YAHOO! INC.
INDEX TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS
Page
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Report of Independent Accountants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Supplementary Consolidated Balance Sheet as of September 30, 1997 (unaudited) and
December 31, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Supplementary Consolidated Statement of Operations for the nine months ended
September 30, 1997 and 1996 (unaudited) and for the years ended December 31, 1996 and 1995 . . . 3
Supplementary Consolidated Statement of Shareholders' Equity for the nine months ended
September 30, 1997 (unaudited) and for the years ended December 31, 1996 and 1995 . . . . . . . 4
Supplementary Consolidated Statement of Cash Flows for the nine months ended September 30,
1997 and 1996 (unaudited) and for the years ended December 31, 1996 and 1995 . . . . . . . . . . 5
Notes to Supplementary Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . 6
EXHIBIT 99.1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Yahoo! Inc.
In our opinion, the consolidated balance sheet and the related consolidated
statements of operations, of shareholders' equity and of cash flows (which
statements are not presented separately herein) present fairly, in all
material respects, the financial position of Yahoo! Inc. and its
subsidiaries at December 31, 1996 and 1995 and the results of their
operations and their cash flows for the year ended December 31, 1996 and the
period from March 5, 1995 (Inception) through December 31, 1995, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these statements based on our
audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principle used and significant
estimates made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
As described in Notes 1 and 8 to the supplementary consolidated financial
statements, on October 20, 1997, Yahoo! Inc. merged with Four11 Corporation
in a transaction accounted for as a pooling of interests. The accompanying
supplementary consolidated financial statements give retroactive effect to
the merger of Yahoo! Inc. with Four11 Corporation.
In our opinion, the accompanying supplementary consolidated balance sheet and
the related supplementary consolidated statements of operations, of
shareholders' equity and of cash flows present fairly, in all material
respects, the financial position of Yahoo! Inc. and its subsidiaries at
December 31, 1996 and 1995, and the results of their operations and their
cash flows for the year ended December 31, 1996 and the period from March 5,
1995 (Inception) through December 31, 1995, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express
an opinion on these statements based on our audits. We conducted our audits
of these statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
/s/ PRICE WATERHOUSE LLP
San Jose, California
January 14, 1997,
except as to the pooling of interests with
Four11 Corporation which is as of October 20, 1997.
1
YAHOO! INC.
SUPPLEMENTARY CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, DECEMBER 31,
1997 1996 1995
------------ ------------ ----------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 56,448,000 $ 33,547,000 $5,535,000
Short-term investments in marketable securities 42,748,000 60,689,000 392,000
Accounts receivable, net of allowance of $2,022,000
(unaudited), $665,000 and $84,000 8,992,000 5,082,000 828,000
Prepaid expenses 7,161,000 384,000 18,000
------------ ------------ ----------
Total current assets 115,349,000 99,702,000 6,773,000
Long-term investments in marketable securities 4,003,000 9,748,000 -
Property and equipment, net 5,325,000 2,789,000 264,000
Investment in unconsolidated joint venture 1,228,000 729,000 -
Other assets 2,286,000 - -
------------ ------------ ----------
$128,191,000 $112,968,000 $7,037,000
------------ ------------ ----------
------------ ------------ ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,068,000 $ 1,106,000 $ 63,000
Accrued expenses and other current liabilities 9,228,000 4,718,000 556,000
Deferred revenue 4,539,000 1,347,000 179,000
Capitalized lease obligation 398,000 - -
Due to related parties 760,000 1,082,000 134,000
------------ ------------ ----------
Total current liabilities 16,993,000 8,253,000 932,000
------------ ------------ ----------
Capitalized lease obligation 899,000 - -
------------ ------------ ----------
Minority interests in consolidated subsidiaries 809,000 510,000 -
------------ ------------ ----------
Commitments and contingencies (Notes 7 and 8)
Shareholders' equity:
Convertible Preferred Stock, $0.001 par value;
none (unaudited), none and 7,750,072 shares authorized in
1997, 1996 and 1995; none (unaudited), none and 7,738,072
issued and outstanding in 1997, 1996 and 1995 - - 8,000
Preferred Stock, $0.001 par value;
10,000,000 (unaudited), 10,000,000 and no shares authorized
in 1997, 1996 and 1995; none issued and outstanding in
1997, 1996 and 1995 - - -
Common Stock, $0.00067 par value;
225,000,000 (unaudited) 225,000,000 and 75,000,000 shares
authorized in 1997, 1996 and 1995; 44,598,543 (unaudited)
and 41,298,067, 16,363,396 issued and outstanding in
1997, 1996 and 1995 20,000 18,000 1,000
Additional paid-in capital 136,165,000 109,271,000 6,895,000
Accumulated deficit (26,695,000) (5,084,000) (799,000)
------------ ------------ ----------
Total shareholders' equity 109,490,000 104,205,000 6,105,000
------------ ------------ ----------
$128,191,000 $112,968,000 $7,037,000
------------ ------------ ----------
------------ ------------ ----------
The accompanying notes are an integral part of these
supplementary consolidated financial statements.
2
YAHOO! INC.
SUPPLEMENTARY CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
1997 1996 1996 1995
------------ ----------- ----------- -----------
(unaudited)
Net revenues $ 42,306,000 $10,754,000 $19,697,000 $ 1,410,000
Cost of revenues 6,143,000 1,825,000 3,316,000 198,000
------------ ----------- ----------- -----------
Gross profit 36,163,000 8,929,000 16,381,000 1,212,000
------------ ----------- ----------- -----------
Operating expenses:
Sales and marketing 28,801,000 8,792,000 15,106,000 815,000
Product development 7,613,000 3,157,000 5,150,000 303,000
General and administrative 4,501,000 3,173,000 4,878,000 972,000
Other-nonrecurring costs 21,245,000 - - -
------------ ----------- ----------- -----------
Total operating expenses 62,160,000 15,122,000 25,134,000 2,090,000
------------ ----------- ----------- -----------
Loss from operations (25,997,000) (6,193,000) (8,753,000) (878,000)
Investment income, net 3,755,000 2,408,000 3,928,000 79,000
Minority interests in losses from operations
of consolidated subsidiaries 631,000 166,000 540,000 -
------------ ----------- ----------- -----------
Loss before income taxes (21,611,000) (3,619,000) (4,285,000) (799,000)
Provision for income taxes - - - -
------------ ----------- ----------- -----------
Net loss $(21,611,000) $(3,619,000) $(4,285,000) $ (799,000)
------------ ----------- ----------- -----------
------------ ----------- ----------- -----------
Net loss per share $ (0.50) $ (0.10) $ (0.11) $ (0.02)
------------ ----------- ----------- -----------
------------ ----------- ----------- -----------
Weighted average common shares and equivalents 43,201,000 37,124,000 39,256,000 34,492,000
The accompanying notes are an integral part of these
supplementary consolidated financial statements.
3
YAHOO! INC.
SUPPLEMENTARY CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL
---------------------- ------------------------ PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
---------- ---------- ----------- --------- ------------ ------------ ----------
Issuance of Common Stock in connection
with the formation of the Company - $ - 15,579,530 $ 1,000 $ 2,000 $ - $ 3,000
Issuance of Series A Convertible Preferred
Stock at $0.20 per share 5,200,000 5,000 - - 1,018,000 - 1,023,000
Issuance of Common Stock, net
of issuance costs - - 488,586 - 816,000 - 816,000
Issuance of options to consultants in
exchange for services - - - - 75,000 - 75,000
Issuance of Common Stock in exchange
for technology rights - - 11,180 - 2,000 - 2,000
Issuance of Series B Convertible Preferred
Stock at $1.97 per share 2,538,072 3,000 - - 4,978,000 - 4,981,000
Issuance of Common Stock pursuant to
exercise of options - - 284,100 - 4,000 - 4,000
Net loss - - - - - (799,000) (799,000)
----------- --------- ----------- --------- ----------- ------------ ------------
Balance at December 31, 1995 7,738,072 8,000 16,363,396 1,000 6,895,000 (799,000) 6,105,000
Issuance of Mandatorily Redeemable
Convertible Series C Preferred Stock
at $12.50 per share 5,100,000 5,000 - - 63,745,000 - 63,750,000
Sale of Common Stock, net of issuance
costs of $1,192,000 - - 4,485,000 3,000 35,040,000 - 35,043,000
Conversion Convertible Preferred Stock
to Common Stock (12,838,072) (13,000) 19,257,108 13,000 - - -
Issuance of Common Stock, net
of issuance costs - - 447,997 - 3,418,000 - 3,418,000
Issuance of Common Stock pursuant to
exercise of options - - 744,566 1,000 9,000 - 10,000
Compensation expense on option grants 164,000 - 164,000
Net loss - - - - - (4,285,000) (4,285,000)
----------- --------- ----------- -------- ------------ ------------ ------------
Balance at December 31, 1996 - - 41,298,067 18,000 109,271,000 (5,084,000) 104,205,000
Issuance of Common Stock pursuant to
exercise of Visa warrants (unaudited) - - 315,536 - - - -
Issuance of Common Stock for purchase
of Net Controls (unaudited) - - 37,167 - 1,400,000 - 1,400,000
Issuance of Common Stock pursuant to
Visa Group Agreement (unaudited)
(Note 8) - - 699,481 1,000 21,049,000 - 21,050,000
Issuance of Common Stock pursuant to
exercise of options (unaudited) - - 2,135,544 1,000 3,267,000 - 3,268,000
Issuance of Common Stock pursuant
to Employee Stock Purchase Plan
(unaudited) - - 112,748 - 845,000 - 845,000
Compensation expense on option grants
(unaudited) 333,000 - 333,000
Net loss (unaudited) - - - - - (21,611,000) (21,611,000)
----------- --------- ----------- -------- ------------ ------------ ------------
Balance at September 30, 1997
(unaudited) - $ - 44,598,543 $ 20,000 $136,165,000 $(26,695,000) $109,490,000
----------- --------- ----------- -------- ------------ ------------ ------------
----------- --------- ----------- -------- ------------ ------------ ------------
The accompanying notes are an integral part of these
supplementary consolidated financial statements.
4
YAHOO! INC.
SUPPLEMENTARY CONSOLIDATED STATEMENT OF CASH FLOWS
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
1997 1996 1996 1995
--------------- -------------- ------------- --------------
(unaudited)
Cash flows from operating activities:
Net loss $ (21,611,000) $ (3,619,000) $ (4,285,000) $ (799,000)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization 1,596,000 396,000 552,000 140,000
Common Stock issued in exchange for
technology rights and services - - - 5,000
Compensation expense on stock option grants 333,000 110,000 164,000 -
Minority interests in losses from
operations of consolidated subsidiaries (631,000) (166,000) (540,000) -
Non-cash charge 21,245,000 - - -
Changes in assets and liabilities:
Accounts receivable, net (3,910,000) (2,442,000) (4,254,000) (828,000)
Prepaid expenses (7,951,000) (676,000) (366,000) (18,000)
Accounts payable 962,000 1,336,000 1,043,000 63,000
Accrued expenses and other current liabilities 3,749,000 2,737,000 4,290,000 428,000
Deferred revenue 3,192,000 194,000 1,168,000 179,000
Due to related parties (322,000) 128,000 948,000 134,000
-------------- -------------- -------------- --------------
Net cash used in operating activities (3,348,000) (2,002,000) (1,280,000) (696,000)
-------------- -------------- -------------- --------------
Cash flows from investing acitivities:
Acquisition of property and equipment (4,044,000) (2,072,000) (3,077,000) (192,000)
Purchases of investments 23,686,000 (73,077,000) (113,285,000) (392,000)
Proceeds from sales and maturities of investments (299,000) 392,000 43,240,000 -
Investment in unconsolidated joint venture - (729,000) (729,000) -
-------------- -------------- -------------- --------------
Net cash provided by (used in) investing activities 19,343,000 (75,486,000) (73,851,000) (584,000)
-------------- -------------- -------------- --------------
Cash flows from financing activities:
Proceeds from issuance of Common Stock, net 4,113,000 37,519,000 38,471,000 820,000
Proceeds from issuance of convertible notes payable 500,000 - - -
Proceeds from bridge loan - 594,000 - -
Proceeds from issuance of Convertible Preferred Stock - 63,750,000 63,750,000 6,004,000
Proceeds from minority investors 996,000 450,000 1,050,000 -
Proceeds from capitalized lease obligations 1,500,000 - - -
Repayment of lease obligations (203,000) (128,000) (128,000) (9,000)
-------------- -------------- -------------- --------------
Net cash provided by financing activities 6,906,000 102,185,000 103,143,000 6,815,000
-------------- -------------- -------------- --------------
Net change in cash and cash equivalents 22,901,000 24,697,000 28,012,000 5,535,000
Cash and cash equivalents at beginning of period 33,547,000 5,535,000 5,535,000 -
-------------- -------------- -------------- --------------
Cash and cash equivalents at end of period $ 56,448,000 $ 30,232,000 $ 33,547,000 $ 5,535,000
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 91,000 $ 19,000 $ - $ 4,000
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
SUPPLEMENTAL SCHEDULE OF NONCASH TRANSACTIONS:
Acquisition of property and equipment through capital leases $ - $ - $ - $ 137,000
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
Purchase of Net Controls through issuance of Common Stock $ 1,400,000 $ - $ - $ -
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
The accompanying notes are an integral part of these
supplementary consolidated financial statements.
5
YAHOO! INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Yahoo! Inc. (the "Company") is an Internet media company that offers a
network of globally-branded properties, specialty programming, and
aggregated content distributed primarily on the World Wide Web (the
"Web") serving business professionals and consumers, and is among the
most widely used guides for information and discovery on the Web. The
Company was incorporated in California on March 5, 1995 and commenced
operations on that date. Yahoo! conducts its business within one
industry segment.
ACQUISITION OF FOUR11 CORPORATION
On October 20, 1997 the Company consummated an Agreement and Plan of
Reorganization (the "Agreement") with Four11 Corporation ("Four11"), a
privately held company, upon which Four11's shareholders exchanged all of
their shares on an as-if-converted basis, for shares of the Company's
Common Stock in a business combination to be accounted for as a pooling
of interests. The supplementary consolidated financial information as of
September 30, 1997 (unaudited) and December 31, 1996 and 1995 and for the
nine month periods ended September 30, 1997 and 1996 (unaudited) and the
years ended December 31, 1996 and 1995 reflects the Company's
consolidated financial position and the results of operations as if
Four11 was a wholly-owned subsidiary of the Company since inception (See
Note 8).
PRINCIPLES OF CONSOLIDATION
The supplementary consolidated financial statements include the accounts of
Yahoo! Inc. and its majority-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated. The equity
and loss from operations attributable to the minority shareholder interests
which related to the Company's foreign and domestic subsidiaries, are shown
separately in the supplementary consolidated balance sheets and
supplementary consolidated statements of operations, respectively.
Losses in excess of the minority interest equity are charged against the
Company. Investments in entities owned 20% or more but less than
majority owned and not otherwise controlled by the Company are accounted
for under the equity method.
6
YAHOO! INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS
REVENUE RECOGNITION
The Company derives substantially all of its revenues from the sale of
advertisements on short-term contracts. The Company's standard rates for
advertising currently range from $0.02 to $0.08 per impression. To date,
the duration of the Company's advertising commitments has ranged from one
week to one year. Advertising revenues are recognized ratably over the
period in which the advertisement is displayed, provided that no
significant Company obligations remain and collection of the resulting
receivable is probable. Company obligations typically include guarantees
of minimum number of "impressions," or times that an advertisement
appears in page views downloaded by users of YAHOO!. To the extent
minimum guaranteed impressions are not met, the Company defers
recognition of the corresponding revenues until guaranteed impression
levels are achieved. Deferred revenue is comprised of billings in excess
of recognized revenue relating to advertising contracts. During 1996,
SOFTBANK, a 35% shareholder of the Company at December 31, 1996, and its
related companies accounted for approximately 12% of net revenues.
During the period from March 5, 1995 (Inception) to December 31, 1995,
another company accounted for approximately 11% of net revenues.
International revenues were not material in any period presented. License
and royalty revenues are recognized as amounts are earned under the terms
of applicable agreements, provided no significant Company obligations
exist and collection of the resulting receivable is probable.
Revenues from barter transactions are recognized during the period in which
the advertisements are displayed in YAHOO!. Barter transactions are
recorded at the lower of estimated fair value of the goods or services
received or the estimated fair value of the advertisements given. To date,
barter transactions have been less than 10% of net revenues.
PRODUCT DEVELOPMENT
Costs incurred in the classification and organization of listings within
YAHOO! and the development of new products and enhancements to existing
products are charged to expense 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 recorded as expense the first time an advertisement
appears. Advertising expense totaled $3,939,000 for 1996 and $130,000 for
the period from March 5, 1995 (Inception) through December 31, 1995.
7
YAHOO! INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS
CASH, CASH EQUIVALENTS, SHORT AND LONG-TERM INVESTMENTS
The Company invests certain of its excess cash in debt instruments of the
U.S. Government, its agencies, and high-quality corporate issuers. All
highly liquid instruments with an original maturity of three months or less
are considered cash equivalents; those with original maturities greater
than three months and current maturities less than twelve months from the
balance sheet date are considered short-term investments, and those with
maturities greater than twelve months from the balance sheet date are
considered long-term investments.
At December 31, 1996, short-and long-term investments were classified as
available-for-sale and consisted of 64% corporate debt securities, 26% debt
securities of the U.S. Government and its agencies, and 10% foreign debt
securities. All long-term investments are due within five years. At
December 31, 1996, the fair value of the investments approximated cost.
Fair value is determined based upon the quoted market prices of the
securities as of the balance sheet date. At December 31, 1995, the
Company's short-term investments were classified as available for sale and
consisted of U.S. Treasury Bills.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentration of credit risk consist primarily of cash, cash equivalents,
short and long-term investments, and accounts receivable. Substantially
all of the Company's cash, cash equivalents, short and long-term
investments are managed by two financial institutions. Accounts receivable
are typically unsecured and are derived from revenues earned from customers
primarily located in the United States. The Company performs ongoing
credit evaluations of its customers and maintains reserves for potential
credit losses; historically, such losses have been immaterial and within
management's expectations. At December 31, 1996, no one customer accounted
for 10% or more of the accounts receivable balance. At December 31, 1995,
two customers accounted for a total of 21% of the accounts receivable
balance.
PROPERTY AND EQUIPMENT
Property and equipment, including leasehold improvements, are stated at
cost. Depreciation is computed using the straight-line method over the
estimated useful lives of the assets, generally two to five years.
INCOME TAXES
Income taxes are computed using the asset and liability method. Under the
asset and liability method, deferred income tax assets and liabilities are
determined based on the differences between the financial reporting and tax
bases of assets and liabilities and are measured using the currently
enacted tax rates and laws.
8
YAHOO! INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS
FOREIGN CURRENCY
The functional currency of the Company's subsidiaries in the United
Kingdom, Germany, and France is the local currency. The financial
statements of these subsidiaries are translated to United States dollars
using year-end rates of exchange for assets and liabilities, and average
rates for the year for revenues, costs, and expenses. Translation gains
and losses, which were insignificant at December 31, 1996, are deferred and
accumulated as a component of shareholders' equity. Net gains and losses
resulting from foreign exchange transactions are included in the
consolidated statements of operations and were not significant during the
periods presented.
NET LOSS PER SHARE
Net loss per share is computed using the weighted average number of common
and common equivalent shares outstanding during the period. Common
equivalent shares consist of the incremental common shares issuable upon
conversion of the convertible preferred stock (using the if-converted
method) and shares issuable upon the exercise of stock options and warrants
(using the treasury stock method or the modified treasury stock method,
whichever applies). Common equivalent shares are excluded from the
computation if their effect is antidilutive, except that, pursuant to the
Securities and Exchange Commission Staff Accounting Bulletin, the
convertible preferred stock (using the if-converted method) and common
equivalent shares (using the treasury stock method and the assumed public
offering price) issued subsequent to March 5, 1995 through April 11, 1996
have been included in the computation as if they were outstanding for all
periods presented.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses
during the reported period. Actual results could differ from those
estimates.
9
YAHOO! INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS
RECLASSIFICATION
Certain prior period balances have been reclassified to conform with
current period presentation.
BENEFIT PLAN
The Company maintains a 401(k) Profit Sharing Plan (the "401(k) Plan") for
its full time employees. Each participant in the 401(k) Plan may elect to
contribute from 1% to 17% of his or her annual compensation to the 401(k)
Plan. The Company matches employee contributions at a rate of 25%.
Employee contributions are fully vested, whereas vesting in matching
Company contributions occurs at a rate of 33.3% per year of employment.
All contributions to the 401(k) Plan are invested at the employee's
discretion in eight separate funds. During 1996, the Company's
contribution amounted to $81,000, all of which was expensed.
INTERIM FINANCIAL INFORMATION (UNAUDITED)
The accompanying supplementary consolidated balance sheet as of
September 30, 1997, the supplementary consolidated statements of
operations and cash flows for the nine month periods ended September 30,
1997 and 1996 and the supplementary consolidated statement of
shareholders' equity for the nine months ended September 30, 1997
are unaudited. Similarly, amounts disclosed in the notes to the
financial statements relating to the nine months ended September 30,
1997 and 1996 are unaudited. In the opinion of management, these
statements have been prepared on the same basis as the audited
financial statements and include all adjustments, consisting of
normal recurring adjustments, necessary for the fair presentation of the
results of the interim periods. The results of operations for such
periods are not necessarily indicative of the results expected for the full
fiscal year or any future period.
10
YAHOO! INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS
2. BALANCE SHEET COMPONENTS
DECEMBER 31,
1996 1995
------------- -----------
Property and equipment:
Computers and equipment $ 2,228,000 $ 322,000
Furniture and fixtures 888,000 4,000
Leasehold improvements 290,000 3,000
------------- -----------
3,406,000 329,000
Less: accumulated depreciation (617,000) (65,000)
------------- -----------
2,789,000 264,000
------------- -----------
------------- -----------
Accrued expenses and other current
liabilities:
Accrued vacation, wages, and other
employee benefits 1,069,000 121,000
Accured professional service expenses 801,000 73,000
Accrued content costs 554,000 -
Other 2,294,000 362,000
------------- -----------
$ 4,718,000 $ 556,000
------------- -----------
------------- -----------
3. RELATED PARTY TRANSACTIONS
During July 1995, the Company entered into an agreement with a holder
of approximately 2% of the Company's Common Stock at December 31, 1996
whereby the shareholder granted the Company a license for trademarks
and intellectual property rights for inclusion in YAHOO!. The Company
agreed to share with the shareholder certain advertising revenue
earned from YAHOO! pages where the shareholder's data appears. The
amount of advertising revenue allocated to the shareholder varies
based upon the location of pages within YAHOO! and the level of
customer usage of the supplied data. During 1996, the Company paid
approximately $375,000 to the shareholder under this agreement and the
amount due to the shareholder at December 31, 1996 was $186,000.
During the period from March 5, 1995 (Inception) through December 31,
1995, no amount was paid to the shareholder under the agreement and
the amount due to the shareholder at December 31, 1995 was $35,000.
The shareholder also pays certain fees for the maintenance of YAHOO!
pages where its data appears. During 1996 and the period from March
5, 1995 (Inception) through December 31, 1995, the Company recognized
$20,000 and $30,000, respectively, of maintenance revenue relating to
the agreement.
11
YAHOO! INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS
During 1996, the Company recognized net revenues of approximately
$2,096,000 on advertising contracts placed by SOFTBANK and its related
companies, a 35% shareholder of the Company at December 31, 1996.
Contracted prices on these orders are comparable to those given to
other major customers of the Company. During 1996, the Company also
recognized publication revenues from a subsidiary of SOFTBANK of
approximately $200,000 and development and licensing revenues of
approximately $85,000. Additionally, a sales representative firm
which is a subsidiary of SOFTBANK has provided services to the Company
totaling approximately $2,300,000 and $177,000 during 1996 and 1995,
respectively. The amount due to the firm for services rendered
totaled $896,000 at December 31, 1996 and $99,000 at December 31,
1995. Additionally, the Company entered into two separate joint
venture agreements with SOFTBANK during 1996 (see Note 4).
4. JOINT VENTURES
YAHOO! JAPAN
During April 1996, the Company signed a joint venture agreement with
SOFTBANK, a 35% shareholder of the Company at December 31, 1996,
whereby Yahoo! Japan Corporation was formed to establish and manage in
Japan a Japanese version of the YAHOO! Internet Guide, develop related
Japanese on-line navigational services, and conduct other related
business. The Company's ownership interest in the joint venture is
40% and is being accounted for using the equity method. At
December 31, 1996, the Company's investment in the joint venture
was $729,000, which was also the Company's initial investment.
There is no commitment on either company's behalf to invest
additional cash in the joint venture.
YAHOO! MARKETPLACE
On August 26, 1996, the Company entered into agreements with Visa
International Service Association (VISA) and another party (together, the
VISA Group) to establish a new company, Yahoo! Marketplace, to develop
and operate a navigational service focused on information and resources
for the purchase of consumer products and services over the Internet. The
parties have agreed to invest a total of up to $3,000,000 in proportion
to their respective equity interests, and as of December 31, 1996, had
invested $1,000,000. At December 31, 1996, the Company owned
approximately 55% of the equity interest in Yahoo! Marketplace. During
1996, Yahoo! Marketplace incurred losses from operations of $637,000. At
December 31, 1996, $163,000 of the minority interest on the balance sheet
represents VISA's interest in the net assets of Yahoo! Marketplace. In
connection with this agreement, the Company has issued to VISA for a
purchase price of $50,000 a warrant to purchase 525,000 shares of the
Company's Common Stock at an exercise price of $8.33 per share, which
warrant is exercisable during a two year period commencing in March 1997.
In July 1997, prior to the completion of significant business
activities and public launch of the property, the Company and Visa
entered into an agreement under which the Visa Group released the
Company from certain obligations and claims, and the Company returned
the Visa Group's original equity contribution to the L.L.C. (See Note 8).
12
YAHOO! INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS
YAHOO! EUROPE
On November 1, 1996, the Company signed a joint venture agreement with
a subsidiary of SOFTBANK, a 35% shareholder of the Company at December
31, 1996, whereby separate companies were formed in Germany, the
United Kingdom, and France to establish and manage versions of the
YAHOO! Internet Guide for Germany, the United Kingdom, and France,
develop related on-line navigational services, and conduct other
related business. The parties have agreed to invest a total of up to
$4,000,000 in proportion to their respective equity interests, and as
of December 31, 1996 had invested $2,000,000. The Company has a
majority share of approximately 70% in each of the Yahoo! Europe
entities, and therefore, has consolidated the financial results.
During 1996, Yahoo! Europe incurred losses from operations of
$842,000. At December 31, 1996, $347,000, of the minority interest on
the balance sheet represents SOFTBANK's interest in the net assets of
Yahoo! Europe.
5. SHAREHOLDERS' EQUITY
STOCK SPLIT
During July 1997, the Company's Board of Directors approved a 3-for-2
stock split (the "Stock Split"). All references to the number of shares
of Preferred Stock, Common Stock, weighted average common shares, and per
share amounts have been retroactively restated in the accompanying
supplementary consolidated financial statements to reflect the effect of
the Stock Split.
COMMON STOCK
On April 11, 1996, the Company completed its initial public offering of
4,485,000 shares of its Common Stock. Net proceeds to the Company
aggregated approximately $35,043,000. As of the closing date of the
offering, all of the Convertible Preferred Stock and Mandatorily
Redeemable Convertible Preferred Stock outstanding was converted into an
aggregate of 19,257,108 shares of Common Stock. The Company has the
right to repurchase, at the original issue price, a declining percentage
of certain of the common shares issued to employees under written
agreements with such employees. The Company's right to repurchase such
stock declines on a percentage basis generally over four years based on
the length of the employees' continual employment with the Company. At
December 31, 1996, 4,752,363 shares of common stock were subject to
repurchase by the Company.
13
YAHOO! INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS
PREFERRED STOCK
At December 31, 1996, the Company has authorized 10,000,000 shares of
undesignated preferred stock. At December 31, 1995, the Company had
authorized 7,750,072 shares of preferred stock, of which 5,212,000 shares
had been designated Series A Convertible Preferred Stock ("Series A") and
2,538,072 shares had been designated Series B Convertible Preferred Stock
("Series B"). At December 31, 1995, 5,200,000 of Series A and 2,538,072
of Series B were issued and outstanding. During March 1996, the Company
entered into an agreement to sell 5,100,000 shares of Mandatorily
Redeemable Convertible Series C Preferred Stock ("Series C") at a price
of $12.50 per share for aggregate proceeds of $63,750,000. The holders
of Series A, Series B and Series C were entitled to various rights and
preferences under the terms of their respective agreements. On April 11,
1996, the Company completed its initial public offering of its Common
Stock. At that time, all issued and outstanding shares of the Company's
Convertible Preferred Stock and Mandatorily Redeemable Convertible
Preferred Stock were converted into an aggregate of 19,257,108 shares of
Common Stock.
STOCK OPTION PLAN
In May 1995, the Board of Directors adopted the 1995 Stock Plan (the
"Plan") which originally provided for the grant of up to 7,500,000
incentive stock options, non-qualified stock options, and stock
purchase rights. On March 6, 1996, the Board of Directors approved
an increase in the number of authorized shares in the Plan to
12,000,000. Under the Plan, incentive stock options may be granted to
employees, officers, and directors of the Company and non-qualified
stock options and stock purchase rights may be granted to consultants,
employees, directors, and officers of the Company. Options granted
under the Plan are for periods not to exceed ten years, and must be
issued at prices not less than 100% and 85%, for incentive and
nonqualified stock options, respectively, of the fair market value of
the stock on the date of grant as determined by the Board of
Directors. Options granted to shareholders who own greater than 10%
of the outstanding stock are for periods not to exceed five years and
must be issued at prices not less than 110% of the fair market value
of the stock on the date of grant as determined by the Board of
Directors. Options granted under the Plan generally vest 25% after
the first year and ratably each month over the remaining thirty-six
month period.
14
YAHOO! INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS
Pursuant to the consummation of the Agreement and Plan of Reorganization
with Four11 Corporation, the Company assumed the 1995 Four11 Stock Option
Plan (the "Four11 Plan"). Terms under the Four11 Plan are substantially
consistent with the Plan except that options issued under the Four11 Plan
may be exercised prior to vesting. Shares obtained upon exercise of
unvested options are subject to repurchase in the event of termination,
at the original purchase price, which repurchase right lapses on a
schedule consistent with the vesting of the underlying option. At
December 31, 1996, no shares were subject to repurchase under the
provisions of the Four11 Plan.
Options to purchase 830,040 and 101,250 shares were vested at
December 31, 1996 and 1995, respectively.
A summary of the Plan's activity (including options issued under
the Four11 Plan) is as follows:
AVAILABLE OPTIONS PRICE PER
FOR GRANT OUTSTANDING SHARE
Shares reserved 7,830,332 -
Options granted (5,260,626) 5,260,626 $ 0.01-0.22
Options exercised - (284,100) $ 0.01
---------- --------- --------------
Balance at December 31, 1995 2,569,706 4,976,526 $ 0.01-0.22
Additional shares reserved 4,500,000 -
Options granted (5,707,385) 5,707,385 $ 0.13 - 13.92
Options cancelled 461,328 (461,328) $ 0.01 - 12.33
Options exercised - (744,566) $ 0.01
---------- --------- --------------
Balance at December 31, 1996 1,823,649 9,478,017 $ 0.01 - 13.92
---------- --------- --------------
---------- --------- --------------
During the period from January 1996 through April 1996, the Company
granted options to purchase an aggregate of 3,450,702 shares of Common
Stock at exercise prices ranging from $0.13 to $6.67 per share. Based in
part on an independent appraisal obtained by the Company's Board of
Directors, $625,000 of compensation expense relating to certain options
is to be recognized over the four-year vesting periods of the options, of
which, $156,000 was recognized in 1996. Additionally, during the period
from August 1996 through September 1997, the Company granted options to
purchase an aggregate of 166,324 shares of Common Stock at exercise
prices ranging from $0.22 to $0.78 per share. The Company will record
$2,168,000 of compensation expense relating to these options over the
four-year vesting period, of which the Company recorded $8,000 and
$216,000 (unaudited) during the year ended December 31, 1996 and the nine
months ended September 30, 1997, respectively. During the period from
March 5, 1995 (Inception) through December 31, 1995, the Company granted
options to purchase 441,600 shares of Common Stock to consultants in
exchange for services at an exercise price of $0.01 per share. The
Company recorded expense totaling $75,000 during the period from March 5,
1995 (Inception) through December 31, 1995 based on the estimated fair
value of the services received.
15
YAHOO! INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS
DIRECTORS' STOCK OPTION PLAN
Effective March 6, 1996, the Board of Directors adopted the 1996
Directors' Stock Option Plan (the "Directors' Plan"). The Directors' Plan
provides for the issuance of up to 300,000 nonstatutory stock options to
nonemployee directors of the Company. Each person who becomes a
nonemployee director of the Company after the date of the Company's
initial public offering will automatically be granted a nonstatutory
option (the "First Option") to purchase 60,000 shares of Common Stock upon
the date on which such person first becomes a director. Thereafter, each
director of the Company will be granted an annual option (the "Annual
Option") to purchase 7,500 shares of Common Stock. Options under the
Directors' Plan will be granted at the fair value of the stock and will
vest in equal monthly installments over four years, in the case of the
First Option, or at the end of four years in the case of the Annual
Option. At December 31, 1996, there had been no option grants under the
Directors' Plan.
EMPLOYEE STOCK PURCHASE PLAN
Effective March 6, 1996, the Company's Board of Directors adopted the
Employee Stock Purchase Plan (the "Purchase Plan"), which provides for the
issuance of a maximum of 450,000 shares of Common Stock. Eligible
employees can have up to 15% of their earnings withheld, up to certain
maximums, to be used to purchase shares of the Company's Common Stock on
every January 1st and July 1st. The price of the Common Stock purchased
under the Purchase Plan will be equal to 85% of the lower of the fair
market value of the Common Stock on the commencement date of each six
month offering period or the specified purchase date. There were no
shares issued under the Purchase Plan during 1996.
STOCK COMPENSATION
The Company accounts for its employee stock option plans in accordance
with the provisions of Accounting Principles Board Opinion No. 25. In
October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 (FAS 123), "Accounting for
Stock-Based Compensation" which established a fair value based method of
accounting for employee stock option plans. The Company has elected to
adopt the disclosure method of FAS 123. Had compensation cost for the
Company's option plans been determined based on the fair value at the
grant dates, as prescribed in FAS 123, the Company's net loss and pro
forma net loss per share would have been as follows:
1996 1995
Net loss:
As reported $(4,285,000) $ (799,000)
Pro forma $(5,131,000) $ (801,000)
Net loss per share:
As reported $ (0.11) $ (0.02)
Pro forma $ (0.13) $ (0.02)
16
YAHOO! INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS
Prior to the Company's initial public offering, the fair value of each
option grant was determined on the date of grant using the minimum value
method. Subsequent to the offering, the fair value was determined using
the Black-Scholes model. Except for the volatility assumption which was
only used under the Black-Scholes model, the following range of
assumptions was used to perform the calculations:
1996 1995
Expected life 30 months 30 months
Interest rate 5.1% - 6.5% 5.3% - 6.0%
Volatility 53% not applicable
Dividend yield 0% 0%
Because additional stock options are expected to be granted each year, the
above pro forma disclosures are not representative of pro forma effects on
reported financial results for future years.
6. INCOME TAXES
No provision for federal and state income taxes has been recorded as the
Company has incurred net operating losses through December 31, 1996. The
following table sets forth the primary components of deferred tax assets:
DECEMBER 31,
1996 1995
------------ -----------
Net operating loss and credit carryforwards $ 3,421,000 $ 144,000
Nondeductible reserves and expenses 1,382,000 134,000
Other 86,000 -
------------ -----------
Gross deferred tax assets 4,889,000 278,000
Valuation allowance (4,889,000) (278,000)
------------ -----------
$ - $ -
------------ -----------
------------ -----------
17
YAHOO! INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 1996 and December 31, 1995, the Company fully reserved its
deferred tax assets. The Company believes sufficient uncertainty exists
regarding the realizability of the deferred tax assets such that a
valuation allowance is required.
Deferred tax assets and related valuation allowances of approximately
$3,185,000 relate to certain U.S. operating loss carryforwards resulting
from the exercise of employee stock options, the tax benefit of which,
when recognized, will be accounted for as a credit to additional paid-in
capital rather than a reduction of the income tax provision.
Additionally, deferred tax assets of $236,000 relate to operating loss
carryforwards in various foreign jurisdictions. Certain of these
carryforwards will expire if not utilized.
At December 31, 1996, the Company had approximately $7,800,000 of federal
net operating loss carryforwards for tax reporting purposes available to
offset future taxable income; such carryforwards expire in 2010.
Under the Tax Reform Act of 1986, the amounts of and benefits from net
operating losses carried forward may be impaired or limited in certain
circumstances. Events which may cause limitations in the amount of net
operating losses that the Company may utilize in any one year include, but
are not limited to, a cumulative ownership change of more than 50% over a
three year period. In addition, certain net operating loss
carryforwards may be used only to offset taxable income arising from
certain of the Company's subsidiaries. At December 31, 1996, the effect
of such limitations, if imposed, is not expected to be material.
7. COMMITMENTS, CONTINGENCIES AND BORROWINGS
The Company leases its facilities under non-cancelable operating lease
agreements which expire during 1998 and 1999. Rent expense under
operating leases for the years ended December 31, 1996 and 1995 aggregated
$436,000 and $32,000, respectively.
Future minimum lease commitments under non-cancelable operating and
capital leases as of December 31, 1996 are as follows:
18
YAHOO! INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS
OPERATING
LEASES
----------
Year ended December 31,
1997 $ 697,000
1998 607,000
1999 36,000
2000 -
-----------
Total minimum lease payments $1,340,000
-----------
-----------
During February 1997, the Company entered into four separate equipment
lease line of credit agreements aggregating $1,500,000. During the nine
months ended September 30, 1997, the Company financed $1,500,000 of
computers and equipment under these facilities. For equipment purchased
under the lease line, principal and interest are payable over a 36 month
period.
During June 1996, the Company obtained $594,000 in bridge financing which
was repaid during 1996. During July 1997, the Company issued a convertible
subordinated promissory note for aggregate proceeds of $500,000. The note
bears interest at an annual rate of 6% and is payable on demand by the
holder anytime after March 31, 1998 or default by the Company.
During June 1996 and February 1997, the Company issued warrants to
purchase 16,116 shares of Common Stock to certain lenders. The warrants
are exercisable through their expiration in 2001 and 2007.
19
YAHOO! INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS
On March 15, 1996, the Company entered into an agreement with Netscape
whereby the Company was designated one of five "Premier Providers". Under
the terms of the agreement, the Company is required to make payments of
up to $5,000,000 over the agreement's one year term, which began in
mid-April 1996. During 1996, $3,500,000 had been paid and recognized as
expense under the agreement. The remaining $1,500,000 was paid during
January 1997. During March 1997, the Company renewed its designation as a
"Premier Provider" (See Note 8).
From time to time the Company is subject to legal proceedings and claims
in the ordinary course of business, including claims of alleged
infringement of trademarks and other intellectual property rights. The
Company is not currently aware of any legal proceedings or claims that the
Company believes will have, individually or in the aggregate, a material
adverse effect on the Company's financial position or results of
operations.
8. SUBSEQUENT EVENTS (UNAUDITED)
MERGER WITH FOUR11 CORPORATION
On October 20, 1997, the Company completed the acquisition of Four11
Corporation, a privately held, online communications and directory
company. Under the terms of the acquisition, which will be accounted for
as a pooling of interests, the Company exchanged 1,505,720 shares of
Common Stock for all of Four11's outstanding shares and assumed 148,336
options and warrants to purchase Yahoo! Common Stock, at a common exchange
ratio of approximately 0.2318121 of a share of the Company's Common Stock
for each share of Four11's common stock. All outstanding Four11 preferred
shares were converted into common stock immediately prior to the
acquisition. These supplementary consolidated financial statements do
not include non-recurring costs of approximately $4,000,000 arising from
the acquisition. The costs consist of investment banking fees, legal and
accounting fees, redundancy costs, and certain other expenses directly
related to the acquisition. These costs will be recorded as expenses
in the quarter ending December 31, 1997.
GTE LITIGATION
In July 1997, GTE New Media Services Incorporated ("GTE New Media"), an
affiliate of GTE, filed suit in Dallas, Texas, against Netscape and the
Company, in which GTE New Media made a number of claims relating to the
inclusion of certain Yellow Pages hypertext links in the NETSCAPE GUIDE
BY YAHOO!, an online navigational property operated by the Company under
an agreement with Netscape. In this lawsuit, GTE New Media has alleged,
among other things, that by including such links to the Yellow Pages
service operated by several Regional Bell Operating Companies (the
"RBOCs") within the NETSCAPE GUIDE, the Company has tortiously interfered
with an alleged contractual relationship between GTE New Media and
Netscape relating to placement of links by Netscape for a Yellow Pages
service operated by GTE New Media. GTE New Media seeks injunctive relief
as well as actual and punitive damages. In October 1997, GTE New Media
brought suit in the U.S. District Court for the District of Columbia,
against the RBOCs, Netscape and the Company, in which GTE alleges, among
other things, that the alleged exclusion of the GTE New Media Yellow
Pages from the NETSCAPE GUIDE Yellow Pages service violates federal
antitrust laws, and GTE New Media seeks injunctive relief and damages
(trebled under federal antitrust laws) from such alleged actions. The
Company believes that the claims against the Company in these lawsuits
are without merit and intends to contest them vigorously. Although the
Company cannot predict with certainty the outcome of these lawsuits or
the expenses that may be incurred in defending the lawsuits, the Company
does not believe that the result in the lawsuits will have a material
adverse effect on the Company's financial position or results of
operations.
YAHOO! MARKETPLACE
In July 1997, prior to the completion of significant business activities
and public launch of Yahoo! Marketplace, the Company and Visa entered
into an agreement under which the Visa Group released the Company from
certain obligations and claims, and the Company returned the Visa Group's
original equity contribution to the L.L.C. In connection with this
agreement, Yahoo! issued 699,481 shares of Yahoo! Common Stock to the
Visa Group, for which the Company recorded a one-time, non-cash, pre-tax
charge of $21,245,000 in the second quarter ended June 30, 1997.
20
YAHOO! INC.
NOTES TO SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENTS
NETSCAPE GUIDE BY YAHOO!
During March 1997, the Company entered into certain agreements with
Netscape Communications Corporation (Netscape) under which the Company has
developed and operates an Internet information navigation service called
"NETSCAPE GUIDE BY YAHOO!" (the GUIDE). The Co-Marketing agreement
provides that revenue from advertising on the Guide, which is managed by
the Company, is to be shared between the Company and Netscape. Under the
terms of the Trademark License agreement, the Company made a one-time
non-refundable trademark license fee payment of $5,000,000 in March 1997
which is being amortized over the initial two-year term, which commenced
in May 1997. Under the terms of the Co-Marketing agreement as amended in
June 1997, the Company also provided Netscape with a minimum of $4,660,000
in guarantees against shared advertising revenues in the first year of the
agreement and up to $15,000,000 in the second year of the agreement,
subject in the second year to certain minimum levels of impressions being
reached on the GUIDE. Actual payments may be higher and will relate
directly to the overall revenue recognized from the GUIDE. As of
September 30, 1997, $1,160,000 had been paid to Netscape under this
agreement.
NETSCAPE PREMIER PROVIDER
Also during March 1997, the Company entered into an agreement with
Netscape whereby it renewed its designation as one of four "Premier
Providers" of domestic navigational services within the Netscape Web
Site. Under the terms of the agreement, the Company is required to make
minimum payments of $3,200,000 in cash and is obligated to provide
$1,500,000 in the Company's advertising services in return for certain
minimum guaranteed exposures over the course of the one-year term of the
agreement, which commenced in May 1997. The minimum payments are
amortized over the term of the agreement. As of September 30, 1997, the
Company had paid $1,637,000 in cash and an additional $600,000 was paid
in October under the terms of the agreement. Expense incurred to date as
of September 30, 1997 under the agreement were approximately $2,650,000.
To the extent that the minimum guaranteed exposures are exceeded, the
Company is obligated to remit to Netscape additional payments of cash and
the Company's advertising services. At September 30, 1997, approximately
$700,000 has been expensed over and above the amortization of the minimum
guaranteed payments.
During June 1997, the Company entered into certain agreements with
Netscape whereby it was designated as a "Premier Provider" of
international search and navigational guide services for the Netscape Net
Search program. Under the terms of the agreements, the Company will
provide services in 12 countries, including Australia, Denmark, France,
Germany, Italy, Japan, Korea, The Netherlands, Portugal, Spain, Sweden,
and the United Kingdom. Under the terms of the agreements, the Company
made a cash payment of $2,900,000 in July 1997 and is obligated to
provide $100,000 in the Company's advertising services in return for
certain minimum guaranteed exposures over the course of the one-year term
of the agreements, which commenced in July 1997. The Company amortizes
the total cost of these agreements over their one-year term.
YAHOO! KOREA
During August 1997, the Company signed a joint venture agreement with
SOFTBANK, a holder of approximately 33% of the Company's Common Stock at
September 30, 1997, and other SOFTBANK affiliate companies whereby Yahoo!
Korea was formed to develop and operate a version of the YAHOO! Internet
Guide in the native Korean language. The parties have invested a total of
$1,000,000 in proportion to their respective equity interests. The
Company has a majority share of approximately 60% in the joint venture,
and therefore, has consolidated the financial results, which were
insignificant during the quarter.
PURCHASE OF NETCONTROLS
On July 31, 1997, the Company entered into a stock purchase agreement to
acquire all of the outstanding capital stock of NetControls, Inc. for
37,167 shares of the Company's Common Stock. The acquisition was recorded
as a purchase for accounting purposes and the majority of the purchase
price of approximately $1,400,000 will be amortized over the estimated
useful life of the technology acquired. Upon acquisition, the historical
financial results of NetControls, Inc. were deminimis.
LEASE COMMITMENTS
During September 1997, the Company entered into a sublease agreement
which will provide the Company with additional office space at its
existing Santa Clara, CA location. Under this sublease agreement, the
Company has committed to approximately $12,000,000 in sublease payments
over the seven year period beginning January 1, 1998.
AMENDMENT TO 1995 STOCK OPTION PLAN
During April 1997, the Company's Board of Directors approved an increase
in the number of authorized shares under the Plan to 19,500,000.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 128, "Earnings per Share." This
Statement is effective for the Company's fiscal year ending December 31,
1997. The Statement redefines earnings per share under generally accepted
accounting principles. Under the new standard, primary earnings per share
is replaced by basic earnings per share and fully diluted earnings per
share is replaced by diluted earnings per share. The impact of this
Statement for the three and nine month periods ended September 30, 1996 and
1997 on the calculation of primary and fully diluted earnings per share is
not material.
In June 1997, the FASB issued SFAS 130, "Reporting Comprehensive Income."
SFAS 130 establishes standards for reporting comprehensive income and its
components in a financial statement. Comprehensive income as defined
includes all changes in equity (net assets) during a period from nonowner
sources. Examples of items to be included in comprehensive income, which
are excluded from net income, include foreign currency translation
adjustment and unrealized gain/loss on available for sale securities. The
disclosure prescribed by SFAS must be made beginning with the first quarter
of 1998 and is not anticipated to have a material impact on the Company's
financial position or results of operations.
In June 1997, the FASB issued SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information." This statement establishes standards
for the way companies report information about operating segments in annual
financial statements. It also establishes standards for related
disclosures about products and services, geographic areas, and major
customers. The Company has not yet determined the impact, if any, of
adopting this new standard. The disclosures prescribed by SFAS 131 are
effective in 1998.
21