,676,000 - - - 1,676,000
Net loss - (25,520,000) - - (25,520,000)
Foreign currency translation
adjustment - - - (380,000) (380,000)
------------- ----------- ------------- ------------- --------------
Balance at December 31, 1997 151,744,000 (32,963,000) - (443,000) 118,358,000
Issuance of Common Stock pursuant
to exercise of warrants (unaudited) 37,000 - - - 37,000
Issuance of Common Stock for
acquisitions and investments (unaudited) 48,053,000 - - - 48,053,000
Sale of Common Stock, net of
issuance costs (unaudited) 249,913,000 - - - 249,914,000
Issuance of Common Stock for
employee stock plans (unaudited) 17,519,000 - - - 17,521,000
Compensation expense on
option grants (unaudited) 471,000 - - - 471,000
Tax benefits from stock option
plans (unaudited) 8,675,000 - - - 8,675,000
Net income (unaudited) - 7,065,000 - - 7,065,000
Accumulated deficit from
acquisition (unaudited) - (1,067,000) - - (1,067,000)
Unrealized gains on available-for-sale
securities, net of tax (unaudited) - - 11,905,000 - 11,905,000
Foreign currency translation
adjustment (unaudited) - - - 113,000 113,000
------------- ----------- ------------- ------------- --------------
Balance at September 30, 1998 $ 476,412,000 $ (26,965,000) $ 11,905,000 $ (330,000) $ 461,045,000
(unaudited and restated) ------------- ----------- ------------- ------------- --------------
------------- ----------- ------------- ------------- --------------
</TABLE>
The accompanying notes are an integral part of these supplementary consolidated
financial statements.
16
<PAGE>
YAHOO! INC.
SUPPLEMENTARY CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended September 30, Year Ended December 31,
------------------------------- ---------------------------------------------
1998 1997 1997 1996 1995
------------- ------------- ------------- ------------- -------------
(unaudited) (unaudited)
(restated)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 7,065,000 $ (23,579,000) $(25,520,000) $ (6,427,000) $ (1,016,000)
Adjustments to reconcile net income
(loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization 6,423,000 1,728,000 2,737,000 639,000 153,000
Tax benefits from stock option plans 8,675,000 - - - -
Compensation and other expense on stock
option grants and warrant issuances 471,000 333,000 1,676,000 197,000 -
Minority interests in operations
of consolidated subsidiaries (365,000) (631,000) (727,000) (540,000) -
Income from investment in Yahoo! Japan - - (100,000) - -
Non-cash charge 15,000,000 21,245,000 21,245,000 - -
Changes in assets and liabilities:
Accounts receivable, net (9,846,000) (4,225,000) (5,963,000) (4,269,000) (931,000)
Prepaid expenses 2,966,000 (7,982,000) (6,010,000) (386,000) (36,000)
Accounts payable 3,000,000 812,000 2,425,000 1,386,000 339,000
Accrued expenses and
other current liabilities 9,431,000 4,244,000 7,404,000 4,393,000 477,000
Deferred revenue 25,473,000 3,199,000 2,983,000 1,665,000 436,000
Due to related parties (285,000) (322,000) 330,000 948,000 134,000
------------- ------------- ------------ ------------- --------------
Net cash provided by (used in) operating activities 68,008,000 (5,178,000) 480,000 (2,394,000) (444,000)
------------- ------------- ------------ ------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (6,461,000) (4,157,000) (6,722,000) (3,442,000) (255,000)
Cash acquired in acquisitions 233,000 - - - -
Purchases of investments in
marketable securities (324,233,000) (32,493,000) (58,753,000) (115,247,000) (392,000)
Proceeds from sales and maturities
of investments in marketable securities 98,478,000 58,141,000 86,678,000 43,240,000 -
Other investments (5,445,000) (299,000) (1,649,000) (729,000) -
------------- ------------- ------------ ------------- --------------
Net cash provided by (used in) investing activities (237,428,000) 21,192,000 19,554,000 (76,178,000) (647,000)
------------- ------------- ------------ ------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Common Stock, net 267,374,000 4,173,000 7,516,000 42,484,000 871,000
Proceeds from issuance of Convertible
Preferred Stock - - - 63,750,000 6,004,000
Proceeds from minority investors 600,000 996,000 999,000 1,050,000 -
Other - 1,297,000 1,106,000 (128,000) (9,000)
------------- ------------- ------------ ------------- --------------
Net cash provided by financing activities 267,974,000 6,466,000 9,621,000 107,156,000 6,866,000
------------- ------------- ------------ ------------- --------------
Effect of exchange rate changes on cash
and cash equivalents 113,000 (63,000) (380,000) (63,000) -
------------- ------------- ------------ ------------- --------------
Net change in cash and cash equivalents 98,667,000 22,417,000 29,275,000 28,521,000 5,775,000
Cash and cash equivalents at beginning of period 63,571,000 34,296,000 34,296,000 5,775,000 -
------------- ------------- ------------ ------------- --------------
Cash and cash equivalents at end of period $ 162,238,000 $ 56,713,000 $ 63,571,000 $ 34,296,000 $ 5,775,000
------------- ------------- ------------ ------------- --------------
------------- ------------- ------------ ------------- --------------
</TABLE>
The accompanying notes are an integral part of these supplementary consolidated
financial statements.
17
<PAGE>
YAHOO! INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY. Yahoo! Inc., including its subsidiaries ("Yahoo!" or the
"Company"), is a global Internet media company that offers a network of branded
World Wide Web (the "Web") programming that serves millions of users daily.
Yahoo! Inc. provides targeted Internet resources and communications services for
a broad range of audiences, based on demographic, key-subject and geographic
interests. The Company was incorporated in California on March 5, 1995 and
commenced operations on that date. The Company conducts its business within one
industry segment.
RESTATEMENT OF FINANCIAL STATEMENTS OF CHANGES TO CERTAIN INFORMATION. The
accompanying supplementary consolidated financial statements as of September 30,
1998 and for the nine month period ended September 30, 1998 have been restated
to reflect a change in the original accounting for the purchase price allocation
related to the June 1998 acquisition of Viaweb Inc. ("Viaweb", see Note 10).
After discussions with the Staff of the Securities and Exchange Commission (the
"Staff"), the Company has revised the original accounting for the purchase price
allocation and the related amortization of intangibles. Although Yahoo!, with
the concurrence of its independent accountants, believes that its original
accounting treatment was in accordance with generally accepted accounting
principles, it has accepted the Staff's view with respect to these matters. This
resulted in a reduction in the amount of the charge for in-process research and
development from $44,100,000 to $15,000,000 and an increase in the amounts
allocated to purchased technology, deferred tax liability, and goodwill from
$3,800,000, $0, and $432,000 to $15,000,000, $6,000,000, and $24,332,000,
respectively. The restatement does not affect previously reported net cash flows
for the periods. The effect of this reallocation on previously reported
supplementary consolidated financial statements as of and for the nine month
period ended September 30, 1998 is as follows (in thousands except per share
amounts, unaudited):
<TABLE>
<CAPTION>
Nine Months Ended
September 30, 1998
------------------
Statements of Operations: As Reported Restated
----------- --------
<S> <C> <C>
Cost of revenues $15,936 $17,603
Product development 16,136 15,665
Amortization of intangibles - 1,159
Other - nonrecurring costs 44,100 15,000
Income (loss) from operations (18,800) 7,945
Net income (loss) (19,680) 7,065
Net income (loss) per share:
Basic ($0.22) $0.08
Diluted ($0.22) $0.06
September 30, 1998
------------------
Balance Sheets: As Reported Restated
----------- --------
Other assets $12,650 $45,395
Total assets 499,436 532,181
Deferred tax liability - 6,000
Accumulated deficit (53,710) (26,965)
Total shareholders' equity $434,300 $461,045
</TABLE>
ACQUISITION OF YOYODYNE ENTERTAINMENT, INC. On October 20, 1998, the Company
consummated an Agreement and Plan of Reorganization (the "Agreement") with
Yoyodyne Entertainment, Inc. ("Yoyodyne"), a privately-held, direct marketing
services company, upon which Yoyodyne's shareholders
18
<PAGE>
exchanged all of their shares for shares of the Company's Common Stock in a
business combination to be accounted for as a pooling of interests. The
supplementary consolidated financial information as of September 30, 1998
(restated) and December 31, 1997 and 1996 and for nine months ended September
30, 1998 (restated) and 1997 and the years ended December 31, 1997, 1996, and
1995 reflects the Company's consolidated financial position and the results
of operations as if Yoyodyne was a wholly-owned subsidiary of the Company
since inception.
ACQUISITION OF FOUR11 CORPORATION. On October 20, 1997, the Company consummated
an Agreement and Plan of Reorganization with Four11 Corporation ("Four11"), a
privately-held company, upon which Four11's shareholders exchanged all of their
shares on an as-if-converted basis for shares of the Company's Common Stock in a
business combination which was accounted for as a pooling of interests. The
supplementary consolidated financial statements for the three years ended
December 31, 1997 and the accompanying notes reflect the Company's financial
position and the results of operations as if Four11 was a wholly-owned
subsidiary of the Company since inception.
SUMMARY OF ACQUISITIONS. Components of the supplementary consolidated results of
operations of Yahoo!, Four11, and Yoyodyne are as follows:
<TABLE>
<CAPTION>
Nine Months Year Ended December 31,
Ended -----------------------------------------------------------
Sept. 30, 1998 1997 1996 1995
------------- ------------- ------------- -------------
(restated)
<S> <C> <C> <C> <C>
Net Revenues
Yahoo! $ 125,036,000 $ 65,460,000 $ 19,073,000 $ 1,363,000
Four11 -- 1,951,000 624,000 47,000
Yoyodyne 1,824,000 3,039,000 1,793,000 210,000
------------- ------------- ------------- -------------
126,860,000 70,450,000 21,490,000 1,620,000
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Net Income (Loss)
Yahoo! 11,693,000 (19,973,000) (2,334,000) (634,000)
Four11 -- (2,914,000) (1,951,000) (165,000)
Yoyodyne (4,628,000) (2,633,000) (2,142,000) (217,000)
------------- ------------- ------------- -------------
$ 7,065,000 $ (25,520,000) $ (6,427,000) $ (1,016,000)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
PRINCIPLES OF CONSOLIDATION. The supplementary consolidated financial statements
include the accounts of Yahoo! Inc. and its majority-owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated. The
equity and net loss attributable to the minority shareholder interests which
related to the Company's subsidiaries, are shown separately in the supplementary
consolidated balance sheets and supplementary consolidated statements of
operations, respectively. Losses in excess of the minority interest equity would
be charged against the Company. Investments in entities owned 20% or more but
less than majority owned and not otherwise controlled by the Company are
accounted for under the equity method.
REVENUE RECOGNITION. The Company's revenues are derived principally from the
sale of banner advertisements on short-term contracts. The Company's standard
rates for advertising currently range from approximately $0.02 per impression
for general rotation to approximately $0.08 per impression for highly targeted
audiences and properties. To date, the duration of the Company's advertising
commitments has ranged from one week to two years. During 1997, the Company also
began selling a combination of sponsorship and banner advertising contracts. In
general, these sponsorship advertising contracts have longer terms than standard
banner advertising contracts (ranging from three months to two years) and also
involve more integration with Yahoo! services, such as the placement of buttons
which provide users with direct links to the advertiser's Web site. Advertising
revenues on both banner and sponsorship contracts are recognized ratably in the
period in which the advertisement is displayed, provided that no significant
Company obligations remain and collection of the resulting receivable is
probable. Company obligations
19
<PAGE>
typically include guarantees of minimum number of "impressions," or times
that an advertisement appears in pages viewed by users of the Company's
online properties. To the extent minimum guaranteed impressions are not met,
the Company defers recognition of the corresponding revenues until the
remaining guaranteed impression levels are achieved. The Company also earns
additional revenue on sponsorship contracts for fees relating to the design,
coordination, and integration of the customer's content and links into Yahoo!
online properties. These fees are recognized as revenue once the related
activities have been performed and the customer's web links are available on
Yahoo! online properties. A number of the Company's agreements provide that
Yahoo! receive revenues from electronic commerce transactions. These revenues
are recognized by the Company upon notification from the advertiser of
revenues earned by Yahoo! and, to date, have not been significant. Revenues
from barter transactions are recognized during the period in which the
advertisements are displayed in Yahoo! properties. Barter transactions are
recorded at the fair value of the goods or services provided or received,
whichever is more readily determinable in the circumstances. To date, barter
transactions have been less than 10% of net revenues. During 1997, no one
customer accounted for more than 10% of net revenues. During 1996, SOFTBANK,
a 31% shareholder of the Company at December 31, 1997, and its related
companies accounted for approximately 12% of net revenues. During 1995,
another company accounted for approximately 11% of net revenues. Deferred
revenue is primarily comprised of billings in excess of recognized revenue
relating to advertising contracts and payments received pursuant to
sponsorship advertising agreements in advance of revenue recognition.
PRODUCT DEVELOPMENT. Costs incurred in the classification and organization of
listings within Yahoo! properties and the development of new products and
enhancements to existing products 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 COSTS. Advertising production costs are recorded as expense the
first time an advertisement appears. All other advertising costs are expensed as
incurred. The Company does not incur any direct-response advertising costs.
Advertising expense totaled $10,899,000 for 1997, $4,162,000 for 1996, and
$136,000 for 1995.
BENEFIT PLAN. The Company maintains a 401(k) Profit Sharing Plan (the "Plan")
for its full-time employees. Each participant in the Plan may elect to
contribute from 1% to 17% of his or her annual compensation to the Plan. The
Company matches employee contributions at a rate of 25%. Employee contributions
are fully vested, whereas vesting in matching Company contributions occurs at a
rate of 33.3% per year of employment. During 1997 and 1996, the Company's
contributions amounted to $263,000 and $81,000, respectively, all of which was
expensed.
CASH, CASH EQUIVALENTS, SHORT AND LONG-TERM INVESTMENTS. The Company invests its
excess cash in debt instruments of the U.S. Government and its agencies, and in
high-quality corporate issuers. All highly liquid instruments with an original
maturity of three months or less are considered cash equivalents, those with
original maturities greater than three months and current maturities less than
twelve months from the balance sheet date are considered short-term investments,
and those with maturities greater than twelve months from the balance sheet date
are considered long-term investments.
At December 31, 1997 and 1996, short and long-term investments in
marketable securities were classified as available-for-sale and consisted of 81%
and 62% corporate debt securities, 8% and 28% debt securities of the U.S.
Government and its agencies, 4% and 0% municipal debt securities, and 7% and 10%
foreign debt securities, respectively. All long-term investments in marketable
securities mature within two years. At December 31, 1997, the fair value of the
investments approximated cost. Fair value is determined based upon the quoted
market prices of the securities as of the balance sheet date.
20
<PAGE>
At December 31, 1997, the Company had equity interests in privately-
held, information technology companies totaling $6,450,000. These investments
are included in other long-term assets and are accounted for under the cost
method. The Company purchased these investments at or near December 31, 1997,
therefore, their carrying values approximate fair values. 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.
CONCENTRATION OF CREDIT RISK. Financial instruments that potentially subject the
Company to significant concentration of credit risk consist primarily of cash,
cash equivalents, short and long-term investments, and accounts receivable.
Substantially all of the Company's cash, cash equivalents, short and long-term
investments are managed by three financial institutions. Accounts receivable are
typically unsecured and are derived from revenues earned from customers
primarily located in the United States. The Company performs ongoing credit
evaluations of its customers and maintains reserves for potential credit losses;
historically, such losses have been immaterial and within management's
expectations. At December 31, 1997 and 1996, no one customer accounted for 10%
or more of the accounts receivable balance. At December 31, 1995, two customers
accounted for a total of 21% of the accounts receivable balance.
PROPERTY AND EQUIPMENT. Property and equipment, including leasehold
improvements, are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets, generally
two to five years.
INCOME TAXES. Income taxes are computed using the asset and liability method.
Under the asset and liability method, deferred income tax assets and liabilities
are determined based on the differences between the financial reporting and tax
bases of assets and liabilities and are measured using the currently enacted tax
rates and laws.
STOCK-BASED COMPENSATION. The Company accounts for stock-based employee
compensation arrangements in accordance with the provisions of Accounting
Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to
Employees," and complies with the disclosure provisions of SFAS 123, "Accounting
for Stock-Based Compensation." Under APB 25, compensation cost is recognized
over the vesting period based on the difference, if any, on the date of grant
between the fair value of the Company's stock and the amount an employee must
pay to acquire the stock.
FOREIGN CURRENCY AND INTERNATIONAL OPERATIONS. The functional currency of the
Company's subsidiaries in the United Kingdom, Germany, France, Sweden, Denmark,
Norway, Australia, Singapore, and Korea is the local currency. The financial
statements of these subsidiaries are translated to United States dollars using
year-end rates of exchange for assets and liabilities, and average rates for the
year for revenues, costs, and expenses. Translation losses, which are deferred
and accumulated as a component of shareholders' equity, were $380,000 and
$63,000 for the years ended December 31, 1997 and 1996, respectively. Net gains
and losses resulting from foreign exchange transactions are included in the
consolidated statements of operations and were not significant during the
periods presented. International revenues have accounted for less than 10% of
net revenues in the years ended December 31, 1997, 1996, and 1995. International
assets were not significant at December 31, 1997 or 1996.
BASIC AND DILUTED NET LOSS PER SHARE. The Company adopted SFAS 128, "Earnings
per Share" during the year ended December 31, 1997 and retroactively restated
all prior periods. Basic earnings per share is computed using the weighted
average number of common shares outstanding during the period. Diluted earnings
per share is computed using the weighted average number of common and common
equivalent shares outstanding during the period. Common equivalent shares
consist of the incremental common shares issuable upon conversion of the
convertible preferred stock (using the if-converted method) and shares issuable
upon the exercise of stock options and warrants (using the treasury stock
method). Common equivalent shares are excluded from the computation if their
effect is anti-dilutive.
21
<PAGE>
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,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reported period. Actual results could differ from those estimates.
RECENT ACCOUNTING PRONOUNCEMENTS. In June 1997, the Financial Accounting
Standards Board ("FASB") issued SFAS 130, "Reporting Comprehensive Income." SFAS
130 establishes standards for reporting comprehensive income and its components
in a financial statement. Comprehensive income as defined includes all changes
in equity (net assets) during a period from non-owner sources. Examples of items
to be included in comprehensive income, which are excluded from net income,
include foreign currency translation adjustments and unrealized gains/losses on
available-for-sale securities. The disclosure prescribed by SFAS 130 must be
made beginning with the first quarter of 1998. Additionally, in June 1997, the
FASB issued SFAS 131, "Disclosures about Segments of an Enterprise and Related
Information." This statement establishes standards for the way companies report
information about operating segments in annual financial statements. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. The Company has not yet determined the
impact, if any, of adopting this new standard. The disclosures prescribed by
SFAS 131 will be effective for the year ending December 31, 1998 consolidated
financial statements.
INTERIM FINANCIAL INFORMATION (UNAUDITED AND RESTATED). The accompanying
supplementary consolidated balance sheet as of September 30, 1998 and the
supplementary consolidated statements of operations and cash flows for the nine
months ended September 30, 1998 and 1997 and the supplementary consolidated
statement of shareholders' equity for the nine months ended September 30, 1998
are unaudited. In the opinion of management, these statements have been prepared
on the same basis as the audited financial statements and include all
adjustments, consisting of normal recurring adjustments, necessary for the fair
presentation of the results of the periods. The results of operations for such
periods are not necessarily indicative of the results expected for the full
fiscal year or for any future period.
RECLASSIFICATIONS. Certain prior years' balances have been reclassified to
conform with the current year's presentation.
22
<PAGE>
NOTE 2 BALANCE SHEET COMPONENTS
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
Property and equipment:
Computers and equipment $ 7,383,000 $ 2,655,000
Furniture and fixtures 2,316,000 888,000
Leasehold improvements 894,000 328,000
------------ ------------
10,593,000 3,871,000
Less: accumulated depreciation (3,229,000) (712,000)
------------ ------------
$ 7,364,000 $ 3,159,000
------------ ------------
------------ ------------
Other assets:
Investment in GeoCities $ 5,100,000 $ --
Investment in Broadcast.com (formerly AudioNet) 1,350,000 --
Investment in Yahoo! Japan 2,828,000 729,000
Other 1,680,000 --
------------ ------------
$ 10,958,000 $ 729,000
------------ ------------
------------ ------------
Accrued expenses and other current liabilities:
Accrued vacation, wages, and other employee benefits $ 2,951,000 $ 1,168,000
Accrued content and connect costs 2,909,000 754,000
Accrued sales and marketing related 2,222,000 250,000
Accrued professional service expenses 1,730,000 831,000
Other 2,873,000 1,867,000
------------ ------------
$ 12,685,000 $ 4,870,000
------------ ------------
------------ ------------
</TABLE>
NOTE 3 RELATED PARTY TRANSACTIONS
During 1997 and 1996, the Company recognized net revenues of approximately
$3,120,000 and $2,381,000, respectively, on advertising contracts and
publication, development, and licensing arrangements with SOFTBANK and its
related companies, a holder of approximately 31% of the Company's Common Stock
at December 31, 1997. Prices on these contracts were comparable to those given
to other major customers of the Company. Additionally, three SOFTBANK-related
companies provided Internet access and sales and marketing-related services for
fees of approximately $3,190,000, $2,300,000, and $177,000 during 1997, 1996,
and 1995, respectively. Sequoia Capital, a holder of approximately 9% of the
Company's Common Stock at December 31, 1997, was also an investor in one of
these SOFTBANK-related companies. The amount due for these services totaled
approximately $1,046,000 and $896,000 at December 31, 1997 and 1996,
respectively.
NOTE 4 ACQUISITIONS AND INVESTMENTS
ACQUISITION OF NETCONTROLS. On July 31, 1997, the Company entered into a stock
purchase agreement to acquire all of the outstanding capital stock of
NetControls, Inc. for 74,334 shares of the Company's Common Stock. The
acquisition was recorded as a purchase for accounting purposes and the majority
of the purchase price of approximately $1,400,000 will be amortized over the
three year estimated useful life of the technology acquired. Upon acquisition,
the historical financial results of NetControls, Inc. were de minimis.
ACQUISITION OF FOUR11. On October 20, 1997, the Company completed the
acquisition of Four11 Corporation, a privately-held online communications and
Internet directory company. Under the terms of the acquisition, which was
accounted for as a pooling of interests, the Company exchanged 3,011,440
23
<PAGE>
shares of Yahoo! Common Stock for all of Four11's outstanding shares and
assumed 296,672 options and warrants to purchase Yahoo! Common Stock. All
outstanding Four11 preferred shares were converted into Four11 common stock
immediately prior to the acquisition. During the quarter ended December 31,
1997, the Company recorded a one-time charge of $3,850,000 for
acquisition-related costs. These costs consisted of investment banking fees,
legal and accounting fees, redundancy costs, and certain other expenses
directly related to the acquisition.
INVESTMENT IN BROADCAST.COM. On December 30, 1997, the Company invested
$1,350,000 in cash for a less than 20% equity position in Broadcast.com
(formerly AudioNet, Inc.), a provider of Internet broadcasting services. The
Company purchased 79,618 shares of Broadcast.com common stock for a total of
$750,000 and a warrant to purchase 159,236 shares of Broadcast.com common stock
at an exercise price of $9.42 per share for $600,000. The investment is being
accounted for under the cost method as of December 31, 1997 (see Note 10).
INVESTMENT IN GEOCITIES. On December 31, 1997, the Company issued 156,158 shares
of Yahoo! Common Stock for a less than 20% equity position in GeoCities, a
provider of free personal Web pages. In return, the Company received 336,684
shares of GeoCities Series E preferred stock (673,368 shares when adjusted for
the GeoCities June 1998 two-for-one stock split) (unaudited). The investment,
aggregating $5,100,000, is being accounted for under the cost method as of
December 31, 1997 (see Note 10).
NOTE 5 JOINT VENTURES
YAHOO! JAPAN. During April 1996, the Company signed a joint venture agreement
with SOFTBANK, a holder of approximately 31% of the Company's Common Stock at
December 31, 1997, whereby Yahoo! Japan Corporation was formed to establish and
manage in Japan a Japanese version of the Yahoo! Internet Guide, develop related
Japanese online navigational services, and conduct other related business. The
Company's ownership interest in the joint venture upon inception was 40%. At
December 31, 1996, the Company's investment in the joint venture was $729,000.
In September 1997, the Company invested an additional $299,000 in the joint
venture. During November 1997, Yahoo! Japan Corporation completed its initial
public offering, issuing 975 previously unissued shares and raising total
proceeds of approximately $5,500,000. Accordingly, the Company increased its
investment by $1,700,000, recorded as additional paid-in capital, to reflect the
increase in the Company's share of Yahoo! Japan Corporation's net assets. The
investment is being accounted for using the equity method. At December 31, 1997,
the fair value of the Company's 34% ownership in Yahoo! Japan, based on the
quoted trading price, was approximately $53,000,000.
YAHOO! EUROPE. On November 1, 1996, the Company signed a joint venture agreement
with a subsidiary of SOFTBANK, a holder of approximately 31% of the Company's
Common Stock at December 31, 1997, whereby separate companies were formed in
Germany, the United Kingdom, and France ("Yahoo! Europe") to establish and
manage versions of the Yahoo! Internet Guide for Germany, the United Kingdom,
and France, develop related online navigational services, and conduct other
related business. The parties agreed to invest a total of up to $4,000,000 in
proportion to their respective equity interests, and had invested $2,000,000 as
of December 31, 1996 and the entire $4,000,000 as of December 31, 1997. The
Company has a majority share of approximately 70% in each of the Yahoo! Europe
entities, and therefore, has consolidated their financial results. During 1997
and 1996, Yahoo! Europe incurred losses from operations of $1,807,000 and
$842,000, respectively. SOFTBANK's interest in the net assets of Yahoo! Europe
at December 31, 1997 and 1996, as represented by the minority interest on the
balance sheet, was $405,000 and $347,000, respectively.
YAHOO! KOREA. During August 1997, the Company signed a joint venture agreement
with SOFTBANK and other SOFTBANK affiliate companies whereby Yahoo! Korea was
formed to develop and operate a Korean version of the Yahoo! Internet Guide,
develop related Korean online navigational services, and conduct other related
business. The parties have invested a total of $999,000 in proportion to their
respective equity interests. The Company has a majority share of approximately
60% in the joint venture, and therefore, has consolidated the financial results,
which were insignificant for the year ended December 31, 1997.
24
<PAGE>
YAHOO! MARKETPLACE. On August 26, 1996, the Company entered into agreements with
Visa International Service Association ("VISA") and another party (together, the
"Visa Group") to establish a limited liability company, Yahoo! Marketplace
L.L.C., to develop and operate a navigational service focused on information and
resources for the purchase of consumer products and services over the Internet.
As of December 31, 1996, the parties had invested a total of $1,000,000. At
December 31, 1996, the Company owned approximately 55% of the equity interest in
Yahoo! Marketplace. Yahoo! Marketplace incurred start-up losses of $246,000 in
1997 and $637,000 in 1996. In connection with this agreement, the Company issued
to the Visa Group for a purchase price of $50,000, a warrant to purchase
1,050,000 shares of the Company's Common Stock at an exercise price of $4.17 per
share, which warrant was exercisable during a two year period commencing in
March 1997. In April 1997, the Visa Group net exercised the warrant. During July
1997, prior to the completion of significant business activities and public
launch of the property, the Company and VISA entered into an agreement under
which the Visa Group released the Company from certain obligations and claims.
In connection with this agreement, the Company issued 1,398,962 shares of Yahoo!
Common Stock to the Visa Group, for which the Company recorded a one-time,
non-cash, pre-tax charge of $21,245,000 in the second quarter ended June 30,
1997.
NOTE 6 SHAREHOLDERS' EQUITY
COMMON STOCK. On April 11, 1996, the Company completed its initial public
offering of 8,970,000 shares of its Common Stock. Net proceeds to the Company
aggregated approximately $35,106,000. As of the closing date of the offering,
all of the Convertible Preferred Stock outstanding was converted into an
aggregate of 38,514,216 shares of Common Stock. The Company has the right to
repurchase, at the original issue price, a declining percentage of certain of
the common shares issued to employees under restricted stock agreements. The
Company's repurchase right lapses over four years based on the length of the
employees' continual employment with the Company. At December 31, 1997,
6,250,000 shares of Common Stock were subject to repurchase by the Company.
STOCK OPTION PLANS. Pursuant to the consummation of the Agreement and Plan of
Merger with Yoyodyne Entertainment, Inc., the Company assumed the 1996 Yoyodyne
Stock Option Plan (the "Yoyodyne Plan"). As of December 31, 1997, the Company
had five stock-based compensation plans which are described below. The Company
applies APB Opinion 25 and related interpretations in accounting for its plans
and complies with the disclosure provisions of SFAS 123.
The 1995 Stock Plan (the "Stock Plan"), the 1995 Four11 Stock Option
Plan (the "Four11 Plan"), and the Yoyodyne Plan allow for the issuance of
incentive stock options, non-qualified stock options and stock purchase rights
to purchase a maximum of 39,686,529 shares of the Company's Common Stock. Under
the Stock Plan, the Four11 Plan, and the Yoyodyne Plan, incentive stock options
may be granted to employees, directors, and officers of the Company and
non-qualified stock options and stock purchase rights may be granted to
consultants, employees, directors, and officers of the Company. Options granted
under the Stock Plan, the Four11 Plan, and the Yoyodyne Plan are for periods not
to exceed ten years, and must be issued at prices not less than 100% and 85%,
for incentive and nonqualified stock options, respectively, of the fair market
value of the stock on the date of grant as determined by the Board of Directors.
Options granted to shareholders who own greater than 10% of the outstanding
stock are for periods not to exceed five years and must be issued at prices not
less than 110% of the fair market value of the stock on the date of grant as
determined by the Board of Directors. Options granted under the Stock Plan and
the Four11 Plan generally vest 25% after the first year of service and ratably
each month over the remaining thirty-six month period. Options granted under the
Yoyodyne Plan have various vesting periods which do not exceed thirty-six
months. Options issued under the Four11 Plan may be exercised prior to vesting
and are subject to repurchase in the event of a voluntary termination, at the
original purchase price. At December 31, 1997, 61,498 shares were subject to
repurchase under the provisions of the Four11 Plan.
The 1996 Directors' Stock Option Plan (the "Directors' Plan") provides
for the issuance of up to 600,000 non-statutory stock options to non-employee
directors of the Company. Each person who becomes a non-employee director of the
Company after the date of the Company's initial public offering will
automatically be granted a non-statutory option (the "First Option") to purchase
120,000 shares of
25
<PAGE>
Common Stock upon the date on which such person first becomes a director.
Thereafter, each director of the Company will be granted an annual option
(the "Annual Option") to purchase 15,000 shares of Common Stock. Options
under the Directors' Plan will be granted at the fair market value of the
stock on the date of grant as determined by the Board of Directors and will
vest in equal monthly installments over four years, in the case of the First
Option, or at the end of four years in the case of the Annual Option.
Activity under the Company's stock option plans is summarized as follows:
<TABLE>
<CAPTION>
Available Options Weighted Average
for Grant Outstanding Price per Share
--------------- -------------- -------------------
<S> <C> <C> <C>
Shares reserved 15,660,664
Options granted (10,521,252) 10,521,252 $ 0.01
Options exercised (568,200) 0.01
--------------- -------------- -------------------
Balance at December 31, 1995 5,139,412 9,953,052 0.01
Additional shares reserved 9,625,865
Options granted (11,414,770) 11,414,770 3.36
Options canceled 922,656 (922,656) 3.32
Options exercised (1,489,132) 0.01
--------------- -------------- -------------------
Balance at December 31, 1996 4,273,163 18,956,034 1.87
Additional shares reserved 15,000,000
Options granted (9,220,820) 9,220,820 18.75
Options canceled 177,826 (177,826) 4.59
Options exercised (4,834,912) 1.05
--------------- -------------- -------------------
Balance at December 31, 1997 10,230,169 23,164,116 $ 8.70
--------------- -------------- -------------------
--------------- -------------- -------------------
</TABLE>
26
<PAGE>
The following table summarizes information about fixed stock options
outstanding as of December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- -------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life in Price Exercisable Price
Years
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
less than $0.01 4,993,540 7.6 $ 0.01 1,488,628 $ 0.01
$0.07 - $0.11 722,704 8.0 $ 0.07 197,122 $ 0.08
$0.33 - $0.50 1,909,514 8.2 $ 0.40 569,436 $ 0.39
$1.17 - $2.00 626,848 8.2 $ 1.71 155,506 $ 1.78
$2.33 - $3.33 2,458,080 8.2 $ 2.78 652,312 $ 2.59
$5.67 - $6.96 4,303,868 8.8 $ 6.23 884,578 $ 6.18
$8.88 - $13.25 2,671,502 9.4 $ 11.31 -- $ --
$16.17 - $21.57 1,256,750 9.7 $ 19.41 -- $ --
$23.00 - $31.16 4,221,310 9.9 $ 26.38 3,674 $ 31.16
---------- ---------
23,164,116 3,951,256
---------- ---------
---------- ---------
</TABLE>
Options to purchase 1,660,080 and 202,500 shares were vested at
December 31, 1996 and 1995, respectively.
During the period from January 1996 through April 1996, the Company
granted options to purchase an aggregate of 6,901,404 shares of Common Stock at
exercise prices ranging from $0.07 to $3.33 per share. Based in part on an
independent appraisal obtained by the Company's Board of Directors, $625,000 of
compensation expense relating to certain options is to be recognized over the
four-year vesting periods of the options, of which, $156,000 was recognized in
both 1997 and 1996. During 1995, the Company granted options to purchase 883,200
shares of Common Stock to consultants in exchange for services at an exercise
price of $0.01 per share. The Company recorded expense totaling $75,000 related
to these options based on the estimated fair value of the services received.
Pursuant to the acquisition of Four11, the Company will record $2,168,000 of
compensation expense related to certain stock options issued below fair market
value between August 1996 and September 1997, of which the Company recorded
$1,059,000 and $8,000 during the years ended December 31, 1997 and 1996,
respectively. The remaining $1,101,000 will be recognized over the remainder of
the four-year vesting periods of the options.
EMPLOYEE STOCK PURCHASE PLAN. Effective March 6, 1996, the Company's Board of
Directors adopted the Employee Stock Purchase Plan (the "Purchase Plan"), which
provides for the issuance of a maximum of 900,000 shares of Common Stock.
Eligible employees can have up to 15% of their earnings withheld, up to certain
maximums, to be used to purchase shares of the Company's Common Stock on every
December 31st and June 30th. The price of the Common Stock purchased under the
Purchase Plan will be equal to 85% of the lower of the fair market value of the
Common Stock on the commencement date of each six month offering period or the
specified purchase date. During 1997, 268,430 shares were purchased at prices of
$3.69 to $9.65 per share. There were no shares issued under the Purchase Plan
during 1996. At December 31, 1997, 631,570 shares were available under the
Purchase Plan for future issuance.
STOCK COMPENSATION. The Company accounts for stock-based compensation in
accordance with the provisions of APB 25. Had compensation expense been
determined based on the fair value at the grant dates, as prescribed in SFAS
123, the Company's net loss would have been $31,918,000, $7,273,000, and
$1,018,000, and basic and diluted loss per share would have been $0.37, $0.09,
and $0.02 for the years ended December 31, 1997, 1996, and 1995, respectively.
Prior to the Company's initial public offering, the fair value of each option
grant was determined on the date of grant using the minimum value method.
27
<PAGE>
Subsequent to the offering, the fair value was determined using the
Black-Scholes model. The weighted average fair market value of an option
granted during 1997, 1996, and 1995 was $8.67, $1.58, and $0.01,
respectively. Except for the volatility assumption which was only used under
the Black-Scholes model, the following range of assumptions was used to
perform the calculations: expected life of 36 months in 1997 and 30 months in
1996 and 1995; interest rate ranges of 5.6% to 6.6% during 1997, 5.1% to 6.5%
during 1996, and 5.3% to 6.0% during 1995; volatility of 59% in 1997, 53% in
1996, and it was not applicable in 1995; and no dividend yield for the three
years ended December 31, 1997. Because additional stock options are expected
to be granted each year, the above pro forma disclosures are not
representative of pro forma effects on reported financial results for future
years.
NOTE 7 INCOME TAXES
No provision for federal and state income taxes has been recorded as the Company
has incurred net operating losses through December 31, 1997. The following table
sets forth the primary components of deferred tax assets:
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------
1997 1996 1995
--------------- -------------- ---------------
<S> <C> <C> <C>
Net operating loss and credit carryforwards $ 25,512,000 $ 4,303,000 $ 144,000
Nondeductible reserves and expenses 3,667,000 1,382,000 134,000
Other - 86,000 -
--------------- -------------- ---------------
Gross deferred tax assets 29,179,000 5,771,000 278,000
Valuation allowance (29,179,000) (5,771,000) (278,000)
--------------- -------------- ---------------
$ - $ - $ -
--------------- -------------- ---------------
--------------- -------------- ---------------
</TABLE>
At December 31, 1997, 1996, and 1995, the Company fully reserved its
deferred tax assets. The Company believes sufficient uncertainty exists
regarding the realizability of the deferred tax assets such that a full
valuation allowance is required. Deferred tax assets and related valuation
allowances of approximately $18,600,000 relate to certain U.S. operating loss
carryforwards resulting from the exercise of employee stock options, the tax
benefit of which, when recognized, will be accounted for as a credit to
additional paid-in capital rather than a reduction of the income tax provision.
Additionally, deferred tax assets of $900,000 relate to operating loss
carryforwards in various foreign jurisdictions. Certain of these carryforwards
will expire if not utilized. At December 31, 1997, the Company had approximately
$58,300,000 of federal net operating loss carryforwards for tax reporting
purposes which may offset future taxable income; such carryforwards will expire
beginning in 2010. Some of these loss carryforwards are subject to limitation on
utilization in future years due to a change in ownership. Additionally, the
Company has approximately $26,200,000 of California net operating loss
carryforwards for tax reporting purposes which will expire beginning in 2003.
UNAUDITED INTERIM INCOME TAXES. Based on the current estimate of operating
results and certain other factors, the Company expects its effective tax rate,
before the effect of the non-deductible charges of $15,000,000 for acquired
in-process research and development and amortization of intangible assets, will
approximate 27% for fiscal year 1998 (using a 25% tax rate for the fourth
quarter of 1998). Before the effect of these charges, the tax rate for the nine
months ended September 30, 1998 was approximately 28%. This rate is lower than
the statutory U.S. federal rate due primarily to the utilization of net
operating loss carryforwards, the utilization of research and development
credits, and the change in the valuation allowance on deferred tax assets. The
Company continues to provide a valuation allowance on certain deferred tax
assets which relate principally to foreign and acquired domestic net operating
loss carryforwards. When realized, the tax benefit of the deferred tax assets
attributable to the exercise of employee stock options will be accounted for as
a credit to additional paid-in capital rather than a reduction of the income tax
provision. As of September 30, 1998, $8,675,000 has been recognized as a credit
to additional paid-in capital.
28
<PAGE>
NOTE 8 COMMITMENTS AND CONTINGENCIES
OPERATING LEASES. During September 1997, the Company entered into a non-
cancelable operating sublease agreement which will provide the Company with
additional office space at its existing Santa Clara, California location.
Additionally during 1997, the Company entered into various other non-cancelable
operating lease agreements for its sales offices throughout the U.S. and its
international subsidiaries. Future minimum lease payments under non-cancelable
operating leases with initial terms of one year or more are $1,809,000 in 1998,
$2,328,000 in 1999, $2,370,000 in 2000, $2,261,000 in 2001, $2,252,000 in 2002,
and $2,584,000 thereafter. Total minimum rental payments aggregate $13,604,000.
Rent expense under operating leases totaled $1,361,000, $534,000, and $47,000
during 1997, 1996, and 1995, respectively.
NETSCAPE GUIDE BY YAHOO!. During March 1997, the Company entered into certain
agreements with Netscape Communications Corporation ("Netscape") under which the
Company has developed and operates an Internet information navigation service
called "Netscape Guide by Yahoo!" (the "Guide"). The Co-Marketing agreement
provides that revenue from advertising on the Guide, which is managed by the
Company, is to be shared between the Company and Netscape. Under the terms of
the Trademark License agreement, the Company made a one-time non-refundable
trademark license fee payment of $5,000,000 in March 1997 which is being
amortized over the initial two-year term, which commenced in May 1997. Under the
terms of the Co-Marketing agreement as amended in June 1997, the Company also
provided Netscape with a minimum of up to $4,660,000 in guarantees against
shared advertising revenues in the first year of the agreement, subject in the
first year to a minimum level of gross revenue being met, and up to a minimum of
$15,000,000 in the second year of the agreement, subject in the second year to
certain minimum levels of impressions being reached on the Guide. Actual
payments will relate directly to the overall revenue and impressions recognized
from the Guide. As of December 31, 1997, $1,160,000 of shared advertising
revenues had been paid to Netscape under this agreement.
NETSCAPE PREMIER PROVIDER. Also during March 1997, the Company entered into an
agreement with Netscape whereby it was designated as one of four "Premier
Providers" of domestic navigational services within the Netscape Web site. Under
the terms of the agreement, the Company is required to make minimum payments of
$3,200,000 in cash and is obligated to provide $1,500,000 in the Company's
advertising services in return for certain minimum guaranteed exposures over the
course of the one-year term of the agreement, which commenced in May 1997. The
minimum payments are amortized over the term of the agreement. As of December
31, 1997, the Company had paid $2,456,000 in cash under the terms of the
agreement. Expenses incurred to date as of December 31, 1997 under the agreement
were approximately $4,600,000. To the extent that the minimum guaranteed
exposures are exceeded, the Company is obligated to remit to Netscape additional
payments. See Note 10.
During June 1997, the Company entered into certain agreements with
Netscape whereby it was designated as a Premier Provider of international search
and navigational guide services for the Netscape Net Search program. Under the
terms of the agreements, the Company will provide services in 12 countries,
including Australia, Denmark, France, Germany, Italy, Japan, Korea, The
Netherlands, Portugal, Spain, Sweden, and the United Kingdom. Under the terms of
the agreements, the Company made a cash payment of $2,900,000 in July 1997 and
is obligated to provide $100,000 in the Company's advertising services in return
for certain minimum guaranteed exposures over the course of the one-year term of
the agreements, which commenced in July 1997. The Company amortizes the total
cost of these agreements over their one-year term.
NOTE 9 LITIGATION
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
29
<PAGE>
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 is subject
to other legal proceedings and claims in the ordinary course of business,
including claims of alleged infringement of trademarks and other intellectual
property rights. The Company is not currently aware of any 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.
NOTE 10 SUBSEQUENT EVENTS (UNAUDITED)
INVESTMENTS. The Company accounts for investments in accordance with SFAS No.
115, "Accounting for Certain Investments in Debt and Equity Securities." The
Company's marketable investments are classified as available-for-sale as of the
balance sheet date and are reported at fair value, with unrealized gains and
losses, net of tax, recorded in shareholders' equity. Realized gains or losses
and permanent declines in value, if any, on available-for-sale securities will
be reported in other income or expense, as incurred. As of September 30, 1998,
the Company recognized unrealized gains, net of income taxes, of $11,905,000.
The Company invests in equity instruments of privately-held,
information technology companies for business and strategic purposes. These
investments are included in other long-term assets and are accounted for under
the cost method. 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. During 1998, certain of these investments in privately-held
companies became marketable equity securities when the investees completed
initial public offerings. Such investments are recorded as long-term investments
in marketable equity securities.
RECENT ACCOUNTING PRONOUNCEMENTS. In June 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 130
("SFAS 130"), "Reporting Comprehensive Income," which was adopted by the Company
in the first quarter of fiscal 1998. SFAS 130 establishes standards for
reporting comprehensive income and its components in a financial statement.
Comprehensive income as defined includes all changes in equity (net assets)
during a period from non-owner sources. Examples of items to be included in
comprehensive income, which are excluded from net income, include foreign
currency translation adjustment and unrealized gains and losses on
available-for-sale securities. The components of comprehensive income, net of
tax, are as follows:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1998 1997
(restated)
<S> <C> <C>
Net income (loss) $ 7,065,000 ($23,579,000)
Unrealized gains on available-
for-sale securities, net of tax 11,905,000 -
Foreign currency translation
gains (losses) 113,000 (63,000)
------------ --------------
Comprehensive income (loss) $19,083,000 ($23,642,000)
------------ --------------
------------ --------------
</TABLE>
30
<PAGE>
Accumulated other comprehensive income consists of the unrealized gains
on available-for-sale securities, net of tax and the cumulative translation
adjustment, as presented on the accompanying supplementary consolidated balance
sheets.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 133 ("SFAS 133"), "Accounting for
Derivative Instruments and Hedging Activities." The Company is currently
determining the additional disclosures, if any, that may be required under this
pronouncement.
NETSCAPE GUIDE BY YAHOO!. On May 21, 1998, the Company and Netscape terminated
the Co-Marketing and Trademark License agreements effective July 1, 1998.
Pursuant to the termination of these agreements, Netscape agreed to forego
revenue sharing on the Guide for the three months prior to the termination date.
The Company entered into a new agreement with Netscape to include the Yahoo!
brand in the Netscape Distinguished Provider Program (a promotional program on
the Netscape website), which began on June 1, 1998, for which the Company was
provided a $1,584,000 credit as part of the termination agreement. Unamortized
trademark license costs in excess of the advertising credit were charged to
operations in the quarter ended June 30, 1998. As users are delivered to Yahoo!
from the Netscape website, the advertising credit is amortized and charged to
operations.
ACQUISITION OF VIAWEB INC. On June 10, 1998, the Company completed the
acquisition of all outstanding shares of Viaweb, a provider of software and
services for hosting online stores, through the issuance of 787,182 shares of
Yahoo! Common Stock. All outstanding options to purchase Viaweb common stock
were converted into options to purchase 122,252 shares of Yahoo! Common Stock.
The acquisition was accounted for as a purchase in accordance with APB Opinion
No. 16. Under the purchase method of accounting, the purchase price is allocated
to the assets acquired and liabilities assumed based on their estimated fair
values at the date of the acquisition. Results of operations for Viaweb have
been included with those of the Company for periods subsequent to the date of
acquisition.
The total purchase price of the acquisition was $48,559,000 including
acquisition expenses of $1,750,000. The purchase price was allocated to the
assets acquired and liabilities assumed based on their estimated fair values as
follows:
<TABLE>
<CAPTION>
<S> <C>
In-process research and development $15,000,000
Purchased technology 15,000,000
Intangible assets 24,332,000
Deferred tax liability (6,000,000)
Tangible assets acquired 571,000
Liabilities assumed (344,000)
-------------
$48,559,000
-------------
-------------
</TABLE>
As a result of discussions with the Staff, the Company has adjusted
the allocation of the purchase price originally reported. Among the factors
considered in discussions with the Staff in determining the amount of the
allocation of the purchase price to in-process research and development were
various factors such as estimating the stage of development of each
in-process research and development project at the date of acquisition,
estimating cash flows resulting from the expected revenues generated from
such projects, and discounting the net cash flows, in addition to other
assumptions. The remaining identified intangibles, including the value of
purchased technology and other intangibles will be amortized on a
straight-line basis over three and seven years, respectively. Amortization
expense of purchased technology and other intangible assets was $1,250,000
and $869,000, respectively, during the quarter ended September 30, 1998 and
was $1,667,000 and $1,159,000, respectively, for the nine month period then
ended. A deferred tax liability has been recognized for the difference
between the assigned values for book purposes and the tax bases of assets in
accordance with the provisions of Statement of Financial Accounting Standard
No. 109.
In addition, other factors were considered in discussions with the
Staff in determining the value assigned to purchased in-process technology
such as research projects in areas supporting the on-line store technology
(including significant enhancement to the ability of the
product to
31
<PAGE>
support multiple users and multiple servers), developing functionality to
support the ability to process credit card orders, and enhancing the
product's user interface developing functionality that would allow the
product to be used outside of the United States.
If none of these projects is successfully developed, the Company's
sales and profitability may be adversely affected in future periods.
Additionally, the failure of any particular individual project in-process could
impair the value of other intangible assets acquired. The Company expects to
begin to benefit from the purchased in-process technology in late 1998.
ACQUISITION OF WEBCAL CORPORATION. On July 17, 1998, the Company completed
the acquisition of WebCal Corporation ("WebCal"), a privately-held developer
and marketer of Web-based calendaring and scheduling products, and publisher
of EventCal, a comprehensive database of world-wide public events. Under the
terms of the acquisition, which was accounted for as a pooling of interests,
the Company exchanged 270,954 shares of Yahoo! Common Stock for all of
WebCal's outstanding shares. The historical operations of WebCal are not
material to the Company's financial position or results of operations,
therefore, prior period financial statements have not been restated for this
acquisition. WebCal's accumulated deficit on July 17, 1998 was $1,067,000.
STOCK SPLIT. During July 1998, the Company's Board of Directors approved a
two-for-one Common Stock split. Shareholders of record on July 17, 1998 (the
record date) received one additional share for every share held on that date.
All share numbers in the supplementary consolidated financial statements and
notes thereto for all periods presented have been adjusted to reflect the
two-for-one split.
PRIVATE PLACEMENT. During July 1998, the Company entered into an agreement for a
private placement of Common Stock to SOFTBANK Holdings, Inc., a 29% shareholder
of the Company at June 30, 1998. On July 14, 1998, the Company received proceeds
of $250,000,000 in exchange for 2,726,880 newly issued shares of Yahoo! Common
Stock. SOFTBANK's total ownership at September 30, 1998 is approximately 30%.
The shares purchased by SOFTBANK are subject to a pre-existing agreement,
entered into in 1996, that prohibits SOFTBANK from purchasing additional shares
of the Company's capital stock if such purchase would result in SOFTBANK owning
more than 35% of the Company's capital stock (assuming the exercise of all
outstanding options and warrants to purchase capital stock).
ACQUISITION OF YOYODYNE ENTERTAINMENT, INC. On October 20, 1998, the Company
acquired Yoyodyne Entertainment, Inc., a privately-held, direct marketing
services company. Under the terms of the acquisition, which will be accounted
for as a pooling of interests, the Company exchanged 280,622 shares of Yahoo!
Common Stock and options and warrants to purchase Yahoo! Common Stock for all of
Yoyodyne's outstanding shares, options, and warrants. These supplementary
consolidated financial statements do not include a one-time charge of
approximately $2,000,000 relating to expenses incurred with the transaction. The
costs consist of broker fees, legal and accounting fees, and certain other
expenses directly related to the acquisition. These costs will be recorded as
expenses in the quarter ending December 31, 1998.
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