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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
COMMISSION FILE NUMBER 0-28018
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YAHOO! INC.
(Exact name of Registrant as specified in its charter)
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<S> <C>
CALIFORNIA 77-0398689
(State or other (I.R.S. Employer
jurisdiction of Identification
incorporation or No.)
organization)
</TABLE>
3420 CENTRAL EXPRESSWAY
SANTA CLARA, CALIFORNIA 95051
(Address of principal executive offices)
Registrant's telephone number, including area code: (408) 731-3300
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Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.00017 PAR VALUE
(Title of Class)
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
As of January 31, 1999, the aggregate market value of voting stock held by
non-affiliates of the Registrant, based upon the closing sales price for the
Registrant's Common Stock, as reported in the NASDAQ National Market System, was
$15,415,530,000. Shares of Common Stock held by each officer and director and by
each person who owns 5% or more of the outstanding Common Stock have been
excluded in that such persons may be deemed to be affiliates. This determination
of affiliate status is not necessarily a conclusive determination for any other
purpose.
The number of shares of the Registrant's Common Stock outstanding as of
January 31, 1999 was 200,510,944.
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DOCUMENTS INCORPORATED BY REFERENCE
The following documents (or parts thereof) are incorporated by reference
into the following parts of this Form 10-K:
(1) Proxy Statement for the 1999 Annual Meeting of Shareholders--Items
10, 11, 12 and 13.
The Registrant hereby amends Items 6, 7, 8 and 14 of its Annual Report on
Form 10-K filed on February 26, 1999 as follows:
ITEM 6. SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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<CAPTION>
YEAR ENDED DECEMBER 31,
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1998 1997 1996 1995
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<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net revenues...................................................... $ 203,270 $ 70,450 $ 21,490 $ 1,620
Gross profit...................................................... 176,528 59,565 16,768 1,339
Total operating expenses.......................................... 147,760 90,347 27,702 2,428
Net income (loss)................................................. 25,588(a) (25,520)(b) (6,427) (1,016)
Net income (loss) per share--basic*............................... 0.14 (0.15) (0.04) (0.01)
Net income (loss) per share--diluted*............................. $ 0.11(a) $ (0.15)(b) $ (0.04) $ (0.01)
Shares used in per share calculation--basic*...................... 184,060 174,672 157,300 109,468
Shares used in per share calculation--diluted*.................... 224,100 174,672 157,300 109,468
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------
1998 1997 1996 1995
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<S> <C> <C> <C> <C>
BALANCE SHEETS DATA:
Cash, cash equivalents, and short and long-term investments in
marketable debt securities........................................ $ 482,426 $ 108,045 $ 106,695 $ 6,167
Working capital..................................................... 387,256 84,050 92,790 5,620
Total assets........................................................ 621,884 143,512 116,205 7,489
Shareholders' equity................................................ $ 536,210 $ 118,358 $ 105,916 $ 5,975
</TABLE>
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Note: The selected financial data for the four years ended December 31, 1998 has
been restated to reflect the acquisition of Yoyodyne Entertainment, Inc.
which was accounted for as a pooling of interests.
* Reflects the two-for-one stock splits effective August 1998 and February
1999.
(a) Net income and net income per share include non-recurring charges of $19.4
million incurred in connection with the June 1998 acquisition of Viaweb
Inc., the October 1998 acquisition of Yoyodyne Entertainment, Inc., and the
December 1998 acquisition of HyperParallel, Inc., and amortization of $4.9
million on intangible assets.
(b) Net loss and net loss per share include non-recurring charges of $21.2
million related to the Yahoo! Marketplace restructuring and $3.9 million
incurred in connection with the October 1997 acquisition of Four11
Corporation.
ITEM 7. 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 ITEM 1 OF THIS ANNUAL REPORT ON FORM 10-K.
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OVERVIEW
Yahoo! Inc. ("Yahoo!" or the "Company") is a global Internet media company
that offers a branded network of comprehensive information, communication, and
shopping services to millions of users daily. As the first online navigational
guide to the World Wide Web (the "Web"), www.yahoo.com is a leading guide in
terms of traffic, advertising, household and business user reach, and is one of
the most recognized brands associated with the Internet. 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 October 20, 1997, the Company completed the acquisition of Four11
Corporation ("Four11"), 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 6,022,880 shares of Yahoo!
Common Stock for all of Four11's outstanding shares and assumed 593,344 options
and warrants to purchase Yahoo! Common Stock. During the quarter ended December
31, 1997, the Company recorded a one-time charge of $3.9 million 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 consolidated financial statements for the three years
ended December 31, 1998 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.
On June 10, 1998, the Company completed the acquisition of all outstanding
shares of Viaweb Inc. ("Viaweb"), a provider of software and services for
hosting online stores, through the issuance of 1,574,364 shares of Yahoo! Common
Stock. All outstanding options to purchase Viaweb common stock were converted
into options to purchase 244,504 shares of Yahoo! Common Stock. The acquisition
was accounted for as a purchase in accordance with the provisions of Accounting
Principles Board Opinion ("APB") 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 $48.6 million including
acquisition expenses of $1.8 million. Of the purchase price, $15.0 million 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
determined by the Company and pursuant to discussions with the Staff of the
Securities and Exchange Commission (the "Staff").
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 $2.9 million and $2.0 million,
respectively, for the year ended December 31, 1998. 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 online 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 by 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
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periods. Additionally, the failure of any particular individual project in
process could impair the value of other intangible assets acquired. The Company
began to benefit from the purchased in-process technology in late 1998.
Yahoo! is continuing the development efforts associated with online store
technology, credit card processing and to a lesser extent international
functionality. The development efforts with respect to the online store
technology and credit card processing are on schedule with Yahoo!'s original
assumptions with various features having been introduced as of December 31,
1998. Given the complexities of completing the international functionality,
Yahoo! continues to make progress in the development of these features and now
expects to be substantially complete by the end of June 1999.
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 541,908
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.
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 was accounted for as a pooling of interests, the
Company exchanged 561,244 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 consolidated financial statements for the three years
ended December 31, 1998 and the accompanying notes reflect the Company's
financial position and the results of operations as if Yoyodyne was a
wholly-owned subsidiary of the Company since inception. During October 1998, the
Company recorded a one-time charge of $2.1 million for acquisition-related
costs. These costs consisted of broker fees, legal and accounting fees, and
certain other expenses directly related to the acquisition.
On December 17, 1998, the Company completed the acquisition of all of the
outstanding shares of HyperParallel, Inc. ("HyperParallel"), a company
specializing in data analysis, through the issuance of 74,856 shares of Yahoo!
Common Stock and approximately $700,000 of cash totaling $8.1 million including
acquisition costs. The acquisition was accounted for as a purchase in accordance
with APB 16. Under the purchase method of accounting, the purchase price was
allocated to the assets acquired and liabilities assumed based on their
estimated fair values at the date of the acquisition. Results of operations for
HyperParallel have been included with those of the Company for periods
subsequent to the acquisition.
Approximately $2.3 million of the total purchase price was allocated to
in-process research and development. This amount was developed by estimating the
stage of development of each in-process research and development project at the
date of the acquisition, estimating incremental cash flows generated from such
projects, and discounting the net cash flows back to their present value using a
discount rate of 35%, which represents a premium to the Company's cost of
capital to take into account the uncertainty surrounding the successful
development of the purchased in-process technology. The projections were based
on management's estimates of market size and growth, expected trends in
advertising and technology, expected research and development and selling and
general administrative expenditures, and the expected timing of new product
introductions. Approximately $1.2 million of the total purchase price was
allocated to existing technology which is being amortized over 3 years. The
value of the existing technology was developed based on similar assumptions
using a discount rate of 25%. The projections used in developing the values
should not be considered an accurate predictor of future performance for several
reasons, including the consideration of many factors outside the control of the
Company. The remaining purchase price of approximately $4.6 million was
allocated to goodwill
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which is being amortized over 7 years. Tangible assets acquired and liabilities
assumed were not material to the Company's financial statements.
The value assigned to purchased in-process technology was determined by
identifying three research projects in-progress as of the acquisition date.
These three research projects in-progress focus on technologies surrounding
search tools. Two of the application oriented development projects were 70% and
20% complete as of the acquisition date. These projects are expected to be
completed in the first and fourth quarters, respectively, of 1999. The remaining
project relates to the next release of the current search tool which was
approximately 20% complete as of the acquisition date and is expected to be
completed in the fourth quarter of 1999. Future research and development costs
to be incurred on the individual in-process projects are not expected to be
material to Yahoo!'s financial position or results of operations. In addition,
if none of these projects were successfully developed, Yahoo!'s revenues and
profitability would not be materially adversely affected.
On January 28, 1999, the Company announced the signing of a definitive
agreement to acquire GeoCities, a publicly traded Internet company. Under the
terms of the acquisition, which will be accounted for as a pooling of interests,
the Company will exchange approximately 21,254,000 shares of Yahoo! Common Stock
for approximately 31,403,000 shares of GeoCities common stock. Additionally, the
Company will convert approximately 8,894,000 GeoCities stock options into
approximately 6,019,000 Yahoo! stock options. The acquisition is expected to be
completed in the second quarter of 1999 and is subject to certain conditions,
regulatory approval, and approval by GeoCities stockholders. The Company expects
to record a one-time charge in the second quarter of 1999 relating to expenses
incurred with this transaction. GeoCities' operating results for the years ended
December 31, 1998, 1997, and 1996 included revenues of approximately $18.4
million, $4.6 million, and $0.3 million, respectively, and net losses of
approximately $19.8 million, $8.9 million, and $3.0 million, respectively.
The Company's revenues are derived principally from the sale of banner and
sponsorship advertisements. The Company's standard rates for banner advertising
currently range from approximately $6.00 per thousand impressions for run of
network to approximately $90.00 per thousand impressions for highly targeted
audiences and properties. To date, the duration of the Company's banner
advertising commitments has ranged from one week to two years. Sponsorship
advertising contracts have longer terms (ranging from three months to two years)
than standard banner advertising contracts and also involve more integration
with Yahoo! services, such as the placement of buttons that 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 at the end of a period 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
revenue on sponsorship contracts from fees relating to the design, coordination,
and integration of customers' content and links into Yahoo! online media
properties. These development fees are recognized as revenue once the related
activities have been performed and the customer's Web links are available on
Yahoo! online media properties. A number of the Company's agreements provide
that Yahoo! receive revenues from electronic commerce transactions. Currently,
these revenues are recognized by the Company upon notification from the
advertiser of revenues earned by Yahoo!. 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, revenues from development fees, electronic commerce
transactions, and barter transactions have each been less than 10% of net
revenues.
4
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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 2,797,924 shares of Yahoo! Common
Stock to the Visa Group, for which the Company recorded a one-time, non-cash,
pre-tax charge of $21.2 million in the second quarter ended June 30, 1997.
RESULTS OF OPERATIONS
NET REVENUES. Net revenues were $203.3 million, $70.5 million , and $21.5
million for the years ended December 31, 1998, 1997, and 1996, respectively. The
increases from year to year are due primarily to the increasing number of
advertisers purchasing space on the Company's online media properties as well as
larger and longer-term purchases by certain advertisers. Approximately 3,800
customers advertised on the Company's online media properties during 1998 as
compared to approximately 2,600 and 700 in 1997 and 1996, respectively. No one
customer accounted for 10% or more of net revenues during the years ended
December 31, 1998 and 1997, and SOFTBANK and its related companies ("SOFTBANK")
accounted for 11% of net revenues during 1996. Advertising purchases by
SOFTBANK, a 30% shareholder of the Company at December 31, 1998, accounted for
approximately 5% and 4% of net revenues during the years ended December 31, 1998
and 1997, respectively. Contracted prices on these orders are comparable to
those given to other major customers of the Company. International revenues have
accounted for less than 10% of net revenues during the years ended December 31,
1998, 1997, and 1996. Barter revenues also represented less than 10% of net
revenues during those periods. 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
last three years, management does not believe that this level of revenue growth
will be sustained in future periods.
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 online media properties, Internet connection
charges, amortization of purchased technology, prize awards, equipment
depreciation, and compensation. Cost of revenues were $26.7 million for the year
ended December 31, 1998, or 13% of net revenues, as compared to $10.9 million,
or 15% of net revenues, and $4.7 million, or 22% of net revenues, for the years
ended December 31, 1997 and 1996, 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 the Company's online media properties, the
increased usage of these properties, and the amortization of technology
purchased in the Viaweb acquisition. The Company anticipates that its content
and Internet connection expenses will increase with the quantity and quality of
content available on 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 approximately 167 million page
views per day in December 1998 compared with an average of approximately 65
million page views per day in December 1997 and an average of approximately 20
million page views per day in December 1996. Yahoo! Japan, an unconsolidated
joint venture of the Company that began operations in April 1996, is included in
these page views figures and accounted for an average of approximately 13
million per day in December 1998, 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
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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 1999, however,
anticipated spending levels may vary as a result of acquisitions and future
business combinations.
SALES AND MARKETING. Sales and marketing expenses were $92.4 million for
the year ended December 31, 1998, or 45% of net revenues. For the years ended
December 31, 1997 and 1996, sales and marketing expenses were $45.8 million and
$16.2 million, or 65% and 75% of net revenues, respectively. Sales and marketing
expenses consist primarily of advertising and other marketing-related expenses
(which include distribution costs), compensation and employee-related expenses,
sales commissions, and travel costs. The year-to-year increases in absolute
dollars are 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 its direct
sales force and marketing personnel, expansion in the international subsidiaries
with the addition of subsidiaries in Germany, France, and the United Kingdom
during 1996, Sweden, Australia, Singapore, Korea, Denmark, and Norway during
1997, and Italy, Hong Kong, and Spain as well as Yahoo! guides in Spanish and
Mandarin Chinese languages during 1998, 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 through advertising
and distribution, continues to expand its international operations, and
continues to build its global direct sales organization. As a percentage of net
revenues, the Company currently anticipates that sales and marketing expenses
will be in the range of 40% to 43% for 1999, however, anticipated spending
levels may vary as a result of acquisitions and future business combinations.
PRODUCT DEVELOPMENT. Product development expenses were $22.7 million, or
11% of net revenues for the year ended December 31, 1998 compared to $12.1
million and $5.7 million, or 17% and 27% of net revenues for the years ended
December 31, 1997 and 1996, respectively. Product development expenses consist
primarily of employee compensation relating to developing and enhancing the
features and functionality of Yahoo! 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! 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 range from 10% to 12% during 1999, however,
anticipated spending levels may vary as a result of acquisitions and future
business combinations.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were $11.2
million, or 6% of net revenues for the year ended December 31, 1998 compared to
$7.4 million and $5.8 million, or 10% and 27% of net revenues for the years
ended December 31, 1997 and 1996, respectively. General and administrative
expenses consist primarily of compensation and fees for professional services,
and the year-to-year increases in absolute dollars are 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 5% during 1999, however, anticipated
spending levels may vary as a result of acquisitions and future business
combinations.
AMORTIZATION OF INTANGIBLES. As part of the Viaweb acquisition, the Company
recorded an intangible asset related to goodwill in the amount of $24.3 million.
This asset is being amortized over a seven-year period beginning in June 1998.
OTHER--NON-RECURRING COSTS. During June 1998, the Company completed the
acquisition of all outstanding shares of Viaweb through the issuance of
1,574,364 shares of Yahoo! Common Stock. All
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outstanding options to purchase Viaweb common stock were converted into options
to purchase 244,504 shares of Yahoo! Common Stock. During the quarter ended June
30, 1998, the Company recorded a non-recurring charge of $15.0 million for
in-process research and development that had not yet reached technological
feasibility and had no alternative future use. On October 20, 1998, the Company
completed the acquisition of all outstanding shares, options, and warrants of
Yoyodyne through the issuance of 561,244 shares of Yahoo! Common Stock and
options and warrants to purchase Yahoo! Common Stock. During the quarter ended
December 31, 1998, the Company recorded a one-time charge of approximately $2.1
million for expenses incurred with the transaction. During December 1998, the
Company completed the acquisition of all outstanding shares of HyperParallel
through the issuance of 74,856 shares of Yahoo! Common Stock and some cash.
During the quarter ended December 31, 1998, the Company recorded a non-recurring
charge of $2.3 million for in-process research and development that had not yet
reached technological feasibility and had no alternative future use.
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 2,797,924 shares of Yahoo! Common
Stock to the Visa Group, for which the Company recorded a one-time, non-cash,
pre-tax charge of $21.2 million 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 $3.9 million which consisted of investment banking
fees, legal and accounting fees, redundancy costs, and certain other expenses
directly related to the acquisition.
INVESTMENT INCOME, NET. Investment income, net of expense, was $14.6
million for the year ended December 31, 1998 compared to $4.5 million and $4.0
million for the years ended December 31, 1997 and 1996, respectively. The
increase from 1997 to 1998 is primarily attributable to a higher average
investment balance, principally due to proceeds of $250.0 million received by
the Company on July 14, 1998 from a private placement of shares to SOFTBANK.
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 $68,000 for the year
ended December 31, 1998 compared to $727,000 and $540,000 for the years ended
December 31, 1997 and 1996, respectively. The decrease from 1997 to 1998 is
primarily attributable to near break-even results in the European and Korean
joint ventures in the aggregate. 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. 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. Yahoo! recorded an income tax provision of $17.8 million in
1998. At December 31, 1998, the Company had net operating loss carryforwards and
research tax credit carryforwards, which if not utilized, will begin to expire
in 2003 through 2010. Deferred tax assets totaled $152.7 million of which
approximately $141 million relates to net operating loss carryforwards and tax
credit carryforwards from the exercise of stock options. When recognized, the
tax benefit of the loss and credit carryforwards is accounted for as a credit to
additional paid-in capital rather than as a reduction of income tax expense. The
Company has a valuation allowance of $135.1 million for deferred tax assets for
which realization is not more-likely-than-not. The Company's 1998 estimated
income tax rate was impacted during the year by the release of the prior year's
valuation allowance, nondeductible acquisition-related charges, and
pre-acquisition losses of companies acquired in 1998.
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NET INCOME (LOSS). The Company recorded net income of $25.6 million or
$0.11 per share diluted for the year ended December 31,1998 compared to net
losses of $25.5 million and $6.4 million, or $0.15, and $0.04 per share diluted
for the years ended December 31, 1997 and 1996, respectively. Excluding the
effect of the non-recurring charge of $19.4 million incurred in connection with
various 1998 acquisitions and the amortization of $2.9 million and $2.0 million
from the purchased technology and intangible assets acquired in the purchase of
Viaweb, the Company earned $49.9 million or $0.22 per share diluted for the year
ended December 31, 1998. Excluding the effect of the one-time, non-cash, pre-tax
charge of $21.2 million recorded for the restructuring of the Yahoo! Marketplace
agreements with the Visa Group and the one-time charge of $3.9 million recorded
for costs incurred for the acquisition of Four11, the Company's net loss was
$0.4 million or $0.00 per share diluted for the year ended December 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
Yahoo! invests excess cash 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 December 31, 1998, the Company had cash and cash
equivalents and investments in marketable debt securities totaling $482.4
million compared to $108.0 million at December 31, 1997. For the year ended
December 31, 1998, cash provided by operating activities was $110.3 million
compared to cash provided by operating activities of $0.5 million and cash used
for operating activities of $2.4 million for the years ended December 31, 1997
and 1996, respectively.
For the year ended December 31, 1998, cash provided by operating activities
of $110.3 million was primarily due to earnings, before non-recurring charges of
$17.3 million and depreciation and amortization of $10.2 million, increases in
deferred revenue (due to invoicing and cash receipts in excess of revenue) and
accrued liabilities, and tax benefits from stock option plans. The increase in
deferred revenue relates principally to overall significant growth in revenue
and increases in advanced payments on several new and relatively longer
sponsorship agreements. For the year ended December 31, 1997, cash provided by
operating activities of $0.5 million was primarily due to increases in accrued
liabilities and deferred revenue, substantially offset by increases in prepaid
expenses and other assets, which resulted primarily from a $5.0 million one-time
non-refundable license payment to Netscape under the Netscape Guide by Yahoo!
agreement and a $2.9 million payment to Netscape under the international
Netscape Net Search program agreement. For the year ended December 31, 1996,
cash used by operating activities was $2.4 million.
Cash used in investing activities was $329.9 million for the year ended
December 31, 1998. Purchases (net of sales and maturities) of investments in
marketable securities and other assets during the period were $312.8 million and
capital expenditures totaled $11.9 million. 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 $19.6
million for the year ended December 31, 1997. Sales and maturities (net of
purchases) of investments in marketable securities during the period were $27.9
million and capital expenditures totaled $6.7 million. Cash used in investing
activities was $76.2 million for the year ended December 31, 1996. Purchases
(net of sales and maturities) of investments in marketable securities and other
assets during the period were $72.0 million and capital expenditures totaled
$3.4 million.
For the year ended December 31, 1998, cash provided by financing activities
of $281.3 million was due primarily to the issuance of Common Stock to SOFTBANK
in the amount of $250.0 million during July 1998 and the issuance of Common
Stock pursuant to the exercise of stock options. For the year ended December 31,
1997, cash provided by financing activities of $9.6 million was due primarily to
the issuance of Common Stock pursuant to the exercise of stock options. For the
year ended December 31,
8
<PAGE>
1996, cash provided by financing activities of $107.2 million was primarily due
to the March 1996 issuance of 5.1 million shares of Convertible Series C
Preferred Stock for aggregate proceeds of $63.8 million, the April 1996 initial
public offering of 17.9 million shares of Common Stock for net proceeds of $35.1
million, and other issuances of Common Stock.
The Company currently has no material commitments other than those under
operating lease agreements. 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 to further enhance its liquidity
position. The sale of additional securities could result in additional dilution
to the Company's shareholders.
YEAR 2000 IMPLICATIONS
Many currently installed computer systems and software products are coded to
accept only two-digit entries in the date code field and cannot distinguish 21st
century dates from 20th century dates. These date code fields will need to
distinguish 21st century dates from 20th century dates and, as a result, many
companies' software and computer systems may need to be upgraded or replaced in
order to comply with such "Year 2000" requirements. The Company is in the
process of assessing the Year 2000 issue and expects to complete the program by
the spring of 1999. The Company has not incurred material costs to date in this
process, and currently does not believe that the cost of additional actions will
have a material effect on its results of operations or financial condition.
Although Yahoo! currently believes that its systems are Year 2000 compliant in
all material respects, the current systems and products may contain undetected
errors or defects with Year 2000 date functions that may result in material
costs. Although Yahoo! is not aware of any material operational issues or costs
associated with preparing its internal systems for the Year 2000, the Company
may experience serious unanticipated negative consequences (such as significant
downtime for one or more Yahoo! Media properties) or material costs caused by
undetected errors or defects in the technology used in its internal systems. In
addition, the Company utilizes third-party equipment, software and content,
including non-information technology systems ("non-IT systems"), such as its
security system, building equipment, and non-IT systems embedded
microcontrollers that may not be Year 2000 compliant. The Company is in the
process of developing a plan to assess whether these third parties are
adequately addressing the Year 2000 issue and whether any of its non-IT systems
have material Year 2000 compliance problems. Failure of such third-party
equipment, software, or content to operate properly with regard to the year 2000
and thereafter could require the Company to incur unanticipated expenses to
remedy any problems, which could have a material adverse effect on its business,
results of operations, and financial condition. Yahoo! is in the process of
fully developing a comprehensive contingency plan to address situations that may
result if it is unable to achieve Year 2000 readiness of its critical
operations. Finally, the Company is also subject to external forces that might
generally affect industry and commerce, such as utility or transportation
company Year 2000 compliance failures and related service interruptions.
Furthermore, the purchasing patterns of advertisers may be affected by Year 2000
issues as companies expend significant resources to correct their current
systems for Year 2000 compliance. The Company does not currently have any
information about the Year 2000 status of its advertising customers. However,
these expenditures may result in reduced funds available for Web advertising or
sponsorship of Web services, which could have a material adverse effect on the
Company's business, results of operations, and financial condition.
9
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to the impact of interest rate changes, foreign
currency fluctuations, and change in the market values of its investments.
INTEREST RATE RISK. The Company's exposure to market rate risk for changes
in interest rates relates primarily to the Company's investment portfolio. The
Company has not used derivative financial instruments in its investment
portfolio. The Company invests its excess cash in debt instruments of the U.S.
Government and its agencies, and in high-quality corporate issuers and, by
policy, limits the amount of credit exposure to any one issuer. The Company
protects and preserves its invested funds by limiting default, market and
reinvestment risk.
Investments in both fixed rate and floating rate interest earning
instruments carries a degree of interest rate risk. Fixed rate securities may
have their fair market value adversely impacted due to a rise in interest rates,
while floating rate securities may produce less income than expected if interest
rates fall. Due in part to these factors, the Company's future investment income
may fall short of expectations due to changes in interest rates or the Company
may suffer losses in principal if forced to sell securities which have declined
in market value due to changes in interest rates.
FOREIGN CURRENCY RISK. International revenues from the Company's foreign
subsidiaries were less than 10% of total revenues. International sales are made
mostly from the Company's foreign sales subsidiaries in their respective
countries and are typically denominated in the local currency of each country.
These subsidiaries also incur most of their expenses in the local currency.
Accordingly, all foreign subsidiaries use the local currency as their functional
currency.
The Company's international business is subject to risks typical of an
international business, including, but not limited to differing economic
conditions, changes in political climate, differing tax structures, other
regulations and restrictions, and foreign exchange rate volatility. Accordingly,
the Company's future results could be materially adversely impacted by changes
in these or other factors.
The Company's exposure to foreign exchange rate fluctuations arises in part
from intercompany accounts in which costs incurred in the United States are
charged to the Company's foreign sales subsidiaries. These intercompany accounts
are typically denominated in the functional currency of the foreign subsidiary
in order to centralize foreign exchange risk with the parent company in the
United States. The Company is also exposed to foreign exchange rate fluctuations
as the financial results of foreign subsidiaries are translated into U.S.
dollars in consolidation. As exchange rates vary, these results, when
translated, may vary from expectations and adversely impact overall expected
profitability. The effect of foreign exchange rate fluctuations on the Company
in 1998 was not material.
INVESTMENT RISK. 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 when ownership is less than 20%. 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, which are in the Internet industry, are subject to significant
fluctuations in fair market value due to the volatility of the stock market, and
are recorded as long-term investments.
10
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE
- ---------------------------------------------------------------------------------------- ---------
<S> <C> <C>
Consolidated Financial Statements:
Report of Independent Accountants..................................................... 12
Consolidated Balance Sheets at December 31, 1998 and 1997............................. 13
Consolidated Statements of Operations for each of the three years in the period ended
December 31, 1998................................................................... 14
Consolidated Statements of Shareholders' Equity for each of the three years in the
period ended December 31, 1998...................................................... 15
Consolidated Statements of Cash Flows for each of the three years in the period ended
December 31, 1998................................................................... 16
Notes to Consolidated Financial Statements............................................ 17
Financial Statement Schedules:
II--Valuation and Qualifying Accounts for each of the three years in the period
ended December 31, 1998........................................................... 34
All other schedules are omitted because they are not applicable or the required information is
shown in the Consolidated Financial Statements or Notes thereto.
Supplementary Financial Data:
Quarterly Financial Data (unaudited) for the two years ended December 31, 1998........ 35
</TABLE>
11
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Yahoo! Inc.
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Yahoo! Inc. and its subsidiaries at December 31, 1998 and 1997, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1998, 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 8, 1999, except as to the stock split described in Note 1
and Note 10, which are as of February 8, 1999
12
<PAGE>
YAHOO! INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................. $ 125,474 $ 63,571
Short-term investments in marketable securities....................... 308,025 27,772
Accounts receivable, net of allowance of $4,967 in 1998 and $2,598 in
1997................................................................ 24,831 11,163
Prepaid expenses and other current assets............................. 8,909 5,982
--------- ---------
Total current assets.............................................. 467,239 108,488
Long-term investments in marketable securities.......................... 90,266 16,702
Property and equipment, net............................................. 15,189 7,364
Other assets............................................................ 49,190 10,958
--------- ---------
Total assets...................................................... $ 621,884 $ 143,512
--------- ---------
--------- ---------
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Accounts payable...................................................... $ 6,302 $ 5,256
Accrued expenses and other current liabilities........................ 34,419 12,685
Deferred revenue...................................................... 38,301 5,085
Due to related parties................................................ 961 1,412
--------- ---------
Total current liabilities......................................... 79,983 24,438
--------- ---------
Deferred tax liability.................................................. 4,443 --
Commitments and contingencies (Note 9)
Minority interests in consolidated subsidiaries......................... 1,248 716
Shareholders' equity:
Preferred Stock, $0.001 par value; 10,000 shares authorized; none
issued or outstanding in 1998 and 1997.............................. -- --
Common Stock, $0.00017 par value; 900,000 shares authorized; 199,019
issued and outstanding in 1998 and 180,408 issued and outstanding in
1997................................................................ 23 20
Additional paid-in capital............................................ 522,997 151,744
Accumulated deficit................................................... (8,442) (32,963)
Accumulated other comprehensive income (loss)......................... 21,632 (443)
--------- ---------
Total shareholders' equity........................................ 536,210 118,358
--------- ---------
Total liabilities and shareholders' equity........................ $ 621,884 $ 143,512
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
13
<PAGE>
YAHOO! INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Net revenues.................................................. $ 203,270 $ 70,450 $ 21,490
Cost of revenues.............................................. 26,742 10,885 4,722
--------- --------- ---------
Gross profit.................................................. 176,528 59,565 16,768
--------- --------- ---------
Operating expenses:
Sales and marketing......................................... 92,380 45,778 16,168
Product development......................................... 22,742 12,082 5,700
General and administrative.................................. 11,210 7,392 5,834
Amortization of intangibles................................. 2,028 -- --
Other--non-recurring costs.................................. 19,400 25,095 --
--------- --------- ---------
Total operating expenses................................ 147,760 90,347 27,702
--------- --------- ---------
Income (loss) from operations................................. 28,768 (30,782) (10,934)
Investment income, net........................................ 14,579 4,535 3,967
Minority interests in operations of consolidated
subsidiaries................................................ 68 727 540
--------- --------- ---------
Income (loss) before income taxes............................. 43,415 (25,520) (6,427)
Provision for income taxes.................................... 17,827 -- --
--------- --------- ---------
Net income (loss)............................................. $ 25,588 $ (25,520) $ (6,427)
--------- --------- ---------
--------- --------- ---------
Net income (loss) per share--basic............................ $ 0.14 $ (0.15) $ (0.04)
--------- --------- ---------
--------- --------- ---------
Net income (loss) per share--diluted.......................... $ 0.11 $ (0.15) $ (0.04)
--------- --------- ---------
--------- --------- ---------
Shares used in per share calculation--basic................... 184,060 174,672 157,300
--------- --------- ---------
--------- --------- ---------
Shares used in per share calculation--diluted................. 224,100 174,672 157,300
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
14
<PAGE>
YAHOO! INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
---------------------- ---------------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT
--------- ----------- --------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995.................... 7,738 $ 8 65,693 $ 1 $ 6,982 $ (1,016)
Comprehensive income (loss):
Net loss...................................... -- -- -- -- -- (6,427)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment.....
Other comprehensive income (loss)............. -- -- -- -- -- --
Comprehensive income (loss)...............
Issuance of Convertible Series C Preferred
Stock......................................... 5,100 5 -- -- 63,745 --
Sale of Common Stock, net of issuance costs..... -- -- 17,940 3 35,103 --
Conversion of Convertible Preferred Stock to
Common Stock.................................. (12,838) (13) 77,028 13 -- --
Issuance of Common Stock, net of issuance
costs......................................... -- -- 1,887 -- 7,368 --
Issuance of Common Stock pursuant to exercise of
options....................................... -- -- 2,978 1 9 --
Compensation expense on option grants and
warrant issuances............................. -- -- -- -- 197 --
--------- ----- --------- --- ----------- ------------
Balance at December 31, 1996.................... -- -- 165,526 18 113,404 (7,443)
Comprehensive income (loss):
Net loss...................................... -- -- -- -- -- (25,520)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment.....
Other comprehensive income (loss)............. -- -- -- -- -- --
Comprehensive income (loss)...............
Issuance of Common Stock pursuant to exercise of
warrants...................................... -- -- 1,395 -- -- --
Issuance of Common Stock for acquisitions and
investments................................... -- -- 461 -- 6,400 --
Issuance of Common Stock pursuant to Visa Group
Agreement..................................... -- -- 2,798 1 21,049 --
Issuance of Common Stock for employee stock
plans and other............................... -- -- 10,228 1 7,515 --
Write-up of investment in Yahoo! Japan.......... -- -- -- -- 1,700 --
Compensation and other expense on option grants
and warrant issuances......................... -- -- -- -- 1,676 --
--------- ----- --------- --- ----------- ------------
Balance at December 31, 1997.................... -- -- 180,408 20 151,744 (32,963)
Comprehensive income (loss):
Net income.................................... -- -- -- -- -- 25,588
Other comprehensive income (loss), net of tax:
Net unrealized gains on securities..........
Foreign currency translation adjustment.....
Other comprehensive income (loss)............. -- -- -- -- -- --
Comprehensive income (loss)...............
Issuance of Common Stock pursuant to exercise of
warrants...................................... -- -- 191 -- 196 --
Issuance of Common Stock for acquisitions....... -- -- 2,289 -- 54,195 --
Sale of Common Stock, net of issuance costs..... -- -- 5,454 1 249,448 --
Issuance of Common Stock for employee stock
plans......................................... -- -- 10,677 2 31,032 --
Compensation expense on option grants........... -- -- -- -- 926 --
Tax benefits from stock options................. -- -- -- -- 35,456 --
Accumulated deficit from acquisition............ -- -- -- -- -- (1,067)
--------- ----- --------- --- ----------- ------------
Balance at December 31, 1998.................... -- $ -- 199,019 $ 23 $ 522,997 $ (8,442)
--------- ----- --------- --- ----------- ------------
--------- ----- --------- --- ----------- ------------
<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE COMPREHENSIVE
INCOME (LOSS) TOTAL INCOME (LOSS)
--------------- --------- --------------
<S> <C> <C> <C>
Balance at December 31, 1995.................... $ -- $ 5,975
Comprehensive income (loss):
Net loss...................................... -- (6,427) $ (6,427)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment..... (63)
--------------
Other comprehensive income (loss)............. (63) (63) (63)
--------------
Comprehensive income (loss)............... $ (6,490)
--------------
--------------
Issuance of Convertible Series C Preferred
Stock......................................... -- 63,750
Sale of Common Stock, net of issuance costs..... -- 35,106
Conversion of Convertible Preferred Stock to
Common Stock.................................. -- --
Issuance of Common Stock, net of issuance
costs......................................... -- 7,368
Issuance of Common Stock pursuant to exercise of
options....................................... -- 10
Compensation expense on option grants and
warrant issuances............................. -- 197
--------------- ---------
Balance at December 31, 1996.................... (63) 105,916
Comprehensive income (loss):
Net loss...................................... -- (25,520) $ (25,520)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment..... (380)
--------------
Other comprehensive income (loss)............. (380) (380) (380)
--------------
Comprehensive income (loss)............... $ (25,900)
--------------
--------------
Issuance of Common Stock pursuant to exercise of
warrants...................................... -- --
Issuance of Common Stock for acquisitions and
investments................................... -- 6,400
Issuance of Common Stock pursuant to Visa Group
Agreement..................................... -- 21,050
Issuance of Common Stock for employee stock
plans and other............................... -- 7,516
Write-up of investment in Yahoo! Japan.......... -- 1,700
Compensation and other expense on option grants
and warrant issuances......................... -- 1,676
--------------- ---------
Balance at December 31, 1997.................... (443) 118,358
Comprehensive income (loss):
Net income.................................... -- 25,588 $ 25,588
Other comprehensive income (loss), net of tax:
Net unrealized gains on securities.......... 21,787
Foreign currency translation adjustment..... 288
--------------
Other comprehensive income (loss)............. 22,075 22,075 22,075
--------------
Comprehensive income (loss)............... $ 47,663
--------------
--------------
Issuance of Common Stock pursuant to exercise of
warrants...................................... -- 196
Issuance of Common Stock for acquisitions....... -- 54,195
Sale of Common Stock, net of issuance costs..... -- 249,449
Issuance of Common Stock for employee stock
plans......................................... -- 31,034
Compensation expense on option grants........... -- 926
Tax benefits from stock options................. -- 35,456
Accumulated deficit from acquisition............ -- (1,067)
--------------- ---------
Balance at December 31, 1998.................... $ 21,632 $ 536,210
--------------- ---------
--------------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
15
<PAGE>
YAHOO! INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).......................................... $ 25,588 $ (25,520) $ (6,427)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization............................ 10,215 2,737 639
Tax benefits from stock options.......................... 17,827 -- --
Non-cash charges related to stock option grants and
warrant issuances...................................... 926 1,676 197
Minority interests in operations of consolidated
subsidiaries........................................... (68) (727) (540)
Purchased in-process research and development............ 17,300 -- --
Other non-cash charge.................................... -- 21,245 --
Changes in assets and liabilities:
Accounts receivable, net............................... (13,616) (5,963) (4,269)
Prepaid expenses....................................... 2,144 (6,110) (386)
Accounts payable....................................... 515 2,425 1,386
Accrued expenses and other current liabilities......... 16,688 7,404 4,393
Deferred revenue....................................... 33,210 2,983 1,665
Due to related parties................................. (451) 330 948
--------- --------- ---------
Net cash provided by (used in) operating activities........ 110,278 480 (2,394)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment...................... (11,911) (6,722) (3,442)
Cash acquired in acquisitions.............................. 199 -- --
Purchases of marketable securities......................... (471,135) (58,753) (115,247)
Proceeds from sales and maturities of marketable
securities............................................... 158,350 86,678 43,240
Other investments.......................................... (5,445) (1,649) (729)
--------- --------- ---------
Net cash provided by (used in) investing activities........ (329,942) 19,554 (76,178)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Common Stock, net................ 280,679 7,516 42,484
Proceeds from issuance of Convertible Preferred Stock...... -- -- 63,750
Proceeds from minority investors........................... 600 999 1,050
Other...................................................... -- 1,106 (128)
--------- --------- ---------
Net cash provided by financing activities.................. 281,279 9,621 107,156
--------- --------- ---------
Effect of exchange rate changes on cash and cash
equivalents................................................ 288 (380) (63)
--------- --------- ---------
Net change in cash and cash equivalents...................... 61,903 29,275 28,521
Cash and cash equivalents at beginning of year............... 63,571 34,296 5,775
--------- --------- ---------
Cash and cash equivalents at end of year..................... $ 125,474 $ 63,571 $ 34,296
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
16
<PAGE>
YAHOO! INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY. Yahoo! Inc. ("Yahoo!" or the "Company") is a global Internet
media company that offers a branded network of comprehensive information,
communication, and shopping services to millions of users daily. 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.
On October 20, 1998 and 1997, the Company consummated its acquisitions of
Yoyodyne Entertainment, Inc. ("Yoyodyne") and Four11 Corporation ("Four11"),
respectively, upon which Yoyodyne's and Four11's shareholders exchanged all of
their shares for shares of the Company's Common Stock in business combinations
that were accounted for as pooling of interests. The consolidated financial
statements for the three years ended December 31, 1998 and the accompanying
notes reflect the Company's financial position and the results of operations as
if Yoyodyne and Four11 were wholly-owned subsidiaries of the Company since
inception.
Components of the consolidated results of operations of Yahoo! and of Four11
and Yoyodyne prior to their acquisitions by Yahoo! are as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
NET REVENUES
Yahoo!....................................... $ 201,446 $ 65,460 $ 19,073
Four11....................................... -- 1,951 624
Yoyodyne..................................... 1,824 3,039 1,793
--------- --------- ---------
$ 203,270 $ 70,450 $ 21,490
--------- --------- ---------
--------- --------- ---------
NET INCOME (LOSS)
Yahoo!....................................... $ 30,216 $ (19,973) $ (2,334)
Four11....................................... -- (2,914) (1,951)
Yoyodyne..................................... (4,628) (2,633) (2,142)
--------- --------- ---------
$ 25,588 $ (25,520) $ (6,427)
--------- --------- ---------
--------- --------- ---------
</TABLE>
STOCK SPLITS. 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.
The shares were distributed on July 31, 1998 and the stock split was effective
on August 3, 1998. During January 1999, the Company's Board of Directors
approved a two-for-one Common Stock split. Shareholders of record on January 22,
1999 (the record date) received one additional share for every share held on
that date. The shares were distributed on February 5, 1999 and the stock split
was effective on February 8, 1999. All share numbers in these consolidated
financial statements and notes thereto for all periods presented have been
adjusted to reflect the two-for-one common stock splits.
PRINCIPLES OF CONSOLIDATION. The 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 that related to the
Company's subsidiaries, are shown separately in the consolidated balance sheets
and 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
17
<PAGE>
YAHOO! INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
majority owned and not otherwise controlled by the Company are accounted for
under the equity method.
RECLASSIFICATIONS. Certain prior years' balances have been reclassified to
conform with the current year's presentation.
REVENUE RECOGNITION. The Company's revenues are derived principally from
the sale of banner and sponsorship advertisements. The Company's standard rates
for banner advertising currently range from approximately $6.00 per thousand
impressions for run of network to approximately $90.00 per thousand impressions
for highly targeted audiences and properties. To date, the duration of the
Company's banner advertising commitments has ranged from one week to two years.
Sponsorship advertising contracts have longer terms (ranging from three months
to two years) than standard banner advertising contracts and also involve more
integration with Yahoo! services, such as the placement of buttons that 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 at the end of a period 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 revenue on sponsorship contracts from fees relating
to the design, coordination, and integration of customers' content and links
into Yahoo! online media properties. These development fees are recognized as
revenue once the related activities have been performed and the customer's Web
links are available on Yahoo! online media properties. A number of the Company's
agreements provide that Yahoo! receive revenues from electronic commerce
transactions. Currently, these revenues are recognized by the Company upon
notification from the advertiser of revenues earned by Yahoo!. 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, revenues from development fees,
electronic commerce transactions, and barter transactions have each been less
than 10% of net revenues.
No one customer accounted for 10% or more of net revenues during 1998 and
1997, and SOFTBANK and its related companies ("SOFTBANK"), a holder of
approximately 30% of the Company's Common Stock at December 31, 1998, accounted
for 11% of net revenues during 1996 (see Note 4).
Deferred revenue is primarily comprised of billings in excess of recognized
revenue relating to advertising contracts and payments received pursuant to
sponsorship advertising contracts 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. Material
software development costs subsequent to the establishment of technological
feasibility are capitalized. Based upon the Company's product development
process, technological feasibility is established upon completion of a working
model. Costs incurred by the
18
<PAGE>
YAHOO! INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 approximately $32.7 million, $10.9 million, and $4.2
million for 1998, 1997, and 1996, respectively.
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 1998, 1997 and 1996, the Company's
contributions amounted to $584,000, $263,000, and $81,000, respectively.
CASH AND 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.
The Company's marketable securities 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 December 31,
1998, the Company recorded net unrealized gains, net of income taxes, of $21.8
million.
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
when ownership is less than 20%. 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, which are in the
Internet industry, are subject to significant fluctuations in fair market value
due to the volatility of the stock market, and are recorded as long-term
investments.
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,
and short and long-term investments are managed by four 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
19
<PAGE>
YAHOO! INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
reserves for potential credit losses; historically, such losses have been within
management's expectations. At December 31, 1998 and 1997, no one customer
accounted for 10% or more of the accounts receivable balance.
DEPRECIATION AND AMORTIZATION. Property and equipment, including leasehold
improvements, are stated at cost and depreciated using the straight-line method
over the estimated useful lives of the assets, generally two to five years.
Goodwill and other intangible assets are included in other assets and are
carried at cost less accumulated amortization, which is being provided on a
straight-line basis over the economic lives of the respective assets, generally
three to seven years. The Company periodically evaluates the recoverability of
its long-lived assets based on expected undiscounted cash flows and recognizes
impairments, if any, based on expected discounted future cash flows.
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. A valuation allowance is provided for the
amount of deferred tax assets that, based on available evidence, are not
expected to be realized.
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 Statement of
Financial Accounting Standards ("SFAS') No. 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 international subsidiaries 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 of
exchange for the year for revenues, costs, and expenses. Translation gains
(losses), which are deferred and accumulated as a component of shareholders'
equity, were $288,000, ($380,000), and ($63,000) for 1998, 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, 1998, 1997,
and 1996. International assets were not significant at December 31, 1998, 1997,
or 1996.
BASIC AND DILUTED NET INCOME (LOSS) PER SHARE. Basic net income (loss) per
share is computed using the weighted average number of common shares outstanding
during the period. Diluted net income (loss) 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 convertible preferred stock (using the
if-converted method) and shares issuable upon the exercise of stock options and
warrants (using the treasury stock method). For 1998, common equivalent shares
primarily related to shares issuable upon the exercise of stock options and
approximated 40.0 million shares. Common equivalent shares in 1997 and 1996 were
excluded from the computation as their effect was anti-dilutive.
20
<PAGE>
YAHOO! INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
COMPREHENSIVE INCOME. In June 1997, the Financial Accounting Standards
Board ("FASB") issued 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 adjustments and unrealized gains and losses on
available-for-sale securities. Accumulated other comprehensive income, as
presented on the accompanying consolidated balance sheets, consists of the net
unrealized gains on available-for-sale securities, net of tax and the cumulative
translation adjustment.
RECENT ACCOUNTING PRONOUNCEMENTS. In June 1998, the FASB issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS 133
establishes methods of accounting for derivative financial instruments and
hedging activities related to those instruments as well as other hedging
activities, and is effective for fiscal years beginning after June 15, 1999. The
Company is currently determining the additional disclosures, if any, that may be
required under this pronouncement. In March 1998, the American Institute of
Certified Public Accountants issued Statement of Position 98-1 ("SOP 98-1"),
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." This standard requires companies to capitalize qualifying
computer software costs which are incurred during the application development
stage and amortize them over the software's estimated useful life. SOP 98-1 is
effective for fiscal years beginning after December 15, 1998. The Company is
currently evaluating the impact of SOP 98-1 on its financial statements and
related disclosures.
21
<PAGE>
YAHOO! INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 BALANCE SHEET COMPONENTS (IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31 ,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
Property and equipment:
Computers and equipment................................. $ 17,254 $ 7,383
Furniture and fixtures.................................. 4,465 2,316
Leasehold improvements.................................. 1,790 894
--------- ---------
23,509 10,593
Less: accumulated depreciation.......................... (8,320) (3,229)
--------- ---------
$ 15,189 $ 7,364
--------- ---------
--------- ---------
Other assets:
Intangible assets (Note 5).............................. $ 40,731 $ 1,530
Investments in privately-held companies................. 5,445 6,450
Other................................................... 3,014 2,978
--------- ---------
$ 49,190 $ 10,958
--------- ---------
--------- ---------
Accrued expenses and other current liabilities:
Accrued compensation and related expenses............... $ 9,732 $ 2,951
Accrued content, connect, and other costs............... 7,726 2,909
Accrued sales and marketing related expenses............ 4,947 2,222
Accrued professional service expenses................... 5,084 1,730
Other................................................... 6,930 2,873
--------- ---------
$ 34,419 $ 12,685
--------- ---------
--------- ---------
</TABLE>
NOTE 3 INVESTMENTS
At December 31, 1998, short and long-term investments in marketable
securities were classified as available-for-sale as follows (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COSTS GAINS LOSSES VALUE
---------- ----------- ------------- ----------
<S> <C> <C> <C> <C>
U.S. Government and agencies................. $ 331,757 $ 611 $ -- $ 332,368
Municipal bonds.............................. 12,893 81 -- 12,974
Corporate debt securities.................... 8,584 26 -- 8,610
Corporate equity securities.................. 7,454 33,885 -- 41,339
Other........................................ 3,020 -- (20) 3,000
---------- ----------- --- ----------
$ 363,708 $ 34,603 $ (20) $ 398,291
---------- ----------- --- ----------
---------- ----------- --- ----------
</TABLE>
22
<PAGE>
YAHOO! INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 INVESTMENTS (CONTINUED)
The contractual maturities of debt securities classified as
available-for-sale as of December 31, 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
ESTIMATED
FAIR VALUE
----------
<S> <C>
Due within one year............................................................... $ 308,025
Due after one year through two years.............................................. 48,927
----------
$ 356,952
----------
----------
</TABLE>
At December 31, 1997, short and long-term investments in marketable
securities were classified as available-for-sale and consisted of 81% corporate
debt securities, 8% debt securities of the U.S. Government and its agencies, 4%
municipal debt securities, and 7% foreign debt securities. At December 31, 1997,
the fair value of the investments approximated cost.
NOTE 4 RELATED PARTY TRANSACTIONS
During 1998, 1997 and 1996, the Company recognized net revenues of
approximately $10.3 million, $3.1 million, and $2.4 million, respectively, on
advertising contracts and publication, development, and licensing arrangements
with SOFTBANK and its related companies (such as E*Trade Group, Inc., Kingston
Technology Company, and E-Loan, Inc.), a holder of approximately 30% of the
Company's Common Stock at December 31, 1998. Prices on these contracts were
comparable to those given to other similar customers of the Company.
Additionally, three SOFTBANK-related companies provided Internet access and
sales and marketing-related services for fees of approximately $3.1 million,
$3.2 million, and $2.3 million during 1998, 1997, and 1996, respectively.
Sequoia Capital, a holder of approximately 3% of the Company's Common Stock at
December 31, 1998, was also an investor in one of these SOFTBANK-related
companies.
NOTE 5 ACQUISITIONS
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 148,668 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 $1.4 million is being 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 6,022,880 shares
of Yahoo! Common Stock for all of Four11's outstanding shares and assumed
593,344 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 $3.9 million 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.
23
<PAGE>
YAHOO! INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 ACQUISITIONS (CONTINUED)
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 1,574,364 shares of
Yahoo! Common Stock. All outstanding options to purchase Viaweb common stock
were converted into options to purchase 244,504 shares of Yahoo! Common Stock.
The acquisition was accounted for as a purchase in accordance with the
provisions of APB 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 $48.6 million including
acquisition expenses of $1.8 million. The purchase price was allocated to the
assets acquired and liabilities assumed based on their estimated fair values as
determined by the Company and pursuant to discussions with the Staff of the
Securities and Exchange Commission (the "Staff") as follows (in thousands):
<TABLE>
<S> <C>
In-process research and development................................ $ 15,000
Purchased technology............................................... 15,000
Goodwill........................................................... 24,332
Tangible assets acquired........................................... 571
Liabilities assumed................................................ (344)
Deferred tax liability............................................. (6,000)
---------
$ 48,559
---------
---------
</TABLE>
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 $2.9 million and $2.0 million,
respectively, for the year ended December 31, 1998. 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 SFAS 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 online 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 by
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 began to
benefit from the purchased in-process technology in late 1998.
Yahoo! is continuing the development efforts associated with online store
technology, credit card processing and to a lesser extent international
functionality. The development efforts with respect to
24
<PAGE>
YAHOO! INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 ACQUISITIONS (CONTINUED)
the online store technology and credit card processing are on schedule with
Yahoo!'s original assumptions with various features having been introduced as of
December 31, 1998. Given the complexities of completing the international
functionality, Yahoo! continues to make progress in the development of these
features and now expects to be substantially complete by the end of June 1999.
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 541,908 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 $1.1 million. Net revenues and pre-tax
net loss for WebCal in 1998 through the date of the acquisition approximated
$2,000 and $847,000, respectively.
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 was
accounted for as a pooling of interests, the Company exchanged 561,244 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 consolidated
financial statements for the three years ended December 31, 1998 and the
accompanying notes reflect the Company's financial position and the results of
operations as if Yoyodyne was a wholly-owned subsidiary of the Company since
inception. During October 1998, the Company recorded a one-time charge of $2.1
million for acquisition-related costs. These costs consisted of broker fees,
legal and accounting fees, and certain other expenses directly related to the
acquisition.
ACQUISITION OF HYPERPARALLEL, INC. On December 17, 1998, the Company
completed the acquisition of all of the outstanding shares of HyperParallel,
Inc. ("HyperParallel"), a company specializing in data analysis, through the
issuance of 74,856 shares of Yahoo! Common Stock and approximately $700,000 of
cash totaling $8.1 million including acquisition costs. The acquisition was
accounted for as a purchase in accordance with APB 16. Under the purchase method
of accounting, the purchase price was allocated to the assets acquired and
liabilities assumed based on their estimated fair values at the date of the
acquisition. Results of operations for HyperParallel have been included with
those of the Company for periods subsequent to the acquisition.
Approximately $2.3 million of the total purchase price was allocated to
in-process research and development. This amount was developed by estimating the
stage of development of each in-process research and development project at the
date of the acquisition, estimating incremental cash flows generated from such
projects, and discounting the net cash flows back to their present value using a
discount rate of 35%, which represents a premium to the Company's cost of
capital to take into account the uncertainty surrounding the successful
development of the purchased in-process technology. The projections were based
on management's estimates of market size and growth, expected trends in
advertising and technology, expected research and development and selling and
general administrative expenditures, and the expected timing of new product
introductions. Approximately $1.2 million of the total purchase price was
allocated to existing technology which is being amortized over 3 years. The
value of the existing technology was developed based on similar assumptions
using a discount rate of 25%. The projections used in developing the values
should not be considered an accurate predictor of
25
<PAGE>
YAHOO! INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 ACQUISITIONS (CONTINUED)
future performance for several reasons, including the consideration of many
factors outside the control of the Company. The remaining purchase price of
approximately $4.6 million was allocated to goodwill which is being amortized
over 7 years. Tangible assets acquired and liabilities assumed were not material
to the Company's financial statements.
The value assigned to purchased in-process technology was determined by
identifying three research projects in-progress as of the acquisition date.
These three research projects in-progress focus on technologies surrounding
search tools. Two of the application oriented development projects were 70% and
20% complete as of the acquisition date. These projects are expected to be
completed in the first and fourth quarters, respectively, of 1999. The remaining
project relates to the next release of the current search tool which was
approximately 20% complete as of the acquisition date and is expected to be
completed in the fourth quarter of 1999. Future research and development costs
to be incurred on the individual in-process projects are not expected to be
material to Yahoo!'s financial position or results of operations. In addition,
if none of these projects were successfully developed, Yahoo!'s revenues and
profitability would not be materially adversely affected.
UNAUDITED PRO FORMA DISCLOSURES OF SIGNIFICANT ACQUISITIONS. The following
unaudited pro forma consolidated results of operations give effect to the
acquisitions of Viaweb and HyperParallel as if they occurred as of the beginning
of the period (in thousands, except per share data):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
Net revenues............................................ $ 204,136 $ 71,392
Net income (loss)....................................... $ 22,290 $ (31,866)
Net income (loss) per share--basic...................... $ 0.12 $ (0.18)
Net income (loss) per share--diluted.................... $ 0.10 $ (0.18)
Shares used in per share calculation--basic............. 184,835 175,929
Shares used in per share calculation--diluted........... 224,983 175,929
</TABLE>
NOTE 6 JOINT VENTURES
YAHOO! JAPAN. During April 1996, the Company signed a joint venture
agreement with SOFTBANK 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%. During November 1997, Yahoo! Japan Corporation completed its initial
public offering, issuing 975 previously unissued shares and raising total
proceeds of approximately $5.5 million. Accordingly, the Company increased its
investment by $1.7 million, 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 and the Company's
share of net income, to date, has been immaterial. At December 31, 1998, the
carrying value of the investment was $2.9 million and is recorded in other
assets. However, the fair value of the Company's 34% ownership in Yahoo! Japan,
based on the quoted trading price, was approximately $170 million at December
31, 1998.
YAHOO! EUROPE. On November 1, 1996, the Company signed a joint venture
agreement with a subsidiary of SOFTBANK whereby separate companies were formed
in Germany, the United Kingdom,
26
<PAGE>
YAHOO! INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 JOINT VENTURES (CONTINUED)
and France ("Yahoo! Europe") to establish and manage versions of the Yahoo!
Internet Guide for those countries, develop related online navigational
services, and conduct other related business. The parties have invested a total
of $6.0 million in proportion to their respective equity interests as of
December 31, 1998. The Company has a majority share of approximately 70% in each
of the Yahoo! Europe entities, and therefore, has consolidated their financial
results. During 1998, 1997, and 1996, Yahoo! Europe incurred losses from
operations of $409,000, $1,807,000 and $842,000, respectively. SOFTBANK's
interest in the net assets of Yahoo! Europe at December 31, 1998 and 1997, as
represented by the minority interest on the balance sheet, was $883,000 and
$405,000, 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 $1.0 million 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 have been insignificant to date. SOFTBANK's
interest in the net assets of Yahoo! Korea at December 31, 1998 and 1997, as
represented by the minority interest on the balance sheet, was $365,000 and
$311,000, respectively.
YAHOO! MARKETPLACE. On August 26, 1996, Yahoo! 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.
Yahoo!'s principal obligations included a commitment to provide operating
contributions to support implementation of the service including its look and
feel, development of its software, hiring of its management, promotion of the
service, promotion of VISA, a nonexclusive license to Yahoo! Marketplace to use
the Yahoo! brand and search tools, and an agreement that Yahoo! Marketplace
would be used exclusively for the activities defined in the operating agreement.
VISA's key obligations included a commitment to provide operating contributions
including encouraging VISA member banks to participate and utilize the services
of Yahoo! Marketplace, assistance in implementing systems to process payments,
other marketing assistance activities, providing non-exclusive rights to
utilization of the VISA brand, and an agreement not to compete for 18 months by
entering into a similar arrangement with a Yahoo! competitor. As of December 31,
1996, the parties had invested a total of $1.0 million. At December 31, 1996,
Yahoo! 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.
During May 1997, Yahoo! received a letter from VISA formally expressing its
concerns with respect to breach of contract, Yahoo! support obligations, and
exclusivity. In June 1997, Yahoo! conducted numerous discussions concerning
settlement of these obligations and claims and proposed a settlement with the
Visa Group which was signed in July 1997, prior to the completion of significant
business activities and public launch of the property. In connection with this
settlement, Yahoo! issued 2,797,924 shares of Yahoo! Common Stock to the Visa
Group, for which Yahoo! recorded a one-time, non-cash, pre-tax charge of $21.2
million in the second quarter ended June 30, 1997. The settlement ultimately
released Yahoo! from all of its obligations described above. The agreement
settled all disputes and claims arising among the parties with respect to the
interpretation of and the parties' respective performance under the agreements
and released the parties from further liability. It also
27
<PAGE>
YAHOO! INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 JOINT VENTURES (CONTINUED)
released Yahoo! from any other further damage claims by VISA for
non-performance. Yahoo! also forfeited its non-compete commitment from VISA. No
portions of these agreements continued in effect subsequent to the settlement.
NOTE 7 SHAREHOLDERS' EQUITY
COMMON STOCK. On April 11, 1996, the Company completed its initial public
offering of 17.9 million shares of its Common Stock. Net proceeds to the Company
aggregated $35.1 million. As of the closing date of the offering, all of the
Convertible Preferred Stock outstanding was converted into an aggregate of
approximately 77 million shares of Common Stock. On July 14, 1998, the Company
received proceeds of $250.0 million in exchange for 5,453,760 newly issued
shares of Yahoo! Common Stock through a private placement with SOFTBANK. 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).
STOCK OPTION PLANS. Pursuant to the consummation of the acquisitions of
Viaweb Inc. and Yoyodyne Entertainment, Inc. during 1998, the Company assumed
the Viaweb 1997 Stock Option Plan (the "Viaweb Plan") and the 1996 Yoyodyne
Stock Option Plan (the "Yoyodyne Plan"), respectively. As of December 31, 1998,
the Company had five stock-based compensation plans which are described below.
The 1995 Stock Plan (the "Stock Plan"), the 1995 Four11 Stock Option Plan
(the "Four11 Plan"), the Viaweb Plan, and the Yoyodyne Plan (collectively the
"Plans") allow for the issuance of incentive stock options, non-qualified stock
options, and stock purchase rights to purchase a maximum of 87.6 million shares
of the Company's Common Stock. Under the Plans, 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
Plans 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 Viaweb Plan generally vest
25% on each anniversary over four years. Options granted under the Yoyodyne Plan
have various vesting periods that 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, 1998, shares subject to repurchase under the provisions
of the Four11 Plan were insignificant.
The 1996 Directors' Stock Option Plan (the "Directors' Plan") provides for
the issuance of up to 1.2 million 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
240,000
28
<PAGE>
YAHOO! INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 SHAREHOLDERS' EQUITY (CONTINUED)
shares of 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 30,000 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. Options granted under
the Directors' Plan are for periods not to exceed 10 years.
Activity under the Company's stock option plans is summarized as follows (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
AVAILABLE OPTIONS WEIGHTED AVERAGE
FOR GRANT OUTSTANDING PRICE PER SHARE
----------- ----------- -----------------
<S> <C> <C> <C>
Balance at December 31, 1995....................... 10,279 19,906 $ 0.00
Additional shares reserved......................... 19,252
Options granted.................................... (22,829) 22,829 1.68
Options canceled................................... 1,845 (1,845) 1.66
Options exercised.................................. (2,978) 0.00
----------- ----------- ------
Balance at December 31, 1996....................... 8,547 37,912 0.94
Additional shares reserved......................... 30,000
Options granted.................................... (18,442) 18,442 9.38
Options canceled................................... 356 (356) 2.30
Options exercised.................................. (9,670) 0.53
----------- ----------- ------
Balance at December 31, 1997....................... 20,461 46,328 4.35
Additional shares reserved......................... 8,245
Options granted.................................... (19,566) 19,566 54.94
Options canceled................................... 2,494 (2,494) 12.23
Options exercised.................................. (10,551) 2.89
----------- ----------- ------
Balance at December 31, 1998....................... 11,634 52,849 $ 22.99
----------- ----------- ------
----------- ----------- ------
</TABLE>
29
<PAGE>
YAHOO! INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 SHAREHOLDERS' EQUITY (CONTINUED)
The following table summarizes information concerning outstanding and
exercisable options at December 31, 1998 (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- ------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
REMAINING EXERCISE EXERCISE
NUMBER CONTRACTUAL PRICE NUMBER PRICE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE (IN YEARS) PER SHARE EXERCISABLE PER SHARE
- --------------------------------------- ----------- --------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
less than $0.01........................ 8,002 6.6 $ 0.00 5,187 $ 0.00
$0.03-$1.17............................ 6,473 7.1 0.60 3,141 0.69
$1.25-$3.21............................ 5,940 7.6 2.57 1,765 2.53
$3.33-$8.08............................ 5,518 8.3 5.41 912 5.15
$10.78-$13.47.......................... 7,711 8.9 12.96 1,766 13.09
$13.94-$29.14.......................... 6,100 9.2 20.58 141 14.41
$30.38-$57.75.......................... 6,481 9.6 47.12 -- --
$62.41-$135.00......................... 6,624 9.9 95.89 -- --
----------- --- ----------- ----------- -----------
52,849 8.4 $ 22.99 12,912 $ 2.83
----------- --- ----------- ----------- -----------
----------- --- ----------- ----------- -----------
</TABLE>
Options to purchase approximately 7.9 million shares and 3.3 million shares
were vested at December 31, 1997 and 1996, respectively. The weighted average
exercise prices per share for options vested at December 31, 1997 and 1996 were
$0.99 and less than $0.01, respectively. Through December 31, 1998, Yahoo! and
certain acquired entities recorded compensation expense related to certain stock
options issued with exercise prices below the fair market value of the related
common stock. The Company recorded compensation expense in the amount of
$926,000, $1,215,000, and $164,000 in 1998, 1997, and 1996, respectively.
Approximately $1,017,000 remains to be amortized over the remaining 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 1,800,000 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 31(st) and June 30(th). 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 1998, 126,000 shares were
purchased at prices from $14.72 to $36.10 per share. During 1997, 537,000 shares
were purchased at prices from $1.85 to $4.83 per share. There were no shares
issued under the Purchase Plan during 1996. At December 31, 1998, 1,137,000
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
30
<PAGE>
YAHOO! INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 SHAREHOLDERS' EQUITY (CONTINUED)
grant dates, as prescribed in SFAS 123, the Company's results would have been as
follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ---------
<S> <C> <C> <C>
Net income (loss):
As reported............................................... $ 25,588 $ (25,520) $ (6,427)
Pro forma................................................. $ (10,291) $ (31,918) $ (7,273)
Net income (loss) per share--basic:
As reported............................................... $ 0.14 $ (0.15) $ (0.04)
Pro forma................................................. $ (0.06) $ (0.18) $ (0.05)
Net income (loss) per share--diluted:
As reported............................................... $ 0.11 $ (0.15) $ (0.04)
Pro forma................................................. $ (0.06) $ (0.18) $ (0.05)
</TABLE>
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.
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 1998, 1997, and 1996 was $26.53, $4.34, and $0.79, 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 1998 and 1997, and 30 months in 1996; risk-free
interest rate ranges of 4.2% to 5.6% during 1998, 5.6% to 6.6% during 1997, and
5.1% to 6.5% during 1996; expected volatility of 67% in 1998, 59% in 1997, and
53% in 1996; and no expected dividend yield for the three years ended December
31, 1998. 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 8 INCOME TAXES
The components of income (loss) before taxes are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
United States................................... $ 44,718 $ (22,962) $ (5,488)
Foreign......................................... (1,303) (2,558) (939)
--------- --------- ---------
$ 43,415 $ (25,520) $ (6,427)
--------- --------- ---------
--------- --------- ---------
</TABLE>
31
<PAGE>
YAHOO! INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 INCOME TAXES (CONTINUED)
The provision for income taxes in 1998 is composed of the following (in
thousands):
<TABLE>
<S> <C>
Current:
Federal.......................................................... $ 20,333
State............................................................ 1,937
---------
22,270
---------
Deferred:
Federal.......................................................... (3,616)
State............................................................ (827)
---------
(4,443)
---------
Total provision.................................................... $ 17,827
---------
---------
</TABLE>
No provision for federal and state income taxes for 1997 and 1996 has been
recorded as the Company incurred net operating losses for these periods.
The provision for income taxes differs from the amount computed by applying
the statutory federal income tax rate as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Income tax at the federal statutory rate of 35%.... $ 15,195 $ (8,010) $ (817)
State income tax, net of federal benefit........... 1,937 (1,626) (112)
Non-deductible acquisition-related charges......... 8,521 -- --
Research tax credits............................... (1,155) -- --
Change in valuation allowances..................... (6,770) 8,175 864
Other.............................................. 99 1,461 65
--------- --------- ---------
$ 17,827 $ -- $ --
--------- --------- ---------
--------- --------- ---------
</TABLE>
32
<PAGE>
YAHOO! INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 INCOME TAXES (CONTINUED)
Deferred income taxes reflect the tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The components of the net
deferred income tax assets are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Deferred income tax assets:
Net operating loss and credit carryforwards.... $ 148,249 $ 25,512 $ 4,303
Nondeductible reserves and expenses............ 4,443 3,667 1,468
--------- --------- ---------
Gross deferred tax assets...................... 152,692 29,179 5,771
Valuation allowance............................ (135,063) (29,179) (5,771)
--------- --------- ---------
17,629 -- --
--------- --------- ---------
Deferred income tax liabilities:
Unrealized investment gains.................... (12,796) -- --
Intangible assets.............................. (4,833) -- --
--------- --------- ---------
Gross deferred tax liabilities................. (17,629) -- --
--------- --------- ---------
$ -- $ -- $ --
--------- --------- ---------
--------- --------- ---------
</TABLE>
As of December 31, 1998, the Company's federal and state net operating loss
carryforwards for income tax purposes were approximately $333 million and $181
million, respectively. If not utilized, the federal net operating loss
carryforwards will begin to expire in 2010, and the state net operating loss
carryforwards will begin to expire in 2003. The Company's federal and state
research tax credit carryforwards for income tax purposes are approximately
$10.7 million and $10.1 million, respectively. If not utilized, the federal tax
credit carryforwards will begin to expire in 2010. Approximately $13 million of
net operating loss carryforwards relate to acquired entities and expire
beginning in 2010. Utilization of these net operating loss carryforwards may be
limited by a cumulative stock ownership change of more than 50%, or by other
limitations.
Deferred tax assets of approximately $141 million as of December 31, 1998
pertain to certain net operating loss carryforwards and credit carryforwards
resulting from the exercise of employee stock options. When recognized, the tax
benefit of these loss and credit carryforwards are accounted for as a credit to
additional paid-in capital rather than a reduction of the income tax provision.
Deferred tax assets include approximately $1.6 million related to net operating
loss carryforwards in various foreign jurisdictions. These carryforwards will
expire if not utilized.
NOTE 9 COMMITMENTS AND CONTINGENCIES
OPERATING LEASES. During December 1998, the Company entered into a
non-cancelable operating sublease agreement that will provide the Company with
additional office space at its existing Santa Clara, California location.
Additionally during 1998, 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 $3.6 million in
1999, $3.3 million in 2000, $2.7 million in 2001, $2.6 million in 2002, $2.5
million in 2003, and $0.6 million thereafter. Certain of the Company's lease
agreements have
33
<PAGE>
YAHOO! INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 COMMITMENTS AND CONTINGENCIES (CONTINUED)
a five year renewal option from the date of expiration. Total minimum rental
payments aggregate $15.4 million. Rent expense under operating leases totaled
$2.3 million, $1.4 million, and $0.5 million during 1998, 1997, and 1996,
respectively.
LEGAL. From time to time the Company is subject to legal proceedings and
claims in the ordinary course of business, including claims of alleged
infringement of trademarks, copyrights and other intellectual property rights,
and a variety of claims arising in connection with the Company's email, message
boards, and other communications and community features, such as claims alleging
defamation and invasion of privacy. 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 EVENT
GEOCITIES. On January 28, 1999, the Company announced the signing of a
definitive agreement to acquire GeoCities, a publicly traded Internet company.
Under the terms of the acquisition, which will be accounted for as a pooling of
interests, the Company will exchange approximately 21,254,000 shares of Yahoo!
Common Stock for approximately 31,403,000 shares of GeoCities common stock.
Additionally, the Company will convert approximately 8,894,000 GeoCities stock
options into approximately 6,019,000 Yahoo! stock options. The acquisition is
expected to be completed in the second quarter of 1999 and is subject to certain
conditions, regulatory approval, and approval by GeoCities stockholders. The
Company expects to record a one-time charge in the second quarter of 1999
relating to expenses incurred with this transaction.
GeoCities' operating results for the years ended December 31, 1998, 1997,
and 1996 included revenues of approximately $18.4 million, $4.6 million, and
$0.3 million, respectively, and net losses of approximately $19.8 million, $8.9
million, and $3.0 million, respectively.
34
<PAGE>
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
------------------------
BALANCE AT CHARGED TO CHARGED TO WRITE-OFFS BALANCE AT
ALLOWANCE FOR BEGINNING COSTS AND OTHER NET OF END OF
DOUBTFUL ACCOUNTS OF YEAR EXPENSES ACCOUNTS RECOVERIES YEAR
- ----------------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
1998......... $ 2,598 $ 5,668 $ -- $ 3,299 $ 4,967
1997......... $ 665 $ 2,812 $ -- $ 879 $ 2,598
1996......... $ 84 $ 611 $ -- $ 30 $ 665
</TABLE>
35
<PAGE>
QUARTERLY FINANCIAL DATA
(UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------------
SEPTEMBER DECEMBER
MARCH 31 JUNE 30 30 31
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
1998
Net revenues........................................ $ 30,596 $ 41,688 $ 54,576 $ 76,410
Gross profit........................................ 26,302 35,904 47,051 67,271
Income (loss) from operations....................... 2,658 (7,860) 13,146 20,824
Income (loss) before income taxes................... 4,341 (5,917) 18,322 26,669
Net income (loss)................................... 3,270 (8,977)(a) 12,771(b) 18,524(c)
Net income (loss) per share--basic *................ 0.02 (0.05) 0.07 0.09
Net income (loss) per share--diluted *.............. $ 0.02 $ (0.05)(a) $ 0.06(b) $ 0.08(c)
1997
Net revenues........................................ $ 10,731 $ 14,432 $ 18,703 $ 26,584
Gross profit........................................ 8,835 11,908 16,028 22,794
Loss from operations................................ (3,029) (23,641) (1,320) (2,792)
Income (loss) before income taxes................... (1,435) (22,209) 65 (1,941)
Net income (loss)................................... (1,435) (22,209)(d) 65 (1,941)(e)
Net income (loss) per share--basic *................ (0.01) (0.13) 0.00 (0.01)
Net income (loss) per share--diluted *.............. $ (0.01) $ (0.13)(d) $ 0.00 $ (0.01)(e)
</TABLE>
- ------------------------
Note: The quarterly financial data for the quarters presented above has been
restated to reflect the acquisition of Yoyodyne Entertainment, Inc. which
was accounted for as a pooling of interests.
* Reflects the two-for-one stock splits effective August 1998 and February
1999.
(a) Net loss and net loss per share include a non-recurring charge of $15.0
million incurred in connection with the June 1998 acquisition of Viaweb Inc.
and amortization of $0.7 million on related intangible assets.
(b) Net income and net income per share include amortization of $2.1 million on
intangible assets.
(c) Net income and net income per share include non-recurring charges of $4.4
million incurred in connection with the October 1998 acquisition of Yoyodyne
Entertainment, Inc. and the December 1998 acquisition of HyperParallel,
Inc., and amortization of $2.1 million on intangible assets.
(d) Net loss and net loss per share include a non-recurring charge of $21.2
million related to the Yahoo! Marketplace restructuring.
(e) Net loss and net loss per share include a non-recurring charge of $3.9
million incurred in connection with the October 1997 acquisition of Four11
Corporation.
36
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) Consolidated Financial Statements: See Index to Consolidated Financial
Statements at Item 8 on page 38 of this report.
(2) Financial Statement Schedule: See Index to Consolidated Financial
Statements at Item 8 on page 38 of this report.
(3) Exhibits are incorporated herein by reference or are filed with this
report as indicated below (numbered in accordance with Item 601 of
Regulation S-K):
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
2.1 Agreement and Plan of Merger, dated as of January 27, 1999 by and among Yahoo! Inc., Home Page
Acquisition Corp. and GeoCities (without exhibits). (Filed as Exhibit 1 to the GeoCities SC 13D,
dated February 8, 1999 and incorporated herein by reference.)
3.1* Amended and Restated Articles of Incorporation of Registrant
3.2 Amended and Restated Bylaws of Registrant (Filed as Exhibit 3.3 to the Company's Registration
Statement on Form SB-2, Registration No. 333-2142-LA, declared effective on April 11, 1996 [the
"SB-2 Registration Statement"], and incorporated herein by reference.)
3.3* Certificate of Amendment to Bylaws dated January 11, 1999
10.1 Form of Indemnification Agreement with the Registrant's officers and directors (Filed as Exhibit 10.1
to the SB-2 Registration Statement and incorporated herein by reference.)
10.2 1995 Stock Plan, as amended, and form of stock option agreement (Filed as Exhibit 10.2 to the
Company's Annual Report on Form 10-K for the year ended December 31, 1996 [the "December 31, 1996
10-K"] and incorporated herein by reference.)
10.3 Form of Management Continuity Agreement with the Registrant's Executive Officers (Filed as Exhibit
10.3 to the SB-2 Registration Statement and incorporated herein by reference.)
10.4 Stock Purchase Agreement dated March 3, 1995 with each of David Filo and Jerry Yang (Filed as Exhibit
10.4 to the SB-2 Registration Statement and incorporated herein by reference.)
10.5 Series A Preferred Stock Agreement dated April 7, 1995 between the Registrant and Purchasers of
Series A Preferred Stock (Filed as Exhibit 10.5 to the SB-2 Registration Statement and incorporated
herein by reference.)
10.6 Form of Stock Restriction Agreements dated April 7, 1995 between the Registrant and Jerry Yang and
David Filo (Filed as Exhibit 10.6 to the SB-2 Registration Statement and incorporated herein by
reference.)
10.7 Series B Preferred Stock Agreement dated November 22, 1995 between the Registrant and Purchasers of
Series B Preferred Stock (Filed as Exhibit 10.7 to the SB-2 Registration Statement and incorporated
herein by reference.)
10.8 Series C Preferred Stock Agreement dated March 12, 1996 between the Registrant and SOFTBANK Holdings
Inc. (Filed as Exhibit 10.8 to the SB-2 Registration Statement and incorporated herein by
reference.)
10.9 Second Amended and Restated Investor Rights Agreement dated March 12, 1996 between the Registrant and
certain shareholders (Filed as Exhibit 10.9 to the SB-2 Registration Statement and incorporated
herein by reference.)
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
10.10 Second Amended and Restated Co-Sale Agreement dated March 12, 1996 between the Registrant and certain
shareholders (Filed as Exhibit 10.10 to the SB-2 Registration Statement and incorporated herein by
reference.)
10.11 Second Amended and Restated Voting Agreement dated March 12, 1996 between the Registrant and certain
shareholders (Filed as Exhibit 10.11 to the SB-2 Registration Statement and incorporated herein by
reference.)
10.12+ Publishing Agreement dated June 2, 1995 between the Registrant and IDG Books Worldwide, Inc. (Filed
as Exhibit 10.12 to the SB-2 Registration Statement and incorporated herein by reference.)
10.13 Sublease Agreement dated June 6, 1996 relating to the Registrant's office at 3400 Central Expressway,
Suite 201, Santa Clara, California (Filed as Exhibit 10.15 to the December 31, 1996 10-K and
incorporated herein by reference.)
10.14+ Agreement dated January 15, 1996 between the Registrant and Ziff-Davis Publishing Company (Filed as
Exhibit 10.19 to the SB-2 Registration Statement and incorporated herein by reference.)
10.15 1996 Employee Stock Purchase Plan and form of subscription agreement (Filed as Exhibit 10.20 to the
SB-2 Registration Statement and incorporated herein by reference.)
10.16 1996 Directors' Stock Option Plan and form of option agreement (Filed as Exhibit 10.21 to the SB-2
Registration Statement and incorporated herein by reference.)
10.17+ Yahoo! Canada Affiliation Agreement dated February 29, 1996 between the Registrant and Rogers
Multi-Media Inc. (Filed as Exhibit 10.23 to the SB-2 Registration Statement and incorporated herein
by reference.)
10.18 Standstill and Voting Agreement dated March 12, 1996 between the Registrant and SOFTBANK Holdings
Inc. (Filed as Exhibit 10.26 to the SB-2 Registration Statement and incorporated herein by
reference.)
10.19+ Joint Venture Agreement dated April 1, 1996 by and between Yahoo! Inc. and SOFTBANK Corporation
(Filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q/A for the quarter ended June
30, 1996 [the "June 30, 1996 10-Q"] and incorporated herein by reference.)
10.20+ Yahoo! Japan License Agreement dated April 1, 1996 by and between Yahoo! Inc. and Yahoo! Japan
Corporation (Filed as Exhibit 10.3 to the June 30, 1996 10-Q and incorporated herein by reference.)
10.21+ SOFTBANK Letter Agreement dated April 1, 1996 by and between Yahoo! Inc. and SOFTBANK Group (Filed as
Exhibit 10.4 to the June 30, 1996 10-Q and incorporated herein by reference.)
10.22+ Joint Venture Agreement dated November 1, 1996 by and between Yahoo! Inc. and SB Holdings (Europe)
Ltd. (Filed as Exhibit 10.30 to the December 31, 1996 10-K and incorporated herein by reference.)
10.23+ Yahoo! UK License Agreement dated November 1, 1996 by and between Yahoo! Inc. and Yahoo! UK (Filed as
Exhibit 10.31 to the December 31, 1996 10-K and incorporated herein by reference.)
10.24+ Yahoo! Deutschland License Agreement dated November 1, 1996 by and between Yahoo! Inc. and Yahoo!
Deutschland (Filed as Exhibit 10.32 to the December 31, 1996 10-K and incorporated herein by
reference.)
10.25+ Yahoo! France License Agreement dated November 1, 1996 by and between Yahoo! Inc. and Yahoo! France
(Filed as Exhibit 10.33 to the December 31, 1996 10-K and incorporated herein by reference.)
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
10.26 Restructuring Agreement dated as of July 29, 1997 among the Registrant, Visa International Service
Association, Visa Marketplace, Inc., Sterling Payot Company, and Sterling Payot Capital, L.P.
(Filed as Exhibit 4.1 to the Company's Current Report on Form 8-K, dated July 29, 1997 and
incorporated herein by reference.)
10.27 Joint Venture Agreement, dated August 31, 1997 between Yahoo! Inc., SOFTBANK Korea Corporation,
SOFTBANK Corporation, and Yahoo! Japan Corporation (Filed as Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1997 [the "September 30, 1997
10-Q"] and incorporated herein by reference.)
10.28 Sublease Agreement, dated September 11, 1997 between Yahoo! Inc. and Amdahl Corporation (Filed as
Exhibit 10.2 to the September 30, 1997 10-Q and incorporated herein by reference.)
10.29 Four11 Corporation 1995 Stock Option Plan Registrant (Filed as Exhibit 4.2 to the Company's
Registration Statement on Form S-8, Registration No. 333-39105, dated October 30, 1997, and
incorporated herein by reference.)
10.30+ Amendment Agreement dated September 17, 1997 by and between Yahoo! Inc. and SOFTBANK Corporation
(Filed as Exhibit 10.39 to the Company's Annual Report on Form 10-K for the year ended December 31,
1997 [the "December 31, 1997 10-K"] and incorporated herein by reference.)
10.31+ Amendment to Yahoo! Japan License Agreement dated September 17, 1997 by and between Yahoo! Inc. and
Yahoo! Japan Corporation (Filed as Exhibit 10.40 to the December 31, 1997 10-K and incorporated
herein by reference.)
10.32+ Services Agreement dated November 30, 1997 by and between Yahoo! Korea Corporation and SOFTBANK Korea
Corporation (Filed as Exhibit 10.41 to the December 31, 1997 10-K and incorporated herein by
reference.)
10.33+ Yahoo! Korea License Agreement dated November 30, 1997 by and between Yahoo! Inc., Yahoo! Korea
Corporation, and Yahoo! Japan Corporation (Filed as Exhibit 10.42 to the December 31, 1997 10-K and
incorporated herein by reference.)
10.34 Agreement and Plan of Merger dated June 4, 1998 by and among Yahoo! Inc., XY Acquisition Corporation,
and Viaweb Inc. (Filed as Exhibit 2.1 to the Company's Current Report on Form 8-K, dated June 12,
and incorporated herein by reference.)
10.35 Viaweb Inc. 1997 Stock Option Plan and form of Option Agreement thereunder (Filed as Exhibit 4.2 to
the Company's Registration Statement on Form S-8, Registration No. 333-56781, dated June 12, 1998
[the "S-8 Registration Statement dated June 12, 1998"], and incorporated herein by reference.)
10.36 Forms of Viaweb Inc. 1996 Option Agreements (Filed as Exhibit 4.3 to the S-8 Registration Statement,
dated June 12, 1998, and incorporated herein by reference.)
10.37 Stock Purchase Agreement dated as of July 7, 1998, between Yahoo! and SOFTBANK Holdings Inc. (Filed
as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998
[the "June 30, 1998 10-Q"] and incorporated herein by reference.)
10.38 Amendment to Second Amended and Restated Investor Rights Agreement dated July 7, 1998 among Yahoo!,
SOFTBANK Holdings Inc., Sequoia Capital VI and Sequioia Technology Partners VI (Filed as Exhibit
10.2 to the June 30, 1998 10-Q and incorporated herein by reference.)
10.39 Content License Agreement dated January 8, 1998 between Yahoo! and ZDNet (Filed as Exhibit 10.3 to
the June 30, 1998 10-Q and incorporated herein by reference.)
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
10.40 Agreement and Plan of Merger dated as of October 9, 1998, by and among Yahoo! Inc., YO Acquisition
Corporation, and Yoyodyne Entertainment, Inc. (Filed as Exhibit 2.1 to the Company's Current Report
on Form 8-K, dated October 23, 1998 [the "8-K dated June 12, 1998"] and incorporated herein by
reference.)
10.41 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. (Filed as Exhibit 2.2 to 8-K dated
June 12, 1998 and incorporated herein by reference.)
10.42 Yoyodyne Entertainment, Inc. 1996 Stock Option Plan and form of Option Agreement thereunder. (Filed
as Exhibit 4.1 to the Company's Registration Statement on Form S-8, Registration No. 333-66067,
dated October 23, 1998 and incorporated herein by reference.)
16.1 Letter dated March 6, 1996 from Coopers & Lybrand L.L.P., prior accountant of the Registrant (Filed
as Exhibit 10.25 to the SB-2 Registration Statement and incorporated herein by reference.)
21.1* List of Subsidiaries
23.1 Consent of Independent Accountants
27.1* Financial Data Schedule
</TABLE>
- ------------------------
+ Confidential treatment granted.
* Previously filed.
(b) Reports on Form 8-K
On October 23, 1998, the Company filed a report on Form 8-K, pursuant to
Items 2 and 7 of such Form, regarding its acquisition of Yoyodyne
Entertainment, Inc.
On November 19, 1998, the Company filed an amended report on Form 8-K,
pursuant to Items 2 and 7 of such Form, which included the supplementary
consolidated financial statements of Yahoo! Inc.
40
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this amendment to be signed
on its behalf by the undersigned, thereunto duly authorized, on the 29th day of
April, 1999.
<TABLE>
<S> <C> <C>
YAHOO! INC.
By: *
-----------------------------------------
Timothy Koogle
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
amendment has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
Chairman and Chief
* Executive Officer
- ------------------------------ (Principal Executive April 29, 1999
Timothy Koogle Officer)
*
- ------------------------------ President, Chief Operating April 29, 1999
Jeff Mallett Officer, and Director
Senior Vice President,
Finance and
/s/ GARY VALENZUELA Administration, and
- ------------------------------ Chief Financial Officer April 29, 1999
Gary Valenzuela (Principal Financial
Officer)
* Vice President, Finance
- ------------------------------ (Principal Accounting April 29, 1999
James J. Nelson Officer)
*
- ------------------------------ Director April 29, 1999
Eric Hippeau
*
- ------------------------------ Director April 29, 1999
Arthur H. Kern
*
- ------------------------------ Director April 29, 1999
Michael Moritz
*
- ------------------------------ Director April 29, 1999
Jerry Yang
* /s/ GARY
VALENZUELA
- ------------------------------
Gary Valenzuela
ATTORNEY-IN-FACT
</TABLE>
41
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statements on Form S-3 (No. 333-56779, No.
333-62943, No. 333-67587, No. 333-71645), in the Registration Statements on Form
S-8 (No. 333-3694, No. 333-39105, No. 333-56781, No. 333-66067) and in the
Registration Statement on Form S-4 (No. 333-76995) of Yahoo! Inc. of our report
dated January 8, 1999, except as to the stock split described in Note 1 and Note
10, which are as of February 8, 1999, appearing in this Form 10-K/A.
/s/ PricewaterhouseCoopers LLP
San Jose, California
April 28, 1999
