EXHIBIT 13.1
PORTIONS OF THE 1997 ANNUAL REPORT TO SHAREHOLDERS
SELECTED FINANCIAL DATA
Year Ended December 31,
--------------------------------------------------
1997 1996 1995
------------- ------------- ------------
STATEMENTS OF OPERATIONS DATA:
Net revenues $ 67,411,000 $ 19,697,000 $ 1,410,000
Gross profit 58,039,000 16,381,000 1,212,000
Sales and marketing expenses 43,930,000 15,106,000 815,000
Product development expenses 11,138,000 5,150,000 303,000
General and administrative expenses 6,472,000 4,878,000 972,000
Other - non-recurring costs 25,095,000 - -
Net loss (22,887,000) (4,285,000) (799,000)
Basic and diluted net loss per share $(0.53) $(0.11) $(0.03)
Shares used in computing basic and diluted net loss per share 43,583,000 39,256,000 27,307,000
Pro forma net income (unaudited)(1) $2,208,000
Pro forma diluted net income per share (unaudited)(1) $0.04
December 31,
--------------------------------------------------
1997 1996 1995
------------- ------------- ------------
BALANCE SHEETS DATA:
Cash, cash equivalents, and short and long-term
investments in marketable securities $ 107,012,000 $ 103,984,000 $ 5,927,000
Working capital 83,733,000 91,449,000 5,841,000
Total assets 141,884,000 112,968,000 7,037,000
Shareholders' equity $ 117,712,000 $ 104,205,000 $ 6,105,000
Note: The selected financial data for the three years ended December 31, 1997 has been restated to reflect
the acquisition of Four11 Corporation which was accounted for as a pooling of interests.
(1) Pro forma net income and diluted net income per share exclude the effects of other non-recurring
costs of $21,245,000 related to the Yahoo! Marketplace restructuring incurred during the quarter
ended June 30, 1997 and $3,850,000 incurred in connection with the acquisition of Four 11 Corporation
during the quarter ended December 31, 1997.
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
EXCEPT FOR HISTORICAL INFORMATION, THE DISCUSSION IN THIS REPORT (INCLUDING,
WITHOUT LIMITATION, THE DISCUSSION UNDER THE HEADING "RESULTS OF OPERATIONS")
CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE
COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED HEREIN.
FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT
LIMITED TO, THOSE DISCUSSED BELOW, AND THE RISKS DISCUSSED UNDER THE CAPTION,
"RISK FACTORS" IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED
DECEMBER 31, 1997 (A COPY OF WHICH IS AVAILABLE AT WWW.SEC.GOV OR UPON REQUEST
FROM THE COMPANY).
OVERVIEW
Yahoo! Inc. (the "Company") is a global Internet media company that offers a
network of branded World Wide Web (the "Web") programming that serves
millions of users daily. As the first online navigational guide to the Web,
WWW.YAHOO.COM is the single largest guide in terms of traffic, advertising,
household and business user reach, and is one of the most recognized brands
associated with the Internet. Yahoo! Inc. provides targeted Internet
resources and communications services for a broad range of audiences, based
on demographic, key-subject and geographic interests. The Company was
incorporated in California on March 5, 1995 and commenced operations on that
date. In August 1995, the Company commenced selling advertisements on its
Web pages and recognized its initial revenues. In April 1996, the Company
completed its initial public offering.
The Company's revenues are derived principally from the sale of banner
advertisements on short-term contracts. The Company's standard rates for
advertising currently range from approximately $0.02 per impression for
general rotation to approximately $0.08 per impression for highly targeted
audiences and properties. To date, the duration of the Company's advertising
commitments has ranged from one week to two years. During 1997, the Company
also began selling a combination of sponsorship and banner advertising
contracts. In general, these sponsorship advertising contracts have longer
terms than standard banner advertising contracts (ranging from three months
to two years) and also involve more integration with Yahoo! services, such as
the placement of buttons which provide users with direct links to the
advertiser's Web site. Advertising revenues on both banner and sponsorship
contracts are recognized ratably over the period in which the advertisement
is displayed, provided that no significant Company obligations remain and
collection of the resulting receivable is probable. Company obligations
typically include guarantees of minimum number of "impressions," or times
that an advertisement appears in pages viewed by users of the Company's
online properties. To the extent minimum guaranteed impressions are not met,
the Company defers recognition of the corresponding revenues until the
remaining guaranteed impression levels are achieved. The Company also earns
additional revenue on sponsorship contracts for fees relating to the design,
coordination, and integration of the customer's content and links into Yahoo!
online properties. These fees are recognized as revenue once the related
activities have been performed and the customer's web links are available on
Yahoo! online properties. A number of the Company's agreements provide that
Yahoo! receive revenues from electronic commerce transactions. These
revenues are recognized by the Company upon notification from the advertiser
of revenues earned by Yahoo! and, to date, have not been significant.
13
During 1997, the Company entered into certain agreements with Netscape
Communications Corporation ("Netscape") under which the Company has developed
and operates an Internet information navigation service called "Netscape
Guide by Yahoo!" (the "Guide"), and was designated as a "Premier Provider" of
domestic and international search and navigational services within the
Netscape Web site. The Co-Marketing agreement provides that revenue from
advertising on the Guide, which is managed by the Company, is to be shared
between the Company and Netscape. Under the terms of the Trademark License
agreement, the Company made a one-time non-refundable trademark license fee
payment of $5,000,000 in March 1997, which is being amortized over the
initial two-year term, which commenced in May 1997. Under the terms of the
Co-Marketing agreement as amended in June 1997, the Company also provided
Netscape with a minimum of up to $4,660,000 in guarantees against shared
advertising revenues in the first year of the agreement, subject in the first
year to a minimum level of gross revenue being met, and up to a minimum of
$15,000,000 in the second year of the agreement, subject in the second year
to certain minimum levels of impressions being reached on the Guide. Actual
payments will relate directly to the overall revenue and impressions
recognized from the Guide. Under the terms of the Premier Provider
agreements, the Company is required to make minimum payments in cash of
$6,100,000 and is obligated to provide $1,600,000 in the Company's
advertising services in return for certain minimum guaranteed exposures over
the course of the one-year term of the agreements. To the extent that the
minimum guaranteed exposures are exceeded, the Company is obligated to remit
to Netscape additional payments.
In August 1996, the Company entered into agreements with Visa
International Service Association ("VISA") and another party (together, the
"Visa Group") to establish a limited liability company, Yahoo! Marketplace
L.L.C., to develop and operate a navigational service focused on information
and resources for the purchase of consumer products and services over the
Internet. During July 1997, prior to the completion of significant business
activities and public launch of the property, the Company and VISA entered
into an agreement under which the Visa Group released the Company from
certain obligations and claims. In connection with this agreement, Yahoo!
issued 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.
During July 1997, GTE New Media Services Incorporated ("GTE New Media"),
an affiliate of GTE, filed suit in Dallas, Texas against Netscape and the
Company, in which GTE New Media made a number of claims relating to the
inclusion of certain Yellow Pages hypertext links in the Netscape Guide by
Yahoo!, an online navigational property operated by the Company under an
agreement with Netscape. In this lawsuit, GTE New Media has alleged, among
other things, that by including such links to the Yellow Pages service
operated by several Regional Bell Operating Companies (the "RBOCs") within
the Guide, the Company has tortiously interfered with an alleged contractual
relationship between GTE New Media and Netscape relating to placement of
links by Netscape for a Yellow Pages service operated by GTE New Media. GTE
New Media seeks injunctive relief as well as actual and punitive damages. In
October 1997,
14
GTE New Media brought suit in the U.S. District Court for the District of
Columbia, against the RBOCs, Netscape, and the Company, in which GTE New
Media has alleged, among other things, that the alleged exclusion of the GTE
New Media Yellow Pages from the Netscape Guide Yellow Pages service violates
federal antitrust laws, and GTE New Media seeks injunctive relief and damages
(trebled under federal antitrust laws) from such alleged actions. The
Company believes that the claims against the Company in these lawsuits are
without merit and intends to contest them vigorously. Although the Company
cannot predict with certainty the outcome of these lawsuits or the expenses
that may be incurred in defending the lawsuits, the Company does not believe
that the result in the lawsuits will have a material adverse effect on the
Company's financial position or results of operations.
On October 20, 1997, the Company completed the acquisition of Four11
Corporation, a privately-held online communications and Internet directory
company. Under the terms of the acquisition, which was accounted for as a
pooling of interests, the Company exchanged 1,505,720 shares of Yahoo! Common
Stock for all of Four11's outstanding shares and assumed 148,336 options and
warrants to purchase Yahoo! Common Stock. During the quarter ended December
31, 1997, the Company recorded a one-time charge of $3,850,000 for the
acquisition. These costs consisted of investment banking fees, legal and
accounting fees, redundancy costs, and certain other expenses directly
related to the acquisition. The consolidated financial statements for the
three years ended December 31, 1997 and the accompanying notes reflect the
Company's financial position and the results of operations as if Four11 was a
wholly-owned subsidiary of the Company since inception.
CERTAIN RISK FACTORS
Yahoo! has a limited operating history upon which an evaluation of the
Company can be based, and its prospects are subject to the risks, expenses,
and uncertainties frequently encountered by companies in the new and rapidly
evolving markets for Internet products and services, including the Web-based
advertising market. Specifically, such risks include, without limitation,
the failure to continue to develop and extend the "Yahoo!" brand, the failure
to develop new media properties, the inability of the Company to maintain and
increase the levels of traffic on Yahoo! properties, the development or
acquisition of equal or superior services or products by competitors, the
failure of the market to adopt the Web as an advertising medium, the failure
to successfully sell Web-based advertising through the Company's recently
developed internal sales force, potential reductions in market prices for
Web-based advertising as a result of competition or other factors, the
failure of the Company to effectively generate commerce-related revenues
through sponsored services and placements in Yahoo! properties, the inability
of the Company to effectively integrate the technology and operations or any
other acquired businesses or technologies with its operations, such as the
recent acquisition of Four11 Corporation, the failure of the Company to
successfully develop and offer personalized Web-based services, such as
e-mail services, to consumers without errors or interruptions in service, and
the inability to continue to identify, attract, retain and motivate qualified
personnel. There can be no assurance that the Company will be successful in
addressing such risks.
15
As of December 31, 1997, the Company had an accumulated deficit of
$27,971,000. The limited operating history of the Company and the uncertain
nature of the markets addressed by the Company make the prediction of future
results of operations difficult or impossible and, therefore, the recent
revenue growth experienced by the Company should not be taken as indicative
of the rate of revenue growth, if any, that can be expected in the future.
The Company believes that period-to-period comparisons of its operating
results are not meaningful and that the results for any period should not be
relied upon as an indication of future performance. The Company currently
expects to continue to significantly increase its operating expenses to
expand its sales and marketing operations, to continue to develop and extend
the "Yahoo!" brand, to fund greater levels of product development, to develop
and commercialize additional media properties, and to acquire complementary
businesses and technologies. The Company derives the majority of its
revenues from the sale of advertisements under short-term contracts, which
are difficult to forecast accurately. The Company's expense levels are based
in part on its expectations concerning future revenue and, to a large extent,
are fixed. The Company also has fixed expenses in the form of advertising
revenue guarantees of up to $18,500,000 over the next 15 months relating to
the Netscape Guide By Yahoo!, which subject the Company to additional risk in
the event that advertising revenues from this property are not sufficient to
offset guaranteed payments and related operating expenses. Quarterly
revenues and operating results depend substantially upon the advertising
revenues received within the quarter, which are difficult to forecast
accurately. Accordingly, the cancellation or deferral of a small number of
advertising or sponsorship contracts could have a material adverse effect on
the Company's business, results of operations, and financial condition. The
Company may be unable to adjust spending in a timely manner to compensate for
any unexpected revenue shortfall, and any significant shortfall in revenue in
relation to the Company's expectations would have an immediate adverse effect
on the Company's business, operating results, and financial condition. In
addition, the Company plans to continue to significantly increase its
operating expenses to expand its sales and marketing operations, to continue
to develop and extend the "Yahoo!" brand, to fund greater levels of product
development, and to develop and commercialize additional media properties.
To the extent that such expenses precede or are not subsequently followed by
increased revenues, the Company's business, operating results, and financial
condition will be materially and adversely affected. As a result of these
factors, there can be no assurance that the Company will not incur
significant losses on a quarterly and annual basis in the future.
The Company's operating results may fluctuate significantly in the
future as a result of a variety of factors, many of which are outside the
Company's control. These factors include the level of usage of the Internet,
demand for Internet advertising, the addition or loss of advertisers, the
level of user traffic on Yahoo! and the Company's other online media
properties, the advertising budgeting cycles of individual advertisers, the
amount and timing of capital expenditures and other costs relating to the
expansion of the Company's operations, the introduction of new products or
services by the Company or its competitors, pricing changes for Web-based
advertising, the timing of initial set-up, engineering or development
16
fees that may be paid in connection with larger advertising and distribution
arrangements, technical difficulties with respect to the use of Yahoo! or
other media properties developed by the Company, incurrence of costs relating
to future acquisitions, general economic conditions, and economic conditions
specific to the Internet and online media. As a strategic response to
changes in the competitive environment, the Company may from time to time
make certain pricing, service or marketing decisions, or business
combinations that could have a material adverse effect on the Company's
business, results of operations, and financial condition. The Company also
has experienced, and expects to continue to experience, seasonality in its
business, with user traffic on Yahoo! and the Company's other online media
properties being lower during the summer and year-end vacation and holiday
periods, when usage of the Web and the Company's services typically
experience slower growth or decline. Additionally, seasonality may also
affect the amount of customer advertising dollars placed with the Company in
the first and third calendar quarters as advertisers historically spend less
during these quarters.
A key element of the Company's strategy is to generate additional
advertising revenues through sponsored services and placements by third
parties in Yahoo! online properties in addition to banner advertising. In
connection with these arrangements, the Company may receive sponsorship fees
as well as a portion of transaction revenues received by the third-party
sponsor from users originated through the Yahoo! placement, in return for
minimum levels of user impressions to be provided by the Company. To the
extent implemented, these arrangements expose the Company to potentially
significant financial risks, including the risk that the Company fails to
deliver required minimum levels of user impressions and that third party
sponsors do not renew the agreements at the end of their term. In addition,
because the Company has limited experience with these arrangements, the
Company is unable to determine what effect such arrangements will have on
gross margins and results of operations. Although transaction-based fees
have not to date represented a significant portion of the Company's net
revenues, if and to the extent such revenues become significant, the
foregoing factors could result in greater variations in the Company's
quarterly operating results and could have a material adverse effect on the
Company's business, results of operations, and financial condition.
The market for Internet products and services is highly competitive and
competition is expected to continue to increase significantly. In addition,
the Company expects the market for Web-based advertising, to the extent it
continues to develop, to be intensely competitive. There are no substantial
barriers to entry in these markets, and the Company expects that competition
will continue to intensify. Although the Company currently believes that the
diverse segments of the Internet market will provide opportunities for more
than one supplier of products and services similar to those of the Company,
it is possible that a single supplier may dominate one or more market
segments, including well-established companies such as Microsoft. The
Company competes with many other providers of online navigation, information
and community services. The Company also competes with online services and
other Web site operators, as well as traditional offline media such as
television, radio and print for a share of advertisers' total advertising
budgets. The Company believes that the number of companies selling Web-based
advertising
17
and the available inventory of advertising space have increased substantially
during recent periods. Accordingly, the Company may face increased pricing
pressure for the sale of advertisements. There can be no assurance that the
Company will be able to compete successfully against its current or future
competitors or that competition will not have a material adverse effect on
the Company's business, operating results, and financial condition.
Due to all of the foregoing factors, in some future quarter the
Company's operating results may fall below the expectations of securities
analysts and investors. In such an event, the trading price of the Company's
Common Stock would likely be materially and adversely affected.
RESULTS OF OPERATIONS
NET REVENUES. Net revenues were $67,411,000, $19,697,000, and $1,410,000 for
the years ended December 31, 1997, 1996, and 1995, respectively. The
increases from year to year are due primarily to the increasing number of
advertisers purchasing space on Yahoo! and the Company's other online media
properties. Approximately 2,600 customers advertised on Yahoo! and the
Company's other online media properties during 1997 as compared to
approximately 700 in 1996. Additionally, the Company began selling
sponsorship contracts during 1997 which also contributed to the increase in
net revenues. International revenues have accounted for less than 10% of net
revenues in the years ended December 31, 1997, 1996, and 1995. Barter
transactions have also accounted for less than 10% of net revenues in the
years ended December 31, 1997, 1996, and 1995. There can be no assurance
that customers will continue to purchase advertising on the Company's Web
pages or that market prices for Web-based advertising will not decrease due
to competitive or other factors.
COST OF REVENUES. Cost of revenues consists of the expenses associated with
the production and usage of Yahoo! and the Company's other online media
properties. These costs primarily consist of fees paid to third parties for
content included on the Company's properties, Internet connection charges,
equipment depreciation, and compensation. Cost of revenues were $9,372,000
for the year ended December 31, 1997, or 14% of net revenues as compared to
$3,316,000, or 17% of net revenues and $198,000, or 14% of net revenues for
the years ended December 31, 1996 and 1995, respectively. The absolute
dollar increases in cost of revenues from year to year are primarily
attributable to an increase in the quantity of content available on Yahoo!
and the Company's other online media properties, and the increased usage of
these properties. The Company anticipates that its content and Internet
connection expenses will increase with the quantity and quality of content
available on Yahoo! and the Company's other online media properties, and
increased usage of these properties. As measured in page views (defined as
electronic page displays), the Company delivered an average of approximately
65 million page views per day in December 1997 compared with an average of
approximately 20 million page views per day in December 1996 and an average
of approximately 6 million page views per day in February 1996. Yahoo!
Japan, an unconsolidated joint venture of the Company which began operations
in April 1996, is included in these page views figures and accounted for an
average of approximately 5 million per day in December 1997 and an average of
approximately 1.4
18
million per day in December 1996. The Company anticipates that its content
and Internet connection expenses will continue to increase in absolute
dollars for the foreseeable future. The Company currently anticipates 1998
cost of revenues to be in the range of 12% to 16% of revenues.
SALES AND MARKETING. Sales and marketing expenses were $43,930,000 for the
year ended December 31, 1997, or 65% of net revenues. For the years ended
December 31, 1996 and 1995, sales and marketing expenses were $15,106,000 and
$815,000, or 77% and 58% of net revenues, respectively. Sales and marketing
expenses consist primarily of advertising and other marketing related
expenses (which include Netscape Premier Provider costs), compensation, sales
commissions, and travel costs. The year-to-year increases in absolute
dollars are primarily attributable to increases in compensation expense
associated with an increase in sales and marketing personnel related to the
addition of a direct sales force which the Company began building in the
fourth quarter of 1996; an increase in advertising costs associated with the
Company's aggressive brand building strategy; an increase in the total costs
incurred from the Netscape search programs; the addition of and growth in the
various international subsidiaries including France, Germany, and the United
Kingdom during 1996 and Singapore, Australia, Korea, Sweden, Denmark, and
Norway during 1997; and an increase in sales commissions associated with the
increase in revenues. The Company anticipates that sales and marketing
expenses in absolute dollars will increase in future periods as it continues
to pursue an aggressive brand building strategy and continues to build its
direct sales organization. As a percentage of net revenues, the Company
currently anticipates that sales and marketing expenses will approximate 60%
in the first quarter of 1998 and will trend lower over the remainder of 1998.
PRODUCT DEVELOPMENT. Product development expenses were $11,138,000, or 17%
of net revenues for the year ended December 31, 1997 compared to $5,150,000
and $303,000, or 26% and 21% of net revenues for the years ended December 31,
1996 and 1995, respectively. Product development expenses consist primarily
of employee compensation relating to developing and enhancing the features
and functionality of Yahoo! and the Company's other online media properties.
The year-to-year increases in absolute dollars are primarily attributable to
increases in the number of engineers that develop and enhance Yahoo! and the
Company's other online media properties. To date, all internal product
development costs have been expensed as incurred. Acquired technology for
which technological feasibility has been established, including the
technology purchased in the Company's 1997 acquisition of NetControls for
$1,400,000, is capitalized and amortized over its useful life. The Company
believes that significant investments in product development are required to
remain competitive. As a consequence, the Company intends to incur increased
product development expenditures in absolute dollars in future periods. As a
percentage of net revenues, the Company currently anticipates that product
development expenses will approximate current levels during 1998.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were
$6,472,000, or 10% of net revenues for the year ended December 31, 1997
compared to $4,878,000 and $972,000, or 25% and 69% of net revenues for the
years ended December 31, 1996 and 1995, respectively. General and
administrative
19
expenses consist primarily of compensation and fees for professional
services. The year-to-year increases in absolute dollars are primarily
attributable to increases in staffing and usage of professional services.
The Company believes that the absolute dollar level of general and
administrative expenses will increase in future periods, as a result of
increased staffing and fees for professional services. As a percentage of
net revenues, the Company currently anticipates that general and
administrative expenses will approximate current levels in the first half of
1998 and may decrease slightly during the second half of 1998.
OTHER -- NON-RECURRING COSTS. During July 1997, the Company and VISA entered
into an agreement under which the Visa Group released the Company from
certain obligations and claims. In connection with this agreement, Yahoo!
issued 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. In conjunction with the October 1997
acquisition of Four11 Corporation, the Company recorded a one-time charge of
$3,850,000 which consisted of investment banking fees, legal and accounting
fees, redundancy costs, and certain other expenses directly related to the
acquisition.
INVESTMENT INCOME, NET. Investment income, net of investment expense, was
$4,982,000 for the year ended December 31, 1997 as compared to $3,928,000 for
the year ended December 31, 1996. The increase of $1,054,000 from 1996 to
1997 is primarily attributable to a higher average investment balance as a
result of private and public offering proceeds received during March and
April of 1996. Investment income in future periods may fluctuate as a result
of fluctuations in average cash balances maintained by the Company and
changes in the market rates of its investments.
MINORITY INTERESTS IN OPERATIONS OF CONSOLIDATED SUBSIDIARIES. Minority
interests in operations of consolidated subsidiaries were $727,000 and
$540,000 for the years ended December 31, 1997 and 1996, respectively. The
increase from 1996 to 1997 is primarily attributable to the staggered launch
dates of the joint ventures. Yahoo! Europe operations began during the third
quarter of 1996 and Yahoo! Korea operations started in the third quarter of
1997 and both subsidiaries are still in the early stages of development. The
Company expects that minority interests in operations of consolidated
subsidiaries in the aggregate will continue to fluctuate in future periods as
a function of the results from consolidated subsidiaries. When, and if, the
consolidated subsidiaries become profitable, the minority interests
elimination on the statement of operations will have an adverse effect on the
Company's net results.
INCOME TAXES. No provision for federal and state income taxes has been
recorded as the Company has incurred net operating losses through December
31, 1997. At December 31, 1997, the Company had approximately $54,200,000 of
federal net operating loss carryforwards for tax reporting purposes available
to offset future taxable income; such carryforwards will expire beginning in
2010. Additionally, the Company has approximately $26,200,000 of California
net operating loss carryforwards for tax reporting purposes which will expire
beginning in 2003. Deferred tax assets and related valuation allowances
totaled $27,198,000 of which approximately $18,600,000 relate to certain U.S.
operating loss carryforwards resulting from the exercise of employee stock
options, the tax benefit of which, when recognized, will be
20
accounted for as a credit to additional paid-in capital rather than a
reduction of the income tax provision. The Company currently expects its
combined federal and state income tax rate to increase to approximately 20%
for 1998. This estimate is based on current tax law and current estimate of
earnings, and is subject to change.
NET LOSS. The Company recorded net losses of $22,887,000, $4,285,000, and
$799,000, or $0.53, $0.11, and $0.03 per share for the years ended
December 31, 1997, 1996, and 1995, respectively. Excluding the effect of the
one-time, non-cash, pre-tax charge of $21,245,000 recorded during the second
quarter of 1997 for the restructuring of the Yahoo! Marketplace agreements
with the Visa Group and the one-time charge of $3,850,000 recorded during the
fourth quarter of 1997 for costs incurred for the acquisition of Four11, the
Company earned $2,208,000.
LIQUIDITY AND CAPITAL RESOURCES
Yahoo! invests predominantly in instruments that are highly liquid, of
quality investment grade, and predominantly have maturities of less than one
year with the intent to make such funds readily available for operating
purposes. At December 31, 1997, the Company had cash and cash equivalents
and investments in marketable securities totaling $107,012,000 compared to
$103,984,000 at December 31, 1996. For the year ended December 31, 1997,
cash provided by operating activities was $3,123,000 compared to cash used
for operating activities of $1,280,000 and $696,000 for the years ended
December 31, 1996 and 1995, respectively.
Capital expenditures for the years ended December 31, 1997, 1996, and
1995 totaled $6,580,000, $3,077,000, and $192,000, respectively, and are
expected to continue to increase in future periods as a result of the
Company's growth. Capital expenditures have generally been comprised of
purchases of computer hardware and software as well as furniture and
leasehold improvements related to leased facilities.
For the year ended December 31, 1997, cash provided by financing
activities of $8,514,000 was primarily due to proceeds of $6,409,000 from the
issuance of Common Stock under the Company's stock option and employee stock
purchase plans. Additionally, proceeds of $999,000 were received from
minority investors in consolidated joint ventures. For the year ended
December 31, 1996, cash provided by financing activities of $103,206,000 was
primarily due to the March 1996 issuance of 5,100,000 shares of Mandatorily
Redeemable Convertible Series C Preferred Stock for aggregate proceeds of
$63,750,000, the April 1996 initial public offering of 4,485,000 shares of
Common Stock for net proceeds of $35,106,000, and other issuances of Common
Stock. Additionally, proceeds of $1,050,000 were received from minority
investors in consolidated joint ventures. For the year ended December 31,
1995, cash provided by financing activities of $6,815,000 was primarily due
to proceeds of $6,004,000 from the issuance of Convertible Preferred Stock.
The Company currently has no material commitments other than those under
the Netscape Co-Marketing agreement, the Netscape Premier Provider
agreements, and operating lease agreements. Under the terms of the amended
Co-Marketing agreement, the Company has remaining fixed expenses in
21
the form of advertising revenue guarantees of up to $3,500,000 over the next
three months, subject to a minimum level of gross revenue being met during
the first year of the agreement, and up to $15,000,000 in the second year,
subject to certain minimum levels of advertising impressions being reached on
the Guide. Under the terms of the Premier Provider agreements, the Company
has minimum expense obligations of $2,917,000 at December 31, 1997, of which
$550,000 is to be paid for with the Company's advertising services. The
Company has experienced a substantial increase in its capital expenditures
and operating lease arrangements since its inception, which is consistent
with increased staffing, and anticipates that this will continue in the
future. Additionally, the Company will continue to evaluate possible
acquisitions of, or investments in businesses, products, and technologies
that are complementary to those of the Company, which may require the use of
cash. Management believes existing cash and investments will be sufficient
to meet the Company's operating requirements for at least the next twelve
months; however, the Company may sell additional equity or debt securities or
obtain credit facilities. The sale of additional securities could result in
additional dilution to the Company's shareholders.
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CONSOLIDATED BALANCE SHEETS
December 31,
-----------------------------
1997 1996
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 62,538,000 $ 33,547,000
Short-term investments in marketable
securities 27,772,000 60,689,000
Accounts receivable, net of allowance
of $2,598,000 and $665,000 10,986,000 5,082,000
Prepaid expenses 5,893,000 384,000
------------ ------------
Total current assets 107,189,000 99,702,000
------------ ------------
Long-term investments in marketable
securities 16,702,000 9,748,000
Property and equipment, net 7,035,000 2,789,000
Investment in Yahoo! Japan 2,828,000 729,000
Other assets 8,130,000 -
------------ ------------
$141,884,000 $112,968,000
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,711,000 $ 1,106,000
Accrued expenses and other current
liabilities 12,481,000 4,718,000
Deferred revenue 4,852,000 1,347,000
Due to related parties 1,412,000 1,082,000
------------ ------------
Total current liabilities 23,456,000 8,253,000
------------ ------------
Commitments and contingencies (Notes 8 and 9)
Minority interests in consolidated subsidiaries 716,000 510,000
Shareholders' equity:
Preferred Stock, $0.001 par value; 10,000,000
shares authorized; none issued - -
Common Stock, $0.00067 par value; 225,000,000
shares authorized; 45,012,624 and 41,298,067
issued and outstanding 20,000 18,000
Additional paid-in capital 146,106,000 109,334,000
Accumulated deficit (27,971,000) (5,084,000)
Cumulative translation adjustment (443,000) (63,000)
------------ ------------
Total shareholders' equity 117,712,000 104,205,000
------------ ------------
$141,884,000 $112,968,000
------------ ------------
------------ ------------
The accompanying notes are an integral part of these consolidated financial
statements.
23
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
---------------------------------------------
1997 1996 1995
------------ ------------ -----------
Net revenues $ 67,411,000 $ 19,697,000 $ 1,410,000
Cost of revenues 9,372,000 3,316,000 198,000
------------ ------------ -----------
Gross profit 58,039,000 16,381,000 1,212,000
------------ ------------ -----------
Operating expenses:
Sales and marketing 43,930,000 15,106,000 815,000
Product development 11,138,000 5,150,000 303,000
General and administrative 6,472,000 4,878,000 972,000
Other - non-recurring costs 25,095,000 - -
------------ ------------ -----------
Total operating expenses 86,635,000 25,134,000 2,090,000
------------ ------------ -----------
Loss from operations (28,596,000) (8,753,000) (878,000)
Investment income, net 4,982,000 3,928,000 79,000
Minority interests in operations
of consolidated subsidiaries 727,000 540,000 -
------------ ------------ -----------
Net loss $(22,887,000) $ (4,285,000) $ (799,000)
------------ ------------ -----------
------------ ------------ -----------
Basic and diluted net loss per share $ (0.53) $ (0.11) $ (0.03)
------------ ------------ -----------
------------ ------------ -----------
Shares used in computing basic and diluted
net loss per share 43,583,000 39,256,000 27,307,000
------------ ------------ -----------
------------ ------------ -----------
The accompanying notes are an integral part of these consolidated financial
statements.
24
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Convertible
Preferred Stock Common Stock
--------------------- -------------------
Shares Amount Shares Amount
------------------------------------------------
Issuance of Common Stock in connection
with the formation of the Company - $ - 15,579,530 $ 1,000
Issuance of Series A and B
Convertible Preferred Stock at
$0.20 and $1.97 per share, respectively 7,738,072 8,000 - -
Issuance of Common Stock for
employee stock plans and other - - 783,866 -
Net loss - - - -
----------- -------- ---------- -------
Balance at December 31, 1995 7,738,072 8,000 16,363,396 1,000
Issuance of Mandatorily
Redeemable Convertible
Series C Preferred Stock at
$12.50 per share 5,100,000 5,000 - -
Sale of Common Stock, net of
issuance costs of $1,192,000 - - 4,485,000 3,000
Conversion of 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 -
Issuance of Common Stock
pursuant to exercise of options - - 744,566 1,000
Compensation expense on
option grants - - - -
Net loss - - - -
Foreign currency translation adjustment - - - -
----------- -------- ---------- -------
Balance at December 31, 1996 - - 41,298,067 18,000
Issuance of Common Stock pursuant
to exercise of warrants - - 348,159 -
Issuance of Common Stock for
acquisitions and investments - - 115,246 -
Issuance of Common Stock pursuant
to Visa Group Agreement - - 699,481 1,000
Issuance of Common Stock for
employee stock plans - - 2,551,671 1,000
Write-up of investment in
Yahoo! Japan - - - -
Compensation expense on
option grants - - - -
Net loss - - - -
Foreign currency
translation adjustment - - - -
----------- -------- ---------- -------
Balance at December 31, 1997 - $ - 45,012,624 $20,000
----------- -------- ---------- -------
----------- -------- ---------- -------
Additional Cumulative
Paid-in Accumulated Translation
Capital Deficit Adjustment Total
---------------------------------------------------------------
Issuance of Common Stock in connection
with the formation of the Company $ 2,000 $ - $ - $ 3,000
Issuance of Series A and B
Convertible Preferred Stock at
$0.20 and $1.97 per share, respectively 5,996,000 - - 6,004,000
Issuance of Common Stock for
employee stock plans and other 897,000 - - 897,000
Net loss - (799,000) - (799,000)
------------ ------------ --------- ------------
Balance at December 31, 1995 6,895,000 (799,000) - 6,105,000
Issuance of Mandatorily
Redeemable Convertible
Series C Preferred Stock at
$12.50 per share 63,745,000 - - 63,750,000
Sale of Common Stock, net of
issuance costs of $1,192,000 35,103,000 - - 35,106,000
Conversion of Convertible Preferred
Stock to Common Stock - - - -
Issuance of Common Stock,
net of issuance costs 3,418,000 - - 3,418,000
Issuance of Common Stock
pursuant to exercise of options 9,000 - - 10,000
Compensation expense on
option grants 164,000 - - 164,000
Net loss - (4,285,000) - (4,285,000)
Foreign currency translation adjustment - - (63,000) (63,000)
------------ ------------ --------- ------------
Balance at December 31, 1996 109,334,000 (5,084,000) (63,000) 104,205,000
Issuance of Common Stock pursuant
to exercise of warrants - - - -
Issuance of Common Stock for
acquisitions and investments 6,400,000 - - 6,400,000
Issuance of Common Stock pursuant
to Visa Group Agreement 21,049,000 - - 21,050,000
Issuance of Common Stock for
employee stock plans 6,408,000 - - 6,409,000
Write-up of investment in
Yahoo! Japan 1,700,000 - - 1,700,000
Compensation expense on
option grants 1,215,000 - - 1,215,000
Net loss - (22,887,000) - (22,887,000)
Foreign currency
translation adjustment - - (380,000) (380,000)
------------ ------------ --------- ------------
Balance at December 31, 1997 $146,106,000 $(27,971,000) $(443,000) $117,712,000
------------ ------------ --------- ------------
------------ ------------ --------- ------------
The accompanying notes are an integral part of these consolidated financial
statements.
25
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
--------------------------------------------
1997 1996 1995
------------ ------------ ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(22,887,000) $ (4,285,000) $ (799,000)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,554,000 552,000 145,000
Compensation expense on stock option grants 1,215,000 164,000 -
Minority interests in operations
of consolidated subsidiaries (727,000) (540,000) -
Income from investment in Yahoo! Japan (100,000) - -
Non-cash charge 21,245,000 - -
Changes in assets and liabilities:
Accounts receivable, net (5,904,000) (4,254,000) (828,000)
Prepaid expenses (5,959,000) (366,000) (18,000)
Accounts payable 2,499,000 1,043,000 63,000
Accrued expenses and other current liabilities 7,352,000 4,290,000 428,000
Deferred revenue 3,505,000 1,168,000 179,000
Due to related parties 330,000 948,000 134,000
------------ ------------ ----------
Net cash provided by (used in) operating activities 3,123,000 (1,280,000) (696,000)
------------ ------------ ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (6,580,000) (3,077,000) (192,000)
Purchases of investments in marketable securities (58,753,000) (113,285,000) (392,000)
Proceeds from sales and maturities of investments
in marketable securities 84,716,000 43,240,000 -
Investment in AudioNet (1,350,000) - -
Investment in Yahoo! Japan (299,000) (729,000) -
------------ ------------ ----------
Net cash provided by (used in) investing activities 17,734,000 (73,851,000) (584,000)
------------ ------------ ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Common Stock, net 6,409,000 38,534,000 820,000
Proceeds from issuance of Convertible Preferred Stock - 63,750,000 6,004,000
Proceeds from minority investors 999,000 1,050,000 -
Other 1,106,000 (128,000) (9,000)
------------ ------------ ----------
Net cash provided by financing activities 8,514,000 103,206,000 6,815,000
------------ ------------ ----------
Effect of exchange rate changes on cash
and cash equivalents (380,000) (63,000) -
------------ ------------ ----------
Net change in cash and cash equivalents 28,991,000 28,012,000 5,535,000
Cash and cash equivalents at beginning of period 33,547,000 5,535,000 -
------------ ------------ ----------
Cash and cash equivalents at end of period $ 62,538,000 $ 33,547,000 $5,535,000
------------ ------------ ----------
------------ ------------ ----------
The accompanying notes are an integral part of these consolidated financial
statements.
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY. Yahoo! Inc. (the "Company") is a global Internet media company
that offers a network of branded World Wide Web (the "Web") programming that
serves millions of users daily. Yahoo! Inc. provides targeted Internet
resources and communications services for a broad range of audiences, based
on demographic, key-subject and geographic interests. The Company was
incorporated in California on March 5, 1995 and commenced operations on that
date. The Company conducts its business within one industry segment.
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include
the accounts of Yahoo! Inc. and its majority-owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated. The
equity and net loss attributable to the minority shareholder interests which
related to the Company's subsidiaries, are shown separately in the
consolidated balance sheets and consolidated statements of operations,
respectively. Losses in excess of the minority interest equity would be
charged against the Company. Investments in entities owned 20% or more but
less than majority owned and not otherwise controlled by the Company are
accounted for under the equity method.
RECLASSIFICATIONS. Certain prior years' balances have been reclassified to
conform with the current year's presentation.
REVENUE RECOGNITION. The Company's revenues are derived principally from the
sale of banner advertisements on short-term contracts. The Company's
standard rates for advertising currently range from approximately $0.02 per
impression for general rotation to approximately $0.08 per impression for
highly targeted audiences and properties. To date, the duration of the
Company's advertising commitments has ranged from one week to two years.
During 1997, the Company also began selling a combination of sponsorship and
banner advertising contracts. In general, these sponsorship advertising
contracts have longer terms than standard banner advertising contracts
(ranging from three months to two years) and also involve more integration
with Yahoo! services, such as the placement of buttons which provide users
with direct links to the advertiser's Web site. Advertising revenues on both
banner and sponsorship contracts are recognized ratably in the period in
which the advertisement is displayed, provided that no significant Company
obligations remain and collection of the resulting receivable is probable.
Company obligations typically include guarantees of minimum number of
"impressions," or times that an advertisement appears in pages viewed by
users of the Company's online properties. To the extent minimum guaranteed
impressions are not met, the Company defers recognition of the corresponding
revenues until the remaining guaranteed impression levels are achieved. The
Company also earns additional revenue on sponsorship contracts for fees
relating to the design, coordination, and integration of the customer's
content and links into Yahoo! online properties. These fees are recognized
as revenue once the related activities have been performed and the customer's
web links are available on Yahoo! online properties. A number of the
Company's agreements provide that Yahoo! receive revenues from electronic
commerce transactions. These revenues are recognized by the Company upon
notification from the advertiser of revenues earned by Yahoo! and, to date,
have not been significant.
27
Revenues from barter transactions are recognized during the period in which
the advertisements are displayed in Yahoo! properties. 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. During 1997, no
one customer accounted for more than 10% of net revenues. During 1996,
SOFTBANK, a 31% shareholder of the Company at December 31, 1997, and its
related companies accounted for approximately 12% of net revenues. During
1995, another company accounted for approximately 11% of net revenues.
Deferred revenue is primarily comprised of billings in excess of recognized
revenue relating to advertising contracts and payments received pursuant to
sponsorship advertising agreements in advance of revenue recognition.
PRODUCT DEVELOPMENT. Costs incurred in the classification and organization of
listings within Yahoo! properties and the development of new products and
enhancements to existing products are charged to expense as incurred.
Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting for
the Costs of Computer Software to be Sold, Leased or Otherwise Marketed,"
requires capitalization of certain software development costs subsequent to
the establishment of technological feasibility. Based upon the Company's
product development process, technological feasibility is established upon
completion of a working model. Costs incurred by the Company between
completion of the working model and the point at which the product is ready
for general release have been insignificant.
ADVERTISING COSTS. Advertising production costs are recorded as expense the
first time an advertisement appears. All other advertising costs are expensed
as incurred. The Company does not incur any direct-response advertising
costs. Advertising expense totaled $10,168,000 for 1997, $3,939,000 for 1996,
and $130,000 for 1995.
ACQUISITION OF FOUR11 CORPORATION. On October 20, 1997, the Company
consummated an Agreement and Plan of Reorganization with Four11 Corporation
("Four11"), a privately-held company, upon which Four11's shareholders
exchanged all of their shares on an as-if-converted basis for shares of the
Company's Common Stock in a business combination which was accounted for as a
pooling of interests. The consolidated financial statements for the three
years ended December 31, 1997 and the accompanying notes reflect the
Company's financial position and the results of operations as if Four11 was a
wholly-owned subsidiary of the Company since inception. As separate
companies, Yahoo! accounted for net revenues of $40,355,000 for the nine
months ended September 30, 1997, and $19,073,000 and $1,363,000 for the years
ended December 31, 1996 and 1995, respectively, and Four11 accounted for net
revenues of $1,951,000 for the nine months ended September 30, 1997, and
$624,000 and $47,000 for the years ended December 31, 1996 and 1995,
respectively. During the fourth quarter of 1997, combined Yahoo!-Four11 net
revenues were $25,105,000. Yahoo! accounted for net losses of $18,697,000
for the nine months ended September 30, 1997, and $2,334,000 and $634,000 for
the years ended December 31, 1996 and 1995, respectively, and Four11
accounted for net losses of $2,914,000 for the nine months ended September
30, 1997, and $1,951,000 and $165,000 for the years ended December 31, 1996
and 1995, respectively. During the fourth quarter of 1997, the combined
Yahoo!-Four11 net loss was $1,276,000.
28
BENEFIT PLAN. The Company maintains a 401(k) Profit Sharing Plan (the
"Plan") for its full-time employees. Each participant in the Plan may elect
to contribute from 1% to 17% of his or her annual compensation to the Plan.
The Company matches employee contributions at a rate of 25%. Employee
contributions are fully vested, whereas vesting in matching Company
contributions occurs at a rate of 33.3% per year of employment. During 1997
and 1996, the Company's contributions amounted to $263,000 and $81,000,
respectively, all of which was expensed.
CASH, CASH EQUIVALENTS, SHORT AND LONG-TERM INVESTMENTS. The Company invests
its excess cash in debt instruments of the U.S. Government and its agencies,
and in high-quality corporate issuers. All highly liquid instruments with an
original maturity of three months or less are considered cash equivalents,
those with original maturities greater than three months and current
maturities less than twelve months from the balance sheet date are considered
short-term investments, and those with maturities greater than twelve months
from the balance sheet date are considered long-term investments.
At December 31, 1997 and 1996, short and long-term investments in
marketable securities were classified as available-for-sale and consisted of
81% and 64% corporate debt securities, 8% and 26% debt securities of the U.S.
Government and its agencies, 4% and 0% municipal debt securities, and 7% and
10% foreign debt securities, respectively. All long-term investments in
marketable securities mature within two years. At December 31, 1997, the
fair value of the investments approximated cost. Fair value is determined
based upon the quoted market prices of the securities as of the balance sheet
date.
At December 31, 1997, the Company had equity interests in
privately-held, information technology companies totaling $6,450,000. These
investments are included in other long-term assets and are accounted for
under the cost method. The Company purchased these investments at or near
December 31, 1997, therefore, their carrying values approximate fair values.
For these non-quoted investments, the Company's policy is to regularly review
the assumptions underlying the operating performance and cash flow forecasts
in assessing the carrying values. The Company identifies and records
impairment losses on long-lived assets when events and circumstances indicate
that such assets might be impaired. To date, no such impairment has been
recorded.
CONCENTRATION OF CREDIT RISK. Financial instruments that potentially subject
the Company to significant concentration of credit risk consist primarily of
cash, cash equivalents, short and long-term investments, and accounts
receivable. Substantially all of the Company's cash, cash equivalents, short
and long-term investments are managed by three financial institutions.
Accounts receivable are typically unsecured and are derived from revenues
earned from customers primarily located in the United States. The Company
performs ongoing credit evaluations of its customers and maintains reserves
for potential credit losses; historically, such losses have been immaterial
and within management's expectations. At December 31, 1997 and 1996, no one
customer accounted for 10% or more of the accounts receivable balance. At
December 31, 1995, two customers accounted for a total of 21% of the accounts
receivable balance.
PROPERTY AND EQUIPMENT. Property and equipment, including leasehold
improvements, are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets, generally
two to five years.
29
INCOME TAXES. Income taxes are computed using the asset and liability
method. Under the asset and liability method, deferred income tax assets and
liabilities are determined based on the differences between the financial
reporting and tax bases of assets and liabilities and are measured using the
currently enacted tax rates and laws.
STOCK-BASED COMPENSATION. The Company accounts for stock-based employee
compensation arrangements in accordance with the provisions of Accounting
Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to
Employees," and complies with the disclosure provisions of SFAS 123,
"Accounting for Stock-Based Compensation." Under APB 25, compensation cost
is recognized over the vesting period based on the difference, if any, on the
date of grant between the fair value of the Company's stock and the amount an
employee must pay to acquire the stock.
FOREIGN CURRENCY AND INTERNATIONAL OPERATIONS. The functional currency of
the Company's subsidiaries in the United Kingdom, Germany, France, Sweden,
Denmark, Norway, Australia, Singapore, and Korea is the local currency. The
financial statements of these subsidiaries are translated to United States
dollars using year-end rates of exchange for assets and liabilities, and
average rates for the year for revenues, costs, and expenses. Translation
losses, which are deferred and accumulated as a component of shareholders'
equity, were $380,000 and $63,000 for the years ended December 31, 1997 and
1996, respectively. Net gains and losses resulting from foreign exchange
transactions are included in the consolidated statements of operations and
were not significant during the periods presented. International revenues
have accounted for less than 10% of net revenues in the years ended December
31, 1997, 1996, and 1995. International assets were not significant at
December 31, 1997 or 1996.
BASIC AND DILUTED NET LOSS PER SHARE. The Company adopted SFAS 128,
"Earnings per Share" during the year ended December 31, 1997 and
retroactively restated all prior periods. As a result of adopting SFAS 128,
the net loss per share of $0.02 reported for the year ended December 31, 1995
increased to a basic and diluted net loss of $0.03. Basic earnings per share
is computed using the weighted average number of common shares outstanding
during the period. Diluted earnings per share is computed using the weighted
average number of common and common equivalent shares outstanding during the
period. Common equivalent shares consist of the incremental common shares
issuable upon conversion of the convertible preferred stock (using the
if-converted method) and shares issuable upon the exercise of stock options
and warrants (using the treasury stock method). Common equivalent shares are
excluded from the computation if their effect is anti-dilutive.
USE OF ESTIMATES. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reported period. Actual results could differ from those estimates.
RECENT ACCOUNTING PRONOUNCEMENTS. In June 1997, the Financial Accounting
Standards Board ("FASB") issued SFAS 130, "Reporting Comprehensive Income."
SFAS 130 establishes standards for reporting comprehensive
30
income and its components in a financial statement. Comprehensive income as
defined includes all changes in equity (net assets) during a period from
non-owner sources. Examples of items to be included in comprehensive income,
which are excluded from net income, include foreign currency translation
adjustments and unrealized gains/losses on available-for-sale securities.
The disclosure prescribed by SFAS 130 must be made beginning with the first
quarter of 1998. Additionally in June 1997, the FASB issued SFAS 131,
"Disclosures about Segments of an Enterprise and Related Information." This
statement establishes standards for the way companies report information
about operating segments in annual financial statements. It also establishes
standards for related disclosures about products and services, geographic
areas, and major customers. The Company has not yet determined the impact,
if any, of adopting this new standard. The disclosures prescribed by
SFAS 131 will be effective for the year ending December 31, 1998 consolidated
financial statements.
NOTE 2 BALANCE SHEET COMPONENTS
December 31,
---------------------------------
1997 1996
---------------------------------
Property and equipment:
Computers and equipment $ 6,815,000 $ 2,228,000
Furniture and fixtures 2,316,000 888,000
Leasehold improvements 855,000 290,000
------------- ------------
9,986,000 3,406,000
Less: accumulated depreciation (2,951,000) (617,000)
------------- ------------
$ 7,035,000 $ 2,789,000
------------- ------------
------------- ------------
Other Assets:
Investment in Geocities $ 5,100,000 $ -
Investment in AudioNet 1,350,000 -
Other 1,680,000 -
------------- ------------
$ 8,130,000 $ -
------------- ------------
------------- ------------
Accrued expenses and other current liabilities:
Accrued vacation, wages, and other employee benefits $ 2,838,000 $ 1,069,000
Accrued content and connect costs 2,909,000 754,000
Accrued sales and marketing related 2,144,000 250,000
Accrued professional service expenses 1,730,000 801,000
Other 2,860,000 1,844,000
------------- ------------
$ 12,481,000 $ 4,718,000
------------- ------------
------------- ------------
31
NOTE 3 RELATED PARTY TRANSACTIONS
During 1997 and 1996, the Company recognized net revenues of approximately
$3,120,000 and $2,381,000, respectively, on advertising contracts and
publication, development, and licensing arrangements with SOFTBANK and its
related companies, a holder of approximately 31% of the Company's Common
Stock at December 31, 1997. Prices on these contracts were comparable to
those given to other major customers of the Company. Additionally, three
SOFTBANK-related companies provided Internet access and sales and
marketing-related services for fees of approximately $3,190,000, $2,300,000,
and $177,000 during 1997, 1996, and 1995, respectively. Sequoia Capital, a
holder of approximately 9% of the Company's Common Stock at December 31,
1997, was also an investor in one of these SOFTBANK-related companies. The
amount due for these services totaled approximately $1,046,000 and $896,000
at December 31, 1997 and 1996, respectively.
NOTE 4 ACQUISITIONS AND INVESTMENTS
ACQUISITION OF NETCONTROLS. On July 31, 1997, the Company entered into a
stock purchase agreement to acquire all of the outstanding capital stock of
NetControls, Inc. for 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 three year estimated useful life of the technology acquired. Upon
acquisition, the historical financial results of NetControls, Inc. were de
minimis.
ACQUISITION OF FOUR11. On October 20, 1997, the Company completed the
acquisition of Four11 Corporation, a privately-held online communications and
Internet directory company. Under the terms of the acquisition, which was
accounted for as a pooling of interests, the Company exchanged 1,505,720
shares of Yahoo! Common Stock for all of Four11's outstanding shares and
assumed 148,336 options and warrants to purchase Yahoo! Common Stock. All
outstanding Four11 preferred shares were converted into Four11 common stock
immediately prior to the acquisition. During the quarter ended December 31,
1997, the Company recorded a one-time charge of $3,850,000 for
acquisition-related costs. These costs consisted of investment banking fees,
legal and accounting fees, redundancy costs, and certain other expenses
directly related to the acquisition.
INVESTMENT IN AUDIONET. On December 30, 1997, the Company invested
$1,350,000 in cash for a less than 20% equity position in AudioNet, Inc., a
provider of Internet broadcasting services. The Company purchased 79,618
shares of AudioNet common stock for a total of $750,000 and a warrant to
purchase 159,236 shares of AudioNet common stock at an exercise price of
$9.42 per share for $600,000. The investment is being accounted for under
the cost method.
INVESTMENT IN GEOCITIES. On December 31, 1997, the Company issued 78,079
shares of Yahoo! Common Stock for a less than 20% equity position in
GeoCities, a provider of free personal Web pages. In return, the Company
received 336,684 shares of GeoCities Series E preferred stock. The
investment, aggregating $5,100,000, is being accounted for under the cost
method.
32
NOTE 5 JOINT VENTURES
YAHOO! JAPAN. During April 1996, the Company signed a joint venture
agreement with SOFTBANK, a holder of approximately 31% of the Company's
Common Stock at December 31, 1997, whereby Yahoo! Japan Corporation was
formed to establish and manage in Japan a Japanese version of the Yahoo!
Internet Guide, develop related Japanese online navigational services, and
conduct other related business. The Company's ownership interest in the
joint venture upon inception was 40%. At December 31, 1996, the Company's
investment in the joint venture was $729,000. In September 1997, the Company
invested an additional $299,000 in the joint venture. During November 1997,
Yahoo! Japan Corporation completed its initial public offering, issuing 975
previously unissued shares and raising total proceeds of approximately
$5,500,000. Accordingly, the Company increased its investment by $1,700,000,
recorded as additional paid-in capital, to reflect the increase in the
Company's share of Yahoo! Japan Corporation's net assets. The investment is
being accounted for using the equity method. At December 31, 1997, the fair
value of the Company's 34% ownership in Yahoo! Japan, based on the quoted
trading price, was approximately $53,000,000.
YAHOO! EUROPE. On November 1, 1996, the Company signed a joint venture
agreement with a subsidiary of SOFTBANK, a holder of approximately 31% of the
Company's Common Stock at December 31, 1997, whereby separate companies were
formed in Germany, the United Kingdom, and France ("Yahoo! Europe") to
establish and manage versions of the Yahoo! Internet Guide for Germany, the
United Kingdom, and France, develop related online navigational services, and
conduct other related business. The parties agreed to invest a total of up
to $4,000,000 in proportion to their respective equity interests, and had
invested $2,000,000 as of December 31, 1996 and the entire $4,000,000 as of
December 31, 1997. The Company has a majority share of approximately 70% in
each of the Yahoo! Europe entities, and therefore, has consolidated their
financial results. During 1997 and 1996, Yahoo! Europe incurred losses from
operations of $1,807,000 and $842,000, respectively. SOFTBANK's interest in
the net assets of Yahoo! Europe at December 31, 1997 and 1996, as represented
by the minority interest on the balance sheet, was $405,000 and $347,000,
respectively.
YAHOO! KOREA. During August 1997, the Company signed a joint venture
agreement with SOFTBANK and other SOFTBANK affiliate companies whereby Yahoo!
Korea was formed to develop and operate a Korean version of the Yahoo!
Internet Guide, develop related Korean online navigational services, and
conduct other related business. The parties have invested a total of
$999,000 in proportion to their respective equity interests. The Company has
a majority share of approximately 60% in the joint venture, and therefore,
has consolidated the financial results, which were insignificant for the year
ended December 31, 1997.
YAHOO! MARKETPLACE. On August 26, 1996, the Company entered into agreements
with Visa International Service Association ("VISA") and another party
(together, the "Visa Group") to establish a limited liability company, Yahoo!
Marketplace L.L.C., to develop and operate a navigational service focused on
information and resources for the purchase of consumer products and services
over the Internet. As of December 31, 1996, the parties had invested a total
of $1,000,000. At December 31, 1996, the Company owned approximately 55% of
the equity interest in Yahoo! Marketplace. Yahoo! Marketplace incurred
start-up losses of $246,000
33
in 1997 and $637,000 in 1996. In connection with this agreement, the Company
issued to the Visa Group for a purchase price of $50,000, a warrant to
purchase 525,000 shares of the Company's Common Stock at an exercise price of
$8.33 per share, which warrant was exercisable during a two year period
commencing in March 1997. In April 1997, the Visa Group net exercised the
warrant. During July 1997, prior to the completion of significant business
activities and public launch of the property, the Company and VISA entered
into an agreement under which the Visa Group released the Company from
certain obligations and claims. In connection with this agreement, the
Company issued 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.
NOTE 6 SHAREHOLDERS' EQUITY
STOCK SPLIT. During July 1997, the Company's Board of Directors approved a
three-for-two Common Stock split. Shareholders of record on August 11, 1997
(the record date) received one additional share for every two shares held on
that date. All references to the number of shares of Common Stock, weighted
average common shares, and per share amounts have been retroactively restated
in the accompanying consolidated financial statements to reflect the effect
of the three-for-two 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 $35,106,000. 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 restricted stock agreements. The Company's
repurchase right lapses over four years based on the length of the employees'
continual employment with the Company. At December 31, 1997, 3,125,000
shares of Common Stock were subject to repurchase by the Company.
STOCK OPTION PLANS. As of December 31, 1997, the Company had four
stock-based compensation plans which are described below. The Company
applies APB Opinion 25 and related interpretations in accounting for its
plans and complies with the disclosure provisions of SFAS 123, "Accounting
for Stock-Based Compensation."
The 1995 Stock Plan (the "Stock Plan") and the 1995 Four11 Stock Option
Plan (the "Four11 Plan") allow for the issuance of incentive stock options,
non-qualified stock options and stock purchase rights to purchase a maximum
of 19,830,332 shares of the Company's Common Stock. Under the Stock Plan and
the Four11 Plan, incentive stock options may be granted to employees,
directors, and officers of the Company and non-qualified stock options and
stock purchase rights may be granted to consultants, employees, directors,
and officers of the Company. Options granted under the Stock Plan and the
Four11 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
34
DIRECTORS. Options granted to shareholders who own greater than 10% of the
outstanding stock are for periods not to exceed five years and must be issued
at prices not less than 110% of the fair market value of the stock on the
date of grant as determined by the Board of Directors. Options granted under
the Stock Plan and the Four11 Plan generally vest 25% after the first year of
service and ratably each month over the remaining thirty-six month period.
Options issued under the Four11 Plan may be exercised prior to vesting and
are subject to repurchase in the event of a voluntary termination, at the
original purchase price. At December 31, 1997, 30,749 shares were subject to
repurchase under the provisions of the Four11 Plan
The 1996 Directors' Stock Option Plan (the "Directors' Plan") provides
for the issuance of up to 300,000 non-statutory stock options to non-employee
directors of the Company. Each person who becomes a non-employee director of
the Company after the date of the Company's initial public offering will
automatically be granted a non-statutory option (the "First Option") to
purchase 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
market value of the stock on the date of grant as determined by the Board of
Directors and will vest in equal monthly installments over four years, in the
case of the First Option, or at the end of four years in the case of the
Annual Option.
Activity under the Company's stock option plans is summarized as follows:
Available Options Weighted Average
for Grant Outstanding Price per Share
-------------- ------------- -----------------
Shares reserved 7,830,332
Options granted (5,260,626) 5,260,626 $ 0.02
Options exercised - (284,100) 0.01
-------------- ------------- -----------------
Balance at December 31, 1995 2,569,706 4,976,526 0.02
Additional shares reserved 4,800,000
Options granted (5,707,385) 5,707,385 6.71
Options canceled 461,328 (461,328) 6.64
Options exercised - (744,566) 0.01
-------------- ------------- -----------------
Balance at December 31, 1996 2,123,649 9,478,017 3.73
Additional shares reserved 7,500,000
Options granted (4,604,075) 4,604,075 37.45
Options canceled 88,913 (88,913) 9.18
Options exercised - (2,417,456) 2.09
-------------- ------------- -----------------
Balance at December 31, 1997 5,108,487 11,575,723 $ 17.38
-------------- ------------- -----------------
-------------- ------------- -----------------
35
The following table summarizes information about fixed stock options
outstanding as of December 31, 1997:
Options Outstanding Options Exercisable
- - ------------------------------------------------------------------ ---------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life in Years Price Exercisable Price
- - -------------- ------------- -------------- ---------- ----------- ---------
$0.01 - $0.01 2,496,770 7.6 $ 0.01 744,314 $ 0.01
$0.13 - $0.22 361,352 8.0 $ 0.14 98,561 $ 0.16
$0.67 - $1.00 954,757 8.2 $ 0.79 284,718 $ 0.78
$2.33 - $4.00 313,424 8.2 $ 3.43 77,753 $ 3.57
$4.67 - $6.67 1,229,040 8.2 $ 5.56 326,156 $ 5.18
$11.33 - $13.92 2,151,934 8.8 $ 12.46 442,289 $ 12.35
$17.75 - $26.50 1,335,751 9.4 $ 22.61 - $ -
$32.33 - $43.13 628,375 9.7 $ 38.82 - $ -
$46.00 - $55.75 2,104,320 9.9 $ 52.75 - $ -
------------- -----------
11,575,723 1,973,791
------------- -----------
------------- -----------
Options to purchase 830,040 and 101,250 shares were vested at
December 31, 1996 and 1995, respectively.
During the period from January 1996 through April 1996, the Company
granted options to purchase an aggregate of 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 both 1997 and 1996. During 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 related to these options based on the
estimated fair value of the services received. Pursuant to the acquisition
of Four11, the Company will record $2,168,000 of compensation expense related
to certain stock options issued below fair market value between August 1996
and September 1997, of which the Company recorded $1,059,000 and $8,000
during the years ended December 31, 1997 and 1996, respectively. The
remaining $1,101,000 will be recognized over the remainder of the four-year
vesting periods of the options.
EMPLOYEE STOCK PURCHASE PLAN. Effective March 6, 1996, the Company's Board
of Directors adopted the Employee Stock Purchase Plan (the "Purchase Plan"),
which provides for the issuance of a maximum of 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 December 31st
36
and June 30th. The price of the Common Stock purchased under the Purchase
Plan will be equal to 85% of the lower of the fair market value of the Common
Stock on the commencement date of each six month offering period or the
specified purchase date. During 1997, 134,215 shares were purchased at
prices of $7.37 to $19.30 per share. There were no shares issued under the
Purchase Plan during 1996. At December 31, 1997, 315,785 shares were
available under the Purchase Plan for future issuance.
STOCK COMPENSATION. The Company accounts for stock-based compensation in
accordance with the provisions of APB 25. Had compensation expense been
determined based on the fair value at the grant dates, as prescribed in SFAS
123, the Company's net loss would have been $29,268,000, $5,131,000, and
$801,000, and basic and diluted loss per share would have been $0.67, $0.13,
and $0.03 for the years ended December 31, 1997, 1996, and 1995,
respectively. Prior to the Company's initial public offering, the fair value
of each option grant was determined on the date of grant using the minimum
value method. Subsequent to the offering, the fair value was determined
using the Black-Scholes model. The weighted average fair market value of an
option granted during 1997, 1996, and 1995 was $17.34, $3.16, and $0.01,
respectively. Except for the volatility assumption which was only used under
the Black-Scholes model, the following range of assumptions was used to
perform the calculations: expected life of 36 months in 1997 and 30 months in
1996 and 1995; interest rate ranges of 5.6% to 6.6% during 1997, 5.1% to 6.5%
during 1996, and 5.3% to 6.0% during 1995; volatility of 59% in 1997, 53% in
1996, and it was not applicable in 1995; and no dividend yield for the three
years ended December 31, 1997. Because additional stock options are expected
to be granted each year, the above pro forma disclosures are not
representative of pro forma effects on reported financial results for future
years.
NOTE 7 INCOME TAXES
No provision for federal and state income taxes has been recorded as the
Company has incurred net operating losses through December 31, 1997. The
following table sets forth the primary components of deferred tax assets:
December 31,
---------------------------------
1997 1996 1995
----------- ---------- --------
Net operating loss and credit carryforwards $23,966,000 $3,421,000 $144,000
Nondeductible reserves and expenses 3,232,000 1,382,000 134,000
Other - 86,000 -
------------ ----------- ---------
Gross deferred tax assets 27,198,000 4,889,000 278,000
Valuation allowance (27,198,000) (4,889,000) (278,000)
------------ ----------- ---------
$ - $ - $ -
------------ ----------- ---------
------------ ----------- ---------
At December 31, 1997, 1996, and 1995, the Company fully reserved its
deferred tax assets. The Company believes sufficient uncertainty exists
regarding the realizability of the deferred tax assets such that a full
37
valuation allowance is required. Deferred tax assets and related valuation
allowances of approximately $18,600,000 relate to certain U.S. operating loss
carryforwards resulting from the exercise of employee stock options, the tax
benefit of which, when recognized, will be accounted for as a credit to
additional paid-in capital rather than a reduction of the income tax
provision. Additionally, deferred tax assets of $900,000 relate to operating
loss carryforwards in various foreign jurisdictions. Certain of these
carryforwards will expire if not utilized. At December 31, 1997, the Company
had approximately $54,200,000 of federal net operating loss carryforwards for
tax reporting purposes available to offset future taxable income; such
carryforwards will expire beginning in 2010. Additionally, the Company has
approximately $26,200,000 of California net operating loss carryforwards for
tax reporting purposes which will expire beginning in 2003.
NOTE 8 COMMITMENTS AND CONTINGENCIES
OPERATING LEASES. During September 1997, the Company entered into a
non-cancelable operating sublease agreement which will provide the Company
with additional office space at its existing Santa Clara, California
location. Additionally during 1997, the Company entered into various other
non-cancelable operating lease agreements for its sales offices throughout
the U.S. and its international subsidiaries. Future minimum lease payments
under non-cancelable operating leases with initial terms of one year or more
are $1,659,000 in 1998, $2,155,000 in 1999, $2,187,000 in 2000, $2,151,000 in
2001, $2,136,000 in 2002, and $2,463,000 thereafter. Total minimum rental
payments aggregate $12,751,000. Rent expense under operating leases totaled
$1,225,000, $436,000, and $32,000 during 1997, 1996, and 1995, respectively.
NETSCAPE GUIDE BY YAHOO!. During March 1997, the Company entered into
certain agreements with Netscape Communications Corporation ("Netscape")
under which the Company has developed and operates an Internet information
navigation service called "Netscape Guide by Yahoo!" (the "Guide"). The
Co-Marketing agreement provides that revenue from advertising on the Guide,
which is managed by the Company, is to be shared between the Company and
Netscape. Under the terms of the Trademark License agreement, the Company
made a one-time non-refundable trademark license fee payment of $5,000,000 in
March 1997 which is being amortized over the initial two-year term, which
commenced in May 1997. Under the terms of the Co-Marketing agreement as
amended in June 1997, the Company also provided Netscape with a minimum of up
to $4,660,000 in guarantees against shared advertising revenues in the first
year of the agreement, subject in the first year to a minimum level of gross
revenue being met, and up to a minimum of $15,000,000 in the second year of
the agreement, subject in the second year to certain minimum levels of
impressions being reached on the Guide. Actual payments will relate directly
to the overall revenue and impressions recognized from the Guide. As of
December 31, 1997, $1,160,000 of shared advertising revenues had been paid to
Netscape under this agreement.
NETSCAPE PREMIER PROVIDER. Also during March 1997, the Company entered into
an agreement with Netscape whereby it was designated as one of four "Premier
Providers" of domestic navigational services within the Netscape Web site.
Under the terms of the agreement, the Company is required to make minimum
payments of $3,200,000 in cash and is obligated to provide $1,500,000 in the
Company's advertising services in return
38
for certain minimum guaranteed exposures over the course of the one-year term
of the agreement, which commenced in May 1997. The minimum payments are
amortized over the term of the agreement. As of December 31, 1997, the
Company had paid $2,456,000 in cash under the terms of the agreement.
Expenses incurred to date as of December 31, 1997 under the agreement were
approximately $4,600,000. To the extent that the minimum guaranteed
exposures are exceeded, the Company is obligated to remit to Netscape
additional payments.
During June 1997, the Company entered into certain agreements with
Netscape whereby it was designated as a Premier Provider of international
search and navigational guide services for the Netscape Net Search program.
Under the terms of the agreements, the Company will provide services in 12
countries, including Australia, Denmark, France, Germany, Italy, Japan,
Korea, The Netherlands, Portugal, Spain, Sweden, and the United Kingdom.
Under the terms of the agreements, the Company made a cash payment of
$2,900,000 in July 1997 and is obligated to provide $100,000 in the Company's
advertising services in return for certain minimum guaranteed exposures over
the course of the one-year term of the agreements, which commenced in July
1997. The Company amortizes the total cost of these agreements over their
one-year term.
NOTE 9 LITIGATION
In July 1997, GTE New Media Services Incorporated ("GTE New Media"), an
affiliate of GTE, filed suit in Dallas, Texas against Netscape and the
Company, in which GTE New Media made a number of claims relating to the
inclusion of certain Yellow Pages hypertext links in the Netscape Guide by
Yahoo!, an online navigational property operated by the Company under an
agreement with Netscape. In this lawsuit, GTE New Media has alleged, among
other things, that by including such links to the Yellow Pages service
operated by several Regional Bell Operating Companies (the "RBOCs") within
the Guide, the Company has tortiously interfered with an alleged contractual
relationship between GTE New Media and Netscape relating to placement of
links by Netscape for a Yellow Pages service operated by GTE New Media. GTE
New Media seeks injunctive relief as well as actual and punitive damages. In
October 1997, GTE New Media brought suit in the U.S. District Court for the
District of Columbia, against the RBOCs, Netscape, and the Company, in which
GTE New Media has alleged, among other things, that the alleged exclusion of
the GTE New Media Yellow Pages from the Netscape Guide Yellow Pages service
violates federal antitrust laws, and GTE New Media seeks injunctive relief
and damages (trebled under federal antitrust laws) from such alleged actions.
The Company believes that the claims against the Company in these lawsuits
are without merit and intends to contest them vigorously. Although the
Company cannot predict with certainty the outcome of these lawsuits or the
expenses that may be incurred in defending the lawsuits, the Company does not
believe that the result in the lawsuits will have a material adverse effect
on the Company's financial position or results of operations. From time to
time the Company is subject to other legal proceedings and claims in the
ordinary course of business, including claims of alleged infringement of
trademarks and other intellectual property rights. The Company is not
currently aware of any legal proceedings or claims that the Company believes
will have, individually or in the aggregate, a material adverse effect on the
Company's financial position or results of operations.
39
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF YAHOO! INC.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of shareholders' equity and of cash
flows present fairly, in all material respects, the financial position of
Yahoo! Inc. and its subsidiaries at December 31, 1997 and 1996, and the
results of their operations and their cash flows for the years ended December
31, 1997, 1996, and 1995, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
San Jose, California
January 9, 1998
40
QUARTERLY FINANCIAL DATA (UNAUDITED)
QUARTER ENDED
-------------------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
--------------- --------------- --------------- --------------
1997
Net revenues $ 10,065,000 $ 14,107,000 $ 18,134,000 $ 25,105,000
Gross profit 8,628,000 11,789,000 15,746,000 21,876,000
Net income (loss) (740,000) (21,552,000) 681,000 (1,276,000)
Basic and diluted net income (loss) per share $ (0.02) $ (0.50) $ 0.01 $ (0.03)
Pro forma net income (loss)(1) (307,000) 2,574,000
Pro forma diluted net income (loss) per share (1) $ (0.01) $ 0.05
1996
Net revenues $ 1,770,000 $ 3,358,000 $ 5,626,000 $ 8,943,000
Gross profit 1,584,000 2,806,000 4,539,000 7,452,000
Net loss (181,000) (1,720,000) (1,718,000) (666,000)
Basic and diluted net loss per share $(0.01) $ (0.04) $ (0.04) $ (0.02)
Note: The quarterly financial data for the quarters presented above has been
restated to reflect the acquisition of Four11 Corporation which was
accounted for as a pooling of interests.
(1) Pro forma net income and diluted net income per share exclude the
effects of other non-recurring costs of $21,245,000 related to the
Yahoo! Marketplace restructuring incurred during the quarter
ended June 30, 1997 and $3,850,000 incurred in connection with the
acquisition of Four11 Corporation during the quarter ended
December 31, 1997.
41
CORPORATE INFORMATION
CORPORATE EXECUTIVE
OFFICERS AND DIRECTORS
TIMOTHY KOOGLE
President and Chief
Executive Officer and Director
JERRY YANG
Chief Yahoo and Director
DAVID FILO
Chief Yahoo
JEFF MALLETT
Chief Operating Officer
GARY VALENZUELA
Sr. Vice President,
Finance and Administration,
Chief Financial Officer
FARZAD NAZEM
Sr. Vice President,
Product Development, EXECUTIVE OFFICERS
Chief Technology Officer
Timothy Brady
JAMES NELSON Vice President, Production
Vice President, Finance
KAREN EDWARDS
JOHN PLACE Vice President, Brand Marketing
General Counsel and Secretary
Heather Killen
ANIL SINGH Vice President, International
Vice President, Advertising Sales
GEOFF RALSTON
ERIC HIPPEAU Vice President, Development
Director (1) and Communications
ARTHUR KERN ELLEN SIMINOFF
Director (1)(2) Vice President, Strategic
Development
MICHAEL MORITZ
Director (1)(2) SRINIJA SRINIVASAN
Vice President, Editor-in-Chief
WENDY YANOWITCH
Vice President, Operations
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
42
CORPORATE HEADQUARTERS ANNUAL SHAREHOLDERS MEETING
Yahoo! Inc. Yahoo! Korea The annual meeting of shareholders
3420 Central Expressway 4 Naengchun-dong, Seodaemun-ku, will be April 17, 1998 at 10am at Yahoo!
Santa Clara, CA 95051-0703 Seoul, Korea Corporate Headquarters.
WORLD YAHOO!S YAHOO! UK & IRELAND STOCK INFORMATION
80/81 St. Martin's Lane
YAHOO! AUSTRALIA & NEW ZEALAND London WC2N 4AA Yahoo! Inc. Common Stock is quoted on
Suite 10, 177-199 Pacific Highway, the NASDAQ National Market System
North Sydney, NSW 2060, Australia INDEPENDENT ACCOUNTANTS under the symbol YHOO. The table
Price Waterhouse LLP below sets forth the range of high and
YAHOO! CANADA San Jose, California low closing sales prices for the quarters
Suite 400, indicated. *
156 Front St. West
Toronto M5J 2L6 Canada LEGAL COUNSEL All stock prices have been adjusted for
Venture Law Group the 3-for-2 stock split which was com-
YAHOO! DANMARK Menlo Park, California pleted on September 2, 1997.
YAHOO! NORGE
YAHOO! SVERIGE The Company had approximately 750
Artillerigatan 36 114 45, TRANSFER AGENT shareholders of record as of December
Stockholm, Sweden 31, 1997. The Company has not declared
Boston EquiServe or paid any cash dividends on its Common
YAHOO! DEUTSCHLAND P.O. Box 8040 Stock and presently intends to retain its
Riesstrasse 25, Haus C, 80992 Boston, MA 02266-8040 future earnings, if any, to fund the devel-
Munchen, Germany opment and growth of its business and,
FORM 10-K therefore, does not anticipate paying any
YAHOO! FRANCE cash dividends in the foreseeable future.
14 Place Marie-Jeanne Bassot, 92593 A copy of the Yahoo! Inc. Form 10-K
Levallois-Perret Cedex, France as filed with the Securities and
Exchange Commission is available *COMMON STOCK
YAHOO! IN ASIA without charge at WWW.SEC.GOV or by 1996
703 Winning House request by contacting: High Low
10-16 Cochrane Street --------------
Central First Quarter
Hong Kong Yahoo! Investor Relations Second Quarter $22.00 $12.17
3420 Central Expressway Third Quarter $16.00 $10.50
Santa Clara, California 95051-0703 Fourth Quarter $15.08 $11.33
YAHOO! JAPAN
24-1 Nihonbashi-Hakozaki Cho A copy of this annual report can be
Chuo-Ku, Tokyo 103 found online at: 1997
Japan HTTP://WWW.YAHOO.COM/INFO/INVESTOR/ High Low
--------------
First Quarter $24.29 $11.67
Second Quarter $26.17 $18.29
Third Quarter $55.38 $22.33
Fourth Quarter $71.00 $38.00
- - -C- 1998 Yahoo! Inc. All rights reserved. Yahoo! and the Yahoo! logo are
registered trademarks of Yahoo! Inc. All other names are trademarks and/or
registered trademarks of their respective owners.
43