Yahoo 2004 Annual Report Download - page 91

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In addition, the Company had a second dispute with Google concerning the shares issuable to the Company pursuant to
a warrant held by the Company to purchase Google shares that were received in connection with a June 2000 services
agreement. Pursuant to a conversion provision in the warrant, in June 2003, Google issued 1.2 million shares to the
Company. The Company believed it was entitled to a greater number of shares in accordance with the warrant
agreement.
In August 2004, Google issued 2.7 million shares of Class A common stock in settlement of these two disputes. The
Company agreed to dismiss the 361 patent lawsuits and has granted to Google a fully-paid license to the 361 patent as
well as several related patent applications held by Overture. The Company allocated the 2.7 million shares between the
two disputes, based on the relative fair values of the two disputes, including consideration of a valuation performed by a
third party. A portion of the shares allocated to the patent dispute has been recorded as an adjustment to goodwill for
the period that the patents were in effect prior to Overture’s acquisition by the Company. The portion of the shares
received for the settlement of the patent dispute which has been allocated to future periods has been recorded in deferred
revenue on the consolidated balance sheets and will be recognized as fees revenues over the remaining life of the patent,
approximately 12 years. The shares allocated to the warrant dispute settlement did not have an income statement effect
as the fair value of the warrant was recorded at the time the services were performed based on the fair value of the
services rendered.
During the year ended December 31, 2004, the Company disposed of approximately 4.0 million shares of Google and
recorded a gain of approximately $413 million, net of selling costs, which is included in other income, net on the
consolidated statements of operations. Certain of these shares were sold through a derivative contract which allowed the
Company to sell certain of its Google shares in a transaction with a third party bank (the ‘‘Bank’’). The Google shares
that were subject to the derivative contract were pledged to the Bank for the term of the option contract. Realized gains
on the derivative contract, which are included in other income, net on the consolidated statements of operations, were
not material. The derivative contract expired prior to December 31, 2004 and no shares were pledged as of that date.
The capital gain on these transactions, together with the increased fair value of marketable equity securities held by the
Company, resulted in the recognition of a tax benefit related to previously reserved capital losses, which reduced the
effective income tax rate for the year ended December 31, 2004 when compared to the year ended December 31, 2003.
The Company’s remaining holdings of approximately 4.2 million Google shares are now classified as available-for-sale
securities and reported at fair value and included in marketable equity securities on the consolidated balance sheets in the
amount of approximately $812 million. The unrealized gain, net of tax, of $482 million as of December 31, 2004 is
recorded in accumulated other comprehensive income. The related tax effect has been recorded as a deferred income tax
liability.
Note 15 SEGMENTS
The Company manages its business geographically. The primary areas of measurement and decision-making are the
United States and International. Management relies on an internal management reporting process that provides revenue
and segment operating income before depreciation and amortization for making financial decisions and allocating
resources. Segment operating income before depreciation and amortization includes income from operations before
depreciation, amortization of intangible assets and amortization of stock compensation expense. Management believes that
segment operating income before depreciation and amortization is an appropriate measure of evaluating the operational
performance of the Company’s segments. However, this measure should be considered in addition to, not as a substitute
for, or superior to, income from operations or other measures of financial performance prepared in accordance with
generally accepted accounting principles.
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