<PAGE>
As Filed with the Securities and Exchange Commission on May 17, 1999
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to ________________
Commission File No. 0-22815
GeoCities
---------
(Exact name of Registrant as specified in its charter)
State of Delaware 95-4515867
------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4499 Glencoe Avenue
Santa Monica, California 90292
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (310) 827-3700
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 [_]
The number of shares outstanding of the Registrant's Common Stock, $.001
par value, as of April 30, 1999, was 32,606,536.
<PAGE>
GEOCITIES
FORM 10-Q
INDEX
Page
Number
------
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets at March 31, 1999
(unaudited) and December 31, 1998 1
Unaudited Condensed Consolidated Statements of Operations
for the Three Month Periods Ended March 31, 1999 and 1998 2
Unaudited Condensed Consolidated Statements of Cash Flows
for the Three Month Periods Ended March 31, 1999 and 1998 3
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 5
Item 3. Qualitative and Quantitative Disclosure about Market Risk 24
Part II. Other Information
Item 1. Legal Proceedings II-1
Item 2. Changes in Securities and Use of Proceeds II-3
Item 3. Defaults upon Senior Securities II-4
Item 4. Submission of Matters to a Vote of Security Holders II-4
Item 5. Other Information II-4
Item 6. Exhibits and Reports on Form 8-K II-4
A. Exhibits
B. Reports on Form 8-K
Signatures
<PAGE>
PART I
Financial Information
Item 1. Financial Statements
GeoCities
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
-------------- --------------
(unaudited) (audited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 29,611,000 $ 51,014,000
Short-term investments in marketable securities.... 41,125,000 33,797,000
Accounts receivable, net........................... 6,089,000 4,296,000
Prepaids and other current assets.................. 3,090,000 1,453,000
------------ ------------
Total current assets............................. 79,915,000 90,560,000
Long-term investments in marketable securities..... 6,574,000 5,094,000
Property and equipment, net........................ 11,718,000 8,706,000
Goodwill and other intangibles, net................ 21,171,000 24,482,000
Other assets....................................... 11,253,000 1,540,000
------------ ------------
Total assets..................................... $130,631,000 $130,382,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................... $ 2,685,000 $ 2,269,000
Accrued expenses................................... 5,242,000 6,745,000
Deferred revenue................................... 2,214,000 335,000
Capital lease obligations, current portion......... 2,381,000 1,707,000
------------ ------------
Total current liabilities........................ 12,522,000 11,056,000
Capital lease obligations, net of current portion.. 2,256,000 1,641,000
Other liabilities.................................. 2,445,000 686,000
------------ ------------
Total liabilities................................ 17,223,000 13,383,000
Stockholders' equity:
Common stock....................................... 32,000 32,000
Additional paid-in capital......................... 162,015,000 155,972,000
Unearned deferred compensation..................... (6,454,000) (6,845,000)
Accumulated deficit................................ (42,185,000) (32,160,000)
------------ ------------
Total stockholders' equity....................... 113,408,000 116,999,000
------------ ------------
Total liabilities and stockholders' equity....... $130,631,000 $130,382,000
============ ============
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
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GeoCities
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------
1999 1998
------------ -----------
<S> <C> <C>
Net revenues....................................... $ 7,842,000 $ 2,173,000
Cost of revenues................................... 5,074,000 1,565,000
------------ -----------
Gross profit.................................. 2,768,000 608,000
Operating expenses:
Sales and marketing.............................. 6,243,000 2,202,000
Product development.............................. 2,714,000 508,000
General and administrative....................... 2,732,000 999,000
Amortization of goodwill and other intangibles... 1,983,000 --
------------ -----------
Total operating expenses........................ 13,672,000 3,709,000
------------ -----------
Loss from operations............................... (10,904,000) (3,101,000)
Interest income, net............................. 879,000 203,000
------------ -----------
Net loss........................................... (10,025,000) (2,898,000)
Accretion on mandatory redeemable
convertible preferred stock..................... -- (687,000)
------------ -----------
Net loss applicable to common stockholders.... $(10,025,000) $(3,585,000)
============ ===========
Basic and diluted net loss per share
applicable to common stockholders................. $ (0.31) $ (1.29)
============ ===========
Weighted average shares outstanding
used in per-share calculation..................... 32,260,000 2,770,000
============ ===========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
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GeoCities
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss........................................ $(10,025,000) $ (2,898,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization................ 3,628,000 144,000
Deferred compensation earned................. 386,000 40,000
Bad debt reserve............................. 142,000 76,000
Changes in operating assets and liabilities:
Accounts receivable......................... (1,935,000) (318,000)
Prepaids and other current assets........... (1,637,000) 203,000
Other assets................................ 16,000 40,000
Accounts payable............................ 416,000 (295,000)
Accrued expense............................. (1,494,000) 1,021,000
Deferred revenue............................ 129,000 129,000
------------ ------------
Net cash used in operating activities..... (10,374,000) (1,858,000)
Cash flows used in investing activities:
Purchase of property and equipment.............. (2,631,000) (438,000)
Redemption of held-to-maturity securities....... 22,250,000 --
Purchases of held-to-maturity securities........ (31,058,000) (24,595,000)
------------ ------------
Net cash used in investing activities........ (11,439,000) (25,033,000)
Cash flows from financing activities:
Proceeds from issuance of common stock, net..... 850,000 199,000
Payments under capital-lease obligations........ (440,000) (79,000)
Subscription receivable......................... -- 25,000,000
------------ ------------
Net cash provided by financing activities.... 410,000 25,120,000
------------ ------------
Net decrease in cash.............................. (21,403,000) (1,771,000)
Cash and cash equivalents, beginning of period.... 51,014,000 3,785,000
------------ ------------
Cash and cash equivalents, end of period.......... $ 29,611,000 $ 2,014,000
============ ============
</TABLE>
The accompanying notes are an integral part of
these condensed consolidated financial statements.
3
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GeoCities
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All Information with Respect to March 31, 1999 and 1998 is Unaudited)
1. Organization and Business
GeoCities (the "Company") was incorporated as a California corporation on
December 16, 1994, and began operations in 1995. In June 1998, the Board of
Directors approved the reincorporation of the Company in the State of Delaware
and changed the par value of the Company's Common Stock. The Company offers a
community of personal websites on the Internet within 41 themed neighborhoods.
The Company's main source of revenue is from advertising, along with other
revenue streams, including fee-based premium services and commerce. The
Company's business is characterized by rapid technological change, new product
development and evolving industry standards.
The consolidated financial statements are unaudited, other than the balance
sheet at December 31, 1998, and, in the opinion of management, reflect all
adjustments that are necessary for a fair presentation of the results for the
periods shown. The results of operations for such periods are not necessarily
indicative of the results expected for the full fiscal year or for any future
period. Certain items shown in the prior financial statements have been
reclassified to conform with the presentation of the current period. These
condensed consolidated financial statements should be read in conjunction with
the consolidated financial statements as of and for the three years ended
December 31, 1998, and related notes included in the Company's Annual Report on
form 10-K dated March 31, 1999, filed with the Securities and Exchange
Commission (the "SEC").
2. Merger with Yahoo
In January 1999, the Company entered into an agreement with Yahoo! Inc.
("Yahoo!") whereby the Company will become a wholly-owned subsidiary of Yahoo!.
Under the terms of the agreement, Yahoo! will issue 0.6768 shares of Yahoo!
common stock in exchange for each share of the Company's common stock. In
addition, all options to purchase the Company's common stock will be converted
into options to purchase Yahoo! common stock at the same conversion rate. The
acquisition is intended to be accounted for as a pooling of interests and is
expected to be completed in the second quarter of 1999.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion of the financial condition and results of
operations of GeoCities should be read in conjunction with the consolidated
financial statements and the related notes to such financial statements included
elsewhere in this report. This discussion contains forward-looking statements
that involve risks and uncertainties. GeoCities' actual results may differ
materially from these forward-looking statements as a results of certain
factors, including, but not limited to, those set forth under "Risk Factors" and
elsewhere in this report. Readers are also urged to carefully review and
consider the various risk factor disclosures made in the Company's other reports
and filings with the SEC, including the Company's annual report on Form 10-K
filed March 31, 1999 and the Company's definitive proxy statement on schedule
14A filed on April 29, 1999. Readers are cautioned not to place undue reliance
on these forward-looking statements to reflect events or circumstances occurring
after the date hereof.
Overview
To date, the Company's revenues have been derived principally from the sale
of advertisements. The Company sells banner advertisements, event sponsorships
and premium site locations within the Company's website. The Company also
receives advertising revenues from select premier commerce partners in return
for preferred banner advertising locations on, and integration into, the
Company's website. The Company also receives advertising revenues from third-
party content providers who pay the Company for displaying their content on the
Company's website. In March 1999, the Company introduced the Pages That Pay
program, which enables member merchants to advertise their products and services
on the GeoCities homesteader's personal websites and in turn pays the
homesteader a referral fee upon consummated sales. Currently, the duration of
the Company's various banner advertising arrangements averages between two to
three months. Advertising rates are dependent on whether the impressions are for
general rotation throughout the Company's website or for targeted audiences and
properties within specific areas of the GeoCities site. All advertising revenues
are recognized ratably in the period in which the advertisement is displayed,
provided that no significant Company obligations remain and collection of the
resulting receivable is probable. Company obligations typically include
guarantees of a minimum number of "impressions" or times that an advertisement
appears in page views downloaded by users. Payments received from advertisers
prior to displaying their advertisements on the site are recorded as deferred
revenues and are recognized as revenue ratably when the advertisement is
displayed.
In addition to advertising revenues, the Company derives other revenues
primarily from its GeoPlus program, and, to a lesser extent, from its GeoShops
program. The Company's GeoPlus program offers premium services for a monthly
fee, providing homesteaders additional disk space and enhanced publishing tools
for their web pages. The Company's GeoShops program, a commerce service that,
for a monthly fee, allows homesteaders to sell products and services on their
personal websites, and, for an additional fee, provides homesteaders with
transaction authorization and processing capabilities. Revenues from the GeoPlus
and GeoShops programs are recognized in the month that the service is provided.
The Company has incurred significant losses since its inception, and as of
March 31, 1999, had an accumulated deficit of approximately $42.2 million. Also,
in connection with the grant of certain stock options to employees during 1997
and 1998, the Company recorded unearned deferred compensation totaling
approximately $8.0 million, representing the difference between the deemed value
of the Company's Common Stock for accounting purposes and the exercise price of
such options at the date of grant. At March 31, 1999, the unearned deferred
compensation balance was $6.5 million. Such amount, net of amortization, is
presented as a reduction of stockholders' equity and amortized over the vesting
period of the applicable options. As a result, the Company currently expects to
amortize the following amounts of deferred compensation annually: 1999--$1.5
million; 2000--$1.8 million; 2001--$2.0 million; 2002--$0.9 million; 2003--$0.4
million and 2004--$0.2 million. Amortization of deferred compensation was
$386,000 and $40,000 for the three months ended March 31, 1999 and 1998,
respectively.
The Company, FTC staff attorneys and the Director of Consumer Protection for
the FTC executed a consent order in June 1998, in connection with the FTC's
investigation into certain of the Company's past business practices regarding
the collection and use of personal identifying information. The consent order
was issued by the FTC on
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February 5, 1999. Based on the scope of the consent order, the Company does not
believe that its compliance with the consent order will have a material adverse
effect on its business, results of operations or financial condition.
On January 28, 1999, the Company announced the signing of a definitive
agreement with Yahoo! Inc. whereby GeoCities will become a wholly-owned
subsidiary of Yahoo!. According to the terms of the agreement, the merger is
intended to be accounted for as a pooling of interests and Yahoo! will issue
0.6768 shares of Yahoo! common stock for each share of GeoCities common stock
outstanding. In addition, all outstanding stock options of GeoCities will be
converted into Yahoo! stock options using the same exchange ratio. The merger is
subject to certain conditions and approval by the Company's stockholders.
GeoCities filed a definitive proxy statement with the SEC on April 29, 1999
which discusses the material terms of the merger and has called a special
meeting of stockholders for May 28, 1999 to vote on the merger. If the merger is
consummated, GeoCities' future results of operations could be significantly
affected as its operations and business are integrated with Yahoo!'s business
and operations.
In March 1999, GeoCities acquired all of the issued and outstanding capital
stock and options to purchase capital stock of Futuretouch. The purchase price
included an aggregate of 65,000 shares of GeoCities common stock, valued at
$6,228,000 and an additional $1.0 million payable on the first year anniversary
of the closing, subject to the achievement of performance criteria. The
acquisition was accounted for as a purchase with the excess of the purchase
price over the fair value of the net assets acquired being recorded as goodwill
and other intangibles.
Results of Operations--Three Months Ended March 31, 1999 and 1998
Net Revenues
Net revenues were $7,842,000 for the three months ended March 31, 1999, a
261% increase from $2,173,000 during the three months ended March 31, 1998. The
increase in net revenues was due primarily to an increase in the number of
advertisers from 90 for the three months ended March 31, 1998 to 223 for the
three months ended March 31, 1999; the addition of the Company's premier
commerce partners; the increase in the Company's website traffic, exemplified by
the increase in page views from 2.1 billion for the three months ended March 31,
1998 to 5.4 billion for the three months ended March 31, 1999; the deployment of
the Pages That Pay program and, to a lesser extent, expansion in GeoPlus and
GeoShops memberships; and the addition of third-party content providers which
pay the Company for carrying their content within the GeoCities community.
Advertising revenues accounted for approximately 95% and 88% of net revenues
for the three months ended March 31, 1999 and 1998, respectively. The Company's
four largest customers accounted for approximately 22% and 30% of net revenues
in the three months ended March 31, 1999 and 1998, respectively. The GeoPlus
program accounted for 4% and 12% of net revenues for the three months ended
March 31, 1999 and 1998, respectively. During the three months ended March 31,
1999 and 1998, the Company's revenues from its GeoShops program and revenue-
sharing arrangements with commerce partners were not material.
Cost of Revenues
Cost of revenues were $5,074,000 for the three months ended March 31, 1999,
or 65% of net revenues as compared to $1,565,000, or 72% of net revenues for the
three months ended March 31, 1998. The absolute dollar increases in cost of
revenues were primarily due to the costs of building the Company's server and
networking infrastructure in response to the growth in homesteader membership,
from 1.6 million at March 31, 1998 to 4.0 million at March 31, 1999, increasing
costs of serving banner advertisements due to increasing page views, and
amortization of purchase technology costs of $616,000. Cost of revenues as a
percentage of net revenues has decreased because of the growth in net revenues.
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Operating Expenses
Sales and Marketing Expenses
Sales and marketing expenses were $6,243,000 for the three months ended
March 31, 1999, or 80% of net revenues as compared to $2,202,000, or 101% of net
revenues for the three months ended March 31, 1998. The absolute dollar
increases in sales and marketing expenses were primarily attributable to the
Company's continued efforts to build a direct sales and marketing force and
editorial and support staff, from 64 at March 31, 1998 to 164 at March 31, 1999,
increased expenses associated with promotion and marketing efforts and a
nonrecurring charge related to the termination of a distribution agreement for
$497,000. Sales and marketing expenses as a percentage of net revenues have
decreased because of the growth in net revenues.
Product Development Expenses
Product development expenses were $2,714,000 for the three months ended
March 31, 1999, or 35% of net revenues as compared to $508,000, or 23% of net
revenues for the three months ended March 31, 1998. The increases in product
development expenses were primarily attributable to increases in the number of
engineers devoted to supporting enhancement to and development of the Company's
products. The Company's believes that significant investments in product
development are required to remain competitive.
General and Administrative Expenses
General and administrative expenses were $2,732,000 for the three months
ended March 31, 1999, or 35% of net revenues as compared to $999,000, or 46% of
net revenues for the three months ended March 31, 1998. The absolute dollar
increases in general and administrative expenses were primarily due to increases
in the number of general and administrative personnel, from 17 at March 31, 1998
to 41 at March 31, 1999, and an increase in professional services and facility
expenses to support the growth of the Company's operations. General and
administrative expenses as a percentage of net revenues decreased due to the
growth in net revenues.
Amortization of Goodwill and Other Intangibles
Amortization of goodwill and other intangibles was $1,983,000 for the three
months ended March 31, 1999, or 25% of net revenues. Amortization expense is
attributable to the goodwill and other intangibles recognized in connection with
the acquisition of Starseed, Inc. in December 1998.
Interest Income, Net
Interest income, net was $879,000 for the three months ended March 31, 1999,
as compared to $203,000 for the three months ended March 31, 1998. Interest
income, net includes income from the Company's cash and investments and expenses
related to the Company's financing obligations. The increase in absolute dollars
was primarily due to a higher average investment balance as a result of the
receipt of the proceeds from the consummation of the Company's initial public
offering in August 1998.
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Liquidity and Capital Resources
Liquidity and Capital Resources
The Company invests predominantly in instruments that are highly liquid, of
quality investment grade, and predominantly have maturities of less than one
year with the intent to make such funds readily available for operating
purposes. As of March 31, 1999, the Company had approximately $29,611,000 in
cash and cash equivalents and $47,699,000 in short-term and long-term
investments. The Company regularly invests excess funds in a combination of
short-term money market funds, government securities and commercial paper.
Net cash used in operating activities increased to $10,374,000 for the three
months ended March 31, 1999, from $1,858,000 for the three months ended March
31, 1998. The increase in net cash used resulted primarily from increases in net
loss, accounts receivable, prepaids and other current assets and decreases in
accrued expenses, partially offset by increases in accounts payable.
Net cash used in investing activities decreased to $11,439,000 for the three
months ended March 31, 1999, from $25,033,000 for the three months ended March
31, 1998, resulting primarily from redemption of investment securities,
partially offset by the purchase of investments with the proceeds received in
1998 from the Company's equity financings and increased purchases of property
and equipment.
Net cash provided by financing activities decreased to $410,000 for the
three months ended March 31, 1999, compared to $25,120,000 for the three months
ended March 31, 1998, resulting primarily from approximately $25,00,0000 of cash
proceeds that was received in January 1998 in connection with the sale of shares
of the Company's preferred stock, and for the three months ended March 31, 1999,
increased capital lease payments, partially offset by increases in cash proceeds
from the issuance of common stock.
The Company has a bank line of credit for $10,000,000. To date, there have
been no borrowings under this line of credit. This credit facility includes a
$7,000,000 revolving facility for working capital and a $3,000,000 equipment
lease facility. This facility bears interest at the bank's prime rate for the
revolving facility and the bank's prime rate plus 0.75% for the equipment lease
facility. Any borrowings under this line of credit will be collateralized by
substantially all of the Company's assets.
The Company's capital requirements depend on numerous factors, including
market acceptance of the Company's services, the amount of resources the Company
devotes to investments in the GeoCities community, the resources the Company
devotes to marketing and selling its services and its brand promotions and other
factors. Since its inception, GeoCities has experienced a substantial increase
in its capital expenditures and operating lease arrangements consistent with the
growth in its operations and staffing, and anticipates that this will continue
for the foreseeable future. Additionally, the Company will continue to evaluate
possible investments in products and technologies, and plans to expand its sales
and marketing programs. The Company currently anticipates that its existing line
of credit and available funds will be sufficient to meet its anticipated needs
for working capital and capital expenditures for at least the next 12 months.
Year 2000 Readiness
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 at the turn of this
century 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.
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State of Readiness
In October 1998, the Company completed an initial evaluation of the year
2000 readiness of the information technology systems used in its operations ("IT
Systems") and its non-IT Systems, such as building security, voice mail and
other systems. Based on this evaluation, the Company identified two database
tables that hold information concerning GeoCities' homesteaders in which the
date-of-birth year field was stored as a two-digit character string and, as a
result, were not year 2000 compliant. All programs affected by the
aforementioned noncompliance were identified and converted to a year 2000
compliant system in March 1999. In addition, as a result of the preliminary
evaluation, all production server operating systems in use by the Company at
that time which were not deemed year 2000 compliant have been upgraded to year
2000 compliant systems.
The Company is currently undergoing a more comprehensive analysis of the
year 2000 readiness of its IT and non-IT systems. This additional analysis will
cover the following phases:
1) identification of GeoCities-owned and third-party IT Systems and non-IT
Systems;
2) obtaining representations and other assurances from third-party vendors and
licensors of their products' year 2000 readiness;
3) assessment of any repair or replacement requirements;
4) repair or replacement;
5) testing;
6) implementation; and
7) creation of contingency plans in the event of year 2000 failures.
The Company has completed the first phase of this additional analysis and is
currently performing phases (2) through (6) of the analysis. The Company expects
to complete these phases by the end of June 1999, after which, the Company will
implement phase (7) of the plan. the Company expects to complete all of the
phases by the end of July 1999.
Other than the foregoing, based on its preliminary evaluation and the
interim results of its current analysis, the Company believes it is year 2000
compliant.
Costs
To date, the Company has not incurred any material expenditures in
connection with identifying or evaluating year 2000 compliance issues. Most of
its expenses have related to the opportunity cost of time spent by employees of
the Company evaluating its IT Systems and non-IT Systems, year 2000 compliance
matters generally, and repairing existing IT Systems and non-IT Systems, based
on the findings of its preliminary evaluation. Furthermore, based on its
analysis to date, the Company does not expect that it will be required to incur
any material expenditures in the future with respect to year 2000 compliance
issues.
Risks of Year 2000 Issues
While the Company believes it is year 2000 compliant, there are still a
number of risks associated with year 2000 issues. For instance, the Company
relies heavily on third-party software and services to implement , track and
account for its advertising revenues. If a year 2000 issue were to arise with
respect to such software or services, the Company's ability to generate and
collect revenues could be materially and adversely impacted. In addition to the
IT Systems and non-IT Systems currently within its direct control, the Company
relies both domestically and internationally, upon various vendors, governmental
agencies, utility companies, telecommunications service
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companies, delivery service companies and other service providers who are
outside of the Company's control. The Company cannot assure you that these
parties will not suffer a year 2000 business disruption.
In particular, if a year 2000 problem were to arise with respect to a
telecommunications service company, the Company's website could become
inaccessible. In such event, the Company's business, results of operations and
financial condition would be materially and adversely impacted.
Contingency Plan and Monitoring
The Company does not presently have a contingency plan with respect to year
2000 issues. As part of the comprehensive analysis that the Company is currently
performing, the Company plans to develop a contingency plan to address such
issues.
In addition, the Company is continuing to monitor all of the new IT Systems
and non-IT Systems that it acquires or accesses in the normal course of its
business. If additional year 2000 compliance issues are discovered, the Company
plans to evaluate the need for repair or replacement or to develop contingency
plans relating to such issues.
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RISK FACTORS
You should carefully consider the following risks in your evaluation of
GeoCities. The risks and uncertainties described below are not the only ones
facing GeoCities. Additional risks and uncertainties, including those risks set
forth below, may also adversely impact and impair GeoCities' business. If any of
the following risks actually occur, GeoCities' business, results of operations
or financial condition would likely suffer. In such case, the trading price of
GeoCities common stock could decline, and you may lose all or part of the money
you paid to buy GeoCities common stock.
Limited Operating History
GeoCities was founded in December 1994 but did not begin generating
advertising revenues until mid-1996. For the three months ended March 31, 1999
and 1998, GeoCities generated revenues of $7.8 million and $2.2 million,
respectively. Accordingly, it has a limited operating history upon which an
evaluation of its current business and prospects can be based. In addition,
GeoCities' revenue model is evolving and relies substantially upon the sale of
advertising on its website. You must consider the risks, expenses and problems
frequently encountered by companies in their early stages of development,
particularly companies in new and rapidly evolving markets such as the Internet.
These risks include GeoCities':
. ability to maintain and/or increase levels of traffic on its website;
. ability to continue to develop and extend the GeoCities brand;
. ability to meet its minimum obligations under advertising agreements;
. dependence on Internet users broadly accepting the community model;
. ability to attract new members or retain current members;
. dependence on homesteaders' acceptance of advertising on homesteads;
. ability to generate significant Web-based commerce revenues or premium
service revenues from GeoCities' members;
. ability to anticipate and adapt to the developing Internet market;
. dependence on its server and networking systems and its ability to
efficiently handle GeoCities' web traffic;
. ability to achieve broad acceptance as an advertising and commercial medium;
. ability to effectively manage rapidly expanding operations;
. ability to identify, attract, retain and motivate qualified personnel;
. ability to maintain or achieve higher rates for advertising;
. dependence on the availability of the Internet;
. dependence on market prices for Web-based advertising;
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. ability to successfully integrate its operations with acquisitions or that
the risks associated with acquisitions, including but not limited to
expenses, fluctuations in amortization and write-downs of intangible assets,
will materially adversely affect its business, results of operations and
financial condition; and dependence on general economic conditions.
Further risks facing GeoCities include:
. the ability of competitors to introduce or develop different or more
extensive communities by direct and indirect competitors, particularly in
light of the fact that many of such competitors are much larger and have
greater financial, technical and marketing resources than GeoCities;
. reductions in market prices for Web-based advertising as a result of
competition or other reasons; and
. changes in laws that adversely affect GeoCities' business.
GeoCities cannot assure you that its business strategy will be successful or
that it will be successful in addressing such risks. If its business strategy
fails or if it fails to successfully address any of the above-mentioned risks,
its failure could have a material adverse effect on GeoCities' business, results
of operations and financial condition. Please see "Management's Discussion and
Analysis of Financial Condition and Results of Operations" for more information
on GeoCities' limited operating history.
GeoCities May Not Achieve Profitability; GeoCities Anticipates Continued Losses
As of March 31, 1999, GeoCities had an accumulated deficit of $42.2 million
and has not achieved profitability on a quarterly or annual basis to date.
Although its revenues have grown in recent quarters, it cannot assure you that
it will ever achieve profitability or that its losses will not increase. If
GeoCities ever does achieve profitability, it cannot assure you that it can
sustain or increase profitability. If revenues grow slower than GeoCities
anticipates, or if operating expenses exceed its expectations or cannot be
adjusted accordingly, its business, results of operations and financial
condition will be materially and adversely affected.
The extent of GeoCities' losses will depend, in part, on its ability to
increase revenues from advertising, generate commerce activity on its website
and generate premium membership service fees. If the proposed merger with Yahoo!
(please see "Risks Associated with Yahoo! Merger") is not consummated,
GeoCities' operating expenses would increase significantly, especially in the
areas of sales and marketing and brand promotion. GeoCities' extremely limited
operating history makes the prediction of future results of operations
difficult, and, therefore, you should not rely on its recent revenue growth as
any indication of its future revenue growth. GeoCities believes that period-to-
period comparisons of its operating results are not meaningful and that you
should not rely on the results for any period as an indication of its future
performance.
GeoCities' Quarterly Results Are Unpredictable and Subject to Significant
Fluctuation
GeoCities' operating results may vary significantly from quarter to quarter
as a result of a variety of factors, many of which are outside of GeoCities'
control. These factors include:
. demand for web-based advertising;
. acceptance of the web as a commerce medium;
. level of traffic on the GeoCities website;
. advertising budgeting cycles of advertisers;
. amount and timing of capital expenditures and other costs relating to the
expansion of GeoCities' operations;
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. introduction of new or enhanced services by GeoCities or GeoCities'
competitors;
. timing and number of new hires;
. pricing changes for web-based advertising as a result of competition or
otherwise;
. loss of a key advertising contract or relationship;
. types of advertisements sold by GeoCities;
. engineering or development fees that may be paid in connection with adding
new website development and publishing tools; and
. incurrence of costs relating to future acquisitions.
GeoCities may from time to time make pricing, service or marketing decisions
or acquisitions that could have a material adverse effect on GeoCities'
business, results of operations and financial condition.
Advertising Revenue Is Seasonal
GeoCities expects to continue to experience seasonality in its business.
User traffic on GeoCities' website decreases during the summer and year-end
vacation and holiday periods. Additionally, seasonality may adversely affect
GeoCities' advertising revenues during the first and third calendar quarters, as
advertisers historically spend less during these periods. Because web-based
advertising is an emerging market, additional seasonal and other patterns in
web-based advertising may develop in the future as the market matures.
As a result of GeoCities' limited operating history, GeoCities has limited
meaningful historical financial data upon which to base planned operating
expenses. Some of GeoCities' expenses are fixed, and some of GeoCities' expense
levels are based, in part, on GeoCities' expectations as to future revenues from
advertising, commerce revenue-sharing arrangements, premium membership service
fees and GeoCities' anticipated growth in memberships. GeoCities cannot assure
you that it will be able to accurately predict its revenues, particularly in
light of the intense competition for the sale of web-based advertisements,
revenue-sharing opportunities and new members, GeoCities' limited operating
history and the uncertainty as to whether the web will be broadly accepted as an
advertising and commerce medium. If GeoCities fails to accurately predict
revenues in relation to fixed-expense levels, such failure could have a material
adverse effect on GeoCities' business, results of operations and financial
condition.
GeoCities Relies on Short-Term Advertising Contracts and Revenue-Sharing
Arrangements
GeoCities derives substantially all of its revenues from the sale of
advertising under short-term contracts, averaging one to two months in length.
As a result, GeoCities' quarterly revenues and its operating results
significantly depend on advertising revenues from contracts entered into within
the quarter, and on GeoCities' ability to adjust spending in a timely manner to
compensate for any unexpected revenue shortfall.
To date, a significant portion of GeoCities' revenues in any given period
has been derived from a small group of customers which generally changes from
period to period. GeoCities expects this situation to continue in the future. No
one customer accounted for more than 10% of GeoCities' net revenues for the
three months ended March 31, 1999. GeoCities' four largest customers accounted
for approximately 22% of GeoCities' net revenues during the three months ended
March 31, 1999. The cancellation or deferral of existing advertising or commerce
contracts or the failure to obtain new contracts in any quarter could materially
and adversely affect GeoCities' business, results of operations and financial
condition for that quarter and future periods.
GeoCities' advertising revenues are dependent upon the amount of traffic on
the GeoCities website. Accordingly, any significant shortfall in traffic on the
GeoCities website in relation to GeoCities' expectations or the
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expectations of existing or potential advertisers would have a material adverse
effect on GeoCities' business, results of operations and financial condition. In
addition, substantially all of GeoCities' advertising contracts require it to
guarantee a minimum number of "impressions" or times that an advertisement
appears in page views downloaded by users. If these minimum impressions are not
met:
. GeoCities could be required to provide credit for additional impressions;
. GeoCities' ability to sell advertising to new or existing advertisers could
be adversely affected; and
. GeoCities could be forced to reduce advertising rates.
Even though advertising rates have been traditionally based on a guaranteed
number of impressions, the intense competition in selling advertising on the web
results in a wide variety of pricing models, rate quotes and advertising
services, which makes it difficult to project future levels of advertising
revenues and rates. GeoCities cannot predict which pricing models, if any, will
achieve broad acceptance among advertisers. If GeoCities' advertising model
fails to achieve broad market acceptance, GeoCities' business, results of
operations and financial condition could be materially adversely affected. In
addition to selling advertising, a key element of GeoCities' strategy is to
generate revenues through revenue-sharing relationships with e-commerce
partners. GeoCities currently has short-term agreements with four premier
commerce partners: Amazon.com, CDnow, First USA and Egghead, Inc. Under the
terms of these agreements, GeoCities agreed to limit the number of premier
commerce partners on GeoCities' website to four and to certain other
restrictions. To date, GeoCities has not received a material amount of revenues
under the revenue- sharing portions of these arrangements, and GeoCities cannot
assure you that it ever will.
Each of GeoCities' premier commerce partners has the option to renew its
agreement with GeoCities, subject to the payment of certain renewal fees and
rates. Furthermore, Egghead can terminate its agreement with GeoCities upon 30
days notice, subject to the payment of certain termination fees. GeoCities
cannot assure you that any of its premier commerce partners will exercise their
renewal right or that Egghead will not exercise its right to terminate its
agreement with GeoCities. In addition, GeoCities' agreement with First USA,
obligates it to generate a certain number of accepted credit-card applications.
If GeoCities fails to generate such applications, it would likely be required to
increase the amount of advertising GeoCities provides to First USA on the
GeoCities website. If GeoCities is required to do so, GeoCities' business,
results of operations and financial condition could be materially adversely
affected.
GeoCities' Business Model Is Unproven and Relies on Members and Community Leader
Volunteers
GeoCities' business model depends on its ability to leverage the "community-
based" platform to generate multiple revenue streams. This business model is
unproven. To be successful, GeoCities must, among other things, develop and
market products and services that achieve broad market acceptance by GeoCities'
members, Internet advertisers, commerce vendors and Internet users. The success
of the GeoCities business model depends to a great degree on GeoCities' members,
including:
. content generation by GeoCities' members;
. grass-roots promotional efforts of GeoCities' members;
. acceptance by GeoCities' members of advertising and other promotional
programs of third parties and GeoCities, including GeoCities' watermark on
homesteads; and
. voluntary involvement of GeoCities' community leaders and liaisons to attract
web users to the GeoCities website and to reduce the demands on GeoCities'
personnel.
As indicated, the GeoCities business model relies on volunteers such as its
community leaders and liaisons to provide assistance to homesteaders and other
users of the GeoCities website. GeoCities is aware of a published report that
several volunteers at AOL have asked the U.S. Department of Labor to investigate
whether AOL's use of
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voluntary labor violates the Federal Fair Labor Standards Act. The same report
states that the Labor Department has not begun an investigation into the matter,
but acknowledges that it has received information from several of AOL's
volunteers. Although GeoCities is not aware of any similar requests by any of
its volunteers, no assurances can be given that such requests will not be made
in the future. GeoCities does not believe that any of its practices in
connection with the use of volunteers in its business is in violation of any
labor laws; however, to the extent that the Department of Labor makes an adverse
determination in the AOL matter, it could materially and adversely affect the
combined company's business and financial results.
Reliance on Advertising Revenues; Unproven Acceptance and Effectiveness of the
Web as an Advertising Medium
GeoCities derives a substantial majority of its revenues from the sale of
advertisements, including banner advertising revenues and advertising revenues
from GeoCities' premier commerce partners. Advertising revenues represented 95%
and 88% of GeoCities' net revenues in three months ended March 31, 1999 and
1998, respectively. GeoCities plans to continue emphasizing advertising as a
method of generating revenues. GeoCities' ability to generate significant
advertising revenues depends on, among other things, whether GeoCities can
develop a large base of users and visitors possessing demographic
characteristics attractive to advertisers and whether GeoCities can develop or
acquire effective advertising delivery and measurement systems. Advertisers have
only used the Internet as an advertising medium for a relatively short period of
time. Accordingly, the effectiveness of the Internet as an advertising medium as
compared to traditional advertising media has yet to be established.
Many of GeoCities' advertisers have only limited experience with the web as
an advertising medium, have not yet devoted a significant portion of their
advertising budgets to web-based advertising and may not find such advertising
to be effective for promoting their products and services relative to
traditional print and broadcast media. The adoption of web-based advertising,
particularly by those entities that have historically relied upon traditional
media for advertising, requires the acceptance of a new way of conducting
business and exchanging information. Entities that have invested substantial
resources in other methods of conducting business may be reluctant to adopt a
new strategy that may limit or compete with their existing efforts. GeoCities
cannot assure you that the market for web-based advertising will continue to
emerge or become sustainable. Furthermore, the market for web-based advertising
may develop more slowly than expected.
The process of managing advertising within the GeoCities' website is an
increasingly important and complex task. GeoCities licenses its advertising
management system from AdForce, Inc. Under the license agreement, AdForce
provides GeoCities with an Internet advertising administration system known as
AdForce to facilitate GeoCities' management of advertising on the GeoCities
website. GeoCities uses the AdForce service to generate ad tags, schedule
advertising and generate reports. The AdForce agreement has a term of two years
and will expire in May 2000, if not renewed, subject to GeoCities' right to
terminate the agreement with or without cause during the 30-day period following
May 4, 1999. Additionally, GeoCities may terminate the agreement if AdForce
fails to perform under the agreement. GeoCities cannot assure you that it will
not terminate the AdForce agreement. If it did terminate the agreement,
GeoCities believes that it could replace the AdForce service with other
available advertising management systems. However, any such termination and
replacement could disrupt GeoCities' ability to manage GeoCities' advertising
operations for a period of time. In addition, system failures or material
difficulties in the operation of the AdForce system or any replacement system,
could prevent GeoCities from delivering banner advertisements and sponsorships
through GeoCities' website, which might require it to displace salable
advertising inventory with free or discounted advertising to GeoCities' existing
advertisers.
GeoCities May Not Be Able to Manage Growth and Relationships
GeoCities has experienced and may continue to experience rapid growth, which
has placed, and could continue to place, a significant strain on its managerial,
financial and operational resources. GeoCities is required to simultaneously
manage multiple relationships with various strategic partners, technology
licensors, members, advertisers and other third parties. These requirements
could be strained if GeoCities' business and/or operations continue to grow or
if GeoCities enters into additional third party relationships. GeoCities cannot
assure you that its
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systems, procedures or controls will be adequate to support its operations or
that its management will be able to effectively manage any growth.
The Loss of, or Inability to Attract, Key Personnel Could Materially Adversely
Affect GeoCities
GeoCities' performance substantially depends on the performance of its
executive officers and other key employees. GeoCities does not currently have
"key person" life insurance policies on any of its employees. If GeoCities loses
the services of any of its executive officers or other key employees, its
business, results of operations and financial condition could be materially
adversely affected. The competition for senior management, experienced media
sales and marketing personnel, qualified web engineers and other employees is
intense, and GeoCities has experienced difficulty, from time to time, in hiring
and retaining the personnel necessary to support its business. Consequently,
GeoCities cannot assure you that it will be able to attract and retain qualified
personnel.
GeoCities' Markets Are Highly Competitive
The market for members, visitors and Internet advertising and e-commerce
opportunities is new and rapidly evolving, and competition for members, visitors
and advertisers is intense and is expected to increase significantly in the
future. Barriers to entry are relatively insubstantial. GeoCities believes that
the principal competitive factors for companies seeking to create community on
the Internet are critical mass, functionality, brand recognition, member
affinity and loyalty, broad demographic focus and open access to visitors.
GeoCities believes that its current major competitors are companies that are
primarily focused on creating web-based communities on the Internet. These
competitors include America Online, Inc., Excite, Inc., Disney, Tripod, Inc.,
Angelfire Communications, Xoom, Inc. and theglobe.com.
GeoCities will likely also face competition in the future from web
directories, search engines, shareware archives, content sites, commercial
online services, sites maintained by Internet service providers and other
entities that attempt to or establish communities on the Internet by developing
their own community or purchasing one of GeoCities' competitors. In addition,
GeoCities may face competition from traditional media and other companies, a
number of which, including Disney, CBS and NBC, have recently made significant
acquisitions of or investments in Internet companies. Further, there can be no
assurance that GeoCities' competitors and potential competitors will not develop
communities that are equal or superior to those of GeoCities or that achieve
greater market acceptance than GeoCities' community.
GeoCities also competes for visitors with many Internet content providers
and Internet service providers, including web directories, search engines,
shareware archives, content sites, commercial online services and sites
maintained by Internet service providers, as well as thousands of Internet sites
operated by individuals and government and educational institutions. These
competitors include free information, search and content sites or services, such
as America Online, Inc. (including Netscape Communications), CNET, Inc.,
CNN/Time Warner, Inc., Excite, Inc., Infoseek Corporation, Lycos, Inc.,
Microsoft Corporation and Yahoo!, some of which, such as Yahoo! and Disney,
owner of a significant interest in Infoseek, also have relationships with
GeoCities. GeoCities also competes with the foregoing companies, as well as
traditional forms of media such as newspapers, magazines, radio and television,
for advertisers and advertising revenue. GeoCities believes that the principal
competitive factors in attracting advertisers include the amount of traffic on
its website, brand recognition, customer service, the demographics of GeoCities'
members and viewers, GeoCities' ability to offer targeted audiences and the
overall cost effectiveness of the advertising medium offered by GeoCities.
GeoCities believes that the number of Internet companies relying on web-based
advertising revenue will increase greatly in the future. In the past several
months, a number of significant acquisitions of Internet companies have been
announced, including:
. Disney's acquisition of a significant interest in Infoseek;
. AOL's acquisition of Netscape;
. @Home Networks, Inc.'s acquisition of Excite, Inc.; and
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. USA Networks' and Ticketmaster Online-CitySearch, Inc.'s proposed combination
of services with Lycos, Inc.
Accordingly, GeoCities will likely face increased competition, which will
increase pricing pressures on its advertising rates, which could in turn have a
material adverse effect on GeoCities' business, results of operations and
financial condition.
Many of GeoCities' existing and potential competitors, including web
directories and search engines and large traditional media companies, have
longer operating histories in the web market, greater name recognition, larger
customer bases and significantly greater financial, technical and marketing
resources than GeoCities. Such competitors are able to undertake more extensive
marketing campaigns for their brands and services, adopt more aggressive
advertising pricing policies and make more attractive offers to potential
employees, distribution partners, commerce companies, advertisers and third
party content providers. There can be no assurance that Internet content
providers and Internet service providers, including web directories, search
engines, shareware archives, sites that offer professional editorial content,
commercial online services and sites maintained by Internet service providers
will not be perceived by advertisers as having more desirable websites for
placement of advertisements. In addition, substantially all of GeoCities'
current advertising customers and strategic partners also have established
collaborative relationships with certain of GeoCities' competitors or potential
competitors, and other high-traffic websites. Accordingly, there can be no
assurance that GeoCities will be able to grow its memberships, traffic levels
and advertiser customer base at historical levels or retain its current members,
traffic levels or advertiser customers, or that competitors will not experience
greater growth in traffic that GeoCities as a result of such relationships which
could have the effect of making their websites more attractive to advertisers,
or that GeoCities' strategic partners will not sever or will elect not to renew
their agreements with GeoCities. There can also be no assurance that GeoCities
will be able to compete successfully against its current or future competitors
or that competition will not have a material adverse effect on GeoCities'
business, results of operations and financial condition.
Capacity Constraints and System Failures Could Adversely Impact GeoCities'
Business
GeoCities' business and reputation and ability to attract web users,
advertisers, new members and commerce partners to GeoCities' website depends
substantially on the performance of its server, networking hardware and software
infrastructure. If a system failure causes an interruption in service or a
decrease in responsiveness of GeoCities' website, the GeoCities website could
experience less traffic. If such interruption or decreases were sustained or
repeated, GeoCities' reputation and the attractiveness of its brand name could
be impaired.
GeoCities currently utilizes the following precautionary measures with
respect to its systems:
. maintaining redundant systems for all critical operational areas so that
connectivity through a failed router or switch can be restored via one of the
on-site hot standby systems;
. maintaining redundant application servers and databases to ensure full
functionality in the event of a system failure;
. configuring its disk storage to survive multiple drive failures without risk
of data loss;
. using several dedicated servers and tape libraries to backup the GeoCities
website every 24 hours;
. rotating backup media into offsite archives to ensure data integrity should
catastrophic events occur on site; and
. maintaining business interruption insurance which GeoCities believes is
sufficient to provide coverage due to systems failures.
Despite the foregoing safety precautions, GeoCities cannot assure you that
its systems will continue to perform to its members' and its customers'
satisfaction.
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GeoCities entered into a one-year web-hosting agreement with Exodus
Communications, Inc. in November 1997. This agreement automatically renews for
subsequent one-year terms unless either party provides notice at least 90 days
prior to the expiration of any term. Pursuant to the agreement, Exodus provides
and manages power and environmentals for GeoCities' networking and server
equipment. Exodus also provides site connectivity to the Internet via multiple
DS-3 and OC-3 links on a 24 hour-a-day, seven days per week basis. If GeoCities'
Internet connectivity is interrupted due to reasons within Exodus' reasonable
control, Exodus must in general provide GeoCities with additional access at no
charge. Exodus does not, however, guarantee that its Internet access will be
uninterrupted, error-free or completely secure. If the Internet access provided
by Exodus is disrupted, or if GeoCities' server and networking systems fail to
handle current or higher volumes of traffic, GeoCities' business, results of
operations and financial condition could be materially adversely affected.
Increases in the use of GeoCities' website or the addition of raw products or
features to the GeoCities website could strain the capacity of our systems,
which could lead to slower response times or system failures. Such events would
diminish the experience for GeoCities' members and visitors and would likely
decrease the number of impressions received by advertisers, which could reduce
GeoCities' advertising and commerce revenues. GeoCities does not know whether it
will be able to provide effective Internet connections and systems to manage
substantially larger numbers of customers at higher transmission speed. As a
result, GeoCities may not be able to scale up to its expected customer levels
while maintaining the performance of its website. If GeoCities' resource
requirements increase, it will need to purchase additional servers and
networking equipment and rely more heavily on Exodus and its services to
maintain adequate data transmission speeds. GeoCities cannot assure you that
such additional equipment or services will be available, or that the cost of
such equipment and services will not be significant.
The successful delivery of GeoCities' services also substantially depends upon
Exodus' and GeoCities' ability to protect GeoCities' servers and network
infrastructure against damage from human error, fire, flood, power loss,
telecommunications failure, sabotage, intentional acts of vandalism and similar
events. In addition, substantially all of GeoCities' servers and network
infrastructure are located in northern California, an area susceptible to
earthquakes. If an earthquake were to occur, GeoCities' system could experience
an outage or failure. Despite the precautions that GeoCities and Exodus have
taken and plan to take, the occurrence of other natural disasters or other
unanticipated problems at either of the facilities could interrupt GeoCities'
services or significantly damage GeoCities' equipment. Although GeoCities has
implemented network security measures, GeoCities' servers are still vulnerable
to computer viruses, break-ins, and similar disruptions from unauthorized
tampering. If any one of these events were to occur, GeoCities' service could be
interrupted, delayed or terminated, which could materially adverse affect its
business, results of operations and financial condition. In addition, its
reputation and the GeoCities brand could be materially and adversely affected.
GeoCities May Not Be Able to Effectively Respond to Technological Changes
GeoCities competes in a market which is characterized by rapidly changing
technology, evolving industry standards, frequent new product and service
announcements and enhancements and changing customer demands. Accordingly,
GeoCities' success will depend on its ability to adapt to rapidly changing
technologies and industry standards, and its ability to continually improve the
speed, performance, features, ease of use and reliability of its server and
networking system in response to the evolving demands of the marketplace and
competitive service and product offerings. If GeoCities fails to rapidly adapt
in response to such events, its business, results of operations and financial
condition could be materially adversely affected.
GeoCities continually strives to incorporate new technology into GeoCities'
website for the benefit of GeoCities' members, visitors and advertising and
commerce partners. Introducing new technology into GeoCities' systems involves
numerous technical challenges, substantial amounts of personnel resources and
often takes many months to complete. GeoCities cannot assure you that it will be
successful at integrating such technology into GeoCities' website on a timely
basis or without degrading the responsiveness and speed of GeoCities' website or
that, once integrated, such technology will function as expected.
Government Regulation and Legal Uncertainties Could Adversely Impact GeoCities'
Business and Operations
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General. Laws and regulations directly applicable to Internet communications,
commerce and advertising are becoming more prevalent. The most recent session of
the United States Congress resulted in Internet laws regarding children's
privacy, copyrights and taxation. Such legislation could dampen the growth in
use of the web generally and decrease the acceptance of the web as a
communications, commercial and advertising medium. Although GeoCities'
transmissions originate in California, the governments of other states or
foreign countries might attempt to regulate GeoCities' transmissions or levy
sales or other taxes relating to GeoCities' activities. The European Union
recently enacted its own privacy regulations that may result in limits on the
collection and use of certain user information. The laws governing the Internet,
however, remain largely unsettled, even in areas where there has been some
legislative action. It may take years to determine whether and how existing laws
such as those governing intellectual property, privacy, libel and taxation apply
to the Internet and Internet advertising. In addition, the growth and
development of the market for Internet commerce may prompt calls for more
stringent consumer protection laws, both in the United States and abroad, that
may impose additional burdens on companies conducting business over the
Internet. GeoCities' business, results of operations and financial condition
could be adversely affected by the adoption or modification of laws or
regulations relating to the Internet.
It is also possible that GeoCities' use of "cookies" to track demographic
information and user preferences and to target advertising may become subject to
laws limiting or prohibiting their use. A "cookie" is a bit of information keyed
to a specific server, file pathway or directory location that is stored on a
user's hard drive, possibly without the user's knowledge. A user is generally
able to remove cookies. Germany, for example, has imposed laws limiting the use
of cookies, and a number of Internet commentators, advocates and governmental
bodies in the United States and other countries have urged the passage of laws
limiting or abolishing the use of cookies. Limitations on or elimination of
GeoCities' use of cookies could limit GeoCities' effectiveness in targeting
advertisements, which could have a material adverse effect on GeoCities'
business, results of operations and financial condition.
A number of legislative proposals have been made at the federal, state and
local level that would impose additional taxes on the sale of goods and services
over the Internet and certain states have taken measures to tax Internet-related
activities. Congress has passed legislation which places a moratorium on any new
taxation of Internet commerce. GeoCities cannot assure you that Congress will
keep such moratorium in place. Moreover, if such moratorium were lifted, it is
likely that some type of federal and/or state taxes will be imposed upon
Internet commerce. GeoCities cannot assure you that such legislation or other
attempts at regulating commerce over the Internet will not substantially impair
the growth of commerce on the Internet and, as a result, adversely affect
GeoCities' opportunity to derive financial benefit from such activities.
The "GeoRewards" affinity program, which entitles homesteaders to receive
GeoPoints and GeoTickets redeemable for merchandise, such as T-shirts, books,
music or other merchandise, exposes GeoCities to certain additional risks and
expenses including, without limitation, those related to compliance with
consumer protection laws, loss of customer data, disputes over redemption
procedures and rules, product liability, sales taxation and liabilities
associated with any failure in the performance by participating merchants.
Federal Trade Commission Investigation. See "Legal Proceedings"
Liability for Information Retrieved from the Web. Materials may be downloaded
by members and other users of GeoCities' website and subsequently distributed to
others. Accordingly, GeoCities could be subject to claims for defamation,
negligence, copyright or trademark infringement, personal injury or other
theories based on the nature, content, publication and distribution of such
materials. Such claims have been brought, and sometimes successfully pressed,
against online service providers in the past. GeoCities received inquiries on a
regular basis from third parties regarding such matters, all of which have been
resolved to date without any payments or other material adverse effect on
GeoCities' business, results of operations or financial condition.
It is also possible that if any third-party content information provided on
the GeoCities website contains errors, third parties could make claims against
us for losses incurred in reliance on such information. GeoCities also offers
e-mail services, which might expose it to potential risk, such as liabilities or
claims resulting from unsolicited e-mail (spamming), lost or misdirected
messages, illegal or fraudulent use of e-mail or interruptions or delays in
e-mail
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service. Even if such claims do not result in liability to GeoCities, it
could incur significant costs in investigating and defending against such
claims. GeoCities' potential liability for information carried on or
disseminated through GeoCities' systems could require it to implement measures
to reduce GeoCities' exposure to such liability, which may require the
expenditure of substantial resources and limit the attractiveness of GeoCities'
services to members and users.
GeoCities also enters into agreements with commerce partners and sponsors
which may generate revenues from the purchase of goods and services through
direct links from the GeoCities website. Such arrangements may expose GeoCities
to additional legal risks and uncertainties. While GeoCities' agreements with
these parties often require them to indemnify GeoCities against such
liabilities, GeoCities cannot be sure this is adequate. Although GeoCities
carries general liability insurance, GeoCities' insurance may not cover all
potential claims to which it is exposed. Any imposition of liability that is not
covered by insurance or is in excess of insurance coverage could have a material
adverse effect on GeoCities' business, results of operations and financial
condition.
Risks Associated with Brand Development
GeoCities believes that the importance of brand recognition will increase due
to the growing number of Internet sites and the low barriers to entry.
Therefore, establishing and maintaining the GeoCities brand is critical to grow
its business. To attract and retain members, Internet users, advertisers and
commerce partners, and to promote and maintain the GeoCities brand in response
to competitive pressures, GeoCities has substantially increased its investment
in creating and maintaining distinct brand loyalty among these groups, including
through traditional media advertising campaigns in print, radio, billboards and
television.
Promotion and enhancement of the GeoCities brand will also depend, in part, on
its success in providing a high-quality community experience. If GeoCities fails
to generate a corresponding increase in revenues as a result of its branding
efforts or otherwise fails to promote its brand successfully, or if GeoCities
incurs excessive expenses in promoting its brand, its business, results of
operations and financial condition will be materially and adversely affected. If
members, visitors to the GeoCities website, advertisers or businesses do not
perceive its existing services to be of high quality, or if GeoCities introduces
new services or enters into new business ventures that are not favorably
received by such parties, the value of the GeoCities brand could be diluted,
thereby decreasing the attractiveness of the GeoCities website to such parties.
GeoCities May Not Be Able to Effectively Protect Its Intellectual Property and
Proprietary Right or Obtain Rights to Third-Party Intellectual Property or
Proprietary Rights
GeoCities regards its technology as proprietary and attempts to protect it by
relying on trademark, service mark, copyright and trade secret laws and
restrictions on disclosure and transferring title and other methods. GeoCities
currently has no patents or patents pending and does not anticipate that patents
will become a significant part of its intellectual property in the foreseeable
future. GeoCities also generally enters into confidentiality or license
agreements with its employees and consultants, and generally controls access to
and distribution of its documentation and other proprietary information. Despite
these precautions to protect its proprietary rights from unauthorized use or
disclosure, parties may attempt to disclose, copy or otherwise obtain and use
GeoCities' proprietary information without authorization. Parties may also
successfully develop similar technology independently.
GeoCities pursues the registration of its service marks in the United States
and internationally, and has applied for and obtained a number of registered
service marks in the United States, including "GeoCities." GeoCities cannot
assure you that any of its registrations will be approved. Even if they are
approved, such trademarks may be successfully challenged by others. Moreover,
GeoCities may not be able to obtain effective trademark, service mark, copyright
and trade secret protection in every country in which its services are
distributed or made available through the Internet. GeoCities cannot assure you
that the steps it has taken will prevent misappropriation of GeoCities'
proprietary information, particularly in foreign countries where laws or law
enforcement practices may not protect its proprietary rights as fully as in the
United States.
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Legal standards relating to the validity, enforceability and scope of
protection of certain proprietary rights in Internet-related businesses are
uncertain and still evolving, and GeoCities cannot assure you of the future
viability or value of any of its proprietary rights or of any other companies
within this market. In addition, litigation may be necessary in the future to
enforce its intellectual property rights, to protect its trade secrets or to
determine the validity and scope of the proprietary rights of others. Such
litigation might result in substantial costs and diversion of resources and
management attention and could have a material adverse effect on GeoCities'
business, results of operations and financial condition.
GeoCities' business activities might infringe upon the proprietary rights of
others and other parties might assert infringement claims against GeoCities.
From time to time, GeoCities has been, and expects to continue to be, subject to
claims in the ordinary course of its business alleging that it or the content
generated by its members infringe trademarks, service marks and other
intellectual property rights of third parties. To date, such claims have not
resulted in any significant litigation or had a material adverse effect on
GeoCities' business; however, in the future, such claims could subject GeoCities
to significant liability for damages and could invalidate its proprietary
rights. Furthermore, even if any such claims are not meritorious, they could be
time consuming and expensive to defend and could divert management's time and
attention, which might have a material adverse effect on GeoCities' business,
results of operations and financial condition.
GeoCities currently licenses from third parties certain technologies
incorporated into GeoCities' website. As GeoCities continues to introduce new
services that incorporate new technologies, GeoCities may be required to license
additional technology from others. GeoCities cannot assure you that it will be
able to obtain licenses to such third-party technology on commercially
reasonable terms, if at all. If GeoCities fails to obtain any of these
technology licenses, its ability to introduce new services, and the performance
of its existing services, could be delayed or limited until equivalent
technology could be identified, licensed and integrated. See "Business--
Intellectual Property and Proprietary Rights."
GeoCities Would Be Adversely Impacted if Use of the Internet Does not Continue
to Grow or if the Web Infrastructure Does Not Continue to Develop
GeoCities' future success depends substantially on continued growth in the use
of the Internet and the web in order to support the sale of advertising on
GeoCities' website and on the acceptance and volume of commerce transactions on
the Internet. GeoCities cannot assure you that the number of Internet users will
continue to grow or that commerce over the Internet will become more widespread.
As is typical in the case of a new and rapidly evolving industry, demand and
market acceptance for recently introduced services are subject to a high level
of uncertainty. The Internet may not prove to be a viable commercial marketplace
for a number of reasons, including:
. lack of acceptable security technologies;
. lack of access and ease of use;
. congestion of traffic;
. inconsistent quality of service;
. lack of availability of cost-effective, high-speed service;
. inadequate development of the necessary infrastructure;
. excessive governmental regulation;
. uncertainty regarding intellectual property ownership; and
. lack of timely development and commercialization of performance improvements,
including high-speed modems.
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The success of GeoCities' website will substantially depend upon the continued
development of a web infrastructure, such as a reliable network backbone with
the necessary speed, data capacity and security, and timely development of
complementary products such as high speed modems for providing reliable web
access and services. Because global commerce and online exchange of information
on the web and other similar open wide area networks are new and evolving,
GeoCities cannot assure you that the web will support increasing use or will
prove to be a viable commercial marketplace. The web has experienced, and is
expected to continue to experience, significant growth in the number of users
and the amount of content. If the web continues to experience increased numbers
of users, frequency of use or increased resource requirements of users, the web
infrastructure may not be able to support the demands placed on it by this
continued growth and the web's performance or reliability may be adversely
affected.
The web could also lose its viability or effectiveness due to delays and the
development or adoption of new standards and protocols to handle increased
levels of activities or due to increased government regulation. GeoCities cannot
assure you that the infrastructure standards, protocols or complementary
products or services necessary to make the web a viable commercial marketplace
will be developed, or, if they are developed, that the web will achieve broad
acceptance. Even if such infrastructure, standards or protocols or complementary
products, services or facilities are developed and the web becomes a viable
commercial marketplace, GeoCities may have to spend substantial amounts to adapt
GeoCities' services to changing web technologies, which expenditures could have
a material adverse effect on GeoCities' business, results of operations and
financial condition.
Risks Associated with International Operations and Expansion
GeoCities plans to develop the GeoCities community model in international
markets; however, GeoCities cannot assure you that the Internet or the GeoCities
community model will become widely accepted in any international markets.
GeoCities has developed and operates GeoCities Japan Corporation, a joint
venture with SOFTBANK of Japan. GeoCities owns 40% of the joint venture;
however, to date, GeoCities has not generated a material amount of revenue from
its ownership interest in the joint venture. GeoCities has only limited
experience in developing this localized version of its community model and will
be relying heavily on the efforts and abilities of SOFTBANK in such venture. In
addition, GeoCities expects that the success of any additional foreign
operations it initiates in the future will also be substantially dependent upon
local partners. If revenues from international ventures are not adequate to
cover the investments in such activities, GeoCities' business, results of
operations and financial condition could be materially and adversely affected.
GeoCities may not be able to manage Internet operations as a result of
difficulty in locating an effective foreign partner, competition, technical
problems, distance and language and cultural differences. Therefore, GeoCities
cannot assure you that GeoCities or its international partners will be able to
successfully market and operate the GeoCities community model in foreign
markets. GeoCities also believes that in light of substantial anticipated
competition, it will be necessary to move quickly into international markets to
effectively obtain market share; however, GeoCities cannot assure you that it
will be able to do so.
In addition, international operations are subject to other inherent risks,
including:
. impact of recessions in economies outside the United States;
. reduced protection for intellectual property rights in some countries;
. unexpected changes in regulatory requirements;
. trade barriers;
. difficulties in staffing and managing foreign operations;
. fluctuations in currency exchange rates;
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. longer payment cycles in general;
. problems in collecting accounts receivable;
. difficulty in enforcing contracts;
. political and economic instability;
. seasonal reductions in business activity in certain other parts of the world;
and
. potentially adverse tax consequences.
These risks may materially adversely affect GeoCities' future international
operations and, consequently, its business.
Risks Associated with Potential Acquisitions or Investments
GeoCities may acquire or make investments in products, services or
technologies that would complement its existing business, augment the
distribution of its community or enhance its technological capabilities. From
time to time GeoCities has had discussions with companies regarding acquiring,
or investing in, their businesses, products, services or technologies. GeoCities
cannot assure you that it will be able to identify suitable acquisition or
investment candidates. Even if it does identify suitable candidates, GeoCities
cannot assure you that it will be able to make such acquisitions or investments
on commercially acceptable terms. If GeoCities buys a company, it may have
difficulty in assimilating that company's personnel and operations. Such
acquisitions may also involve risks of entering geographic and business markets
in which GeoCities has limited or no prior experience. In addition, the key
personnel of the acquired company may decide not to work for GeoCities. If
GeoCities makes other types of acquisitions, it could have difficulty in
assimilating the acquired products, services or technologies into its
operations. These difficulties could disrupt GeoCities' ongoing business,
distract its management and employees, increase its expenses and adversely
affect its results of operations due to accounting requirements such as
goodwill.
Risks Associated with Yahoo! Merger
Expected Benefits of the Merger May Not be Realized. If Yahoo! and GeoCities
are not able to effectively integrate their technology, operations and personnel
in a timely and efficient manner, then the benefits of the merger with Yahoo!
will not be realized. In particular, if the integration is not successful:
. the combined company's operating results may be adversely affected;
. the combined company may lose key personnel; and
. the combined company may not be able to retain GeoCities' community
membership base of homesteaders.
In addition, the attention and effort devoted to the integration of the two
companies will significantly divert management's attention from other important
issues, and could have a material adverse impact on the combined company.
The Merger Could Adversely Affect the Combined Financial Results. If the
benefits of the merger with Yahoo! do not exceed the costs associated with the
merger, including the dilution to Yahoo!'s shareholders resulting from the
issuance of shares in connection with the merger, Yahoo!'s financial results,
including earnings per share, could be adversely affected. Specifically, Yahoo!
expects to incur a one-time charge of approximately $66 million related to the
merger during the second quarter of 1999.
The Market Price of Yahoo! Common Stock May Decline as a Result of the Merger.
The market price of Yahoo! common stock may decline as a result of the merger
if:
. the integration of Yahoo! and GeoCities is unsuccessful;
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. GeoCities and Yahoo! do not achieve the perceived benefits of the merger as
rapidly or to the extent anticipated by financial analysts; or
. the effect of the merger on the combined company's financial results is not
consistent with the expectations of financial analysts.
Failure of the Merger to Qualify as a Pooling of Interests Would Negatively
Affect Combined Financial Results. The failure of the merger with Yahoo! to
qualify for pooling of interests accounting treatment for financial reporting
purposes for any reason would materially and adversely affect Yahoo!'s reported
earnings and, likely, the price of Yahoo!'s common stock. The availability of
pooling of interests accounting treatment for the merger depends upon
circumstances and events occurring after the effective time of the merger. For
example, there must be no significant changes in the business of the combined
company, including significant dispositions of assets, for a period of two years
following the effective time. Further, affiliates of Yahoo! and GeoCities must
not sell any shares of either Yahoo! or GeoCities capital stock until the day
that Yahoo! publicly announces financial results covering at least 30 days of
combined operations of Yahoo! and GeoCities after the merger. If the effective
time of the merger occurs during May 1999, GeoCities and Yahoo! expect that such
combined financial results would be published in July 1999. If affiliates of
Yahoo! or GeoCities sell their shares of Yahoo! common stock prior to that time
despite a contractual obligation not to do so, the merger may not qualify for
accounting as a pooling of interests for financial reporting purposes.
Year 2000 Risks
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Year 2000 Readiness Compliance" for detailed information on
GeoCities' state of readiness, potential risks and contingency plans regarding
the year 2000 issue.
Item 3. Quantitative and Qualitative Disclosures About Market Risks
GeoCities is exposed to the impact of interest rate changes and change in the
market values of its investments.
Interest Rate Risk
GeoCities' exposure to market rate risk for changes in interest rates relates
primarily to GeoCities' investment portfolio. GeoCities has not used derivative
financial instruments in its investment portfolio. GeoCities 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. GeoCities protects and preserves its invested funds by
limiting default, market and reinvestment risk. Investments in both fixed rate
and floating rate interest earning instruments carry 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,
GeoCities' future investment income may fall short of expectations due to
changes in interest rates, or GeoCities may suffer losses in principal if forced
to sell securities which have declined in market value due to changes in
interest rates.
Investment Risk
In 1997 GeoCities formed a joint venture with SOFTBANK Corporation of Japan
called GeoCities Japan Corporation. GeoCities owns 40% of the joint venture. To
date, GeoCities has not generated a material amount of revenue from its
ownership interest in the joint venture. This investment is included in other
assets and is accounted for under the equity method. GeoCities' policy is to
regularly review the assumptions underlying the operating performance and cash
flow forecasts in assessing the carrying value of this joint venture. GeoCities
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.
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PART II
Other Information
Item 1. Legal Proceedings
In September 1997, GeoCities received a letter from the FTC requesting that
GeoCities voluntarily produce certain information regarding GeoCities'
collection and use of personal identifying information. GeoCities produced the
requested information, as well as certain supplemental information in late 1997.
In February 1998, the FTC staff sent a draft complaint and draft consent order
to GeoCities. At that time, the FTC staff indicated that, if approved by the
FTC, an administrative suit would be brought against GeoCities alleging that it
had violated Section 5(a) of the Federal Trade Commission Act (the "FTC Act") by
engaging in unfair and deceptive practices in connection with GeoCities'
collection and use of personal identifying information obtained from
individuals, including children. The FTC staff also offered to settle the matter
under the terms contained in the draft consent order.
After receiving the draft complaint and draft consent order, GeoCities and the
FTC staff engaged in settlement discussions. As a result of these discussions,
on June 11, 1998, GeoCities and FTC staff attorneys executed a proposed
Agreement Containing Consent Order (the "Proposed Consent Order"). Following a
period of public comment, the Proposed Consent Order was amended so that
GeoCities' compliance with the terms of the Children's Online Privacy Protection
Act of 1998 would be permitted under the order. The amended version of the
Agreement Containing Consent Order (the "Consent Order") was issued by the FTC
on February 5, 1999, and served on GeoCities on February 22, 1999. The Consent
Order resolves the FTC's allegations, which are contained in a complaint filed
by the FTC with the Consent Order, that GeoCities:
. disclosed to third parties personal identifying information collected in its
member application process contrary to what had been represented to consumers
by GeoCities;
. implied that there was an affiliation between GeoCities and a children's club
operated by a GeoCities community leader such that children provided personal
identifying information to the club believing they were disclosing the
information to GeoCities; and
. failed to disclose to consumers, including the parents of children, how
GeoCities would use the personal identifying information it collected from
those consumers and children.
Under the terms of the Consent Order, GeoCities is required to cease and
desist from the allegedly deceptive practices in the future and establish
certain procedures to:
. give adequate notice to consumers regarding GeoCities' information collection
and disclosure practices;
. provide consumers with the ability to have GeoCities delete their personal
identifying information from GeoCities' database;
. more clearly identify its affiliation (or lack thereof) with third parties
which may collect information or sponsor activities on GeoCities; and
. obtain express parental consent prior to collecting and using personal
identifying information obtained from children under 13 years of age.
Under the terms of the Consent Order, GeoCities did not admit any of the
allegations contained in the complaint, nor was it required to make any monetary
payment to the FTC or consumers. Although the Consent Order requires that
GeoCities take specific actions, including those outlined above, GeoCities has
been and remains committed to protecting the privacy rights of all consumers
(and, in particular children) on the Internet. As part of its ongoing efforts to
enhance the protection of the privacy of its members, GeoCities has consulted
and worked
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with industry self-regulation groups and has implemented or intends to implement
programs designed to enhance the protection of the privacy of its members,
including children. Such programs include:
. publishing a comprehensive, multi-screen, privacy statement that is
accessible from many places on GeoCities' website, including the GeoCities
home page and new member application form;
. revamping the new member application form to make the questions clearer to
consumers;
. enhancing its training program for community leaders;
. suspending certain e-mail marketing programs of an affiliate and confirming
that the affiliate had never sent e-mails to individuals based on the
representation included in the application form;
. altering its rules to expressly forbid third parties from collecting
information in connection with promotions for any purpose other than to
fulfill the promotion;
. instructing companies that received information from GeoCities regarding
children under 13 to cease use of such information;
. making changes to the content that appears on GeoCities' website, such as
warnings to children not to give out personal information, and removing
inappropriate advertising and promotions from GeoCities' children and family-
oriented "Enchanted Forest" neighborhood; and
. requiring that individuals under 13 involve their parents in the process of
applying for a free membership in GeoCities.
To confirm the adequacy of its disclosure practices in the area of information
collection and use, GeoCities submitted its privacy statement to TRUSTe, an
industry self-regulation group. TRUSTe has certified such statement as an
accurate representation to consumers of GeoCities' information collection
practices. GeoCities has also joined the Online Privacy Alliance.
In August 1998, a lawsuit was filed against GeoCities in Los Angeles County
Superior Court involving GeoCities' collection and use of personal identifying
information (Hyatt v. GeoCities). The complaint in this case follows the FTC
draft complaint without alleging any new facts. This case involves a single
cause of action for the alleged violation of California Business and Professions
Code Section 17200 and seeks an injunction, disgorgement of any profits obtained
as a result of the alleged improper activity and attorneys' fees. GeoCities
filed an answer to this lawsuit in September 1998.
In September 1998, an additional case was filed against GeoCities in Los
Angeles County Superior Court related to the same activity (Wormley v.
GeoCities, et. al.). The complaint in this case also followed the FTC draft
complaint and alleged no new facts. This suit purported to be a class action and
alleged causes of action for the violation of California Business and
Professions Code Sections 17200 and 17500 fraud, unjust enrichment, negligent
misrepresentation and invasion of privacy. This suit sought disgorgement of any
profits obtained as a result of the alleged improper activity, unspecified
damages, and attorneys' fees. In November 1998, GeoCities filed a demurrer to
and motion to strike portions of the Wormley complaint. In December 1998, in
response to GeoCities' demurrer and motion to strike, the plaintiff filed an
amended complaint. The amended complaint, like the original complaint, purports
to be a class action and alleges causes of action for the violation of Sections
17200 and 17500, the Consumers Legal Remedies Act ("CLRA"), fraud, unjust
enrichment, negligent misrepresentation, and invasion of privacy. The plaintiffs
are seeking the same remedies as in the original complaint. In January 1999,
GeoCities filed a demurrer to and motion to strike portions of the amended
complaint. In January 1999, the court in the Wormley matter determined that the
Hyatt matter (discussed above) is related to the Wormley matter, and ordered the
Hyatt matter transferred to the department where the Wormley matter is pending.
In February 1999, a hearing was held on GeoCities' demurrer to and motion to
strike portions of the amended Wormley complaint. At that
II-2
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hearing, the court dismissed the Section 17500, CLRA, and invasion of privacy
causes of action. In early March 1999, the Hyatt and Wormley matters were both
transferred to another department, and on March 17, 1999, a joint status
conference was held in both cases. As a result of this status conference, the
court set hearings for April 1999 to determine whether (1) the cases should be
heard in the same department and (2) discovery in the Hyatt matter should be
limited or stayed until the resolution of the class certification process in the
Wormley matter. On April 21, 1999, the court set a voluntary, non-binding
mediation for both the Hyatt and Wormley matters to be conducted on or before
August 19, 1999. On April 30, 1999, an additional case was filed against
GeoCities in the Philadelphia County Court of Common Pleas in Pennsylvania
related to the same activity (Chapman v. GeoCities). The complaint in this case
also follows the FTC draft complaint and alleges no new facts. The suit purports
to be a class action on behalf of Pennsylvania citizens and involves a single
cause of action for the alleged violation of the Pennsylvania Unfair Trade
Practices and Consumer Protection Law. This suit seeks unspecified damages and
attorneys' fees. GeoCities has yet to file a responsive pleading in this case.
Based on GeoCities' analysis of these lawsuits and given the fact that they
involve the same set of circumstances that are covered in the FTC matter,
GeoCities believes that the allegations contained in the three complaints are
without merit and intends to defend these actions vigorously. GeoCities intends
to contest class certification as inappropriate in light of the claims alleged
in the Wormley and Chapman matters. GeoCities also plans to assert various
factual and legal defenses to these matters by way of summary judgment and any
other appropriate means.
GeoCities, in the normal course of business, is subject to various other legal
matters. While the results of litigation and claims cannot be predicted with
certainty, GeoCities believes that the final outcome of these other matters will
not have a material adverse effect on GeoCities' business, results of operations
or financial condition.
Item 2. Changes in Securities and Use of Proceeds
(c) Recent Sales of Unregistered Securities. During the three months ended March
31, 1999, following the exercise of options to purchase shares of Common Stock
that had been granted under the Company's Stock Incentive Plans and Common Stock
issued under the Employee Stock Purchase Plan, the Company issued an aggregate
of 405,901 shares of Common Stock for an aggregate purchase price of
approximately $836,000. All of such sales of Common Stock were made pursuant to
the exemption from the registration requirements of the Securities Act afforded
by Rule 701 promulgated under the Securities Act.
In March 1999, the Company acquired all of the issued and outstanding capital
stock and options to purchase capital stock of Futuretouch Corporation
("Futuretouch"). In connection with this transaction, the Company issued to the
former shareholders of Futuretouch an aggregate of 65,000 shares of its common
stock. The offer and sale of those shares was exempt from the registration
requirements of the Securities Act by virtue of Section 4(2) thereof or
Regulation D promulgated thereunder.
(d) Use of Proceeds From Sales of Registered Securities. On August 14, 1998, the
Company completed an initial public offering of its Common Stock. The managing
underwriters in the offering were Goldman, Sachs & Co., Donaldson, Lufkin &
Jenrette and Hambrecht & Quist (the "Underwriters"). The shares of Common Stock
sold in the offering were registered under the Securities Act of 1933, as
amended, on a Registration Statement on Form S-1 (the "Registration Statement")
(Reg. No. 333-56659) that was declared effective by the SEC on August 10, 1998.
The offering commenced on August 11, 1998. All 4,750,000 shares of Common Stock
registered under the Registration Statement were sold at a price of $17.00 per
share. The Underwriters also exercised an overallotment option of 712,500 shares
on August 11, 1998. All 712,500 overallotment shares were sold at a price of
$17.00 per share. The aggregate price of the offering amount registered and sold
was $92,862,500. In connection with the offering, the Company paid an aggregate
of $6,500,375 in underwriting discounts and commissions to the Underwriters and
incurred $2,037,000 in miscellaneous offering costs.
After deducting the underwriting discounts and commissions and the offering
expenses described above, the Company received net proceeds from the Offering of
approximately $84,325,000. The Company has used the net
II-3
<PAGE>
proceeds from its initial public offering of Common Stock of the Company
to invest in interest bearing investment grade instruments and has used its
previously existing cash balances to fund the general operations of the Company.
The proceeds from the initial public offering will be used for investments in
the GeoCities community site, including enhancements to the Company's server and
networking infrastructure and the functionality of its website and general
corporate purposes, including working capital, expansion of its sales and
marketing capabilities and brand-name promotions. The Company may also use a
portion of such proceeds for acquisitions of complementary businesses, services
and technology. None of the Company's net proceeds of the Offering were paid
directly or indirectly to any director, officer, general partner of the Company
or their associates, persons owning 10% or more of any class of equity
securities of the Company, or an affiliate of the Company.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a). Exhibits
Exhibit
Number Description
27.1 Financial Data Schedule
(b). Reports on Form 8-K
Amended Current Report on form 8-K/A filed on February 16, 1999
Current Report on form 8-K filed on February 25, 1999
II-4
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report on Form 10-Q to be signed on its behalf
by the undersigned thereunto duly authorized.
GEOCITIES
May 17, 1999 /s/ STEPHEN L. HANSEN
---------------------
Stephen L. Hansen
Chief Operating Officer and Chief Financial
Officer
(Principal Financial and Accounting Officer)
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