Yahoo 1997 Annual Report Download - page 16

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During 1997, the Company entered into certain agreements w ith Netscape Communications
Corp ora tion (“Netscape”) under w hich the Company has developed and opera t e s a n In t e rn e t in form a t ion
navigation service called “Netsca p e Gu id e b y Ya h oo!” (t h e “Gu id e ”), a n d w a s d e s ig n a t e d a s a “Pre m ie r
Provid e r” of domestic and international search a n d n a vig a t ion a l s e rvice s w it h in t h e Ne t s ca p e We b site.
The Co-Ma rketing agreement provides that re ve n u e from a d ve rtising on t h e Gu id e , w hich is ma n a g e d b y
the Company, is t o b e s h a re d b e t w e e n t h e Com p a n y a n d Ne t s ca p e . Un d e r t h e t e rm s of t h e Tra d e m a rk
License agreement, the Company ma d e a on e -t im e n on -re fu n d a b le t ra d e m a rk lice n s e fe e p a ym e n t of
$5,000,000 in Ma rch 1997, w hich is b e in g a m ortize d ove r t h e in it ia l t w o-ye a r t e rm , w h ich com m e n ce d in
Ma y 1997. Under the terms of the Co-Marketing agreeme n t a s a m e n d e d in J u n e 1997, t h e Com p a n y a ls o
provided Netscape w ith a minimum of up to $4,660,000 in guarantees against sha re d a d ve rtising
revenues in the first year of the a g re e m e n t , s u b je ct in t h e firs t ye a r t o a m in im u m le ve l of g ros s re ve n u e
being met, and up to a minimum of $15,000,000 in the second yea r of t h e a g re e m e n t , s u b je ct in t h e
second year to certain minimum levels of impressions being rea ch e d on t h e Gu id e . Act u a l p a ym e n t s
w ill re la t e d ire ctly to the overall revenue and impre s s ion s re cog n ize d from t h e Gu id e . Un d e r t h e t e rm s
of the Premier Provider agreements, the Company is re q u ire d t o m a ke m in im u m p a ym e n t s in ca s h of
$6,100,000 and is obligated to provide $1,600,000 in the Company’s a dvert is in g s e rvice s in re turn for
cert a in m in im u m g u a ra nteed exposures over the course of the on e -ye a r t e rm of t h e a g re e m e n t s . To
the extent that the minimum guarante e d e xp os u re s a re e xce e d e d , t h e Com p a n y is ob lig a t e d t o re m it
to Netscape additional payments.
In August 1996, the Company entered into agreeme n t s w ith Visa International Service Association
(“ VISA”) a n d a n ot h e r p a rty (t og e t h e r, t h e “Visa Grou p ”) t o e s t a b lis h a lim it e d lia b ilit y com p a n y, Ya h oo!
Ma rketplace L.L.C., to develop and operate a n a vig a t ion a l s e rvice focu s e d on in form a t ion a n d re s ou rce s
for the purchase of consumer products and services ove r t h e In t e rn e t . Du rin g J u ly 1997, p rior t o t h e com -
pletion of significant business activities and public launch of the p rop e rty, t h e Com p a n y a n d VISA e n t e re d
into an agreement under w hich the Vis a Group released the Company from certain obligations and
claims. In connection w ith t h is a g re ement, Yahoo! issued 699,481 shares of Yahoo! Common Stock to the
Vis a Grou p , for w h ich t h e Com p a n y re cord e d a on e -t im e , n on -ca sh, pre-tax charge of $21,245,000 in the
second quart e r e nded June 30, 1997.
During July 1997, GTE New Me d ia Se rvice s Incorporated (“GTE New Me d ia ”), an affiliate of GTE, filed
suit in Dallas, Texa s a g a in s t Ne t s ca p e a n d t h e Com p a n y, in w hich GTE Ne w Me d ia m a d e a number of
claims relating to the inclusion of certain Yellow Pa g e s h yp e rtext lin ks in t h e Ne t s ca pe Guide by Yahoo!,
an online navigational property operated by the Company unde r a n a g re e m e n t w it h Ne t s ca p e . In t h is
law suit, GTE Ne w Me d ia h a s a lle g e d , a mong other things, that by including such links to the Yellow
Pa ges service operated by seve ra l Re g ion a l Be ll Op e ra t in g Com p a n ie s (t h e “RBOCs ”) w it h in t h e Gu id e ,
the Company has tort iou s ly in t e rfe red w ith a n a lle ged contractual relationship betw een GTE New Media
and Netscape relating to place m e n t of lin ks b y Ne t s ca p e for a Ye llow Page s s e rvice op e ra t e d b y GTE Ne w
Me dia. GTE New Me d ia s e eks injunctive relief as w ell as actual and punitive da m a g e s . In Oct ob e r 1997,
GTE New Me d ia b rou g h t s u it in t h e U.S. Dis t rict Cou rt for t h e Dis t rict of Colu m b ia , a g a in s t t h e RBOCs ,
Netscape, and the Company, in w h ich GTE Ne w Me d ia h a s a lle g e d , a m on g ot h e r t h in g s , t h a t t h e a lle g e d
exclusion of the GTE New Me d ia Yellow Pa g e s from t h e Ne t s ca p e Gu id e Yellow Pa g e s s e rvice viola t e s
federal antitrust law s, and GTE New Me d ia seeks injunctive relief and dama g e s (t re b le d u n d e r fe d e ra l
antitrust law s) from s u ch a lle ged actions. The Company believes that the cla im s a g a in s t t h e Com p a n y in
these law suits a re w ithou t m e rit a n d in t e nds to contest them vigorously. Alt h ou g h t h e Com p a n y ca n n ot
predict w ith ce rtainty t h e ou t com e of t h e s e law suits or t h e e xp e nses that may be incurred in defending
the law suits, t h e Com p a n y d oe s not believe that the result in the la w suits w ill have a material adve rs e
effect on the Company's fin a n cia l p os it ion or re s u lt s of op e ra t ion s .
On October 20, 1997, the Company completed the acquisition of Four11 Corporation, a private ly-h e ld
online communications and Internet directory company. Un d e r t h e t e rm s of t h e a cq u is it ion , w h ich w a s
accounted for as a pooling of interests, the Company e xch a n g e d 1,505,720 s h a re s of Ya h oo! Com m on
Stock for all of Four11’s ou t s t a n d in g s h a re s a n d a s s u m e d 148,336 op t ion s a n d w a rra n t s t o p u rch a s e
Yahoo! Com m on St ock. Du rin g t h e q u a rter e n d e d De cember 31, 1997, the Company recorded a one-time
charge of $3,850,000 for the acquisition. These costs consisted of inve s t m e n t b a n kin g fe e s , le g a l a n d
accounting fees, redundancy costs, and certain other expe n s e s d ire ct ly re la t e d t o t h e a cq u is it ion . Th e
consolidated financial statements for the t h re e ye a rs e n d e d De ce m b e r 31, 1997 a n d t h e a ccom p a n yin g
notes reflect the Company’s fin a n cia l p os it ion a n d t h e results of operations as if Four11 w as a w holly-
ow ned s u b s id ia ry of t h e Com p a n y s in ce inception.
Certain Ris k Factors
Yahoo! h a s a limited operating history upon w hich a n evaluation of the Company can be base d , a n d it s
prospects are subject to the risks, expense s , a n d u n ce rtainties fre q u e n t ly e n cou n t e re d b y com p a n ie s in
the new a n d ra pidly evolving markets for Internet products and service s , in clu d in g t h e We b -b a s e d a d ve r-
tising market. Specifically, s u ch ris ks in clu d e , w it h ou t lim it a t ion , t h e fa ilu re t o con t in u e t o d e ve lop a n d
extend the “Yahoo!” brand, the failure to develop ne w media properties, the inability of the Compa n y t o
maintain and increase the le ve ls of t ra ffic on Ya h oo! p rop e rties, the d e ve lop m e n t or a cq u is it ion of e q u a l or
superior services or products by competitors, the failure of the m a rke t t o a d op t t h e We b a s an advert is in g
medium, the failure to successfully sell We b -b a s e d a d ve rtising t h rou g h t h e Com p a n y’s recently developed
internal sales force, potential re d u ct ion s in m a rke t p rice s for We b -b a s e d advert is in g a s a result of compe-
tition or other factors, the failure of the Company to effe ct ive ly g e n e ra t e com m e rce -re la t e d re ve n u e s
through sponsored services and placements in Yahoo! properties, the inability of the Company to e ffe ct ive ly
integrate the technology and opera t ion s or a n y ot h e r a cq u ire d b u s in e s s e s or t e ch n olog ie s w it h it s op e ra t ion s ,
such as the recent acquisition of Four11 Corporation, the failure of the Compa n y t o s u cce s s fu lly d e ve lop a n d
offer personalized We b -b a s e d s e rvice s , s u ch a s e -m a il s e rvice s, to consumers w ithou t e rrors or in t e rru p t ion s
in service, and the inability to continue to identify, a t t ra ct , re t a in a n d m ot iva t e q u a lifie d p e rs on n e l. There
can be no assurance that the Company w ill be successful in addressing such risks.