<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 8-K
CURRENT REPORT
------------------------
PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED):
FEBRUARY 25, 1999
GEOCITIES
(Exact Name of Registrant as Specified in its Charter)
------------------------
<TABLE>
<S> <C> <C>
DELAWARE
(State or Other Jurisdiction
of
Incorporation or
Organization)
0-22815 95-4515867
(Commission File No.) (I.R.S. Employer
Identification
No.)
</TABLE>
4499 GLENCOE AVENUE, MARINA DEL REY, CA 90292
(Address of Principal Executive Offices) (Zip Code)
(310) 827-3700
(Registrant's Telephone Number, Including Area Code)
1918 MAIN STREET, SUITE 300, SANTA MONICA, CA 90405
(Former Name or Former Address, if Changed Since Last Report)
- --------------------------------------------------------------------------------
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<PAGE>
ITEM 5. OTHER EVENTS
This current report on Form 8-K reports a restatement of the Company's
financial statements for the years ended December 31, 1996 and 1997, to reflect
the non-cash accrual of 7% dividend on its previously outstanding mandatory
redeemable convertible preferred stock. Upon GeoCities' initial public offering
in August 1998, the mandatory redeemable convertible preferred stock (and
accrued dividends) by its terms converted into common stock and ceased accruing
a dividend, and no previously accrued dividend was or will be required to be
paid. The restatement had no effect on the previously reported net loss in the
Company's statements of operations for any periods presented.
Based on the then advice of its auditors, the Company did not previously
record the dividend, as payment of the dividend was considered unlikely in light
of the fact that the Company had undertaken an initial public offering in which
the preferred stock would automatically convert into common stock. Upon
reconsideration, the Company's auditors now believe and have advised the Company
that accrual of the dividend was the appropriate accounting treatment and is
consistent with current Securities and Exchange Commission accounting policies.
Toward that end, GeoCities is also amending the nine-month and three-month
financial statements included in its Form 10-Q for the period ended September
30, 1998 and 1997, to reflect the interest accrual.
The effect of the restatement is to increase the historical basic and
diluted net loss per share applicable to common stockholders from ($1.15) to
($1.19) and from ($3.40) to ($3.72) for the years ended December 31, 1996 and
1997, respectively. The restatement increases historical basic and diluted net
loss per share applicable to common stockholders from ($2.24) to ($2.45) and
from ($1.19) to ($1.36) for the nine months ended September 30, 1997 and 1998,
respectively, and from ($.88) to ($.94) and from ($.18) to ($.19) for the three
months ended September 30, 1997 and 1998, respectively. As mentioned above, as
no interest was required to be paid, the restatement does not affect previously
reported cash flows for any period. Moreover, since the mandatory redeemable
convertible preferred stock is no longer outstanding, the restatement noted
above will have no effect on future periods. The restatement also has no effect
on previously reported pro forma basic or diluted net loss per share.
2
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
GEOCITIES FINANCIAL STATEMENTS (RESTATED)
Report of Independent Accountants.......................................................................... 4
Balance Sheets at December 31, 1996 and 1997............................................................... 5
Statements of Operations for each of the three years in the period ended December 31, 1997................. 6
Statements of Stockholders' Equity (Deficiency) for each of the three years in the period ended December
31, 1997................................................................................................. 7
Statements of Cash Flows for each of the three years in the period ended December 31, 1997................. 8
Notes to Financial Statements.............................................................................. 9
</TABLE>
3
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of GeoCities
We have audited the accompanying balance sheets of GeoCities (the "Company")
as of December 31, 1996 and 1997, and the related statements of operations,
stockholders' equity (deficiency) and cash flows for each of the three years in
the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of GeoCities as of December 31,
1996 and 1997, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
As discussed in Note 2, the accompanying financial statements for 1996 and
1997 have been restated to reflect accretion on the Company's mandatory
redeemable convertible preferred stock.
PRICEWATERHOUSECOOPERS LLP
Woodland Hills, California
June 2, 1998, except for the effects
of the stock split described in
Note 2, as to which the date is
July 21, 1998 and the restatement
portion of Note 2 as to which the
date is February 19, 1999
4
<PAGE>
GEOCITIES
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1997
------------ -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................................................... $ 33,000 $ 3,785,000
Accounts receivable, less allowance for doubtful accounts of $0 and $98,000 for
1996 and 1997, respectively...................................................... 262,000 1,206,000
Prepaids and other current assets.................................................. 57,000 403,000
Subscription receivable............................................................ -- 25,000,000
------------ -------------
Total current assets............................................................. 352,000 30,394,000
Property and equipment, net.......................................................... 879,000 1,216,000
Deposits............................................................................. 217,000 613,000
Other assets......................................................................... -- 645,000
------------ -------------
Total assets..................................................................... $1,448,000 $ 32,868,000
------------ -------------
------------ -------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable................................................................... $ 397,000 $ 1,036,000
Accrued expenses and other current liabilities..................................... 199,000 2,289,000
Deferred revenue................................................................... 110,000 225,000
Capital lease obligations, current portion......................................... 188,000 393,000
Note payable 1,100,000 --
------------ -------------
Total current liabilities........................................................ 1,994,000 3,943,000
Capital lease obligations, net of current portion.................................... 437,000 183,000
Related party note payable........................................................... -- 651,000
------------ -------------
2,431,000 4,777,000
Commitments and contingencies (Note 7)
Series A, B, C, D, E and F mandatory redeemable convertible preferred stock, $0.001
par value; authorized 16,245,000 and 26,526,000 shares in 1996 and 1997: issued and
outstanding, 6,008,000 and 22,230,000 shares in 1996 and 1997; liquidation
preference of approximately $2,100,000 and $39,129,000 at 1996 and 1997............ 2,168,000 38,137,000
Stockholders' equity (deficiency):
Convertible preferred stock, $.001 par value; 1,200,000 shares authorized, issued
and outstanding.................................................................. 386,000 --
Common stock, par value $0.001; authorized 40,000,000 and 60,000,000 shares in 1996
and 1997; issued and outstanding 2,617,000 and 2,641,000 shares in 1996 and 1997,
respectively..................................................................... 43,000 49,000
Additional paid-in capital......................................................... (82,000) 2,966,000
Unearned compensation.............................................................. -- (660,000)
Accumulated deficit................................................................ (3,498,000) (12,401,000)
------------ -------------
Total stockholders' equity (deficiency).......................................... (3,151,000) (10,046,000)
------------ -------------
Total liabilities and stockholders' equity (deficiency).......................... $1,448,000 $ 32,868,000
------------ -------------
------------ -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
GEOCITIES
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1995 1996 1997
------------- ------------- --------------
<S> <C> <C> <C>
Net revenues........................................................ $ 46,000 $ 314,000 $ 4,582,000
Cost of revenues.................................................... 103,000 788,000 4,634,000
------------- ------------- --------------
Gross profit (loss)............................................. (57,000) (474,000) (52,000)
Operating expenses:
Sales and marketing............................................... 117,000 764,000 5,045,000
Product development............................................... 72,000 475,000 1,021,000
General and administrative........................................ 233,000 1,252,000 2,901,000
------------- ------------- --------------
Loss from operations................................................ (479,000) (2,965,000) (9,019,000)
Other income (expense):
Interest income................................................... -- 19,000 238,000
Interest and other expense........................................ (2,000) (59,000) (121,000)
------------- ------------- --------------
Loss before provision for income taxes.............................. (481,000) (3,005,000) (8,902,000)
Provision for income taxes.......................................... (1,000) (1,000) (1,000)
------------- ------------- --------------
Net loss............................................................ $ (482,000) $ (3,006,000) $ (8,903,000)
------------- ------------- --------------
------------- ------------- --------------
Historical basic and diluted net loss per share applicable to common
stockholders $ (0.11) $ (1.19) $ (3.72)
Historical weighted average shares outstanding used in basic and
diluted per share calculation..................................... 4,431,000 2,617,000 2,620,000
Pro forma basic and diluted net loss per share...................... $ (0.36)
Pro forma weighted average shares outstanding used in basic and
diluted per share calculation..................................... 24,850,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
GEOCITIES
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL
---------------------- ---------------------- PAID-IN UNEARNED
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION
----------- --------- ----------- --------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994...............
Issuance of common stock................... 4,906,000 $ 49,000
Issuance of common stock for services...... 52,000 17,000
Issuance of Series C convertible preferred
stock in exchange for common stock and
note payable............................. 1,200,000 $ 386,000 (2,341,000) (23,000) $ 23,000
Net loss................................... -- -- -- -- --
----------- --------- ----------- --------- ----------- --------------
Balance at December 31, 1995............... 1,200,000 386,000 2,617,000 43,000 23,000 --
Accretion of mandatory redeemable
convertible preferred stock.............. -- -- -- -- (105,000) --
Net loss................................... -- -- -- -- -- --
----------- --------- ----------- --------- ----------- --------------
Balance at December 31, 1996............... 1,200,000 386,000 2,617,000 43,000 (82,000) --
Additional paid-in capital related to
issuance of Series E mandatory redeemable
convertible preferred stock for cash..... -- -- -- -- 3,196,000 --
Conversion of Series C convertible
preferred stock to mandatory redeemable
convertible preferred stock.............. (1,200,000) (386,000) -- -- -- --
Exercise of stock options.................. -- -- 24,000 6,000 -- --
Unearned compensation related to stock
options granted.......................... -- -- -- -- 684,000 $ (684,000)
Compensation related to stock options
vesting.................................. -- -- -- -- -- 24,000
Accretion of mandatory redeemable
convertible preferred stock.............. -- -- -- -- (832,000) --
Net loss...................................
----------- --------- ----------- --------- ----------- --------------
Balance at December 31, 1997............... -- -- 2,641,000 $ 49,000 $ 2,966,000 $ (660,000)
----------- --------- ----------- --------- ----------- --------------
----------- --------- ----------- --------- ----------- --------------
<CAPTION>
TOTAL
STOCKHOLDERS'
ACCUMULATED EQUITY
DEFICIT (DEFICIENCY)
------------- -------------
<S> <C> <C>
Balance at December 31, 1994............... $ (10,000) $ (10,000)
Issuance of common stock................... -- 49,000
Issuance of common stock for services...... -- 17,000
Issuance of Series C convertible preferred
stock in exchange for common stock and
note payable............................. -- 386,000
Net loss................................... (482,000) (482,000)
------------- -------------
Balance at December 31, 1995............... (492,000) (40,000)
Accretion of mandatory redeemable
convertible preferred stock.............. -- (105,000)
Net loss................................... (3,006,000) (3,006,000)
------------- -------------
Balance at December 31, 1996............... (3,498,000) (3,151,000)
Additional paid-in capital related to
issuance of Series E mandatory redeemable
convertible preferred stock for cash..... -- 3,196,000
Conversion of Series C convertible
preferred stock to mandatory redeemable
convertible preferred stock.............. -- (386,000)
Exercise of stock options.................. -- 6,000
Unearned compensation related to stock
options granted.......................... -- --
Compensation related to stock options
vesting.................................. -- 24,000
Accretion of mandatory redeemable
convertible preferred stock.............. -- (832,000)
Net loss................................... (8,903,000) (8,903,000)
------------- -------------
Balance at December 31, 1997............... $ (12,401,000) $(10,046,000)
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
GEOCITIES
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
<S> <C> <C> <C>
1995 1996 1997
---------- ------------ -------------
Cash flows from operating activities:
Net loss............................................................... $ (482,000) $ (3,006,000) $ (8,903,000)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization........................................ 7,000 188,000 431,000
Issuance of common stock for services................................ 17,000 -- --
Issuance of warrant related to note payable.......................... -- -- 51,000
Deferred compensation earned......................................... -- -- 24,000
Bad debt reserve..................................................... -- -- 98,000
Changes in operating assets and liabilities:
Accounts receivable................................................ (7,000) (255,000) (1,042,000)
Prepaids and other current assets.................................. 12,000 (56,000) (346,000)
Deposits and other assets.......................................... -- (214,000) (396,000)
Accounts payable................................................... 90,000 309,000 639,000
Accrued expenses and other liabilities............................. 37,000 162,000 2,095,000
Deferred revenue................................................... -- 110,000 115,000
---------- ------------ -------------
Net cash used in operating activities............................ (326,000) (2,762,000) (7,234,000)
---------- ------------ -------------
Cash flows from investing activities:
Purchase of property and equipment..................................... (69,000) (130,000) (674,000)
Investment in affiliate................................................ -- -- (645,000)
---------- ------------ -------------
Net cash used in investing activities............................ (69,000) (130,000) (1,319,000)
---------- ------------ -------------
Cash flows from financing activities:
Payments under capital-lease obligations............................... (2,000) (239,000) (143,000)
Proceeds from exercise of common stock options......................... 49,000 -- 6,000
Repurchase of common stock............................................. -- --
Proceeds from issuance of mandatory redeemable convertible preferred
stock................................................................ 2,063,000 37,897,000
Subscription receivable................................................ -- (25,000,000)
Due to officer......................................................... 349,000 -- --
Proceeds from related-party note payable............................... -- 645,000
Proceeds from note payable............................................. 1,100,000 --
Repayment on note payable.............................................. -- (1,100,000)
---------- ------------ -------------
Net cash provided by financing activities........................ 396,000 2,924,000 12,305,000
---------- ------------ -------------
Increase in cash and cash equivalents............................ -- 32,000 3,752,000
Cash and cash equivalents, beginning of year............................. -- 1,000 33,000
---------- ------------ -------------
Cash and cash equivalents, end of year................................... $ 1,000 $ 33,000 $ 3,785,000
---------- ------------ -------------
---------- ------------ -------------
Supplemental disclosure of cash-flow information:
Cash paid during the period for:
Interest............................................................. $ 1,000 $ 71,000 $ 89,000
Income taxes......................................................... $ 1,000 $ 1,000 $ 1,000
Supplemental disclosure of non-cash transactions:
Equipment under capital leases......................................... $ 20,000 $ 844,000 $ 94,000
Conversion of Series C convertible preferred stock to mandatory
redeemable convertible preferred stock............................... $ 386,000
Issuance of Series C convertible preferred stock through conversion of
amount due to officer................................................ $ 386,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
GEOCITIES
NOTES TO FINANCIAL STATEMENTS
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 web sites on the Internet within 40 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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
RESTATEMENT
In February 1999, the Company restated its financial statements for the
years ended December 31, 1996 and 1997, to reflect accretion on its mandatory
redeemable convertible preferred stock (see Note 8 of Notes to the Financial
Statements). The effect of this restatement was to increase the previously
reported historical basic and diluted net loss per share applicable to common
stockholders from $(1.15) to $(1.19) and $(3.40) to $(3.72) for the years ended
December 31, 1996 and 1997, respectively. The restatement had no effect on the
previously reported net loss in the Company's statements of operations and cash
flows for any periods presented and has no impact on the previously reported pro
forma net loss per share for the year ended December 31, 1997. This restatement
also had the following effects:
<TABLE>
<CAPTION>
AS PREVIOUSLY REPORTED AS RESTATED
DECEMBER 31, DECEMBER 31,
---------------------------- -----------------------------
1996 1997 1996 1997
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Series A, B, C, D, E and F mandatory redeemable
convertible preferred stock....................... $ 2,063,000 $ 37,200,000 $ 2,168,000 $ 38,137,000
------------- ------------- ------------- --------------
Additional paid-in capital.......................... $ 23,000 $ 3,903,000 $ (82,000) $ 2,966,000
------------- ------------- ------------- --------------
Total stockholders' equity (deficiency)............. $ (3,046,000) $ (9,109,000) $ (3,151,000) $ (10,046,000)
------------- ------------- ------------- --------------
</TABLE>
This restatement does not affect previously reported cash flows for each of
the years ended December 31, 1996 or 1997. Upon the closing of the Company's
initial public offering in August 1998, all of the mandatory redeemable
preferred stock converted into common stock and ceased accruing a dividend; no
previously accrued dividend was required to be paid.
USE OF ESTIMATES
In the normal course of preparing financial statements in conformity with
generally accepted accounting principles, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents.
9
<PAGE>
GEOCITIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
At December 31, 1996 and 1997, certificates of deposit totaling
approximately $0 and $255,000, respectively, were used to collateralize certain
of the Company's lease obligations, and have been included in deposits on the
balance sheet.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is computed using the straight-line method based upon
the estimated useful lives of the assets, ranging from three to five years.
Leasehold improvements and equipment under capital leases are amortized over the
shorter of the estimated useful life or the life of the lease. Useful lives are
evaluated regularly by management in order to determine recoverability in light
of current technological conditions. Maintenance and repairs are charged to
expense as incurred while renewals and improvements are capitalized. Upon the
sale or retirement of property and equipment, the accounts are relieved of the
cost and the related accumulated depreciation or amortization, with any
resulting gain or loss included in the Statement of Operations.
LONG-LIVED ASSETS
The Company identifies and records impairment losses on long-lived assets
when events and circumstances indicate that such assets might be impaired. To
date, no such impairment has been recorded.
COMPUTATION OF HISTORICAL NET LOSS PER SHARE AND PRO FORMA NET LOSS PER
SHARE
The Company calculates net loss per share in accordance with SFAS No. 128,
"Computation of Earnings Per Share." In accordance with SFAS No. 128, basic
earnings per share is computed using the weighted average number of common and
dilutive common equivalent shares outstanding during the period. Common
equivalent shares consist of the incremental common shares issuable upon the
conversion of the mandatory redeemable convertible preferred stock (using the
if-converted method) and shares issuable upon the exercise of stock options and
warrants (using the treasury stock method); common equivalent shares are
excluded from the calculation if their effect is anti-dilutive. Pursuant to SEC
Staff Accounting Bulletin No. 98, common stock and convertible preferred stock
issued for nominal consideration, prior to the effective date of the IPO, are
required to be included in the calculation of basic and diluted net loss per
share, as if they were outstanding for all periods presented. To date, the
Company has not had any issuances or grants for nominal consideration.
Diluted net loss per share for the years ended December 31, 1995, 1996, and
1997, does not include the effect of options to purchase 777,000, 1,113,000, and
4,605,000 shares of common stock, respectively, and 0, 0, and 20,304 common
stock warrants, respectively, or 0, 6,008,000, and 22,230,000 shares of
mandatory redeemable convertible preferred stock on an "if converted" basis,
respectively, as the effect of their inclusion is antidilutive during each
period.
Pro forma net loss per share for the year ended December 31, 1997, assumes
that the common stock issuable upon conversion of the outstanding mandatory
redeemable convertible preferred stock had been outstanding during each such
period.
10
<PAGE>
GEOCITIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
The following table sets forth the computation of basic and diluted net loss
per share for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------------------------------
1995 1996 1997
-------------- ------------- -------------
<S> <C> <C> <C>
Net loss............................................................ $ (482,000) $ (3,006,000) $ (8,903,000)
Accretion of mandatory redeemable convertible preferred stock....... -- (105,000) (832,000)
-------------- ------------- -------------
Net loss applicable to common stockholders.......................... $ (482,000) $ (3,111,000) $ (9,735,000)
-------------- ------------- -------------
-------------- ------------- -------------
Weighted average shares........................................... 4,431,000 2,617,000 2,620,000
Basic and diluted net loss per share applicable to common
stockholders.................................................... $ (0.11) $ (1.19) $ (3.72)
-------------- ------------- -------------
-------------- ------------- -------------
Pro Forma Presentation:
Net loss applicable to common stockholders.......................... $ (9,735,000)
Accretion of mandatory redeemable convertible preferred stock....... 832,000
-------------
Net loss.......................................................... $ (8,903,000)
-------------
-------------
Shares used above................................................... 2,620,000
Pro forma adjustment to reflect weighted effect of assumed
conversion of mandatory redeemable convertible preferred stock.... 22,230,000
-------------
Shares used in computing pro forma basic and diluted net loss per
share............................................................. 24,850,000
-------------
-------------
Pro forma basic and diluted net loss per share...................... $ (0.36)
-------------
-------------
</TABLE>
STOCK-BASED COMPENSATION
The Company accounts for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board ("APB") No. 25,
"Accounting for Stock Issued to Employees," and complies with the disclosure
requirements of SFAS No. 123, "Accounting for Stock-Based Compensation." Under
APB No. 25, compensation cost, if any, is recognized over the respective vesting
period based on the difference, on the date of grant, between the fair value of
the Company's common stock and the grant price.
INCOME TAXES
The Company utilizes the liability method of accounting for income taxes.
Under this method, deferred tax liabilities and assets are determined based on
the difference between the financial statement and the tax bases of assets and
liabilities using enacted tax rates in effect for the period in which the
differences are expected to reverse. Valuation allowances are established, when
necessary, to reduce deferred tax assets to the amount expected to be realized.
11
<PAGE>
GEOCITIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
REVENUE RECOGNITION
The Company's revenues are derived principally from the sale of banner
advertisements under short-term contracts; advertising rates are dependent on
whether the impressions are for general rotation throughout the Company's web
site or premier targeted audiences and properties within specific areas of the
Company's web site. To date, the duration of the Company's advertising
commitments has generally averaged from one to two months. In December 1997, the
Company also began selling a combination of sponsorship and banner advertising
campaign contracts to select premier commerce partners. In general, these
premier commerce partner contracts have longer terms than standard banner
advertising contracts (generally up to one year) and involve some integration
with the Company's web site. Advertising revenues on both banner and premier
commerce partner contracts are recognized ratably in the period in which the
advertisement is displayed, provided that no significant Company obligations
remain and collection of the resulting receivable is probable. Company
obligations typically include the guarantee of a minimum number of "impressions"
or times that an advertisement appears in pages viewed by the users of the
Company's online properties.
In addition to advertising revenues, the Company derives revenues from its
GeoPlus program, a premium service for its members (introduced in late 1996) and
GeoShops, a commerce service for its members (introduced in March 1998). These
services require the payment of monthly fees by the customers; revenues are
recognized on a monthly basis as the fees become due. GeoPlus revenues accounted
for 4% and 7% of revenues for the years ended December 31, 1996 and 1997,
respectively; to date, revenues from GeoShops have not been significant. The
Company also has revenue sharing agreements with its premier commerce partners.
These revenues are recognized by the Company upon notification by the premier
commerce partners of revenues earned by the Company, and to date, have not been
significant.
Barter transactions are recorded at the fair value of the goods or services
received or the estimated fair value of the advertisements given, whichever is
more readily determinable in the circumstances. To date, barter transactions
have not been significant.
PRODUCT DEVELOPMENT
Product development costs are expensed as incurred. Statement of Financial
Accounting Standards No. 86, "Accounting for the Costs of Computer Software to
be Sold, Leased or Otherwise Marketed," requires capitalization of certain
software development costs subsequent to the establishment of technological
feasibility. Based upon the Company's product development process, technological
feasibility is established upon completion of a working model. Costs incurred by
the Company between completion of the working model and the point at which the
product is ready for general release have been insignificant
ADVERTISING COSTS
Advertising costs are expensed as incurred and amounted to approximately
$66,000, $196,000, and $1,742,000 for the years ended December 31, 1995, 1996
and 1997, respectively.
12
<PAGE>
GEOCITIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This statement establishes standards for the reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. Comprehensive income generally represents all changes in
stockholders' equity during the period except those resulting from investments
by, or distributions to, stockholders. SFAS No. 130 is effective for fiscal
years beginning after December 15, 1997 and requires restatement of earlier
periods presented. SFAS No. 130 had no impact on the Company's financial
statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information." SFAS No. 131 establishes standards for
the way that a public enterprise reports information about operating segments in
its annual financial statements, and requires that those enterprises report
selected information about operating segments in interim financial reports
issued to stockholders. SFAS No. 131 is effective for fiscal years beginning
after December 15, 1997 and requires restatement of earlier periods presented.
Management is currently evaluating the requirements of SFAS No. 131.
STOCK SPLIT
In January 1996, September 1997 and July 1998, the Company authorized and
implemented 1,443-for-one, two-for-one, and two-for-one stock splits. The share
information in the accompanying financial statements has been retroactively
restated to reflect the effect of these stock splits.
3. CONCENTRATION OF CREDIT RISK:
Financial instruments which subject the Company to concentrations of credit
risk consist primarily of cash and cash equivalents, short-term investments and
trade accounts receivable. The Company maintains cash and cash equivalents with
various domestic financial institutions. The Company performs periodic
evaluations of the relative credit standing of these institutions. From time to
time, the Company's cash balances with any one financial institution may exceed
Federal Deposit Insurance Corporation insurance limits.
The Company's customers are concentrated in the United States. The Company
performs ongoing credit evaluations, generally does not require collateral and
establishes an allowance for doubtful accounts based upon factors surrounding
the credit risk of customers, historical trends and other information; to date,
such losses have been within management's expectations.
For the year ended December 31, 1996, two customers accounted for
approximately 14% and 10%, respectively, of all revenues generated by the
Company and 18% and 0%, respectively, of accounts receivable at December 31,
1996.
For the year ended December 31, 1997, one customer accounted for 12% of all
revenues generated by the Company, and 12% of accounts receivable at December
31, 1997.
13
<PAGE>
GEOCITIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1997
------------ -------------
<S> <C> <C>
Computer equipment, including assets under capital leases of
$672,000 and $766,000 for 1996 and 1997, respectively......... $ 794,000 $ 1,399,000
Furniture and fixtures, including assets under capital leases of
$172,000 and $172,000 for 1996 and 1997, respectively......... 200,000 292,000
Leasehold improvements.......................................... 80,000 151,000
------------ -------------
1,074,000 1,842,000
Less, accumulated depreciation and amortization, including
amounts related to assets under capital leases of $145,000 and
$459,000 for 1996 and 1997, respectively...................... (195,000) (626,000)
------------ -------------
Total....................................................... $ 879,000 $ 1,216,000
------------ -------------
------------ -------------
</TABLE>
5. RELATED-PARTY TRANSACTIONS:
On November 6, 1997, the Company and SOFTBANK Corporation of Japan
("SOFTBANK"), the parent company of an investor in the Company, formed a joint
venture called GeoCities Japan Corporation ("GeoCities Japan") to create and
manage a Japanese version of GeoCities. In accordance with the joint venture
agreement ("Agreement"), the Company purchased 40% of GeoCities Japan for
approximately $645,000 and licensed certain intellectual properties for the
purpose of localizing the Japanese version of GeoCities to GeoCities Japan. The
Agreement remains in effect perpetually, provided that, if as of April 1, 2001,
or any April 1 thereafter; (i) GeoCities Japan has sustained net losses for the
four consecutive fiscal quarters, and (ii) GeoCities and SOFTBANK differ with
respect to the future business plan of GeoCities Japan, then each party shall
have the right to terminate the Joint Venture with 90-days notice.
The Company's investment of approximately $645,000 was funded through a loan
from SOFTBANK. Pursuant to the terms of the loan agreement, the loan bears
interest at 5.5% per annum and is repayable upon occurrence of a Significant
Financing Event, which is defined as a non-U.S. IPO or private placement that
raises at least 1.5 billion yen for GeoCities Japan. In the event that GeoCities
Japan does not have a Significant Financing Event on or prior to March 31, 2000,
SOFTBANK will forgive the repayment of the loan. Interest expense and accrued
interest for the year ended December 31, 1997, were each $6,000.
In consideration of the licenses granted, GeoCities Japan is required to pay
the Company an amount equal to 3% of total revenue obtained by GeoCities Japan
within 30 days of the end of each quarter. The license expires 20 years from the
date of the Agreement, unless the Agreement is terminated earlier. Upon
termination, GeoCities Japan will cease to use and distribute all licensed
properties. Royalty payments for the year ended December 31, 1997, were not
significant.
14
<PAGE>
GEOCITIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. RELATED-PARTY TRANSACTIONS: (CONTINUED)
The investment is being accounted for under the equity method and is
included in other assets at December 31, 1997. The loss on affiliate recorded
for the year ended December 31, 1997, was not significant.
Advertising revenues at December 31, 1997, include $107,000 in revenues
received from an entity that is controlled by a significant shareholder of the
Company. At December 31, 1997, such amounts had been collected.
In April 1998, the Company approved a loan of $100,000 to an
officer/director of the Company.
In December 1997, in conjunction with its financing activities, the Company
entered into a one-year distribution and commerce agreement ("Agreement") with
Yahoo!, which is automatically renewable for subsequent one-year terms, subject
to the right of either party to terminate the relationship at the end of any
term with up to 90-days' notice. In connection with the Agreement, Yahoo! also
made a minority equity investment in the Company. The Agreement was designed to
increase traffic and memberships of both parties in addition to offering
GeoCities' Homesteaders an array of free personalized member services on Yahoo!.
Under the terms of the Agreement, GeoCities agreed to provide its
community-based, Web site and other services for free to registered users of
Yahoo!. In addition, Yahoo! agreed to market GeoCities-branded personal
publishing programs on select areas throughout Yahoo!, as well as provide a
GeoCities-specific programming module on My Yahoo! for GeoCities' Homesteaders.
The Agreement did not involve any cash consideration; any revenues related to
the Agreement are accounted for in accordance with the Company's barter revenue
recognition policy, as appropriate.
6. LINE OF CREDIT:
In August 1997, the Company executed a $2,000,000 revolving line of credit
(the "Line") with a commercial bank. Pursuant to the agreement, the Line matured
on December 1, 1998, bears interest at the bank's prime rate of interest, plus
0.50%, (8.5% at December 31, 1997), and is collateralized by substantially all
of the Company's assets. The Company is required to comply with certain
financial covenants, as defined in the agreement, which include tangible
effective net-worth and quick-ratio covenants. In connection with the Line, the
Company issued a warrant to the bank to purchase up to 20,304 shares of the
Company's common stock at the exercise price of $4.925, which was higher than
the then estimated fair market value of a share of the Company's common stock.
The exercise price is subject to adjustment in limited situations involving
anti-dilution as defined in the agreement. The warrant may be exercised at any
time prior to September 22, 2004. The Company has no obligations to repurchase
the warrant from the bank.
In May 1998, the Company negotiated an increase of the Line to $10,000,000,
including a $7,000,000 revolving facility for working capital and $3,000,000
lease facility, extended the maturity to December 31, 1999, and reduced the
interest rate to prime for the revolving facility and prime plus 0.75% for the
lease facility; all other terms substantially remained the same. In addition,
the commitment letter also includes a non-revolving line of credit for
$3,000,000, which bears interest at the bank's prime rate plus 0.75% per year,
and matures on May 12, 1999, if not renewed. At December 31, 1997, there were no
borrowings under either agreement.
15
<PAGE>
GEOCITIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES:
LEASES
The Company leases its facilities and certain computer and office equipment
under noncancelable leases for varying periods through 2002. The Company's lease
obligations are collateralized by certain assets of the Company at December 31,
1997. The following are the minimum lease obligations under these leases at
December 31, 1997:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
---------- ------------
<S> <C> <C>
1998.............................................................. $ 443,000 $ 1,442,000
1999.............................................................. 172,000 1,038,000
2000.............................................................. 10,000 297,000
2001.............................................................. -- 207,000
2002.............................................................. -- 50,000
---------- ------------
Minimum lease payments.............................................. 625,000 $ 3,034,000
------------
------------
Less: Amount representing interest.................................. (49,000)
----------
Present value of minimum lease payments............................. 576,000
Less: Current portion............................................... 393,000
----------
Long-term portion................................................... $ 183,000
----------
----------
</TABLE>
Rent expense pertaining to operating leases for the years ended December 31,
1995, 1996 and 1997, was approximately $28,000, $229,000 and $1,100,000,
respectively.
EMPLOYMENT AGREEMENTS
The Company maintains employment agreements with certain of its executive
officers. The employment agreements provide for minimum salary levels, incentive
compensation and severance benefits, among other items.
GEOREWARDS PROGRAM
During 1996, the Company created a marketing program to reward members of
the Company's online community ("Homesteaders") for various activities, allowing
them to earn GeoPoints. Homesteaders may redeem GeoPoints to upgrade their web
site or purchase goods from the Company's GeoStore. At December 31, 1996 and
1997, the Company had accrued $38,000 and $463,000, respectively, for probable
future redemption of GeoPoints; these amounts are included in accrued expenses.
CONTINGENCIES
From time to time, the Company has been party to various other litigation
and administrative proceedings relating to claims arising from its operations in
the normal course of business. Management believes that the resolution of these
other matters will not have a material adverse effect on the Company's business,
results of operations, financial condition or cash flows.
16
<PAGE>
GEOCITIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. CAPITALIZATION:
As of December 31, 1997, the Company had six series of Mandatory Redeemable
Convertible Preferred Stock (collectively "Preferred Stock") authorized and
outstanding. The holders of the various series of Preferred Stock generally have
the same rights and privileges; significant differences are discussed below.
The holders of the Preferred Stock are entitled to a discretionary
noncumulative dividend as specified below which is mandatory in the event of a
liquidation (not included in the liquidation preference below), and are entitled
to the number of votes equal to the number of shares of common stock that could
be converted on the date of the vote. Upon liquidation, the holders of the
Preferred Stock receive, prior and in preference to the holders of common stock
their liquidation preference plus accrued dividends at the stated rate, from the
date of issuance to the date payment is made available. Redemption, at the
option of the holders of Preferred Stock, may be elected beginning on January 1,
2001 at which time, the redemption preference plus seven percent per annum, on a
cumulative basis is due. At the option of the holders of Preferred Stock, each
share of Preferred Stock is convertible at the stated conversion price per
share, subject to adjustment as defined in the Certificate of Incorporation.
During the year ended December 31, 1995, the Company issued 1,200,000 shares
of Convertible Preferred Stock Series C in consideration for $0.3213 per share
in the form of the cancellation of shares of common stock and conversion of a
note payable of $386,000 to the Company's Chairman and Founder. In connection
with the Series F Stock issuance, the Convertible Preferred Stock Series C
became Mandatory Redeemable Convertible Preferred Stock.
During the year ended December 31, 1996, the Company issued 3,108,000 and
2,900,000 shares of Series A Stock and Series B Stock for $1,000,000 and
$1,100,000, respectively. During January and February 1997, the Company issued
10,169,492 shares of Series D Stock for approximately $9,000,000. In October and
December 1997, the Company issued 1,428,564 and 814,270 shares of Series E Stock
at $3.50 and $7.4254 per share, respectively for total cash consideration of
$9,750,000 and 20,242 shares of Yahoo! stock valued at approximately $1,300,000
which resulted in the recording of a subscription receivable for approximately
$6,000,000 at December 31, 1997. The subscription receivable was collected in
January 1998 and the Yahoo! stock was subsequently sold.
In December 1997, the Company sold 2,552,576 shares of Series F Stock for
approximately $19,000,000 which resulted in the recording of a subscription
receivable at December 31, 1997. The subscription receivable was collected in
January 1998.
Rights of Preferred Stock as of December 31, 1997
<TABLE>
<CAPTION>
DIVIDEND LIQUIDATION REDEMPTION
PREFERENCE PREFERENCE PREFERENCE
----------- ----------- -----------
<S> <C> <C> <C>
Series A Stock.............................................................. $ 0.0225 $ 0.3218 $ 0.3218
Series B Stock.............................................................. $ 0.0275 $ 0.3793 $ 0.3793
Series C Stock.............................................................. $ -- $ 0.3213 $ 0.3213
Series D Stock.............................................................. $ 0.0625 $ 0.885 $ 0.885
Series E Stock.............................................................. $ 0.245 $ 3.50 $ 3.50
Series F Stock.............................................................. $ 0.5195 $ 7.4254 $ 7.4254
</TABLE>
17
<PAGE>
GEOCITIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. CAPITALIZATION: (CONTINUED)
The shares of Series E Stock sold in December 1997 (814,270 shares at
$7.4254 per share) have a redemption preference of $3.50 per share. The proceeds
received in excess of the redemption preference ($3,196,000) have been recorded
as additional paid-in capital.
As of December 31, 1997, the holders of Series A through F Stock may, at
their option, on each of January 1, 2001, January 1, 2002 and January 1, 2003,
require the Company to redeem shares equal to one-third of the total number of
shares of all Preferred Stock outstanding as of January 1, 2001. Any shares of
Preferred Stock to be redeemed shall be redeemed ratably among all holders of
Preferred Stock, based upon the respective redemption price of such shares.
Additionally, the holders of not less than 80% of the Preferred Stock then
outstanding, voting as a single class, may, at any time on or after December 31,
1998, require the Company to redeem all of the shares of Preferred Stock in the
event that the Company has not by such time consummated (i) a "Qualified Public
Offering" of its securities (as defined in the Certificate of Incorporation), or
(ii) a sale of the Company that meets certain requirements.
Each share of Series A through F Stock shall be converted into common stock
automatically upon the closing of the sale of the Company's securities in a firm
commitment underwritten public offering from which the Company receives gross
proceeds of not less than $20,000,000 and which is a Qualified Public Offering
as defined in the Certificate of Incorporation.
At December 31, 1997, the Company had reserved approximately 22,230,000
shares of common stock for the future conversion of the Series A through F
Stock.
WARRANTS
In connection with the Series D Preferred Stock issuance, the Company issued
a warrant to a bank to purchase 64,972 of the Company's Series D Preferred Stock
at $0.885 per share, exercisable at any time prior to January 12, 2002. On
December 31, 1997, the bank converted this warrant (on a net basis), and the
Company issued 57,226 shares of Series D Preferred Stock. The Bank immediately
sold these shares in connection with the Series E and F Preferred Stock
issuances. Also see Notes 6 and 10 of Notes to Financial Statements for a
warrant issued in connection with a line of credit, and options issued to a
Series D Preferred stockholder and others pursuant to stock option agreements.
18
<PAGE>
GEOCITIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES:
The primary components of temporary differences which gave rise to deferred
taxes at December 31 are:
<TABLE>
<CAPTION>
1996 1997
------------- -------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.................................................. $ 1,423,000 $ 4,639,000
Bad debt expense.................................................................. -- 40,000
Accrued expenses.................................................................. 7,000 321,000
Other............................................................................. -- 1,000
------------- -------------
Total deferred tax assets....................................................... 1,430,000 5,001,000
Valuation allowance............................................................... (1,401,000) (4,958,000)
------------- -------------
Net deferred tax assets......................................................... 29,000 43,000
------------- -------------
Deferred tax liabilities:
Depreciation and amortization..................................................... (29,000) (43,000)
------------- -------------
Total deferred tax liabilities.................................................. (29,000) (43,000)
------------- -------------
Net............................................................................. $ -- $ --
------------- -------------
------------- -------------
</TABLE>
As a result of the Company's loss history, management believes a valuation
allowance for the entire net deferred tax assets, after considering deferred tax
liabilities, is required. The change in the valuation allowance was an increase
of $3,557,000 in 1997. As of December 31, 1997, the Company had federal and
state net operating loss carryforwards of approximately $11,250,000 and
$10,650,000, respectively. Federal and state net operating loss expirations
begin in 2010 and 2002, respectively. Due to changes in ownership (see Note 8),
the Company will be limited in the annual utilization of its net operating loss
carryforwards.
10. STOCK OPTIONS:
From inception through December 31, 1997, the Company has been authorized to
and has granted a total of 5,555,000 options to purchase its common stock; in
April and May 1998, the Board of Directors approved an increase in the total
number of shares issuable under the plan by 2,233,000 and 600,000, respectively,
increasing the total available to 8,388,000 at June 30, 1998.
In 1997, the Company adopted the 1997 Stock Option Plan (the "Plan"), which
provides for issuance of both non-statutory and incentive stock options to
employees, officers, directors and consultants of the Company. Incentive stock
options may be granted at no less than 100% of the fair market value of the
Company's common stock on the date of grant as determined by the Board of
Directors (110% if granted to an employee who owns 10% or more of the common
stock). Options granted to date generally vest ratably over a four-year period
from the date of grant and are generally exercisable for a period of no longer
than seven years from the date of grant (five years if granted to an individual
who owns 10% or more of the common stock). In the event option holders cease to
be employed by the Company, all unvested options are forfeited and, provided
that the employee's employment has not been terminated for cause, all vested
options may be exercised within a period of up to 90 days after termination; the
Company and the Company's preferred stockholders have rights to repurchase any
shares purchased through the exercise of an option.
19
<PAGE>
GEOCITIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. STOCK OPTIONS: (CONTINUED)
In connection with its Series D stock offering in early 1997, the Company
granted options to purchase 1,000,000 shares of its common stock at an exercise
price of $0.885 per share to CMG@Ventures; these options vested immediately and
are exercisable by January 13, 2004. The exercise price was in excess of the
then estimated fair market value of a common share. The Company has no
obligation to repurchase the option from CMG@Ventures. At that time, the Company
also granted an option to purchase 1,000,000 shares of its common stock at an
exercise price of $0.885 per share to certain officers, directors and
consultants to the Company. These options generally vest over a four year period
from the date of grant and are generally exercisable by January 13, 2004. In
certain circumstances, the vesting of these options may accelerate, and there
are certain participation rights in the event of a liquidation.
A summary of the status of the Company's stock options, as of December 31,
1996 and 1997, and the changes during the years ended on those dates is
presented below:
<TABLE>
<CAPTION>
1996 1997
----------------------- -----------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Outstanding at beginning of year................................. 777,000 $ 0.01 1,113,000 $ 0.16
Granted--price equals fair value............................... 364,000 $ 0.25 2,648,000 $ 0.74
Granted--less than fair value.................................. -- -- 1,307,000 $ 0.81
Exercised...................................................... -- -- (25,000) $ 0.25
Canceled....................................................... (28,000) $ 0.25 (438,000) $ 0.35
---------- ----------
Outstanding at year-end.......................................... 1,113,000 $ 0.16 4,605,000 $ 0.66
---------- ----------
---------- ----------
Options exercisable at year-end.................................. 1,939,000 $ 0.52
Options available for future grant............................... 925,000
</TABLE>
At December 31, 1997, the Company had reserved a total of 5,530,000 shares
of common stock for issuance to its stock option holders.
In connection with its grants of options, the Company has recognized
unearned deferred compensation expense of $684,000 for the year ended December
31, 1997. This amount will be amortized over the vesting periods ranging from 48
to 72 months from the date of grant; $24,000 was expensed during the year ended
December 31, 1997.
20
<PAGE>
GEOCITIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. STOCK OPTIONS: (CONTINUED)
The following table summarizes information about stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------------------- OPTIONS EXERCISABLE
WEIGHTED ------------------------
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICE OUTSTANDING LIFE PRICE OUTSTANDING PRICE
- -------------------------------------------------- ----------- --------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$0.01 777,000 5.00 $ 0.01 777,000 $ 0.01
$0.25--$0.44 744,000 6.14 $ 0.32 47,000 $ 0.26
$0.75--$1.25 3,084,000 6.29 $ 0.88 1,115,000 $ 0.89
----------- -----------
4,605,000 1,939,000
----------- -----------
----------- -----------
</TABLE>
The fair value of options granted during 1995, 1996 and 1997 is estimated as
$0, $12,000 and $993,000, respectively, on the dates of grants using the minimum
value method with the following assumptions: (i) dividend yield of 0%, (ii)
expected volatility of 0%, (iii) weighted-average risk-free interest rate
ranging from 6.04% to 6.8% for 1996 and 5.8% to 6.5% for 1997 and (iv) weighted-
average expected life of five years for 1996 and 1997, and (v) assumed
forfeiture rate of 10% for 1996 and 1997.
The Company applies APB No. 25 in accounting for its stock options granted
to employees and accordingly, no compensation expense has been recognized in the
financial statements (except for those options issued with exercise prices at
less than fair market value at date of grant). Had the Company determined
compensation expense based on the fair value at the grant date for its stock
options issued to employees under SFAS No. 123, the Company's net loss would
have been adjusted to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1995 1996 1997
----------- ------------- -------------
<S> <C> <C> <C> <C>
Net loss applicable to common stockholders............. As reported $ (482,000) $ (3,111,000) $ (9,735,000)
----------- ------------- -------------
----------- ------------- -------------
Pro forma $ (482,000) $ (3,111,000) $ (9,782,000)
----------- ------------- -------------
----------- ------------- -------------
Basic net loss per share applicable to common
stockholders......................................... As reported $ (0.11) $ (1.19) $ (3.72)
----------- ------------- -------------
----------- ------------- -------------
Pro forma $ (0.11) $ (1.19) $ (3.73)
----------- ------------- -------------
----------- ------------- -------------
</TABLE>
Pro forma net loss reflects compensation expense under SFAS No. 123 only for
options granted for the years ended December 31, 1997, 1996 and 1995. The
insignificant impact of applying SFAS No. 123 is not indicative of future
amounts.
11. RETIREMENT PLAN
Effective July, 1997, the Company established a qualified 401(k) Profit
Sharing Plan (the "Plan") available to all employees who meet the Plan's
eligibility requirements. Employees may elect to contribute from 1% to 18% of
their eligible earnings to the Plan. This defined contribution plan provides
that the Company will, at its discretion, make contributions to the Plan on a
periodic basis.
21
<PAGE>
GEOCITIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. STOCK OPTIONS: (CONTINUED)
Additionally, the employer may match 33 1/3% of the first 6% of the employees'
contributions, which amounts vest over five years. Terminations and forfeitures
from the Plan are allocated to Plan participants at year-end. The Company made
contributions to the Plan of approximately $10,000 in 1997.
12. SUBSEQUENT EVENTS (UNAUDITED):
In July 1998, the Company entered into an agreement to buy certain Web-page
development technology for a total consideration of up to $1.45 million
including $850,000 in cash and $455,000 in Common Stock, valued at the price of
the Common Stock upon the consummation of the Company's Initial Public Offering.
The final payment of $145,000 may be in cash or Common Stock. This transaction
is expected to be completed in August 1998, and is not material to the financial
position, results of operations and cash flows of the Company.
In July 1998, the Board adopted the 1998 Stock Incentive Plan and Employee
Stock Purchase Plan and reserved an additional 2,600,000 shares of Common Stock
for issuance thereunder.
In July 1998, the Company signed a lease for approximately 24,000 square
feet to relocate its corporate headquarters. Monthly lease payments will be
$23,700 commencing September 1, 1998.
22
<PAGE>
(c) Exhibits
<TABLE>
<S> <S>
23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants
</TABLE>
23
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.
<TABLE>
<S> <C> <C>
GEOCITIES
</TABLE>
<TABLE>
<S> <C>
Date: February 25, 1999 /s/ STEPHEN L. HANSEN
-------------------------------------------
Stephen L. Hansen
Chief Financial Officer and
Chief Operating Officer
</TABLE>
24
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ----------- ------------------------------------------------------------------------------------------------------
<C> <S>
23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants
</TABLE>
25
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this report on Form 8-K of GeoCities of our
report dated June 2, 1998, except for the effects of the stock split described
in Note 2 as to which the date is July 21, 1998 and the restatement portion of
Note 2 as to which the date is February 19, 1999, on our audits of the financial
statements of GeoCities as of December 31, 1996 and 1997, and for each of the
three years in the period ended December 31, 1997.
/s/ PricewaterhouseCoopers LLP
Woodland Hills, California
February 23, 1999
