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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X]ANNUAL REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
1-9676
Commission File Number
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ZIFF-DAVIS INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3987754
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
One Park Avenue, New York, NY 10016
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (212) 503-3500
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Shares registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on which
------------ Registered
Common Stock, $.01 par value -----------------------------
New York Stock Exchange
Shares registered pursuant to Section 12(g) of the Act:
Not Applicable
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [_]
The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant was approximately $768,220,000 at March 23,
1999 based upon the closing price for shares of the registrant's Common Stock
as reported on the New York Stock Exchange Composite Tape on that date.
At March 23, 1999 the number of shares outstanding of the registrant's Common
Stock was 103,108,291.
DOCUMENTS INCORPORATED BY REFERENCE
Ziff-Davis Inc. intends to file with the Securities and Exchange Commission,
not later than 120 days after the close of its fiscal year, a definitive proxy
statement relating to Ziff-Davis Inc.'s 1999 Annual Meeting which is
incorporated by reference into Part III hereof.
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ZIFF-DAVIS INC.
Index to 1998 Form 10-K
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PART I
Item 1. Business................................................... 3
Item 2. Properties................................................. 14
Item 3. Legal Proceedings.......................................... 15
Item 4. Submission of Matters to a Vote of Security Holders........ 16
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters........................................ 16
Item 6. Selected Financial Data.................................... 17
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 17
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk....................................................... 17
Item 8. Consolidated Financial Statements.......................... 17
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure................................... 17
PART III
Item 10. Directors and Executive Officers of the Registrant*........ 17
Item 11. Executive Compensation*.................................... 17
Item 12. Security Ownership of Certain Beneficial Owners and
Management*................................................ 17
Item 13. Certain Relationships and Related Transactions*............ 17
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K................................................... 18
SIGNATURES........................................................... 21
APPENDIX............................................................. F-1
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* These items are omitted because the registrant intends to file with the
Securities and Exchange Commission, not later than 120 days after the close of
its fiscal year, a definitive proxy statement relating to Ziff-Davis Inc.'s
Annual Meeting containing the information required to be disclosed under Part
III of Form 10-K.
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PART I
ITEM 1. BUSINESS
Ziff-Davis Inc. ("Ziff-Davis") is a leading media and marketing company that
provides information on computing and technology, including the Internet. Ziff-
Davis is focused on the businesses of print publishing, trade shows and
conferences, Internet, market research, education and television. Ziff-Davis
provides technology companies worldwide with marketing strategies for reaching
key decision-makers. Ziff-Davis operates in three primary business segments: 1)
publishing, 2) tradeshows and conferences and 3) Internet (referred to as
"ZDNet"). Beginning in 1999, Ziff-Davis will operate a fourth segment,
television. For financial information on Ziff-Davis' business segments see
Notes 19 and 21 in the Consolidated Financial Statements beginning on
page F-16.
Formation of the Corporation
Ziff-Davis, a Delaware corporation, was formed through an initial public
offering and a reorganization that were completed on May 4, 1998. On February
4, 1998, a nonstock corporation, ZD Inc., was formed in contemplation of a
reorganization and initial public offering of Ziff-Davis. Upon completion of
the initial public offering (described below), Ziff-Davis Inc. was renamed ZD
Inc. and ZD Comdex and Forums was renamed ZD Events Inc. and ZD Inc. was
renamed Ziff-Davis Inc.
On May 4, 1998 SOFTBANK Corp., through its wholly owned subsidiary SOFTBANK
Holdings Inc. ("SBH"), completed a reorganization whereby the common stock of
ZD Inc. and ZD Events Inc. were contributed to Ziff-Davis in exchange for
73,619,335 shares of Ziff-Davis Common Stock. Concurrent with the
reorganization, Ziff-Davis (1) completed an initial public offering of
25,800,000 common shares at an initial public offering price of $15.50 per
share, (2) issued $250,000,000 of 8 1/2% subordinated notes due 2008,
(3) entered into a $1,350,000,000 credit facility with a group of banks under
which $1,250,000,000 was borrowed and (4) converted $908,673,000 of
intercompany indebtedness to equity. In addition, Ziff-Davis received
approximately $9,107,000 of fixed assets from Kingston Technology Company
("Kingston"), a related party, in exchange for 580,645 shares of Ziff-Davis
Common Stock and $107,000 in cash. These assets have been subsequently leased
back to Kingston. Total shares of Ziff-Davis Common Stock issued to Softbank
were 74,200,000.
Industry Background
Technology continues to be one of the largest and fastest growing sectors of
the U.S. economy. The market for technology goods and services is rapidly
expanding due to increased integration of computers into the workplace and
home, shortened product life cycles and increased use of the Internet. The
demand for computer technology to enhance productivity and the increasing
number of applications in the areas of education, entertainment and
communications has dramatically increased the number of computers in use
worldwide, from 150 million in 1993 to over 300 million in 1997. This increase
in computer usage has significantly broadened the consumer and business markets
for computer technology. In addition, rapid technological advances have
shortened product life cycles. Today, the estimated marketable product life of
a PC is less than six months as compared to five years in 1981. The Internet
has also become a widely accepted information tool. In 1998 Forrester Research
Inc. estimated that the number of adult Web users would reach 51 million in the
U.S. by the end of 1998 and would grow to 99 million by the end of 2001.
These factors have led to increased demand among buyers and users of computer
technology product for objective, up-to-date information and analysis. To meet
this demand, sellers of computer technology products need to effectively
advertise to increase sales, educate consumers, improve end-user satisfaction
and build brand loyalty. Computer technology-focused media enables sellers to
communicate their message effectively by targeting a focused customer base. As
a result of a broadening consumer base containing favorable demographics,
computer technology publications and other media are becoming increasingly
attractive as a platform for consumer product advertising.
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Computer Technology Print Publications Market
Advertising and circulation revenue for computer-oriented print publications
grew on average 10% a year from 1994 to 1997, totaling $1.7 billion in 1997.
However, in 1998 computer advertising pages decreased 8% as compared to 1997,
according to Adscope and CMR. Ziff-Davis believes the decline in the technology
advertising market is due mainly to continuing margin pressure on computer
equipment manufacturers, industry and product delays, lower demand in Asia and
a focus on the Year 2000 transition.
Computer Technology Trade Shows
Trade show attendees are presented with product advertisements in the form of
exhibits and "editorial" content in the form of conferences and other ancillary
forums. Producers of trade shows and conferences generate revenue from exhibit
space sales, advertising and attendance fees. Trade shows and conferences allow
sellers to conduct a large volume of face-to-face sales presentations to
qualified buyers in a short period of time. Professional attendees include
hardware and software manufacturers and developers, sales and distribution
personnel and large volume end-users. Industry leaders such as Microsoft
Corporation and Cisco Systems, Inc. use these events to promote the launch of
important products in order to reach top-ranking decision-makers in the
computer technology industry.
Trade shows are an increasingly important marketing strategy for information
technology vendors and can be an effective medium for generating and closing
sales. In 1998 estimated exhibit space revenue from North American computer-
product trade shows was approximately $686 million, exhibit square footage rose
17% from 1997, the number of exhibiting firms increased 26% from 1997 and
attendance at such shows rose 20% from 1997.
Growth Of The Internet And Demand For Technology Related Content
As the internet gains acceptance as an advertising and commerce medium and
Internet use continues to grow, technology will play an increasing role in
everyday life. According to Dataquest, worldwide end user spending for
information technology products and related services is expected to be
approximately $2 trillion in 1999 and grow 10% to 15% annually over the next
three years. With the growth of the Internet and the widespread use of personal
computers, cellular phones, pagers and personal digital assistants, technology
has become an area of broad general interest. Users of technology products and
services confront an increasingly complex marketplace due to the rapid pace of
technological change and the frequent introduction of new products and
services. The prevalence of technology and the growing number of technological
choices heighten the demand for up-to-date, comprehensive information about
technology-related products and services.
Publishing Segment
Ziff-Davis is a leading computer-related magazine publisher, with 26 primary
U.S. and international titles, including its joint ventures, and over 50
licensed publications, totaling more than 75 publications distributed
worldwide. Ziff-Davis' publications have a combined circulation of
approximately seven million primary readers worldwide. Approximately 61.5% of
total revenue for the year ended December 31, 1998, was attributable to its
print publishing business. Ziff-Davis' magazines are designed to appeal to a
target audience of sophisticated customers in the business and consumer markets
by providing high-quality editorial content. Ziff-Davis produces monthly
magazines that provide comparative, laboratory-based product reviews and news
weeklies that provide product and industry news and analysis. Ziff-Davis also
serves the developing market for lifestyle and entertainment publications that
focus on technology. Ziff-Davis' publications also include magazines related to
the electronic gaming industry.
Ziff-Davis believes its leading position in the computer publishing market is
based upon:
. Leading Brands in Key Categories. In 1997, Ziff-Davis' PC Magazine, PC
Week and Computer Shopper magazines were the top three computer magazines
in the U.S. and among the top 25 U.S. magazines, each as measured by
total revenue.
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. Strength in Advertising, Circulation and Newsstand Sales. In 1997, Ziff-
Davis accounted for 36.8% of all advertising and circulation dollars
spent in computer periodicals. Ziff-Davis' U.S. publications have a total
circulation of approximately six million primary readers, and Ziff-Davis
has a worldwide circulation of approximately seven million primary
readers. In 1998, PC Magazine's circulation was greater than that of
Business Week, Fortune or Forbes. With respect to newsstand sales, Ziff-
Davis' publications accounted for 50.1% of all computer magazines sold in
the first six months of 1998.
. High Quality Editorial Content. Ziff-Davis' top editors and columnists
are supported by laboratory-testing facilities, producing widely
acknowledged authoritative benchmarks for determining product quality.
Ziff-Davis' comprehensive content attracts focused audiences, thereby
attracting leading advertisers and exhibitors to its products and
services.
. Successful Development of New Publications for Emerging Sectors. Ziff-
Davis has successfully introduced or acquired publications targeted at
the consumer market (FamilyPC and Computer Gaming World), technology
lifestyle (Yahoo! Internet Life), Internet professionals (Inter@ctive
Week) and resellers (Sm@rt Reseller).
Advertising Sales
Ziff-Davis seeks to assist its advertisers in maximizing the return on their
marketing investment. Advertising sales accounted for 77.6% of Ziff-Davis'
total print publishing revenue for the year ended December 31, 1998. A
relatively small number of advertisers contribute a significant percentage of
Ziff-Davis' advertising revenue. In 1998, Ziff-Davis' top 20 advertising
customers accounted for approximately 37.1% of its advertising revenue. These
advertising clients, and Ziff-Davis' other advertising clients, may not
continue to use Ziff-Davis' services to the same extent, or at all, in the
future. A significant reduction in advertising by one or more of Ziff-Davis'
largest clients would have a material adverse effect on its profit and
liquidity.
Circulation
Ziff-Davis maintains centralized circulation operations, enabling it to
capitalize on its successful practices on a timely basis across all
publications. Ziff-Davis strives to increase its readership by building
relationships with distributors, retailers and subscribers. Revenue from
circulation of Ziff-Davis' paid-circulation magazines accounted for 19.6% of
Ziff-Davis' total print publishing revenue in 1998. This was comprised of
subscription sales (10.2% in 1998) and newsstand sales (9.4% in 1998). Ziff-
Davis' publications have a total circulation of approximately seven million
primary readers worldwide.
International, Licensing and Joint Ventures
In its international publications, Ziff-Davis seeks to maximize global reach,
maintain content quality and reduce the cost of entering new markets. Through
subsidiaries, Ziff-Davis currently has publishing operations in France, the
United Kingdom and Germany. Ziff-Davis also has over 50 licensed publications
worldwide. Ziff-Davis' licenses are generally three to five year agreements
that provide for a minimum annual royalty against a percentage of revenue.
Ziff-Davis also operates with a number of joint venture partners, including IDG
in the U.S., Richina Media Holdings and other local agencies in China and APN
Computing Group in Australia.
U.S. Publications
Business Magazines. In the U.S. market, Ziff-Davis publishes seven computer
publications directed to business buyers, including four paid-circulation
magazines and three controlled-circulation weeklies or bi-weeklies. Each
publication produces authoritative, independent guidance that Ziff-Davis
believes is generally considered to be the primary product resource in its
market segment. Macworld is published by Mac Publishing L.L.C., a joint venture
with IDG.
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PC Magazine provides corporate buyers of computer technology with
comprehensive laboratory-based comparative reviews of PC hardware, software and
networking products, with a focus on technical specifications. With a paid
circulation of more than 1.18 million, PC Magazine is the largest circulation
computer magazine in the world, accounting for 37.8% of all computer
advertising revenue in directly competitive U.S. publications in 1998. PC
Magazine also produces two newsstand-only specials: Your New PC (buying advice
for less sophisticated computer buyers) and InternetUser (reviews of Internet
products).
PC/Computing offers reviews of computer products, focusing on productivity
and usability. A monthly publication, it is one of only three computer
magazines to have reached a circulation of over one million readers.
Computer Shopper provides buying advice, product evaluations and technology
coverage, including availability, pricing, specifications and configurations of
thousands of computer products. Computer Shopper has a newsstand circulation of
approximately 260,000 (the largest newsstand sales of any computer
publication).
PC Week provides enterprise product buyers and information technology
professionals at large corporate computing sites with timely information on
products, companies and general industry news. PC Week has a controlled
circulation of over 400,000.
Inter@ctive Week provides Internet and telecommunications professionals with
information on products, events, services, strategies, alliances and key
players. With a controlled circulation of over 150,000, Inter@ctive Week became
one of the leading publications for the digital communications technology
industry in less than three years.
Sm@rt Reseller, a bi-weekly publication, provides value-added resellers,
system integrators, distributors, Web developers and Internet service providers
with in-depth news and analysis on business and technology. Sm@rt Reseller
currently has a controlled circulation of over 65,000.
Macworld provides Macintosh buyers with comparative, laboratory-based product
evaluations, reviews and information about Macintosh products, supported by a
product testing facility which Ziff-Davis believes is the most advanced in the
Macintosh industry. Macworld has a qualified circulation of over 500,000 and is
published through a joint venture.
Consumer Magazines. Ziff-Davis publishes six magazines that serve the rapidly
growing consumer market in order to meet the varying needs of computer
enthusiasts, net surfers, family buyers and gamers.
Electronic Gaming Monthly targets video game enthusiasts and offers news,
information and product reviews about the latest games on ten different game
systems. This monthly publication has a paid circulation of more than 390,000.
Expert Gamer (formerly known as EGM/2/), a companion publication to Electronic
Gaming Monthly with a paid circulation of more than 190,000, offers in-depth
strategies, exclusive tips and tricks and comprehensive maps and walk-throughs
of the latest games.
Yahoo! Internet Life is a leading Internet consumer magazine. Yahoo! Internet
Life has a paid circulation of more than 450,000 readers. It is designed to be
an entertaining and authoritative guide to the Internet, targeting an
influential, affluent and early-adopting group of readers. Ziff-Davis has an
exclusive license from Yahoo! Inc. to use Yahoo! in the title of a print
magazine.
Computer Gaming World provides computer game enthusiasts with results-
oriented gaming information. Computer Gaming World serves more than 280,000
game enthusiasts and is the oldest and one of the largest computer game
publications.
Official U.S. PlayStation Magazine assists Sony PlayStation users in getting
the most out of their game consoles by providing up-to-date news, interviews
and insights. This publication has a paid circulation of over 175,000
PlayStation game fans.
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FamilyPC is specifically targeted to households with children and has a paid
circulation of over 400,000. Written by parents for parents in easy to
understand language, its purpose is to assist families in selecting computers
and software and thereafter ensure that they get a rewarding, productive and
educational experience from them.
International Publications
Ziff-Davis publishes in the United Kingdom PC Magazine, PC Direct, PC Gaming
World and IT Week; in Germany PC Professionell, PC Direkt and Internet
Professionell; in France PC Expert and PC Direct; and in the People's Republic
of China PC Week, PC Computing, PC Magazine and Sm@rt Reseller through a
venture with Richina Media Holdings and local agencies in China.
PC Magazine (U.K.), PC Expert, PC Professionell, and PC Magazine (China) are
equivalents of PC Magazine (U.S.) adapted to their individual markets.
Similarly, PC Direct (U.K.), PC Direct (France) and PC Direkt are intended to
be equivalents of Ziff-Davis' U.S. publication, Computer Shopper. IT Week
includes material from Inter@ctive Week and ZDNet News in addition to local
content.
Education
Ziff-Davis publishes computer training products and services for end-users
and advanced technology professionals. Its products and services include
Internet-based training, computer-based training, instructor-led courseware and
customization tools. Ziff-Davis believes its education offerings extend the
Company's reach and brand reputation while permitting it to attract and retain
customers.
Ziff-Davis produces software-specific newsletters and technology information,
with approximately forty titles. Generally published monthly, the titles
include time-saving tips and techniques on products such as Windows 95, Novel
NetWare, Visual Basic, Word, Excel, Microsoft Office, PhotoShop and Windows NT,
in addition to several programming and operating systems journals.
ZDU is an Internet-based technology educational service through which Ziff-
Davis provides interactive instructor-led training to subscribers. The ZDU
service is closely integrated with ZDNet.
Market Research
Ziff-Davis' market research division develops, analyzes and compiles a wide
variety of information on computer technology issues ranging from current
technical aspects to decision making trends. The ZD Market Intelligence, or
ZDMI, unit focuses on installed and planned technology hardware and software
purchases. It is a leading source in North America and Europe of fact-based
information for the computer and communications industries. ZDMI is an
important part of Ziff-Davis' effort to be a single source marketing solution,
as it provides marketing customers with important targeting information. ZDMI's
databases are built from more than 45,000 telephone interviews per month and
contain data on installed and planned computer and communications products and
services at over 350,000 business sites in the U.S., Canada and eight European
countries, according to Ziff-Davis estimates. ZDMI identifies and targets
customers by tracking current activity and market share in the business, home
and reseller channels. Customers use ZDMI's services to make important
marketing decisions.
Ziff-Davis also identifies and analyzes trends in the decision making process
for computer technology consumers. This information indicates the criteria
people focus on to select products beyond technical product specifications.
Ziff-Davis' market research division also consolidates information obtained in
each of the databases maintained by other operating divisions within Ziff-
Davis, so that each division can offer Ziff-Davis' clients a wide range of
information to meet their marketing needs across multiple platforms.
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Paper And Printing
Ziff-Davis maintains strong relationships with its paper suppliers and
printing companies. Ziff-Davis' main paper suppliers for its U.S. publications
are Bowater, Blandin, Champion, Consolidated and Fraser, which provided 8%,
13%, 38%, 15% and 12%, respectively, of Ziff-Davis' paper supply in 1998 as
measured by tonnage. Its paper supply contracts are generally two-to-three year
agreements, with quarterly pricing adjustments, and are renewable on a
staggered basis. Most agreements contain pricing clauses that seek to ensure
the most competitive pricing on a quarter to quarter basis. Ziff-Davis has
relationships with a number of printing companies, including R.R. Donnelley,
Brown, Quadgraphics and Quebecor. Approximately 46% of Ziff-Davis' total
printing expenditures for its U.S. publications are with R.R. Donnelley, which
has a number of alternative printing sites. Printing contracts are generally
two-to-three year agreements.
Laboratory Testing
Ziff-Davis is committed to laboratory-based product testing as an integral
part of its editorial mission. For the year ended December 31, 1998, Ziff-Davis
spent over $11 million in laboratory testing. Ziff-Davis' ZD Labs staff works
with testers from many of Ziff-Davis' different publications to provide
comprehensive, objective test results to assist buying decisions. In addition
to the core ZD Labs staff, the PC Magazine, PC Week, Computer Shopper and
PC/Computing publications maintain their own staff and/or testing space. The ZD
Labs testing facility tests thousands of products and systems each year and
conducts large-scale tests to simulate corporate installations. Ziff-Davis
believes ZD Labs gives it a competitive advantage in terms of staffing,
equipment and access to the technology necessary to effectively evaluate
products.
Events Segment
Ziff-Davis is a leading producer of trade shows, conferences and customized
marketing and educational programs for the computer industry in the U.S.
Approximately 25.6% of Ziff-Davis' total revenue in 1998 was attributable to
its trade show and conference business. The Company produces the industry-wide
COMDEX events, which Ziff-Davis' predecessor acquired in April 1995, other
segment-focused trade shows and conferences and customized events for specific
clients. Ziff-Davis produced over 50 trade shows and conferences in 1998.
The COMDEX/Fall event, held in the fourth quarter of each year, has been held
for 19 years and is the number one ranked trade show for all industries in the
U.S. as measured by total revenue, total exhibit space and number of attendees.
In 1998, Ziff-Davis estimates that over two million people attended its trade
shows and conferences worldwide. In addition to COMDEX/Fall, held annually in
Las Vegas, Ziff-Davis produces eighteen other COMDEX events in thirteen
countries.
In 1998, Ziff-Davis produced eleven segment-focused "NetWorld+Interop" and
"Seybold Seminars" trade shows in nine countries. The NetWorld+Interop trade
shows focus on the networking/interconnectivity segment of the computer
industry and the Seybold Seminars focus on technologies for publishing and
graphic communications. Ziff-Davis also produces the following segment-focused
trade shows:
. WINDOWS WORLD, in conjunction with Microsoft Corporation,
. EXPO COMM, servicing the worldwide telecommunications industry,
. CommUnity, for the emerging corporate integrated data, voice and video
segments,
. COMDEX/Enterprise, focusing on solutions for the large corporate
information technology infrastructures,
. Java SM Business Expo SM, sponsored by Sun Microsystems, Inc. and
focusing on the full range of Java(TM) technology for information
technology professionals and
. Support Services Conference & Expo, focusing on technology for help desk
and information technology support services.
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Ziff-Davis also produces customized conferences that are designed to meet the
marketing needs of specific clients. For example, Ziff-Davis produced the
JavaOne series of conferences for Sun Microsystems, Inc., which were designed
to introduce Java technology software to the developer community.
Attendees at Ziff-Davis' trade shows and conferences cover a wide range of
participants from the computer industry, including manufacturers, distributors,
dealers, retailers, as well as value-added and other resellers and large
corporate end-users. Each event includes an extensive conference program,
providing a forum to exchange information germane to the particular event's
focus. In addition, each event has one or more "keynote" sessions with speakers
drawn from computer industry leaders. Ziff-Davis estimates that in 1998 over
8,000 companies participated as exhibitors in its trade shows and conferences.
Sources Of Trade Show And Conference Revenue
Exhibitor space fees accounted for 66.8% of Ziff-Davis' total trade show and
conference revenue for 1998. Ziff-Davis believes most trade show producers
receive virtually all of their revenue from the sale of exhibitor space fees.
Ziff-Davis has actively sought to increase its revenue from other sources,
including attendee fees, which accounted for 33.2% of all trade show and
conference revenue in 1998.
All exhibitors pay the same price per square foot of booth space, regardless
of the exhibit hall selected or the location or size of the booth. Typically, a
majority of exhibitors at each trade show commit to booth space for the next
year's show. Ziff-Davis encourages this commitment through a prioritized booth
selection procedure based upon seniority. Annual renewal is required for
exhibitors to maintain their seniority. Exhibitors pay for space in two or
three installments, the last of which is usually due six months prior to the
upcoming event.
Attendee fees accounted for 14.1% of Ziff-Davis' trade show and conference
revenue for 1998, primarily from NetWorld+Interop and Seybold Seminiars events.
Most COMDEX attendees are invited guests of exhibitors who receive
complimentary admission tickets from Ziff-Davis for their customers and key
prospects. This helps exhibitors ensure that their best customers and prospects
will attend.
Advertising revenue from Ziff-Davis' trade shows and conferences is derived
principally from five products:
. a daily newspaper distributed during the show,
. the Program Exhibits Guide,
. the Preview, a newspaper distributed to pre-registrants and certain
prior year attendees before the show,
. advertising billboards and banners and
. exhibitor logo products that are sold to exhibitors to increase booth
traffic and name recognition.
Ziff-Davis also maintains a continuously updated database containing the
names and certain demographic information on its attendees. This database is
rented to direct mail users on a fee-per-use basis.
COMDEX
COMDEX trade shows cover a broad range of new technologies at every stage
from their development and introduction to commercial maturity. Many of the
most significant computer product launches over the past 19 years occurred at
COMDEX, including the launch of the IBM PC, Lotus 1-2-3, Windows 3.1 and DVD.
COMDEX/Fall is a five-day trade show held annually in November in Las Vegas.
In 1998, COMDEX/Fall had approximately 1,500 exhibiting companies occupying 1.2
million net square feet of exhibit space and 200,000 attendees. COMDEX/Spring,
which was launched in 1981, is a smaller version of the fall event. In
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1998, it was held in Chicago and had approximately 560 exhibiting companies and
over 85,000 attendees. For the last eight years, Ziff-Davis, in cooperation
with Microsoft Corporation, has produced a WINDOWS WORLD trade show
concurrently with COMDEX/Spring.
In 1993, Ziff-Davis began launching additional COMDEX events in order to
capitalize on the international recognition of the COMDEX brand name. In 1998,
other COMDEX events were held in Miami, Toronto, Vancouver, Montreal, Mexico
City, Monterrey (Mexico), Buenos Aires, Sao Paulo, Rio de Janeiro, London,
Paris, Tokyo, Seoul, New Delhi, Beijing, Singapore and Cairo.
NetWorld+Interop
NetWorld+Interop is the largest of Ziff-Davis' segment-focused trade shows
and is the leading show for professionals in the rapidly growing field of
computer networking. NetWorld+Interop places strong emphasis on the quality of
its conference programs and has become a leading educational forum for the
Internet and enterprise computing communities. The largest NetWorld+Interop
event is held annually in May in Las Vegas. Each NetWorld+Interop trade show
features InteropNet, a live, multi-platform network that interconnects
exhibitors to one another and to the Internet. In 1998, the NetWorld+Interop
Las Vegas event had approximately 700 exhibiting companies occupying 475,000
net square feet of exhibit space and 55,000 attendees. The NetWorld+Interop
Atlanta event, held in October each year, is only slightly smaller in all
categories. In 1998, NetWorld+Interop events were held in Las Vegas, Atlanta,
Singapore, Tokyo, London, Sao Paulo, Paris and Sydney.
Seybold Seminars
Ziff-Davis' Seybold Seminars are also segment-focused trade shows, providing
information and education for traditional and new media publishing industries.
These shows focus on the latest technologies and products, design tools and
desktop applications. The largest of the Seybold Seminars series is held
annually each Fall in San Francisco. In 1998, this Seybold Seminars show had
approximately 350 exhibiting companies occupying 150,000 net square feet of
exhibit space and 38,000 attendees. Other Seybold Seminars events are held in
New York and Tokyo.
Internet Segment
Ziff-Davis' Website ("ZDNet") represents Ziff-Davis' online division. The
Internet has emerged as a global mass medium, enabling millions of people to
access and share information and conduct business electronically. In 1998
Forrester Research, Inc. estimated that the number of adult Web users would
reach 51 million in the U.S. by the end of 1998 and would grow to 99 million by
the end of 2001. Major factors driving this growth include the increasing
familiarity and acceptance of the Internet by businesses and consumers, the
increasing number of personal computers in homes and offices, the ease, speed
and lower cost of Internet access and improvements in network infrastructure.
As the Internet gains acceptance as an advertising and commerce medium and
Internet use continues to grow, technology will play an increasing role in
everyday life. According to Dataquest, worldwide end user spending for
information technology products and related services is expected to be
approximately $2 trillion in 1999 and grow 10% to 15% annually over the next
three years. With the growth of the Internet and the widespread use of personal
computers, cellular phones, pagers and personal digital assistants, technology
has become an area of broad general interest. Users of technology products and
services confront an increasingly complex marketplace due to the rapid pace of
technological change and the frequent introduction of new products and
services. The prevalence of technology and the growing number of technological
choices heighten the demand for up-to-date, comprehensive information about
technology-related products and services.
Through ZDNet, Ziff-Davis has Web sites which are designed to capitalize on
the market opportunities created by the increasing importance of technology,
the emergence of the Internet as a mass medium and the
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appealing demographics of technology-oriented Web users. ZDNet focuses on
content, community and commerce, enabling users to research topics of interest,
interact with other users, download software and evaluate and purchase a wide
range of products and services at a single destination. Ziff-Davis was among
the first content providers to focus its efforts on the Internet, launching its
zdnet.com service in the fall of 1994.
ZDNet Sites and Services
ZDNet offers more than 60 interconnected and easily navigable sites focused
on providing comprehensive, authoritative and timely online technology content,
creating an active community environment for its users and providing
opportunities for commerce.
Select ZDNet Sites
ZDNet.com (www.zdnet.com) is the home page and gateway for all of ZDNet's
sites and was ranked first among all Web sites in the category of news,
information and entertainment (as measured by net reach) in December 1998
according to Media Metrix.
ComputerShopper.com (www.computershopper.com) (formerly called NetBuyer)
supplies users with a comprehensive display of computer and technology products
in one central location with direct links to merchants to facilitate commerce
transactions. ZDNet shoppers can easily browse and search pricing and product
information, access expert recommendations and buying tips and complete their
purchases online for a unified shopping experience. Users of
ComputerShopper.com can purchase products directly on the site using a secured
server or can place orders through individual merchants (by clicking through to
the merchants' Web sites, dialing the merchants' 1-800 numbers or faxing the
orders to the merchants). Over $37 million in commerce orders were initiated
through ComputerShopper.com and forwarded to merchants in December 1998.
ZDNet Products (www.zdproducts.com) is a comprehensive and authoritative
source for information on purchasing computer products and technology. This
site is organized with user-friendly search and compare capabilities and offers
readily available expert advice and reviews for a full range of users and
systems.
ZDNet Anchordesk (www.anchordesk.com) was one of the first Web sites to
provide a combination of opinionated analysis and news in an interactive e-mail
environment featuring a talk-back capability for its subscribers. This site
offers a companion e-mail newsletter which is distributed every business day to
a subscription base of over 2 million.
ZDNetwork News (www.zdnn.com) provides 24 hours a day/7 days a week coverage
for computing and technology news and information. ZDNetwork News aggregates
news through its investigative and reporting staff, its relationship with ZDTV
and Ziff-Davis publications such as PC Week, Inter@ctive Week and Sm@rt
Reseller and strategic partnerships with MSNBC, Excite and others. This site
also provides audio and video clip capabilities, e-mail and customized news
with MSNBC's NewsAlert, Backweb and Pointcast.
GameSpot and Videogames.com (www.gamespot.com, www.videogames.com) offer
comprehensive news, reviews, previews and tips for all game categories.
GameSpot had the largest share of game advertising revenue among all game Web
sites for the first six months of 1998. GameSpot is 70% owned by ZDNet with the
remaining interest owned by the founders of the site and certain other
employees. Ziff-Davis expects to acquire the remaining 30% interest in GameSpot
in the second quarter of 1999.
ZDNet Help (www.zdhelp.com) offers comprehensive tips, advice and trouble-
shooting aids for a full range of hardware and software. Users can search,
browse or access experts in chat rooms and on bulletin boards.
ZDNet Software Library (www.hotfiles.com) offers over 34,000 files of
shareware, freeware and other downloadable software programs, nearly all of
which are tested for viruses and compatibility and approximately 25,000 of
these files are professionally reviewed and rated.
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ZDNet Inter@ctive Investor (www.zdii.com) provides investors with extensive,
up-to-date financial company profiles and news on technology and Internet
stocks. It provides access to multiple third-party information services such as
The Red Herring magazine, institutional equity research commentary and research
reports through Multex Systems Inc. This site ranked eighth in Barron's 1998
annual survey of the top ten Internet investment sites.
Other ZDNet Channels
Ziff-Davis Print Publication Sites. Each of the Ziff-Davis print publications
has a branded Web site within ZDNet's interconnected sites. Each of the sites
contains content adapted from Ziff-Davis print media and original content
developed specifically for these sites. Among the print publication sites
operated by ZDNet are the companion sites of Ziff-Davis' most successful print
magazines, such as PC Magazine, PC/Computing, PC Week and Yahoo! Internet Life.
Topical Sites. ZDNet also has eight sites, four of which were launched in
1998, that are targeted at particular audiences or topics, providing an
efficient means for advertisers and marketers to reach highly focused consumer
groups. Examples of ZDNet's targeted sites are At Home (www.zdnet.com/athome),
Enterprise (www.zdnet.com/enterprise), Small Business Advisor
(www.zdnet.com/smallbusiness), Windows (www.zdwindows.com) and Year 2000
Challenge (www.zdy2k.com). ZDNet identifies and monitors technology trends
seeking to effectively launch and introduce new sites that address the needs of
its users.
Strategic Alliances
ZDNet's strategic alliances are important souces of content exchange,
revenue, brand visibility and increased user traffic. ZDNet has strategic
alliances with many of the Web's leading sites, including Yahoo!, Excite, MSNBC
and Deja News, pursuant to which selected ZDNet-branded content is displayed on
their sites in exchange for traffic, brand recognition, content or a percentage
of the revenue generated from those sites. These alliances are generally under
short-term contracts that expire in 1999, subject to renewal upon the agreement
of both parties.
International
Through wholly owned sites and joint ventures, ZDNet currently operates
localized versions of certain of its Web sites in the United Kingdom, Germany,
France and Australia. In addition, through licensing arrangements with non-U.S.
operators, localized foreign language versions of ZDNet's Web sites were
available as of December 31, 1998 in more than 12 additional countries,
including Japan, Italy, Latin America, Russia, South Africa, Spain and
Switzerland. In order to deliver high-quality content worldwide, each of
ZDNet's international Web sites offers content tailored specifically to its
local market in addition to content translated from ZDNet's U.S. Web sites.
ZDNet plans to continue to expand into selected overseas markets through
international launches as well as joint ventures and licensing arrangements
with local operating partners, as opportunities arise.
Advertising Sales and Marketing
ZDNet derives the principal portion of its revenue from the sale of
advertisements. For 1998 advertising revenue represented 86% of ZDNet's net
revenue. Advertising revenue is generally derived from short-term contracts on
a per impression basis and by the number of product listings in the
ComputerShopper.com site.
During the fourth quarter of 1998, 377 companies advertised with ZDNet, as
compared to 280 in the fourth quarter of 1997. The following is a list of
ZDNet's top fifteen advertising customers based on advertising revenue in 1998:
<TABLE>
<S> <C> <C>
Active Home/X-10 E-Trade Micron Computer
Buy Direct First USA Microsoft
Chumbo Gateway Onsale
Compaq Hewlett Packard Symantec
Computer Sales Professional IBM 3Com/US Robotics
</TABLE>
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No advertiser accounted for more than 5% of ZDnet's revenue during 1998.
ZDNet's 20 largest advertising customers accounted for approximately 46.5% of
net advertising revenue during 1998. A significant reduction in advertising by
one or more of ZDNet's largest advertisers would have a material adverse effect
on ZDNet's profits and liquidity.
Television Segment (beginning in February 1999)
In order to expand its media platforms, Ziff-Davis entered into a license and
services agreement to manage ZDTV for MAC Holdings, a company that is wholly
owned by Mr. Masayoshi Son, who is a director of Ziff-Davis and principal
stockholder of SOFTBANK Corp. In February 1999, Ziff-Davis acquired ZDTV and
sold a one-third interest in ZDTV to Vulcan Programming, Inc., an entity owned
by Paul G. Allen, for $54 million.
ZDTV, which was launched in May 1998, is the first 24-hour cable television
channel and integrated Web site focused exclusively on computers, technology
and the Internet. ZDTV targets a wide range of viewers, including computer and
technology enthusiasts, computer gaming enthusiasts, business people, teens,
families and other viewers with a sustained interest in computers, technology
and the Internet. ZDTV's programming includes educational features, product
evaluations, gaming tips and strategies, current events and other
entertainment. ZDTV also features live interactive programming, allowing
viewers to participate through simultaneous Web programming on ZDTV.com. ZDTV
reached approximately 9.6 million homes at December 31, 1998 according to ZDTV
estimates. In addition, ZDTV creates customized programming for third parties,
including the regional Emmy award-winning "The Site" with MSNBC and "21st
Century Home" with Home & Garden Television.
For more information about Ziff-Davis' acquisition of ZDTV, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Ziff-Davis' Consolidated Financial Statements.
Seasonality
Ziff-Davis' business is seasonal. Revenue typically reaches its highest level
during the fourth quarter of each calendar year. These seasonal trends
materially affect its quarter-to-quarter operating results. Thus, one quarter's
operating results are not indicative of what the following quarter's operating
results will be. This is largely due to the timing of Ziff-Davis' single
largest trade show event, COMDEX/Fall, and the general increase in publishing
revenue in the fourth quarter due to increased consumer buying activity during
the holiday season.
Competition
Ziff-Davis competes with a wide range of companies for each of its products
and services. The magazine publishing business is highly competitive. Ziff-
Davis faces broad competition from other technology publishers and from other
media companies such as business, news and general interest magazines. Computer
and technology publishers that directly compete with Ziff-Davis in the U.S.
include IDG, CMP and Imagine Media. Ziff-Davis also competes with various
computer and technology publishers in the international markets where it
conducts business. A publishing company's success depends upon a number of
factors, such as editorial quality, product positioning and price. Competitive
factors for advertising sales include quality of readership, circulation,
reader response and advertising rates.
Ziff-Davis also faces competition in its trade show and conference business,
primarily from several significant trade show management companies. These
include Miller Freeman, Mecklermedia and IDG. Competitive factors in this
business include quality of conference content, organizational efficiency and
quality and number of exhibitors and attendees.
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Ziff-Davis' ZDNet competes for advertisers, merchants, users and strategic
partners with: Web sites specializing in technology information, such as sites
provided by c|net, CMP, IDG and Internet.com; Internet portals, search sites
and content aggregators, such as Excite, Infoseek, Lycos and Yahoo!; general
purpose online service providers, such as America Online and MSN; general news
sites, such as those provided by CNN and ABC; browser/software companies
offering information services, such as Microsoft and Netscape and; large
general-interest sites, such as Time Warner's pathfinder.com.
In addition, ZDNet competes with traditional media content businesses such as
newspapers, magazines, radio and television. Additionally, certain ZDNet
channels compete with Web sites focused on a particular corresponding content
niche. For example, GameSpot competes with Web sites such as those provided by
Imagine Media and HappyPuppy, and the ZDNet Software Library competes with
several software download sites.
Ziff-Davis' market research division faces competition from numerous market
research companies, including International Data Corporation, Gartner Group's
Dataquest and IntelliQuest. Database providers such as Information Resource
Group and Dun & Bradstreet provide additional competition.
Ziff-Davis' education division competes with a variety of education
providers, including vendor-supplied training materials and traditional
classroom-based computer training.
ZDTV is the first 24-hour cable television channel and integrated Web site
focused exclusively on computers, technology and the Internet, and as such, it
is not expected to face direct competition in the near future. However, ZDTV
does compete with a variety of general and special interest television
programs. In addition, the market for television programming in general is
highly competitive, with many programming producers competing for channel
carriage, advertisers and audiences.
Trademarks
Ziff-Davis has developed strong brand awareness for its principal
publications, trade shows and other products and services. Accordingly, Ziff-
Davis considers its trademarks, copyrights, trade secrets and similar
intellectual property as critical to its success and relies on trademark,
copyright and trade secrets laws, as well as licensing and confidentiality
agreements, to protect its intellectual property rights. Ziff-Davis generally
registers its material trademarks in the U.S. and in certain other key
countries in which these trademarks are used. Effective trademark, copyright
and trade secret protection may not be available in every country where Ziff-
Davis' publications and services are available.
Ziff-Davis may be subject to claims of alleged infringement by it or its
licensees of trademarks and other intellectual property rights of third parties
from time to time in the ordinary course of business. Ziff-Davis does not
believe there are any such legal proceedings or claims that are likely to have,
individually or in the aggregate, a material adverse effect on its business,
financial condition or results of operations.
Employees
As of December 31, 1998, Ziff-Davis had a total of 3,205 employees. Of these
employees, 621 were engaged in U.S. magazine publishing activities, 397 in
international publishing activities, 505 in trade shows and conferences, 316 in
Internet activities, 407 in education activities, 436 in market research and
523 in central services. None of Ziff-Davis' U.S. employees is represented by a
labor union. Ziff-Davis considers its relationships with its employees to be
satisfactory.
ITEM 2. PROPERTIES
Ziff-Davis' New York City headquarters consists of approximately 310,000
square feet of leased space. Ziff-Davis has over 50 editorial, production and
sales offices and computer labs in many other cities in the United States and
around the world. Ziff-Davis' other principal offices are located in the Boston
and San
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Franciso metropolitan areas. Ziff-Davis nor any of its subsidiaries own real
property that is material to its business and leases all but one of its offices
from third parties. Ziff-Davis is relocating its headquarters from One Park
Avenue, New York, NY to 28 East 28th Street, New York, NY during the first
quarter of 1999. Ziff-Davis' new headquarters will consist of approximately
400,000 square feet of leased space. Ziff-Davis believes that its facilities
are adequate to meet its requirements.
ITEM 3. LEGAL PROCEEDINGS
Ziff-Davis was named a defendant in an action, filed on April 17, 1998 in the
Supreme Court of the State of New York, by minority stockholders of SOFTBANK
Interactive Marketing Inc. ("Softbank Interactive"), formerly an indirect
subsidiary of SOFTBANK Corp. The complaint alleges, among other things, that
SOFTBANK Holdings Inc., SOFTBANK Interactive's majority stockholder, acting
with Ziff-Davis and two of its senior officers and directors who were directors
of SOFTBANK Interactive (and who were also named as defendants), had conflicts
of interest between SOFTBANK Interactive and other investments of SOFTBANK
Corp. and its non-Ziff-Davis affiliates (collectively, "Softbank") (including
investments in Ziff-Davis Inc.) and failed to act in the best interests of
SOFTBANK Interactive and the minority stockholders by taking actions which
benefited Ziff-Davis. The complaint states claims based on common law fraud,
breach of fiduciary duty and aiding and abetting theories and seeks in excess
of $200 million in damages. Ziff-Davis and the other defendants have moved to
dismiss all of the claims against them other than a breach of contract claim
which is solely against SOFTBANK Holdings, and the motion was granted, with the
result that all of the claims against Ziff-Davis and its officers were
dismissed, and most of the claims against SOFTBANK Holdings were dismissed,
leaving only a claim against SOFTBANK Holdings concerning the alleged failure
of SOFTBANK Holdings to give plaintiffs adequate notice of the sale of its
stock to SOFTBANK Interactive.
In addition, eight securities class action suits have been filed against
Ziff-Davis and certain of its directors and officers in the United States
District Court for the Southern District of New York. The complaints allege
that defendants violated Sections 11, 12(a)(2) and 15 of the Securities Act in
connection with the registration statement filed by Ziff-Davis with the
Securities and Exchange Commission relating to the initial public offering of
Ziff-Davis' common stock. More particularly, the complaints allege that the
registration statement contained false and misleading statements and failed to
disclose facts that could have indicated an impending decline in Ziff-Davis'
revenue. The complaints seek, on behalf of a class of purchasers of Ziff-Davis'
common stock from the date of the initial public offering through October 8,
1998, unspecified damages, interest, fees and costs, rescission, and injunctive
relief such as the imposition of a constructive trust upon the proceeds of the
initial public offering.
The complaints are as follows: Napoli v. Ziff-Davis Inc., et al., No. 98 Civ.
7158 (filed Oct. 9, 1998); Steinberg, et al. v. Ziff-Davis Inc., et al., No. 98
Civ. 7205 (filed Oct. 13, 1998); Flinker v. Ziff-Davis Inc., et al., No. 98
Civ. 7231 (filed Oct. 14, 1998); Koenig v. Ziff-Davis Inc., et al., No. 98 Civ.
7260 (filed Oct. 15, 1998); Schindler v. Ziff-Davis Inc., et al., No. 98 Civ.
7418 (filed Oct. 19, 1998); Miller v. Ziff-Davis Inc., et al., No. 98 Civ. 7541
(filed Oct. 23, 1998); Felgoise v. Ziff-Davis Inc., et al., No. 98 Civ. 8045
(filed Nov. 9, 1998) and Javier v. Ziff-Davis Inc., et al., No. 98 Civ. 8201
(filed Nov. 17, 1998). On January 28, 1999, the court entered an order
consolidating the actions, appointing lead plaintiff's counsel and requiring
the filing of a consolidated amended complaint within 45 days. The plaintiffs
filed a consolidated complaint on March 15, 1999. The responsive pleading of
Ziff-Davis Inc. and certain of its directors and officers named in the suits is
due April 29, 1999.
In addition, two derivative suits have been filed by stockholders against
Ziff-Davis and all of its directors in the Court of Chancery of the State of
Delaware for New Castle County. The complaints allege that the directors
breached their fiduciary duties to Ziff-Davis by repricing the stock options
awarded to certain directors and demand the nullification of the repricing and
an injunction against exercise by the directors of any repriced option. The
complaints are as follows: Jacobs v. Ziff-Davis Inc., et al., No. 16813NC
(filed Nov. 30, 1998) and Bernd Bildstein v. Ziff-Davis Inc., et al., No.
16835NC (filed Dec. 10, 1998). Plaintiffs filed an
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amended complaint on February 17, 1999, which is substantially similar to the
original complaints, except that the amended complaint also addresses the
granting of "new options" at an allegedly "reduced exercise price". The
plaintiffs have also indicated their intent to seek consolidation of the
actions. A response to the amended complaint is due April 29, 1999.
Although the outcome of the foregoing cases cannot be predicted, Ziff-Davis
believes that there are substantial defenses to all of the claims.
There are no other legal proceedings to which Ziff-Davis is a party, other
than ordinary routine litigation incidental to its business that is not
otherwise material to the business or financial condition of Ziff-Davis.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Ziff-Davis' Common Stock, par value $0.01 per share, is traded on the New
York Stock Exchange under the trading symbol "ZD". As of March 23, 1999, there
were 103,108,291 shares of Ziff-Davis Common Stock outstanding and 315
stockholders of record.
The high and low sales prices of Ziff-Davis' Common Stock, as reported on the
NYSE Composite Tape, for that portion of the second quarter of 1998 since the
Common Stock began trading and for the third and fourth quarters of 1998 are
shown below.
<TABLE>
<CAPTION>
1998 High Low
---- ------ ------
<S> <C> <C>
Second Quarter (from April 29, 1998 - June 30, 1998)........... $19.00 $12.81
Third Quarter ................................................. 16.38 5.38
Fourth Quarter................................................. 23.94 3.63
</TABLE>
Dividends
Ziff-Davis has never declared or paid dividends on its Common Stock. Ziff-
Davis intends to retain all of its earnings to finance operations, repay
indebtedness and fund future growth. Ziff-Davis does not expect to pay
dividends for the foreseeable future.
Recent Sales of Unregistered Securities
On December 29, 1998, SOFTBANK Kingston Inc., an affiliate of Ziff-Davis,
sold 30,000 shares of Ziff-Davis Common Stock to Donaldson, Lufkin & Jenrette
Securities Corporation, a Delaware corporation ("DLJ"), for $11.00 per share or
an aggregate offering price of $330,000 pursuant to an exemption from
registration under Section 4(1 1/2) of the Securities Act of 1933, as amended.
DLJ is an "accredited investor" within the meaning of Rule 501 of the
Securities Act, and by reason of its business and financial experience DLJ has
such knowledge, sophistication and experience in business and financial matters
that it is capable of evaluating the merits and risks of an investment in the
shares and is able to bear the economic risk of such investment. DLJ is
purchasing the shares for its own account for investment purposes and not with
a view to distribution. DLJ will not offer, sell or deliver at any time,
directly or indirectly, the shares unless the shares are offered and sold under
the applicable exemptions of the Securities Act.
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ITEM 6. SELECTED FINANCIAL DATA
For information required under Item 6 see page F-2.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
For information required under Item 7 see pages F-3 to F-15.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The information required by this item appears in Management's Discussion and
Analysis of Financial Condition and Results of Operations under the headings
"Credit Facility" and "Interest Rate Swaps" beginning on page F-11.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
For information required under Item 8 see pages F-16 to F-53.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information with respect to directors and executive officers of the
registrant required to be included pursuant to this Item 10 will be included
under the caption "Directors And Executive Officers Of The Registrant" in the
definitive proxy statement relating to Ziff-Davis' 1999 Annual Meeting and is
incorporated in this Item 10 by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information with respect to executive compensation required to be
included pursuant to this Item 11 will be included under the caption "Executive
Compensation" in the definitive proxy statement relating to Ziff-Davis' 1999
Annual Meeting and is incorporated in this Item 11 by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information with respect to security ownership of certain beneficial
owners and management required to be included pursuant to this Item 12 will be
included under the captions "Security Ownership Of Certain Beneficial Owners
And Management", and "Executive Compensation" in the definitive proxy statement
relating to Ziff-Davis' 1999 Annual Meeting and is incorporated in this Item 12
by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information with respect to any reportable transaction, business
relationship or indebtedness between Ziff-Davis and the beneficial owners of
more than 5% of its Common Stock, the directors or nominees for director of
Ziff-Davis, the executive officers of Ziff-Davis or the members of the
immediate families of such individuals that is required to be included pursuant
to this Item 13 will be included under the captions "Executive Compensation",
and "Certain Relationships with our Majority Stockholders and Related
Transactions", in the definitive proxy statement relating to Ziff-Davis' 1999
Annual Meeting and is incorporated in this Item 13 by reference.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K
(A) Documents filed as part of this report
(1) Financial Statements and Supplemental Schedules
(a) The Consolidated Financial Statements of Ziff-Davis Inc. are filed
as part of this Form 10-K and are set forth on pages F-16 to F-53.
The report of PricewaterhouseCoopers LLP, Independent Public
Accountants, dated February 22, 1999, is set forth on page F-16 of
this Form 10-K.
(b) No financial statement schedules required.
(2) Exhibits
<TABLE>
<CAPTION>
<C> <S> <C>
3.1 Amended and Restated Certificate of Incorporation of Ziff-Davis
Inc. (incorporated by reference to the exhibit in Ziff-Davis
Inc.'s Registration Statement on Form S-1, File No. 333-46493).
3.2 Form of Amended and Restated Certificate of Incorporation of
Ziff-Davis Inc. (incorporated by reference to the exhibit in
Ziff-Davis Inc.'s Registration Statement on Form S-1, File No.
333-69447).
3.3 By-laws of Ziff-Davis Inc. (incorporated by reference to the
exhibit in Ziff-Davis Inc.'s Registration Statement on Form S-1,
File No. 333-46493).
4.1 Specimen of certificate representing Ziff-Davis Inc. Common
Stock, par value $.01 per share (incorporated by reference to
the exhibit in Ziff-Davis Inc.'s Registration Statement on Form
S-1, File No. 333-46493).
4.2 Specimen of certificate representing Ziff-Davis Inc.--ZD Common
Stock, par value $.01 per share. (incorporated by reference to
the exhibit in Ziff-Davis Inc.'s Registration Statement on Form
S-1, File No. 333-69447).
4.3 Specimen of certificate representing Ziff-Davis Inc.--ZDNet
Common Stock, par value $.01 per share. (incorporated by
reference to the exhibit in Ziff-Davis Inc.'s Registration
Statement on Form S-1, File No. 333-69447).
10.1 1998 Incentive Compensation Plan (incorporated by reference to
the exhibit in Ziff-Davis Inc.'s Registration Statement on Form
S-1, File No. 333-46493).
10.2 1998 Employee Stock Purchase Plan (incorporated by reference to
the exhibit in Ziff-Davis Inc.'s Registration Statement on Form
S-1, File No. 333-46493).
10.3 1998 Non-Employee Directors' Stock Option Plan (incorporated by
reference to the exhibit in Ziff-Davis Inc.'s Registration
Statement on Form S-1, File No. 333-46493).
10.4 Undertaking, dated as of April 1, 1998, between SOFTBANK Corp.
and ZD Inc. (incorporated by reference to the exhibit in Ziff-
Davis Inc.'s Registration Statement on Form S-1, File No.
333-46493).
10.5 License and Services Agreement, dated as of July 28, 1997,
between Ziff-Davis Inc., ZDTV LLC, ZD Television Productions,
Inc., MAC Holdings (America) Inc. and MAC Inc. (incorporated by
reference to the exhibit in Ziff-Davis Inc.'s Registration
Statement on Form S-1, File No. 333-46493).
10.6 Master License Agreement, dated as of April 1, 1998, between
Ziff-Davis Inc. and SOFTBANK Corp. (incorporated by reference to
the exhibit in Ziff-Davis Inc.'s Registration Statement on Form
S-1, File No. 333-46493).
10.7 License Agreement, dated as of July 1, 1997, between MAC Inc.
and Ziff-Davis Inc. and SOFTBANK Corp. (incorporated by
reference to the exhibit in Ziff-Davis Inc.'s Registration
Statement on Form S-1, File No. 333-46493).
</TABLE>
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<TABLE>
<C> <S> <C>
10.8 Agreement to Produce, dated as of April 1, 1998, between ZD
COMDEX and Forums Inc. and SOFTBANK Corp. (incorporated by
reference to the exhibit in Ziff-Davis Inc.'s Registration
Statement on Form S-1, File No. 333-46493).
10.9 Trademark License Agreement, dated as of April 1, 1998, between
ZD COMDEX and Forums Inc. and SOFTBANK Forums KK (incorporated
by reference to the exhibit in Ziff-Davis Inc.'s Registration
Statement on Form S-1, File No. 333-46493).
10.10 Technical Assistance Agreement, dated as of April 1, 1998,
between ZD COMDEX and Forums Inc. and SOFTBANK Forums KK
(incorporated by reference to the exhibit in Ziff-Davis Inc.'s
Registration Statement on Form S-1, File No. 333-46493).
10.11 Registration Rights Agreement, dated as of April 1, 1998,
between ZD Inc. and SOFTBANK Holdings Inc. (incorporated by
reference to the exhibit in Ziff-Davis Inc.'s Registration
Statement on Form S-1, File No. 333-46493).
10.12 Credit Agreement, dated as of March 27, 1996 between SOFTBANK
Holdings Inc., the Guarantors listed therein, The Bank of New
York and Morgan Stanley Senior Funding, Inc., as amended March
9, 1998 (incorporated by reference to the exhibit in Ziff-Davis
Inc.'s Registration Statement on Form S-1, File No. 333-46493).
10.13 Secured Guaranteed Credit Agreement, dated as of May 4, 1998,
among Ziff-Davis Inc., the Banks listed therein, Morgan Stanley
Senior Funding, Inc., as Syndication Agent, The Chase Manhattan
Bank and DLJ Capital Funding, Inc., as Co-Documentation Agents,
The Bank of New York, as Administrative Agent and the
Guarantors (incorporated by reference to the exhibit in Ziff-
Davis Inc.'s Registration Statement on Form S-1, File No. 333-
46493).
10.14 Amendment No. 1 and Waiver to Secured Guaranteed Credit
Agreement, dated as of May 28, 1998, among Ziff-Davis Inc., the
Banks listed therein and The Bank of New York, as
Administrative Agent (incorporated by reference to the exhibit
in Ziff-Davis Inc.'s Registration Statement, Form S-1, File No.
333-69447).
10.15 Amendment No. 2 to Secured Guaranteed Credit Agreement, dated
as of June 8, 1998, among Ziff-Davis Inc., the Banks listed
therein and The Bank of New York, as Administrative Agent
(incorporated by reference to the exhibit in Ziff-Davis Inc.'s
Registration Statement, Form S-1, File No. 333-69447).
10.16 Amendment No. 3 to Secured Credit Agreement, dated as of
December 30, 1998, among Ziff-Davis Inc., the Banks listed
therein and The Bank of New York, as Administrative Agent
(incorporated by reference to the exhibit in Ziff-Davis Inc.'s
Registration Statement, Form S-1, File No. 333-69447).
10.17 Lease of Ziff-Davis Inc. headquarters at 28 East 28th Street,
New York, New York (incorporated by reference to the exhibit in
Ziff-Davis Inc.'s Registration Statement on Form S-1, File No.
333-46493).
10.18 Lease Agreement, dated as of May 4, 1998, between Ziff-Davis
Inc., ZD Inc., ZD COMDEX and Forums Inc. and Kingston
Technology Company (incorporated by reference to the exhibit in
Ziff-Davis Inc.'s Registration Statement on Form S-1, File No.
333-46493).
10.19 Assignment, dated as of May 4, 1998, between Kingston
Technology Company and Ziff-Davis Inc. (incorporated by
reference to the exhibit in Ziff-Davis Inc.'s Registration
Statement on Form S-1, File No. 333-46493).
10.20 Employment Agreement, dated as of April 1, 1998, between ZD
Inc. and Eric Hippeau (incorporated by reference to the exhibit
in Ziff-Davis Inc.'s Registration Statement on Form S-1, File
No. 333-46493).
10.21 Employment Agreement, dated as of April 1, 1998, between ZD
COMDEX and Forums Inc. and Jason E. Chudnofsky (incorporated by
reference to the exhibit in Ziff-Davis Inc.'s Registration
Statement on Form S-1, File No. 333-46493).
</TABLE>
19
<PAGE>
<TABLE>
<C> <S> <C>
10.22 Employment Agreement, dated as of April 1, 1998, between Ziff-
Davis Inc. and Terri S. Holbrooke (incorporated by reference to
the exhibit in Ziff-Davis Inc.'s Registration Statement, Form
S-1, File No. 333-69447).
10.23 Employment Agreement, dated as of April 1, 1998, between Ziff-
Davis Inc. and Timothy C. O'Brien (incorporated by reference to
the exhibit in Ziff-Davis Inc.'s Registration Statement, Form
S-1, File No. 333-69447).
10.24 Employment Agreement, dated as of November 6, 1998, between
Ziff-Davis Inc. and Michael S. Perlis (incorporated by
reference to the exhibit in Ziff-Davis Inc.'s Registration
Statement, Form S-1, File No. 333-69447).
10.25 Stock Purchase Agreement, dated as of February 5, 1999, by and
between Ziff-Davis Inc. and Vulcan Ventures, Inc. (incorporated
by reference to the exhibit in Ziff-Davis Inc.'s Registration
Statement on Form S-1, File No. 333-69447).
10.26 Bill of Sale and Assignment, dated as of February 4, 1999
between MAC Holdings (America) Inc. and ZD Inc. (incorporated
by reference to the exhibit in Ziff-Davis Inc.'s Current Report
on Form 8-K, File No. 001-14055).
12.1 Ratios of Earnings to Fixed Charges.
21.1 List of subsidiaries of Ziff-Davis Inc. (incorporated by
reference to the exhibit in Ziff-Davis Inc.'s Registration
Statement on Form S-1, File No. 333-69447)
23.1 Consent of PricewaterhouseCoopers LLP.
27.1 Financial Data Schedule (incorporated by reference to the
exhibit in Ziff-Davis Inc.'s Registration Statement on Form S-
1, File No. 333-69447).
</TABLE>
(B) Reports on Form 8-K.
Ziff-Davis filed a Report on Form 8-K dated December 1, 1998 identifying its
intent to exercise an option to purchase ZDTV from MAC and the intent to sell
one-third of the acquired interest in ZDTV to Vulcan Ventures, Inc.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Date: March 29, 1999
Ziff-Davis Inc.
/s/ Eric Hippeau
By:
----------------------------------
Name: Eric Hippeau
Title: Chairman, Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities on March 29, 1999.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ Eric Hippeau Chairman, Chief Executive
______________________________________ Officer, Director
Eric Hippeau (Principal Executive
Officer)
/s/ Timothy C. O'Brien Chief Financial Officer,
______________________________________ Director (Principal
Timothy C. O'Brien Financial Officer)
/s/ Mark D. Moyer Controller (Principal
______________________________________ Accounting Officer)
Mark D. Moyer
Director
______________________________________
Masayoshi Son
Director
______________________________________
Yoshitaka Kitao
/s/ Ronald D. Fisher Director
______________________________________
Ronald D. Fisher
/s/ Jason E. Chudnofsky Director
______________________________________
Jason E. Chudnofsky
/s/ Jonathan D. Lazarus Director
______________________________________
Jonathan D. Lazarus
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
Director
______________________________________
Jerry Yang
/s/ Daniel L. Rosensweig Director
______________________________________
</TABLE> Daniel L. Rosensweig
22
<PAGE>
ZIFF-DAVIS INC.
APPENDIX
<TABLE>
<CAPTION>
Page
----
<S> <C>
Selected financial data.................................................. F-2
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... F-3
Report of independent accountants........................................ F-16
Consolidated balance sheets as of December 31, 1997 and 1998 ............ F-17
Consolidated statements of operations for the years ended December 31,
1996, 1997 and 1998..................................................... F-18
Consolidated statements of cash flows for the years ended December 31,
1996, 1997, 1998........................................................ F-19
Consolidated statements of changes in stockholders' equity for the years
ended December 31, 1996, 1997 and 1998.................................. F-20
Notes to consolidated financial statements............................... F-21
</TABLE>
F-1
<PAGE>
SELECTED FINANCIAL DATA
The following table presents Selected Historical Consolidated Financial and
Other Data for Ziff-Davis Inc. as of and for the years ended December 31, 1995,
1996, 1997 and 1998. This data was derived from the Consolidated Financial
Statements of Ziff-Davis Inc. An affiliate of Ziff-Davis Inc. acquired a print
publishing business, "ZDI", on February 29, 1996; the data does not include
results from the acquired business for periods before the date of acquisition.
However, because ZDI represents Ziff-Davis Inc.'s principal operations, the
following table also presents Selected Historical Combined Financial and Other
Data for ZDI as of and for the years ended December 31, 1994 and 1995 and as of
and for the two month period ended February 28, 1996. The data as of and for
the year ended December 31, 1995 and as of and for the two months ended
February 28, 1996 was derived from the audited Consolidated Financial
Statements of ZDI. ZDI data as of for the year ended December 31, 1994, was
derived from ZDI's unaudited financial statements. On May 4, 1998, Ziff-Davis
Inc. completed a reorganization described in Note 2 to the Consolidated
Financial Statements of Ziff-Davis Inc.; results for periods before the
reorganization are not directly comparable to results for periods after the
reorganization. This table should be read in conjunction with the Management's
Discussion and Analysis of Financial Condition and Results of Operations and
the Consolidated Financial Statements of Ziff-Davis Inc.
<TABLE>
<CAPTION>
ZDI(1) Ziff-Davis Inc.
------------------------------------- ---------------------------------------------
Two month
Year ended December 31, period ended Year ended December 31,
----------------------- February 28, ---------------------------------------------
1994 1995 1996 1995(2) 1996(2) 1997 1998
----------- ----------- ------------ ---------- ---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenue, net............ $ 711,379 $ 768,995 $ 125,465 $ 202,729 $ 955,139 $1,153,761 $1,108,892
Depreciation and
amortization........... 34,208 91,546 15,137 24,305 139,736 154,940 152,544
Income from operations.. 80,723 55,750 7,270 62,675 87,181 109,232 31,080
Interest expense, net... 17,887 92,609 14,030 44,005 120,646 190,445 143,547
Income (loss) before
income taxes........... 77,650 (40,250) (6,995) 22,869 (27,124) (72,491) (104,236)
Net income
(loss)(3)(4)........... 77,650 (26,002) (4,547) 10,945 (52,081) (71,179) (77,809)
Balance Sheet Data (at
period end):
Cash and cash
equivalents............ $ 1,066,606 $ 10,083 $ 13,669 $ 27,908 $ 29,915 $ 30,301 $ 32,566
Total assets............ 2,751,525 1,623,906 1,619,905 1,090,981 3,584,173 3,546,646 3,433,803
Total long-term debt.... 1,034,000 964,153 964,153 575,450 2,522,252 2,408,240 1,539,322
Stockholders' equity.... 391,275 365,150 360,717 397,881 447,756 126,130 1,352,598
Other Data:
Capital expenditures.... $ 15,119 $ 14,163 $ 552 $ 3,367 $ 22,365 $ 30,196 $ 36,599
Investments and
acquisitions, net of
cash acquired.......... -- -- -- 814,520 2,124,823 14,000 27,772
</TABLE>
- --------
(1) A third party acquired ZDI as of January 1, 1995. An affiliate of Ziff-
Davis Inc. acquired ZDI on February 29, 1996. Because ZDI represents Ziff-
Davis Inc.'s principal operations, ZDI data has been presented for periods
before these dates.
(2) An affiliate of Ziff-Davis Inc. acquired ZDI on February 29, 1996; Ziff-
Davis Inc. data does not include results from the acquired business for
periods before the date of acquisition.
(3) During 1994, ZDI conducted its operations through various partnerships.
Accordingly, there was no income tax provision for 1994.
(4) No historical earnings per share or share data are presented as Ziff-Davis
Inc. does not consider such data meaningful. See Note 2 to the Consolidated
Financial Statements of Ziff-Davis Inc. for certain pro forma earnings per
share information concerning Ziff-Davis Inc.
F-2
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Revenue
Ziff-Davis Inc. ("Ziff-Davis") had net revenue of $1.109 billion for 1998. A
substantial portion of Ziff-Davis' revenue is derived from the sale of
advertising, which in 1998 accounted for 51.6% of total revenue. No single
advertiser has comprised more than 3.0% of Ziff-Davis' advertising revenue
during any of the last three years. However, Ziff-Davis' top 20 advertisers
accounted for 37.1% of total advertising revenue for 1998.
In the publishing segment, Ziff-Davis' principal sources of revenue are
advertising (64.4% of 1998 total publishing revenue), circulation (18.7%) and
other (16.9%). Circulation comprises both paid subscriptions (10.9%) and
newsstand sales (7.8%) while other includes educational and training materials
(7.4%) and market research studies (7.1%) with the balance primarily consisting
of royalties, reprints and other miscellaneous sales. In the events segment,
revenue is derived from two principal sources: sale of exhibit space (66.8% of
1998 total segment revenue) and attendee conference and seminar fees (14.1%).
Unlike many trade show producers, Ziff-Davis derives a significant portion of
its trade show revenue from other sources (19.1%), including advertising in
show-related publications, billboards, banners, fees from managing customer-
sponsored events and other show-related activities. Ziff-Davis believes these
other sources will continue to be an important growth area, particularly for
its content-focused events. In the Internet segment, Ziff-Davis' principal
source of revenue is from advertising (86.0% of total Internet revenue for
1998). The Internet segment also derives revenue from subscription-based fees
and services (14.0% of total Internet revenue in 1998).
Cost of operations
In the publishing business, the principal components of Ziff-Davis'
production costs are raw materials, printing and distribution, which
represented 34.5%, 38.0% and 27.2%, respectively, of total 1998 publishing
production expenses. Ziff-Davis' principal raw material is paper. Paper supply
and prices are subject to volatility and may be significantly affected by many
factors, including market and economic conditions. The principal components of
production costs within the events business are the costs of renting and
preparing the facilities to hold the events (46.8% in 1998), direct mail and
the related costs for promotion of the events (37.0% in 1998) and program
development and presentation costs (13.4% in 1998). Production costs in the
Internet segment consist primarily of third party web hosting costs.
The other principal operating costs for Ziff-Davis are selling, general and
administrative expenses, including editorial costs. Included in these costs are
salaries, sales commissions and benefits (55.4% in 1998) along with marketing
and promotion expenses related to advertising and circulation (19.7% in 1998).
Factors affecting future periods
Ziff-Davis' revenue and profitability are influenced by a number of external
factors, including the volume of new technology product introductions, the
amount and allocation of marketing expenditures by Ziff-Davis' clients, the
extent to which sellers elect to advertise using print and online media or
participate in trade shows and conferences, changes in paper prices,
availability of appropriate venues for its largest trade shows and conferences
and competition among computer technology marketers, including print
publishers, producers of trade shows and conferences and providers of other
technology information services. Accordingly, Ziff-Davis may experience
fluctuations in revenue from period to period. Many of Ziff-Davis' large
customers concentrate their advertising expenditures around major new product
launches. Marketing expenditures by technology companies can also be affected
by factors affecting the computer industry generally, including pricing
pressures and temporary surpluses of inventory. Revenue and profitability are
also influenced by product mix and the timing and frequency of Ziff-Davis' new
product launches and launches in new markets, as well as by acquisitions. New
publications generally require several years to achieve profitability and upon
achieving initial profitability, often have lower margins than more established
publications. The launch of new publications,
F-3
<PAGE>
trade shows and services are funded with cash flow from operations and are
expensed as incurred. Accordingly, Ziff-Davis' revenue from year to year may be
affected by the number and timing of new product launches. If Ziff-Davis
concludes that a new publication, trade show or service will not achieve
certain milestones with regard to revenue, profitability and cash flow within a
reasonable period of time, management may discontinue such publication, trade
show or service or merge it into another existing publication, trade show or
service.
On February 4, 1999, Ziff-Davis purchased ZDTV. This purchase will affect
Ziff-Davis' results in future periods. See "--ZDTV" below for certain summary
pro forma and other information about this purchase.
Ziff-Davis expects to recognize compensation expense of approximately $21.3
million as a result of certain options granted on December 21, 1998 and January
29, 1999. Such compensation expense will be recognized over the vesting period
of the options. The 1999 compensation expense related to these options is
expected to be approximately $5.5 million. See Note 13 to Ziff-Davis'
Consolidated Financial Statements.
Ziff-Davis expects to acquire the remaining 30% interest in GameSpot Inc. in
exchange for Ziff-Davis Inc.--ZDNet Common Stock valued at $9 million, based on
the initial public offering price; provided that the stockholders of GameSpot
will not receive less than 600,000 shares of ZDNet stock. Assuming a purchase
price of $9 million, this acquisition will result in additional annual
amortization of approximately $1 million per annum. For a description of the
ZDNet Offering, see ""--Liquidity and Capital Resources--ZDNet Offering''
below.
Presentation of Financial Information
Ziff-Davis is comprised of certain operations which were acquired at various
times and completed a reorganization in May 1998. See Notes 1 and 2 to the
Consolidated Financial Statements.
F-4
<PAGE>
Results of Operations
The table below presents the results of Ziff-Davis as if the assets and
operations acquired by affiliates of Ziff-Davis on February 29, 1996 (as
described in Note 1 to the Consolidated Financial Statements) had been acquired
on January 1, 1995. Purchase accounting adjustments relating to that
acquisition have been reflected through pro forma amortization, interest and
income tax adjustments, as described in note (1) to the table. Although the
1996 presentation is not in accordance with generally accepted accounting
principles, management believes it presents the most meaningful basis of
comparison. The financial information presented below may not necessarily
reflect the results of operations which would have occurred had the February
29, 1996 acquisition been completed on January 1, 1995.
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------
Pro Forma(1) Actual
------------ ----------------------
1996 1997 1998
------------ ---------- ----------
(dollars in thousands)
<S> <C> <C> <C>
Revenue, net:
Publishing............................. $ 796,602 $ 834,015 $ 782,882
Events................................. 264,884 287,528 269,867
Internet............................... 19,118 32,218 56,143
---------- ---------- ----------
1,080,604 1,153,761 1,108,892
---------- ---------- ----------
Cost of production....................... 302,644 325,245 305,346
Selling, general and administrative
expenses................................ 528,636 564,344 567,683
Depreciation and amortization............ 161,259 154,940 152,544
Restructuring charge .................... -- -- 52,239
---------- ---------- ----------
Income from operations................... 88,065 109,232 31,080
Interest expense, net.................... (135,500) (190,445) (143,547)
Other non-operating income, net.......... 6,106 8,722 8,231
---------- ---------- ----------
Loss before income taxes................. (41,329) (72,491) (104,236)
Provision (benefit) for income taxes..... 25,682 (1,312) (26,427)
---------- ---------- ----------
Net loss................................. $ (67,011) $ (71,179) $ (77,809)
========== ========== ==========
Other Data:
Cash and cash equivalents, end of
period.................................. $ 29,915 $ 30,301 $ 32,566
Net cash provided (used) by operating
activities.............................. 65,681 (3,364) 95,776
Net cash used by investing activities.... (66,856) (44,196) (64,371)
Net cash provided (used) by financing
activities.............................. 6,768 47,946 (29,140)
EBITDA(2)................................ 255,430 272,894 244,094
</TABLE>
- --------
(1) The February 29, 1996 acquisition gave rise to different bases of
accounting for the period after the acquisition as compared to the period
prior to the acquisition. This is primarily due to a purchase price which
exceeded the book value of the assets acquired, financed by a higher level
of both debt and equity as compared to the pre-acquisition capital
structure. The above numbers assume that the acquisition took place on
January 1, 1995; therefore, depreciation and amortization, interest expense
and net loss have been increased by approximately $6,386,000, $824,000 and
$10,383,000, respectively for 1996.
(2) "EBITDA" is defined as income before provision for income taxes, interest
expense, depreciation and amortization. EBITDA for the year ended December
31, 1998 does not include a one-time restructuring charge of $52,239,000.
EBITDA is not intended to represent cash flows from operations and should
not be considered as an alternative to net income as an indicator of Ziff-
Davis' operating performance or to cash flows as a measure of liquidity.
Although Ziff-Davis believes that EBITDA is a standard measure commonly
reported and widely used by analysts, investors and other interested
parties in the publishing and media industries, the EBITDA presented for
Ziff-Davis may not be comparable to similarly titled measures reported by
other companies.
F-5
<PAGE>
Year ended December 31, 1998 compared with year ended December 31, 1997
Revenue, net
Revenue decreased by $44.9 million or 3.9% from $1,153.8 million in 1997 to
$1,108.9 million in 1998.
Publishing--Revenue from publishing decreased by $51.1 million or 6.1% from
$834.0 million in 1997 to $782.9 million in 1998. This decline was primarily
due to the transfer of certain publications to a joint venture and the closure
of three publications due to the restructuring discussed below. The remainder
of the decrease was primarily due to lower advertising in business publications
partly offset by growth in advertising in consumer publications. Advertising
revenue was lower in business publications principally due to factors affecting
the computer technology industry during the year. Margin pressure on computer
equipment manufacturers, industry and product delays, lower demand in Asia and
a focus on the Year 2000 transition are contributing to a reduced demand for
advertising in Ziff-Davis' magazines. Revenue from international operations,
which generated 10.2% of the segment's revenue, increased by $2.1 million
primarily due to the launch of IT Week in the UK, partially offset by lower
advertising in business publications.
Net revenue from MacUser and MacWeek magazines contributed to Mac Publishing
LLC were $32.5 million for 1997 but are no longer consolidated into Ziff-Davis'
results for 1998. On May 1, 1998, Ziff-Davis acquired its joint venture
partner's 50% interest in FamilyPC magazine. Ziff-Davis now owns 100% of the
magazine and its results are included in the consolidated results from the
acquisition date. Revenue from FamilyPC included in the 1998 results was $11.1
million. Revenue related to the three publications closed as part of the
restructuring was $12.5 million lower in the fourth quarter of 1998 as compared
to the fourth quarter of 1997.
Events--Revenue from events decreased by $17.6 million or 6.1% from $287.5
million in 1997 to $269.9 million in 1998. The decrease was primarily due to a
decline in revenue due to the discontinuation of certain "one-time" shows that
were held in 1997, lower ancillary revenue at COMDEX/Fall and lower square
footage sold at COMDEX/Spring. This decrease was partially offset by increased
revenue from increased square footage sold at Networld+Interop Las Vegas and
Java One due to an increased number of attendees.
Internet--Net revenue increased 74.2% to $56.1 million for the year ended
December 31, 1998 from $32.2 million for the year ended December 31, 1997.
Revenue from advertising was 86% of net revenue for the year ended December 31,
1998 compared to 73% for the year ended December 31, 1997. Revenue from
advertising increased 104.2% to $48.2 million for the year ended December 31,
1998 from $23.6 million for the prior year. The increase in advertising revenue
was attributed to an increase in volume as both the number of advertisers and
the average monthly revenue per advertiser increased. Subscription-based fees
and services decreased by 6.9% to $8.0 million for the year ended December 31,
1998 from $8.6 million for the year ended December 31, 1997.
Cost of production
Production costs decreased by 6.1% or $19.9 million from $325.2 million in
1997 to $305.3 million in 1998.
Publishing production costs decreased by $6.0 million or 2.7% from $221.4
million in 1997 to $215.3 million in 1998. The decrease was related to a
decline in the number of advertising pages produced.
The cost of producing events decreased by $17.4 million or 17.4% from $99.5
million in 1997 to $82.1 million in 1998. The decrease was a result of lower
operational costs and re-negotiated contracts as well as the discontinuation of
certain "one-time" shows that were held in 1997.
Internet production costs increased by $3.6 million or 83.7% from $4.3
million in 1997 to $7.9 million in 1998. The increase in production costs was
due to higher user traffic levels and increased editorial costs associated with
the launch of new content areas.
F-6
<PAGE>
Selling, general and administrative expenses
Selling, general and administrative expenses increased by $3.3 million or
0.6% from $564.3 million in 1997 to $567.7 million in 1998. The increase was
due to expenditures to launch new products and increased advertising expenses.
The increase was partially offset by headcount reductions and efficiencies
attained through the integration of operations resulting from the
reorganization completed in May 1998, as well as costs eliminated by the
closure of three magazines in the fourth quarter of 1998.
Depreciation and amortization
Total depreciation and amortization decreased $2.4 million from $154.9
million in 1997 to $152.5 million in 1998. The decrease was a result of certain
assets being fully depreciated in 1997 and early 1998.
Restructuring
Margin pressure on computer equipment manufacturers, industry and product
delays, lower demand in Asia and a focus on the Year 2000 transition are
contributing to a reduced demand for advertising in Ziff-Davis' magazines,
principally PC Magazine, PC/Computing, Computer Shopper and PC Week. Ziff-Davis
Inc. believes these factors are continuing.
As a result of this reduced demand, in October 1998, Ziff-Davis announced a
restructuring program with the intent of significantly reducing its cost base.
Ziff-Davis incurred a pre-tax charge of $52.2 million for this restructuring
program. The charge was reported as a component of income from operations for
the fourth quarter of 1998. The charge included asset impairment costs ($37.9
million), employee termination costs ($8.6 million) and costs to exit
activities ($5.7 million) principally resulting from the closing of three
publications, Windows Pro, Internet Business and Equip, and the reduction of
Ziff-Davis' work force by 310 employees. The charge also included costs
resulting from the discontinuation of certain educational journals and trade
shows. The following sets forth additional detail concerning the principal
components of the charge:
. Asset impairment costs totaled $37.9 million. These costs included the
write-off of intangible assets associated with the discontinued
publications ($34.3 million) and trade shows ($2.9 million) as well as
deferred expenses associated with the discontinued educational journals
($0.7 million).
. Employee termination costs related to severed personnel at the closed
publications as well as a rationalization and resulting workforce
reduction of the remainder of Ziff-Davis' operations. Employee
termination costs included payments for severance and earned vacation as
well as the costs of outplacement services and the provision of
continued benefits to personnel. As of December 31, 1998, $5.2 million
of the $8.6 million related to these employee terminations had been
paid.
. Costs to exit activities reflected the costs associated with the final
closure of the discontinued publications ($1.8 million) and the costs to
reduce office space under lease as a result of the reduced level of
employees ($3.8 million).
Interest expense, net
Interest expense decreased by $46.9 million or 24.6% from $190.4 million in
1997 to $143.5 million in 1998. The reduction was due primarily to lower levels
of debt outstanding throughout the year, as well as the capitalization of
$908.7 million of intercompany debt as part of the reorganization.
Other non-operating income, net
Other non-operating income, net primarily reflects Ziff-Davis' equity share
in earnings and losses from joint ventures and fees earned from management of
events not produced by Ziff-Davis. This income decreased $0.5 million or 5.6%
from $8.7 million in 1997 to $8.2 million in 1998 reflecting reduced fees from
managed events. The decline was partially offset by Ziff-Davis' equity share in
earnings of MAC Publishing, LLC, an entity that was formed in August 1997.
F-7
<PAGE>
Income taxes
The 1998 income tax benefit of $26.4 million increased from $1.3 million
reported in 1997. The increase was due primarily to income tax benefits
generated from the losses with respect to the MAC Assets, which were not
deductible until Ziff-Davis purchased the MAC Assets from an affiliate on May
4, 1998. The income tax benefit was also increased by a higher net loss for the
year ended December 31, 1998 compared to the net loss for the year ended
December 31, 1997.
Net loss
As a result of the changes described above, the net loss for the period
increased $6.6 million or 9.3% from $71.2 million in 1997 to $77.8 million in
1998.
EBITDA
EBITDA for the year ended December 31, 1998 was $244.1 million compared to
$272.9 million for the year ended December 31, 1997. EBITDA for the year ended
December 31, 1998 does not include the $52.2 million restructuring charge.
Results were unfavorable as compared to 1997 due to a lower level of earnings
from advertising in the higher margin business publications partly offset by
improved results in the events segment and reduced losses in the Internet
segment. The improvement in the events segment was attributed to the absence of
losses from the discontinuance of certain "one-time" shows held in 1997 as well
as continued costs savings. Reduced losses from the Internet segment were the
result of revenue growth exceeding increases in expenses. The ratio of EBITDA
to revenue was 22.0% for 1998 compared to 23.7% in 1997.
Year ended December 31, 1997 compared with Pro Forma Year ended December 31,
1996
Revenue, net
Net revenue increased by $73.2 million or 6.8% from $1,080.6 million in 1996
to $1,153.8 million in 1997.
Publishing--Net revenue from publishing grew by $37.4 million or 4.7% from
$796.6 million to $834.0 million. Approximately $22 million was due to
inclusion of a full year of results for the electronic gaming publications
acquired in mid-1996 and two publications launched in late 1996. Increases in
advertising rates, generally ranging between 3.0% and 10.0%, and a 5.1%
increase in advertising pages contributed $11.5 million. Revenue from
international operations, which generated 10.2% of the segment's revenue,
decreased by $6.6 million due to the strengthening of the U.S. dollar relative
to the major European currencies. Continued growth from new educational product
launches and sales of market research studies accounted for the balance of the
revenue growth.
Events--Net revenue from events increased $22.6 million or 8.5% from $264.9
million to $287.5 million. Approximately $15 million of the increase was due to
11 new trade show launches, including revenue from ancillary show-related
sources. The balance of revenue growth was due to higher exhibitor rates
charged at the major events, partly offset by a decline in revenue from
COMDEX/Spring and certain U.K. events.
Internet--Net revenue increased by $13.1 million or 68.6% from $19.1 million
for the pro forma year ended December 31, 1996 to $32.2 million in 1997. An
increasing percentage of ZDNet's net revenue was derived from advertising for
the year ended December 31, 1997, accounting for 73.3% of net revenue, compared
to 37.7% for the same period in 1996. The increased percentage of net revenue
derived from advertising in the later period reflects a continuation of ZDNet's
strategic shift from a business model based on subscription-based fees and
services to one based on advertising.
Revenue from advertising increased $16.4 million or 227.8% to $23.6 million
in 1997 from $7.2 million for the pro forma year ended December 31, 1996. The
increase in advertising revenue was attributable to increases in the number of
advertisers, the average expenditures per advertiser and increasing advertising
rates. The increase was evenly attributable to rate and volume increases.
Subscription-based fees and services decreased $3.3 million or 27.7% from $11.9
million in 1996 to $8.6 million in 1997.
F-8
<PAGE>
Cost of production
Production costs increased $22.6 million or 7.5% from $302.6 million to
$325.2 million.
Publishing production costs increased $10.4 million or 4.8% from $215.3
million in 1996 to $225.7 million in 1997. Costs related to new launches and
volume-related growth increased approximately $20 million but were partly
offset by approximately $10 million of lower paper costs.
The costs of producing events increased $12.2 million or 14.0% from $87.3
million in 1996 to $99.5 million in 1997 primarily as a result of costs related
to new events launched in 1997.
Internet production costs increased $1.3 million or 43.3% from $3.0 million
in 1996 to $4.3 million in 1997. The increase in production costs was due to
higher user traffic levels and increased editorial costs associated with the
launch of new content areas.
Selling, general and administrative expenses
Selling, general and administrative expenses increased $35.7 million or 6.8%
from $528.6 million to $564.3 million. The increase was due to the addition of
employees to support base business volume growth and launches of new products
and services. Results included a one-time $6.0 million charge for the
consolidation and restructuring of the events business which was announced in
the fourth quarter of 1997. Costs for the publishing segment rose 1.2% while
those for the events segment rose 22.1% due to the number of new launches and
the one-time restructuring charge.
Depreciation and amortization
Total depreciation and amortization decreased $6.3 million to $154.9 million
in 1997. The reduction in depreciation and amortization expense was a result of
certain assets being fully depreciated in 1996.
Interest expense, net
Net interest expense increased $54.9 million or 40.5% to $190.4 million in
1997 due to interest on an additional $900 million of intercompany indebtedness
to Softbank incurred to finance a return of capital.
Other non-operating income, net
Other non-operating income, net primarily reflects Ziff-Davis Inc.'s equity
share of earnings and losses from joint ventures and fees earned from
management of events not produced by Ziff-Davis. This income increased $2.6
million from $6.1 million in 1996 to $8.7 million or 42.6% reflecting growth in
fees from managed events and reduced losses from joint ventures.
Income Taxes
The 1997 combined income tax benefit of $1.3 million compares to a pro forma
income tax provision of $25.7 million in 1996. The improvement in the tax
provision is due to a higher pre-tax loss giving rise to a tax benefit. The
difference between the 1997 and 1996 effective tax rates and the federal
statutory tax rate of 35.0% is primarily due to non-recognition of tax losses
generated by the MAC Assets ($56.9 million in 1997 and $77.2 million in 1996),
non-deductible goodwill amortization ($10.2 million in 1997 and $8.6 million in
1996) and state and local income taxes. In addition, the 1996 tax provision
increased approximately $3.2 million as a result of pro forma adjustments
related to the ZDI acquisition.
Net loss
As a result of the changes described above, net loss for the period increased
$4.2 million or 6.2% from $67.0 million to $71.2 million.
F-9
<PAGE>
EBITDA
EBITDA for 1997 was $272.9 million, an increase of $17.5 million or 6.8% from
the $255.4 million generated in 1996. The increase was due to higher revenue
and management fee income, net of higher production costs and selling, general
and administrative expenses. The ratio of EBITDA to revenue remained relatively
constant at 23.7% for 1997 compared to the 1996 margin of 23.6%.
Liquidity and Capital Resources
As a result of the May 4, 1998 reorganization, Ziff-Davis' intercompany debt
owed to Softbank was reduced to $83.1 million. Such indebtedness bears interest
at 9.9% and matures in February 2010. Concurrently with Ziff-Davis' initial
public offering, Ziff-Davis issued and sold $250 million aggregate principal
amount of notes. In addition, Ziff-Davis entered into a $1.35 billion credit
facility, and borrowed $1.25 billion under such facility, to provide additional
funds for the repayment of intercompany debt to Softbank and to provide for
Ziff-Davis' working capital requirements. The balance of intercompany
obligations owed to Softbank was converted to equity. See Note 2 to the
Consolidated Financial Statements.
At December 31, 1998, Ziff-Davis' outstanding total debt was $1,547.9
million, excluding unamortized discount, which consisted of $77.9 million due
to Softbank, $250 million in notes and $1,220.0 million under the credit
facility. Under its most restrictive covenant, Ziff-Davis could have borrowed
an additional $28,800,000 under the credit facility at December 31, 1998.
Cash and equivalents were $32.6 million at December 31, 1998, an increase of
$2.3 million from $30.3 million at December 31, 1997. The increase was due to
factors described below:
Cash provided by operations was $95.8 million for the year ended December 31,
1998 compared to a use of $3.4 million for the year ended December 31, 1997.
The increase from 1997 to 1998 was attributed to lower losses before the
restructuring charge and a decrease in funding to affiliates for the 1998
period.
Cash used for investing activities for the year ended December 31, 1998
totaled $64.4 million compared to $44.2 million for the year ended December 31,
1997. The majority of these expenditures were for computer equipment and
leasehold improvements. Acquisitions and investments in the 1998 period relate
to Ziff-Davis' acquisition of Sky TV, a tradeshow in Canada, an additional 50%
interest in Family PC magazine, a European marketing database company as well
as investments in Red Herring and Deja News. Acquisitions for the year ended
December 31, 1997 reflect the purchase of a 70% interest in GameSpot.
Cash used in financing activities totaled $29.1 million for the year ended
December 31, 1998, representing proceeds from the reorganization and initial
public offering of $1,863.3 million, net of transaction costs, and funding from
Softbank of $20.4 million offset by the repayment of debt and amounts due to
affiliates of $1,916.1 million. Cash provided by financing activities in 1997
amounted to $47.9 million representing capital contributions partly offset by
repayments of intercompany debt.
Ziff-Davis had a working capital surplus of approximately $35.5 million at
December 31, 1998, compared to a working capital deficit of approximately
$371.1 million at December 31, 1997. Ziff-Davis' balance sheet has historically
had a working capital deficit due to significant amounts due to affiliates.
Ziff-Davis also maintains a significant level of deferred revenue generated
from publication subscriptions paid in advance and prepayments from trade show
exhibitors. At December 31, 1998, Ziff-Davis had deferred revenue of $152.1
million compared to $154.7 million at December 31, 1997. Deferred revenue does
not represent a cash liability owed by Ziff-Davis, unless Ziff-Davis fails to
deliver a magazine or cancels a trade show, and generally does not affect Ziff-
Davis' ability to fund day-to-day operations. Working capital increased as a
result of the reorganization and the initial public offering of Ziff-Davis'
common stock which resulted in the repayment and conversion to equity of
related party obligations in connection therewith.
On December 11, 1998, Standard & Poor's lowered its corporate credit and bank
loan ratings for Ziff-Davis to BB- from BB and its subordinated debt rating for
Ziff-Davis to B from B+. This downgrade had no
F-10
<PAGE>
impact on our current borrowings. Although this downgrade may make future
borrowings more expensive, we do not believe this will have a material impact
on our liquidity or our access to credit markets.
Ziff-Davis believes, based on its current level of operations and anticipated
growth, that Ziff-Davis' ability to generate cash, together with cash on hand
and available lines of credit, will be sufficient to make required payments of
principal and interest on Ziff-Davis' indebtedness and to fund anticipated
capital expenditures and working capital requirements. However, actual capital
expenditures may change, particularly as a result of any acquisitions Ziff-
Davis may pursue. The ability of Ziff-Davis to meet its debt service
obligations and reduce its total debt will depend upon the future performance
of Ziff-Davis.
Credit Facility
Ziff-Davis' credit facility, as amended, consists of a seven-year $400
million reducing revolving credit facility, a seven-year $450 million term loan
and an eight-year $500 million term loan. There are no scheduled reductions in
the revolving credit commitment or amortization under the term loan until
September 2000.
For the reasons described under "--Restructuring" above, Ziff-Davis' debt to
EBITDA ratios at December 31, 1998 would have been above the levels that had
originally been required by its credit facility. On December 16, 1998, the
lenders of the $1.35 billion credit facility agreed to amend certain provisions
of that facility. The amended provisions include an increase in the allowed
leverage ratios. In return, the Company agreed to pay a one-time fee of $3.375
million and increase the interest rates on amounts borrowed under the facility
to rates currently ranging from LIBOR plus 2.875% to LIBOR plus 3.375%
depending on the type of loan. Had the increased interest rates been in effect
for the period from Ziff-Davis' initial public offering on April 28, 1998 to
December 31, 1998, interest expense would have increased by approximately $11.9
million. Based on the $1,220.0 million outstanding on December 31, 1998, the
annualized incremental interest is $18.0 million. This increase in interest
expense would reduce the amounts otherwise available to fund operations.
Ziff-Davis' credit facility exposes it to market risk with respect to changes
in interest rates. Ziff-Davis manages this risk through the use of interest
rate swap agreements, as described below. Through the use of these swap
agreements, Ziff-Davis has effectively established a fixed interest rate for
$550 million of the outstanding credit facility. Based on the $1,220.0 million
outstanding under the credit facility at December 31, 1998, if the LIBOR rate
were to increase by 1%, Ziff-Davis would incur, after giving effect to the swap
agreements, an additional $6.7 million of annual interest expense.
Interest Rate Swaps
On June 10, 1998, Ziff-Davis entered into interest rate swap agreements, with
an aggregate notional amount of $550 million. Under these swap agreements,
which commenced on August 10, 1998, Ziff-Davis receives a floating rate of
interest based on three-month LIBOR, which resets quarterly, and pays a fixed
rate of interest each quarter for the terms of the respective agreements. The
weighted average fixed rate Ziff-Davis pays under these agreements is 5.85%.
Ziff-Davis has entered into these agreements solely to hedge its interest rate
risk. At December 31, 1998, the three-month LIBOR rate was 5.06%.
These swap agreements are viewed by Ziff-Davis as risk management tools and
are not used for trading or speculative purposes. The notional amount of $550
million does not represent a real amount exchanged by the parties, and
therefore, is not a measure of Ziff-Davis' exposure through its use of swap
agreements. The fair values of these swap agreements were estimated by
obtaining quotes from brokers which represented the amounts that Ziff-Davis
would pay if the agreements were terminated at the balance sheet date. While it
is not Ziff-Davis' intention to terminate these swap agreements, these fair
values indicated that the termination of the swap agreements would have
resulted in a loss of $15,627,000.
By nature, swap agreements involve credit risk, due to the possible
nonperformance by counterparties. To mitigate this risk, Ziff-Davis enters into
swap agreements with major financial institutions and diversifies the
counterparties used as a means to limit counterparty exposure and concentration
of risk.
F-11
<PAGE>
ZDTV
In July 1997, Ziff-Davis entered into a license and services agreement to
develop ZDTV for MAC Holdings, a company that is wholly owned by Mr. Masayoshi
Son, who is a director of Ziff-Davis and principal stockholder of SOFTBANK
Corp. Under this agreement, Ziff-Davis agreed to fund ZDTV's operations through
unsecured advances and was granted an option to purchase ZDTV for a price equal
to MAC Holdings' investment plus 10% per annum for the period of investment. On
January 15, 1999, Ziff-Davis exercised this option and on February 4, 1999,
purchased ZDTV at a purchase price of $81.4 million. Ziff-Davis paid
approximately $32.8 million of the purchase price in cash, funded on February
5, 1999, and paid the remainder by applying approximately $48.6 million in
advances owed to it by MAC Holdings through December 31, 1998. Ziff-Davis also
agreed to be responsible for the funding of ZDTV during the period in 1999
prior to the purchase which will be accounted for as additional purchase price.
The cash portion of the purchase price was funded by an advance from ZDTV to
Ziff-Davis, pursuant to the ZDTV cash management system, of the funds invested
in ZDTV by Vulcan Programming described below. In connection with its
acquisition of ZDTV, Ziff-Davis assumed MAC Holdings' obligations under an
option granted to DirectTV to purchase 5% of ZDTV for $15 million, subject to
adjustment.
Ziff-Davis currently has certain long-term agreements to distribute ZDTV via
satellite. Historically, start-up cable television channels have required
substantial investment and there can be no assurance that ZDTV will ultimately
obtain sufficient cable carriage and commercial acceptance to be profitable.
The following unaudited summary pro forma information assumes that the
acquisition of ZDTV and the sale of a one-third interest in ZDTV to Vulcan
Programming referred to below had been consummated on January 1, 1998.
Adjustments for ZDTV transactions include the operating results of ZDTV,
amortization of the purchase price of ZDTV, Vulcan Programming's one-third
interest in the losses of ZDTV and the tax effect of these items.
<TABLE>
<CAPTION>
Adjustments
Ziff-Davis for ZDTV
Inc. Transactions Pro forma
---------- ------------ ----------
(dollars in thousands except per
share data)
<S> <C> <C> <C>
Revenue................................ $1,108,892 $ 5,585 $1,114,477
Income (loss) from operations.......... 31,080 (55,049) (23,969)
Net loss............................... (77,809) (22,443) (100,252)
Pro forma basic loss per share......... $ (1.00)
</TABLE>
ZDTV's cash requirements are currently expected to be approximately $50
million for 1999. The $54 million invested in ZDTV by Vulcan Programming will
be used to fund ZDTV and thereafter cash requirements will be funded by the
partners or by third parties.
Ziff-Davis intends to file appropriate financial statements and pro forma
information regarding ZDTV on or before April 20, 1999 as set forth in its Form
8-K filed with the SEC on February 19, 1999.
Vulcan Transactions
On February 5, 1999, Vulcan Programming, an entity owned by Paul G. Allen,
purchased a one-third interest in ZDTV for $54 million. On March 4, 1999,
Vulcan Ventures, the investment vehicle of Paul G. Allen, purchased
approximately three million shares of Ziff-Davis Inc. common stock for $50
million. Proceeds from these investments will be used to reduce outstanding
indebtedness under Ziff-Davis' revolving credit facility.
ZDNet Offering
Upon approval of Ziff-Davis' stockholders, Ziff-Davis plans to issue through
an initial public offering a new class of common stock, designated Ziff-Davis
Inc.--ZDNet Common Stock, intended to track the performance of Ziff-Davis'
online business. Ziff-Davis expects to offer 10 million shares at an initial
public
F-12
<PAGE>
offering price of $12.00 per share, the midpoint of the range of initial public
offering prices as established by Ziff-Davis' underwriters. Net proceeds from
the offering, after deducting underwriting expenses, are estimated at $107.6
million, or $124.3 million if the underwriters fully exercise their option to
purchase additional shares. Proceeds from the offering will be used to reduce
outstanding indebtedness under Ziff-Davis' revolving credit facility. Ziff-
Davis plans to complete the offering in the first or second quarter of 1999 but
reserves the right to delay or not make the offering at all, depending on
market conditions.
Seasonality
Historically, Ziff-Davis' business has been seasonal as a significant portion
of annual revenue has occurred in the second and fourth quarters. The following
table sets forth certain unaudited quarterly combined statements of operations
data for each of the eight quarters in the period ended December 31, 1998. In
the opinion of Ziff-Davis' management, this unaudited information has been
prepared on a basis consistent with the audited Consolidated Financial
Statements appearing elsewhere in this prospectus and includes all adjustments,
consisting only of normal recurring adjustments, necessary to present fairly
the information set forth therein when read in conjunction with the
Consolidated Financial Statements and related notes thereto. The operating
results for any quarter are not necessarily indicative of results for any
future period.
<TABLE>
<CAPTION>
Quarters Ended
-----------------------------------------------------------------------------------------------
March 31, June 30, September 30, December 31, March 31, June 30, September 30, December 31,
1997 1997 1997 1997 1998 1998 1998 1998
--------- -------- ------------- ------------ --------- -------- ------------- ------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue, net:
Publishing............. $204,281 $211,333 $191,613 $226,788 $191,245 $198,419 $181,726 $211,492
Events................. 15,321 82,135 24,227 165,845 27,121 65,782 29,787 147,177
Internet............... 5,283 7,862 8,132 10,941 9,688 12,274 14,505 19,676
-------- -------- -------- -------- -------- -------- -------- --------
Total revenue........... $224,885 $301,330 $223,972 $403,574 $228,054 $276,475 $226,018 $378,345
Percentage of total
year.................. 19.5% 26.1% 19.4% 35.0% 20.6% 24.9% 20.4% 34.1%
Cost of production...... 61,526 92,986 62,716 108,017 70,310 75,749 63,471 95,816
Selling, general and
administrative
expenses............... 139,980 143,243 143,131 137,990 144,239 140,063 139,516 143,865
Depreciation and
amortization........... 38,966 39,032 39,699 37,243 37,475 39,276 37,843 37,950
Restructuring charge.... -- -- -- -- -- -- -- 52,239
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) from
operations............. (15,587) 26,069 (21,574) 120,324 (23,970) 21,387 (14,812) 48,475
Income (loss) before
taxes.................. (60,145) (17,715) (66,937) 72,306 (68,287) (12,032) (39,449) 15,532
Net income (loss)....... $(59,817) $(17,387) $(66,609) $ 72,634 $ (5,121) $(76,560) $ (4,498) $ 8,370
EBITDA(1)............... $ 25,534 $ 68,216 $ 20,486 $158,658 $ 15,127 $ 63,397 $ 27,487 $138,083
Percentage of total
year.................. 9.4% 25.0% 7.5% 58.1% 6.2% 26.0% 11.3% 56.5%
</TABLE>
- --------
(1) "EBITDA" is defined as income before provision for income taxes, interest
expense, depreciation and amortization. EBITDA for the quarter ended
December 31, 1998 does not include a one-time restructuring charge of
$52,239,000. EBITDA is not intended to represent cash flows from operations
and should not be considered as an alternative to net income as an
indicator of Ziff-Davis' operating performance or to cash flows as a
measure of liquidity. Although Ziff-Davis believes that EBITDA is a
standard measure commonly reported and widely used by analysts, investors
and other interested parties in the publishing and media industries, the
EBITDA presented for Ziff-Davis may not be comparable to similarly titled
measures reported by other companies.
F-13
<PAGE>
Inflation and Fluctuations in Paper Prices and Postage Costs
Ziff-Davis continually assesses the impact of inflation and changes in paper
prices. Ziff-Davis generally enters into contracts for the purchase of paper
which adjust the price on a quarterly basis. Paper prices began to rise in
1994, rose significantly in 1995 and 1996 and then decreased in 1997. During
1998, paper prices were relatively flat. Management anticipates that paper
prices will remain relatively stable in 1999. Ziff-Davis will continue to
monitor the impact of inflation and paper prices and will consider these
matters in setting its pricing policies. Ziff-Davis frequently reviews its
purchasing and manufacturing processes for opportunities to reduce costs and
mitigate the impact of paper price and postage rate increases such as
purchasing lighter-grade paper stock or, when paper prices are at cyclical
lows, increasing paper inventory or entering into longer term contracts with
suppliers. However, Ziff-Davis had not entered, and does not currently plan to
enter, into long-term forward price or option contracts for paper. Management
estimates postage costs will increase approximately 3.5% in 1999.
Year 2000 Readiness Disclosure
During 1997, Ziff-Davis began a review of its computer systems and software
to identify systems and software which might malfunction due to
misidentification of the Year 2000. Ziff-Davis is using both internal and
external resources to identify, test, correct and reprogram systems and
software for Year 2000 readiness.
At December 31, 1998, Ziff-Davis was in the research and validation phase of
its Year 2000 project for information technology, or IT, systems and non-IT
systems. This phase consists of research and validation of all infrastructure,
hardware and software, including platform, wide-area network and local-area
network components. Research for non-IT systems includes identifying systems
that include embedded technology, such as micro-controllers, which are not Year
2000 compliant.
Ziff-Davis has identified critical systems and applications that will either
be validated for compliance through formal documentation, through vendors or
through testing. Ziff-Davis will enter the testing phase of its infrastructure,
hardware, software and databases in the first quarter of 1999 and plans to
complete such phase by September 1, 1999. Contingency plans will be developed
for any systems or platforms that are known to be non-compliant as of September
1, 1999.
Some of Ziff-Davis' computer systems and databases, including its
subscription fulfillment and payroll systems, are managed by third parties
under contractual arrangements. Ziff-Davis currently has no Year 2000
compliance problems known to it relating to third parties. Ziff-Davis has
requested those third parties with which it has material relationships in the
first quarter of 1999 to advise it as to whether such third parties anticipate
difficulties in addressing Year 2000 compliance problems, and if so, the nature
of such difficulties. Ziff-Davis anticipates that such inquiries will be
completed by April 30, 1999.
In addition, Ziff-Davis will develop contingency plans during the second half
of 1999 in order to compensate for any disruption or downtime that could result
from a Year 2000 compliance problem. Ziff-Davis plans to replace IT and non-IT
systems that it determines are not Year 2000 compliant prior to October 1, 1999
in order to minimize any risk of a Year 2000 compliance problem.
Ziff-Davis has incurred remediation costs associated with its Year 2000
readiness efforts. These remediation costs have been incurred in connection
with replacement of systems and hardware, modification of software and
consulting costs related to Year 2000 solution providers. The costs to address
Year 2000 issues which have been included in the general and administrative
expenses have not been tracked separately and are therefore not determinable.
However, management believes these expenses have been substitutive rather than
incremental to the recurring level of general and administrative expenses.
Total capitalized costs incurred in the replacement of systems in connection
with Ziff-Davis' Year 2000 readiness efforts as of December 31, 1997 and 1998
were $1,692,000 and $3,837,000, respectively. Ziff-Davis estimates that it will
incur an additional $3,815,000 during 1999 related to its Year 2000 readiness
efforts.
F-14
<PAGE>
Ziff-Davis expects to complete testing and replacement of critical systems by
the beginning of the fourth quarter of 1999. Ziff-Davis' estimate of its most
reasonably likely "worst case scenario" would be the failure of its internal
applications and systems that process and store certain information and data.
Ziff-Davis would resolve the failure of such applications and systems one by
one and management of Ziff-Davis does not believe that the impact on its
critical systems would be material. However, if the Company or any subscribers,
advertisers, licensors, vendors or other third parties on whom it relies
experiences a Year 2000 compliance problem, this could have a material adverse
effect on Ziff-Davis' profit and liquidity.
Recently Issued Accounting Pronouncements
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities,
issued in June 1998, establishes accounting and reporting standards for
derivative instruments and for hedging activities and is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. Ziff-Davis does
not expect the adoption of SFAS No. 133 to have a material impact on Ziff-
Davis' results of operations.
Ziff-Davis expects to adopt this statement beginning with its 2000 financial
statements.
Forward-Looking Statements
Certain statements contained in this Form 10-K and in "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
contain forward-looking statements which are subject to various risks and
uncertainties. Actual results could differ materially from those discussed
herein. Important factors that could cause or contribute to such differences
include those discussed under the caption "Risk Factors" contained in Ziff-
Davis' Registration Statement on Form S-1 (File No. 333-69447).
F-15
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Ziff-Davis Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, cash flows and changes in stockholders'
equity, present fairly, in all material respects, the financial position of
Ziff-Davis Inc. and its subsidiaries (the "Company") at December 31, 1997 and
1998, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, 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/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
New York, NY
February 22, 1999
F-16
<PAGE>
ZIFF-DAVIS INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
December 31,
----------------------
1997 1998
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................. $ 30,301 $ 32,566
Accounts receivable, net.............................. 221,310 227,325
Inventories........................................... 17,853 15,551
Prepaid expenses and other current assets............. 37,900 34,543
Due from affiliates................................... 131,290 53,984
Deferred taxes........................................ 8,794 22,262
---------- ----------
Total current assets.................................... 447,448 386,231
Property and equipment, net............................. 53,536 91,189
Intangible assets, net.................................. 3,030,333 2,907,043
Other assets............................................ 15,329 49,340
---------- ----------
Total assets............................................ $3,546,646 $3,433,803
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................... $ 55,468 $ 74,397
Accrued expenses...................................... 80,094 97,319
Unearned income, net.................................. 154,682 152,081
Due to affiliates and management...................... 398,332 4,618
Current portion of notes payable to affiliates........ 125,790 7,692
Other current liabilities............................. 4,222 14,591
---------- ----------
Total current liabilities............................... 818,588 350,698
Notes payable to affiliates............................. 2,408,240 70,192
Notes payable, net of unamortized discount.............. -- 1,469,130
Deferred taxes.......................................... 180,117 165,082
Due to management....................................... -- 5,400
Other liabilities....................................... 13,571 20,703
---------- ----------
Total liabilities....................................... 3,420,516 2,081,205
---------- ----------
Commitments and contingencies (Notes 17 and 18)
Stockholders' equity:
Preferred stock(1).................................... -- --
Common stock(2)....................................... -- 1,000
Additional paid-in capital............................ 248,330 1,571,681
Accumulated deficit................................... (119,429) (197,238)
Deferred compensation................................. (996) (22,024)
Cumulative translation adjustment..................... (1,775) (821)
---------- ----------
Total stockholders' equity.............................. 126,130 1,352,598
---------- ----------
Total liabilities and stockholders' equity.............. $3,546,646 $3,433,803
========== ==========
</TABLE>
- --------
(1) December 31, 1998: par value $.01 per share, 10,000,000 shares authorized,
no shares issued and outstanding; December 31, 1997: no shares authorized,
issued and outstanding.
(2) December 31, 1998: par value $.01 per share, 120,000,000 shares authorized,
100,000,000 shares issued and outstanding; December 31, 1997: par value
$.01 per share, 2,000 shares authorized, 200 shares issued and outstanding.
The accompanying notes are an integral part of these financial statements.
F-17
<PAGE>
ZIFF-DAVIS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------------
1996 1997 1998
--------- --------- -----------
<S> <C> <C> <C>
Revenue, net:
Publishing............................... $ 674,040 $ 834,015 $ 782,882
Events................................... 264,884 287,528 269,867
Internet................................. 16,215 32,218 56,143
--------- --------- -----------
955,139 1,153,761 1,108,892
--------- --------- -----------
Cost of production......................... 271,532 325,245 305,346
Selling, general and administrative
expenses.................................. 456,690 564,344 567,683
Depreciation and amortization of property
and equipment............................. 32,303 30,379 29,885
Amortization of intangible assets.......... 107,433 124,561 122,659
Restructuring charge....................... -- -- 52,239
--------- --------- -----------
Income from operations..................... 87,181 109,232 31,080
Interest expense, net--related party....... (120,646) (190,445) (65,935)
Interest expense, net...................... -- -- (77,612)
Other non-operating income, net............ 6,341 8,722 8,231
--------- --------- -----------
Loss before income taxes................... (27,124) (72,491) (104,236)
Provision (benefit) for income taxes....... 24,957 (1,312) (26,427)
--------- --------- -----------
Net loss................................... $ (52,081) $ (71,179) $ (77,809)
========= ========= ===========
Pro forma basic loss per common share...... $ (0.78)
===========
Pro forma weighted average common shares
outstanding............................... 100,000,000
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-18
<PAGE>
ZIFF-DAVIS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------------
1996 1997 1998
----------- -------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................. $ (52,081) $(71,179) $ (77,809)
Adjustments to reconcile net loss to net
cash provided (used) by operating activi-
ties:
Depreciation and amortization............ 139,736 154,940 152,544
Amortization of debt issuance costs and
discount................................ -- -- 2,430
Restructuring charge..................... -- -- 52,239
Income from equity investments........... (115) (2,030) (7,483)
Deferred tax provision (benefit)......... 24,957 (1,312) (28,974)
Changes in operating assets and liabili-
ties:
Accounts receivable..................... (38,086) (18,899) (4,899)
Inventories............................. 7,788 (853) 2,923
Accounts payable and accrued expenses... 12,850 (7,376) (1,121)
Unearned income......................... 1,392 (20,194) (5,326)
Due to affiliates and management........ (29,303) (38,543) (3,348)
Other, net.............................. (5,595) 2,082 14,600
----------- -------- -----------
Net cash provided (used) by operating
activities............................... 61,543 (3,364) 95,776
----------- -------- -----------
Cash flows from investing activities:
Capital expenditures.................... (22,365) (30,196) (36,599)
Investments and acquisitions, net of
cash acquired.......................... (2,124,823) (14,000) (27,772)
----------- -------- -----------
Net cash used by investing activities..... (2,147,188) (44,196) (64,371)
----------- -------- -----------
Cash flows from financing activities:
Proceeds from equity offering........... -- -- 380,337
Proceeds from issuance of notes pay-
able................................... -- -- 242,723
Proceeds from issuance of bank debt..... -- -- 1,240,200
Proceeds from notes payable to affili-
ates................................... 1,080,000 10,000 --
Payments of amounts due to affiliates... -- -- (314,798)
Repayments of credit facility........... -- -- (95,504)
Borrowings under credit facility........ -- -- 65,504
Principal payments on notes payable to
affiliates............................. -- (31,420) (1,571,264)
Payment of deferred financing fee....... -- -- (3,375)
Purchase of treasury shares............. -- -- (29,500)
Sale of treasury shares................. -- -- 29,500
Advance from majority shareholder....... -- -- 20,377
Contributed capital..................... 1,015,652 69,366 6,660
Payment of dividends.................... (8,000) -- --
----------- -------- -----------
Net cash provided (used) by financing
activities............................... 2,087,652 47,946 (29,140)
Net increase in cash and cash
equivalents.............................. 2,007 386 2,265
Cash and cash equivalents at beginning of
period................................... 27,908 29,915 30,301
----------- -------- -----------
Cash and cash equivalents at end of peri-
od....................................... $ 29,915 $ 30,301 $ 32,566
=========== ======== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-19
<PAGE>
ZIFF-DAVIS INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(dollars in thousands)
<TABLE>
<CAPTION>
Ziff-Davis Inc. ZDI ZDCF Additional Retained Cumulative
------------------- Treasury ------------- ------------- paid-in earnings Deferred translation
Shares Amount Stock Shares Amount Shares Amount capital (deficit) compensation adjustment
----------- ------ -------- ------ ------ ------ ------ ---------- --------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31,
1995........... -- $ -- $ -- -- $ -- 100 $ -- $ 379,586 $ 11,831 $ -- $ 111
Acquisition of
Ziff-Davis
Holdings Corp... 100 -- 1,014,178
Return of
capital........ (899,948)
Capital
contribution... 1,474
Dividend paid... (8,000)
Shares
contributed to
restricted
stock plan..... 3,528 (3,528)
Compensation
earned on
restricted
stock.......... 1,080
Net loss........ (52,081)
Foreign currency
translation
adjustment..... (475)
----------- ------ ------- ---- ----- ---- ----- ---------- --------- -------- ------
Balance at
December 31,
1996........... -- -- -- 100 -- 100 -- 498,818 (48,250) (2,448) (364)
Return of
capital........ (381,434)
Capital
contribution... 128,482
Shares
contributed to
restricted
stock plan..... 2,464 (2,464)
Compensation
earned on
restricted
stock.......... 3,916
Net loss........ (71,179)
Foreign currency
translation
adjustment..... (1,411)
----------- ------ ------- ---- ----- ---- ----- ---------- --------- -------- ------
Balance at
December 31,
1997........... -- -- -- 100 -- 100 -- 248,330 (119,429) (996) (1,775)
Capital
contribution... 9,007
Capitalization
of amounts due
to affiliates.. 908,673
Contribution of
subsidiaries
from SBH to
Ziff-Davis
Inc............ 73,619,355 736 (100) -- (100) --
Initial public
offering....... 25,800,000 258 375,235
Acquisition of
fixed assets
from an
affiliate...... 580,645 6 8,994
Purchase of
treasury shares
from SBH....... (2,000,000) (20) (29,480)
Sale of treasury
shares to the
public......... 2,000,000 20 29,480
Stock option
vested as
severance...... 162
Conversion of
Softbank stock
options........ -- 3,018 (3,018)
Issuance of
ZDNet Options.. 18,262 (18,262)
Net loss........ (77,809)
Compensation
earned on
restricted
stock.......... 252
Foreign currency
translation
adjustment..... 954
----------- ------ ------- ---- ----- ---- ----- ---------- --------- -------- ------
Balance at
December 31,
1998........... 100,000,000 $1,000 $ -- -- $ -- -- $ -- $1,571,681 $(197,238) $(22,024) $ (821)
=========== ====== ======= ==== ===== ==== ===== ========== ========= ======== ======
<CAPTION>
Total
stockholders'
equity
-------------
<S> <C>
Balance at
December 31,
1995........... $ 391,528
Acquisition of
Ziff-Davis
Holdings Corp... 1,014,178
Return of
capital........ (899,948)
Capital
contribution... 1,474
Dividend paid... (8,000)
Shares
contributed to
restricted
stock plan..... --
Compensation
earned on
restricted
stock.......... 1,080
Net loss........ (52,081)
Foreign currency
translation
adjustment..... (475)
-------------
Balance at
December 31,
1996........... 447,756
Return of
capital........ (381,434)
Capital
contribution... 128,482
Shares
contributed to
restricted
stock plan..... --
Compensation
earned on
restricted
stock.......... 3,916
Net loss........ (71,179)
Foreign currency
translation
adjustment..... (1,411)
-------------
Balance at
December 31,
1997........... 126,130
Capital
contribution... 9,007
Capitalization
of amounts due
to affiliates.. 908,673
Contribution of
subsidiaries
from SBH to
Ziff-Davis
Inc............ 736
Initial public
offering....... 375,493
Acquisition of
fixed assets
from an
affiliate...... 9,000
Purchase of
treasury shares
from SBH....... (29,500)
Sale of treasury
shares to the
public......... 29,500
Stock option
vested as
severance...... 162
Conversion of
Softbank stock
options........ --
Issuance of
ZDNet Options.. --
Net loss........ (77,809)
Compensation
earned on
restricted
stock.......... 252
Foreign currency
translation
adjustment..... 954
-------------
Balance at
December 31,
1998........... $1,352,598
=============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-20
<PAGE>
ZIFF-DAVIS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(numbers rounded to the nearest thousand, except share and per share amounts)
1. The Company and Basis of Presentation
Formation of Ziff-Davis Inc.
Ziff-Davis Inc. was formed through an initial public offering and a
reorganization that were completed on May 4, 1998. (See Note 2.) Prior to that
date, the predecessors of Ziff-Davis Inc. (currently named ZD Inc. ("ZDI") and
ZD Events Inc.) were wholly owned indirect subsidiaries of SOFTBANK Corp
(together with its non-Ziff-Davis Inc. affiliates, "Softbank"). As such,
financial statements for periods prior to May 4, 1998 have been prepared on a
combined basis while the financial statements for the periods after May 4, 1998
have been prepared on a consolidated basis.
As further described below, the consolidated financial statements include the
accounts of ZDI from its date of acquisition (February 29, 1996) and ZD Events
for all periods presented. In addition, the results of the MAC Assets (as
defined below) which were acquired in two tranches on October 31, 1997 and May
4, 1998 have been included in Ziff-Davis Inc.'s financial statements from the
time of their acquisition by MAC Inc. ("MAC") (February 29, 1996). These
results have been included in a manner similar to a pooling of interests, as
the MAC Assets, ZDI and ZD Events Inc. were under common control at the time
the MAC Assets were acquired by Ziff-Davis Inc. (See relationship with Softbank
and MAC below.)
Relationship with Softbank and MAC
SOFTBANK Corp. is the indirect majority stockholder of Ziff-Davis Inc.
SOFTBANK Corp. is a Japanese corporation which at the time of the acquisition
of the MAC Assets was majority owned directly and indirectly by its president,
Mr. Son. As of December 31, 1998, Mr. Son owned approximately 45% of SOFTBANK
Corp. (50.2% as of December 31, 1997). MAC, also a Japanese corporation, was
wholly owned by Mr. Son.
Operations and acquisitions
Ziff-Davis Inc. operates in three business segments: (1) publishing, (2)
events and (3) Internet.
Publishing
The publishing segment is engaged in publishing magazines, journals,
newsletters, electronic information products, training manuals and market
research about the computer industry. The publishing segment's principal
operations are in the U.S. and Europe, although it also licenses or syndicates
its editorial content to over 50 other publications distributed worldwide.
Events
The events segment is engaged in the organization, production and management
of trade shows, conferences and seminars for the computer industry. The events
segment's principal operations are in the U.S. and to a lesser extent in Europe
and Asia.
Internet
The Internet segment is engaged in providing technology related information
to Internet users worldwide. The Internet segment's principal operations are in
the U.S. and to a lesser extent in Europe.
F-21
<PAGE>
ZIFF-DAVIS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
Acquisition of ZDI (formerly Ziff-Davis Publishing Company and Ziff-Davis
Holdings Corp.)
In February 1996, Softbank acquired the stock of Ziff-Davis Holdings Corp.
("Holdings") for an aggregate purchase price of approximately $1,800,000,000,
plus transaction costs. Concurrent with the acquisition, in a separate
agreement, MAC, directly or through wholly owned affiliates, acquired certain
of the assets and assumed certain of the liabilities of ZDI (the "MAC Assets")
for an aggregate purchase price of approximately $302,000,000.
These acquisitions have been accounted for as of February 29, 1996 using the
purchase method of accounting. The excess of the purchase price over the fair
value of the assets acquired and liabilities assumed was $1,922,000,000 and
$285,000,000, respectively.
Subsequent to the acquisition, Holdings and ZDI were merged with ZDI being
the surviving corporation.
Purchase of the MAC Assets
In 1997, ZDI agreed to purchase certain of the MAC Assets for $370,000,000.
The acquisition was effected in two tranches, the first of which closed on
October 31, 1997 and the second of which closed upon completion of the initial
public offering of Ziff-Davis Inc.'s common stock (further described below). At
December 31, 1997, ZDI had accrued the $370,000,000 purchase price which was
recorded as a return of capital.
The acquisitions from MAC described above have been accounted for in a manner
similar to a pooling of interests as all entities involved were under common
control at the time of the acquisitions. Accordingly, the accompanying
consolidated financial statements include the results of operations of the MAC
Assets from February 29, 1996.
Acquisition of Sendai
On May 8, 1996, ZDI acquired substantially all of the assets and liabilities
of Sendai Publishing Group, Inc., a publisher and distributor of magazines,
books, products and computer services related to the electronic gaming
industry, for approximately $27,500,000, plus transaction costs. The
acquisition was accounted for as a purchase and accordingly, Sendai's results
are included in the consolidated financial statements since the date of
acquisition. The excess of the purchase price over assets acquired approximated
$33,378,000. The operations of Sendai did not have a material effect on the
consolidated results of operations for the year ended December 31, 1996.
Acquisition of Sky TV
On October 28, 1998, Ziff-Davis Inc. acquired the assets of Sky TV Inc. and
certain affiliates for approximately $12,150,000 in cash plus contingent
payments related to earnings performance payable in 2002. Sky TV is a media
company that produces video content for distribution principally through
airline in-flight, cable and broadcast television. The acquisition was
accounted for as a purchase and accordingly Sky TV's results are included in
the consolidated financial statements since the date of acquisition. The excess
of the purchase price over assets acquired approximated $11,318,000. The
operations of Sky TV did not have a material effect on consolidated results of
operations for the year ended December 31, 1998.
F-22
<PAGE>
ZIFF-DAVIS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
2. Reorganization, Initial Public Offering and ZDNet Stock Proposal
On February 4, 1998, a nonstock corporation, ZD Inc., was formed in
contemplation of a reorganization and initial public offering of Ziff-Davis
Inc. Upon completion of the initial public offering (described below),
Ziff-Davis Inc. was renamed ZD Inc. and ZDCF was renamed ZD Events Inc. and ZD
Inc. was renamed Ziff-Davis Inc.
On May 4, 1998 SOFTBANK Corp., through its wholly owned subsidiary SOFTBANK
Holdings Inc. ("SBH"), completed a reorganization whereby the common stock of
ZD Inc. and ZD Events Inc. were contributed to Ziff-Davis Inc. in exchange for
73,619,335 shares of Ziff-Davis Inc.'s common stock. Concurrent with the
reorganization, Ziff-Davis Inc. (1) completed an initial public offering of
25,800,000 common shares at an initial public offering price of $15.50 per
share, (2) issued $250,000,000 of 8 1/2% subordinated notes due 2008,
(3) entered into a $1,350,000,000 credit facility with a group of banks under
which $1,250,000,000 was borrowed and (4) converted $908,673,000 of
intercompany indebtedness to equity. In addition, Ziff-Davis Inc. received
approximately $9,107,000 of fixed assets from Kingston Technology Company
("Kingston"), a related party, in exchange for 580,645 shares of Ziff-Davis
Inc.'s common stock and $107,000 in cash. These assets have been subsequently
leased back to Kingston. Total shares of common stock issued to Softbank were
74,200,000. The transactions described above are hereafter referred to as the
"Reorganization".
Proceeds, net of transaction costs, from the initial public offering and
funding transactions in the Reorganization of $1,863,260,000 were used to
complete the purchase of certain assets from MAC for $370,000,000 and repay
intercompany indebtedness.
On May 28, 1998, Ziff-Davis Inc.'s U.S. underwriters exercised their option
to purchase 2.0 million additional shares of common stock to cover over-
allotments. Ziff-Davis Inc. purchased the additional shares from SBH resulting
in no change to the total number of shares outstanding. On December 31, 1998,
SBH contributed 71,619,355 shares of Ziff-Davis Inc.'s common stock to SOFTBANK
America Inc., an affiliate of SOFTBANK Corp.
F-23
<PAGE>
ZIFF-DAVIS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
Unaudited pro forma financial information
The following summary pro forma information has been prepared as if the
Reorganization and initial public offering described above, had been
consummated on January 1, 1998. The pro forma adjustments include a $5,219,000
reduction of interest expense, a $900,000 increase in depreciation expense and
a $900,000 reduction of selling, general and administrative expenses, as well
as the tax effect of these items recorded at an effective tax rate of 40%.
<TABLE>
<CAPTION>
Year ended
December 31, 1998
---------------------
(dollars in thousands
except share and per
share amounts)
<S> <C>
Revenue, net........................................... $ 1,108,892
Depreciation and amortization ......................... 153,444
Income from operations................................. 31,080
Interest expense, net.................................. 138,328
Loss before income taxes............................... (99,017)
Income tax benefit..................................... 24,339
Net loss............................................... $ (74,678)
Net loss per basic common share........................ $ (0.75)
Weighted average common shares outstanding............. 100,000,000
</TABLE>
ZDNet Stock Proposal (unaudited)
The stockholders of Ziff-Davis Inc. are scheduled to vote on a proposal (the
"Tracking Stock Proposal") to authorize the issuance of a new series of common
stock, to be designated as Ziff-Davis Inc.--ZDNet Common Stock ("ZDNet Stock"),
intended to reflect the performance of Ziff-Davis Inc.'s online business
division ("ZDNet"). The majority owner of the common stock of Ziff-Davis Inc.
has committed to vote for the Tracking Stock Proposal. Before the ZDNet Stock
is first issued, Ziff-Davis Inc.'s existing common stock will be re-classified
as Ziff-Davis Inc.--ZD Common Stock ("ZD Stock") and that stock will be
intended to reflect the performance of Ziff-Davis Inc.'s other businesses and a
"Retained Interest" in ZDNet (i.e., Ziff-Davis Inc.'s interest in ZDNet
excluding the interest intended to be represented by outstanding shares of
ZDNet Stock) (collectively, "ZD").
ZD currently has a 100% Retained Interest in ZDNet. Following approval of the
Tracking Stock Proposal, Ziff-Davis Inc. currently plans to offer to the
public, for cash, 10,000,000 shares of ZDNet Stock intended to represent
approximately 14% of the equity value attributed to ZDNet. Ziff-Davis Inc.
expects to offer ZDNet Stock to the public sometime in the first or second
quarter of 1999. However, Ziff-Davis Inc. could choose to conduct the offering
at a later time, or not to make the offering at all, depending on the
circumstances at the time. In addition to or instead of the offering, Ziff-
Davis Inc. reserves the right to distribute ZDNet Stock to stockholders of
Ziff-Davis Inc.
3. Summary of Significant Accounting Policies
Principles of combination and consolidation
Prior to the Reorganization, the financial statements were prepared on a
combined basis to include the accounts of ZDI and ZD Events including, as
discussed above, the MAC Assets. The financial statements of
F-24
<PAGE>
ZIFF-DAVIS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
Ziff-Davis Inc. prepared subsequent to the Reorganization described above have
been prepared on a consolidated basis. All significant transactions between
these entities have been eliminated in combination and consolidation.
Investments in companies in which Ziff-Davis Inc.'s ownership interests range
from 20% to 50% and in which Ziff-Davis Inc. has the ability to exercise
significant influence over the operating and financial policies of such
companies are accounted for under the equity method.
Cash and cash equivalents
Ziff-Davis Inc. considers all highly liquid investments with an original
maturity of 3 months or less to be cash equivalents.
Concentration of credit risk
Ziff-Davis Inc. places its temporary cash investments with high credit
quality financial institutions. At times, such investments may be in excess of
federally insured limits. Ziff-Davis Inc. has not experienced losses in such
accounts.
Ziff-Davis Inc.'s advertisers and exhibitors include principally customers
who represent a variety of technology companies in the U.S. and other
countries. Ziff-Davis Inc. extends credit to its customers and distributors and
historically has not experienced significant losses relating to receivables
from individual customers or groups of customers.
Property and equipment
Property and equipment have been recorded at cost or estimated fair value at
the date of acquisition. Depreciation is computed using the straight-line
method, half-year convention, over the estimated useful lives of the assets
which range from 3 to 30 years. Leasehold improvements are amortized using the
straight-line method over the service life of the improvement or the life of
the related lease, whichever is shorter. Maintenance and repair costs are
charged to expense as incurred.
Inventories
Inventories, which consist principally of paper, are stated at the lower of
cost or market. Cost is determined on a first-in, first-out basis.
Debt issuance costs and discount on senior subordinated notes
The cost to issue debt is recorded in the balance sheet in other assets and
amortized to interest expense over the life of the debt. The discount on the
senior subordinated notes is recorded in the balance sheet as a reduction of
long-term debt and is amortized to interest expense over the life of the notes.
All amounts are amortized utilizing the effective-interest method.
Intangible assets
Intangible assets consist principally of advertising lists, exhibitor
relationships, trademarks and trade names and goodwill. Amortization of these
assets is computed on a straight-line basis over estimated useful lives.
Identifiable intangible assets are amortized over a period of 2 to 40 years and
goodwill, which represents the
F-25
<PAGE>
ZIFF-DAVIS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
excess of the purchase price over the estimated fair values of net assets
acquired, is amortized over a period of 5 to 40 years. (See Note 7.) Ziff-Davis
Inc. assesses the recoverability of intangible assets whenever adverse events
or changes in circumstances indicate that expected future cash flows
(undiscounted and without interest charges) may not be sufficient to support
the carrying amount of intangible assets. If undiscounted cash flows are not
sufficient to support the recorded value of assets, an impairment loss is
recognized to reduce the carrying value of the intangibles to estimated
recoverable value.
Revenue recognition
Advertising revenue for Ziff-Davis Inc.'s publications, less agency
commissions, is recognized as income in the month that the related publications
are sent to subscribers or become available for sale at newsstands.
Circulation revenue consists of both subscription revenue and single copy
newsstand sales. Subscription revenue, less estimated cancellations, is
deferred and recognized as income in the month that the related publications
are sent to subscribers. Newsstand sales, less estimated returns, are
recognized in the month that the related publications become available for sale
at newsstands.
Payments received in advance of trade shows, conferences and seminars are
initially reported on the balance sheet as deferred revenue and are recognized
as income when the events take place.
Revenue generated by market research is recognized when the service is
provided.
Online revenue is derived principally from the sale of advertisements on
short-term contracts. Online revenue is recognized ratably in the period in
which the advertisement is displayed, provided that no significant obligations
remain and collection of the resulting receivable is probable. Ziff-Davis
Inc.'s obligations typically include guarantees of minimum number of
"impressions", or times that an advertisement appears in pages viewed by users
of Ziff-Davis Inc.'s online properties. To the extent minimum guaranteed
impressions are not met, Ziff-Davis Inc. defers recognition of the
corresponding revenues until the remaining guaranteed impression levels are
achieved.
Operating costs and expenses
Cost of production includes the direct costs of producing magazines, online
content, newsletters and training materials, primarily paper, printing and
distribution, and the direct costs associated with organizing, producing and
managing trade shows, seminars, conferences and expositions. Selling, general
and administrative costs include subscriber acquisition costs which are
expensed as incurred. Editorial and product development costs are expensed as
incurred. Product development costs include the cost of artwork, graphics,
prepress, plates and photography for new products.
Reportable segments
In 1998, Ziff-Davis Inc. adopted Statement of Financial Accounting Standards
("SFAS") No. 131, Disclosures about Segments of an Enterprise and Related
Information. SFAS No. 131 supersedes SFAS No. 14, Financial Reporting for
Segments of a Business Enterprise, replacing the "industry segment" approach
with the "management" approach. The management approach designates the internal
organization that is used by management for making operating decisions and
assessing performance as the source of Ziff-Davis Inc.'s reportable segments.
SFAS No. 131 also requires disclosures about products and services, geographic
areas and major customers. The adoption of SFAS No. 131 did not affect results
of operations or financial position but did affect the disclosure of segment
information. (See Note 19.)
F-26
<PAGE>
ZIFF-DAVIS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
Foreign currency
The effect of translating foreign currency financial statements into U.S.
dollars is included in the cumulative translation adjustments account in
stockholders' equity. Gains and losses on foreign currency transactions, which
are not significant to operations, have been included in selling, general and
administrative expenses. Ziff-Davis Inc. has not historically entered into
forward currency contracts.
Other non-operating income
Other non-operating income includes management fee income and Ziff-Davis
Inc.'s equity share of income or loss from joint ventures.
Income taxes
Ziff-Davis Inc. uses the asset and liability approach for financial
accounting and reporting of deferred taxes.
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 amounts reported in the financial statements. Actual results
may differ from these estimates.
Fair value of financial instruments
Ziff-Davis Inc.'s financial instruments recorded on the balance sheet include
cash and cash equivalents, accounts receivable, accounts payable and debt.
Because of their short maturity, the carrying amount of cash and cash
equivalents, accounts receivable and accounts payable approximate fair value.
Fair value of long-term bank debt is based on rates available to Ziff-Davis
Inc. for debt with similar terms and maturities. Fair value of public debt is
based on market prices.
Ziff-Davis Inc. uses interest rate swap agreements to manage risk on its
floating rate debt portfolio. Fair value of these instruments is based on
estimated current settlement cost.
Interest rate swaps
Ziff-Davis Inc. periodically uses interest rate swaps to manage its exposure
to interest rate fluctuations on its floating rate debt. These interest rate
swaps are entered into for hedging purposes and as such, must be designated and
effective as a hedge against the risk of increased interest rates. Under the
terms of the agreements Ziff-Davis Inc. pays a fixed interest rate on a
notional amount and receives a variable interest rate on the same notional
amount. The differential between the amounts paid and received is recorded as
additional interest expense. Interest rate swaps designated but no longer
effective as a hedge would be reported at market value and the related gains
and losses would be recognized in earnings. Gains or losses on termination of
interest rate swaps would be recognized in earnings in the period of
termination.
Stock-based compensation
Ziff-Davis Inc. has elected to follow Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees ("APB 25"), to account for stock
options. Effective January 1, 1996, Ziff-Davis Inc. adopted the disclosure-only
provisions of Statement of Financial Accounting Standard ("SFAS") No. 123,
Accounting for Stock-Based Compensation.
F-27
<PAGE>
ZIFF-DAVIS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except per share amounts)
Earnings per share
Earnings per share data for 1996 and 1997 have been omitted on the basis that
they are not meaningful due to the insignificant number of shares outstanding.
Earnings per share data for 1998 is calculated on a pro forma basis as if the
shares issued in connection with the Reorganization and initial public offering
described in Note 2 were outstanding as of January 1, 1998. Options to purchase
Ziff-Davis Inc. common stock that could potentially dilute basic earnings per
share in the future were not included in the computation of diluted loss per
share because they were anti-dilutive. There were options to purchase 6,691,305
shares of Ziff-Davis Inc. common stock outstanding at December 31, 1998.
Comprehensive income
Ziff-Davis Inc. implemented SFAS No. 130. Reporting Comprehensive Income,
effective January 1, 1998. This standard requires Ziff-Davis Inc. to report the
total changes in stockholders' equity that do not result directly from
transactions with stockholders, including those which do not affect retained
earnings. These changes are not material to Ziff-Davis Inc.'s consolidated
financial statements.
New accounting pronouncement
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
establishes accounting and reporting standards for derivative instruments and
for hedging activities and is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. Ziff-Davis Inc. does not expect the adoption of
SFAS No. 133 to have a material impact on Ziff-Davis Inc.'s results of
operations. Ziff-Davis Inc. will adopt SFAS No. 133 beginning with its 2000
financial statements.
Reclassifications
Certain amounts have been reclassified, where appropriate, to conform to the
current financial statement presentation.
4. Restructuring
Margin pressure on computer equipment manufacturers, industry and product
delays, lower demand in Asia and a focus on the Year 2000 transition are
contributing to a reduced demand for advertising in Ziff-Davis Inc.'s
magazines, principally PC Magazine, PC/Computing, Computer Shopper and PC Week.
Ziff-Davis Inc. believes these factors are continuing.
As a result of this reduced demand, in October 1998 Ziff-Davis Inc. announced
a restructuring program with the intent of significantly reducing its cost
base. Ziff-Davis Inc. incurred a pre-tax charge of $52,239,000 for this
restructuring program. The charge included asset impairment costs
($37,890,000), employee termination costs ($8,668,000) and costs to exit
activities ($5,681,000) principally resulting from the closing of three
publications (Windows Pro, Internet Business and Equip) and the reduction of
Ziff-Davis Inc.'s work force by 310 employees. The charge also included costs
resulting from the discontinuation of certain educational journals and trade
shows. The following sets forth additional detail concerning the principal
components of the charge:
. Asset impairment costs totaled $37,890,000. These costs, which are non-
cash, included the write-off of intangible assets, primarily subscriber
lists, advertising lists, tradenames and goodwill, associated with the
discontinued publications ($34,245,000) and trade shows ($2,930,000) as
well as deferred marketing expenses associated with the discontinued
educational journals ($715,000).
F-28
<PAGE>
ZIFF-DAVIS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
. Employee termination costs related to severed personnel at the closed
publications as well as a rationalization and resulting workforce
reduction of the remainder of Ziff-Davis Inc.'s operations. Employee
termination costs included payments for severance and earned vacation as
well as the costs of outplacement services and the provision of
continued benefits to personnel. As of December 31, 1998, $5,200,000 of
the $8,668,000 related to these employee terminations had been paid.
. Costs to exit activities reflect the costs associated with the final
closure of the discontinued publications ($1,837,000) and the costs to
reduce office space under lease as a result of the reduced level of
employees ($3,844,000).
Included in accrued expenses is $7,260,000 related to this restructuring
which Ziff-Davis Inc. believes will be paid during the first half of 1999.
5. Accounts Receivable, Net
Accounts receivable, net, consist of the following:
<TABLE>
<CAPTION>
December 31,
------------------
1997 1998
-------- --------
(dollars in
thousands)
<S> <C> <C>
Accounts receivable.................................. $309,565 $312,706
Allowance for doubtful accounts, returns and
cancellations....................................... (88,255) (85,381)
-------- --------
$221,310 $227,325
======== ========
</TABLE>
6. Property and Equipment, Net
Property and equipment, net, consist of the following:
<TABLE>
<CAPTION>
December 31,
------------------------
1997 1998
----------- -----------
(dollars in thousands)
<S> <C> <C>
Computers and equipment.......................... $ 50,170 $ 78,587
Leasehold improvements........................... 40,033 62,672
Furniture and fixtures........................... 17,619 29,646
----------- -----------
107,822 170,905
Accumulated depreciation and amortization........ (54,286) (79,716)
----------- -----------
$ 53,536 $ 91,189
=========== ===========
</TABLE>
F-29
<PAGE>
ZIFF-DAVIS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
7. Intangible Assets, Net
Intangible assets, net, consist of the following:
<TABLE>
<CAPTION>
Range of December 31,
Useful Lives ----------------------
(years) 1997 1998
------------ ---------- ----------
(dollars in
thousands)
<S> <C> <C> <C>
Advertising lists..................... 7-34 $ 888,100 $ 872,400
Exhibitor relationships............... 4-27 154,070 154,070
Trademarks/trade names................ 30-40 735,595 709,306
License agreements.................... 6-14 11,212 11,212
Subscriber lists...................... 3-10 51,475 51,375
Other................................. 2-20 57,599 58,837
Goodwill.............................. 5-40 1,387,556 1,419,892
---------- ----------
3,285,607 3,277,092
Accumulated amortization.............. (255,274) (370,049)
---------- ----------
$3,030,333 $2,907,043
========== ==========
</TABLE>
Intangible assets primarily relate to the acquisitions of ZDI, COMDEX and the
MAC Assets. As discussed in Note 1, the acquisitions were accounted for under
the purchase method of accounting. As such, the purchase price of these
acquisitions was allocated to tangible and identifiable intangible assets with
the remaining amount being allocated to goodwill.
Advertising lists, exhibitor relationships and subscriber lists were recorded
at estimated fair value as determined by an income approach. Trademarks/trade
names were recorded at estimated fair value using a relief from royalty
approach.
All intangible assets are being amortized using the straight-line method over
estimated useful lives, up to 40 years. In determining the estimated useful
lives, Ziff-Davis Inc. considered its competitive position in the markets in
which it operates, the historical attrition rates of advertisers, subscribers
and exhibitors, legal and contractual obligations and other factors.
Recoverability of goodwill and intangible assets is assessed at a minimum on
an annual basis. Impairments would be recognized in operating results if a
permanent diminution in value were to occur based upon an undiscounted cash
flow analysis. In connection with the restructuring described in Note 4, Ziff-
Davis Inc. recorded a $37,175,000 write-down of intangible assets associated
with discontinued publications and events.
F-30
<PAGE>
ZIFF-DAVIS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
8. Accrued Expenses
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1998
----------- -----------
(dollars in thousands)
<S> <C> <C>
Payroll and related employee benefits............. $ 29,112 $ 26,351
Accrued interest.................................. 6,226 13,678
Restructuring reserve............................. -- 7,260
Other taxes payable............................... 2,822 2,674
Other............................................. 41,934 47,356
----------- -----------
$ 80,094 $ 97,319
=========== ===========
</TABLE>
9. Unearned Income
Unearned income consists of the following:
<TABLE>
<CAPTION>
December 31,
------------------
1997 1998
-------- --------
(dollars in
thousands)
<S> <C> <C>
Unexpired subscriptions................................ $ 82,167 $ 66,018
Prepaid conference fees................................ 80,706 95,706
Reserve for cancellations.............................. (8,191) (9,643)
-------- --------
$154,682 $152,081
======== ========
</TABLE>
10. Income Taxes
Prior to the Reorganization and initial public offering described in Note 2,
the subsidiaries of Ziff-Davis Inc. had been included in consolidated U.S.
federal income tax returns filed by Softbank, except for operations relating to
the MAC Assets (described in Note 1), which were assets of a separate taxpayer.
The tax expense reflected in the consolidated statements of operations and tax
liabilities reflected in the consolidated balance sheet have been prepared on a
separate return basis as though Ziff-Davis Inc. filed stand-alone income tax
returns. No tax benefit has been recorded for the losses related to the MAC
Assets, as such losses are not available to Ziff-Davis Inc. Following the
Reorganization, Ziff-Davis Inc. will no longer be included in the consolidated
U.S. federal income tax returns filed by Softbank.
Income (loss) before income taxes is attributable to the following
jurisdictions:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1996 1997 1998
-------- -------- ---------
(dollars in thousands)
<S> <C> <C> <C>
U.S............................................... $(22,095) $(74,638) $(101,132)
Foreign........................................... (5,029) 2,147 (3,104)
-------- -------- ---------
Total........................................... $(27,124) $(72,491) $(104,236)
======== ======== =========
</TABLE>
F-31
<PAGE>
ZIFF-DAVIS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except per share amounts)
Components of the provision (benefit) for income taxes are as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------
1996 1997 1998
------- ------- --------
(dollars in thousands)
<S> <C> <C> <C>
U.S. federal income taxes:
Current................................... $ -- $ -- $ --
Deferred.................................. 19,338 (1,017) (21,595)
State and local income taxes:
Current................................... -- -- --
Deferred.................................. 5,619 (295) (7,377)
Foreign income taxes:
Current................................... -- -- 2,545
Deferred.................................. -- -- --
------- ------- --------
Total provision (benefit) for income
taxes.................................... $24,957 $(1,312) $(26,427)
======= ======= ========
A reconciliation of the U.S. federal statutory tax rate to the Ziff-Davis
Inc.'s effective tax rate on income (loss) before income taxes is as follows:
<CAPTION>
December 31,
---------------------------
1996 1997 1998
------- ------- --------
<S> <C> <C> <C>
Federal statutory tax rate.................. 35.0% 35.0% 35.0%
State and local taxes (net of federal tax
benefit)................................... 6.0 6.0 4.6
Non-recognition of combined losses of MAC
Assets..................................... (116.6) (32.2) (4.4)
Amortization of non-deductible goodwill..... (13.1) (5.8) (3.4)
Other....................................... (3.3) (1.2) (6.4)
------- ------- --------
Effective tax rate.......................... (92.0)% 1.8% 25.4%
======= ======= ========
</TABLE>
The effective tax rate differs from the federal statutory tax rate primarily
as a result of Ziff-Davis Inc.'s inability to deduct losses of the MAC Assets
prior to May 4, 1998. The amortization of non-deductible goodwill resulted
primarily from the acquisition of 100% of the stock of Holdings in 1996.
F-32
<PAGE>
ZIFF-DAVIS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
Following is a summary of the components of the deferred tax accounts at
December 31, 1997 and 1998:
<TABLE>
<CAPTION>
December 31,
--------------------
1997 1998
--------- ---------
(dollars in
thousands)
<S> <C> <C>
Current deferred tax assets and (liabilities):
Allowance for doubtful accounts................... $ 8,750 $ 15,769
Unearned income................................... 965 6,309
Other............................................. (921) 184
--------- ---------
Current deferred net tax assets................. 8,794 22,262
--------- ---------
Noncurrent deferred tax assets and (liabilities):
Basis difference in intangible assets............. (288,286) (247,832)
Basis difference in property and equipment........ 7,394 12,274
Net operating loss and other carryforwards........ 133,314 91,637
Other............................................. 6,317 15,149
--------- ---------
Noncurrent deferred tax liabilities............. (141,261) (128,772)
Valuation allowance................................. (38,856) (36,310)
--------- ---------
Net noncurrent deferred tax liabilities......... (180,117) (165,082)
--------- ---------
Net deferred tax liabilities........................ $(171,323) $(142,820)
========= =========
</TABLE>
As of December 31, 1997 and 1998 Ziff-Davis Inc. had total deferred tax
assets of $116,963,000 and $105,012,000, respectively, and total deferred tax
liabilities of $288,286,000 and $247,832,000, respectively. The December 31,
1997 and 1998 net deferred tax assets are reduced by a valuation allowance of
$38,856,000 and $36,310,000, respectively, primarily relating to tax benefits
of foreign net operating loss carryforwards which are not expected to be
realized. The decrease in the valuation allowance in 1998 is primarily related
to the expiration of foreign net operating loss carryforwards. No deferred tax
asset has been established for the losses associated with the MAC Assets,
inasmuch as such losses will not be available to Ziff-Davis Inc.
At December 31, 1998, Ziff-Davis Inc. had U.S. and foreign net operating loss
carryforwards of approximately $195,943,000 which began to expire in 1998.
Ziff-Davis Inc.'s utilization of certain net operating loss carryforwards, of
approximately $122,549,000, is subject to limitations, due to the change of
ownership resulting from the Softbank acquisition of the Holdings stock on
February 29, 1996. Management believes that such limitations will not
significantly affect Ziff-Davis Inc.'s ability to recognize the deferred tax
assets relating to the carryforward. Accordingly, no valuation allowance to
reduce the deferred tax asset relating to the carryforward has been
established. In addition, Ziff-Davis Inc. has alternative minimum tax credit
carryforwards of $385,000 which may be carried forward indefinitely until used.
Undistributed earnings of foreign subsidiaries for which no deferred taxes
have been provided approximate $2,789,000 at December 31, 1998. Any additional
U.S. taxes payable on these foreign earnings, if remitted, would be
substantially offset by credits for foreign taxes already paid.
F-33
<PAGE>
ZIFF-DAVIS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
11. Notes Payable
A summary of Ziff-Davis Inc.'s notes payable at December 31, 1997 and 1998 is
as follows:
<TABLE>
<CAPTION>
1997 1998
---------- ----------
(dollars in
thousands)
<S> <C> <C>
Notes payable to
affiliates (Note 12)...... $2,534,030 $77,884
---------- ----------
8 1/2% Senior Subordinated
Notes(1).................. -- 249,130
Credit Facility
Revolving credit........ -- 270,000
Term Loan A............. -- 450,000
Term Loan B............. -- 500,000
---------- ----------
Third party notes
payable.................. -- 1,469,130
---------- ----------
Total notes payable....... 2,534,030 1,547,014
Less current portion notes
payable to affiliates.... (125,790) (7,692)
---------- ----------
$2,408,240 $1,539,322
========== ==========
</TABLE>
- --------
(1) Net of unamortized discount of $870.
8 1/2% senior subordinated notes
On May 4, 1998 Ziff-Davis Inc. issued 8 1/2% Senior Subordinated Notes due
2008 (the "Notes") in the aggregate principal amount of $250,000,000. The Notes
were issued at a discount of $915,000 which is being amortized to interest
expense over the term of the Notes. Included in the balance sheet at December
31, 1998 as a reduction of long-term debt is $870,000 representing the
unamortized discount on the Notes. Interest on the Notes is payable semi-
annually on May 1 and November 1 of each year. Redemption of the Notes by Ziff-
Davis Inc. is subject to certain limitations. The Notes are subordinated to all
existing and future senior indebtedness.
Credit facility
Ziff-Davis Inc. is party to a secured guaranteed credit agreement with The
Bank of New York, Morgan Stanley Senior Funding, DLJ Capital Funding and The
Chase Manhattan Bank, as agents, to provide a $1,350,000,000 term credit
facility. The amount outstanding under this facility at December 31, 1998 was
$1,220,000,000. The credit facility consists of (1) a seven-year $400,000,000
reducing revolving credit facility, with $270,000,000 drawn as of December 31,
1998, (2) a seven-year $450,000,000 term loan ("Term Loan A") and (3) an eight-
year $500,000,000 term loan ("Term Loan B"). Under the credit facility, Ziff-
Davis Inc. paid interest at rates ranging from LIBOR plus 1.5% to LIBOR plus
1.75%. See "--Amendment to credit facility" below.
There are various customary conditions to draw-downs under the revolving
commitments. The revolving credit commitments will be reduced and the $450
million Term Loan A will be amortized, beginning in September 2000, by:
. 10% in 2000, in two equal quarterly installments,
. 20% in each of 2001, 2002, 2003 and 2004 in four equal quarterly
installments and
. 10% at final maturity in March 2005.
F-34
<PAGE>
ZIFF-DAVIS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
The $500 million Term Loan B will be amortized, beginning in September 2000,
by:
. $2 million in 2000, in two equal quarterly installments,
. $4 million in each of 2001, 2002, 2003, 2004 and 2005 in four equal
quarterly installments and
. $478 million at final maturity in March 2006.
The Notes and the credit facility are secured, in part, by a first priority
security interest in capital stock of certain subsidiaries of Ziff-Davis Inc.
and are guaranteed by certain wholly owned domestic subsidiaries of Ziff-Davis
Inc., in each case, including ZD Inc. and ZD Events.
Under its most restrictive covenant, Ziff-Davis Inc. could have borrowed an
additional $28,800,000 under the credit facility at December 31, 1998.
Covenants
The Notes and the credit facility contain certain customary affirmative and
negative covenants, including covenants with respect to limitations on
dispositions of assets, changes of business and ownership, mergers or
acquisitions, restricted payments, indebtedness, loans and investments and
transactions with affiliates. The Notes and the credit facility also contain
certain financial covenants including levels of debt to EBITDA and EBITDA to
interest ratios.
The failure to satisfy any of the covenants would constitute an event of
default under the credit facility. The credit facility also includes other
customary events of default, including, without limitation, nonpayment,
misrepresentation in a material respect, cross-default to other indebtedness,
bankruptcy, ERISA, judgments and change of control. At December 31, 1998,
management believes that Ziff-Davis Inc. was in compliance with all covenants
under its debt agreements.
Amendment to credit facility
On December 16, 1998, the lenders on Ziff-Davis Inc.'s $1,350,000,000 credit
facility agreed to amend certain provisions of that facility. The amended
provisions include an increase in allowed leverage ratios. In return, Ziff-
Davis Inc. agreed to pay a one-time fee of $3,375,000 and increase rates on
amounts borrowed under the facility to rates currently ranging from LIBOR plus
2.875% to LIBOR plus 3.375%, depending on the type of loan. The fee has been
capitalized and will be amortized to interest expense over the remaining term
of the facility.
Related-party debt
In March 1995, Ziff-Davis Inc. entered into a $100,000,000 note payable to
Softbank due in quarterly installments, maturing on February 28, 2010 and
bearing interest at 9.9% per annum. (See Note 12.)
F-35
<PAGE>
ZIFF-DAVIS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
Scheduled principal repayments
Scheduled principal payments due on long-term debt at December 31, 1998 are
as follows:
<TABLE>
<CAPTION>
(dollars in
thousands)
-----------
<S> <C>
1999............................................................... $ 7,692
2000............................................................... 53,923
2001............................................................... 100,923
2002............................................................... 100,923
2003............................................................... 100,923
Thereafter......................................................... 1,183,500
----------
Total.............................................................. $1,547,884
Less unamortized discount.......................................... (870)
----------
Notes payable, net................................................. $1,547,014
==========
</TABLE>
Interest rate swaps
On June 10, 1998 Ziff-Davis Inc entered into interest rate swap agreements,
with an aggregate notional amount of $550,000,000. Under these swap agreements,
which took effect on August 10, 1998, Ziff-Davis Inc. receives a floating rate
of interest based on three-month LIBOR, which resets quarterly, and Ziff-Davis
Inc. pays a fixed rate of interest, each quarter, for the terms of the
respective agreements. The terms of these agreements range from 3 to 7 years
and the weighted average fixed rate Ziff-Davis Inc. pays is 5.85%. Ziff-Davis
Inc. has entered into these agreements solely to hedge its interest rate risk
under its floating rate bank debt.
For the year ended December 31, 1998, these interest rate swaps did not have
a material impact on the financial statements.
12. Related Party Transactions
Ziff-Davis Inc. is a member of a group of companies affiliated through common
ownership with Softbank and has various transactions and relationships with
members of the group. Due to these relationships, it is possible that the terms
of those transactions are not the same as those that would result from
transactions among unrelated parties.
Receivables/payables
Due from affiliates consist of the following:
<TABLE>
<CAPTION>
December 31,
----------------
1997 1998
-------- -------
(dollars in
thousands)
<S> <C> <C>
Due from:
MAC .................................................... $ 42,687 $50,704
Softbank................................................ 84,365 1,557
Other affiliates........................................ 4,238 1,723
-------- -------
$131,290 $53,984
======== =======
</TABLE>
F-36
<PAGE>
ZIFF-DAVIS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
Due to affiliates and management consist of the following:
<TABLE>
<CAPTION>
December 31,
----------------
1997 1998
-------- -------
(dollars in
thousands)
<S> <C> <C>
Due to:
Management (including long-term portion)............... $ -- $ 9,900
MAC ................................................... 270,000 --
Softbank............................................... 126,371 --
Other affiliates....................................... 1,961 118
-------- -------
$398,332 $10,018
======== =======
</TABLE>
As part of the 1996 acquisition of ZDI, Ziff-Davis Inc. agreed to assume
certain obligations to management arising out of prior employment arrangements
with previous owners. In January 1997, Ziff-Davis Inc. paid all amounts due,
including accrued interest, through the payment date.
Prior to the Reorganization and initial public offering, Ziff-Davis Inc. was
a member of Softbank's central cash management system. Under this system, Ziff-
Davis Inc. would periodically transfer excess cash to Softbank for cash
management purposes and in turn receive cash advances from Softbank to fund
Ziff-Davis Inc.'s short-term working capital requirements. Interest was accrued
based on the net balance outstanding at the end of each month. Interest income
was earned at the 30-day LIBOR rate for the applicable month. Interest expense
was incurred at the 30-day LIBOR rate plus 0.5%.
As a result of contingent purchase price adjustments related to its
acquisition of Inter@ctive Enterprises, Ziff-Davis Inc. is obligated to pay the
prior owners of Inter@ctive Week $10,850,000 which was recorded as an increase
to intangible assets. The purchase price payments of $950,000, $4,500,000 and
$5,400,000 are due in 1998, 1999 and 2000, respectively. The 1999 and 2000
payments have been classified as current and long-term due to management.
Other affiliated arrangements
During the years ended December 31, 1996, 1997 and 1998, Ziff-Davis Inc.
incurred $2,000,000, $1,631,000 and $270,000, respectively, in advertising
expense with Yahoo!, Inc. ("Yahoo!"), an affiliated company.
Ziff-Davis Inc. sells advertising space and exhibition services to Kingston.
During the years ended December 31, 1996, 1997 and 1998, Ziff-Davis Inc.
recorded revenue of $882,000, $2,667,000 and $3,070,000, respectively, from
sales to Kingston. These services were provided under terms consistent with
those provided to unaffiliated customers.
In addition, on May 4, 1998 Ziff-Davis Inc. purchased $9,107,000 of fixed
assets from Kingston in exchange for cash and common stock of Ziff-Davis Inc.
Such fixed assets were subsequently leased back to Kingston. Rental income
included as a reduction of selling, general and administrative expenses related
to this transaction was $2,400,000 in 1998.
Ziff-Davis Inc. has entered into an agreement to manage certain trade shows
and expositions owned by Softbank, whereby Ziff-Davis Inc. earns management,
royalty and licensing fees. The fees earned for the years ended December 31,
1996, 1997 and 1998 were $3,394,000, $4,057,000 and $1,117,000, respectively.
F-37
<PAGE>
ZIFF-DAVIS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
In 1996 and 1997, Ziff-Davis Inc. had an arrangement with SOFTBANK
Interactive Marketing, an affiliated company, for the provision of interactive
media sales. Ziff-Davis Inc. paid commissions to SOFTBANK Interactive of
$600,000 and $1,800,000 during the years ended December 31, 1996 and 1997,
respectively. The relationship for provision of interactive media sales was
terminated in 1997 and on December 31, 1997, SOFTBANK Interactive was acquired
by an unrelated third party.
Ziff-Davis Inc. has an arrangement with SOFTBANK Services, an affiliated
company, whereby Ziff-Davis Inc. is charged for administrative services
provided plus a management fee. For the years ended December 31, 1996, 1997 and
1998, Ziff-Davis Inc. incurred services fees of $359,000, $1,259,000 and
$810,000, respectively, in relation to this agreement. During 1998, SOFTBANK
Services was sold to an unrelated third party and the arrangement was
terminated.
Ziff-Davis Inc. has entered into certain licensing agreements with Softbank
for the publishing and distribution of Japanese language editions of certain
publications. The fees earned by Ziff-Davis Inc. for the years ended December
31, 1996, 1997 and 1998 were approximately $964,000, $1,818,000 and $709,000,
respectively.
Certain Ziff-Davis Inc. employees have been granted options to purchase
SOFTBANK Corp. common stock (the "Softbank Options"). Further, on January 29,
1999 options to purchase Ziff-Davis Inc. common stock were granted in
connection with the cancellation of certain Softbank Options. (See Note 13.)
In July 1997, Ziff-Davis Inc. entered into a license and services agreement
to develop ZDTV for MAC Holdings (America) Inc. ("MHA"), a company that is
wholly owned by Mr. Masayoshi Son, who is a director of Ziff-Davis Inc. and
principal stockholder of SOFTBANK Corp. Under this agreement, Ziff-Davis Inc.
agreed to fund ZDTV's operations through unsecured advances and was granted an
option to purchase ZDTV for a price equal to MHA's investment plus 10% per
annum for the period of investment. The cumulative advances, which through
December 31, 1997, totaled $14.4 million net of $10.1 million in repayments,
were repaid concurrently with the Reorganization. Advances in 1998 totaled
$48.6 million and were repaid upon completion of Ziff-Davis Inc.'s acquisition
of ZDTV. (See Notes 2 and 21.)
Ziff-Davis Inc. has entered into operating leases for television production
equipment and has sublet such equipment to ZDTV, an affiliated company. The
terms of the subleases are substantially identical to the terms of the leases
which provide for annual lease payments totaling approximately $1,161,000
through 2003.
F-38
<PAGE>
ZIFF-DAVIS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except per share amounts)
Notes payable to affiliates
See Note 2 for a discussion of Ziff-Davis Inc.'s restructuring of its debt
and equity structures through the Reorganization and initial public offering.
Ziff-Davis Inc.'s long-term debt payable to Softbank consists of the
following:
<TABLE>
<CAPTION>
December 31,
-------------------
1997 1998
---------- -------
(dollars in
thousands)
<S> <C> <C>
Notes payable to affiliate(1)......................... $1,080,000 $ --
Notes payable to affiliate(2)......................... 900,000 --
Notes payable to affiliate(3)......................... 375,027 --
Note payable to affiliate(4).......................... 94,231 77,884
Note payable to affiliate(5).......................... 74,772 --
Note payable to affiliate(6).......................... 10,000 --
---------- -------
Total............................................... 2,534,030 77,884
Less Current portion.................................. (125,790) (7,692)
---------- -------
$2,408,240 $70,192
========== =======
</TABLE>
- --------
(1) Principal and interest payments are due in 53 consecutive quarterly
installments on the last business day of each calendar quarter beginning
March 31, 1998 through March 31, 2011. Notes bear interest at a rate of
7.8% per annum.
(2) Notes mature on December 31, 2001 and bear an interest rate of 6.5% per
annum, payable on the last business day of each quarter beginning March 31,
1997.
(3) Notes mature on February 28, 2010 and bear interest at a rate of 8.0% per
annum.
(4) Note matures on February 28, 2010 and bears interest at 9.9% per annum.
(5) Note is payable in 52 equal quarterly installments commencing March 31,
1997 and bears interest at a rate of 8.0% per annum.
(6) Note is payable on January 1, 2007 and bears interest at a rate of 8.0% per
annum.
During 1996, 1997 and 1998, Ziff-Davis Inc. incurred $120,646,000,
$190,445,000 and $65,935,000, respectively, of interest expense due to Softbank
related to the above notes payable.
Guarantee of Softbank's U.S. debt
In April 1996, Softbank signed a line of credit agreement totaling
$50,000,000 with an independent lender for which Ziff-Davis Inc., along with
certain other SOFTBANK Corp. affiliates, is a guarantor. In January 1997,
October 1997 and March 1998, this line of credit was increased to $75,000,000,
$150,000,000 and $450,000,000, respectively. On May 4, 1998, Ziff-Davis Inc.
was released from this guarantee.
Return of capital and dividends
On December 15, 1996, Ziff-Davis Inc. declared a return of capital of
approximately $900,000,000 paid through the issuance of a note payable to a
subsidiary of Softbank and a cash dividend of $8,000,000 to Softbank. In 1997,
Ziff-Davis Inc. recorded a return of capital of $381,434,000 in connection with
the purchase price of companies under common control.
F-39
<PAGE>
ZIFF-DAVIS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
13. Stock Compensation Plans
Softbank Executive Stock Option Plans
The SOFTBANK Executive Stock Option Plans provide for the granting of
nonqualified stock options (the "Softbank Options") to purchase the common
stock of SOFTBANK Corp. to officers, directors and key employees of Ziff-Davis
Inc. SOFTBANK Corp. is a publicly traded company in Japan. Under the plans,
options have been granted at exercise prices equal to the closing market price
in Japan's public equities market (market price denominated in Japanese yen) on
the date of grant. As of December 31, 1998, substantially all options granted
become exercisable in various installments over the first six anniversaries of
the date of grant and expire ten years after the date of grant. On January 19,
1998, the exercise price of all of the shares outstanding under option
agreements was reset to (Yen)4,000, the closing market price on Japan's Tokyo
Stock Exchange First Section at that date. In conjunction with the repricing,
those options previously exercisable on December 31, 1997 could only be
exercised after July 19, 1998. The repricing did not result in compensation
expense to Ziff-Davis Inc.
1998 Incentive Compensation Plan and the 1998 Non-Employee Directors' Stock
Option Plan
In 1998, Ziff-Davis Inc. adopted the 1998 Incentive Compensation Plan (the
"Incentive Plan") and the 1998 Non-Employee Directors' Stock Option Plan (the
"Non-Employee Directors' Plan"). The Incentive Plan provides for the grant of
options, stock appreciation rights, stock awards and other interests in Ziff-
Davis Inc.'s common stock to key employees of Ziff-Davis Inc. and its
affiliates and consultants. The Non-Employee Directors' Plan provides for the
grant of stock options to non-employee directors. Ziff-Davis Inc. has reserved
8,500,000 shares of common stock for issuance under the Incentive Plan and
200,000 shares of common stock for issuance under the Non-Employee Directors'
Plan. During 1998, Ziff-Davis Inc. granted options to purchase 6,757,495 shares
with exercise prices ranging from $6.00 to $16.00 per share representing the
fair value of such options at that date. Such options vest ratably over five
years.
On September 23, 1998, the Board approved the reduction of the exercise price
of all options outstanding under the Incentive Plan from $16.00 to $6.00, the
closing market price of Ziff-Davis Inc.'s common stock on that date. In
addition, the vesting period of the options was extended by three months. The
repricing did not result in compensation expense to Ziff-Davis Inc.
On December 21, 1998 the Board approved an amendment to the Incentive Plan to
permit grants of options and other stock-based awards with respect to any
series of common stock of Ziff-Davis Inc. and to increase the number of shares
available for issuance from 8,500,000 shares to 17,827,500 shares.
In addition, on December 21, 1998, the Board approved the grant of options to
acquire an aggregate of approximately 5,729,000 shares of ZDNet Stock to
certain employees at a price of $7.50 per share. As a result of the grant Ziff-
Davis Inc. has recorded deferred compensation expense of $18,262,000 for the
difference between the exercise price and the deemed fair value of the
underlying shares. This amount has been recorded as a component of
stockholders' equity offset by an addition to paid-in capital. Ziff-Davis Inc.
expects to recognize non-cash compensation for accounting purposes of
$18,262,000 ratably over the vesting period of the options. These options are
currently scheduled to vest and become exercisable on the fifth anniversary of
the date of grant.
The terms of the options described in the preceding paragraph require an
adjustment in the number of shares of ZDNet Stock that holders may purchase and
the per share purchase price thereof if the initial number of shares issuable
with respect to ZD's Retained Interest in ZDNet is different from 40,000,000.
This
F-40
<PAGE>
ZIFF-DAVIS INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except per share amounts)
adjustment is similar to the adjustment that would generally be made to the
terms of employee stock options in the event of a stock split. Ziff-Davis Inc.
currently expects that the initial Number of Shares Issuable with Respect to
ZD's Retained Interest in ZDNet will be 70,000,000. Assuming that this is so,
the total number of shares of ZDNet Stock that holders may purchase upon
exercise of these options will increase to approximately 10,026,000 and the per
share purchase price thereof will decrease to approximately $4.29.
The December 21, 1998 Board actions described above are subject to
stockholder approval. The majority owner of the common stock of Ziff-Davis Inc.
has committed to approve these actions.
On January 29, 1999, Ziff-Davis Inc. granted options to a number of employees
in connection with the cancellation of corresponding options to purchase stock
of SOFTBANK Corp. In connection with these grants, an affiliate of SOFTBANK
Corp. has agreed with Ziff-Davis Inc. that, if and when any of these options
are exercised, (1) that affiliate will cause the shares of Ziff-Davis Inc.
common stock issuable upon such exercise to be supplied to Ziff-Davis Inc. and
(2) Ziff-Davis Inc. will deliver to that affiliate or its designee the exercise
price paid upon such exercise. Thus, the exercise of these options will not
increase the number of shares of Ziff-Davis Inc. common stock outstanding or
Ziff-Davis Inc.'s stockholders' equity. However, Ziff-Davis Inc. expects to
recognize compensation expense for accounting purposes of approximately
$3,018,000 over three years as a result of these grants. As such, this amount
has been recorded in the Financial Statements as additional paid in capital
offset by a reduction to stockholders' equity as deferred compensation.
GameSpot Inc. 1997 Stock Option Plan
Ziff-Davis Inc. adopted the GameSpot Inc. 1997 Stock Option Plan (the
"GameSpot Plan") to provide long-term incentives for key employees of GameSpot
and to enhance stockholder value. The GameSpot Plan provides for the grant of
options to purchase shares of GameSpot Inc.'s common stock. GameSpot has
reserved 800,000 shares of GameSpot Inc.'s common stock for issuance under the
GameSpot Plan. Such options vest ratably over 3 years.
F-41
<PAGE>
ZIFF-DAVIS INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except per share amounts)
Option grants
Information relating to the Softbank options during 1996, 1997 and 1998 is as
follows:
<TABLE>
<CAPTION>
Weighted Average
Number Option Price
of Shares Per Share(1)
--------- ----------------
<S> <C> <C>
Shares outstanding under options at
December 31, 1995....................... -- --
Granted.................................. 739,493 (2) $87.15
Exercised................................ -- --
Forfeited................................ (12,740)(2) 87.15
--------
Shares outstanding under options at
December 31, 1996....................... 726,753 87.15
Granted.................................. 386,363 61.40
Exercised................................ -- --
Forfeited................................ (146,130) 78.88
--------
Shares outstanding under options at
December 31, 1997....................... 966,986 $78.11
Granted.................................. 258,215 31.03
Exercised................................ (75,982) 31.03
Converted to Ziff-Davis Inc. options..... (83,578) 31.03
Forfeited/cancelled...................... (309,936) 31.03
--------
Shares outstanding under options at
December 31, 1998....................... 755,705 $31.03
========
Shares exercisable as of:
At December 31, 1996..................... -- --
At December 31, 1997 (price range $44.26-
$87.15)................................. 107,630 $82.06
At December 31, 1998 (price of $31.03)... 255,060 $31.03
</TABLE>
- --------
(1) The exercise price of the stock options is set in Japanese yen. The
exercise prices as shown above have been converted to U.S. dollars based
upon the exchange rate as of the date of grant for the respective options.
The 1998 activity reflects the repricing of all options outstanding as of
January 19, 1998 to (Yen)4,000.
(2) Adjusted for a 1.4:1 stock split during 1996 and a 1.3:1 stock split during
1997.
Information relating to Ziff-Davis Inc. stock options issued during 1998 is
as follows:
<TABLE>
<CAPTION>
Weighted Average
Number of Option Price
Shares Per Share
--------- ----------------
<S> <C> <C>
Shares outstanding under options at
December 31, 1997......................... -- --
Granted.................................... 6,757,495 $6.09
Exercised.................................. --
Converted from Softbank options............ 327,400 8.89
Forfeited.................................. (393,590) 6.00
---------
Shares outstanding under options at
December 31, 1998......................... 6,691,305 $6.22
=========
</TABLE>
F-42
<PAGE>
ZIFF-DAVIS INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
Information relating to ZDNet stock options issued during 1998 is as follows:
<TABLE>
<CAPTION>
Weighted Average
Number of Opinion Price
Shares* Per Share*
--------- ----------------
<S> <C> <C>
Shares outstanding under options at December
31, 1997................................... -- --
Granted..................................... 5,729,300 $7.50
Exercised................................... -- --
Forfeited................................... -- --
---------
Shares outstanding under options at December
31, 1998................................... 5,729,300 $7.50
=========
</TABLE>
* The number of shares and price per share will be adjusted if the Initial
Number of Shares Issuable with Respect to ZD's Retained Interest in ZDNet is
different from 40,000,000.
At December 31 1998, no shares of either the Ziff-Davis Inc. or ZDNet options
were exercisable.
Information relating to GameSpot, Inc. stock options is as follows:
<TABLE>
<CAPTION>
Weighted Average
Number of Option price
Shares Per share
--------- ----------------
<S> <C> <C>
Shares outstanding under options at
December 31, 1996......................... -- --
Granted.................................... 780,000 $0.44
Exercised.................................. -- --
Forfeited.................................. (61,000) 0.44
--------
Shares outstanding under options at
December 31, 1997......................... 719,000 $0.44
Granted.................................... -- --
Exercised.................................. -- --
Forfeited.................................. (167,000) $0.44
--------
Shares outstanding under options at
December 31, 1998......................... 552,000 $0.44
========
Shares exercisable as of:
December 31, 1997 (price range of $0.44)... 400,610 $0.44
========
December 31, 1998 (price range of $0.44)... 497,639 $0.44
========
</TABLE>
F-43
<PAGE>
ZIFF-DAVIS INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
As permitted by SFAS No. 123, Ziff-Davis Inc. has chosen to continue to
account for stock options in accordance with the provisions of APB 25 and,
accordingly, no compensation expense related to stock option grants was
recorded in 1996, 1997 or 1998. Pro forma information regarding net income is
required by SFAS No. 123 and has been determined as if Ziff-Davis Inc. had
accounted for stock options under the fair value method. The fair value of the
option grants was estimated at the date of grant using the Black-Scholes
option-pricing model with the following assumptions for 1996, 1997 and 1998:
Softbank options
<TABLE>
<CAPTION>
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Risk-free interest rate......................... 5.89% 6.35% 5.46%
Dividend yield.................................. 0.26% 0.22% 1.50%
Volatility factor............................... 54.03% 51.35% 77.72%
Expected life................................... 6 years 6 years 6 years
Ziff-Davis Inc. options
<CAPTION>
1996 1997 1998
------- ------- -------
Risk-free interest rate......................... n/a n/a 5.03%
Dividend yield.................................. n/a n/a 0.00%
Volatility factor............................... n/a n/a 54.70%
Expected life................................... n/a n/a 6 years
ZDNet options
1996 1997 1998
------- ------- -------
Risk-free interest rate......................... n/a n/a 4.67%
Dividend yield.................................. n/a n/a 0.00%
Volatility factor............................... n/a n/a 54.70%
Expected life................................... n/a n/a 6 years
GameSpot Inc. options
1996 1997 1998
------- ------- -------
Risk-free interest rate......................... n/a 6.35% 6.44%
Dividend yield.................................. n/a 0.00% 0.00%
Volatility factor............................... n/a 100.27% 100.27%
Expected life................................... n/a 4 years 4 years
The weighted average fair value of options granted in 1996, 1997 and 1998, is
as follows:
1996 1997 1998
------- ------- -------
Softbank options................................ $ 64.30 $ 34.05 $ 19.81
Ziff-Davis Inc. options......................... n/a n/a 5.21
ZDNet options................................... n/a n/a 4.25
GameSpot Inc. options........................... n/a 0.32 0.32
</TABLE>
For purposes of the pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. Had
compensation cost for the stock option plans been determined based upon the
fair value at the grant date for awards during 1996, 1997 and 1998 consistent
with the provisions of SFAS No. 123, Ziff-Davis Inc.'s net loss would have been
increased by approximately $3,100,000, $4,200,000 and $15,130,000,
respectively.
F-44
<PAGE>
ZIFF-DAVIS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
Other stock compensation plans
During 1996, 1997 and 1998, Ziff-Davis Inc. granted 45,760, 61,940 and 27,223
shares of common stock of SOFTBANK Corp. respectively (adjusted for a 1.4:1
stock split during 1996 and a 1.3:1 stock split during 1997) to certain key
employees, subject to restrictions as to continuous employment which expire
over a 3 to 5-year period from the date of grant. The granting of the shares to
Ziff-Davis Inc.'s employees has been recorded as additional paid-in capital
offset by a reduction to stockholders' equity as deferred compensation. Such
amounts were recorded at the fair value, as established by market price of the
shares on the date of grant. The unearned compensation is being amortized
ratably over the restricted periods. During 1996, restrictions on 13,790 shares
expired, 2,160 shares were forfeited and $1,080,000 was charged to expense
related to the restricted stock awards. During 1997, restrictions on 75,210
shares expired, 2,150 shares were forfeited and $3,916,000 was charged to
expense related to these restricted stock awards. During 1998, restrictions on
22,361 shares expired, 5,736 shares were forfeited and $252,000 was charged to
expense related to these restricted stock awards.
Employee Stock Purchase Plan
In 1998, Ziff-Davis Inc. adopted the Employee Stock Purchase Plan (the "Stock
Purchase Plan") whereby eligible employees may purchase Ziff-Davis Inc.'s
common stock with after-tax payroll deductions of 1% to 10% of their base pay.
The price at which shares of common stock will be purchased is the lesser of
85% of the fair market value of a share of common stock on (1) the first
business day of a purchase period or (2) the last business day of a purchase
period. Ziff-Davis Inc. has reserved 1,500,000 shares of common stock for
issuance under the Stock Purchase Plan.
On December 21, 1998 the Board approved an amendment to the Employee Stock
Purchase Plan, subject to stockholder approval, to permit grants of options
with respect to any series of common stock of Ziff-Davis Inc. and increase the
number of shares available for sale to participants from 1,500,000 shares to
2,500,000 shares.
14. Employee Benefit Plans
Pension plan
Certain employees of Ziff-Davis Inc. who have met eligibility requirements
were covered by a noncontributory defined benefit pension plan. The benefits
are based on years of service and average compensation at the time of
retirement. Ziff-Davis Inc.'s funding policy is to contribute amounts
sufficient to meet the minimum funding requirements as set forth in the
Employee Retirement Income Security Act of 1974 ("ERISA"). Contributions to the
plan are determined in accordance with the projected unit credit cost method.
Plan assets consist of U.S. equity securities, high grade corporate bonds and
commercial paper, and U.S. treasury notes.
During 1997, Ziff-Davis Inc. decided to terminate the defined benefit pension
plan and pursuant to this decision, all accrued benefits became fully vested as
of August 31, 1997. The amounts below reflect the effects of such termination.
All accrued obligations were settled during 1998 and a gain of $156,000 was
recognized in 1998 as a result of the plan settlement.
The weighted average assumed discount rate of 7% and rate of increase in
future compensation levels of 6% was used in the determination of the actuarial
present value of the projected benefit obligation at December 31, 1996 and
1997. The weighted average expected long-term rate of return on plan assets at
December 31, 1996 and 1997 was 7%.
F-45
<PAGE>
ZIFF-DAVIS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
Net periodic pension cost includes the following components:
<TABLE>
<CAPTION>
1996 1997 1998
-------- ------- -------
(dollars in thousands)
<S> <C> <C> <C>
Service cost................................... $ 700 $ 391 $ --
Interest cost.................................. 472 456 --
Expected return on plan assets................. (300) (445) --
Amortization of transition obligation.......... 199 75 --
-------- ------- -------
Net periodic pension cost...................... $ 1,071 $ 477 $ --
======== ======= =======
</TABLE>
The following table sets forth the funded status and amounts recognized in
the balance sheet:
<TABLE>
<CAPTION>
1997 1998
------------ -----------
(dollars in thousands)
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation..................... $ 5,721 $ --
------------ ----------
Accumulated benefit obligations............... 5,721 --
============ ==========
Projected benefit obligations................... 5,721 --
Plan assets at fair value....................... (6,004) --
------------ ----------
Projected benefit obligation less than plan
assets......................................... (283) --
Unrecognized net transition asset............... 1,279 --
------------ ----------
Pension liability included in balance sheet..... $ 996 $ --
============ ==========
</TABLE>
Retirement plans
Ziff-Davis Inc. maintains various defined contribution retirement plans.
Substantially all of Ziff-Davis Inc.'s employees are eligible to participate in
one of the plans under which annual contributions may be made by Ziff-Davis
Inc. for the benefit of all eligible employees. In certain cases, employees may
also make contributions to the plan in which they participate which, and
subject to certain limitations, may be matched by Ziff-Davis Inc. up to certain
specified percentages. Employees are generally eligible to participate in a
plan upon joining Ziff-Davis Inc. and receive matching contributions after one
year of employment. Ziff-Davis Inc. made contributions to the plans totaling
$10,470,000, $13,725,000 and $13,004,000 in 1996, 1997 and 1998, respectively.
15. Investments
Ziff-Davis Inc. has investments in the following companies/joint ventures:
<TABLE>
<CAPTION>
Carrying value
at December 31,
Ownership ---------------
Equity investments Percentage 1997 1998
------------------ ---------- ------- -------
(dollars in
thousands)
<S> <C> <C> <C>
MAC Publishing LLC............................. 50% $16,244 $19,268
ExpoComm LLC................................... 50 7,758 8,571
Family PC G.P.................................. 50 9,342 --
Cost Investments
----------------
Red Herring Communications, Inc. .............. -- $ 5,000
Deja News, Inc. ............................... -- 5,000
</TABLE>
F-46
<PAGE>
ZIFF-DAVIS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except per share amounts)
The entities listed above are engaged primarily in the publication or
distribution of print media and the organization, production and management of
trade shows and providing interactive information and programming to
technology-oriented Internet users. Other investments and joint ventures are
not material to Ziff-Davis Inc.'s financial statements.
Ziff-Davis Inc.'s equity income (loss) was $(796,000), $335,000 and
$7,483,000 in 1996, 1997 and 1998, respectively.
16. Supplemental Cash Flow Information
<TABLE>
<CAPTION>
1996 1997 1998
---------- -------- --------
(dollars in thousands)
<S> <C> <C> <C>
Cash paid during the year for:
Interest.................................. $ 99,509 $185,447 $129,976
Income taxes.............................. 360 4 1,000
Noncash investing and financing activities:
Fair value of assets acquired............. $2,508,603 $ 20,749 $ 60,473
Liabilities assumed....................... 370,518 6,749 32,701
---------- -------- --------
Cash paid................................. 2,138,085 14,000 27,772
Less--cash acquired....................... 13,262 -- --
---------- -------- --------
Net cash paid for investments and
acquisitions............................. $2,124,823 $ 14,000 $ 27,772
========== ======== ========
Return of capital dividends............... $ 899,948 $381,434 $ --
========== ======== ========
Capital contributions..................... $ 5,002 $ 61,580 $926,096
========== ======== ========
</TABLE>
17. Operating Lease Commitments
Ziff-Davis Inc. is obligated under various operating leases which expire at
various dates through 2021. Future minimum rental commitments under
noncancelable operating leases are as follows:
<TABLE>
<CAPTION>
(dollars in
thousands)
<S> <C>
1999.......................................................... $ 32,740
2000.......................................................... 34,094
2001.......................................................... 31,882
2002.......................................................... 29,957
2003.......................................................... 28,655
Thereafter.................................................... 232,974
--------
Total....................................................... $390,302
========
</TABLE>
Netted in the above totals is approximately $5,000,000 for which Ziff-Davis
Inc. has noncancelable subleases in place. Total sublease income approximates
Ziff-Davis Inc.'s required payments under the related leases. Rent expense
amounted to approximately $23,015,000, $29,994,000 and $24,695,000 for the
years ended December 31, 1996, 1997 and 1998, respectively.
F-47
<PAGE>
ZIFF-DAVIS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
18. Contingencies
Ziff-Davis Inc. is subject to various claims and legal proceedings arising in
the normal course of business.
Class action and derivative litigations
Following a decline in the price per share of Ziff-Davis Inc.'s common stock
in October 1998, eight securities class action suits were filed against Ziff-
Davis Inc. and certain of its directors and officers in the United States
District Court for the Southern District of New York.
The complaints allege that defendants violated Sections 11, 12(a) (2) and 15
of the Securities Act of 1933 in connection with the registration statement
filed by Ziff-Davis Inc. with the Securities and Exchange Commission relating
to the initial public offering of Ziff-Davis Inc.'s stock on April 29, 1998
(the "IPO"). More particularly, the complaints allege that the registration
statement contained false and misleading statements and failed to disclose
facts that could have indicated an impending decline in Ziff-Davis Inc.'s
revenue. The complaints seek on behalf of a class of purchasers of Ziff-Davis
Inc.'s common stock from the date of the IPO through October 8, 1998
unspecified damages, interest, fees and costs, rescission, and injunctive
relief such as the imposition of a constructive trust upon the proceeds of the
IPO.
On January 28, 1999, the court entered an order consolidating the actions,
appointing lead plaintiff's counsel and requiring the filing of a consolidated
amended complaint within 45 days. Thereafter, Ziff-Davis Inc. will have 45 days
to respond to the consolidated amended complaint.
In addition, two derivative suits have been filed by stockholders against
Ziff-Davis Inc. and all of its directors in the Court of Chancery of the State
of Delaware for New Castle County. The complaints allege that the directors
breached their fiduciary duties to Ziff-Davis Inc. by repricing the stock
options awarded to certain directors and demand the nullification of the
repricing and an injunction against exercise by the directors of any repriced
option. Plaintiffs filed an amended complaint on February 17, 1999 (which is
substantially similar to the original complaints, except that the amended
complaint also addresses the granting of "new options" at an allegedly "reduced
exercise price") and have indicated their intent to seek consolidation of the
actions. A response to the amended complaint has not yet been filed.
Other legal proceedings
Ziff-Davis Inc. was named as a defendant in an action, filed on April 17,
1998 in the Supreme Court of the State of New York, by minority stockholders of
SOFTBANK Interactive Marketing Inc. ("SIM"), formerly an indirect subsidiary of
SOFTBANK Corp. The complaint alleges, among other things, that SBH, SIM's
majority stockholder, acting with Ziff-Davis Inc. and two of its senior
officers and directors who were directors of SIM (and who were also named as
defendants), had conflicts of interest between SIM and other Softbank
investments (including investments in Ziff-Davis Inc.) and failed to act in the
best interests of SIM and the minority stockholders by taking actions which
benefited Ziff-Davis Inc. The complaint states claims based on common law
fraud, breach of fiduciary duty and aiding and abetting theories and seeks in
excess of $200,000,000 in damages. Ziff-Davis Inc. and the other defendants
have moved to dismiss all of the claims against them other than a breach of
contract claim which is solely against SBH, and the motion was granted, with
the result that all of the claims against Ziff-Davis Inc. and its officers were
dismissed, and most of the claims against SBH were dismissed, leaving only a
claim against SBH concerning the alleged failure of SBH to give plaintiffs
adequate notice of the sale of its stock to SIM.
F-48
<PAGE>
ZIFF-DAVIS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
Although the outcome of these cases cannot be predicted, Ziff-Davis Inc.
believes that there are substantial defenses to the claims. Ziff-Davis Inc.
currently cannot estimate its ultimate liability, if any, with respect to such
pending litigations. Accordingly, no provision for such matters has been
included in the financial statements.
19. Segment Information
Ziff-Davis Inc. has adopted the provisions of SFAS No. 131 Disclosures about
Segments of an Enterprise and Related Information. As such, prior years data
has been restated in accordance with SFAS No. 131.
Business segment information
Ziff-Davis Inc.'s reportable segments are based on its method of internal
reporting, which segregates its business by product lines. Management measures
operating performance of the business segments based on "EBITDA". EBITDA is
defined as income before provision for income taxes, interest expense,
depreciation and amortization and restructuring charges. EBITDA is not intended
to represent cash flows from operations and should not be considered as an
alternative to net income as an indicator of Ziff-Davis Inc.'s operating
performance or to cash flows as a measure of liquidity. Although Ziff-Davis
Inc. believes that EBITDA is a standard measure commonly reported and widely
used by analysts, investors and other interested parties in the publishing
business and media industries, the EBITDA presented for Ziff-Davis Inc. may not
be comparable to similarly titled measures reported by other companies.
Ziff-Davis Inc.'s reportable segments are:
Publishing
The publishing segment is engaged in publishing magazines, journals,
newsletters, online content, training manuals and providing market research
about the computer industry. The publishing segment's principal operations are
in the United States and Europe, although it also licenses or syndicates its
editorial content to over 50 other publications distributed worldwide.
Events
The events segment is engaged in the organization, production and management
of trade shows, conferences and seminars for the computer industry. The events
segment's principal operations are in North America and to a lesser extent in
Europe, Asia and Latin America.
Internet
The Internet segment is engaged in providing technology-related information
to Internet users worldwide. The Internet segment's principal operations are in
the U.S. and to a lesser extent Europe.
F-49
<PAGE>
ZIFF-DAVIS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
The accounting policies of the segments are the same as those described in
Note 3 under "Summary of Significant Accounting Policies". Ziff-Davis Inc.
evaluates the performance of its segments and allocates resources to them based
on EBITDA. Any inter-segment revenue included in segment data are not material.
The following presents information about the reported segments for the years
ending December 31:
<TABLE>
<CAPTION>
1996 1997 1998
-------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C>
Revenue:
Publishing............................... $674,040 $ 834,015 $ 782,882
Events................................... 264,884 287,528 269,867
Internet................................. 16,215 32,218 56,143
-------- ---------- ----------
Total.................................. $955,139 $1,153,761 $1,108,892
======== ========== ==========
<CAPTION>
1996 1997 1998
-------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C>
EBITDA:
Publishing............................... $136,395 $ 183,545 $ 125,320*
Events................................... 108,791 103,749 119,698
Internet................................. (11,928) (14,400) (924)
-------- ---------- ----------
Total.................................. $233,258 $ 272,894 $ 244,094
======== ========== ==========
</TABLE>
- --------
* Before restructuring charge of $52,239,000.
<TABLE>
<CAPTION>
1996 1997 1998
---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C>
Total Assets:
Publishing............................ $2,358,144 $2,335,034 $2,192,099
Events................................ 1,143,522 1,124,286 1,144,018
Internet.............................. 82,507 87,326 97,686
---------- ---------- ----------
Total............................... $3,584,173 $3,546,646 $3,433,803
========== ========== ==========
A reconciliation of total segment EBITDA to total consolidated loss before
income taxes, for the years ended December 31, 1996, 1997 and 1998 is as
follows:
<CAPTION>
1996 1997 1998
---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C>
EBITDA:
Total segment EBITDA.................. $ 233,258 $ 272,894 $ 244,094
Restructuring charge.................. -- -- (52,239)
Depreciation & amortization........... (32,303) (30,379) (29,885)
Amortization of intangible assets..... (107,433) (124,561) (122,659)
Interest expense, net................. (120,646) (190,445) (143,547)
---------- ---------- ----------
Consolidated loss before taxes...... $ (27,124) $ (72,491) $ (104,236)
========== ========== ==========
</TABLE>
Equity in income of investees included in the publishing segment EBITDA for
the years ended December 31, 1996, 1997 and 1998 was $(796,000), $335,000 and
$2,044,000, respectively. Equity in net income of investees included in the
events segment EBITDA for the years ended December 31, 1996, 1997 and 1998 was
$ -- , $1,695,000 and $5,439,000, respectively.
F-50
<PAGE>
ZIFF-DAVIS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
Publishing's investment in equity method investees for the years ended
December 31, 1996, 1997 and 1998 was $10,138,00, $25,586,000 and $19,268,000,
respectively. Events' investment in equity method investees for the years ended
December 31, 1996, 1997 and 1998 was $7,698,000, $7,758,000 and $8,571,000,
respectively.
During the years ended December 31, 1996, 1997 and 1998, publishing spent
$2,123,651,000, $19,026,000 and $42,324,000, respectively, for additions to
long-lived assets. Events spent $22,527,000, $19,798,000 and $12,565,000 for
additions to long-lived assets during the years ended December 31, 1996, 1997
and 1998, respectively. Internet spent $1,010,000, $5,372,000 and $9,483,000
for additions to long-lived assets during the years ended December 31, 1996,
1997 and 1998, respectively.
The following is sales information by geographic area as of and for the
respective years ended December 31.
<TABLE>
<CAPTION>
1996 1997 1998
---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C>
Revenue:
U.S. ..................................... $ 854,666 $1,040,297 $ 990,096
Foreign................................... 100,473 113,464 118,796
---------- ---------- ----------
Total................................... $ 955,139 $1,153,761 $1,108,892
========== ========== ==========
Foreign revenue is based on the country in which the sales originate. Revenue
from no single foreign country was material to the consolidated revenues of ZD.
The following is long-lived asset information by geographic area as of and
for the years ended December 31, 1996, 1997 and 1998:
<CAPTION>
1996 1997 1998
---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C>
Long-lived assets:
U.S. ..................................... $3,202,981 $3,090,643 $3,034,002
Foreign................................... 9,538 8,555 13,570
---------- ---------- ----------
Total................................... $3,212,519 $3,099,198 $3,047,572
========== ========== ==========
</TABLE>
No single customer accounted for more than 10% of total revenue for each of
the years ended December 31, 1996, 1997 and 1998.
F-51
<PAGE>
ZIFF-DAVIS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
20. Fair Value of Financial Instruments
Ziff-Davis Inc.'s accounting policies with respect to financial instruments
are discussed in Note 3.
The carrying amounts and fair values of Ziff-Davis Inc.'s significant on
balance sheet financial instruments at December 31, 1997 and 1998 are as
follows:
<TABLE>
<CAPTION>
At December 31,
---------------------------------------
1997 1998
------------------- -------------------
Carrying Fair Carrying Fair
Amount Values Amount Values
--------- --------- --------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C>
Cash and cash equivalents............. $ 30,301 $ 30,301 $ 32,566 $ 32,566
Accounts receivable................... 221,310 221,310 227,325 227,325
Accounts payable...................... 55,468 55,468 74,397 74,397
Long-term debt (including current
portion)............................. 2,534,030 2,534,030 1,547,014 1,543,839
</TABLE>
Interest rate swaps
Ziff-Davis Inc. utilizes interest rate swaps to reduce the impact on interest
expense of fluctuating interest rates on its variable rate debt. Under Ziff-
Davis Inc.'s interest rate swap agreements, Ziff-Davis Inc. agreed with the
counterparties to exchange, at quarterly intervals, the difference between
Ziff-Davis Inc.'s fixed pay rate and the counterparties' variable pay rate on
three-month LIBOR. At December 31, 1998, Ziff-Davis Inc. was a fixed payor of
5.85% on an aggregate notional amount of $550,000,000.
The fair values of these interest rate swaps were estimated by obtaining
quotes from brokers which represented the amounts that Ziff-Davis Inc. would
pay if the agreements were terminated at the balance sheet date. While it is
not Ziff-Davis Inc.'s intention to terminate these interest rate swaps, these
fair values indicated that the termination of the interest rate swap agreements
would have resulted in a loss of $15,627,000.
21. Subsequent Events
ZDTV
On February 4, 1999, Ziff-Davis Inc. purchased ZDTV at a purchase price of
approximately $81,400,000. (See Note 12.) Ziff-Davis Inc. paid approximately
$32,800,000 of the purchase price in cash (settled on February 5, 1999) and
paid the remainder by applying approximately $48,600,000 in advances owed to it
by MAC Holdings America. Ziff-Davis Inc. also agreed to be responsible for the
funding of ZDTV during the period in 1999 prior to the purchase which will be
accounted for as additional purchase price. Other than advances to ZDTV which
are reported on Ziff-Davis Inc.'s balance sheet, the results of operations of
ZDTV are not included in Ziff-Davis Inc.'s results for any of the periods
presented. This acquisition will be accounted for in 1999 under the purchase
method of accounting.
Vulcan transactions
On February 5, 1999, Vulcan Programming Inc., an entity owned by Paul G.
Allen, purchased a one-third interest in ZDTV for $54,000,000 in cash. On March
4, 1999, Vulcan Ventures, the investment vehicle of Paul G. Allen, purchased
approximately three million shares of Ziff-Davis Inc. common stock for
$50,000,000 in cash.
F-52
<PAGE>
ZIFF-DAVIS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
Unaudited summary pro forma information
The following unaudited summary pro forma information assumes that the
acquisition of ZDTV and the sale of a one-third interest in ZDTV to Vulcan
Programming had been consummated on January 1, 1998. Adjustments for ZDTV
transactions include the operating results of ZDTV, amortization of the
purchase price of ZDTV, Vulcan Programming's one-third interest in the losses
of ZDTV and the tax effects of these items. The pro forma data is not
necessarily indicative of actual results had the transaction occurred on
January 1, 1998. Further, pro forma results are not meant to represent future
financial results.
<TABLE>
<CAPTION>
Adjustments
for
Ziff-Davis acquisition
Inc. of ZDTV Pro Forma
---------- ----------- ----------
(dollars in thousands except
per share amounts)
<S> <C> <C> <C>
Revenue............................... $1,108,892 $ 5,585 $1,114,477
Income (loss) from operations......... 31,080 (55,049) (23,969)
Net loss.............................. (77,809) (22,443) (100,252)
Pro forma basic loss per share........ $ (1.00)
</TABLE>
Incentive Plan
On March 4, 1999, the Board approved an amendment to the Incentive Plan,
subject to stockholder approval, which increased the number of shares available
for issuance under the Incentive Plan to 23,327,500 shares.
F-53
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Page No.
--------
<C> <S> <C>
3.1 Amended and Restated Certificate of Incorporation of Ziff-
Davis Inc. (incorporated by reference to the exhibit in
Ziff-Davis Inc.'s Registration Statement on Form S-1, File
No. 333-46493).
3.2 Form of Amended and Restated Certificate of Incorporation of
Ziff-Davis Inc. (incorporated by reference to the exhibit in
Ziff-Davis Inc.'s Registration Statement on Form S-1, File
No. 333-69447).
3.3 By-laws of Ziff-Davis Inc. (incorporated by reference to the
exhibit in Ziff-Davis Inc.'s Registration Statement on Form
S-1, File No. 333-46493).
4.1 Specimen of certificate representing Ziff-Davis Inc. Common
Stock, par value $.01 per share (incorporated by reference
to the exhibit in Ziff-Davis Inc.'s Registration Statement
on Form S-1, File No. 333-46493).
4.2 Specimen of certificate representing Ziff-Davis Inc.--ZD
Common Stock, par value $0.1 per share (incorporated by
reference to the exhibit in Ziff-Davis Inc.'s Registration
Statement on Form S-1, File No. 333-69447).
4.3 Specimen certificate representing Ziff-Davis Inc.--ZDNet
Common Stock, par value $0.1 per share (incorporated by
reference to the exhibit in Ziff-Davis Inc.'s Registration
Statement on Form S-1, File No. 333-69447).
10.1 1998 Incentive Compensation Plan (incorporated by reference
to the exhibit in Ziff-Davis Inc.'s Registration Statement
on Form S-1, File No. 333-46493).
10.2 1998 Employee Stock Purchase Plan (incorporated by reference
to the exhibit in Ziff-Davis Inc.'s Registration Statement
on Form S-1, File No. 333-46493).
10.3 1998 Non-Employee Directors' Stock Option Plan (incorporated
by reference to the exhibit in Ziff-Davis Inc.'s
Registration Statement on Form S-1, File No. 333-46493).
10.4 Undertaking, dated as of April 1, 1998, between SOFTBANK
Corp. and ZD Inc. (incorporated by reference to the exhibit
in Ziff-Davis Inc.'s Registration Statement on Form S-1,
File No. 333-46493).
10.5 License and Services Agreement, dated as of July 28, 1997,
between Ziff-Davis Inc., ZDTV LLC, ZD Television
Productions, Inc., MAC Holdings (America) Inc. and MAC Inc.
(incorporated by reference to the exhibit in Ziff-Davis
Inc.'s Registration Statement on Form S-1, File No. 333-
46493).
10.6 Master License Agreement, dated as of April 1, 1998, between
Ziff-Davis Inc. and SOFTBANK Corp. (incorporated by
reference to the exhibit in Ziff-Davis Inc.'s Registration
Statement on Form S-1, File No. 333-46493).
10.7 License Agreement, dated as of July 1, 1997, between MAC
Inc. and Ziff-Davis Inc. and SOFTBANK Corp. (incorporated by
reference to the exhibit in Ziff-Davis Inc.'s Registration
Statement on Form S-1, File No. 333-46493).
10.8 Agreement to Produce, dated as of April 1, 1998, between ZD
COMDEX and Forums Inc. and SOFTBANK Corp. (incorporated by
reference to the exhibit in Ziff-Davis Inc.'s Registration
Statement on Form S-1, File No. 333-46493).
10.9 Trademark License Agreement, dated as of April 1, 1998,
between ZD COMDEX and Forums Inc. and SOFTBANK Forums KK
(incorporated by reference to the exhibit in Ziff-Davis
Inc.'s Registration Statement on Form S-1, File No. 333-
46493).
10.10 Technical Assistance Agreement, dated as of April 1, 1998,
between ZD COMDEX and Forums Inc. and SOFTBANK Forums KK
(incorporated by reference to the exhibit in Ziff-Davis
Inc.'s Registration Statement on Form S-1, File No. 333-
46493).
10.11 Registration Rights Agreement, dated as of April 1, 1998,
between ZD Inc. and SOFTBANK Holdings Inc. (incorporated by
reference to the exhibit in Ziff-Davis Inc.'s Registration
Statement on Form S-1, File No. 333-46493).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Page No.
--------
<C> <S> <C>
10.12 Credit Agreement, dated as of March 27, 1996 between
SOFTBANK Holdings Inc., the Guarantors listed therein, The
Bank of New York and Morgan Stanley Senior Funding, Inc., as
amended March 9, 1998 (incorporated by reference to the
exhibit in Ziff-Davis Inc.'s Registration Statement on Form
S-1, File No. 333-46493).
10.13 Secured Guaranteed Credit Agreement, dated as of May 4,
1998, among Ziff-Davis Inc., the Banks listed therein,
Morgan Stanley Senior Funding, Inc., as Syndication Agent,
the Chase Manhattan Bank and DLJ Capital Funding, Inc., as
Co-Documentation Agents, The Bank of New York, as
Administrative Agent, and the Guarantors (incorporated by
reference to the exhibit in Ziff-Davis Inc.'s Registration
Statement on Form S-1, File No. 333-46493).
10.14 Amendment No. 1 and Waiver to Secured Guaranteed Credit
Agreement, dated as of May 28, 1998, among Ziff-Davis Inc.,
the Banks listed therein and The Bank of New York, as
Administrative Agent (incorporated by reference to the
exhibit in Ziff-Davis Inc.'s Registration Statement Form S-
1, File No. 333-69447).
10.15 Amendment No. 2 to Secured Guaranteed Credit Agreement,
dated as of June 8, 1998, among Ziff-Davis Inc., the Banks
listed therein and The Bank of New York, as Administrative
Agent (incorporated by reference to the exhibit in Ziff-
Davis Inc.'s Registration Statement Form S-1, File No. 333-
69447).
10.16 Amendment No. 3 to Secured Credit Agreement, dated as of
December 30, 1998, among Ziff-Davis Inc., the Banks listed
therein and The Bank of New York, as Administrative Agent
(incorporated by reference to the exhibit in Ziff-Davis
Inc.'s Registration Statement Form S-1, File No. 333-69447).
10.17 Lease of Ziff-Davis Inc. headquarters at 28 East 28th
Street, New York, New York (incorporated by reference to the
exhibit in Ziff-Davis Inc.'s Registration Statement on Form
S-1, File No. 333-46493).
10.18 Lease Agreement, dated as of May 4, 1998, between Ziff-Davis
Inc., ZD Inc., ZD COMDEX and Forums Inc. and Kingston
Technology Company (incorporated by reference to the exhibit
in Ziff-Davis Inc.'s Registration Statement on Form S-1,
File No. 333-46493).
10.19 Assignment, dated as of May 4, 1998, between Kingston
Technology Company and Ziff-Davis Inc. (incorporated by
reference to the exhibit in Ziff-Davis Inc.'s Registration
Statement on Form S-1, File No. 333-46493).
10.20 Employment Agreement, dated as of April 1, 1998, between ZD
Inc. and Eric Hippeau (incorporated by reference to the
exhibit in Ziff-Davis Inc.'s Registration Statement on Form
S-1, File No. 333-46493).
10.21 Employment Agreement, dated as of April 1, 1998, between ZD
COMDEX and Forums Inc. and Jason E. Chudnofsky (incorporated
by reference to the exhibit in Ziff-Davis Inc.'s
Registration Statement on Form S-1, File No. 333-46493).
10.22 Employment Agreement, dated as of April 1, 1998, between
Ziff-Davis Inc. and Terri S. Holbrooke (incorporated by
reference to the exhibit in Ziff-Davis Inc.'s Registration
Statement Form S-1, File No. 333-69447).
10.23 Employment Agreement, dated as of April 1, 1998, between
Ziff-Davis Inc. and Timothy C. O'Brien (incorporated by
reference to the exhibit in Ziff-Davis Inc.'s Registration
Statement Form S-1, File No. 333-69447).
10.24 Employment Agreement, dated as of November 6, 1998, between
Ziff-Davis Inc. and Michael S. Perlis (incorporated by
reference to the exhibit in Ziff-Davis Inc.'s Registration
Statement Form S-1, File No. 333-69447).
10.25 Stock Purchase Agreement, dated as of February 5, 1999, by
and between Ziff-Davis Inc. and Vulcan Ventures Inc.
(incorporated by reference to the exhibit in Ziff-Davis
Inc.'s Registration Statement on Form S-1, File No. 333-
69447.)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Page No.
--------
<C> <S> <C>
10.26 Bill of Sale and Assignment, dated as of February 4, 1999
between MAC Holdings (America) Inc. and ZD Inc.
(incorporated by reference to the exhibit in Ziff-Davis
Inc.'s Current Report on Form 8-K File No. 001-14055).
12.1 Ratio of Earnings to Fixed Charges.
21.1 List of subsidiaries of Ziff-Davis Inc. (incorporated by
reference to the exhibit in Ziff-Davis Inc.'s Registration
Statement on Form S-1, File No. 333-69447).
23.1 Consent of PricewaterhouseCoopers LLP.
27.1 Financial Data Schedule (incorporated by reference to the
exhibit in Ziff-Davis Inc.'s Registration Statement on Form
S-2, File No. 333-69447).
</TABLE>
<PAGE>
Exhibit 12.1
Ziff-Davis Inc.
Computation of Ratios of Earnings to Fixed Charges
(Amounts in thousands of dollars)
<TABLE>
<CAPTION>
ZDI (the Predecessor) Ziff-Davis Inc.
------------------------------- -------------------------------------
Year ended Two month
December 31, period ended Year ended December 31,
----------------- February 28, -------------------------------------
1994 1995 1996 1995 1996 1997 1998
-------- -------- ------------ ------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Pre-tax income (loss)
from continuing
operations.............. $ 73,207 $(40,250) $(6,995) $22,869 $(27,124) $(72,491) $(104,236)
Less: Income (loss) from
equity investments...... 4,443 3,391 235 -- 526 (2,030) (7,483)
-------- -------- ------- ------- -------- -------- ---------
77,650 (36,859) (6,760) 22,869 (26,598) (74,521) (111,719)
-------- -------- ------- ------- -------- -------- ---------
Interest expense........ 17,887 92,609 14,030 44,005 120,646 190,445 143,547
Interest portion of rent
expense................. 7,292 7,633 1,340 831 7,672 9,998 8,232
-------- -------- ------- ------- -------- -------- ---------
Total fixed charges..... 25,179 100,242 15,370 44,836 128,318 200,443 151,779
-------- -------- ------- ------- -------- -------- ---------
Earnings before income
taxes and fixed
charges................. $102,829 $ 63,383 $ 8,610 $67,705 $101,720 $125,922 $ 40,060
======== ======== ======= ======= ======== ======== =========
Ratio of earnings to
fixed charges........... 4.1 (a) (a) 1.5 (a) (a) (a)
======== ======== ======= ======= ======== ======== =========
</TABLE>
- ----
(a) ZDI's (the predecessor) earnings for the year ended December 31, 1995 and
for the two months ended February 28, 1996 were insufficient to cover fixed
charges by $36,859 and $6,760, respectively. Ziff-Davis Inc's earnings for
the year ended December 31, 1996, 1997 and 1998 were insufficient to cover
fixed charges by $26,598, $74,521 and $111,719, respectively.
1
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (File no. 333-57257) of Ziff-Davis Inc. of our report
dated February 22, 1999 appearing on page F-16 of the Annual Report to
Shareholders which is incorporated in this Annual Report on Form 10-K.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
New York, NY
March 26, 1999
