As filed with the Securities and Exchange Commission on April 20, 1999
SECURTIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K/A
CURRENT REPORT PURSUANT
TO SECTION 13 OR 15(D) OF THE
SECURITIES AND EXCHANGE ACT
Date of report (Date of earliest event reported) February 4, 1999
---------------------------
Ziff-Davis Inc.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware
- --------------------------------------------------------------------------------
(State or Other Jurisdiction of Incorporation)
1-19676 13-3987754
- --------------------------------------------------------------------------------
(Commission File Number) (IRS Employer Identification No.)
One Park Avenue, New York, New York 10016
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(212) 503-3500
- --------------------------------------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
- --------------------------------------------------------------------------------
Former Name or Former Address if Changed Since Last Report)
Exhibit Index on Page 5
-1-
<PAGE>
ITEM 2. ACQUISITION OF ASSETS
On February 4, 1999, Ziff-Davis Inc. ("Ziff-Davis") closed on its previously
announced acquisition of ZDTV LLC ("ZDTV"). On February 5, 1999, Ziff-Davis
announced that ZDTV had closed on its previously announced sale of a one-third
interest in ZDTV to Vulcan Programming Inc. (the "Vulcan Sale"), an entity owned
by Paul G. Allen, for $54,000,000.
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.
ZDTV was previously owned by MAC Holdings (America), Inc. ("MHA"), an affiliate
of Ziff-Davis. The parent of MHA has an investment interest in the majority
stockholder of Ziff-Davis. Prior to the acquisition, Ziff-Davis provided
management services to ZDTV pursuant to a licenses and service agreement with
MHA. As part of the license and services agreement, Ziff-Davis was granted an
option to purchase ZDTV at a price equal to MHA's investment in ZDTV plus 10%
per annum for the period of investment. Ziff-Davis exercised such option and
completed the acquisition for a purchase price of approximately $81,400,000 of
which approximately $32,800,000 was paid in cash and the remainder was settled
by applying approximately $48,600,000 in advances owed to Ziff-Davis by MHA.
Ziff-Davis also agreed to be responsible for funding ZDTV's operations during
the period in 1999 prior to the purchase. The acquisition will be accounted for
under the purchase method of accounting. The cash portion of the purchase price
was paid on February 5, 1999 utilizing a portion of the proceeds from the Vulcan
Sale advanced to Ziff-Davis pursuant to the ZDTV cash management system. In
connection with the acquisition, Ziff-Davis assumed the obligations under an
option granted by MHA to a third party for the purchase of Class B Units in ZDTV
for $15,000,000 subject to adjustment. An affiliate of Vulcan Programming owns
approximately 3 million shares of the ZD series of Ziff-Davis Inc. common stock
representing less than 3% of the currently outstanding common stock.
-2-
<PAGE>
ITEM 7. EXHIBITS
(a) Financial Statements of Business Acquired - Attached as Exhibit 99(a) are
the ZDTV, LLC Financial Statements and Notes to Financial Statements as of
and for the years ended December 31, 1997 and 1998 as well as an audit
report from PricewaterhouseCoopers LLP.
(b) Pro Forma Financial Information - Attached as Exhibit 99(b) is the
Ziff-Davis Inc. Unaudited Pro Forma Financial Information reflecting the
acquisition of ZDTV, LLC.
(c) Exhibits - A list of Exhibits included as part of this report is set forth
in Exhibit Index, which immediately precedes such exhibits and is
incorporated herein by reference.
-3-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Ziff-Davis Inc.
/s/ Timothy C. O'Brien
Dated: April 20, 1999 By:
-----------------------------
Timothy C. O'Brien
Chief Financial Officer
-4-
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
(99)(a) ZDTV, LLC Financial Statements and Notes to Financial Statements
as of and for the years ended December 31, 1997 and 1998.
(99)(b) Ziff-Davis Inc. Unaudited Pro Forma Financial Information
reflecting the acquisition of ZDTV, LLC and the sale of a
one-third interest in ZDTV, LLC to a third party.
-5-
ZDTV, LLC EXHIBIT (99) (A)
<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS
PAGE
----
<S> <C>
ZDTV, LLC
Report of independent accountants......................................................... F-2
Balance sheets as of December 31, 1997 and 1998........................................... F-3
Statements of operations for the years ended December 31, 1997 and 1998................... F-4
Statements of cash flows for the years ended December 31, 1997 and 1998................... F-5
Statements of changes in member's equity for the years ended December 31, 1997 and 1998... F-6
Notes to financial statements............................................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Ziff-Davis Inc.
In our opinion, the accompanying balance sheets and the related statements of
operations, cash flows and changes in member's equity, present fairly, in all
material respects, the financial position of ZDTV, LLC (the "Company") at
December 31, 1997 and 1998, and the results of its operations and its cash flows
for each of the two 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.
As discussed in Note 12 to the financial statements, the Company was acquired by
Ziff-Davis Inc. on February 4, 1999.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
New York, NY
February 22, 1999
F-2
<PAGE>
ZDTV, LLC
<TABLE>
<CAPTION>
BALANCE SHEETS
(DOLLARS IN THOUSANDS)
DECEMBER 31,
1997 1998
-------- --------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents ......................................... $ 189 $ 43
Accounts receivable, net .......................................... 1,153 2,322
Barter receivable ................................................. -- 1,132
Prepaid expenses and other current assets ......................... 2 2,107
-------- --------
Total current assets .................................................. 1,344 5,604
Property and equipment, net ........................................... 7,085 8,583
Other assets, net ..................................................... 100 15,510
-------- --------
Total assets .......................................................... $ 8,529 $ 29,697
======== ========
LIABILITIES AND MEMBER'S EQUITY
Current liabilities:
Accounts payable .................................................. $ 723 $ 4,247
Barter payable .................................................... -- 978
Accrued expenses .................................................. 914 1,790
Unearned income, net .............................................. 225 21
Due to affiliates ................................................. 14,187 50,575
Other current liabilities ......................................... 7 5,033
-------- --------
Total current liabilities ............................................. 16,056 62,644
-------- --------
Other non-current liabilities ......................................... -- 7,917
-------- --------
Commitments and contingencies (Notes 10 and 11)
Total liabilities 16,056 70,561
-------- --------
Member's equity (deficit):
Class A Member's Units
(100,000 authorized, issued and outstanding)....................... -- --
Paid-in capital ................................................... 10,072 24,557
Accumulated deficit ............................................... (17,599) (65,124)
Deferred compensation ............................................. -- (297)
-------- --------
Total member's deficit ................................................ (7,527) (40,864)
-------- --------
Total liabilities and member's equity (deficit) ....................... $ 8,529 $ 29,697
======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE>
ZDTV, LLC
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
YEARS ENDED
DECEMBER 31,
1997 1998
-------- --------
Revenue, net ....................................... $ 2,724 $ 5,296
-------- --------
Cost of production ................................. 1,029 4,113
Selling, general and administrative expenses ....... 13,892 41,886
Depreciation and amortization of property and
equipment........................................... 1,723 4,691
Amortization of long-lived assets .................. -- 880
-------- --------
Total operating expenses ....................... 16,644 51,570
-------- --------
Loss from operations ............................... (13,920) (46,274)
Interest expense, net - related party .............. (180) (1,251)
-------- --------
Loss attributable to member's interest ............. $(14,100) $(47,525)
======== ========
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE>
ZDTV, LLC
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
YEARS ENDED
DECEMBER 31,
1997 1998
-------- --------
Cash flows from operating activities:
Loss attributable to member's interest ................. $(14,100) $(47,525)
Adjustments to reconcile net loss to net cash used
by operating activities:
Depreciation and amortization ...................... 1,723 5,571
Changes in operating assets and liabilities:
Accounts receivable ............................ (140) (1,169)
Prepaid expenses ............................... -- (2,105)
Accounts payable and accrued expenses .......... 818 4,400
Unearned income ................................ 225 (204)
Other, net ..................................... 7 (126)
-------- --------
Net cash used by operating activities .................. (11,467) (41,158)
-------- --------
Cash flows from investing activities:
Capital expenditures ................................. (5,366) (6,190)
Investments and acquisitions, net of cash acquired ... (100) (3,373)
-------- --------
Net cash used by investing activities .................. (5,466) (9,563)
-------- --------
Cash flows from financing activities:
Advances from affiliates ............................. 7,047 36,387
Contributed capital .................................. 10,072 14,188
-------- --------
Net cash provided by financing activities .............. 17,119 50,575
-------- --------
Net increase (decrease) in cash and cash equivalents ... 186 (146)
Cash and cash equivalents at beginning of year ......... 3 189
-------- --------
Cash and cash equivalents at end of year ............... $ 189 $ 43
======== ========
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
ZDTV, LLC
STATEMENTS OF CHANGES IN MEMBER'S EQUITY
(DOLLARS IN THOUSANDS)
TOTAL
MEMBER'S
MEMBERSHIP PAID-IN ACCUMULATED DEFERRED EQUITY
UNITS CAPITAL DEFICIT COMPENSATION (DEFICIT)
----- ------- ------- ------------ -------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 .................... 100,000 $ -- $ (3,499) $ -- $ (3,499)
Capital contribution ............................ -- 10,072 -- -- 10,072
Loss attributable to member's interest .......... -- -- (14,100) -- (14,100)
-------- -------- -------- -------- --------
Balance at December 31, 1997 .................... 100,000 10,072 (17,599) -- (7,527)
Capital contribution ............................ -- 14,188 -- -- 14,188
Issuance and conversion of stock options......... -- 297 -- (297) --
Loss attributable to member's interest .......... -- -- (47,525) -- (47,525)
-------- -------- -------- -------- --------
Balance at December 31, 1998 .................... 100,000 $ 24,557 $(65,124) $ (297) $(40,864)
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE>
ZDTV, LLC
NOTES TO FINANCIAL STATEMENTS)
(DOLLARS ROUNDED TO THE NEAREST THOUSAND)
1. ORGANIZATION AND BASIS OF PRESENTATION
The financial statements include the accounts of ZDTV, LLC (the "Company" or
"ZDTV"), a Delaware limited liability company which is wholly-owned by MAC
Holdings (America) Inc. ("MHA"). 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.
ZDTV operates in one business segment whose principal operations are in the
U.S., although it licenses or syndicates programming worldwide.
Relationship with SOFTBANK and Ziff-Davis Inc.
SOFTBANK Corp. (together with its non-Ziff-Davis affiliates, "Softbank") is
a Japanese corporation which is affiliated with MHA. SOFTBANK Corp is the
indirect majority stockholder of Ziff-Davis Inc. ("ZDI"). ZDI entered into a
license and services agreement in July 1997 to develop ZDTV for MHA. Under this
agreement, ZDI 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 in
ZDTV plus 10% per annum for the period of its investment. (See Notes 7 and 12).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and cash equivalents
ZDTV considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents.
Concentration of credit risk
ZDTV places its temporary cash investments with high credit quality
financial institutions. At times, such investments may be in excess of federally
insured limits. The Company has not experienced losses in such accounts.
ZDTV's advertisers are principally customers who represent a variety of
technology companies in the United States and other countries. ZDTV extends
credit to its customers and distributors and historically has not experienced
significant losses relating to receivables from individual customers or groups
of customers. For the year ended December 31, 1997, a single customer accounted
for 100% of revenue. In 1998, one customer accounted for 17% of revenue.
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
over the estimated useful lives of the assets which range from 2 to 5 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.
F-7
<PAGE>
ZDTV, LLC
NOTES TO FINANCIAL STATEMENTS) - (CONTINUED)
(DOLLARS ROUNDED TO THE NEAREST THOUSAND)
Long-lived assets
Other assets consist principally of capitalized costs of distribution
agreements. Amortization of these assets is computed on a straight-line basis
over the term of the distribution agreements. Identifiable long-lived assets are
amortized over a period of 2 to 10 years. ZDTV assesses the recoverability of
its long lived 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 such assets. If
undiscounted cash flows are not sufficient to support the recorded assets, an
impairment is recognized to reduce the carrying value of the long lived assets
to estimated recoverable values. ZDTV has not experienced any impairment of its
long lived assets.
Barter Transactions
Barter transactions represent the exchange of commercial air time, internet
advertising or production services for programming, merchandise or services.
Barter transactions are generally recorded at the fair market value. Revenue is
recognized on barter when the commercials are broadcast or services provided;
expenses are recorded when the merchandise or service received is utilized.
Barter revenue for the year ended December 31, 1998 was approximately $332,000
and is included in total revenue. Barter expense for the year ended December 31,
1998 was approximately $178,000 and is included in selling, general and
administrative expenses. There were no significant barter transactions in 1997.
Revenue recognition
Significant revenue recognition policies are as follows:
Advertising revenue is recognized in the period during which the
advertisements are aired.
Program and website production and licensing revenue is recognized when the
program material is available for broadcast.
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. Online obligations typically
include guarantees of a minimum number of "impressions" or times an
advertisement appears in pages viewed by users of ZDTV's online properties. To
the extent minimum guaranteed impressions are not met, ZDTV defers recognition
of the corresponding revenue until the remaining guaranteed impression levels
are achieved.
Operating costs and expenses
Production costs represent external costs incurred in the production of
programing and are expensed as incurred.
Income taxes
ZDTV is a limited liability company that does not incur income taxes. Income
taxes are the responsibility of the members.
F-8
<PAGE>
ZDTV, LLC
NOTES TO FINANCIAL STATEMENTS) - (CONTINUED)
(DOLLARS ROUNDED TO THE NEAREST THOUSAND)
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
All current assets and liabilities are carried at cost, which approximates
fair value because of the short-term maturity of those instruments.
Stock-based compensation
ZDTV has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," ("APB25") to account for stock
options. Effective January 1, 1996, ZDTV adopted the disclosure-only provisions
of Statement of Financial Accounting Standard ("SFAS") No. 123, "Accounting for
Stock-Based Compensation."
Comprehensive Income
The company implemented SFAS No. 130 "Reporting Comprehensive Income",
effective January 1, 1998. This standard requires ZDTV to report the total
changes in member's equity that do not result directly from transactions with
members, including those which do not affect retained earnings. These changes
are not material to ZDTV's financial statements.
New Accounting Pronouncements
SFAS No. 133, "Accounting for Derivative Instruments & Hedging Activities",
issued on June 1998, establishes accounting and reporting standards for
derivative instruments and for hedging activities and is effective for all
fiscal years beginning after June 15, 1999. ZDTV does not expect the adoption of
SFAS No. 133 to have a material impact on ZDTV's results of operations.
ZDTV expects to adopt the above statement beginning with its December 31,
1999 financial statements.
3. ACCOUNTS RECEIVABLE, NET
Accounts receivable, net consist of the following:
DECEMBER 31,
1997 1998
------- -------
(IN THOUSANDS)
Accounts receivable....................................... $ 1,153 $ 2,530
Allowance for doubtful accounts........................... -- (208)
------- -------
$ 1,153 $ 2,322
======= =======
F-9
<PAGE>
ZDTV, LLC
NOTES TO FINANCIAL STATEMENTS) - (CONTINUED)
(DOLLARS ROUNDED TO THE NEAREST THOUSAND)
4. PROPERTY AND EQUIPMENT, NET
Property and equipment, net, consist of the following:
DECEMBER 31,
1997 1998
-------- --------
(IN THOUSANDS)
Computers and equipment .......................... $ 5,559 $ 5,816
Leasehold improvements ........................... 3,397 8,400
Furniture and fixtures ........................... 352 1,281
-------- --------
9,308 15,497
Accumulated depreciation and amortization ........ (2,223) (6,914)
-------- --------
$ 7,085 $ 8,583
======== ========
5. DISTRIBUTION AGREEMENTS
ZDTV has entered into various distribution agreements for its programming.
The agreements primarily provide for ZDTV to be carried on satellite or cable
systems for distribution to subscribers for a period of several years. In
exchange for this distribution, ZDTV pays an initial fee which is capitalized
and amortized over the life of the agreements. Included in the balance sheet
caption "Other Assets" is $15,376,000, which is net of $813,000 in accumulated
amortization related to these agreements.
Included in other current liabilities and other non-current liabilities are
$5,000,000 and $7,917,000, representing the current and long-term portions,
respectively, of the payments of initial fees under distribution agreements.
These amounts are payable in the following annual installments (in thousands):
1999.................. $5,000
2000.................. 5,000
2001.................. 2,917
------
12,917
------
Less current portion (5,000)
------
$7,917
======
As these distribution agreements represent long-lived assets, the payable
portion of $12,917,000 represents a non-cash investing activity.
6. MEMBER'S EQUITY
ZDTV, LLC is a Delaware limited liability company with Class A and B
membership units authorized. At December 31, 1998 there were 100,000 Class A
units issued and outstanding, all held by MHA. The Class A units provide voting
rights and the Class B units are non-voting. Both Class A and Class B units are
subject to mandatory capital calls.
In connection with a distribution agreement between ZDTV and a third party,
MHA granted that third party an option to purchase Class B units representing up
to 5% of ZDTV (subject to increase up to 10% on the occurrence of certain
events). The purchase price is to be based on a formula applied to fair market
value as determined by ZDTV, ZDI and the third party or if the parties are
unable to agree, by an independent party, provided that if the third party is
not entitled to purchase more than 5% of ZDTV, the purchase price shall not be
less than $15 million.
F-10
<PAGE>
ZDTV, LLC
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS ROUNDED TO THE NEAREST THOUSAND)
7. RELATED PARTY TRANSACTIONS
ZDTV transacts business with a group of companies affiliated through common
ownership with SOFTBANK Corp. 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.
The cumulative advances relating to the licensing and service agreement
between ZDTV and ZDI totaled $14,187,000 net of $10,072,000 in repayments, at
December 31, 1997. Advances in 1998 totaled $48,621,000 and were repaid upon
completion of ZDI's acquisition of ZDTV. (See Notes 1 and 12). Amounts due to
ZDI in relation to this agreement were $14,187,000 and $48,621,000 at December
31, 1997 and 1998, respectively. Pursuant to the licensing and service
agreement, ZDTV pays interest to ZDI on outstanding advances at a rate based on
LIBOR.
ZDI has entered into operating leases for television production equipment
and has sublet such equipment to ZDTV. The terms of the subleases are
substantially identical to the terms of the leases. During 1998, ZDTV incurred
approximately $910,000 in rental expense related to these subleases.
ZDI allocates the cost of certain corporate general and administrative
services and shared services (including certain legal, accounting (tax and
financial), information systems, telecommunications, purchasing, marketing,
intellectual property, public relations, corporate office and travel expenses)
(collectively, "Central Services") to ZDTV based on utilization. Where
determinations based on utilization alone are impracticable, ZDI uses other
methods and criteria that management believes to be equitable and to provide a
reasonable estimate of the cost attributable to ZDTV. Included in administrative
and overhead costs was an allocation of the Central Services amounting to
$1,596,000 and $2,978,000 for the years ended December 31, 1997 and 1998,
respectively.
During the year ended December 31, 1998, ZDTV incurred $503,000 in
web-hosting expense with ZDNet, a division of ZDI.
In June 1998, ZDTV entered into a licensing agreement with Computer Channel
Corporation ("CCH"), an affiliated company, by which CCH has rights to exhibit
certain ZDTV program series in Japan. Licensing revenues earned in 1998 from
this agreement were $130,000.
8. EMPLOYEE STOCK COMPENSATION PLANS
SOFTBANK Executive Stock Option Plans
The SOFTBANK Executive Stock Options 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 ZDTV. Softbank is
an indirect affiliate of ZDTV and 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 (Y)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 ZDTV.
1998 Incentive Compensation Plan
In 1998, ZDI adopted the 1998 Incentive Compensation Plan (the "Incentive
Plan"). The Incentive Plan provides for the grant of options, stock appreciation
rights, stock awards and other interests in ZDI's common stock to key employees
of ZDI and its affiliates and consultants. ZDI reserved 8,500,000 shares of
common stock for issuance under the Incentive Plan. During 1998, ZDI granted to
ZDTV employees options to purchase 215,350 shares with exercise prices ranging
F-11
<PAGE>
ZDTV, LLC
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS ROUNDED TO THE NEAREST THOUSAND)
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 of Directors of Ziff-Davis Inc. (the
"Board") approved the reduction of the exercise price of all options outstanding
under the plans from $16.00 to $6.00, the closing market price of ZDI'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 ZDTV.
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 ZDI and increased the number of shares reserved for
issuance under the Incentive Plan 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 45,000 shares of ZDNet Stock, to certain employees of
ZDTV at a price of $7.50 per share. As a result of the grant ZDTV has recorded
deferred compensation expense of $143,000 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 member's equity offset by an addition to
paid-in capital. ZDTV expects to recognize non-cash compensation expense for
accounting purposes of $143,000 ratably over the vesting period of the options.
These options were scheduled to vest and become exercisable on the fifth
anniversary of the date of grant.
The December 21, 1998 Board actions described above were subject to
Ziff-Davis Inc. stockholder approval. The majority stockholder of Ziff-Davis
Inc. committed to vote for these actions. (See Note 12).
On January 29, 1999, ZDI granted options to a number of employees,
including employees of ZDTV, 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 ZDI that, if and
when any of these options are exercised, (1) that affiliate will cause the
shares of ZDI common stock issuable upon such exercise to be supplied to ZDI and
(2) ZDI will deliver to that affiliate or its designee the exercise price paid
upon such exercise. ZDTV expects to recognize compensation expense for
accounting purposes of approximately $154,000 over three years as a result of
these grants. As such, this amount has been recorded in the Financial Statements
paid-in capital offset by a reduction to members' equity as deferred
compensation.
F-12
<PAGE>
ZDTV, LLC
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS ROUNDED TO THE NEAREST THOUSAND)
Option grants
Information relating to the Softbank options during 1997 and 1998 issued to
ZDTV employees is as follows:
WEIGHTED
AVERAGE
OPTION
NUMBER PRICE
OF SHARES PER SHARE
--------- ---------
Shares outstanding under options at December 31, 1996 .... 6,879 $87.15
Granted .................................................. 11,500 51.30
Exercised ................................................ -- --
Forfeited ................................................ -- --
------
Shares outstanding under options at December 31, 1997 .... 18,379 $64.72
Granted .................................................. -- --
Exercised ................................................ (2,211) 31.03
Converted to Ziff-Davis Inc. options ..................... (4,262) 31.03
Forfeited ................................................ (5,030) 31.03
------
Shares outstanding under options at December 31, 1998 .... 6,876 $31.03
======
Shares exercisable as of:
At December 31, 1997 (price $87.15) ................. 1,083 $87.15
At December 31, 1998 (price $31.03) ................. 4,076 $31.03
- ---------
(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 (Y)4,000.
Information relating to ZDI stock options issued to ZDTV employees during
1998 is as follows:
WEIGHTED
AVERAGE
OPTION
NUMBER PRICE
OF SHARES PER SHARE
--------- ---------
Shares outstanding under options at December 31, 1997 .... -- --
Granted .................................................. 246,850 $6.00
Exercised ................................................ -- --
Converted from Softbank options .......................... 16,695 8.89
Forfeited ................................................ (31,500) 6.00
-------
Shares outstanding under options at December 31, 1998 .... 232,045 $6.21
=======
Information relating to ZDNet stock options issued to ZDTV employees during 1998
is as follows:
WEIGHTED
AVERAGE
OPTION
NUMBER PRICE
OF SHARES PER SHARE
--------- ---------
Shares outstanding under options at December 31, 1997 ..... -- --
Granted ................................................... 45,000 $7.50
Exercised ................................................. -- --
Forfeited ................................................. -- --
------
Shares outstanding under options at December 31, 1998 ..... 45,000 $7.50
======
At December 31, 1998, no shares of either ZDI or ZDNet options were
exercisable.
F-13
<PAGE>
ZDTV, LLC
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS ROUNDED TO THE NEAREST THOUSAND)
As permitted by SFAS No. 123, ZDTV has chosen to continue to account for
stock options in accordance with the provisions of APB No. 25 and, accordingly,
no compensation expense related to stock option grants was recorded in 1997 or
1998. Pro forma information regarding net income is required by SFAS No. 123 and
has been determined as if ZDTV 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 1997 and 1998:
Softbank Options
1997 1998
---- ----
Risk-free interest rate......................... 6.35% 5.46%
Dividend yield.................................. 0.22% 1.50%
Volatility Factor............................... 51.35% 77.72%
Expected life................................... 6 years 6 years
Ziff-Davis Inc. Options
1997 1998
---- ----
Risk-free interest rate......................... n/a 5.03%
Dividend yield.................................. n/a 0.00%
Volatility Factor............................... n/a 54.70%
Expected life................................... n/a 6 years
ZDNet Options
1997 1998
---- ----
Risk-free interest rate......................... n/a 4.67%
Dividend yield.................................. n/a 0.00%
Volatility Factor............................... n/a 54.70%
Expected life................................... n/a 6 years
The weighted average fair value of options granted in 1997 and 1998, is as
follows:
1997 1998
---- ----
Softbank options................................ $34.05 $19.81
Ziff-Davis Inc. options......................... n/a 5.21
ZDNet options................................... n/a 4.25
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 1997 and 1998, consistent with the
provision of SFAS No. 123, the ZDTV net loss would have been increased by
approximately $75,000 and $379,000 respectively.
9. EMPLOYEE BENEFIT PLANS
ZDI maintains various defined contribution retirement plans.
Substantially all of ZDTV's employees are eligible to participate in one of the
plans under which annual contributions may be made by ZDTV 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 ZDTV up to certain specified percentages. Employees are
generally eligible to participate in a plan upon joining ZDTV and receive
matching contributions after one year of employment. ZDTV made contributions to
the plans totaling $150,000 and $508,000 in 1997 and 1998, respectively.
F-14
<PAGE>
ZDTV, LLC
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS ROUNDED TO THE NEAREST THOUSAND)
10. OPERATING LEASE COMMITMENTS
ZDTV utilizes equipment and space under lease to ZDI. ZDTV's allocations of
the minimum lease payments are as follows (in thousands):
1999 .......................................................... $ 2,925
2000 .......................................................... 3,112
2001 .......................................................... 3,062
2002 .......................................................... 2,716
2003 .......................................................... 1,947
Thereafter .......................................................... 4,892
-------
Total .......................................................... $18,654
=======
Rental expense under operating leases amounted to approximately $512,000 and
$1,872,000 for the years ended December 31, 1997 and 1998, respectively.
11. CONTINGENCIES
ZDTV is subject to various claims and legal proceedings arising in the
normal course of business. Management believes that the ultimate liability, if
any, in the aggregate will not be material to the balance sheet, future
operations or cash flows of ZDTV.
12. SUBSEQUENT EVENTS
Acquisition and sale
On February 4, 1999, ZDI purchased ZDTV at a purchase price of approximately
$81,400,000. ZDI 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 Ziff-Davis by MHA. ZDI 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. In connection
with the accquisition, ZDI assumed the option granted by MHA to a third party
for the purchase of Class B units in ZDTV (see Note 6).
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. After
completion of these transactions, ZDI owned 108,000,000 Class A units and Vulcan
Programming Inc. owned 54,000,000 Class A units. As part of the acquisition, the
terms of the Class A units were modified so that they are no longer subject to
mandatory capital calls.
Shareholder Vote (Unaudited)
The December 21, 1998 Board actions described in Note 8, were approved by
the stockholders of ZDI on March 30, 1999.
Issuance of Class C Units (Unaudited)
ZDTV entered into a Unit Purchase Agreement with ZDTV's President on March 23,
1999. Under that agreement 6,750,000 Class C Units were sold to ZDTV's President
for $1,458,000. The Class C units are not subject to mandatory capital calls.
Such units are subject to a vesting schedule which provides for certain
repurchase rights on termination of employment. Approximately 39.6% of the units
were immediately vested with approximately 2.1% vesting on the first day of each
of the subsequent 29 months.
F-15
<PAGE>
ZDTV, LLC
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
(DOLLARS ROUNDED TO THE NEAREST THOUSAND)
ZDNet Options (unaudited)
The grant of the ZDNet options described in Note 8 was based on there being
40,000,000 shares issued related to ZDI's interest in ZDNet. On March 30,1999,
70,000,000 shares were issued. This increase is accounted for in a manner
similar to a stock split. As a result, the ZDNet options described in Note 8
have been adjusted to 78,750 at an exercise price of approximately $4.29.
F-16
EXHIBIT 99(B)
UNAUDITED PRO FORMA FINANCIAL INFORMATION
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS OF ZIFF-DAVIS INC.
The following Unaudited Pro Forma Combined Financial Statements (the "Pro Forma
Financial Statements") of Ziff-Davis Inc. ("Ziff-Davis") illustrate the effects
of: (1) Ziff-Davis' acquisition of 100% of ZDTV, LLC ("ZDTV") for $81.4 million
($32.8 million in cash and $48.6 million in advances) and (2) the sale of
one-third interest in ZDTV to Vulcan Programming Inc. ("Vulcan") for $54 million
in cash. The net proceeds from the transactions will be used to pay down
borrowings under Ziff-Davis' revolving credit facility. The Unaudited Pro Forma
Combined Balance Sheet has been prepared as if such transactions occurred on
December 31, 1998; the Unaudited Pro Forma Combined Income Statement has been
prepared as if such transactions occurred as of January 1, 1998.
A final determination of required purchase accounting adjustments, including the
allocation of the purchase price to the assets acquired and liabilities assumed
based on their respective fair values, has not yet been made. Accordingly, the
purchase accounting adjustments made in connection with the development of the
Pro Forma Financial Statements are preliminary and have been made solely for
purposes of developing the pro forma combined financial information. However,
Ziff-Davis management believes that the pro forma adjustments and the underlying
assumptions reasonably present the significant effects of the acquisition and
the sale to Vulcan. The actual financial position and results of operations of
the combined entity will differ, perhaps significantly, from the pro forma
amounts reflected herein because of a variety of factors, including changes in
value and changes in operating results between the dates of the Pro Forma
Financial Statements and the date on which the acquisition and sale takes place.
The Pro Forma Financial Statements are not necessarily indicative of actual
operating results or financial position had the acquisition and the sale
occurred as of the dates indicated above, nor do they purport to indicate
operating results or financial position which may be attained in the future.
The significant adjustments to the pro forma net income reflect (1) higher
amortization expense to give effect to the allocation of excess purchase price
over the fair value of net assets acquired prospectively amortized over a
10-year period, (2) minority interest attributable to the Vulcan sale, and (3)
lower interest expense from the repayment of amounts due under the credit
facility.
The significant adjustments to the pro forma financial position reflect (1)
recognition of goodwill representing the excess purchase price over the fair
value of net assets acquired, (2) a decrease in the amount outstanding under
Ziff-Davis' credit facility, and (3) minority interest associated with the
Vulcan sale.
The Pro Forma Financial Statements should be read in conjunction with the
historical financial statements of both Ziff-Davis and ZDTV and the notes to the
Pro Forma Financial Statements included elsewhere herein.
- 1 -
<PAGE>
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA COMBINED BALANCE SHEETS
AT DECEMBER 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
PROFORMA ADJUSTMENTS
---------------------------------
ZIFF-DAVIS ZIFF-DAVIS INC. RECORD
INC. ZDTV LLC ACQUISITION ZIFF-DAVIS'
HISTORICAL HISTORICAL OF ZDTV (A) INVESTMENT(B)
---------- ---------- --------------- ----------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................. $ 32,566 $ 43 $ -- $ --
Accounts receivable, net .................. 227,325 3,454 -- --
Inventories ............................... 15,551 -- -- --
Prepaid expenses and other current assets . 34,543 2,107 -- --
Due from affiliates ....................... 53,984 -- (48,600) --
Deferred taxes ............................ 22,262 -- -- --
---------- ----------- ----------- -----------
Total current assets .................... 386,231 5,604 (48,600) --
Property and equipment, net ................. 91,189 8,583 -- --
Intangible assets, net ...................... 2,907,043 134 -- 73,367
Other assets ................................ 49,340 15,376 81,400 --
---------- ----------- ----------- -----------
Total assets ............................ $3,433,803 $ 29,697 $ $32,800 $ 73,367
========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .......................... $74,397 $5,225 $ -- $ --
Accrued expenses .......................... 97,319 1,811 -- --
Unearned income, net ...................... 152,081 -- -- --
Due to affiliates and management .......... 4,618 50,575 -- (48,600)
Current portion of notes payable to
affiliates .............................. 7,692 -- -- --
Other current liabilities ................. 14,591 5,033 -- --
---------- ----------- ----------- -----------
Total current liabilities ............... 350,698 62,644 -- (48,600)
Notes payable to affiliates ................. 70,192 -- -- --
Notes payable, net of unamortized discount .. 1,469,130 -- 32,800 --
Deferred taxes .............................. 165,082 -- -- --
Due to management ........................... 5,400 -- -- --
Other liabilities ........................... 20,703 7,917 -- --
---------- ----------- ----------- -----------
Total liabilities ....................... 2,081,205 70,561 32,800 (48,600)
---------- ----------- ----------- -----------
Minority interest ........................... -- -- -- --
---------- ----------- ----------- -----------
Commitments and contingencies
Stockholders' equity:
Preferred stock ........................... -- -- -- --
Common stock .............................. 1,000 -- -- --
Additional paid-in capital ................ 1,571,681 24,557 -- 56,843
Accumulated deficit ....................... (197,238) (65,124) -- 65,124
Deferred compensation ..................... (22,024) (297) -- --
Cumulative translation adjustment ......... (821) -- -- --
---------- ----------- ----------- -----------
Total stockholders' equity .................. 1,352,598 (40,864) -- 121,967
---------- ----------- ----------- -----------
Total liabilities and stockholders' equity .. $3,433,803 $ 29,697 $ 32,800 $ 73,367
========== =========== =========== ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA COMBINED BALANCE SHEETS
AT DECEMBER 31, 1998 (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
PROFORMA ADJUSTMENTS
-------------------------------
ELIMINATION
ENTRIES ZIFF-DAVIS INC.
VULCAN SALE(C) CONSOLIDATION(D) PROFORMA
-------------- ----------------- ---------------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents ................. $ -- $ -- $ 32,609
Accounts receivable, net .................. -- -- 230,779
Inventories ............................... -- -- 15,551
Prepaid expenses and other current assets . -- -- 36,650
Due from affiliates ....................... -- -- 5,384
Deferred taxes ............................ -- -- 22,262
----------- ----------- -----------
Total current assets .................... -- -- 343,235
Property and equipment, net ................. -- -- 99,772
Intangible assets, net ...................... -- -- 2,980,544
Other assets ................................ -- (81,400) 64,716
----------- ----------- -----------
Total assets ............................ $ -- $ (81,400) 3,488,267
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .......................... $ -- $ -- $ 79,622
Accrued expenses .......................... -- -- 99,130
Unearned income, net ...................... -- -- 152,081
Due to affiliates and management .......... -- -- 6,593
Current portion of notes payable to
affiliates .............................. -- -- 7,692
Other current liabilities ................. -- -- 19,624
----------- ----------- -----------
Total current liabilities ............... -- -- 364,742
Notes payable to affiliates ................. -- -- 70,192
Notes payable, net of unamortized discount .. (54,000) -- 1,447,930
Deferred taxes .............................. -- -- 165,082
Due to management ........................... -- -- 5,400
Other liabilities ........................... -- -- 28,620
----------- ----------- -----------
Total liabilities ....................... (54,000) -- 2,081,966
----------- ----------- -----------
Minority interest ........................... -- 54,000 54,000
----------- ----------- -----------
Commitments and contingencies
Stockholders' equity:
Preferred stock ........................... -- -- --
Common stock .............................. -- -- 1,000
Additional paid-in capital ................ 54,000 (135,400) 1,571,681
Accumulated deficit ....................... -- -- (197,238)
Deferred compensation ..................... -- -- (22,321)
Cumulative translation adjustment ......... -- -- (821)
----------- ----------- -----------
Total stockholders' equity .................. 54,000 (135,400) 1,352,301
----------- ----------- -----------
Total liabilities and stockholders' equity .. $ -- $ (81,400) $ 3,488,267
=========== =========== ===========
<FN>
The accompanying notes are an integral part of these unaudited proforma financial statements.
</FN>
</TABLE>
- 2 -
<PAGE>
NOTES TO UNAUDITED PROFORMA CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998
(A) Ziff-Davis Inc. acquisition of ZDTV
Entry represents the purchase of ZDTV for $32,800,000 in cash and
$48,600,000 in forgiven receivables. The source of cash for the purchase was
the sale to Vulcan described in Note D.
(B) Record Ziff-Davis' Investment
Entry records Ziff-Davis' investment in ZDTV, establishes the excess of the
purchase price over fair value of net assets acquired as goodwill and
eliminates the pre-acquisition equity and liabilities of ZDTV not assumed by
Ziff-Davis.
(C) Sale to Vulcan
Entry represents the sale of a one-third interest in ZDTV for $54,000,000 to
Vulcan Programming Inc. A portion of the proceeds of the sale were used to
fund the purchase of ZDTV described in Note A above with the remaining
$21,200,000 used to repay indebtedness.
(D) Elimination Entries on Consolidation
Entry eliminates the Ziff-Davis investment in ZDTV against the related
paid-in capital and establishes the Vulcan minority interest balance.
- 3 -
<PAGE>
<TABLE>
<CAPTION>
UNAUDITED PROFORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
ZIFF-DAVIS MINORITY REDUCTION OF ZIFF-DAVIS
INC. ZDTV LLC INTEREST & AMORTIZATION INTEREST INC.
HISTORICAL HISTORICAL TAXES (A) EXPENSE (B) EXPENSE (C) PROFORMA
---------- ---------- --------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenue, net.................................... $ 1,108,892 $ 5,296 $ -- $ -- $ -- $ 1,114,188
Cost of production.............................. (305,346) (4,113) -- -- -- (309,459)
Selling, general and administrative expenses.... (567,683) (41,886) -- -- -- (609,569)
Depreciation and amortization of property and
equipment....................................... (29,885) (4,691) -- -- -- (34,576)
Amortization of intangible assets............... (122,659) (880) -- (7,337) -- (130,876)
Restructuring charge............................ (52,239) -- -- -- -- (52,239)
----------- --------- -------- --------- --------- -----------
Income from operations...................... 31,080 (46,274) -- (7,337) -- (22,531)
Interest expense, net-related party............. (65,935) (1,251) -- -- -- (67,186)
Interest expense, net........................... (77,612) -- -- -- 1,802 (75,810)
Other non-operating income, net................. 8,231 -- -- -- -- 8,231
----------- --------- -------- --------- --------- -----------
Loss before income taxes.................... (104,236) (47,525) -- (7,337) 1,802 (157,296)
Provision (benefit) for income taxes............ (26,427) -- (12,737) (1,966) 721 (40,409)
Minority interest in losses of subsidiary....... -- -- 15,683 2,421 -- 18,104
----------- --------- -------- --------- --------- -----------
Net loss.................................... $ (77,809) $ (47,525) $ 28,420 $ (2,950) $ 1,081 $ (98,783)
=========== ========= ======== ========= ========= ===========
Pro forma basic loss per common share........... $ (0.78) $ (0.99)
=========== ===========
Pro forma weighted average common shares
outstanding..................................... 100,000,000 100,000,000
<FN>
The accompanying notes are an integral part of these unaudited proforma financial statements.
</FN>
</TABLE>
- 4 -
<PAGE>
NOTES TO UNAUDITED PROFORMA COMBINED STATEMENT OF OPERATIONS
(A) Minority interest and taxes
Entry represents the reflection of Vulcan's one-third interest in the losses
of ZDTV. Entry also represents Ziff-Davis' tax benefit related to its share
of ZDTV's losses. Such benefit is calculated at the Company's effective tax
rate of 40%.
(B) Amortization expense
Entry represents the amortization of the $73,367,000 in goodwill arising on
Ziff-Davis' acquisition of ZDTV. Further, one-third of such adjustment is
allocated to the minority interest and a tax benefit calculated at an
effective rate of 40% has been recorded on Ziff-Davis' share of amortization
expense.
(C) Reduction of interest expense
Entry reflects the reduced interest expense resulting from using the net
cash proceeds of the acquisition and sale transaction to repay amounts owed
under Ziff-Davis' revolving credit facility. Such reduction is based on an
average interest rate of 8.5%. Further, the entry reflects the tax expense
(at 40%) related to the reduction of expense. As this is a Ziff-Davis
related transaction, not ZDTV, no minority interest impact is reflected.
- 5 -
