<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported):
August 4, 1999
ZIFF-DAVIS INC.
(Exact name of registrant as specified in its charter)
DELAWARE 1-19676 13-3987754
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
28 E. 28th Street, New York, New York 10016
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 503-3500
N/A
(Former name or former address, if changed since last report)
<PAGE>
Item 5. Other Events.
The following prospectus was included on Ziff-Davis's Form S-1, File
No. 333-69447, filed on March 30, 1999. Information contained herein may be
superceded by current information since the date of the prospectus was March 30,
1999.
-2-
<PAGE>
10,000,000 Shares
Ziff-Davis Inc.--ZDNet
Common Stock
[LOGO] ZDNet ----------------
This is an initial public offering of shares of a new series of common stock
of Ziff-Davis Inc. We intend these shares to reflect the performance of ZDNet,
our online business division. ZDNet stock will have voting rights that will
fluctuate depending on its market value from time to time as compared to the
market value of ZD stock, our other series of common stock.
This prospectus relates to an offering of 8,000,000 shares in the United
States. In addition, 2,000,000 shares are being offered outside the United
States in an international offering.
ZDNet stock has been approved for listing on the New York Stock Exchange
under the symbol "ZDZ", subject to official notice of issuance.
Read the risk factors beginning on page 17 of this prospectus to learn about
certain factors you should consider before buying shares of ZDNet stock.
----------------
Neither the Securities and Exchange Commission nor any other regulatory body
has approved or disapproved of these securities or passed upon the accuracy or
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
----------------
<TABLE>
<CAPTION>
Per Share Total
--------- ------------
<S> <C> <C>
Initial public offering price........................... $19.00 $190,000,000
Underwriting discount................................... $ 1.33 $ 13,300,000
Proceeds, before expenses, to Ziff-Davis Inc............ $17.67 $176,700,000
</TABLE>
The U.S. underwriters may, under certain circumstances, purchase up to an
additional 1,500,000 shares from us at the initial public offering price less
the underwriting discount.
----------------
Joint Global Coordinators and Joint Book-Running Managers
Goldman, Sachs & Co. Donaldson, Lufkin & Jenrette
----------------
Hambrecht & Quist
----------------
Prospectus dated March 30, 1999.
<PAGE>
Artwork includes: (1) descriptions of certain ZDNet Web sites, (2) logos for
the Web sites described and (3) journalistic acclaim of ZDNet and its Web
sites.
Text included within the artwork is as follows:
One Brand.
A $2.3 Trillion Market*
*Source: Dataquest, April 1998 (1999 Worldwide IT Market estimate)
28+ Channels
FIND LEARN EVALUATE PURCHASE USE
More Than 60 Interconnected Sites
believe in technology(TM) ZD(TM)
www.zdnet.com ZDNet(TM)
AnchorDesk
A leading online source for tech intelligence, with Killer Downloads, Top Tech
News, Week in Review, TalkBack and more. Jesse Berst's "Berst Alert" has become
one of the Web's largest newsletters, with more than 2 million subscriptions.
In June 1998 Marketing Computers magazine named Berst "The Web's #1 Most
Influential Journalist."
ZDNN
Timely and comprehensive news on the technology industry 24 hours a day, every
day. In addition to ZDNet's seasoned editorial staff, ZDNN has access to
reporting and analysis from the industry's leading technology publications.
Products
Comprehensive reviews that allow users to evaluate and select products. The
Product Guides channel makes full use of ZD Labs to test the newest hardware
and software, and then presents the findings clearly and honestly.
FIND LEARN EVALUATE
At Home
Resources for home computing. ZDNet's At Home channel has news and reviews for
everything from kids' stuff to family finance to telecommuting.
Community Central
The Web's town square, where online users gather to share the latest news and
opinions and to have fun. Dozens of message boards keep users posted on an
array of current topics, and chat sessions with industry experts make Community
Central visitors the best-informed crowd on the Web.
i
<PAGE>
GameSpot
A popular destination for PC and video gamers, full of authoritative gaming
news, reviews, demos and tips.
PC Magazine Online
The award-winning consumer tech magazine's dynamic Web site gives users all
they need to know to buy computer products with confidence. The Editors' Picks
feature lab-tested products that PC Magazine's expert staff consider the finest
available.
ZDNet is a division of ZD Inc. Believe in Technology, the ZDNet logo and the ZD
logo are trademarks of ZD Inc. All other names and logos are the trademarks of
their respective owners.
computershopper.com
The computershopper.com channel offers products from a wide selection of
vendors and brands, allowing users to shop, compare and buy. Over $37 million
in commerce orders were initiated through computershopper.com and forwarded to
vendors in December 1998.
HELP!
Advice for optimizing the use of a PC or Mac. ZDNet's Help! channel contains
16,500 tips, tricks, shortcuts and bug fixes plus free tech advice when users
need it.
PURCHASE USE FIND
Facilitating Commerce
Once users find the perfect product, they can order by phone, directly through
the vendor or through computershopper.com's secure server.
Software Library
Contains over 34,000 downloadable files which have been tested for viruses and
compatibility.
Devhead
A crucial resource for today's information wizards. Devhead offers tools,
techniques, product information and downloads for developing Web sites and
evaluating Internet products and services.
www.zdnet.com ZDNet(TM)
ii
<PAGE>
Infinite Acclaim.
THE WALL STREET JOURNAL
(interactive edition), 7/98
(ZDNet e-business)
"An all-around resource..."
USA TODAY, 4/98
(ZDNet Inter@ctive Investor)
"Hot Site"
THE SEATTLE TIMES, 2/98
(ZDNet--Software Library)
Best of the Web: General Excellence Category
SMART MONEY, 6/98
(ZDNet--ZDNN)
"...competes hard for scoops and gets plenty."
MARKETING COMPUTERS, 6/98
#1 Most Influential Journalist on the Web: Jesse Berst--AnchorDesk
#3 Most Influential Journalist on the Web: Dan Farber
BARRON'S TOP INVESTMENT SITES, 10/98
(ZDNet--Inter@ctive Investor)
Ranked #8 in Barron's annual survey of top investment sites
WEB MARKETING ASSOCIATION, 12/98
(ZDNet--ZDNN)
Standard of Excellence Award
DAILY NEWS, 3/98
"...a must-stop along the information superhighway."
THE CHICAGO TRIBUNE, 6/98
"...one of the best places on the net to download everything..."
AMERICAN BUSINESS PRESS CEBA AWARDS
(Push "97: COMDEX)
Excellence in Interactive Advertising Award
FIND LEARN EVALUATE PURCHASE USE
believe in technology(TM) ZD(TM)
www.zdnet.com ZDNet(TM)
iii
<PAGE>
SUMMARY
This summary highlights key aspects of the offering of ZDNet stock contained
elsewhere in this prospectus. This summary is not a substitute for the more
detailed information contained in the rest of this prospectus. For a more
comprehensive description of the offering of ZDNet stock, you should read the
entire prospectus.
ZIFF-DAVIS INC. AND ZDNET
Ziff-Davis Inc.
Ziff-Davis Inc. is a leading media and marketing company that provides
information on computing and technology, including the Internet. We provide
technology companies worldwide with marketing strategies for reaching key
decision-makers. From an accounting standpoint, we have separated ZDNet, our
online business division, from ZD, which includes the rest of our businesses
and a retained interest in ZDNet. We have allocated all of our consolidated
assets, liabilities, revenue, expenses and cash flow between ZDNet and ZD.
We intend our ZDNet stock to track the performance of ZDNet and we intend our
ZD stock to track the performance of ZD. We are offering you shares of ZDNet
stock but we are not offering you any shares of ZD stock. We briefly describe
ZD below and we briefly describe ZDNet in the next section of this summary.
ZD includes:
. The following Ziff-Davis Inc. businesses: print publishing, trade shows
and conferences, market research, education, including our Internet-based
educational service, and television, including an online component.
. A retained interest in ZDNet. This retained interest is currently 100%,
but will decline to reflect the initial issuance of ZDNet stock as well
as any future issuances.
Our principal executive offices are located at One Park Avenue, New York, New
York 10016. Our telephone number is (212) 503-3500.
ZDNet
We are offering you ZDNet stock, which we intend to track the performance of
ZDNet, our online business division.
ZDNet provides technology-related information to Internet users worldwide.
ZDNet focuses on content, community and commerce. ZDNet creates up-to-date,
reliable and comprehensive content divided broadly into "channels" that focus
on specific topics or audience groups. ZDNet's network of over 60
interconnected Internet sites offers over 1,200
3
<PAGE>
news stories per month, 50,000 product listings, 30,000 product reviews and
34,000 downloadable programs. The community of ZDNet users interacts through
various online message systems, including bulletin boards, chat rooms,
moderated forums and e-mail. ZDNet facilitates commerce by providing users of
its sites with the ability to evaluate, compare and purchase products and
services and by providing advertisers and merchants with access to a highly
targeted user group with attractive demographics.
According to Media Metrix, in December 1998 zdnet.com ranked first among all
Web sites in the category of news, information and entertainment, ahead of such
sites as cnet.com, cnn.com, msnbc.com, Disney Online and espn.com. ZDNet
estimates that its Web sites served more than 202 million page views during
December 1998, up from 124 million in December 1997. ZDNet delivered
approximately 460 million ad-bearing pages during the fourth quarter of 1998,
up from 240 million during the same period of 1997. In addition, ZDNet had
localized foreign language editions in more than 16 countries as of December
31, 1998.
As the Internet gains acceptance as an advertising and commerce medium and as
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. 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.
ZDNet's objective is to be the leading online content site focused on
technology products and services and the preferred online platform for
advertisers and merchants. ZDNet's strategy is to:
. continue to offer differentiated technology-related content,
. grow ZDNet's user community,
. build ZDNet's brand strength,
. increase advertising and commerce revenue,
. strengthen and expand strategic alliances and
. extend ZDNet's international presence.
ZDNet derives many benefits from its relationship with ZD, including consumer
and business recognition of the ZD brand name, use of magazine articles,
product reviews and other information created by ZD, and the ability to market
and promote ZDNet across all of ZD's businesses and publications. ZDNet's
revenue has grown from $13.6 million in 1995 to $56.1 million in 1998.
4
<PAGE>
The Offering
<TABLE>
<C> <S>
Shares of ZDNet Stock Offered by Ziff-Davis Inc.:
U.S. Offering.................................... 8,000,000 shares
International Offering........................... 2,000,000 shares
Total Offered.................................... 10,000,000 shares, assuming
the underwriters do not
exercise their option to
purchase up to 1,500,000
additional shares.
Total Offered for Account of ZD in Respect of
its Retained Interest in ZDNet................. 8,500,000 shares, assuming
the underwriters do not
exercise their option to
purchase up to 1,500,000
additional shares.
Total Offered for Account of ZDNet.............. 1,500,000 shares
Total Number of Notional ZDNet Shares Deemed
Outstanding After the Offering.................. 71,500,000 shares, which
includes offered shares and
notional shares representing
ZD's retained interest in
ZDNet. Does not include
approximately 10,026,000
shares that may be purchased
for $4.29 per share upon
exercise of outstanding
stock options.
Use of Proceeds: We will attribute the net
proceeds from 1,500,000
shares to ZDNet, in a manner
analogous to a primary
offering of common stock. We
will attribute the net
proceeds from the remaining
shares to ZD, in a manner
analogous to a secondary
offering of common stock of
a subsidiary owned by a
parent. ZDNet will advance
to ZD the net proceeds
attributed to ZDNet, and ZD
will use those net proceeds,
together with the net
proceeds attributed to ZD,
to reduce our outstanding
indebtedness.
New York Stock Exchange Symbol: "ZDZ".
</TABLE>
5
<PAGE>
What is Tracking Stock?
ZDNet Stock: ZDNet stock is what is sometimes referred to as
tracking stock. Tracking stock is a type of
common stock that is intended to reflect or track
the performance of a particular business. In this
case, ZDNet stock is intended to track the
performance of ZDNet.
From an accounting standpoint, we have separated
ZDNet, our online business division, from ZD,
which includes the rest of our businesses and a
retained interest in ZDNet, and we have allocated
all of our consolidated assets, liabilities,
revenue, expenses and cash flow between ZDNet and
ZD.
Although we intend ZDNet stock to reflect the
performance of ZDNet, holders of ZDNet stock will
be common stockholders of Ziff-Davis Inc. For
this reason, holders of ZDNet stock will be
subject to all of the risks associated with an
investment in Ziff-Davis Inc. and all of its
businesses, assets and liabilities.
Dividends: We currently intend to retain all of our earnings
to finance our operations, repay our indebtedness
and fund future growth. We do not expect to pay
any dividends on ZDNet stock for the foreseeable
future.
Mandatory Dividend, If we dispose of all or substantially all of the
Redemption or Exchange on assets of ZDNet and the disposition is not an
Disposition of Assets: exempt disposition under the terms of our
charter, we would be required to choose one of
the following three alternatives:
. pay a dividend to holders of ZDNet stock in an
amount equal to a proportionate interest in the
net proceeds of such disposition,
. redeem from holders of ZDNet stock, for an
amount equal to a proportionate interest in the
net proceeds of such disposition, outstanding
shares of ZDNet stock or
. issue ZD stock in exchange for outstanding
ZDNet stock at a 10% premium.
At any time within one year after completing a
special dividend or partial redemption referred
to above, we will
6
<PAGE>
have the right to issue ZD stock in exchange for
outstanding ZDNet stock at a 10% premium.
For purposes of determining the exchange rate
that will result in an exchange at a 10% premium,
we will value ZD stock and ZDNet stock based on
their average market values over a specified 20-
trading day period before the exchange.
Exchange for ZD Stock or At any time before the total market value of
ZDNet Stock at Ziff-Davis ZDNet stock exceeds 65% of the total market value
Inc.'s Option: of all of our common stock for 30 trading days
during any 60 consecutive trading day period, we
will have the right to issue ZD stock in exchange
for outstanding ZDNet stock at a premium. The
premium will be 25% for exchanges occurring in
the first quarter after issuance and will decline
quarterly over a period of 3 years to 15%.
At any time after the total market value of ZDNet
stock exceeds 65% of the total market value of
all of our common stock for 30 trading days
during any 60 consecutive trading day period, but
before the total market value of ZDNet stock
drops below 50% of the total market value of all
our common stock for 30 trading days during any
60 consecutive trading day period, we will have
the right to issue ZDNet stock in exchange for
outstanding ZD stock at a 15% premium.
In addition, if the total market value of ZDNet
stock exceeds 65% of the total market value of
all of our common stock for 30 trading days
during any 60 consecutive trading day period and
then drops to below 50% of the total market value
of all of our common stock for 30 trading days
during any 60 consecutive trading day period, we
will have the right to issue shares of one series
in exchange for shares of the other series on a
value for value basis. Once this right arises, we
will not lose it, regardless of the subsequent
market values of ZDNet stock and ZD stock.
For purposes of determining the exchange rate
that will result in an exchange at a specified
premium or on a value for value basis, we will
value ZD stock and
7
<PAGE>
ZDNet stock based on their average market values
over a specified 20-trading day period before the
exchange.
Exchange for Stock of a We will have the right, at any time, to transfer
Subsidiary at Ziff-Davis all of the assets and liabilities of ZDNet to a
Inc.'s Option: subsidiary and deliver all of the stock of that
subsidiary in exchange for all of the outstanding
ZDNet stock.
Voting Rights: Each share of ZDNet stock will have a number of
votes equal to the average market value of a
share of ZDNet stock divided by the average
market value of a share of ZD stock over a
specified 20-trading day period prior to the date
of that vote.
Holders of ZD stock and ZDNet stock will vote
together as a single class, except in certain
limited circumstances.
Liquidation: Upon liquidation of Ziff-Davis Inc., holders of
ZD stock and ZDNet stock will be entitled to
receive the net assets of Ziff-Davis Inc., if
any, remaining for distribution to stockholders
after payment or provision for all liabilities of
Ziff-Davis Inc. and payment of the liquidation
preference payable to any holders of preferred
stock. Amounts due upon liquidation in respect of
shares of ZD stock and shares of ZDNet stock will
be distributed pro rata in accordance with the
average market value of ZD stock and the average
market value of ZDNet stock over a specified
20-trading day period prior to the liquidation.
8
<PAGE>
ZDNET
Summary Historical and Pro Forma Combined Financial and Other Data
The following table presents summary historical combined data for ZDNet as of
and for the ten month period ended December 31, 1996 and as of and for the
years ended December 31, 1997 and 1998. In addition, the table presents
unaudited summary pro forma data as of and for the year ended December 31,
1998. The historical financial data was derived from the Combined Financial
Statements of ZDNet included in this prospectus. An affiliate of Ziff-Davis
Inc. acquired ZDNet on February 29, 1996; therefore, no results of ZDNet are
shown for periods before that date. No historical earnings per share or share
data is presented as Ziff-Davis Inc. does not consider such data to be
meaningful. After the issuance of ZDNet stock, Ziff-Davis Inc. will report
earnings per share data for ZD and ZDNet but not for Ziff-Davis Inc.
The pro forma data presented in the table below assumes that:
. the following transactions had occurred as of January 1, 1998 in the case
of statement of operations data and other data and as of December 31, 1998
in the case of balance sheet data:
(a) the sale of 10,000,000 shares of ZDNet stock in the offering at a
public offering price of $19.00 per share, less underwriting discounts
and estimated expenses of the offering assumed to be $1.75 per share,
(b) the attribution to ZDNet of the assumed net proceeds from 1,500,000
shares and the attribution to ZD of the remaining net proceeds from
the offering, and
(c) the transfer by ZDNet to ZD, as an inter-group revolving credit
advance, bearing interest at an assumed rate of 8.5% of the net
proceeds attributed to ZDNet and
(d) the recording of non-cash compensation expense relating to ZDNet
options.
. the policies described under "Certain Cash Management and Accounting
Policies" included in this prospectus had been adhered to for the year
ended December 31, 1998, and each cash transfer from ZD to ZDNet or from
ZDNet to ZD had been accounted for as a decrease or increase in the inter-
group revolving credit advance referred to in (c) above as contemplated by
those policies.
The pro forma data is not necessarily indicative of the actual financial
position or results of operations of ZDNet as of or for the year ended December
31, 1998 or the financial position or results of operations that ZDNet would
have experienced if the transactions for which the data gives pro forma effect
had in fact occurred at the times assumed. Also, the pro forma data does not
purport to represent ZDNet's future financial position or results of
operations.
9
<PAGE>
This table should be read in conjunction with the Selected Historical
Financial and Other Data, Management's Discussion and Analysis of Financial
Condition and Results of Operations and Financial Statements for each of Ziff-
Davis Inc., ZD and ZDNet beginning on F-79, F-33 and F-5 of this prospectus,
respectively.
<TABLE>
<CAPTION>
Year ended
December 31,
-----------------
Ten months Pro forma
ended year ended
December 31, December 31,
1996 1997 1998 1998
------------ -------- ------- ------------
(in thousands)
<S> <C> <C> <C> <C>
Statement of Operations Data:
Revenue, net..................... $ 16,215 $ 32,218 $56,143 $ 56,143
Cost of operations:
Production and content.......... 14,863 23,543 26,208 26,208
Selling, general and
administrative expenses........ 13,280 23,475 30,993 30,993
Stock-based compensation........ -- -- -- 3,317
Depreciation and amortization... 5,485 7,681 6,448 6,448
Loss from operations............. (17,413) (22,481) (7,506) (10,823)
Minority interest................ -- 400 134 134
Interest income.................. -- -- -- 2,199
Loss before income taxes......... (17,413) (22,081) (7,372) (8,490)
Net loss......................... (16,925) (21,238) (7,884) (8,554)
Net loss per notional share (1).. $ (0.12)
Weighted average notional shares
outstanding (2)................. 71,500
Balance Sheet Data (at period
end):
Total current assets............. $ 7,852 $ 11,521 $20,068 $ 45,943
Total assets..................... 82,507 87,326 97,686 123,561
Total liabilities................ 3,932 4,034 8,139 8,139
Division equity.................. 78,575 83,292 89,547 115,422
Other Data:
Net cash used in operating
activities (3).................. $(12,620) $(15,264) $(4,522) $ (4,522)
Capital expenditures............. 1,010 2,374 4,483 4,483
Investments and acquisitions, net
of cash acquired................ -- 2,998 5,000 5,000
EBITDA (4)....................... (11,928) (14,400) (924) (4,241)
</TABLE>
- -------
(1) Pro forma net loss per notional share equals ZDNet's net loss for the year
ended December 31, 1998 divided by the weighted average notional shares
outstanding.
(2) Notional shares are outstanding shares plus shares attributable to ZD's
retained interest in ZDNet. This number assumes the offering had been
completed on January 1, 1998 and gives no effect to outstanding employee
stock options.
(3) This information should be read in conjunction with the more detailed
information concerning cash flows from operating, investing and financing
activities in the Combined Statements of Cash Flows set forth in ZDNet's
Combined Financial Statements.
(4) "EBITDA" is defined as income before provision for income taxes, interest
income, depreciation and amortization. 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 ZDNet'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 media industry, the EBITDA
presented for ZDNet may not be comparable to similarly titled measures
reported by other companies.
10
<PAGE>
ZD
Summary Historical and Pro Forma Combined Financial and Other Data
The following table presents summary combined historical data for ZD as of
and for the years ended December 31, 1996, 1997 and 1998. In addition, the
table presents unaudited summary pro forma data as of and for the year ended
December 31, 1998. The historical financial data was derived from the Combined
Financial Statements of ZD included in this prospectus. An affiliate of Ziff-
Davis Inc. acquired a print publishing business, ZD Publishing, on February 29,
1996; the data does not include results from the acquired businesses for
periods before the date of acquisition. On May 4, 1998, Ziff-Davis Inc.
completed a reorganization described in Note 2 to the Combined Financial
Statements of ZD. Results for periods before the reorganization are not
directly comparable to results for periods after the reorganization. No
historical earnings per share or share data is presented as Ziff-Davis Inc.
does not consider such data meaningful. After the issuance of ZDNet stock,
Ziff-Davis Inc. will report earnings per share data for ZD and ZDNet but not
for Ziff-Davis Inc.
The pro forma data presented in the table below gives effect to the pro forma
adjustments described in Note 2 to the Combined Financial Statements of ZD and
assumes that:
. the following transactions had occurred as of January 1, 1998 in the case
of statement of operations data and other data and as of December 31,
1998 in the case of balance sheet data:
(a) the re-classification of each outstanding share of common stock into
a share of ZD stock,
(b) the sale of 10,000,000 shares of ZDNet stock in the offering at a
public offering price of $19.00 per share, less underwriting
discounts and estimated expenses of the offering assumed to be $1.75
per share,
(c) the attribution to ZDNet of the net proceeds from 1,500,000 shares
and the attribution to ZD of the remaining net proceeds from the
offering,
(d) the transfer by ZDNet to ZD, as an inter-group revolving credit
advance, bearing interest at an assumed rate of 8.5%, of the net
proceeds attributed to ZDNet,
(e) the application of the aggregate net proceeds from the offering to
reduce indebtedness under Ziff-Davis Inc.'s revolving credit
facility, bearing interest at an assumed rate of 8.5%, and
(f) the recording of non-cash compensation expense relating to ZDNet
options.
. the policies described under "Certain Cash Management and Accounting
Policies" included in this prospectus had been adhered to for the year
ended December 31, 1998, and each cash transfer from ZD to ZDNet or from
ZDNet to ZD had been accounted for as a decrease or increase in the
inter-group revolving credit advance referred to in (c) above as
contemplated by those policies.
11
<PAGE>
The pro forma data is not necessarily indicative of the actual financial
position or results of operations of ZD as of or for the year ended December
31, 1998 or the financial position or results of operations that ZD would have
experienced if the transactions for which the data gives pro forma effect had
in fact occurred at the times assumed. Also, the pro forma data does not
purport to represent ZD's future financial position or results of operations.
This table should be read in conjunction with the Selected Historical
Financial and Other Data, Management's Discussion and Analysis of Financial
Condition and Results of Operations and Financial Statements for each of Ziff-
Davis Inc., ZD and ZDNet beginning on F-79, F-33 and F-5 of this prospectus,
respectively.
<TABLE>
<CAPTION>
Pro forma
Year ended December 31, year ended
---------------------------------- December 31,
1996 1997 1998 1998
---------- ---------- ---------- ------------
(in thousands except share and per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenue, net............ $ 938,924 $1,121,543 $1,052,749 $ 1,052,749
Depreciation and
amortization........... 134,251 147,259 146,096 146,996
Income from operations.. 104,594 131,713 38,586 37,338
Interest expense, net... 120,646 190,445 143,547 125,865
Loss before income
taxes.................. (26,636) (71,648) (104,748) (87,788)
Net loss................ (52,081) (71,179) (77,809) (67,423)
Net loss per share...... $ (0.67)
Weighted average shares
outstanding............ 100,000,000
Balance Sheet Data (at period end):
Cash and cash
equivalents............ $ 29,915 $ 30,273 $ 32,274 $ 32,274
Total assets............ 3,584,963 3,548,108 3,429,938 3,439,670
Total long-term debt.... 2,522,252 2,408,240 1,539,322 1,392,697
Division equity......... 447,756 126,130 1,352,598 1,508,955
Other Data:
Net cash provided by
operating
activities(1).......... $ 74,164 $ 11,900 $ 100,299 $ 100,299
Capital expenditures.... 21,355 27,822 32,117 32,117
Capital contributions to
ZDNet.................. 13,630 20,664 14,269 14,269
Investments and
acquisitions, net of
cash acquired.......... 2,124,823 11,002 22,772 22,772
EBITDA(2)............... 233,258 272,894 244,094 241,022
</TABLE>
(Footnotes on following page)
12
<PAGE>
- --------
(1) This information should be read in conjunction with the more detailed
information concerning cash flows from operating, investing and financing
activities in the Combined Statements of Cash Flows set forth in ZD's
Combined Financial Statements.
(2) "EBITDA" is defined as income before provision for income taxes, interest
expense, depreciation and amortization. ZD's EBITDA is calculated by adding
(a) ZD's EBITDA before losses related to its retained interest in ZDNet and
(b) ZD's proportionate interest in ZDNet's EBITDA, which is currently 100%.
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 ZD'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 and media
industries, the EBITDA presented for ZD may not be comparable to similarly
titled measures reported by other companies.
13
<PAGE>
ZIFF-DAVIS INC.
Summary Historical and Pro Forma Consolidated Financial and Other Data
The following table presents summary historical consolidated data for Ziff-
Davis Inc. as of and for the years ended December 31, 1996, 1997 and 1998. In
addition, the table presents unaudited summary pro forma data as of and for the
year ended December 31, 1998. The historical financial data was derived from
the Consolidated Financial Statements of Ziff-Davis Inc. included in this
prospectus. 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. 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. No historical or pro forma earnings per share or share data is
presented as Ziff-Davis Inc. does not consider such data meaningful.
The pro forma data presented gives effect to the pro forma adjustments
described in Note 2 to the Consolidated Financial Statements of Ziff-Davis Inc.
and assumes that the following transactions had occurred as of January 1, 1998
in the case of statement of operations data and other data and as of December
31, 1998 in the case of balance sheet data:
(a) the sale of 10,000,000 shares of ZDNet stock in the offering at a public
offering price of $19.00 per share, less underwriting discounts and
estimated expenses of the offering assumed to be $1.75 per share,
(b) the application of the aggregate net proceeds from the offering to reduce
indebtedness under Ziff-Davis Inc.'s revolving credit facility bearing
interest at an assumed rate of 8.5% and
(c) the recording of non-cash compensation expense relating to ZDNet options.
The pro forma data is not necessarily indicative of the actual financial
position or results of operations of Ziff-Davis Inc. as of or for the year
ended December 31, 1998 or the financial position or results of operations that
Ziff-Davis Inc. would have experienced if the transactions for which the data
gives pro forma effect had in fact occurred at the times assumed. Also, the pro
forma data does not purport to represent Ziff-Davis Inc.'s future financial
position or results of operations.
14
<PAGE>
This table should be read in conjunction with the Selected Historical
Financial and Other Data, Management's Discussion and Analysis of Financial
Condition and Results of Operations and Financial Statements for each of Ziff-
Davis Inc., ZD and ZDNet beginning on F-79, F-33 and F-5 of this prospectus,
respectively.
<TABLE>
<CAPTION>
Pro forma,
Year ended December 31, year ended
---------------------------------- December 31,
1996 1997 1998 1998
---------- ---------- ---------- ------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenue, net............ $ 955,139 $1,153,761 $1,108,892 $1,108,892
Depreciation and amorti-
zation................. 139,736 154,940 152,544 153,444
Income from operations.. 87,181 109,232 31,080 26,515
Interest expense, net... 120,646 190,445 143,547 123,666
Loss before income
taxes.................. (27,124) (72,491) (104,236) (88,920)
Net loss................ (52,081) (71,179) (77,809) (68,620)
Balance Sheet Data (at
period end):
Cash and cash equiva-
lents.................. $ 29,915 $ 30,301 $ 32,566 $ 32,566
Total assets............ 3,584,173 3,546,646 3,433,803 3,433,803
Total long-term debt.... 2,522,252 2,408,240 1,539,322 1,366,822
Stockholders' equity.... 447,756 126,130 1,352,598 1,525,098
Other Data:
Net cash provided (used)
by operating
activities(1).......... $ 61,543 $ (3,364) $ 95,776 $ 95,776
Capital expenditures.... 22,365 30,196 36,599 36,599
Investments and
acquisitions, net of
cash acquired.......... 2,124,823 14,000 27,772 27,772
EBITDA(2)............... 233,258 272,894 244,094 240,429
</TABLE>
- -------
(1) This information should be read in conjunction with the more detailed
information concerning cash flows from operating, investing and financing
activities in the Consolidated Statements of Cash Flows set forth in Ziff-
Davis Inc.'s Consolidated Financial Statements.
(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 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 and media industries, the EBITDA
presented for Ziff-Davis Inc. may not be comparable to similarly titled
measures reported by other companies.
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<PAGE>
The following table presents the relative contribution of ZDNet and ZD to the
revenue and operating income (loss) of Ziff-Davis Inc. for the years ended
December 1997 and 1998.
<TABLE>
<CAPTION>
Year ended
December 31,
----------------------
1997 1998
---------- ----------
(in thousands)
<S> <C> <C>
ZDNet revenue.......................................... $ 32,218 $ 56,143
ZD revenue............................................. 1,121,543 1,052,749
---------- ----------
Ziff-Davis Inc. total revenue........................ $1,153,761 $1,108,892
========== ==========
ZDNet loss from operations............................. $ (22,481) $ (7,506)
ZD income from operations.............................. 131,713 38,586
---------- ----------
Ziff-Davis Inc. income from operations............... $ 109,232 $ 31,080
========== ==========
</TABLE>
16
<PAGE>
RISK FACTORS
You should carefully consider the risk factors described below, as well as
the other information included in this prospectus, before buying shares of
ZDNet stock.
Risk Factors Relating to ZDNet Stock
Holders Of ZDNet Stock Will Be Common Stockholders Of Ziff-Davis Inc. And Will
Be Subject To Risks Associated With An Investment In Ziff-Davis Inc. As A Whole
We cannot assure you that the market value of ZDNet stock will in fact
reflect the performance of ZDNet as we intend.
Even though we have allocated all of our consolidated assets, liabilities,
revenue, expenses and cash flow between ZDNet and ZD in order to prepare their
respective financial statements, that allocation will not change the legal
title to any assets or responsibility for any liabilities and will not affect
the rights of any of our creditors. Further, holders of ZDNet stock will not
have any legal rights related to specific assets of ZDNet and, in any
liquidation, will receive a share of the net assets of Ziff-Davis Inc. based on
the relative trading prices of ZDNet stock and ZD stock rather than on any
assessment of the actual value of ZDNet or ZD. Holders of ZDNet stock will
continue to be common stockholders of Ziff-Davis Inc. and, as such, will be
subject to all risks associated with an investment in Ziff-Davis Inc. and all
of our businesses, assets and liabilities. For example, if the cash flow of ZD
is insufficient to satisfy inter-group loans or other debt owed by ZD, ZDNet
would be adversely affected. For more information on the negative effects our
debt obligations could have on holders of Ziff-Davis Inc. common stock,
including holders of ZDNet stock, see "--Other Ziff-Davis Inc. Risks--Ziff-
Davis Inc. Has Significant Debt Obligations And May Be Unable To Obtain
Additional Financing Or Be Required To Divert Funds To Pay Down Principal And
Interest On Its Debt".
If Ziff-Davis Inc. Runs Into Financial Difficulty, The Value Of ZDNet Stock May
Suffer For Reasons Having Nothing To Do With The Prospects For ZDNet
Financial results of ZD will affect Ziff-Davis Inc.'s consolidated results of
operations, financial position and borrowing costs. This could affect the
results of operations, financial position or borrowing costs of ZDNet or the
market price of ZDNet stock. In addition, net losses of ZD, and any dividends
or distributions on, or repurchases of, ZD stock, will reduce the assets of
Ziff-Davis Inc. legally available for dividends on ZDNet stock. Accordingly,
you should read financial information for ZDNet together with financial
information for ZD and financial information for Ziff-Davis Inc.
Having Two Series Of Common Stock Could Create Potential Conflicts Of Interest
And The Board Of Directors Could Make Decisions That Adversely Affect Holders
Of ZDNet Stock
Having two series of common stock could give rise to occasions when the
interests of holders of one series might diverge or appear to diverge from the
interests of holders of the other series. Examples include:
. our decisions as to whether to allocate the proceeds of issuances, or the
costs of repurchases, of ZDNet stock to ZD in respect of its retained
interest in ZDNet or to the equity of ZDNet,
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<PAGE>
. our decisions as to how to allocate consideration received in connection
with a merger involving Ziff-Davis Inc. between holders of ZD stock and
ZDNet stock,
. our decisions as to whether and when to exchange one series of common
stock for the other series of common stock,
. our decisions as to whether and when to approve dispositions of assets of
either ZD or ZDNet,
. our decisions as to whether to pay dividends on ZD stock and ZDNet stock
and
. our decisions as to whether and how to make transfers of funds between ZD
and ZDNet and, more generally, our decisions as to other operational and
financial matters that could be considered detrimental to ZDNet.
If directors own disproportionate interests, in percentage or value terms, in
ZD stock and ZDNet stock, that disparity could create or appear to create
potential conflicts of interest when they are faced with decisions that could
have different implications for the different series.
Principles Of Delaware Law May Protect Decisions Of The Board Of Directors That
Have A Disparate Impact Upon Holders Of ZD Stock And ZDNet Stock
Principles of Delaware law established in cases involving differing treatment
of two classes of common stock provide that a board of directors owes an equal
duty to all common stockholders regardless of class or series and does not have
separate or additional duties to either group of stockholders. We are not aware
of any legislative or judicial precedent involving the fiduciary duties of
directors of a Delaware corporation with two classes of common stock with
separate rights related to specified operations of the corporation. However,
under the principles of Delaware law referred to above and the related
principle known as the "business judgment rule", you may not be able to
challenge decisions that have a disparate impact upon holders of ZD stock and
ZDNet stock if the board of directors:
. is disinterested and adequately informed with respect to such decisions
and
. acts in good faith and in the belief that it is acting in the best
interests of Ziff-Davis, Inc.'s stockholders.
The Board Of Directors Has Sole Discretion To Allocate Proceeds Upon Issuances
Or Costs Of Repurchases Of ZDNet Stock To ZDNet Or ZD
Proceeds from the issuance of ZDNet stock may not necessarily be allocated to
the equity of ZDNet. The board of directors will determine in its sole
discretion whether to allocate the proceeds of issuances or the costs of
repurchases of ZDNet stock to ZD in respect of its retained interest in ZDNet
or to the equity of ZDNet. For a more complete description of how the board of
directors will allocate cash between ZD and ZDNet, see "Certain Cash Management
and Allocation Policies".
18
<PAGE>
Stockholders Will Not Vote On How To Allocate Consideration Received In
Connection With A Merger Among Holders Of ZD Stock And Holders Of ZDNet Stock
Our charter does not contain any provisions governing how consideration
received in connection with a merger or consolidation involving Ziff-Davis Inc.
is to be allocated between holders of ZD stock and holders of ZDNet stock.
Neither holders of ZD stock nor holders of ZDNet stock will have a separate
class vote in any merger or consolidation so long as we divide the type and
amount of consideration between holders of ZD stock and holders of ZDNet stock
in a manner we determine, in our sole discretion, to be fair. In any such
merger or consolidation, the different ways we may divide the consideration
might have materially different results. As a result, the consideration to be
received by holders of ZDNet stock in any such merger or consolidation may be
materially less valuable than the consideration they would have received if
they had a separate class vote on such merger or consolidation.
We Have The Option To Exchange One Series Of Common Stock For The Other Series
And This May Be Disadvantageous To Holders Of ZDNet Stock
As described in the summary under the caption "What is Tracking Stock?", we
will have the right to issue shares of one series of common stock in exchange
for outstanding shares of the other series of common stock. Because certain
exchanges would be at a premium, and since we could determine to effect an
exchange at a time when either or both of ZD stock and ZDNet stock may be
considered to be overvalued or undervalued, any such exchange may be
disadvantageous to holders of ZDNet stock. In addition, any such exchange would
preclude holders of the exchanged series of common stock from retaining their
investment in a security that is intended to reflect separately the performance
of the related group.
We May Dispose Of Assets Of Either ZD Or ZDNet Without Your Approval
Delaware law requires stockholder approval only for a sale or other
disposition of all or substantially all of the assets of Ziff-Davis Inc. As
long as the assets attributed to ZD or ZDNet represent less than substantially
all of Ziff-Davis Inc.'s assets, we may approve sales and other dispositions of
any amount of the assets of either ZD or ZDNet without any stockholder
approval. If we dispose of all or substantially all of the assets of either ZD
or ZDNet, we would be required, if the disposition is not an exempt disposition
under the terms of our charter, to choose one of the following three
alternatives:
. declare and pay a dividend,
. redeem shares of the relevant series of stock or
. exchange shares of one series for outstanding shares of the other series
at a 10% premium.
Consequently, holders of either series of common stock may receive less value
for their shares than the value that a third-party buyer might pay for all or
substantially all of the assets of such group. In addition, if we elect to
complete an exchange in connection with the disposition, we could do so as one
of the three alternatives required in connection with
19
<PAGE>
the disposition or as an optional exchange that may in some cases be at no
premium, and any such exchange could be completed at a time when ZDNet stock or
ZD stock may be considered to be overvalued or undervalued.
The board of directors will decide, in its sole discretion, how to proceed
and is not required to select the option that would result in the highest value
to holders of ZDNet stock. This decision, however, will be subject to the board
of directors' general fiduciary duties as described above.
We Do Not Expect To Pay Dividends For The Foreseeable Future
Our various debt instruments currently prohibit the payment of dividends, and
in any event, we do not expect to pay any dividends for the foreseeable future.
We May Not Pay Dividends Equally On ZD Stock And ZDNet Stock
We have the right to pay dividends on ZD stock or ZDNet stock, or both, in
equal or unequal amounts, notwithstanding:
. the performance of either ZD or ZDNet,
. the amount of assets available for dividends on either series,
. the amount of prior dividends declared on either series or
. any other factor.
In addition, net losses of ZD, and any dividends or distributions on, or
repurchases of, ZD stock, will reduce the assets of Ziff-Davis Inc. legally
available for dividends on ZDNet stock.
The Board Of Directors May Make Operational And Financial Decisions Affecting
ZD And ZDNet Differently
The board of directors, in its sole discretion, will make operational and
financial decisions and implement policies that affect the businesses of ZD and
ZDNet differently. Examples include:
. transfers of funds between ZD and ZDNet,
. the manner of accounting for transfers of funds between ZD and ZDNet,
. allocation of funds for capital expenditures,
. other transactions between ZD and ZDNet,
. the allocation of financing opportunities in public markets and
. the allocation of business opportunities, resources and personnel.
Decisions of the board of directors may favor either ZD or ZDNet at the expense
of the other. For example, the decision to provide funds for ZD may adversely
affect the ability of ZDNet to obtain funds sufficient to implement its growth
strategies.
20
<PAGE>
The Board Of Directors Has Sole Discretion To Change Certain Cash Management
And Allocation Policies And May Change These Policies In A Manner That Is
Disadvantageous To Holders Of ZDNet Stock Or ZD Stock
The board of directors has adopted certain policies relating to cash
management and allocations between ZD and ZDNet. Although it has no present
intention to do so, the board of directors may, in its sole discretion, modify,
rescind or add to any of these policies in a manner that is disadvantageous to
holders of ZD stock or ZDNet stock. The board of directors' discretion to
change these policies makes an investment in ZDNet stock riskier than an
investment in ordinary common stock. For a more comprehensive description of
these policies, see "Certain Cash Management and Allocation Policies".
Under Its Current Policies The Board Of Directors Has Sole Discretion
Concerning Various Cash Management Matters
The discretion of the board of directors in the area of cash management makes
an investment in ZDNet stock riskier than an investment in ordinary common
stock.
The board of directors will determine, in its sole discretion, whether to
transfer any cash to or from ZDNet. Moreover, the board of directors has sole
discretion to determine
. whether a transfer of cash from ZDNet to ZD will be treated as a
revolving credit advance, a long-term loan or a return of capital and
. whether a transfer of cash from ZD to ZDNet will be treated as a
revolving credit advance, a long-term loan or a contribution to capital.
The determination of the board of directors as to how to account for a cash
transfer will affect the amount of interest expense and interest income,
stockholders' equity and number of notional shares of ZDNet stock outstanding
as reflected in the financial statements of ZD and ZDNet.
If ZD is unable to repay advances or loans owed to ZDNet, ZDNet would be
adversely affected. Also, if ZDNet extends an advance or loan to ZD at an
interest rate below ZDNet's cost of funds or opportunity cost, ZDNet's results
would be adversely affected to the extent of the difference.
Any cash transfers we determine to account for as capital contributions or
returns of capital will increase or decrease ZD's retained interest in ZDNet.
Although we would calculate any change in the retained interest by reference to
the then current market value of ZDNet stock, the change could come at a time
when ZDNet stock is considered to be overvalued or undervalued. Also, any
increase in ZD's retained interest in ZDNet will reduce the percentage of ZDNet
intended to be represented by outstanding ZDNet stock.
The Board Of Directors Has Broad Discretion About A Variety Of Allocation
Matters And May Make Such Allocations In A Manner That Is Disadvantageous To
Holders Of ZDNet Stock Or ZD Stock
The board of directors will determine, in its sole discretion, how to
allocate issuances of Ziff-Davis Inc. debt or preferred stock between ZD and
ZDNet. Moreover, the board of
21
<PAGE>
directors will have broad discretion as to how to allocate Ziff-Davis Inc.'s
consolidated assets, liabilities, revenue, expenses and cash flow between ZD
and ZDNet. The discretion of the board of directors in these areas makes an
investment in ZDNet stock riskier than an investment in ordinary common stock.
Holders Of ZDNet Stock Will Vote Together With Holders Of ZD Stock And Will
Have Limited Separate Voting Rights
Holders of ZD stock and ZDNet stock will vote together as a single class,
except in certain limited circumstances provided under the Delaware general
corporation law. When holders of ZD stock and ZDNet stock vote together as a
single class, holders of the series of common stock having a majority of the
votes will be in a position to control the outcome of the vote even if the
matter involves a conflict of interest between holders of ZD stock and holders
of ZDNet stock.
The Voting Power Of ZDNet Stock Will Fluctuate Based On Its Market Value
Each share of ZD stock will have one vote and each share of ZDNet stock will
have a variable number of votes based on the market value of a share of ZDNet
stock as compared to the market value of a share of ZD stock over a specified
20-trading day period prior to the date of the vote. Accordingly, the relative
voting power of ZD stock and ZDNet stock will fluctuate from time to time based
on the respective market values of ZD stock and ZDNet stock and the number of
shares outstanding of each of ZD stock and ZDNet stock.
We Cannot Assure You That A Market Will Develop For ZDNet Stock Or What Its
Market Price Will Be
There is currently no public trading market for ZDNet stock and we cannot
assure you that one will develop or be sustained after the offering. We cannot
predict the prices at which ZDNet stock will trade after the offering. The
initial public offering price for ZDNet stock was determined through our
negotiations with the underwriters and may not bear any relationship to the
market price at which ZDNet stock will trade after the offering or to any other
established criteria for value.
Certain terms of ZD stock and ZDNet stock may adversely affect the trading
price of ZDNet stock. These terms include:
. the right of the board of directors to exchange shares of one series of
common stock for shares of the other series,
. the discretion of the board of directors in making determinations
relating to a variety of cash management and allocation matters and
. the variable voting power of ZDNet stock as compared to ZD stock.
Such terms may limit the market price of ZDNet stock.
22
<PAGE>
The Market Price Of ZDNet Stock Will Fluctuate And Could Fluctuate
Significantly, Subjecting Ziff-Davis Inc. To Securities Class Action Litigation
The stock market has experienced extreme price and volume fluctuations. The
market prices of securities of Internet-related companies, in particular, have
been especially volatile. In the past, companies that have experienced such
volatility have sometimes been the object of securities class action
litigation. Securities class action litigation may result in substantial costs
and a diversion of management's attention and resources. For a description of
certain class action and derivative litigation to which Ziff-Davis Inc. is a
party, see "ZDNet Description of Business--Legal Proceedings".
The Market Price Of ZDNet Stock May Not Reflect The Performance Of ZDNet As We
Intend And Holders Of ZDNet Stock Will Be Subject To All Risks Associated With
An Investment In Ziff-Davis Inc. As A Whole
We cannot assure you that the market price of ZDNet stock will in fact
reflect the performance of ZDNet as we intend. Holders of ZDNet stock will
continue to be common stockholders of Ziff-Davis Inc. and, as such, will be
subject to all risks associated with an investment in Ziff-Davis Inc. and all
of its businesses, assets and liabilities.
There Are Many Factors Which May Inhibit Or Prevent Acquisition Bids For ZDNet
Or ZD
SOFTBANK Corp. and its non-Ziff-Davis Inc. affiliates currently own
approximately 70% of Ziff-Davis Inc.'s outstanding common stock. As long as
SOFTBANK Corp. and its non-Ziff-Davis Inc. affiliates continue to own a
majority of the voting power of our common stock, no person interested in
acquiring Ziff-Davis Inc. or ZDNet will be able to do so without obtaining the
consent of SOFTBANK Corp. and its non-Ziff-Davis Inc. affiliates.
If ZD and ZDNet were separate companies, any person interested in acquiring
either ZD or ZDNet without negotiating with management could seek control of
that entity by obtaining control of its outstanding voting stock by means of a
tender offer or proxy contest. Although we intend ZD stock and ZDNet stock to
reflect the separate performance of ZD and ZDNet, a person interested in
acquiring only ZD or ZDNet without negotiation with Ziff-Davis Inc.'s
management could obtain control of ZD or ZDNet only by obtaining control of the
outstanding voting stock of Ziff-Davis Inc.
The existence of two series of common stock could present complexities and
could in certain circumstances pose obstacles, financial and otherwise, to an
acquiring person. The existence of two series of common stock could, under
certain circumstances, prevent stockholders from profiting from an increase in
the market value of their shares as a result of a change in control of Ziff-
Davis Inc. by delaying or preventing such a change in control.
After giving effect to the offering and assuming the underwriters do not
exercise their option to purchase additional shares, there will be
approximately 95 million shares of common stock available for future issuance
without further stockholder approval. One of the effects of the existence of
authorized and unissued common stock and preferred stock could be to enable the
board of directors to issue shares to persons friendly to current
23
<PAGE>
management, which could render more difficult or discourage an attempt to
obtain control of Ziff-Davis Inc. by means of a merger, tender offer, proxy
contest or otherwise, and thereby protect the continuity of our management.
Such additional shares also could be used to dilute the stock ownership of
persons seeking to obtain control of Ziff-Davis Inc.
In addition, certain provisions of our charter and by-laws, and certain
provisions of Delaware law, may inhibit changes of control not approved by the
board of directors. For additional takeover constraints, see "Description of
Capital Stock--Certain Other Provisions of the Amended Charter and By-laws" and
"--Certain Provisions of Delaware Law".
The Value Of ZDNet Stock May Decline Due To Future Issuances Of ZDNet Stock
Our charter allows the board of directors, in its sole discretion, to issue
authorized but unissued shares of common stock. This could dilute the value of
shares of ZDNet stock. The board of directors may issue ZD stock or ZDNet stock
to, among other things:
. raise capital,
. provide compensation or benefits to employees,
. pay stock dividends or
. acquire companies or businesses.
Under the Delaware general corporation law, the board of directors would not
need your approval for these issuances. We do not intend to seek your approval
for any such issuances unless:
. stock exchange regulations or other applicable law require approval or
. the board of directors deems it advisable.
The Market Price Of ZDNet Stock May Decline Due To Shares Of ZDNet Stock
Eligible For Future Sale
Upon completion of the offering, we expect to have 10.0 million shares of
ZDNet stock outstanding, or 11.5 million shares if the underwriters fully
exercise their option to purchase additional shares. These shares will be
freely tradeable without restriction by persons other than affiliates of Ziff-
Davis Inc. We expect up to 100,000 shares will be owned by certain affiliates
and will therefore be deemed restricted securities within the meaning of the
Securities Act. In addition, ZD and ZDNet employees will have the right to
purchase approximately 10.0 million additional shares of ZDNet stock under
employee stock options, subject to vesting requirements. Also, upon completion
of the offering and assuming the underwriters do not exercise their option to
purchase additional shares, we will be entitled to issue up to approximately
70.0 million additional shares of ZDNet stock, of which, up to 61.5 million
shares could be for the account of ZD in respect of its retained interest in
ZDNet.
We cannot predict the effect, if any, that sales of ZDNet stock, or the
availability of shares for sale, will have on the market price prevailing from
time to time. Nevertheless, sales of significant amounts of ZDNet stock in the
public market, or the perception that such sales may occur, could adversely
affect prevailing market prices. For a more detailed description of the effect
of future sales of ZDNet stock, see "Shares Eligible for Future Sale".
24
<PAGE>
Risk Factors Relating To ZDNet
ZDNet Has An Extremely Limited Operating History And A History Of Net Losses
And There Is No Assurance ZDNet Will Report Net Income In The Future
ZDNet has an extremely limited operating history and an investor must
consider the risks, expenses and difficulties frequently encountered by such
companies, particularly in the new and rapidly evolving market for Internet
products, content and services. We cannot assure you that ZDNet will be
successful in addressing such risks. Although ZDNet has experienced revenue
growth in recent periods, we cannot assure you that ZDNet's revenue will
continue to grow or continue at its current level.
ZDNet has incurred significant net losses in the past, $21.2 million in 1997
and $7.9 million in 1998. For more information regarding these net losses, see
"ZDNet Selected Historical Combined Financial and Other Data" and ZDNet's
Combined Financial Statements in this prospectus. We cannot assure you that
ZDNet will report net income in the future.
We Cannot Accurately Predict ZDNet's Future Revenue
As a result of the evolving nature of the Internet and ZDNet's limited
operating history, we cannot accurately forecast its revenue. Current and
future expense levels are based principally on estimated future revenue and are
to a large extent fixed. Accordingly, ZDNet may be unable to adjust spending to
compensate for any unexpected revenue shortfall. If ZDNet's actual revenue is
less than its estimated revenue, this could have an immediate material adverse
effect on ZDNet's profits and liquidity.
ZDNets' Quarterly Operating Results May Fluctuate Significantly And Are Not
Reliable Indicators Of Its Future Performance
ZDNet's quarterly operating results may fluctuate significantly because of a
variety of factors, many of which are outside our control, including:
. overall usage levels of the Internet and of ZDNet's sites in particular,
. demand for Internet advertising and the loss of advertisers,
. seasonal trends in Internet use and advertising,
. the amount and timing of ZDNet's capital expenditures,
. costs relating to the expansion of ZDNet's operations and the
introduction of new sites and services,
. price competition or pricing changes in Internet advertising and
. costs relating to technical difficulties or system downtime.
We believe Internet advertising typically slows in the first quarter of the
year. Historically, ZDNet has experienced lower advertising and lower revenue
in the first quarter of each year as compared to the fourth quarter of the
prior year. Seasonality and cyclicality in the level of Internet advertising
expenditures generally could become more pronounced in the future as the
Internet becomes more accepted as an advertising vehicle. If a large
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number of advertisers do not advertise in a given quarter or if advertising
revenue is deferred, ZDNet's revenue in that quarter could be substantially
reduced. This would have a material adverse affect on ZDNet's operating
results. Quarterly comparisons of ZDNet's results of operations are not
reliable and you should not rely on them as an indication of its future
performance. For additional information about the seasonality of ZDNet's
revenue, see "ZDNet Management's Discussion and Analysis of Financial Condition
and Results of Operations".
ZDNet's Future Revenue Is Dependent On The Growth Of Internet Use And The
Acceptance Of The Internet As An Advertising And Commerce Medium
ZDNet's future revenue will depend largely on the widespread acceptance and
use of the Internet as an information source and as an advertising and commerce
vehicle. Rapid growth in Internet use is a recent trend and market acceptance
of the Internet as an advertising and commercial medium is highly uncertain.
The Internet may not be accepted as a viable advertising and commerce medium
for distribution of information and engaging in commerce for a number of
reasons, including:
.inadequate development of the network infrastructure,
.inadequate development of enabling technologies,
.insufficient commercial support for Internet advertising,
.concerns about privacy and security among users and
.lack of widely accepted standards for measuring the effectiveness of
advertising on the Internet.
ZDNet Depends On Advertising As A Principal Source Of Its Revenue
ZDNet derived 86% of its revenue in 1998 from the sale of advertising on its
Internet sites and we expect that advertising revenue will continue to be the
principal source of its revenue in the foreseeable future. Most of ZDNet's
advertising contracts are either short-term contracts and/or can be terminated
by the advertiser at any time with little notice. We cannot assure you that
ZDNet will be able to retain current advertisers or obtain new advertising
contracts.
ZDNet's ability to generate advertising revenue will depend on several
factors, including:
.the continued development of the Internet as an advertising medium,
.the pricing of advertising on other Internet sites,
.the amount of traffic on ZDNet's network of sites,
.pricing pressures, delays and new product launches,
.ZDNet's ability to achieve, demonstrate and maintain attractive user
demographics and
.ZDNet's ability to develop and retain a skilled advertising sales force.
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ZDNet Is Increasingly Dependent On, And Receives A Significant Percentage Of
Its Revenue From, A Limited Number of Advertisers
A relatively small number of advertisers contribute a significant percentage
of ZDNet's consolidated revenue. In 1998, ZDNet's top 20 advertising customers
accounted for approximately 46.5% of its net advertising revenue. These
advertising clients, and its other advertising clients, may not continue to use
ZDNet's services to the same extent, or at all, in the future. 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.
ZDNet Depends On Arrangements With Third Parties For Internet Traffic To Its
Sites And ZDNet's Failure to Maintain These Arrangements With Third Parties
Could Adversely Affect Its Business
ZDNet's ability to advertise on and maintain links from other Internet sites
is an important element to its success. Traffic originating from links existing
on other Internet sites, particularly search engines, directories and other
navigational tools managed by Internet service providers and Web browser
companies, is an important segment of the overall traffic on ZDNet's Internet
sites. ZDNet has special linking arrangements to generate additional traffic
with Yahoo!, Excite and MSNBC which are either short-term contracts and/or can
be terminated with little notice. There is intense competition for these types
of linking arrangements. We cannot assure you that these arrangements will be
maintained or that advertising or links will continue to be available on
reasonable commercial terms or at all.
ZDNet Depends On Licensed Technology From Third Parties And ZDNet's Failure To
Maintain These Arrangements With Third Parties Could Adversely Affect Its
Business
ZDNet relies on certain technology licensed from third parties such as
Vignette's Storyserver, Thunderstone's Texis Search Engine and Netscape's Web
Server Software for use in operating and managing its Internet sites and
providing related services to users and advertisers. ZDNet's ability to
generate revenue from Internet commerce may also depend on data encryption and
authentication technologies that it may be required to license from third
parties. We cannot assure you that such technology licenses will be available
at all, that they will be available on reasonable commercial terms or that they
will operate as intended.
ZDNet's Competitive Position Depends On Its Ability To Attract And Retain Key
Personnel
ZDNet's failure to attract and retain qualified personnel could diminish its
competitive position. ZDNet's performance is substantially dependent on the
continued services and performance of its senior executive officers and other
key personnel. ZDNet does not have long-term employment agreements with any of
its key personnel and maintains no "key person" life insurance policies.
ZDNet's future success also depends on its ability to identify, attract, retain
and motivate highly skilled editorial, technical, managerial, sales, marketing
and customer service personnel. Competition for such persons is intense. We
cannot assure you that ZDNet will be able to attract or retain such personnel.
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ZDNet May Not Be Able To Adequately Respond To Technological Change
The market for Internet products and services is characterized by rapid
technological developments, frequent new product introductions and evolving
industry standards. ZDNet will be required to continually improve the
performance, features and reliability of its network infrastructure and
Internet sites, particularly in response to competition and changing customer
demands. We cannot assure you that ZDNet will be successful in responding
rapidly, cost-effectively or adequately to such developments.
ZDNet's Competition Is Intense And Is Expected To Increase Significantly
We cannot assure you that ZDNet will be able to maintain its competitive
position. Competition among Internet content providers is intense and is
expected to increase significantly in the future. The market for Internet
content sites is rapidly evolving and barriers to entry are low, enabling
newcomers to launch competitive sites at relatively low cost. Moreover,
increased competition could result in price reductions, reduced margins or loss
of market share, any of which could have an effect on our future revenue and
profits.
We believe ZDNet competes most directly with Web sites specializing in broad-
based technology information. These include c|net, CMP, Internet.com and IDG.
ZDNet also generally competes for users and advertisers with:
. Internet portals and search sites that help users access information
rather than create original content and are not specifically focused on
technology related information, such as Excite, Infoseek, Lycos and
Yahoo!,
. general news sites, such as CNN and ABC,
. general purpose online service providers, such as America Online and MSN,
. 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. In order to compete successfully
and attract users, advertisers and strategic partners, ZDNet must continue to
provide high quality, engaging content in a timely and cost-effective manner.
To Remain Competitive, ZDNet Must Constantly Expand And Develop New Content
Areas And Services. This Is Inherently Risky And Expensive
ZDNet's future success may depend in part on its ability to continue
expanding its Internet sites to include new subject matters and services. Costs
related to developing new content areas and services are expensed as they are
incurred while revenue related to these new content areas and services
typically builds over time. Accordingly, ZDNet's profitability from year to
year may be adversely affected by the number and timing of new launches. In
addition, we cannot assure you that any new areas or services will be developed
in a timely or cost-effective manner or that they will be successful.
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We Cannot Assure You That ZDNet Will Continue To Develop The ZDNet Brand
We cannot assure you that ZDNet will be able to continue to develop its
brand. ZDNet believes brand identity is important to attracting and expanding
its user base, Internet traffic and advertising and commerce relationships.
ZDNet believes the significance of brand recognition will intensify as the
number of Internet sites increases.
Any Capacity Constraints Or System Disruptions Could Have A Material Adverse
Effect On ZDNet
The performance and reliability of ZDNet's Internet sites and network
infrastructure are critical to its reputation and ability to attract and retain
users, advertisers, merchants and strategic partners. Any system error or
failure, or a sudden and significant increase in traffic, may result in the
unavailability of sites and significantly delay response times. Individual,
sustained or repeated occurrences could result in a loss of potential or
existing users, advertisers or strategic partners. In addition, because ZDNet's
advertising revenue is directly related to the number of advertisements it
delivers to users, system interruptions or delays would reduce the number of
impressions delivered and thereby reduce its revenue.
ZDNet's systems and operations are vulnerable to interruption or malfunction
due to certain events beyond its control, including natural disasters,
telecommunications failures and computer hacking. ZDNet also relies on Web
browsers and online service providers to provide Internet access to its sites.
We cannot assure you that ZDNet will be able to expand its network
infrastructure, either itself or through use of third-party hosting systems or
service providers, on a timely basis sufficient to meet demand. ZDNet presently
has only a limited amount of redundant facilities or systems, no formal
disaster recovery plan and no sufficient business interruption insurance to
compensate for losses that may occur. Any interruption to its systems or
operations could have a material adverse effect on ZDNet's business and its
ability to retain users, advertisers and strategic partners.
ZDNet's Networks May Be Vulnerable To Security Risks
ZDNet's networks may be vulnerable to unauthorized access, computer hacking,
computer viruses and other security problems. A user who circumvents security
measures could misappropriate proprietary information or cause interruptions or
malfunctions in ZDNet's operations. ZDNet may be required to expend significant
resources to protect against the threat of such security breaches or to
alleviate problems caused by such breaches. Although ZDNet intends to continue
to implement industry-standard security measures, such measures may be
inadequate.
Increased Government Regulation Of The Internet Could Have A Material Adverse
Effect On ZDNet
Increased government regulation, or the application of existing laws to
online activities, could inhibit Internet growth, expose ZDNet and other online
content providers to additional liabilities and increase the cost of doing
business. This could have a material adverse effect on ZDNet's profits and
liquidity. The increasing popularity and use of the Internet and other online
services may lead to the adoption of new laws and regulations in the U.S. or
elsewhere covering issues such as online privacy, copyright and trademark,
sales taxes and
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fair business practices or which require qualification to do business as a
foreign corporation in certain jurisdictions. For instance, the European
Union's recently adopted privacy regulations may limit the collection and use
of certain user information.
ZDNet Relies On Intellectual Property Rights Which May Not Be Adequately
Protected Under Current Laws
To establish and protect its trademark, service mark and other proprietary
rights in its products and services, ZDNet relies on a combination of:
. copyright, unfair competition, trademark, service mark and trade secret
laws,
. confidentiality agreements with its licensees and other third parties and
. confidentiality agreements and policies covering its employees.
We cannot assure you that these measures will be adequate, that ZDNet will be
able to secure registrations for all of its marks in the U.S. or
internationally or that third parties will not infringe upon or misappropriate
its proprietary rights. Any infringement, misappropriation, or litigation
relating to intellectual property rights, may divert management's attention and
ZDNet's funds to litigate such claims.
Legal standards relating to the validity, enforceability and scope of
protection of certain proprietary rights in Internet-related business are
uncertain and evolving. In particular, new domain name registration and
ownership priority procedures may be adopted which may make it more difficult
for ZDNet and other Internet businesses to retain or obtain desirable domain
names.
ZDNet May Incur Liability For Its Internet Content And User Data
As a content provider, ZDNet may face potential liability for intellectual
property infringement, defamation, indecency and other claims. In addition,
ZDNet may incur liability for unauthorized duplication or distribution of
third-party content or materials or for information collected from and about
its users. We cannot assure you that third parties or users will not bring
claims against ZDNet relating to proprietary rights or use of personal
information. Although ZDNet seeks to obtain indemnification from strategic
partners for any liability resulting from licensed content or linked sites, we
cannot assure you that such indemnities will always be obtainable or adequate.
ZDNet's general liability insurance may not cover or be adequate for potential
claims of this type.
ZDNet May Not Be Able To Adequately Manage Its Growth
ZDNet will need to effectively plan and manage its business to succeed in the
rapidly evolving Internet industry. ZDNet continues to increase the scope of
its operations and has grown its workforce substantially. As of December 31,
1997, ZDNet had a total of 252 employees and, as of December 31, 1998, ZDNet
had a total of 316 employees--a growth of 25.4%. This growth has placed, and
future growth may place, a significant strain on ZDNet's resources. For
example, we expect that the variety of advertising products available on ZDNet
sites will expand, increasing demands on ZDNet's billing and collection systems
and requiring additional resources to properly determine pricing and
discounting structures. ZDNet expects that it will need to continue to improve
its financial and management controls and reporting systems and procedures, and
will need to continue to expand, train and manage its workforce.
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ZDNet's Acquisition And Investment Strategy May Not Be Successful And Could
Adversely Affect ZDNet's Business
ZDNet may acquire or make investments in new or complementary businesses,
products, services or technologies. We cannot assure you that ZDNet will be
able to identify suitable acquisition or investment candidates. Even if ZDNet
does identify suitable candidates, we cannot assure you that ZDNet will be able
to make such acquisitions or investments on reasonable commercial terms or
successfully assimilate personnel, operations, products, services or
technologies into its operations. This could disrupt ZDNet's ongoing business,
distract ZDNet's management and employees, increase ZDNet's expenses, including
amortization of goodwill, and materially and adversely affect ZDNet's profits
and liquidity. Furthermore, the incurrence or issuance of debt or equity
securities may be attributed to ZDNet to fund any future ZDNet acquisitions.
ZDNet's Computer Systems, And Those Of Others On Whom It Relies, May Not
Achieve Year 2000 Readiness
Programming codes in existing computer systems and software may not reliably
recognize date-sensitive information when the calendar year changes to 2000.
Systems or software that do not properly recognize such information could
generate erroneous data or fail. We are in the process of identifying and
testing our computer systems and software for Year 2000 readiness. In addition,
we are in the process of working with third parties on whom we rely for system
and database management to ensure Year 2000 readiness. We have not verified
that such third parties are Year 2000 compliant. We cannot assure you that our
systems or software, or third-party systems or software on which we rely, will
be Year 2000 compliant. Significant uncertainty exists concerning the potential
costs and effects associated with Year 2000 compliance. If Ziff-Davis Inc. 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 ZDNet's profits and liquidity. For more information
regarding ZDNet's Year 2000 readiness, see "ZDNet Management's Discussion And
Analysis of Financial Condition and Results of Operations--Year 2000 Readiness
Disclosure" in this prospectus.
ZDNet Intends to Expand Its International Operations And May Encounter A Number
Of Problems Doing So. There Are Also A Number of Risks Associated With
International Operations That Could Adversely Affect ZDNet's Business
Expansion of International Operations. One component of ZDNet's growth
strategy is to further expand into international markets. ZDNet's international
operations are at an early stage of development and have an extremely limited
operating history. In addition, the markets in which ZDNet has undertaken
international expansion have technology and online industries that are less
well developed than in the U.S.
Risks of International Operations. There are certain risks inherent in doing
business in international markets, such as the following:
. uncertainty of product acceptance by different cultures,
. unforeseen changes in regulatory requirements,
. difficulties in staffing and managing multinational operations,
. state-imposed restrictions on the repatriation of funds,
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. currency fluctuations,
. difficulties in finding appropriate foreign licensees or joint venture
partners and
. potentially adverse tax consequences.
There is a risk that such factors will have an adverse effect on ZDNet's
ability to successfully operate internationally and on its profits and
liquidity.
Other Ziff-Davis Inc. Risks
Ziff-Davis Inc. Has Only Operated As A Stand-Alone Company For Less Than A Year
We have only operated as a stand-alone company since May 1998. Until October
1997, our publishing business and our trade show and conference businesses were
managed as separate SOFTBANK Corp. subsidiaries. Our success depends in part on
our continued ability to manage the combined enterprise.
Ziff-Davis Inc.'s Historical Financial Information Is Not Particularly Relevant
To Its Actual Results
Our financial information included in this prospectus does not reflect what
the actual results of operations, financial position and cash flows would have
been had Ziff-Davis Inc. existed prior to the periods presented. In addition,
the financial information is not necessarily indicative of our future results
of operations, financial position and cash flows. For more information
regarding our operating results, see "Ziff-Davis Inc. Management's Discussion
and Analysis of Financial Condition and Results of Operations--Presentation of
Financial Information".
Ziff-Davis Inc. Is Controlled By Its Principal Stockholders. This Creates
Potential Conflicts Of Interest
SOFTBANK Corp. and its non-Ziff-Davis Inc. affiliates own approximately 70%
of Ziff-Davis Inc.'s outstanding shares. As a result, SOFTBANK Corp. and its
non-Ziff-Davis Inc. affiliates could elect all the members of the board of
directors. SOFTBANK Corp. and its non-Ziff-Davis Inc. affiliates could also
control those actions requiring the approval of the holders of a majority of
the voting stock, including amendments to our charter and any business
combinations. This concentration of ownership could prevent a change in control
of Ziff-Davis Inc. that might otherwise be beneficial to stockholders.
We have entered into certain agreements with SOFTBANK Corp. and its non-Ziff-
Davis Inc. affiliates governing ongoing relationships. These agreements include
certain licensing and management agreements relating to publications, events,
ZDNet and ZDTV, a 24-hour cable television channel and integrated Web site
focused exclusively on computers, technology and the Internet. In addition,
SOFTBANK Corp. has given us an undertaking that, as long as it owns 40% of the
voting power in our stock and can elect a majority of the board of directors,
it will not expand its operations outside Japan involving:
. publishing information on computing and Internet-related technology
through print media, CD-ROM/DVD, Internet and television or
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. producing trade shows, conferences, exhibitions and similar events
primarily related to computing and Internet-related technology
that compete with us without the prior approval of our employee directors after
consulting with our independent directors.
This undertaking does not preclude investments by venture capital funds
managed by SOFTBANK Corp. and its non-Ziff-Davis Inc. affiliates which invest
in, among other things, computer and Internet-related companies. These funds
may be able to co-invest with or compete with us with respect to new
investments. In addition, SOFTBANK Corp. and its non-Ziff-Davis Inc. affiliates
may also develop new funds which may compete with us for investment
opportunities. We have agreed not to compete with SOFTBANK Corp. in Japan
without the prior approval of SOFTBANK Corp.'s board of directors and have
given SOFTBANK Corp. and its non-Ziff-Davis Inc. affiliates the continuing
right to license all of our products and services in Japan. These arrangements
and undertakings might be less favorable than arrangements negotiated at arm's
length between unrelated parties.
Ziff-Davis Inc. Has Significant Debt Obligations And May Be Unable To Obtain
Additional Financing Or Be Required To Divert Funds To Pay Down Principal And
Interest On Its Debt
At December 31, 1998:
. Ziff-Davis Inc.'s total debt was approximately $1.5 billion.
. Ziff-Davis Inc.'s total stockholders' equity was approximately $1.4
billion.
. Ziff-Davis Inc.'s total debt was 53% of total capitalization.
Our indebtedness is substantial in relation to stockholders' equity. The
degree to which we are leveraged is important because:
. It may impair our ability to obtain additional financing for working
capital, capital expenditures, acquisitions or general corporate
purposes.
. It may reduce the funds available to us for our operations if a
substantial portion of our cash flow from operations is dedicated to the
payment of principal and interest on our indebtedness.
. It may impair our ability to incur additional debt because of financial
and other restrictive covenants, including those relating to the
incurrence of additional indebtedness, the creation of liens, the payment
of dividends and sales of assets.
. It may increase our vulnerability to adverse general economic conditions,
including increases in interest rates.
Our indebtedness requires us to use a substantial portion of our cash flow to
pay down principal and interest on our outstanding debt. This reduces the funds
available for capital expenditures and future business opportunities.
Our credit facility is secured, in part, by a first priority security
interest in the capital stock of certain of our subsidiaries and is guaranteed
by certain of our wholly owned domestic subsidiaries, including ZD Inc. and ZD
Events Inc.
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On December 11, 1998, Standard & Poors lowered its corporate credit and bank
loan ratings for Ziff-Davis Inc. to BB- from BB and Ziff-Davis Inc.'s
subordinated debt rating to B from B+. This downgrade had no impact on the
terms of our current borrowings. While the 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.
On December 16, 1998, the lenders on our $1.35 billion credit facility
agreed to amend certain provisions of that facility. The amended provisions
include an increase to our allowed leverage ratios. In return, we have agreed
to pay a one-time fee of $3.375 million, and increase our 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.
Ziff-Davis Inc.'s Revenue Is Dependent On Demand For Advertising
Ziff-Davis Inc. derived 52% of its total revenue in 1998 from advertising
sales and we expect that advertising revenue will continue to be a principal
source of our revenue in the foreseeable future. Most of Ziff-Davis Inc.'s
advertising contracts are either short-term contracts and/or can be terminated
by the advertiser at any time with little notice. We cannot assure you that we
will be able to retain current advertisers or obtain new advertising
contracts.
If a general economic downturn or a U.S. recession occurs in the future, our
advertisers may reduce their advertising budgets. In addition, factors such as
pricing pressures, delays and new product launches may affect technology
product advertisers. We cannot assure you that technology product advertisers
will maintain current levels of advertising in special interest magazines and
events instead of advertising in more general interest media. Any material
decline in the demand for advertising by technology product advertisers could
have an adverse effect on our profits and liquidity.
Many Factors Have Contributed To A Reduced Demand For Advertising And
Ziff-Davis Inc. Expects These Factors To Continue
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 our magazines, principally
PC Magazine, PC/Computing, Computer Shopper and PC Week. We believe these
factors will continue. In part as a result of these factors, earnings before
interest, taxes, depreciation and amortization for the fourth quarter of 1998
were significantly lower than they were for the fourth quarter of 1997.
As a result of this reduced demand, we announced on October 8, 1998 a
company-wide restructuring in which we discontinued three publications,
Internet Business, Equip and Windows Pro, and reduced our workforce by
approximately 10%. In the fourth quarter of 1998, we took a pre-tax charge of
$52.2 million as part of this restructuring.
Ziff-Davis Inc. Is Increasingly Dependent On, And Receives A Significant
Percentage Of Its Revenue From, A Limited Number Of Advertisers
A relatively small number of advertisers contribute a significant percentage
of Ziff-Davis Inc.'s advertising revenue. In 1998, Ziff-Davis Inc.'s top 20
advertising customers accounted
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for approximately 37.1% of its advertising revenue. These advertising clients,
and our other advertising clients, may not continue to use our services to the
same extent, or at all, in the future. A significant reduction in advertising
by one or more of Ziff-Davis Inc.'s largest clients would have a material
adverse effect on our profits and liquidity.
Ziff-Davis Inc.'s Revenue Is Dependent On Certain Publications And Trade Shows
Certain of our publications have represented a significant portion of our
historic revenue. We expect that such publications will continue to do so in
the future. Three of our business publications, PC Magazine, Computer Shopper
and PC Week, accounted for approximately 48% of our publishing revenue in 1998.
Although we believe we have a diversified portfolio of special interest
publications and are not dependent on any single publication, a significant
decline in the performance of any of these publications could have a material
adverse effect on our profits and liquidity.
Certain of our trade shows and conferences have represented a significant
portion of our historic revenue. We expect that such trade shows and
conferences will continue to do so in the future. COMDEX/Fall accounted for 32%
of our trade show and conference revenue in 1998. Although we believe we have a
diversified portfolio of trade shows worldwide, a significant decline in the
performance of COMDEX/Fall could have an adverse effect on our profits and
liquidity.
Ziff-Davis Inc.'s Revenue Is Seasonal And This May Affect Its Quarterly
Operating Results
Our business is seasonal. Revenue typically reaches its highest level during
the fourth quarter of each calendar year. These seasonal trends materially
affect our 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 our 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. We cannot assure you that COMDEX/Fall will continue to be successful or
that our fourth quarter revenue will continue to be higher than revenue for our
other quarters.
Ziff-Davis Inc. Has Historical Net Losses And There Is No Assurance It Will
Report Net Income In The Future
We and our predecessor have incurred significant net losses in the past and
we cannot assure you that we will report net income in the future. For more
information on our net losses, see Ziff-Davis Inc.'s. Selected Historical
Consolidated Financial and Other Data and Consolidated Financial Statements
appearing elsewhere in this prospectus.
To Remain Competitive, Ziff-Davis Inc. Must Constantly Expand And Develop New
Products And Services. This Is Inherently Risky And Expensive
Our success depends in part on our ability to monitor rapidly changing
technologies and market trends and offer new publications, trade shows and
services, including online services, that address the needs of specific target
audiences. The process of internally researching and developing new products
and services and whether they will achieve market acceptance and profitability
can be risky and costly. We cannot assure you that our
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efforts to introduce new, or assimilate acquired, publications, trade shows or
services will be successful or profitable. Costs to develop new products are
expensed as incurred. Accordingly, our profitability from year to year may be
adversely affected by the number and timing of new product launches.
In February 1999, we purchased ZDTV from an affiliate at a purchase price of
$81.4 million plus the costs of funding its operations for January 1999. We
cannot assure you that ZDTV will ultimately obtain sufficient cable carriage
and commercial acceptance to be profitable.
Ziff-Davis Inc. May Be Adversely Affected By Fluctuations In Paper And Postage
Costs
ZD's principal raw material is paper. Paper costs constitute a significant
expense, accounting for 15.2% of our total U.S. print publishing operating
expenses in 1997 and 16.3% in 1998. Paper prices have been volatile over the
past several years, rising from 1994 through 1996, declining in 1997 and
remaining relatively flat in 1998. Management anticipates that paper prices
will remain relatively stable in 1999. We do not use forward contracts and most
of our paper supply contracts, which are generally for a two-to-three year
renewable term, provide for price adjustments to reflect changing market
prices. Accordingly, significant increases in paper prices could adversely
affect ZD's future results of operations.
Postage for magazine distribution is also one of ZD's significant expenses,
accounting for 11.3% of our total U.S. print publishing operating expenses in
1997 and 7.7% in 1998. Postage costs increase periodically and can be expected
to increase in the future. Management estimates postage costs will increase
approximately 3.5% in 1999. We may not be able to recover, in whole or in part,
paper or postage cost increases. Accordingly, significant cost increases could
have a material adverse effect on our profits and liquidity.
Ziff-Davis Inc. Faces Significant Competition In Its Various Businesses And If
It Is Unable To Effectively Compete, Its Profits And Liquidity Could Be
Materially And Adversely Affected
We face significant competition with respect to our print publications, trade
shows and conferences and other technology information services. If we are
unable to compete effectively for advertisers, readers, exhibitors and/or
attendees, our profits and liquidity could be materially and adversely
affected.
In our publishing business, we principally compete for advertising and
circulation revenue with publishers of other computer technology publications.
We also face broad competition from media companies that produce general
interest magazines and newspapers. Competition for advertising dollars is
primarily based on advertising rates, the nature and scope of readership,
reader response to advertisers' products and services and the effectiveness of
sales teams. Overall competitive factors in publishing include product
positioning, editorial quality, circulation, price and customer service. In our
trade show and conference business, we compete with other producers of trade
shows and conferences for exhibition space, exhibitors and attendees, primarily
on the basis of the quality of the conference, its content and organizational
efficiency.
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Ziff-Davis Inc.'s Principal Vendors Are Consolidating And This May Adversely
Affect Its Business And Operations
Our principal vendors include paper suppliers, printers, subscription
fulfillment houses and national newsstand distributors. Each of these
industries is currently experiencing consolidation among their principal
participants. Such consolidation may result in:
. decreased competition, which may lead to increased prices,
. interruptions and delays in services provided by such vendors and
. greater dependence on certain vendors.
Such factors could adversely affect our results of operations. One printing
company accounted for approximately 50% of our U.S.-based publications'
manufacturing expenditures in 1997 and 1998. While we believe there are
adequate alternatives available, an interruption or delay in service from, or
the loss of, this printer could have a material adverse effect.
Ziff-Davis Inc. Is Exposed To A Number Of Risks Associated With International
Markets That Could Adversely Affect Its Business And Operations
One component of our growth strategy is to further expand into international
markets. There are certain risks inherent in doing business in international
markets. For example:
. the uncertainty of product acceptance by different cultures,
. the risks of divergent business expectations,
. difficulties in finding appropriate foreign licensees or establishing
joint ventures with foreign partners,
. difficulties in staffing and managing multinational operations,
. currency fluctuations,
. state-imposed restrictions on the repatriation of funds and
. potentially adverse tax consequences.
There can be no assurance that one or more of such factors will not have an
adverse effect on our future international operations and, consequently, on our
profits and liquidity.
Ziff-Davis Inc. Is A Defendant In Several Lawsuits, Which Could Materially And
Adversely Affect Its Business And Operations
In connection with the initial public offering of our existing common stock
and the repricing of certain stock options, we have been named as a defendant
in several lawsuits. While we believe there are substantial defenses to all of
the claims, we cannot assure you that we will prevail. Defense costs and/or
settlement costs relating to these actions could be substantial, and the
defense of these actions may divert management's attention and resources. If
the plaintiffs prevail in these actions, any judgments awarded by the courts
could have a material adverse effect on our liquidity. For more information
regarding these lawsuits, see "ZDNet Description of Business--Legal
Proceedings".
37
<PAGE>
Ziff-Davis Inc.'s Computer Systems, And Those Of Others On Whom It Relies, May
Not Achieve Year 2000 Readiness
Programming codes in existing computer systems and software may not reliably
recognize date-sensitive information when the calendar year changes to 2000.
Systems or software that do not properly recognize such information could
generate erroneous data or fail. We are in the process of identifying and
testing our computer systems and software for Year 2000 readiness. In addition,
we are in the process of working with third parties on whom we rely for system
and database management to ensure Year 2000 readiness. We have not verified
that such third parties are Year 2000 compliant. We cannot assure you that our
systems or software, or third-party systems or software on which we rely, will
be Year 2000 compliant. Significant uncertainty exists concerning the potential
costs and effects associated with Year 2000 compliance. If Ziff-Davis Inc. or
any subscribers, advertisers, licensors, vendors or other third parties on whom
we rely experiences a Year 2000 compliance problem, this could have a material
adverse effect on our profits and liquidity. For more information on our Year
2000 readiness, see "Ziff-Davis Inc. Management's Discussion and Analysis of
Financial Condition And Results of Operations --Year 2000 Readiness Disclosure"
in this prospectus.
----------------
Our logo and certain titles of our Internet sites, publications, products and
services referenced in this prospectus are our trademarks. Each trade name,
trademark or service mark of any other company appearing in this prospectus is
the property of its owner.
38
<PAGE>
CAUTIONARY STATEMENT REGARDING
FORWARD-LOOKING STATEMENTS
Some of the information in this prospectus may constitute forward-looking
statements which are subject to various risks and uncertainties. Such
statements can be identified by the use of forward-looking terminology such as
"may", "will", "expect", "anticipate", "estimate", "continue", "plan" or other
similar words. These statements discuss future expectations, contain
projections of results of operations or of financial condition or state other
"forward-looking" information. When considering such forward-looking
statements, you should keep in mind the factors described in "Risk Factors" and
other cautionary statements appearing in Management's Discussion and Analysis
of Financial Condition and Results of Operations for each of Ziff-Davis Inc.,
ZD and ZDNet appearing elsewhere in this prospectus. Such risk factors and
statements describe circumstances which could cause actual results to differ
materially from those contained in any forward-looking statement.
This prospectus also includes statistical data regarding the publishing,
trade show and Internet industries. This data was obtained from industry
publications and reports which we believe to be reliable sources. We have not
independently verified such data nor sought the consent of any organizations to
refer to their reports herein.
39
<PAGE>
TRADING PRICES OF AND DIVIDENDS ON EXISTING COMMON STOCK
There currently is no trading market for ZDNet stock.
Our existing common stock, which we are not now offering, is traded on the
NYSE under the trading symbol "ZD". On March 23, 1999, the closing price per
share of existing common stock as reported on the NYSE Composite Tape was
$24.88. As of March 23, 1999, there were 103,108,291 shares of existing common
stock outstanding and 315 stockholders of record.
The high and low sales prices of our existing common stock, as reported on
the NYSE Composite Tape, for that portion of the second quarter of 1998 since
our existing common stock began trading, for the third and fourth quarters of
1998 and the first quarter of 1999 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
<CAPTION>
1999
----
<S> <C> <C>
First Quarter (through March 23, 1999)......................... 28.38 15.81
</TABLE>
We have never declared or paid dividends on our existing common stock. For a
description of our intended dividend policy following the offering, see
"Dividend Policy" and "Description of Capital Stock--Dividends".
40
<PAGE>
USE OF PROCEEDS
Based upon the initial public offering price of $19.00 per share of ZDNet
stock, we estimate that, after deducting underwriting discounts and expenses,
we will receive net proceeds from the initial public offering of ZDNet stock,
of $172.5 million, or $199.0 million if the underwriters fully exercise their
option to purchase additional shares. We will attribute the net proceeds from
1.5 million shares to ZDNet (estimated to be approximately $25.9 million), in a
manner analogous to a primary offering of common stock. We will attribute the
net proceeds from the remaining shares to ZD (estimated to be approximately
$146.6 million, or $173.1 million if the underwriters fully exercise their
overallotment option), in a manner analogous to a secondary offering of common
stock of a subsidiary owned by a parent. ZDNet will advance to ZD the net
proceeds attributed to ZDNet, and ZD will use those net proceeds, together with
the net proceeds attributed to ZD, to reduce outstanding indebtedness under our
revolving credit facility. The indebtedness owed under our revolving credit
facility was, at March 23, 1999, $230 million, bore interest at that time at a
weighted average interest rate of approximately 7.799% based on various LIBOR
rates and matures on March 31, 2005. The advance of cash by ZDNet to ZD will be
treated as an inter-group revolving credit advance and will bear interest at
the rate at which we could borrow such funds on a revolving credit basis. Since
that rate is based on a spread to LIBOR rates as in effect from time to time,
it is not possible to quantify the interest rate in advance.
41
<PAGE>
DIVIDEND POLICY
We currently intend to retain all of our earnings to finance our operations,
repay indebtedness and fund future growth. We do not expect to pay any
dividends on ZDNet stock for the foreseeable future.
Although certain of our debt instruments currently prohibit the payment of
dividends, and in any event, as stated above, we do not expect to pay any
dividends for the foreseeable future on either series of common stock, we will
otherwise be permitted to pay dividends on:
. ZD stock out of the assets of Ziff-Davis Inc. legally available for the
payment of dividends under Delaware law, but the total amounts paid as
dividends on ZD stock cannot exceed the Available Dividend Amount for ZD
and
. ZDNet stock, out of the assets of Ziff-Davis Inc. legally available for
the payment of dividends under Delaware law (and transfer corresponding
amounts to ZD in respect of its retained interest in ZDNet), but the
total of the amounts paid as dividends on ZDNet stock and the
corresponding amounts transferred to ZD in respect of its Retained
Interest in ZDNet cannot exceed the Available Dividend Amount for ZDNet.
The "Available Dividend Amount" for ZD or ZDNet, as the case may be, is based
on the amount that would be legally available for the payment of dividends
under Delaware law if ZD and ZDNet were each a separate Delaware corporation.
For more information on the "Available Dividend Amount" for ZD and ZDNet, see
"Description of Capital Stock--Dividends". We expect that determinations to pay
dividends on ZDNet stock would be based primarily upon the financial condition,
results of operations, capital requirements, any restrictions contained in
financing or other agreements binding upon us and such other factors as the
board of directors deems relevant.
42
<PAGE>
CAPITALIZATION
The tables below set forth the capitalization of ZDNet and Ziff-Davis Inc. as
of December 31, 1998 and as adjusted to give effect to:
. the offering at the initial public offering price of $19.00 per share,
after deducting underwriting discounts and estimated expenses and
assuming the underwriters do not exercise their option to purchase
additional shares,
. the application of the net proceeds as described under "Use of Proceeds"
and
. the re-classification of existing common stock into ZD stock.
These tables should be read in conjunction with the Financial Statements and
the notes thereto included in this prospectus.
ZDNet
<TABLE>
<CAPTION>
As of December
31, 1998
----------------------
Actual Pro forma
---------- ----------
(in thousands)
<S> <C> <C>
Long-term debt.......................................... $ -- $ --
Division equity:
Total division equity................................. 89,547 115,422
---------- ----------
Total capitalization................................ $ 89,547 $ 115,422
========== ==========
Ziff-Davis Inc.
<CAPTION>
As of December
31, 1998
----------------------
Actual Pro forma
---------- ----------
(in thousands)
<S> <C> <C>
Long-term debt, excluding current installments.......... $1,539,322 $1,366,822
---------- ----------
Stockholders' equity:
Preferred stock....................................... -- --
ZDNet stock........................................... -- 100
ZD stock.............................................. -- 1,000
Existing common stock................................. 1,000 --
Additional paid in capital............................ 1,571,681 1,744,081
Retained earnings (deficit)........................... (197,238) (197,238)
Deferred compensation................................. (22,024) (22,024)
Cumulative translation adjustment..................... (821) (821)
---------- ----------
Total stockholders' equity............................ 1,352,598 1,525,098
---------- ----------
Total capitalization................................ $2,891,920 $2,891,920
========== ==========
</TABLE>
43
<PAGE>
DILUTION
At December 31, 1998, ZDNet had a net tangible book value of approximately
$21,768,000 or $0.30 per share equivalent. Net tangible book value per share
equivalent at any date represents the amount of ZDNet's total tangible assets
minus total liabilities divided by the Total Number of Notional ZDNet Shares
Deemed Outstanding. After giving effect to the sale of 10,000,000 shares of
ZDNet stock offered hereby at the initial public offering price of $19.00 per
share and the application of the estimated net proceeds allocated to ZDNet, the
pro forma net tangible book value of ZDNet would have been approximately
$47,643,000 or $0.67 per share equivalent. Thus, under these assumptions,
purchasers of ZDNet stock offered by this prospectus will pay $19.00 per share
and will receive shares with a net tangible book value per share equivalent of
$0.67, which represents an immediate dilution of $18.33 per share.
The following table illustrates this per share dilution:
<TABLE>
<S> <C>
Initial public offering price per share.......................... $19.00
------
Net tangible book value per share equivalent at December 31,
1998............................................................ 0.30
Increase in pro forma net tangible book value per share
equivalent attributable to new investors........................ 0.37
------
Pro forma net tangible book value per share equivalent after the
offering........................................................ 0.67
------
Dilution per share to new investors.............................. $18.33
======
</TABLE>
The foregoing computation of dilution excludes an aggregate of approximately
10,026,000 shares of ZDNet stock purchasable at $4.29 per share upon the
exercise of outstanding employee stock options.
44
<PAGE>
ZDNET
SELECTED HISTORICAL COMBINED FINANCIAL AND OTHER DATA
The following table presents Selected Historical Combined Financial and Other
Data for ZDNet and its predecessor as of and for the years ended December 31,
1994 and 1995, as of and for the two month period ended February 28, 1996, as
of and for the ten month period ended December 31, 1996 and as of and for the
years ended December 31, 1997 and 1998. This data was derived from the Combined
Financial Statements of ZDNet included elsewhere in this prospectus. Data as of
and for the year ended December 31, 1994 was derived from ZDNet's unaudited
financial statements. This table should be read in conjunction with the
Selected Historical Financial and Other Data and Management's Discussion and
Analysis of Financial Condition and Results of Operations for each of ZDNet, ZD
and Ziff-Davis Inc. and Financial Statements for each of ZDNet, ZD and Ziff-
Davis Inc. beginning on pages F-5, F-33 and F-79 of this prospectus,
respectively.
<TABLE>
<CAPTION>
Predecessor(1) ZDNet
------------------------------ ---------------------------------
Year ended Two month Ten month
December 31, period ended period ended Year ended
---------------- February 28, December 31, December 31,
1994 1995 1996 1996 1997 1998
------- ------- ------------ ------------ ------------ -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenue, net............ $13,349 $13,576 $ 2,903 $16,215 $ 32,218 $56,143
Cost of operations:
Production and
content............... 9,321 10,709 1,802 14,863 23,543 26,208
Selling, general and
administrative
expenses.............. 7,276 8,360 1,774 13,280 23,475 30,993
Depreciation and
amortization.......... 1,163 4,040 597 5,485 7,681 6,448
Loss from operations.... (4,411) (9,533) (1,270) (17,413) (22,481) (7,506)
Minority interest....... -- -- -- -- 400 134
Loss before income
taxes.................. (4,411) (9,533) (1,270) (17,413) (22,081) (7,372)
Net loss (2)............ (4,526) (5,755) (814) (16,925) (21,238) (7,884)
Balance Sheet Data (at period
end):
Total current assets.... $ 2,432 $ 3,992 $ 4,951 $ 7,852 $ 11,521 20,068
Total assets............ 3,557 91,772 92,717 82,507 87,326 97,686
Total liabilities....... 8,083 2,090 1,492 3,932 4,034 8,139
Division equity
(deficit).............. (4,526) 89,682 91,225 78,575 83,292 89,547
Other Data:
Capital expenditures.... $ 513 $ 1,590 $ 168 $ 1,010 $ 2,374 4,483
Investments and
acquisitions, net of
cash acquired.......... -- -- -- -- 2,998 5,000
</TABLE>
- --------
(1) A third party acquired ZDNet's predecessor as of January 1, 1995. An
affiliate of Ziff-Davis Inc. acquired ZDNet's predecessor on February 29,
1996. Data for ZDNet's predecessor has been presented for periods before
these dates.
(2) No historical earnings per share or share data are presented as ZDNet does
not consider such data meaningful. After issuance of ZDNet stock, Ziff-
Davis Inc. will report earnings per share data for ZD and ZDNet but not for
Ziff-Davis Inc.
45
<PAGE>
ZDNET
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Revenue
ZDNet's revenue consists of advertising revenue and revenue from
subscription-based fees and services. Advertising revenue consists primarily of
revenue derived from the sale of advertisements on pages delivered to users of
ZDNet's Internet sites. ZDNet recognizes the delivery of a single view of an
advertisement as an "impression". Advertising revenue is derived principally
from arrangements with ZDNet's advertising customers that provide for a
guaranteed number of impressions. Advertising rates vary depending primarily on
the total number of guaranteed impressions purchased, the length of the
advertiser's commitment, the location in which the advertisements are displayed
and the type of advertising. Advertising revenue is recognized in the period in
which the advertisements are delivered. For contracts/campaigns that are longer
than one accounting period, the revenue from the contract/campaign is
recognized ratably over the term of the contract/campaign.
Revenue from barter transactions is recognized during the period in which
advertisements are displayed. Barter transactions are recorded at the lower of
estimated fair value of goods or services received or the estimated fair value
of advertising given. To date, barter transactions have been immaterial to
revenue.
During 1995 and part of 1996, ZDNet was focused on generating revenue from
subscription-based fees and services. This revenue is generated primarily by
charging monthly membership fees to provide access to product reviews, software
reviews and shareware. During 1996, ZDNet shifted the focus of the business
model from the generation of subscription-based fees and services to the
generation of advertising revenue.
As a result of this shift, ZDNet's advertising revenue increased from 6.0% of
total revenue for the year ended December 31, 1995 to 86.0% of total revenue
for the year ended December 31, 1998. Over this period subscription-based fees
and services decreased correspondingly as a percentage of revenue.
No single advertiser accounted for more than 5.0% of ZDNet's total revenue
for the year ended December 31, 1997 or 1998. ZDNet's top 20 advertisers
accounted for 29.3% and 39.9% of total revenue for the years ended December 31,
1997 and 1998, respectively.
Cost of Operations
Costs of production and content include costs to produce and edit content on
ZDNet's Internet sites as well as technical costs incurred to maintain ZDNet's
Internet sites. ZD provides certain editorial content and brand-marketing
services to ZDNet for which ZDNet pays a royalty to ZD based on revenue. This
charge is also included in costs of production and content. See Note 4 to
ZDNet's Combined Financial Statements in this prospectus.
46
<PAGE>
The principal selling, general and administrative expenses of ZDNet are
payroll, sales commissions and related expenses, marketing and promotion. Ziff-
Davis Inc. provides certain selling, general and administrative services and
shared services on a centralized basis and the costs of these central services
are allocated between ZD and ZDNet. See Note 4 to ZDNet's Combined Financial
Statements in this prospectus.
ZDNet also incurs a substantial amount of amortization expense related to
intangible assets created as a result of the December 21, 1994 and February 29,
1996 acquisitions of Ziff-Davis Inc.'s predecessors by Forstmann Little and Co.
and SOFTBANK Corp., respectively. The February 1996 acquisition created
$72.7 million of intangible assets for ZDNet. In addition, $5.5 million of
intangible assets were created by ZDNet's January 1997 acquisition of a 70%
equity interest in GameSpot, Inc., formerly SpotMedia Communications, Inc.
Factors Affecting Future Periods
ZDNet's 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 ZDNet's advertisers, the
extent to which merchants elect to advertise using online media and competition
among other technology marketers.
Accordingly, ZDNet may experience fluctuations in revenue from period to
period. Marketing expenditures by technology companies can also be affected by
factors affecting the technology industry generally, including pricing
pressures and temporary surpluses of inventory. Revenue and profitability are
also influenced by product mix, the timing and frequency of ZDNet's new product
launches in new markets and acquisitions.
ZDNet has an extremely limited operating history upon which to base an
evaluation of ZDNet's prospects. ZDNet's prospects must be considered in light
of the risks, expenses and difficulties frequently encountered by start-up
companies in the new and rapidly evolving market for Internet products, content
and services. ZDNet's revenue and cost of operations have grown substantially
and ZDNet has incurred cumulative net losses since inception. These losses
reflect substantial expenditures to develop, launch and acquire ZDNet's
Internet sites and services. ZDNet believes that newly launched sites and
services require a certain period of growth before they begin to achieve
adequate revenue to support their operation.
ZDNet must, among other things, effectively develop new relationships and
maintain existing relationships with its advertisers, their advertising
agencies and other third parties, provide original and compelling content to
Internet users, develop and upgrade its technology, respond to competitive
developments and attract, retain and motivate qualified personnel. There can be
no assurance that ZDNet will succeed in addressing such risks and the failure
to do so could have a material adverse effect on ZDNet's business, financial
condition or results of operations. Additionally, ZDNet's limited operating
history makes the prediction of future operating results difficult or
impossible, and there can be no assurance that ZDNet's revenue will increase or
even continue at its current level, or that ZDNet will
47
<PAGE>
achieve or maintain profitability or generate cash from operations in future
periods. Since inception, ZDNet has incurred significant losses and, for the
period from February 29, 1996 to December 31, 1998, had accumulated a deficit
of $46.0 million. ZDNet may continue to incur losses in the future.
ZDNet expects to recognize compensation expense of approximately $13.4
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 $3.3 million. See Note 11 to ZDNet's Combined
Financial Statements in this prospectus.
ZDNet expects to acquire the remaining 30% interest in GameSpot in exchange
for ZDNet 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. At a price of $19.00 per share, this acquisition
will result in additional annual amortization of approximately $1.3 million per
year. The effect of this acquisition and the shares expected to be issued in
connection therewith are not reflected elsewhere in this prospectus.
For a discussion of other factors that may affect results, see "Risk
Factors--Risk Factors Relating to ZDNet".
Presentation of Financial Information
ZDNet is comprised of certain operations which were acquired at various times
and completed a reorganization in May 1998. See Note 1 to ZDNet's Combined
Financial Statements in this prospectus.
48
<PAGE>
Results of Operations
The table below presents the results of ZDNet as if the assets and operations
acquired by affiliates of Ziff-Davis Inc. on February 29, 1996 (as described in
Note 1 to the ZDNet Combined Financial Statements in this prospectus) had been
acquired on January 1, 1995. Purchase accounting adjustments relating to that
acquisition have been reflected through pro forma amortization and 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 Actual
-------- -----------------
1996(1) 1997 1998
-------- -------- -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Revenue, net............................. $ 19,118 $ 32,218 $56,143
Cost of operations:
Production and content................. 16,665 23,543 26,208
Selling, general and administrative
expenses.............................. 15,054 23,475 30,993
Depreciation and amortization.......... 693 1,495 2,010
Amortization of intangible assets...... 5,712 6,186 4,438
-------- -------- -------
Total operating expenses............. 38,124 54,699 63,649
-------- -------- -------
Loss from operations..................... (19,006) (22,481) (7,506)
Minority interest........................ -- 400 134
-------- -------- -------
Loss before income taxes................. (19,006) (22,081) (7,372)
Provision (benefit) for income taxes..... (1,073) (843) 512
-------- -------- -------
Net loss................................. $(17,933) $(21,238) $(7,884)
======== ======== =======
Other data:
Capital expenditures..................... $ 1,178 $ 2,374 $ 4,483
Investments and acquisitions, net of cash
acquired................................ -- 2,998 5,000
EBITDA(2)................................ (12,601) (14,400) (924)
</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. The above numbers assume that the acquisition
took place on January 1, 1995; therefore amortization of intangible assets
and net loss have been increased by $323,000 and $194,000, respectively,
for the year ended December 31, 1996.
(2) "EBITDA" is defined as income before provision for income taxes, interest
expense, depreciation and amortization. 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 ZDNet's operating performance or to cash
flows as a measure of liquidity. Although ZDNet believes that EBITDA is a
standard measure commonly reported and widely used by analysts, investors
and other interested parties in the media industry, the EBITDA presented
for ZDNet may not be comparable to similarly titled measures reported by
other companies.
49
<PAGE>
The following table presents the foregoing amounts as a percentage of
revenue:
<TABLE>
<CAPTION>
Year ended December 31,
Pro Forma Actual
-----------------------------
1996 1997 1998
----------- ------- -------
<S> <C> <C> <C>
Revenue, net........................... 100.0% 100.0% 100.0%
Cost of operations:
Production and content............... 87.2 73.1 46.7
Selling, general and administrative
expenses............................ 78.7 72.9 55.2
Depreciation and amortization........ 3.6 4.6 3.6
Amortization of intangible assets.... 29.9 19.2 7.9
------- ------- -------
Total operating expenses........... 199.4 169.8 113.4
------- ------- -------
Loss from operations................... (99.4) (69.8) (13.4)
Minority interest...................... -- 1.2 0.3
------- ------- -------
Loss before income taxes............... (99.4) (68.6) (13.1)
Provision (benefit) for income taxes... (5.6) (2.7) 0.9
------- ------- -------
Net loss............................... (93.8)% (65.9)% (14.0)%
======= ======= =======
</TABLE>
Year ended December 31, 1998 compared with the year ended December 31, 1997
Revenue, net
Net revenue increased 74% 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% to $48.1 million for the year ended
December 31, 1998 from $23.6 million for the year ended December 31, 1997. 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 7% to $8.0 million
for the year ended December 31, 1998 from $8.6 million for the year ended
December 31, 1997.
Cost of operations
Production and content. Production and content expenses were $26.2 million
or 46% of net revenue for the year ended December 31, 1998, compared to $23.5
million or 73% of net revenue for the prior year. The absolute dollar increase
in production and content charges was due to an increase in ZD's revenue-based
royalty charge to ZDNet, as well as an increase in production costs to support
higher user traffic levels and increased editorial costs associated with the
launch of new content areas. The cost of production and content decreased as a
percentage of revenue primarily due to economies of scale. ZDNet expects this
trend to continue. Royalty payments to ZD were $2.8 million and $1.6 million
for the years ended December 31, 1998 and 1997, respectively.
50
<PAGE>
Selling, general and administrative expenses. Selling, general and
administrative expenses were $31.0 million or 55% of net revenue for the year
ended December 31, 1998, compared to $23.5 million or 73% of net revenue for
the year ended December 31, 1997. The absolute dollar increase was primarily
due to increased personnel and services required to support the growth of
ZDNet, offset to some extent by the cessation of commission payments to
SOFTBANK Interactive Marketing Inc., as ZDNet sales and marketing teams
replaced SOFTBANK Interactive in these functions. Sales and marketing costs
were $21.2 million or 38% of net revenue for the year ended December 31, 1998
compared to $15.9 million or 49% of net revenue for the year ended December 31,
1997. ZDNet intends to continue to increase spending in absolute dollars on
sales and marketing and intends to launch a print ad campaign in the future.
Sales and marketing expenses are incurred both to drive traffic to ZDNet's Web
site and to increase the number of advertisers and advertising sales. Included
in the sales and marketing costs was an allocation from Ziff-Davis Inc.
relating to certain selling, general and administrative services and shared
services provided on a centralized basis amounting to $0.9 million and $0.5
million for the years ended December 31, 1998 and 1997, respectively.
Administrative and overhead costs were $9.7 million or 17% of net revenue for
the year ended December 31, 1998 compared to $7.6 million or 23% of net revenue
for the year ended December 31, 1997. Included in administrative and overhead
costs was an allocation of the cost of certain Ziff-Davis Inc. services
provided on a centralized basis amounting to $5.1 million and $3.4 million for
the years ended December 31, 1998 and 1997, respectively. The selling, general
and administrative costs decreased as a percentage of revenue primarily due to
economies of scale. ZDNet expects this trend to continue.
Depreciation. Depreciation expense was $2.0 million for the year ended
December 31, 1998 compared to $1.5 million for the year ended December 31,
1997. The increase related primarily to the increased capital expenditures made
by ZDNet for equipment necessary to expand its network and infrastructure in
order to support its continued growth.
Amortization of intangible assets. Amortization of intangible assets was
$4.4 million for the year ended December 31, 1998 compared to $6.2 million for
the year ended December 31, 1997. The decrease in amortization related to the
intangible assets of advertising and subscription lists becoming fully
amortized as of March 1, 1998. This resulted in only two months of the related
amortization being included in the year ended December 31, 1998 versus twelve
months amortization included in the year ended December 31, 1997. Annual
amortization expense related to the remaining goodwill balance will be
approximately $4.1 million before giving effect to any future increase in
goodwill.
Minority interest
The minority interest of $0.1 million in 1998 and $0.4 million in 1997
represented losses attributed to the holders of the minority interest in
GameSpot.
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Income taxes
Losses which were incurred prior to the completion of Ziff-Davis Inc.'s
reorganization on May 4, 1998, are non-deductible for Ziff-Davis Inc. as ZDNet
was under the ownership of MAC Inc. As such, ZDNet recorded income tax expense
of $0.5 million for the year ended December 31, 1998, primarily resulting from
taxable income being generated during the third and fourth quarters of 1998,
representing an effective tax rate of (6.9%). The effective rate in 1997 was
significantly lower than the statutory rate of 35.0% due to the substantial
level of non-deductible expenses which were incurred while ZDNet was owned by
MAC Inc.
Net loss
As a result of the items described above, ZDNet's net loss decreased to $7.9
million from $21.2 million for the years ended December 31, 1998 and 1997,
respectively.
EBITDA
EBITDA for the year ended December 31, 1998 was a loss of $0.9 million
compared to a loss of $14.4 million for the same period in 1997. The
improvement was due to substantially increased revenue, offset to some extent
by higher production and content costs and selling, general and administrative
expenses.
Year ended December 31, 1997 compared with Pro Forma Year ended December 31,
1996
Revenue, net
Net revenue increased 69% to $32.2 million for the year ended December 31,
1997 from $19.1 million for the pro forma year ended December 31, 1996. An
increasing percentage of ZDNet's net revenue was derived from advertising for
the year ended December 31, 1997, accounting for 73% of net revenue, compared
to 37% 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 228% to $23.6 million for year ended
December 31, 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 by 28% to $8.6
million from $11.9 million from the same period in 1996.
Cost of Operations
Production and content. Production and content expenses were $23.5 million or
73% of net revenue for year ended December 31, 1997, compared to $16.7 million
or 87% of net revenue for the pro forma year ended December 31, 1996. The
absolute dollar
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increase in production and content charges was due to an increase in Ziff-Davis
Inc.'s revenue based royalty charge to ZDNet, as well as an increase in
production costs to support higher user traffic levels, and increased editorial
costs associated with the launch of new content areas. The cost of production
and content decreased as a percentage of revenue primarily due to economies of
scale. Royalty charges from ZD were $1.6 million and $1.0 million for the year
ended December 31, 1997 and the pro forma year ended December 31, 1996,
respectively.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $23.5 million or 73% of net revenue for the year
ended December 31, 1997, compared to $15.1 million or 79% of net revenue for
the pro forma year ended December 31, 1996. The absolute dollar increase in
selling, general and administrative expenses was due to higher sales commission
costs paid to SOFTBANK Interactive and to the initial hiring of the existing
ZDNet sales and marketing teams. SOFTBANK Interactive was the exclusive sales
team for ZDNet prior to 1997. Sales and marketing costs were $15.9 million or
49% of net revenue for the year ended December 31, 1997 compared to
$11.0 million or 57% of net revenue for the pro forma year ended December 31,
1996. Included in sales and marketing costs was an allocation from Ziff-Davis
Inc. relating to certain selling, general and administrative services and
shared services provided on a centralized basis amounting to $0.5 million for
the year ended December 31, 1997. There was no such charge for the pro forma
year ended December 31, 1996.
Administrative and overhead costs were $7.6 million or 23% of net revenue for
the year ended December 31, 1997 from $4.1 million or 21% of net revenue for
the pro forma year ended December 31, 1996. Included in administrative and
overhead costs was an allocation of the cost of certain Ziff-Davis Inc.
services provided on a centralized basis amounting to $3.4 million and $2.7
million for the year ended December 31, 1997 and the pro forma year ended
December 31, 1996, respectively. Selling, general and administrative expenses
decreased as a percentage of revenue primarily due to economies of scale.
Depreciation and amortization. Depreciation and amortization expense was $1.5
million for the year ended December 31, 1997, compared to $0.7 million for the
pro forma year ended December 31, 1996. The increase in depreciation expense
primarily related to the increased capital expenditures made by ZDNet for
equipment necessary to expand its network and infrastructure in order to
support its continued growth.
Amortization of intangible assets. Amortization of intangible assets was $6.2
million for the year ended December 31, 1997 compared to $5.7 million for the
pro forma year ended December 31, 1996. In February 1997, ZDNet purchased a 70%
interest in GameSpot, which created intangible assets of approximately $5.5
million. The 1997 period included approximately $0.5 million of amortization
related to this acquisition.
Minority interest
The minority interest of $0.4 million for the year ended December 31, 1997,
represents losses attributed to the holders of the minority interest in
GameSpot, which was acquired in January 1997.
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Income taxes
The 1997 income tax benefit of $0.8 million compares to a pro forma income
tax provision of $1.1 million in 1996. The benefit represents an effective tax
rate of approximately 3.8% and 5.6%, respectively, which is significantly less
than the federal statutory rate of 35.0% because ZDNet has a substantial level
of non-deductible expenses, as losses which were incurred while ZDNet was under
MAC ownership are non-deductible to Ziff-Davis Inc. As such, ZDNet does not
reflect any tax benefits associated with those losses.
Net loss
As a result of the items described above, ZDNet's net loss increased to $21.2
million for the year ended December 31, 1997 from $17.9 million for the pro
forma year ended December 31, 1996.
EBITDA
EBITDA for 1997 was a loss of $14,400,000 compared to a loss of $12,601,000
for the pro forma year ended December 31, 1996. The decrease was primarily due
to higher production and content costs and selling, general and administrative
expenses partially offset by increased revenue.
Liquidity and Capital Resources
Funding from ZD
In the financial statements of ZD and ZDNet, whenever ZDNet had a cash need,
other than cash needs of ZDNet's foreign operations or cash needs of ZDNet's
operations that are not wholly owned, that cash need was funded by ZD and
accounted for as a capital contribution (i.e., as an increase in ZDNet's
division equity and ZD's retained interest in ZDNet). Accordingly, no interest
expense has been reflected in the financial statements of ZDNet. Each of ZD and
ZDNet is sometimes referred to herein as a "group". After the date on which
ZDNet stock is first issued, Ziff-Davis Inc. will account for all cash
transfers from ZD or ZDNet to or for the account of the other, other than
transfers in return for assets or services rendered or transfers in respect of
ZD's retained interest that correspond to dividends paid on ZDNet stock, as
inter-group revolving credit advances. These advances will bear interest at the
rate at which Ziff-Davis Inc. could borrow such funds on a revolving credit
basis as the board of directors determines in its sole discretion. However, the
board of directors has the discretion to determine that a given transfer or
type of transfer should be accounted for as a long-term loan, a capital
contribution increasing ZD's retained interest in ZDNet or a return of capital
reducing ZD's retained interest in ZDNet.
For a discussion about the terms on which Ziff-Davis Inc. can now borrow on a
short-term basis, see "Ziff-Davis Inc. Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources--Credit Facility". There is no assurance, however, that ZDNet will
continue to be able to obtain sufficient funding from ZD. For a discussion of
the discretion of the board of directors regarding
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transfers of cash between ZD and ZDNet, see "Risk Factors--Risk Factors
Relating to ZDNet Stock--Under Its Current Policies The Board of Directors Has
Sole Discretion Concerning Various Cash Management Matters".
Sources and uses of cash
Cash and cash equivalents were $0.3 million at December 31, 1998, an increase
of $0.3 million from $0.0 million at December 31, 1997. The increase was due to
the factors discussed below:
Cash used by operations was $4.5 million for the year ended December 31, 1998
compared to $15.3 million for the year ended December 31, 1997. The improvement
from 1998 to 1997 was due primarily to a reduction in net loss. The loss for
the year ended December 31, 1998 was $7.9 million compared to $21.2 million for
the same period in 1997.
Cash used by investing activities for the year ended December 31, 1998
totaled $9.5 million and $5.4 million for the year ended December 31, 1997.
Cash used for capital expenditures for the year ended December 31, 1998
increased by $2.1 million to $4.5 million from $2.4 million for the year ended
December 31, 1997. ZDNet intends to continue to invest in equipment as
necessary to support the increasing user traffic. Capital expenditures on
equipment is expected to be approximately $4.0 million in 1999. In addition, in
July 1998, ZDNet invested $5.0 million in preferred stock of Deja News, Inc.,
an Internet discussion group. During the year ended December 31, 1997, ZDNet
spent approximately $3.0 million to acquire a 70% interest in GameSpot.
Cash provided by financing activities decreased to $14.3 million for the year
ended December 31, 1998 from $20.7 million for the year ended December 31,
1997, reflecting the improved operating performance of ZDNet. As discussed
under "--Funding from ZD" above, all funding from ZD was accounted for as a
capital contribution.
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Seasonality
Historically, ZDNet's business has been seasonal as a significant portion of
annual revenue has occurred in the fourth quarter. This fluctuation is a result
of seasonal changes common to the media industry. The following table sets
forth certain unaudited quarterly combined statement of operations data for
each of the eight quarters in the period ended December 31, 1998. In the
opinion of Ziff-Davis Inc.'s management, this unaudited information has been
prepared on a basis consistent with the audited Combined Financial Statements
of ZDNet 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 Combined Financial Statements
and related notes thereto. The operating results for any quarter are not
necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
Quarter Ended
(in thousands)
---------------------------------------------------------------------------------------
1997 1998
------------------------------------------- -------------------------------------------
March 31 June 30 September 30 December 31 March 31 June 30 September 30 December 31
-------- ------- ------------ ----------- -------- ------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue................. $ 5,283 $ 7,862 $ 8,132 $10,941 $ 9,688 $12,274 $14,504 $19,677
Cost of operations...... 11,597 14,921 14,401 13,780 16,050 15,405 14,344 17,850
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from
operations............. (6,314) (7,059) (6,269) (2,839) (6,362) (3,131) 160 1,827
Minority interest....... (46) (201) (189) 36 (125) (145) (60) 196
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before
taxes.................. (6,268) (6,858) (6,080) (2,875) (6,237) (2,986) 220 1,631
Provision (benefit) for
taxes.................. (244) (267) (232) (100) (228) (92) 8 824
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)....... $(6,024) $(6,591) $(5,848) $(2,775) $(6,009) $(2,894) $ 212 $ 807
======= ======= ======= ======= ======= ======= ======= =======
EBITDA(1)............... $(4,498) $(4,999) $(4,185) $ (718) $(4,511) $(1,569) $ 1,857 $ 3,299
<CAPTION>
Quarter Ended
---------------------------------------------------------------------------------------
1997 1998
------------------------------------------- -------------------------------------------
March 31 June 30 September 30 December 31 March 31 June 30 September 30 December 31
-------- ------- ------------ ----------- -------- ------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of operations...... 219.5 189.8 177.1 125.9 165.7 125.5 98.9 90.7
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from
operations............. (119.5) (89.8) (77.1) (25.9) (65.7) (25.5) 1.1 9.3
Minority interest....... (0.9) (2.6) (2.3) 0.3 (1.3) (1.2) (0.4) 1.0
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before
taxes.................. (118.6) (87.2) (74.8) (26.2) (64.4) (24.3) 1.5 8.3
Provision (benefit) for
taxes.................. (4.6) (3.4) (2.9) (0.9) (2.4) (0.7) 0.1 4.2
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)....... (114.0)% (83.8)% (71.9)% (25.3)% (62.0)% (23.6)% 1.4% 4.1%
======= ======= ======= ======= ======= ======= ======= =======
EBITDA(1)............... (85.1)% (63.6)% (51.5)% (6.6)% (46.6)% (12.8)% 12.8% 16.8%
</TABLE>
- --------
(1) "EBITDA" is defined as income before provision for income taxes, interest
expense, depreciation and amortization. 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 ZDNet'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 media industry, the EBITDA
presented for ZDNet may not be comparable to similarly titled measures
reported by other companies.
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Year 2000 Readiness Disclosure
During 1997, Ziff-Davis Inc., including the businesses comprising ZDNet,
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 Inc. 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 Inc. 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 Inc. has identified critical systems and applications that will
either be validated for compliance though formal documentation, through vendors
or through testing. Ziff-Davis Inc. 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 Inc.'s computer systems and databases, including its
subscription fulfillment and payroll systems, are managed by third parties
under contractual arrangements. Ziff-Davis Inc. currently has no Year 2000
compliance problems known to it relating to third parties. Ziff-Davis Inc. has
requested those third parties with which Ziff-Davis Inc. 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 Inc.
anticipates that such inquiries will be completed by April 30, 1999.
In addition, Ziff-Davis Inc. 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 Inc. 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 Inc. 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 of Ziff-Davis Inc. 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 Inc.'s Year 2000 readiness efforts as of
December 31, 1997 and 1998 were
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<PAGE>
$1.7 million and $3.8 million, respectively. Ziff-Davis Inc. estimates that it
will incur an additional $3.8 million during 1999 related to its Year 2000
readiness efforts.
Ziff-Davis Inc. expects to complete testing and replacement of critical
systems by the beginning of the fourth quarter of 1999. Ziff-Davis Inc.'s
estimate of ZDNet's 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 Inc. would resolve the failure of such
applications and systems one by one and management of Ziff-Davis Inc. does not
believe that the impact on its critical systems would be material. However, if
Ziff-Davis Inc. 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 ZDNet's profit and liquidity.
Recently Issued Accounting Pronouncement
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 Inc.
does not expect the adoption of SFAS No. 133 to have a material impact on the
ZDNet's results of operations.
ZDNet expects to adopt the above statement beginning with its 2000 financial
statements.
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ZDNET
DESCRIPTION OF BUSINESS
Industry Background
Growth Of The Internet And Demand For Technology-Related Content
The Internet has emerged as a global mass medium, enabling millions of people
to access and share information and conduct business electronically. Forrester
Research, Inc. estimates that the number of adult Web users will reach 51
million in the U.S. by the end of 1998 and will 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.
Advertising And Commerce On The Internet
As the Internet and the technology industry continue to grow, the value of
the Internet to advertisers and merchants can be expected to increase as a
result of:
. the growth in the number of Web users,
. the Internet's global reach,
. the attractive demographic profile of Web users,
. the interactive nature of the medium,
. the increased willingness of users to conduct transactions online and
. the ability to effectively target user groups, customize promotions and
measure Web usage and viewer demographics.
ZDNet believes these characteristics allow Internet advertisers to build
valuable customer relationships through targeted advertising and sales
campaigns. The overall market for advertising on the Internet was approximately
$900 million in 1997 and $1.3 billion in the first nine months of 1998, as
measured by the Internet Advertising Bureau. According to Forrester Research,
Inc., advertising spending on the Internet will exceed $4 billion in the year
2000 and double to more than $8 billion by 2002.
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<PAGE>
The Internet also provides an efficient means for merchants to sell their
products and services directly to consumers. Forrester Research, Inc. forecasts
that worldwide commerce revenue on the Internet will increase from
approximately $35 billion in 1998 to $1.4 trillion in 2003. Internet
transactions are expected to increase as merchants improve Web-based
transaction-processing technology and as consumers become more accustomed to
purchasing online.
ZDNet believes Internet sites focused on technology are particularly well-
suited to promote advertising and commerce because they offer a large user base
with attractive demographics for technology and general consumer product
companies. Historically, technology-focused sites have attracted primarily
technology advertisers, which, according to InterMedia Advertising Solutions,
accounted for approximately 47% of all U.S. online advertising dollars during
the first nine months of 1998. Recently, many of the largest advertisers on
traditional media, including consumer product companies, automobile
manufacturers and travel-related companies, have expanded their use of Internet
advertising. Such consumer-related advertising accounted for 27% of all U.S.
online advertising in the third quarter of 1998 according to the Internet
Advertising Bureau, and ZDNet believes Internet advertising will become an
increasing percentage of consumer product companies' overall advertising
budgets in the future. Internet sites with well-recognized brand names that
focus on technology should be well-positioned to capitalize on emerging
Internet advertising and commerce opportunities.
The ZDNet Solution
ZDNet's Web sites 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 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 Inc. was among the first content providers to focus its
efforts on the Internet, launching its zdnet.com service in the fall of 1994.
The ZDNet solution is based on the following distinguishing attributes:
Broad-Based Comprehensive Technology And Internet-Related Content
ZDNet's interconnected and easily navigable sites offer depth and breadth of
coverage on the technology industry as well as topics of general interest,
including financial information and general news. ZDNet divides its content
broadly into "channels" that focus on specific topics or audience groups. Over
60 sites can be reached through the zdnet.com home page or through their own
distinct domains, and sites are generally organized with similar navigation and
layout to ensure consistency throughout the network. ZDNet's online editorial
and technical staff of industry experts develops high-quality original content
specifically for online interactive use. ZDNet offers over 1,200 news stories
per month, 50,000 product listings, 30,000 product reviews and 34,000
downloadable programs. In addition, through ZDNet's relationship with ZD, ZDNet
has use of the content of all of ZD's
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<PAGE>
computer and technology publications, including PC Magazine, PC/Computing, PC
Week and Yahoo! Internet Life.
Strong Community Affinity
ZDNet has developed an extensive user community and encourages active
participation by enabling users to personalize their content and join user
groups based on common interests. ZDNet provides forums, chat groups and other
interactive online environments that allow users to express views and share
information. In addition, its industry personalities host interactive forums
that encourage user comments and feedback. To promote its community, ZDNet has
instituted a common registration system for chat, discussion and e-mail
capabilities. Registered users are able to access member-only software
downloads and are eligible for special offers such as discounted trial
enrollment in ZDU's online courses, which is part of ZD's education business.
ZDNet makes a variety of e-mail newsletters and alerts available to its users,
allowing subscribers to select those of interest. As of December 1998, ZDNet
had an e-mail newsletter subscription base of over 2.3 million and distributed
over 52 million e-mail newsletters and alerts to its users in that month.
Attractive Environment For Advertising And Commerce
ZDNet facilitates commerce on its sites by providing users with the ability
to evaluate, compare and purchase products and services and by providing
advertisers and merchants with access to a highly targeted user group with
attractive demographics. According to the Winter 1999 @Plan study, among users
of ZDNet's Internet sites:
. 59% have college degrees,
. 85% have an annual household income of at least $35,000, and 21% in
excess of $100,000,
. 49% use the Internet every day and
. 56% purchased a product in the prior six months after gathering
information on the Internet.
In addition, ZDNet has developed an array of sales and marketing options,
such as banners, sponsorship wraps, buttons, text and graphical links, e-mail
sponsorships and custom microsites, that are designed to assist advertisers in
crafting unique and distinctive programs to target and reach their audiences.
ZDNet is also the first non-ad agency to win a prestigious "Creative Excellence
in Business Advertising" award, presented by the American Business Press.
Relationship With ZD
ZDNet derives many benefits from its relationship with ZD, including the
ability to leverage the ZD brand, use content from ZD publications and cross-
market across all of ZD's platforms. ZD publishes leading technology print
publications, such as PC Magazine, PC/Computing, PC Week and Yahoo! Internet
Life, produces leading trade shows and conferences, such as COMDEX,
NetWorld+Interop and Seybold Seminars, operates ZDTV,
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<PAGE>
a 24-hour cable television network, and maintains well-recognized market
research and education platforms, such as ZDU. For over a decade, the "Ziff-
Davis" name has been a leading brand associated with technology content.
The ZDNet Strategy
ZDNet's objective is to be the leading online content site focused on
technology products and services for users and the preferred online platform
for advertisers and merchants. The key elements of ZDNet's strategy are:
Continue To Offer Differentiated Technology And Internet-Related Content
ZDNet will continue to provide comprehensive and authoritative coverage of
the technology field in order to attract users and increase the value of its
sites to advertisers and merchants. Based on market research and user traffic
and feedback, ZDNet will continue to identify technology trends and develop
innovative sites that appeal to specific market segments and user interests. In
the past 12 months, ZDNet has introduced 16 new sites, or new areas within
existing sites, including special areas addressing Year 2000 issues, small
businesses, electronic commerce and technology-related careers.
Grow The ZDNet Community
ZDNet seeks to further grow its membership base by continuing to provide
interesting forums, chat groups and user groups, developing additional
interactive capabilities, promoting new online personalities and offering
insights from a broad range of experts. In response to these efforts, ZDNet's
registered user community has increased from 956,490 on December 31, 1997 to
1,844,571 on December 31, 1998, an increase of 93%. ZDNet also recently
launched ZDRewards, an online membership service which entitles subscribers to
receive a bundle of Ziff-Davis Inc. products and services, such as a
subscription to a ZD magazine or a semester of ZDU online classes, all for one
discounted price.
Build ZDNet Brand Strength
ZDNet seeks to reinforce its brand recognition and extend its reputation as a
leading site among users of technology information by continuing to leverage
the Ziff-Davis and ZDNet names. ZDNet's brand-building initiatives include
displaying the ZDNet brand on all ZDNet site pages, including those accessed
through the portals of its strategic partners,
providing consistent formats for easy navigation on all its sites and promoting
a common registration program for users. ZDNet plans to continue to promote the
ZDNet brand in ZD publications and events and to otherwise coordinate marketing
efforts with ZD.
Increase Advertising And Commerce Revenue
ZDNet seeks to increase revenue generated from advertising and commerce by
continuing to develop innovative content, growing its user community, expanding
its base of technology advertisers, attracting consumer and other advertisers
and facilitating commerce
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opportunities. ZDNet continually refines its online tracking reports to better
enable advertisers and merchants to demonstrate their advertising
effectiveness, evaluate their marketing initiatives and increase the rate of
return on their advertising investments. ZDNet plans to increase the number of
its revenue-sharing commerce relationships with leading technology and consumer
product providers. ZDNet also plans to increase the number of product listings
on its ComputerShopper.com channel and expand its ability to facilitate
electronic commerce.
Strengthen And Expand Strategic Alliances
ZDNet seeks to increase brand awareness, traffic and revenue by entering into
strategic alliances with key Internet companies. ZDNet currently has alliances
with many of the Web's leading sites, including Yahoo!, Excite, MSNBC and Deja
News, and plans to establish new alliances as opportunities arise. As part of
these alliances, ZDNet typically provides selected branded content for its
partners' sites in return for a variety of benefits including revenue and links
back to ZDNet sites from the partner's site, providing ZDNet with access to a
broader base of consumers.
Extend International Presence
ZDNet had localized foreign language editions in more than 16 countries as of
December 31, 1998 and 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.
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.
ZDNet considers its content to be the most thorough and interesting content
on technology that is available online. ZDNet estimates that it currently
offers more than 300,000 pages of content on its interconnected sites where
users can research, evaluate, learn, interact, download and shop. ZDNet creates
original content using its own skilled and dedicated team of 149 editors,
online producers, developers and operations staff and also uses content from ZD
publications and various strategic alliance partners. ZDNet's content is
divided broadly into "channels" that aggregate information from a variety of
sources around a specific topic area or audience focus, thereby facilitating
accessibility. All channels can be reached through the main zdnet.com home page
or through their own distinct domains, making browsing and searching easy.
ZDNet seeks to foster a sense of community and engage its users in an
interactive online experience where they can express opinions and share
information about technology-related products and issues. ZDNet offers a
variety of features and activities designed to facilitate its community growth
and build user loyalty and affinity. Users can
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personalize the content they seek and join user groups with others who have
similar interests. In addition, users can activate the "talk-back" feature,
which allows them to state their views, and the "e-mail to a friend" feature,
which allows them to easily send articles of interest to others. During January
1999, ZDNet estimates that 275,000 e-mails were sent using the e-mail to a
friend feature. Many of ZDNet's channels provide moderated forums and chat
events on a variety of current news and segment topics and certain hosts of
these forums have become popular Internet personalities.
ZDNet seeks to facilitate commerce on the Internet by combining information
about hardware and software products and services with direct access to
merchants. ZDNet's primary computer commerce site, ComputerShopper.com, was one
of the first Web shopping services to integrate comparative pricing, how-to
guides, buying tips, specifications, product reviews and multiple direct
purchasing sources. ComputerShopper.com currently displays products from more
than 113 merchants in over 88 product categories and enables shoppers to both
evaluate products and directly make purchases online.
The following table highlights a number of ZDNet sites:
<TABLE>
<CAPTION>
Selected Sites Description
- -------------- -----------
<S> <C>
Anchor Desk..... Inside analysis of technology news and products
At Home......... Resources for home computing
Careers......... Employment center for computer industry professionals
Classifieds..... Ads and person-to-person auctions for computing products
Community
Central......... Worldwide computing community
ComputerShopper.com.. Marketplace to shop, compare and buy
</TABLE>
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<TABLE>
<CAPTION>
Selected Sites Description
- -------------- -----------
<S> <C>
DevHead....... Tools, tips, and advice for Web developers
E-Business.... Business advice on e-commerce opportunities
Enterprise.... News, reviews and analytical editorial for IT professionals
Equip......... Guide to electronic gadgets for home and office
GameSpot...... Popular destination for PC and video game users
Help Channel.. Advice on optimizing the use of a PC or Mac
Inter@ctive
Investor...... Latest financial data and news for technology investors
Inter@ctive
Week......... News and resources for IT professionals in interactive
communications
PC/Computing.. Advice on getting the most out of technology
PC Magazine... Comparative reviews, buying advice and commentary
</TABLE>
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<PAGE>
<TABLE>
<C> <S>
PC Week......................... Breaking news and analysis on the technology
industry
Products Channel................ Reviews to help evaluate and select products
Sm@rt Reseller.................. News and resources for computer resellers,
integrators and consultants
Small Business Advisor.......... Technology solutions for small business
professionals
Software Library................ Source for tested and reviewed software
Reviews and links to interesting Internet
Yahoo! Internet Life............ sites
ZDNetwork News.................. Timely and comprehensive news on the
technology industry
ZDRewards....................... Offering members discounted Ziff-Davis
products and services
ZDY2K........................... News and resources about Year 2000 issues
</TABLE>
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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 ZD 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. ZDNet expects to acquire the remaining 30% interest in GameSpot.
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 ZD's 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.
Relationship with ZD
ZDNet believes that its relationship with ZD provides it with substantial
advantages over other online technology content providers. ZDNet has rights to
use ZD's technology content online on a preferred basis. In addition, ZDNet has
access to ZD's experience in delivering technology content through print
publishing, trade shows and television and can leverage ZD's experience to the
online medium.
With more than 75 publications distributed worldwide, the Ziff-Davis name is
seen by a combined circulation of approximately seven million primary readers
worldwide. ZD also produced over 50 trade shows and conferences worldwide on
technology and the Internet in 1998 with over two million estimated attendees.
Through ZDU, ZD provides online interactive instructor-led training to paid
subscribers. Through ZDTV, ZD offers the first 24-hour cable television channel
and integrated Web site focused exclusively on computers, technology and the
Internet. ZDNet believes that its relationship with ZD offers users the
advantages of an integrated media and marketing company with multiple
platforms.
ZDNet's relationship with ZD allows it to integrate Ziff-Davis Inc.'s
marketing activities into one cohesive resource for print, trade show and
conference, television and online advertising. In addition, ZDNet and ZD are
able to realize benefits from cross-promotion of their products and services.
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Strategic Alliances
ZDNet's strategic alliances are important sources 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.
ZDNet is the exclusive high-technology content partner of MSNBC, one of the
Web's largest sites for general news and sports content. Under this arrangement
ZDNet licenses content and brands to MSNBC in exchange for the exclusive right
among online computer and technology content providers to use MSNBC's general
news content. ZDNet also recently started using Deja News' technology which
allows ZDNet's users to search Usenet and participate in online discussion
groups, including Usenet newsgroups. In addition, ZDNet content is distributed
by various Internet service providers such as AT&T WorldNet, MindSpring and
BellSouth to individual and corporate customers.
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. See
"Risk Factors--Risk Factors Relating to ZDNet--ZDNet Intends to Expand Its
International Operations And May Encounter A Number Of Problems Doing So. There
Are Also A Number of Risks Associated With International Operations That Could
Adversely Affect ZDNet's Business.
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.
ZDNet believes that its user demographics are attractive to technology and
general consumer product advertisers and merchants. ZDNet has developed
extensive sales and marketing programs designed to assist advertisers in
reaching their audiences through distinctive and customizable programs. ZDNet
sells display advertising in multiple formats, such as banners, sponsorship
wraps, buttons, text and graphical links and e-mail sponsorships, that allow
users to link directly to the advertisers' own Web sites or to special
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promotional microsites created by ZDNet on behalf of its advertisers. In
addition, advertising can be purchased in selected areas or across ZDNet's
entire network of sites.
ZDNet believes that its focused and well-trained sales and marketing
organization is important to attaining and maintaining premium advertising
pricing and maximizing revenue. ZDNet's sales and marketing organization uses
market research tools, such as ZDNet's InternetTrak services, to inform clients
about overall industry trends. InternetTrak is a quarterly marketing survey of
Web users in the U.S. that tracks Web users and their online activities.
ZDNet's direct sales and marketing organization consisted of 86 professionals
as of December 31, 1998. Sales and marketing are generally organized by
geographic region.
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>
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.
Technology Infrastructure and Operations
ZDNet has developed an expandable operations infrastructure using open
standard hardware and software systems. ZDNet's network of sites is primarily
hosted on ZDNet servers maintained at multiple locations to facilitate load
balancing and reduce potential downtimes. Additionally, ZDNet outsources
certain hosting and related functions to:
. NewsCorp/News Internet Services,
. Real Networks and
. InterStep, Inc.
The primary data center is designed to minimize failures by utilizing
redundant equipment and connectivity paths.
ZDNet has developed systems allowing it to efficiently create new content
channels and build in personalization capabilities. With respect to
advertising, publishing and systems management tools, ZDNet has licensed
technology from:
. Vignette for its StoryServer publishing system,
. Thunderstone for its Texis search software and
. Proxicom for software relating to "threaded messages", which are user
originated messages that are organized under specific topics and subtopics
and then are presented to users for further discussion.
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ZDNet also has developed complementary proprietary systems and solutions to
enhance traffic and advertising measurement functions.
Competition
Competition among Internet content sites is intense and is expected to
increase significantly in the future. The market for Internet content providers
is rapidly evolving and barriers to entry are low, enabling newcomers to launch
competitive sites at relatively low cost.
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.
Primary competitive factors in attracting users are:
. quality,
. reliability,
. brand recognition and
. depth, breadth and presentation of content.
Primary competitive factors in attracting advertisers are:
. user demographics and volume,
. ability to deliver interactive and focused advertising and
. cost-effectiveness.
ZDNet's success will depend on its ability to continue to provide
comprehensive, engaging content to attract and maintain both users and
advertisers.
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Employees
As of December 31, 1998, ZDNet had 316 employees, including 149 in Web design
and content development, 86 in sales, marketing, customer support and audience
development, 69 in technical development and operations and 12 in
administration, planning and finance. ZDNet also uses independent contractors
and temporary employees. None of ZDNet's employees is represented by a labor
union. ZDNet considers its relationship with its employees to be satisfactory.
Facilities
ZDNet's headquarters are located in San Francisco and its other principal
offices are located in the Boston metropolitan area, New York, Chicago, Los
Angeles and Seattle. Ziff-Davis Inc. leases all of the property and offices
occupied by ZDNet and as a result ZDNet pays an allocated portion of Ziff-Davis
Inc.'s lease payments. ZDNet believes that the properties it occupies are
adequate for its current operations, and that suitable additional or
alternative space, including space available under lease options, will be
available on reasonable commercial terms for future expansion.
Legal Proceedings
Ziff-Davis Inc. 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, 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 Inc. 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 Inc.
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 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 million 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 SOFTBANK Holdings, 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 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 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 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 common stock. More particularly, the complaints allege that
the registration
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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 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 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. 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 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 12, 1999.
Although the outcome of the foregoing cases cannot be predicted, Ziff-Davis
Inc. believes that there are substantial defenses to all of the claims.
There are no other legal proceedings to which Ziff-Davis Inc. 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 Inc.
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MANAGEMENT OF ZDNET
Executive Officers
The executive officers of ZDNet are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Daniel L. Rosensweig..... 37 President, Chief Executive Officer
Daniel B. Farber......... 48 Vice President, Editor in Chief
Barry D. Briggs.......... 43 Vice President, Advertising Sales and Marketing
Massimo De Nadai......... 43 Vice President, Business Operations
Alan Phillips............ 40 Vice President, Internet Operations and Technology
Robert C. Smahl.......... 36 Vice President, Audience Development
</TABLE>
Biographies Of Executive Officers
Daniel L. Rosensweig. Daniel L. Rosensweig has been President and Chief
Executive Officer of ZDNet since January 1999 and President of ZDNet since
1997. From 1996 to 1997, Mr. Rosensweig served as Executive Vice President of
ZD Inc.'s Internet Publishing Group. Mr. Rosensweig has been a director of
Ziff-Davis Inc. since February 1999 and his current term will expire in 2001.
From 1995 to 1996, Mr. Rosensweig was Vice President and Publisher of PC
Magazine, and from 1994 to 1995 was Publisher of PC Magazine. Since joining ZD
Inc. in 1983, Mr. Rosensweig has also held a number of positions, including
Associate Publisher positions at PC Magazine, Computer Shopper and PC Sources.
Daniel B. Farber. Daniel B. Farber has been Vice President, Editor in Chief
of ZDNet since 1996. During his ten years with Ziff-Davis Inc., Mr. Farber has
also served as Vice President, Editor in Chief of PC Week and MacWeek. Prior to
joining Ziff-Davis Inc., Mr. Farber held a number of editorial positions at IDG
publications, including PC World and MacWorld.
Barry D. Briggs. Barry D. Briggs has been Vice President, Advertising Sales
and Marketing of ZDNet since 1997. During his five years with Ziff-Davis Inc.
he has served as Network Director of Corporate Sales, Associate Publisher of
ComputerLife, and Publisher of FamilyPC. Prior to joining Ziff-Davis Inc., Mr.
Briggs held a number of positions at Time Warner Inc., including Director of
Marketing and Sales Development at Sports Illustrated, National Sales Manager
for Time Magazine and Eastern Regional Director for all Time Inc. magazines.
Massimo De Nadai. Massimo De Nadai has been Vice President, Business
Operations of ZDNet since February 1999, having served as Director, Business
Operations since November 1998 and is responsible for managing finance,
administration, customer service and paid-content services. Mr. De Nadai has
been associated with ZDNet since December 1991, holding a variety of positions
in business management, business development and planning. Prior to joining
ZDNet, Mr. De Nadai held positions in technical
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development, product management and general management at Cullinet Database
Systems, which developed and marketed database management systems, development
tools and packaged applications, Strategic Information, a former division of
Ziff-Davis Inc., which developed packaged database management solutions for
selected vertical markets, and Monchik-Weber Investment Systems, which
developed, maintained and installed systems for brokerage and investment
management organizations.
Alan Phillips. Alan Phillips has been Vice President, Internet Operations and
Technology of ZDNet since January 1998, having previously served as ZDNet's
Director of Internet Operations and Technology since 1995. Prior to joining
Ziff-Davis Inc., Mr. Phillips was President and CEO of Instant Information,
Inc., a leading provider of enhanced fax services from 1990 to 1994. Prior to
1990, Mr. Phillips held several executive positions at Information Marketing
Businesses, Inc., now owned by Simplex, which develops and markets labor
management software, Tekscan, Inc., which develops, manufactures and markets
proprietary sensor technology, and Data Resources, Inc., a McGraw-Hill company,
which focuses on consulting and forecasting industry economic indices.
Robert C. Smahl. Robert C. Smahl has been Vice President, Audience
Development of ZDNet since September 1997. Prior to joining ZDNet, Mr. Smahl
served as General Manager of Windows NT Intranet Solutions at ZD Expos where he
worked in various roles from 1993 to 1997. From 1985 to 1993, Mr. Smahl held a
variety of positions within the circulation department of ZD Publishing.
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ZD
SELECTED HISTORICAL COMBINED FINANCIAL AND OTHER DATA
The following table presents Selected Historical Combined Financial and Other
Data for ZD as of and for the years ended December 31, 1995, 1996, 1997, and
1998. This data was derived from the Combined Financial Statements of ZD
included elsewhere in this prospectus. An affiliate of Ziff-Davis Inc. acquired
a print publishing business, ZD Publishing, on February 29, 1996; the data does
not include results from the acquired business for periods before the date of
acquisition. However, because ZD Publishing represents ZD's principal
operations, the following table also presents Selected Historical Combined
Financial and Other Data for ZD Publishing 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
Combined Financial Statements of ZD Publishing. ZD Publishing data as of for
the year ended December 31, 1994, was derived from ZD Publishing unaudited
financial statements. On May 4, 1998, Ziff-Davis Inc. completed a
reorganization described in Note 2 to the Combined Financial Statements of ZD;
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 Selected Historical Financial and Other Data and
Management's Discussion and Analysis of Financial Condition and Results of
Operations for each of ZDNet, ZD and Ziff-Davis Inc. and Financial Statements
for each of ZDNet, ZD and Ziff-Davis Inc. beginning on pages F-5 , F-33 and F-
79 of this prospectus, respectively.
<TABLE>
<CAPTION>
ZD Publishing(1) ZD
------------------------------------- ---------------------------------------------
Two month
Year ended December 31, period ended Year ended December 31,
----------------------- February 28, ---------------------------------------------
1994 1995 1996 1995(2) 1996(2) 1997 1998
----------- ----------- ------------ ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations (dollars in thousands)
Data:
Revenue, net............ $ 698,030 $ 755,419 $ 122,562 $ 202,729 $ 938,924 $1,121,543 $1,052,749
Depreciation and
amortization........... 33,045 87,506 14,540 24,305 134,251 147,259 146,096
Income from operations.. 85,134 65,283 8,540 62,675 104,594 131,713 38,586
Interest expense, net... 17,887 92,609 14,030 44,005 120,646 190,445 143,547
Income (loss) before
income taxes........... 82,176 (36,472) (6,539) 22,869 (26,636) (71,648) (104,748)
Net income
(loss)(3)(4)........... 82,176 (26,002) (4,547) 10,945 (52,081) (71,179) (77,809)
Balance Sheet Data
(at period end):
Cash and cash
equivalents............ $ 1,064,174 $ 10,083 $ 13,669 $ 27,908 $ 29,915 $ 30,273 $ 32,274
Total assets............ 2,747,968 1,625,426 1,622,438 1,090,981 3,584,963 3,548,108 3,429,938
Total long-term debt.... 1,034,000 964,153 964,153 575,450 2,522,252 2,408,240 1,539,322
Division equity......... 387,718 365,150 360,717 397,881 447,756 126,130 1,352,598
Other Data:
Capital expenditures.... $ 14,606 $ 12,573 $ 384 $ 3,367 $ 21,355 $ 27,822 $ 32,117
Capital contributions to
ZDNet.................. -- 7,106 2,350 -- 13,630 20,664 14,269
Investments and
acquisitions, net of
cash acquired.......... -- -- -- 814,520 2,124,823 11,002 22,772
</TABLE>
- -------
(1) A third party acquired ZD Publishing as of January 1, 1995. An affiliate of
Ziff-Davis Inc. acquired ZD Publishing on February 29, 1996. Because ZD
Publishing represents ZD's principal operations, ZD Publishing data has
been presented for periods before these dates.
(2) An affiliate of Ziff-Davis Inc. acquired ZD Publishing on February 29,
1996; ZD data does not include results from the acquired business for
periods before the date of acquisition.
(3) During 1994, ZD Publishing 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 ZD does not
consider such data meaningful. After issuance of ZDNet stock, Ziff-Davis
Inc. will report earnings per share data for ZD and ZDNet but not for Ziff-
Davis Inc.
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ZD
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Revenue
ZD had net revenue of $1.053 billion for 1998. A substantial portion of ZD's
revenue is derived from the sale of advertising, which in 1998 accounted for
49.8% of total revenue. No single advertiser has comprised more than 4.0% of
ZD's advertising revenue during any of the last three years. However, ZD's top
20 advertisers accounted for 37.5% of total advertising revenue for 1998.
In the publishing segment, ZD's principal sources of revenue are advertising
(64.4% of 1998 total publishing revenue), circulation (18.7%) and other (16.9%)
for the year ended December 31, 1998. 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, ZD 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. ZD believes these other sources will continue to be an
important growth area, particularly for its content-focused events.
ZD provides certain editorial content and brands for ZDNet for which ZDNet
pays a royalty to ZD based on ZDNet's revenue. See Note 5 to ZD's Combined
Financial Statements in this prospectus.
Cost of Operations
In the publishing business, the principal components of ZD's production costs
are raw materials, printing and distribution, which represented 34.5%, 38.0%
and 27.2%, respectively, of total 1998 publishing production expenses. ZD's
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. See "Risk Factors--Other Ziff-Davis Inc. Risks--Ziff-
Davis Inc. May Be Adversely Affected By Fluctuations In Paper And Postage
Costs" and "--Inflation and Fluctuations in Paper and Postage Costs". 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).
The other principal operating costs for ZD are selling, general and
administrative expenses, including editorial costs. Included in these costs are
salaries, sales commissions and benefits (56.6% in 1998) along with marketing
and promotion expenses related to advertising and circulation (20.2% in 1998).
Ziff-Davis Inc. provides certain selling, general and administrative services
and shared services on a centralized basis and the costs of these central
services are allocated between ZD and ZDNet. See Note 5 to ZD's Combined
Financial Statements in this prospectus.
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Factors affecting future periods
ZD's 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 ZD's 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 providers of other technology information services.
Accordingly, ZD may experience fluctuations in revenue from period to period.
Many of ZD's 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 ZD's 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,
trade shows and services are funded with cash flow from operations and are
expensed as incurred. Accordingly, ZD's revenue from year to year may be
affected by the number and timing of new product launches. If ZD 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. See "Risk
Factors--Other Ziff-Davis Inc. Risks--To Remain Competitive Ziff-Davis Inc.
Must Constantly Expand And Develop New Products And Services. This Is
Inherently Risky And Expensive".
On February 4, 1999, ZD purchased ZDTV. This purchase will affect ZD's
results in future periods. See "--ZDTV" below for certain summary pro forma and
other information about this purchase.
ZD expects to recognize compensation expense of approximately $7.9 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 $2.2 million. See Note 15 to ZD's Combined Financial
Statements in this prospectus.
Presentation of Financial Information
ZD is comprised of certain operations which were acquired at various times
and completed a reorganization in May 1998. See Notes 1 and 2 to ZD's Combined
Financial Statements in this prospectus.
In order to create financial statements that separately present ZD's assets,
liabilities, revenue, expenses and cash flow while still reflecting ZD's 100%
retained interest in
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ZDNet's division equity and net losses, ZD has accounted for its interest in
ZDNet in a manner similar to the manner prescribed by APB No. 18, The Equity
Method of Accounting for Investments in Common Stock. Thus, ZD's historical
balance sheets reflect ZD's 100% retained interest in ZDNet's division equity
as "Retained interest in ZDNet". Similarly, ZD's historical statements of
operations reflect ZD's 100% retained interest in ZDNet's division losses as
"Loss related to retained interest in ZDNet".
Since ZD and ZDNet together constitute all of Ziff-Davis Inc. and since ZD's
financial statements have historically reflected 100% of ZDNet's division
equity and losses, ZD's division equity and net income or loss has historically
been equal to Ziff-Davis Inc.'s total stockholders' equity and net income or
loss.
However, ZD's 100% retained interest will decline in the future to reflect,
among other things, the ZDNet stock sold in the offering. When ZD's retained
interest declines to a percentage below 100%, ZD's net income or loss will,
going forward, reflect only that reduced percentage of ZDNet's division income
or loss.
The book value associated with ZD's retained interest will increase or
decrease, among other things, to reflect ZD's proportionate retained interest
in ZDNet's division income or loss and will be adjusted from time to time as
set forth under Note 3 to ZD's Combined Financial Statements in this
prospectus.
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<PAGE>
Results of Operations
The table below presents the results of ZD as if the assets and operations
acquired by affiliates of Ziff-Davis Inc. on February 29, 1996 (as described in
Note 1 to the Combined Financial Statements in this prospectus) 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> <C> <C>
Revenue, net:
Publishing......................... $ 796,602 $ 834,015 $ 782,882
Events............................. 264,884 287,528 269,867
--------- --------- ---------
1,061,486 1,121,543 1,052,749
--------- --------- ---------
Cost of production:
Publishing......................... 212,287 221,367 215,336
Events............................. 87,373 99,533 82,143
--------- --------- ---------
299,660 320,900 297,479
Selling, general and administrative
expenses............................ 499,901 521,671 518,349
Depreciation and amortization........ 154,854 147,259 146,096
Restructuring charge................. -- -- 52,239
--------- --------- ---------
Income (loss) from operations........ 107,071 131,713 38,586
Interest expense, net................ (135,500) (190,445) (143,547)
Loss related to Retained Interest in
ZDNet............................... (17,933) (21,238) (7,884)
Other non-operating income, net...... 6,106 8,322 8,097
--------- --------- ---------
Loss before income taxes............. (40,256) (71,648) (104,748)
Provision (benefit) for income
taxes............................... 26,755 (469) (26,939)
--------- --------- ---------
Net loss............................. $ (67,011) $ (71,179) $ (77,809)
========= ========= =========
Other Data:
Cash and cash equivalents, end of
period.............................. $ 29,915 $ 30,273 $ 32,274
Net cash provided by operating
activities.......................... 80,483 11,900 100,299
Net cash used by investing
activities.......................... (65,678) (59,488) (69,158)
Net cash provided (used) by financing
activities.......................... (9,212) 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 $6,064,000, $824,000 and
$10,383,000 for 1996.
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<PAGE>
(2) "EBITDA" is defined as income before provision for income taxes, interest
expense, depreciation and amortization. ZD's EBITDA is calculated by adding
(a) ZD's EBITDA before losses related to its retained interest in ZDNet and
(b) ZD's proportionate interest (currently 100%) in ZDNet's EBITDA. EBITDA
for the year ended December 31, 1998 is before 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 ZD's operating performance or to cash flows as a measure of
liquidity. Although ZD 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 ZD
may not be comparable to similarly titled measures reported by other
companies.
Year ended December 31, 1998 compared with year ended December 31, 1997
Revenue, net
Revenue decreased by $68.8 million or 6.1% from $1,121.5 million in 1997 to
$1,052.7 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 Inc.'s magazines. Revenue from international
operations, which generated 10.2% of the segment's revenue, increased by $2.1
million 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
Inc.'s results for 1998. On May 1, 1998, Ziff-Davis Inc. acquired its joint
venture partner's 50% interest in FamilyPC magazine. Ziff-Davis Inc. 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 $17.7 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.
81
<PAGE>
Cost of production
Production costs decreased by 7.3% or $23.5 million from $320.9 million in
1997 to $297.4 million in 1998.
Publishing production costs decreased by $6.1 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 is a result of lower
operational costs and re-negotiated contracts as well as the discontinuance of
certain "one-time" shows that were held in 1997.
Selling, general and administrative expenses
Selling, general and administrative expenses decreased by $3.4 million or
0.7% from $521.7 million in 1997 to $518.3 million in 1998. The decrease was
due primarily to the headcount reduction 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. This decrease was partially offset by increased costs
relating to the launch of new products and services and increased advertising
expenses.
Depreciation and amortization
Total depreciation and amortization decreased $1.2 million from $147.3
million in 1997 to $146.1 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 ZD's magazines, principally
PC Magazine, PC/Computing, Computer Shopper and PC Week. ZD 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 $52.2 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 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:
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. 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 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, $5.2 million of the $8.6 million
related to these employee terminations had been paid.
. Costs to exit activities reflect the costs associated with the final
closure of the discontinued publications ($1.8 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.
Loss related to retained interest in ZDNet
The loss related to the retained interest in ZDNet decreased by $13.4 million
from $21.2 million in 1997 to $7.9 million in 1998. This decrease is due to
improved performance of that business. See "ZDNet Management's Discussion and
Analysis of Financial Condition and Results of Operations" elsewhere in this
prospectus.
Other non-operating income, net
Other non-operating income, net primarily reflects ZD's equity share in
earnings and losses from joint ventures and fees earned from management of
events not produced by ZD. This income decreased $0.2 million or 2.4% from $8.3
million in 1997 to $8.1 million in 1998 reflecting reduced fees from managed
events. The decline was partially offset by ZD's equity share in earnings of
MAC Publishing, LLC, an entity that was formed in August 1997.
Income taxes
The 1998 income tax benefit of $26.9 million increased from $0.5 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 ZD 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.
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<PAGE>
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 last year 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 from ZD's
retained interest in ZDNet. 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 ZDNet were the result of revenue growth exceeding increases in expenses.
The ratio of EBITDA to revenue was 23.2% for 1998 compared to 24.3% in 1997.
Year ended December 31, 1997 compared with Pro Forma Year ended December 31,
1996
Revenue, net
Net revenue increased by $60.0 million or 5.7% from $1,061.5 million in 1996
to $1,121.5 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 9.5% of the segment's revenue,
decreased by $1.5 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.
Cost of production
Production costs increased $21.2 million or 7.1% from $299.7 million to
$320.9 million.
Publishing production costs increased $9.1 million or 4.3% from $212.3
million in 1996 to $221.4 million in 1997. Costs related to new launches and
volume-related growth
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<PAGE>
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.
Selling, general and administrative expenses
Selling, general and administrative expenses increased $21.8 million or 4.4%
from $499.9 million to $521.7 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 $7.6 million to $147.3 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.
Loss related to Retained Interest in ZDNet
The loss from ZD's retained interest in ZDNet increased to $21.2 million in
1997 from $17.9 million in 1996 due to the operating performance of that
business. See "ZDNet Management's Discussion and Analysis of Financial
Condition and Results of Operations".
Other non-operating income, net
Other non-operating income, net primarily reflects ZD's equity share in
earnings and losses from joint ventures and fees earned from management of
events not produced by ZD. This income increased $2.2 million from $6.1 million
in 1996 to $8.3 million or 36.1% primarily due to a $2.2 million or 36.3%
increase in ZD's share of Mac Publishing, LLC's earnings.
Income Taxes
The 1997 combined income tax benefit of $0.5 million compares to a pro forma
income tax provision of $26.8 million in 1996. The improvement in the tax
provision is due to a
85
<PAGE>
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
($42.0 million in 1997 and $63.0 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
$2.1 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.
EBITDA
EBITDA for 1997 was $272.9 million, an increase of $17.5 million or 6.9% 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 24.3% for 1997 compared to the 1996 margin of 24.1%.
Liquidity and Capital Resources
Sources and uses of cash
As a result of the May 4, 1998 reorganization, ZD's 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 Inc.'s initial
public offering, Ziff-Davis Inc., on behalf of ZD, issued and sold $250 million
aggregate principal amount of notes. In addition, Ziff-Davis Inc., on behalf of
ZD, 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 ZD's working capital
requirements. The balance of intercompany obligations owed to Softbank was
converted to equity. See Note 2 to the Combined Financial Statements in this
prospectus.
At December 31, 1998, ZD's 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, ZD could have borrowed an additional
$28,800,000 under the credit facility at December 31,1998. For information
concerning the terms of this debt, see "Ziff-Davis Inc.'s Debt".
Cash and cash equivalents were $32.3 million at December 31, 1998, an
increase of $2.0 million from $30.3 million at December 31, 1997. The increase
was due to the factors discussed below:
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Cash provided by operations was $100.3 million for the year ended December
31, 1998 compared to $11.9 million for the year ended December 31, 1997. The
increase from 1997 to 1998 was attributed to ZD's lower losses before the
restructuring charge, lower working capital and a decrease in funding to
affiliates and to ZDNet for the 1998 period.
Cash used in investing activities for the year ended December 31, 1998
totaled $69.2 million compared to $59.5 million for the year ended December 31,
1997. The majority of these expenditures were for computer equipment and
leasehold improvements as well as for funding the operation of ZDNet.
Acquisitions and investments in the 1998 period relate to ZD's acquisition of
Sky TV, a trade show in Canada, an additional 50% interest in Family PC
magazine, a European marketing database company as well as an investment in Red
Herring. Acquisitions for the 1997 period reflected 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.
ZD had a working capital surplus of approximately $22.6 million at December
31, 1998, compared to a working capital deficit of approximately $379.8 million
at December 31, 1997. Ziff-Davis Inc.'s balance sheet has historically had a
working capital deficit due to significant amounts due to affiliates. ZD 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 Inc. had deferred revenue of $151.0 million
compared to $154.7 million at December 31, 1997. Deferred revenue does not
represent a cash liability owed by Ziff-Davis Inc., unless Ziff-Davis Inc.
fails to deliver a magazine or cancels a trade show, and generally does not
affect Ziff-Davis Inc.'s ability to fund day-to-day operations. Working capital
increased as a result of the reorganization and the initial public offering of
Ziff-Davis Inc.'s common stock which resulted in the repayment and conversion
to equity of related party obligations in connection therewith.
On December 11, 1998, Standard & Poors lowered its corporate credit and bank
loan ratings for Ziff-Davis Inc. to BB- from BB and its subordinated debt
rating for Ziff-Davis Inc. to B from B+. This downgrade had no 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.
ZD believes, based on its current level of operations and anticipated growth,
that ZD's 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 ZD's indebtedness and fund anticipated capital expenditures and
working capital requirements. However, actual capital requirements may change,
particularly as a result of any acquisitions ZD may
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pursue. The ability of ZD to meet its debt service obligations and reduce its
total debt will depend upon the future performance of ZD.
Funding for ZDNet
In the financial statements of ZD and ZDNet, whenever ZDNet had a cash need,
other than cash needs of ZDNet's foreign operations or cash needs of ZDNet's
operations that are not wholly owned, that cash need was funded by ZD and
accounted for as a capital contribution (i.e., as an increase in ZDNet's
division equity and ZD's Retained Interest in ZDNet). Accordingly, no interest
income from ZDNet has been reflected in the financial statements of ZD. After
the date on which ZDNet stock is first issued, Ziff-Davis Inc. will account for
all cash transfers from one group to or for the account of the other group,
other than transfers in return for assets or services rendered or transfers in
respect of ZD's retained interest that correspond to dividends paid on ZDNet
stock, as inter-group revolving credit advances. These advances will bear
interest at the rate at which Ziff-Davis Inc. could borrow such funds on a
revolving credit basis as the board of directors determines in its sole
discretion. However the board of directors has the discretion to determine that
a given transfer or type of transfer should be accounted for as a long-term
loan, a capital contribution increasing ZD's retained interest in ZDNet or a
return of capital reducing ZD's retained interest in ZDNet.
Credit Facility
ZD's 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 Inc.'s
debt to EBITDA ratios at December 31, 1998 would have been above the levels
that originally had 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, ZD agreed to pay a one-time fee of $3.375
million 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. Had the increased interest rates been in effect for the period
from Ziff-Davis Inc.'s 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 amount otherwise available for funding ZD or ZDNet operations.
ZD's credit facility exposes it to market risk with respect to changes in
interest rates. ZD manages this risk through the use of interest rate swap
agreements, as described below. Through the use of these swap agreements, ZD
has effectively established a fixed interest rate for $550 million of the
outstanding credit facility. Based on the $1,220.0 million
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outstanding under the credit facility at December 31, 1998, if the LIBOR rate
were to increase by 1%, ZD would incur, after giving effect to the swap
agreements, an additional $6.7 million of annual interest expense.
For a description of the terms of the amended credit facility, see "Ziff-
Davis Inc.'s Debt".
Interest Rate Swaps
On June 10, 1998, ZD entered into interest rate swap agreements, with an
aggregate notional amount of $550 million. Under these swap agreements, which
commenced on August 10, 1998, ZD 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 ZD pays under these agreements is 5.85%. ZD 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 ZD 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 ZD's 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 ZD would pay if the agreements were
terminated at the balance sheet date. While it is not ZD's intention to
terminate these swap agreements, these fair values indicated that the
termination of these 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, ZD enters into swap
agreements with major financial institutions and diversifies the counterparties
used as a means to limit counterparty exposure and concentration of risk.
ZDTV
In July 1997, Ziff-Davis Inc. entered into a license and services agreement
to develop ZDTV for MAC Holdings (America) Inc., 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 MAC Holdings' investment plus 10% per annum
for the period of investment. On January 15, 1999, Ziff-Davis Inc. exercised
this option and on February 4, 1999 purchased ZDTV at a purchase price of $81.4
million. Ziff-Davis Inc. 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 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. The cash portion of the purchase
price was funded by an advance from ZDTV to Ziff-Davis Inc.,
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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 Inc. assumed MAC Holdings' obligations under an option granted to
DirectTV to purchase 5% of ZDTV for $15 million, subject to adjustment.
Ziff-Davis Inc. 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 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
effect of these items. The pro forma data is not necessarily indicative of
actual results had the transaction occurred at January 1, 1998. Further, pro
forma results are not intended to be indicative of future financial results.
<TABLE>
<CAPTION>
Adjustments
Ziff-Davis for ZDTV
Inc. Transactions Pro forma
---------- ------------ ----------
(dollars in thousands)
<S> <C> <C> <C> <C>
Revenue......................... $1,052,749 $ 5,585 $1,058,334
Income (loss) from operations... 38,586 (55,049) (16,463)
Net loss........................ (77,809) (22,443) (100,252)
</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 Inc. 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, Inc., 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.
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Seasonality
Historically, ZD's 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 the Ziff-Davis Inc.'s management, this unaudited information has
been prepared on a basis consistent with the audited Combined Financial
Statements of ZD 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 Combined 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 $191,246 $198,419 $181,726 $211,491
Events................. 15,321 82,135 24,227 165,845 27,121 65,782 29,787 147,177
-------- -------- -------- -------- -------- -------- -------- --------
Total revenue........... $219,602 $293,468 $215,840 $392,633 $218,367 $264,201 $211,513 $358,668
Percentage of total
year.................. 19.6% 26.2% 19.2% 35.0% 20.7% 25.1% 20.1% 34.1%
Cost of production...... 60,842 91,152 61,710 107,196 69,048 74,710 62,898 90,823
Selling, general and
administrative expenses 130,837 132,015 131,633 127,186 131,177 127,114 127,382 132,676
Depreciation and
amortization........... 37,196 37,173 37,804 35,086 35,748 37,859 36,207 36,282
Restructuring charge.... -- -- -- -- -- -- -- 52,239
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) from
operations............. (9,273) 33,128 (15,307) 123,165 (17,606) 24,518 (14,974) 46,648
Income (loss) before
taxes.................. (59,901) (17,448) (66,703) 72,404 (68,058) (11,940) (39,458) 14,708
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. ZD's EBITDA is calculated by adding
(a) ZD's EBITDA before losses related to its retained interest in ZDNet and
(b) ZD's proportionate interest (currently 100%) in ZDNet's EBITDA. EBITDA
for the quarter ended December 31, 1998 does not include 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 ZD's operating performance or to cash
flows as a measure of liquidity. Although ZD 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 ZD may not be comparable to similarly titled measures
reported by other companies.
Inflation and Fluctuations in Paper and Postage Costs
ZD continually assesses the impact of inflation and changes in paper prices.
ZD generally enters into contracts for the purchase of paper which adjust the
price on a
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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. ZD will continue to monitor the impact of inflation and paper prices and
will consider these matters in setting its pricing policies. ZD 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, ZD has 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. See "Risk
Factors--Other Ziff-Davis Inc. Risks--Ziff-Davis Inc. May Be Adversely Affected
By Fluctuations In Paper And Postage Costs" and "ZD Description of Business--
Print Publishing".
Year 2000 Readiness Disclosure
During 1997, Ziff-Davis Inc., including the businesses comprising ZD, 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
Inc. 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 Inc. 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 Inc. has identified critical systems and applications that will
either be validated for compliance though formal documentation, through vendors
or through testing. Ziff-Davis Inc. 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 Inc.'s computer systems and databases, including its
subscription fulfillment and payroll systems, are managed by third parties
under contractual arrangements. Ziff-Davis Inc. currently has no Year 2000
compliance problems known to it relating to third parties. Ziff-Davis Inc. has
requested those third parties with which Ziff-Davis Inc. 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 Inc.
anticipates that such inquiries will be completed by April 30, 1999.
In addition, Ziff-Davis Inc. 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
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2000 compliance problem. Ziff-Davis Inc. 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 Inc. 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 of Ziff-Davis Inc. 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 Inc.'s Year 2000 readiness efforts as of
December 31, 1997 and 1998 were $1,692,000 and $3,837,000, respectively. Ziff-
Davis Inc. estimates that it will capitalize an additional $3,815,000 during
1999 related to its Year 2000 readiness efforts.
Ziff-Davis Inc. expects to complete testing and replacement of critical
systems by the beginning of the fourth quarter of 1999. Ziff-Davis Inc.'s
estimate of ZD's 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 Inc. would resolve the failure of such
applications and systems one by one and management of Ziff-Davis Inc. does not
believe that the impact on its critical systems would be material. However, if
Ziff-Davis Inc. 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 ZD's 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 Inc.
does not expect the adoption of SFAS No. 133 to have a material impact on ZD's
results of operations.
ZD expects to adopt this statement beginning with its 2000 financial
statements.
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ZD
DESCRIPTION OF BUSINESS
Ziff-Davis Inc. is a leading media and marketing company that provides
information on computing and technology, including the Internet. ZD is the
division of Ziff-Davis Inc. focused on the businesses of print publishing,
trade shows and conferences, market research, education, including ZDU, our
Internet-based educational service, and television, including an online
component. ZD provides technology companies worldwide with marketing strategies
for reaching key decision-makers.
ZD's PC Magazine, PC Week and Computer Shopper magazines were the top three
computer magazines in the U.S. and are among the top 25 U.S. magazines, each as
measured by total revenue in 1997. In 1998, ZD was the largest technology
publisher in the U.S. in terms of magazine revenue with at least 50% more
magazine revenue than its closest competitor. In 1997, ZD accounted for 36.8%
of all advertising and circulation dollars spent in computer periodicals. ZD
believes its publications provide readers and advertisers with comprehensive
market and product coverage and quality editorial content.
Through ZD Events, ZD also produces some of the world's most important trade
shows serving vendors, resellers, buyers and users of computer technology and
the Internet. In 1998, ZD produced over 50 trade shows and conferences
worldwide with over two million estimated attendees. ZD's COMDEX/Fall event 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.
ZD's other media and marketing platforms include market research, education
and publication of computer-related newsletters and training manuals and
television. ZD also currently has a 100% retained interest in ZDNet, Ziff-Davis
Inc.'s online business division, although that interest will decline to reflect
the initial issuance of ZDNet stock as well as any future issuances.
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. Forrester Research Inc.
estimates that the number of adult Web users will reach 51 million in the U.S.
by the end of 1998 and will grow to 99 million by the end of 2001.
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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.
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 Inc. 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.
ZD Strategy
ZD's objective is to be the preferred marketing partner to technology vendors
and service providers seeking to reach primary decision-makers involved in the
specification and purchase of their products and services. The key elements of
ZD's strategy are:
Focus On The Technology Market
ZD believes that its focus on the technology market provides it with
substantial opportunities to attract both audiences and advertisers.
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Develop The Most Comprehensive, Objective And Authoritative Content
ZD strives to produce the most differentiated, high quality content to
attract category brand-specifiers and decision-makers. ZD Labs, its computer
testing facility, enables ZD to provide reliable and authoritative product
evaluations to the business and consumer markets. The ability to provide
focused audiences with targeted information attracts leading advertisers and
exhibitors to ZD's products and services.
Build Brand Strength
ZD seeks growth in its core portfolio of leading brands, such as PC Magazine,
PC Week and COMDEX. ZD seeks to expand its market share of audiences and
advertisers while enhancing the quality and accessibility of its content and
marketing services. Ziff-Davis Inc.'s variety of business platforms enables ZD
to offer multiple media presentations of its branded content.
Leverage Multiple Media Marketing Platforms
ZD believes that the scope and depth of Ziff-Davis Inc.'s products and
services across multiple media platforms creates growth opportunities exceeding
those that ZD's businesses could achieve independently. Such opportunities
include the leveraging of strong relationships with advertisers in one media
platform into other platforms, cross-marketing products and services to the
audiences of its different platforms and packaging integrated marketing
products across all platforms for large advertisers. We believe that ZD has a
competitive advantage over single platform providers because of its ability to
offer clients multiple platform marketing solutions.
Launch New Products And Services
ZD believes that rapid advances in technology will create additional growth
opportunities to launch new products and expand its audience and advertiser
base. ZD seeks to identify new audiences and develop products and services that
respond to their informational needs. ZD believes that the scope of its
operations and its experience in launching new products across multiple media
platforms and geographic regions enable it to more readily achieve market
acceptance for new products and services.
Expand Global Reach
ZD intends to leverage its brand recognition and multinational experience to
expand further into overseas markets, focusing on key markets that have size
and growth characteristics to support ZD's strategy of cross-media operations.
ZD seeks to further expand internationally through the launch overseas of
proven U.S. properties, joint ventures and licensing arrangements with local
operating partners and selective acquisitions.
ZD expects to fund its business and operating strategy from internally
generated cash flow from operations, which are estimated to be sufficient to
fund investments as well as repay indebtedness. See "ZD Management's Discussion
and Analysis of Financial Condition and Results of Operations".
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Print Publishing
ZD 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. ZD's
publications have a combined circulation of approximately seven million primary
readers worldwide. Approximately 61.5% of ZD's total revenue for the year ended
December 31, 1998, was attributable to its print publishing business. ZD's
magazines are designed to appeal to a target audience of sophisticated
customers in the business and consumer markets by providing high-quality
editorial content. ZD produces monthly magazines that provide comparative,
laboratory-based product reviews and news weeklies that provide product and
industry news and analysis. ZD also serves the developing market for lifestyle
and entertainment publications that focus on technology. ZD's publications also
include magazines related to the electronic gaming industry that ZD acquired
from Sendai Publishing Group, Inc. in May 1996.
ZD believes its leading position in the computer publishing market is based
upon:
. Leading Brands in Key Categories. In 1997, ZD's 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.
. Strength in Advertising, Circulation and Newsstand Sales. In 1997, ZD
accounted for 36.8% of all advertising and circulation dollars spent in
computer periodicals. ZD's U.S. publications have a total circulation of
approximately six million primary readers, and ZD 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, ZD's publications accounted for
50.1% of all computer magazines sold in the first six months of 1998.
. High Quality Editorial Content. ZD's top editors and columnists are
supported by laboratory-testing facilities, producing widely acknowledged
authoritative benchmarks for determining product quality. ZD's
comprehensive content attracts focused audiences, thereby attracting
leading advertisers and exhibitors to its products and services.
. Successful Development of New Publications for Emerging Sectors. ZD 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).
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The following table sets forth information relating to ZD's primary
publications for 1998.
<TABLE>
<CAPTION>
1998
Circulation Publication 1998
First ----------------- Frequency Advertising
Publication Issue Type(1) Amount(2) (Per Year) Pages(3)
----------- ----- ------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
U.S. Business
PC Magazine................... 1981 P 1,182,181 22x 5,381
PC/Computing.................. 1988 P 1,044,252 12x 2,557
Computer Shopper.............. 1979 P 560,267 12x 6,525
PC Week....................... 1983 C 400,144 51x 5,447
Inter@ctive Week.............. 1994 C 150,150 45x 2,173
Macworld(4)................... 1985 P 532,702 12x 1,296
Sm@rt Reseller................ 1998 C 65,520 22x 890
U.S. Consumer
Electronic Gaming Monthly..... 1988 P 398,219 12x 1,428
Yahoo! Internet Life.......... 1995 P 453,433 12x 722
Computer Gaming World......... 1981 P 286,978 12x 2,416
Expert Gamer(5)............... 1988 P 191,083 12x 688
Official U.S. PlayStation
Magazine..................... 1995 P 179,472 12x 864
FamilyPC(6)................... 1994 P 401,163 12x 1,161
International
PC Professionell (Germany).... 1991 P 209,257 12x 1,570
PC Direkt (Germany)........... 1992 P 170,067 12x 2,285
Internet Professionell
(Germany).................... 1997 P 35,171 12x 176
PC Magazine (UK).............. 1992 P 135,002 12x 3,472
PC Direct (UK)................ 1992 P 121,032 12x 6,606
PC Gaming World (UK).......... 1997 P 40,385 12x 405
IT Week (UK).................. 1998 C 55,000 45x 635
PC Expert (France)............ 1992 P 102,000 12x 1,587
PC Direct (France)............ 1992 P 82,640 12x 2,922
PC Week (China)(7)............ 1996 C 70,000 51x 3,264
PC/Computing (China)(7)....... 1994 P 70,000 12x 215
PC Magazine (China)(7)........ 1994 P 103,000 12x 988
Sm@rt Reseller (China)(7)..... 1998 C 50,000 26x 178
</TABLE>
- --------
(1) P = Paid, C = Controlled.
(2) Based on circulation information provided by ZD to the Audit Bureau of
Circulations for paid publications and BPA International for controlled
publications for the six months ended December 31, 1998 for domestic
publications and based on ZD data for international publications.
(3) As reported by AdScope, Inc., Eugene, OR for the year ended December 31,
1998 for domestic publications and based on ZD data for international
publications.
(4) Joint venture with International Data Group, Inc.
(5) Formerly EGM/2/.
(6) Operated as a joint venture with an affiliate of The Walt Disney Company
through April 30, 1998; 100% owned by ZD thereafter.
(7) Joint venture with Richina Media Holdings and other local agencies in
China.
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Corporate Sales
ZD's corporate sales team integrates its marketing activities into one
cohesive resource for its largest customers. The corporate sales group,
originally established to provide discounts for advertisers buying across two
or more magazine titles, has been expanded to allow marketers to reach their
target buyers through any combination of Ziff-Davis Inc.'s business platforms.
Currently 27 professionals in U.S. corporate sales coordinate major
advertisers' campaigns across Ziff-Davis Inc.'s multiple platforms.
Editorial, Laboratory Testing And Benchmark Software
ZD seeks to develop and maintain a high level of technical expertise to
provide quality technology content. ZD's editorial personnel includes award-
winning editors and experts. ZD believes its publications are widely regarded
as a reliable source of objective product evaluations and industry news because
of the quality and reputation of its laboratory tests. To maintain impartiality
and objectivity in its product reviews, ZD has policies governing separation of
editorial functions from advertising sales functions and restricts trading in
securities of technology-related companies by its journalists.
ZD is committed to laboratory-based product testing as an integral part of
its editorial mission. For the year ended December 31, 1998, ZD spent over $11
million in laboratory testing. The ZD Labs staff works with testers from many
of ZD's 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. ZD believes ZD Labs gives it a competitive
advantage in terms of staffing, equipment and access to the technology
necessary to effectively evaluate products.
ZD Labs produces the core, publicly available and widely distributed
benchmark software that its publications use to measure the performance of PCs,
Macintosh systems and servers. ZD's benchmarks have become industry standards
among major buyers of computer and Internet-related technology.
Sources Of Print Publishing Revenue
ZD's publications are generally either paid-circulation magazines--which
generate revenue from newsstand sales, subscriptions and advertising--or
controlled-circulation publications--which are distributed free of charge to
qualified information technology professionals, generate revenue principally
from advertising sales and provide valuable demographic information to ZD.
Advertising Sales. ZD seeks to assist its advertisers in maximizing the
return on their marketing investment. Advertising sales accounted for 77.6% of
ZD's total print publishing revenue for the year ended December 31, 1998. The
ZD sales force uses market research tools, such as ZD's BrandTrak and ZDNet's
InternetTrak services, to inform clients about overall industry trends.
BrandTrak is a survey that is conducted every six months of
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subscribers to five ZD publications and three European publications in order to
track purchasing behavior by brand. InternetTrak is a quarterly marketing
survey of Web users in the U.S. that tracks Web users and their online
activities. ZD's sales staff provides customer service, research, promotional
support and value-added programs for advertisers.
Circulation. ZD maintains centralized circulation operations, enabling it to
capitalize on its successful practices on a timely basis across all
publications. ZD strives to increase its readership by building relationships
with distributors, retailers and subscribers. Revenue from circulation of ZD's
paid-circulation magazines accounted for 19.6% of ZD's total print publishing
revenue in 1998. This was comprised of subscription sales (10.2% in 1998) and
newsstand sales (9.4% 1998). ZD's publications have a total circulation of
approximately seven million primary readers worldwide.
ZD's newsstand strategy focuses on developing strong relationships with key
distributors and large retail accounts. For example, ZD is the principal
supplier of computer technology publications to Warner Publisher Services, a
division of Time Warner Inc. In addition, ZD has preferred distribution
arrangements with large retailers including WalMart, Staples and Barnes &
Noble. These arrangements, which are terminable at will without notice, include
prominent magazine displays to strengthen ZD's brand identity.
ZD's subscription strategy is to maintain a highly focused readership and
increase subscriber loyalty and renewal rates. This strategy provides ZD's
advertisers with access to a precisely focused target audience.
Licensing and Joint Ventures. In its international publications, ZD seeks to
maximize global reach, maintain content quality and reduce the cost of entering
new markets. Through subsidiaries, ZD currently has publishing operations in
France, the United Kingdom and Germany. ZD also has over 50 licensed
publications worldwide. ZD's licenses are generally three to five year
agreements that provide for a minimum annual royalty against a percentage of
revenue. ZD 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, ZD 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 ZD believes is
generally considered to be the primary product resource in its market segment.
Macworld is published by Mac Publishing L.L.C., a ZD joint venture with IDG.
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
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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 ZD believes is the most advanced in the
Macintosh industry. Macworld has a qualified circulation of over 500,000.
Consumer Magazines. ZD 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. ZD has an exclusive
license from Yahoo! Inc. to use Yahoo! in the title of a print magazine.
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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.
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
ZD 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 ZD's U.S. publication, Computer Shopper. IT Week includes
material from Inter@ctive Week and ZDNet News in addition to local content.
Paper And Printing
ZD maintains strong relationships with its paper suppliers and printing
companies. ZD's 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 ZD's 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. ZD has relationships with a number of
printing companies, including R.R. Donnelley, Brown, Quadgraphics and Quebecor.
Approximately 46% of ZD's 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.
Trade Shows and Conferences
ZD 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 ZD's total revenue in 1998 was attributable to its trade show and
conference business. ZD
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produces the industry-wide COMDEX events, which ZD's predecessor acquired in
April 1995, other segment-focused trade shows and conferences and customized
events for specific clients. ZD 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, ZD estimates that over two million people attended its trade shows and
conferences worldwide. In addition to COMDEX/Fall, held annually in Las Vegas,
ZD produces 18 other COMDEX events in 13 countries.
In 1998, ZD produced 11 segment-focused "NetWorld+Interop" and "Seybold
Seminars" trade shows in 9 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. ZD 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.
ZD also produces customized conferences that are designed to meet the
marketing needs of specific clients. For example, ZD produced the JavaOne
series of conferences for Sun Microsystems, Inc., which were designed to
introduce Java technology software to the developer community.
Attendees at ZD's 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. ZD estimates that in 1998 over
8,000 companies participated as exhibitors in its trade shows and conferences.
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The following table sets forth information relating to ZD's principal trade
shows and conferences, including joint ventures, for 1998. Substantially all of
ZD's international COMDEX events are joint ventures and substantially all
NetWorld+Interop events are owned by ZD.
<TABLE>
<CAPTION>
1998 Actual
-------------------------------------
Total Net Estimated
Launch Square Total Total
Year Footage Exhibitors Attendees
------ --------- ---------- ---------
<S> <C> <C> <C> <C>
EVENT
North America
COMDEX/Fall............................. 1979 1,229,062 1,556 202,000
COMDEX/Spring, WINDOWS WORLD & EXPO COMM
USA.................................... 1981 180,259 563 85,750
COMDEX/Canada incl. WINDOWS WORLD and
Connected Computing.................... 1992 140,648 334 57,110
COMDEX/PacRim........................... 1995 65,762 211 30,500
COMDEX/Quebec........................... 1996 34,770 129 17,825
COMDEX/Miami & EXPO COMM Miami.......... 1996 65,600 261 20,000
NetWorld+Interop & CommUnity Las Vegas.. 1986 475,484 705 55,000
NetWorld+Interop & CommUnity Atlanta.... 1992 383,048 576 44,000
Seybold San Francisco Publishing........ 1986 153,324 356 38,570
Seybold Seminars New York............... 1982 122,920 293 23,970
International
COMDEX/SUCESU-SP Brazil................. 1992 306,134 393 130,000
COMDEX & WINDOWS WORLD Mexico(1)........ 1993 68,874 199 39,000
COMDEX/INFOCOM & WINDOWS WORLD
Argentina.............................. 1997 89,252 250 32,000
COMDEX IT France........................ 1997 118,116 560 60,000
COMDEX/Japan & Object World Tokyo(2).... 1996 96,706 139 80,970
COMDEX/China............................ 1996 164,689 175 91,265
COMDEX/Korea............................ 1997 40,689 127 81,685
COMDEX/Asia at Singapore Informatics.... 1995 32,830 205 19,075
COMDEX/IT INDIA......................... 1996 43,057 125 70,000
NetWorld+Interop Paris.................. 1992 194,015 400 48,770
NetWorld+Interop Tokyo(2)............... 1993 169,800 258 99,320
Seybold Seminars Tokyo(2)............... 1996 3,400 23 24,135
Windows NT Intranet Solutions Japan(2).. 1994 36,500 59 38,020
</TABLE>
- --------
(1) These international COMDEX events are wholly owned by ZD.
(2) Trade shows in Japan are owned by Softbank and managed by ZD.
Sources Of Trade Show And Conference Revenue
Exhibitor space fees accounted for 66.8% of ZD's total trade show and
conference revenue for 1998. ZD believes most trade show producers receive
virtually all of their revenue from the sale of exhibitor space fees. ZD 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
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each trade show commit to booth space for the next year's show. ZD 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 ZD's trade show and conference revenue
for 1998, primarily from NetWorld+Interop and Seybold Seminars events. Most
COMDEX attendees are invited guests of exhibitors who receive complimentary
admission tickets from ZD for their customers and key prospects. This helps
exhibitors ensure that their best customers and prospects will attend.
Advertising revenue from ZD's 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.
ZD 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 1998, it
was held in Chicago and had approximately 560 exhibiting companies and over
85,000 attendees. For the last eight years, ZD, in cooperation with Microsoft
Corporation, has produced a WINDOWS WORLD trade show concurrently with
COMDEX/Spring.
In 1993, ZD 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.
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NetWorld+Interop
NetWorld+Interop is the largest of ZD's 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
ZD's 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.
Television
In order to expand its media platforms, Ziff-Davis Inc. 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 Inc. and
principal stockholder of SOFTBANK Corp. In February 1999, Ziff-Davis Inc.
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.
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For more information about Ziff-Davis Inc.'s acquisition of ZDTV, see "ZD
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and ZD's Combined Financial Statements.
Education
ZD 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. ZD believes its education offerings extend ZD's reach and
brand reputation while permitting it to attract and retain customers.
ZD produces software-specific newsletters and technology information, with
approximately 40 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 ZD
provides interactive instructor-led training to subscribers. The ZDU service is
part of ZD but is closely integrated with ZDNet.
Market Research
ZD's 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 ZD's
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
ZD 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.
ZD 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. ZD's
market research division also consolidates information obtained in each of the
databases maintained by other operating divisions within ZD and ZDNet, so that
each division can offer Ziff-Davis Inc.'s clients a wide range of information
to meet their marketing needs across multiple platforms.
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Competition
ZD competes with a wide range of companies for each of its products and
services. The magazine publishing business is highly competitive. ZD 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 ZD in the U.S. include IDG,
CMP and Imagine Media. ZD 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.
ZD 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.
ZD's 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.
ZD's 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
ZD has developed strong brand awareness for its principal publications, trade
shows and other products and services. Accordingly, ZD 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. ZD 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 ZD's publications and services are available.
ZD 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. ZD 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.
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Employees
As of December 31, 1998, ZD had a total of 2,889 employees. Of these
employees, 621 were engaged in U.S. magazine publishing activities, 397 in
international publishing activities, 505 in trade shows and conferences, 407 in
education activities, 436 in market research and 523 in central services. None
of ZD's U.S. employees is represented by a labor union. ZD considers its
relationships with its employees to be satisfactory.
Facilities
ZD's world headquarters are located in New York and ZD has over 50 editorial,
production and sales offices and computer labs in many other cities in the U.S.
and around the world. ZD's other principal offices are located in the Boston
and San Francisco metropolitan areas. ZD and Ziff-Davis Inc. do not own real
property that is material to its business and Ziff-Davis Inc. leases all but
one of its offices from third parties. ZD believes that its properties, taken
as a whole, are in good operating condition and are suitable and adequate for
its current operations, and that suitable additional or alternative space,
including space available under lease options, will be available at
commercially reasonable terms for future expansion.
Legal Proceedings
For information concerning certain legal proceedings to which Ziff-Davis Inc.
is a party, see "ZDNet Description of Business".
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ZIFF-DAVIS INC.
SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OTHER 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. included elsewhere in this prospectus. 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 Selected Historical Financial and Other Data, Management's
Discussion and Analysis of Financial Condition and Results of Operations for
each of ZDNet, ZD and Ziff-Davis Inc. and Financial Statements for each of
ZDNet, ZD and Ziff-Davis Inc. beginning on pages F-5, F-33 and F-79 of this
prospectus, respectively.
<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> <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. After issuance of ZDNet stock,
Ziff-Davis Inc. will report earnings per share data for ZD and ZDNet but
not for Ziff-Davis Inc.
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ZIFF-DAVIS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Revenue
Ziff-Davis Inc. had net revenue of $1.109 billion for 1998. A substantial
portion of Ziff-Davis Inc.'s 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 Inc.'s advertising revenue during any of
the last three years. However, Ziff-Davis Inc.'s top 20 advertisers accounted
for 37.1% of total advertising revenue for 1998.
In the publishing segment, Ziff-Davis Inc.'s 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 Inc. 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 Inc. believes
these other sources will continue to be an important growth area, particularly
for its content-focused events. In the Internet segment, Ziff-Davis Inc.'s
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 Inc.'s
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 Inc.'s 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. See also "Risk
Factors--Other Ziff-Davis Inc. Risks--Ziff-Davis Inc. May Be Adversely Affected
By Fluctuations in Paper and Postage Costs" and "--Inflation and Fluctuations
in Paper Prices and Postage Costs". 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 Inc. 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).
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Factors affecting future periods
Ziff-Davis Inc.'s 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 Inc.'s
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 Inc. may experience
fluctuations in revenue from period to period. Many of Ziff-Davis Inc.'s 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
Inc.'s 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,
trade shows and services are funded with cash flow from operations and are
expensed as incurred. Accordingly, Ziff-Davis Inc.'s revenue from year to year
may be affected by the number and timing of new product launches. If Ziff-Davis
Inc. 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. See "Risk Factors--Other Ziff-Davis Inc. Risks--To Remain Competitive
Ziff-Davis Inc. Must Constantly Expand And Develop New Products And Services.
This Is Inherently Risky And Expensive".
On February 4, 1999, Ziff-Davis purchased ZDTV. This purchase will affect
Ziff-Davis Inc.'s results in future periods. See "--ZDTV" below for certain
summary pro forma and other information about this purchase.
Ziff-Davis Inc. 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 Inc.'s
Consolidated Financial Statements in this prospectus.
Ziff-Davis Inc. expects to acquire the remaining 30% interest in GameSpot in
exchange for ZDNet 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. At a price of $19.00 per share, this
acquisition will result in additional annual amortization of approximately $1.3
million per year. The effect of this acquisition and the shares expected to be
issued in connection therewith are not reflected elsewhere in this prospectus.
Presentation of Financial Information
Ziff-Davis Inc. 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 in this prospectus.
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Results of Operations
The table below presents the results of Ziff-Davis Inc. as if the assets and
operations acquired by affiliates of Ziff-Davis Inc. on February 29, 1996 (as
described in Note 1 to the Consolidated Financial Statement in this prospectus)
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> <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 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 and media industries, the EBITDA
presented for Ziff-Davis Inc. may not be comparable to similarly titled
measures reported by other companies.
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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 Inc.'s 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
Inc.'s results for 1998. On May 1, 1998, Ziff-Davis Inc. acquired its joint
venture partner's 50% interest in FamilyPC magazine. Ziff-Davis Inc. 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.
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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.
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 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 $52.2 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
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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 $37.9 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 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, $5.2 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 Inc.'s equity
share in earnings and losses from joint ventures and fees earned from
management of events not produced by Ziff-Davis Inc. 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 Inc.'s equity share in earnings of MAC Publishing, LLC, an entity that
was formed in August 1997.
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 Inc. 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.
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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
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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.
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 Inc. 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.
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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.
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 Inc.'s 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
Inc.'s initial public offering, Ziff-Davis Inc. issued and sold $250 million
aggregate principal amount of notes. In addition, Ziff-Davis Inc. 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 Inc.'s working capital requirements. The
balance of intercompany obligations owed to Softbank was converted to equity.
See Note 2 to the Consolidated Financial Statements in this prospectus.
At December 31, 1998, Ziff-Davis Inc.'s 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 Inc. could have
borrowed an additional $28,800,000 under the credit facility at December 31,
1998. For information concerning the terms of this debt, see "Ziff-Davis Inc.'s
Debt".
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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 Ziff-Davis Inc.'s 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 Inc.'s 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 Inc. 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 Inc.'s balance sheet has
historically had a working capital deficit due to significant amounts due to
affiliates. Ziff-Davis Inc. 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 Inc.
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 Inc., unless Ziff-Davis Inc. fails to deliver a magazine or cancels a
trade show, and generally does not affect Ziff-Davis Inc.'s ability to fund
day-to-day operations. Working capital increased as a result of the
reorganization and the initial public offering of Ziff-Davis Inc.'s 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 Inc. to BB- from BB and its subordinated debt
rating for Ziff-Davis Inc. to B from B+. This downgrade had no 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 Inc. believes, based on its current level of operations and
anticipated growth, that Ziff-Davis Inc.'s ability to generate cash, together
with cash on hand and available lines
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of credit, will be sufficient to make required payments of principal and
interest on Ziff-Davis Inc.'s 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 Inc. may pursue. The ability of Ziff-Davis Inc. to meet its debt service
obligations and reduce its total debt will depend upon the future performance
of Ziff-Davis Inc.
Credit Facility
Ziff-Davis Inc.'s 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 Inc's.
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, Ziff-Davis Inc. 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 Inc.'s 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 ZD or ZDNet operations.
Ziff-Davis Inc.'s credit facility exposes it to market risk with respect to
changes in interest rates. Ziff-Davis Inc. manages this risk through the use of
interest rate swap agreements, as described below. Through the use of these
swap agreements, Ziff-Davis Inc. 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 Inc. would incur, after giving
effect to the swap agreements, an additional $6.7 million of annual interest
expense.
For a description of the terms of the amended credit facility, see "Ziff-
Davis Inc.'s Debt".
Interest Rate Swaps
On June 10, 1998, Ziff-Davis Inc. 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 Inc. 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 Inc.
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pays under these agreements is 5.85%. Ziff-Davis Inc. 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 Inc. 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 Inc.'s 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
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 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 Inc. enters
into swap agreements with major financial institutions and diversifies the
counterparties used as a means to limit counterparty exposure and concentration
of risk.
ZDTV
In July 1997, Ziff-Davis Inc. 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 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 MAC Holdings' investment plus 10% per annum for the
period of investment. On January 15, 1999, Ziff-Davis Inc. exercised this
option and on February 4, 1999, purchased ZDTV at a purchase price of $81.4
million. Ziff-Davis Inc. 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 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. The cash portion of the purchase
price was funded by an advance from ZDTV to Ziff-Davis Inc., 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 Inc. assumed MAC Holdings' obligations under an option granted to
DirectTV to purchase 5% of ZDTV for $15 million, subject to adjustment.
Ziff-Davis Inc. 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,
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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 Inc. 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.
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Seasonality
Historically, Ziff-Davis Inc.'s 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 Inc.'s 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 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 and media industries, the
EBITDA presented for Ziff-Davis Inc. may not be comparable to similarly
titled measures reported by other companies.
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<PAGE>
Inflation and Fluctuations in Paper Prices and Postage Costs
Ziff-Davis Inc. continually assesses the impact of inflation and changes in
paper prices. Ziff-Davis Inc. 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 Inc. will
continue to monitor the impact of inflation and paper prices and will consider
these matters in setting its pricing policies. Ziff-Davis Inc. 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 Inc. 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.
See "Risk Factors--Other Ziff-Davis Inc. Risks--Ziff-Davis Inc. May Be
Adversely Affected By Fluctuations in Paper and Postage Costs" and "ZD
Description of Business--Paper and Printing".
Year 2000 Readiness Disclosure
During 1997, Ziff-Davis Inc. 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 Inc. 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 Inc. 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 Inc. has identified critical systems and applications that will
either be validated for compliance through formal documentation, through
vendors or through testing. Ziff-Davis Inc. 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 Inc.'s computer systems and databases, including its
subscription fulfillment and payroll systems, are managed by third parties
under contractual arrangements. Ziff-Davis Inc. currently has no Year 2000
compliance problems known to it relating to third parties. Ziff-Davis Inc. has
requested those third parties with which Ziff-Davis Inc. 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
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<PAGE>
so, the nature of such difficulties. Ziff-Davis Inc. anticipates that such
inquiries will be completed by April 30, 1999.
In addition, Ziff-Davis Inc. 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 Inc. 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 Inc. 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 of Ziff-Davis Inc. 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 Inc.'s Year 2000 readiness efforts as of
December 31, 1997 and 1998 were $1,692,000 and $3,837,000, respectively. Ziff-
Davis Inc. estimates that it will incur an additional $3,815,000 during 1999
related to its Year 2000 readiness efforts.
Ziff-Davis Inc. expects to complete testing and replacement of critical
systems by the beginning of the fourth quarter of 1999. Ziff-Davis Inc.'s
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 Inc. would resolve the failure of such
applications and systems one by one and management of Ziff-Davis Inc. does not
believe that the impact on its critical systems would be material. However, if
Ziff-Davis Inc. 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 Inc.'s 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 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. expects to adopt this statement beginning with its 2000
financial statements.
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<PAGE>
ZIFF-DAVIS INC.
DESCRIPTION OF BUSINESS
General
Ziff-Davis Inc. is a leading media and marketing company that provides
information on computing technology, including the Internet. We provide
technology companies worldwide with marketing strategies for reaching key
decision-makers. From an accounting standpoint, we have separated our online
business division from the rest of our businesses, and we have allocated all of
our consolidated assets, liabilities, revenue, expenses and cash flow between
ZD and ZDNet. For additional information regarding the amounts allocated, see
the Selected Combined Financial and Other Data, Management's Discussion and
Analysis of Financial Condition and Results of Operations, Description of
Business and Combined Financial Statements for each of ZD and ZDNet,
respectively.
Relationship with Softbank
For information concerning the formation of Ziff-Davis Inc. and its
relationship with Softbank see Note 1 to the Consolidated Financial Statements
of Ziff-Davis Inc. included in this prospectus and "Risk Factors--Other Ziff-
Davis Inc. Risks--Ziff-Davis Inc. Is Controlled By Its Principal Stockholders.
This Creates Potential Conflicts Of Interest".
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<PAGE>
MANAGEMENT OF ZIFF-DAVIS INC.
Directors and Executive Officers
Our directors and executive officers are set forth in the table below:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Eric Hippeau............ 47 Chairman, Chief Executive Officer, Director
Jason E. Chudnofsky..... 55 President, Chief Executive Officer, ZD Events, Director
Timothy C. O'Brien...... 50 Chief Financial Officer, Director
Daniel L. Rosensweig.... 37 President, Chief Executive Officer, ZDNet, Director
Claude P. Sheer......... 48 Chief Internet Strategist
Robert G. Brown......... 52 President, ZD Market Intelligence
Terri S. Holbrooke...... 42 President, ZD Brand & Market Services
J. Malcolm Morris....... 56 Senior Vice President, General Counsel
Mark D. Moyer........... 39 Vice President and Controller
Daryl R. Otte........... 37 Senior Vice President, Development and Planning
Michael S. Perlis....... 46 President, ZD Publishing
William A. Rosenthal.... 38 President, ZD Education
Larry Wangberg.......... 56 President, Chief Executive Officer, ZDTV
Thomas L. Wright........ 40 Vice President, Treasurer
Masayoshi Son........... 40 Director
Yoshitaka Kitao......... 47 Director
Ronald D. Fisher........ 51 Director
Jonathan D. Lazarus..... 47 Director
Jerry Yang.............. 30 Director
</TABLE>
Ziff-Davis Inc. intends to nominate for election at least one additional
independent director. See "--Composition of the Board of Directors".
Biographies Of Directors And Executive Officers
Set forth below is the biography of each of our current directors and
executive officers, all of whom have been a director or executive officer since
our initial public offering in April 1998 unless otherwise noted.
Eric Hippeau. Eric Hippeau has been Chairman and Chief Executive Officer of
Ziff-Davis Inc. since 1998 and of ZD Inc. since 1993. Mr. Hippeau has been a
director of Ziff-Davis Inc. since 1998 and his current term will expire in
2001. He joined ZD Inc. in 1989 as Publisher of PC Magazine, was named
Executive Vice President of ZD Inc. in 1990, and President and Chief Operating
Officer in February 1991. Prior to joining ZD Inc., Mr. Hippeau held a number
of positions with IDG, including Vice President of computer publications in
Latin America and Publisher of IDG's InfoWorld magazine. Mr. Hippeau is
currently a Director of GeoCities, Frontier Corporation, SOFTBANK Corp. and
Yahoo! Inc.
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Jason E. Chudnofsky. Jason E. Chudnofsky has been President of ZD Events
since October 1997, has been a director of Ziff-Davis Inc. since 1998 and his
current term will expire in 1999. From 1988 to 1997, Mr. Chudnofsky was
President of the Trade Show Division of The Interface Group which was renamed
SOFTBANK COMDEX when that division was acquired by Softbank in 1995. In
addition, Mr. Chudnofsky served as President and Chief Executive Officer of the
Sands Expo and Convention Center Division from 1990 to 1995. Mr. Chudnofsky has
over 15 years of experience in the exposition, trade show and conference
industry.
Timothy C. O'Brien. Timothy C. O'Brien has been Vice President and Chief
Financial Officer of Ziff-Davis Inc. since 1998 and of ZD Inc. since 1995. Mr.
O'Brien has been a director of Ziff-Davis Inc. since 1998 and his current term
will expire in 2000. From 1985 to 1994, Mr. O'Brien was Chief Financial Officer
of Reed Elsevier Inc. and Reed Publishing USA. From 1992 to 1994, he was also
Executive Vice President of Cahners Publishing Company which he joined in 1980.
From 1970 to 1980, Mr. O'Brien was employed by Price Waterhouse LLP.
Daniel L. Rosensweig. Daniel L. Rosensweig has been President and Chief
Executive Officer of ZDNet since January 1999 and President of ZDNet since
1997. From 1996 to 1997, Mr. Rosensweig served as Executive Vice President of
ZD Inc.'s Internet Publishing Group. Mr. Rosensweig has been a director of
Ziff-Davis Inc. since February 1999 and his current term will expire in 2001.
From 1995 to 1996, Mr. Rosensweig was Vice President and Publisher of PC
Magazine, and, from 1994 to 1995, was Publisher of PC Magazine. Since joining
ZD Inc. in 1983, Mr. Rosensweig has also held a number of positions, including
Associate Publisher positions at PC Magazine, Computer Shopper and PC Sources.
Claude P. Sheer. Claude P. Sheer has been Chief Internet Strategist of ZD
Inc. since November 1998 and was President of ZD Publishing from December 1997
to November 1998. Mr. Sheer was a director of Ziff-Davis Inc. from 1998 until
January 31, 1999. Mr. Sheer served in 1997 as President of U.S. Publications of
ZD Inc. and in 1996 as President of the Business Media Group. Since joining ZD
Inc. in 1980, Mr. Sheer has served in a number of positions including Publisher
of PC Week and Group Vice President of Controlled Circulation Publications.
Robert G. Brown. Robert G. Brown has been President of ZD Market Intelligence
since 1993. He joined ZD Inc. in 1992 as Vice President of Market Development.
Prior to that time, from March 1988 to July 1992, Mr. Brown was founder and
President of R.G. Brown & Associates, a direct marketing and management
consulting company working with computer hardware and software companies. Mr.
Brown was previously President of Quadram, a unit of Intelligent Systems, L.P.,
which manufactured and sold peripheral products to PC users.
Terri S. Holbrooke. Terri S. Holbrooke has been President of ZD Brand & Market
Services since July 1997. From October 1996 to July 1997, Ms. Holbrooke was
Senior Vice President of Marketing for ZD Inc. From January 1996 to October
1996, Ms. Holbrooke was Vice President of SOFTBANK Exposition and Conference
Company. From 1986 to 1995, Ms. Holbrooke held several executive marketing
positions at Novell Inc., including Vice President of Worldwide Marketing
Communications and Vice President of Strategic Planning.
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<PAGE>
J. Malcolm Morris. J. Malcolm Morris has been Senior Vice President, General
Counsel of Ziff-Davis Inc. since 1998, having previously served as Vice
President, General Counsel of ZD Inc. since 1990. Mr. Morris joined ZD Inc. in
1980 as Assistant General Counsel. Prior to joining ZD Inc., Mr. Morris was
engaged in the practice of law at the New York firm of Cleary, Gottlieb, Steen
& Hamilton.
Mark D. Moyer. Mark D. Moyer has been Vice President and Controller of Ziff-
Davis Inc. since 1998 and of ZD Inc. since 1995. From 1990 to 1995, Mr. Moyer
served in various financial management positions at both the divisional and
corporate levels of the ITT Corporation. From 1984 to 1990, Mr. Moyer served in
various finance management positions at both the divisional and corporate
levels of Amax Inc. From 1981 to 1984, Mr. Moyer was employed by Arthur Young &
Company, predecessor firm to Ernst & Young LLP.
Daryl R. Otte. Daryl R. Otte has been Senior Vice President of Development
and Planning for Ziff-Davis Inc. since 1998 and for ZD Inc. since 1997. From
1995 to 1997, Mr. Otte was Vice President of Planning. From 1989 to 1995, Mr.
Otte held various corporate finance and planning positions at Reed Elsevier
Inc., and its predecessors, including Vice President of Planning, Cahners
Publishing Company, and Assistant to the Chief Financial Officer of Reed
Publishing USA.
Michael S. Perlis. Michael S. Perlis has been President of ZD Publishing
since November 1998. From June 1996 to September 1998, Mr. Perlis was President
and Chief Operating Officer of TVSM, the largest publisher of cable television
listing and guidance publications. From 1994 to 1996, Mr. Perlis was Publisher
of Gentleman's Quarterly. In previous posts, Mr. Perlis has served as Publisher
and President of the Playboy Publishing Group, President and Chief Executive,
International Data Group--Peterborough and Group Publisher, Rodale Press.
William A. Rosenthal. William A. Rosenthal has been President of ZD Education
since 1997 having served as President of ZD Inc.'s Logical Operations division
in 1996 and 1997. From 1993 to 1996, Mr. Rosenthal was the General Manager for
ZD Inc.'s Logical Operations division and from 1987 to 1993 was Vice President
of Sales and Marketing for that division.
Larry Wangberg. Larry Wangberg has been President and Chief Executive Officer
of ZDTV since August 1997. From 1995 to 1997, Mr. Wangberg was Chairman and
Chief Executive Officer of StarSight Telecast, Inc. From 1983 to 1995 Mr.
Wangberg was with Times Mirror Cable Television, serving in a number of
positions including Chairman and Chief Executive Officer and Senior Vice
President and a member of the Management Committee of The Times Mirror Company.
Mr. Wangberg has over 20 years experience in the cable television industry and
has served as Chairman of the National Cable Association and Vice Chairman of
the National Academy of Cable Programming.
Thomas L. Wright. Thomas L. Wright has been Treasurer of Ziff-Davis Inc.
since 1998 and of ZD Inc. since 1995. Mr. Wright has been Vice President and
Treasurer of SOFTBANK Holdings Inc. since 1996. Prior to joining ZD Inc.,
Mr. Wright held various positions from 1986 to 1995 at Reliance Group Holdings,
Inc., most recently as Vice President and Assistant Treasurer.
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<PAGE>
Masayoshi Son. Masayoshi Son has been President and Chief Executive Officer
of SOFTBANK Corp. since 1981. Mr. Son has been a director of Ziff-Davis Inc.
since 1998 and his current term will expire in 2001. Mr. Son has been President
and Chief Executive Officer of Mediabank Corporation since 1994 and GeoCities
Japan Corporation since 1997 and was President and Chief Executive Officer of
Japan Sky Broadcasting Co. Ltd., from 1996 to 1998 and SOFTBANK Networks
Corporation from 1997 to 1998. In addition, Mr. Son currently serves as a
Director of PASONABANK Inc., Yahoo! Japan Corporation and E*Trade Group, Inc.
and as a Representative Director of Cisco Systems Inc. and Son Kosan Ltd.
Yoshitaka Kitao. Yoshitaka Kitao has been Executive Vice President and Chief
Financial Officer of SOFTBANK Corp. since 1995. Mr. Kitao has been a director
of Ziff-Davis Inc. since 1998 and his current term will expire in 2000. Mr.
Kitao has been President and Chief Executive Officer of SoftVenture Capital
Inc. since 1996, SOFTBANK Ventures Inc. since 1996 and SOFTBANK Contents
Partners Corporation since 1997. Since 1997, Mr. Kitao has been President of
Cybercash KK and a Director of Trendmicro Inc. Previously, Mr. Kitao served as
Director of Nomura Wasserstein Perella Co., Ltd. from 1992 to 1993, Managing
Director of Wasserstein Perella & Co., Inc. from 1989 to 1992 and was the
General Manager for the Nomura Securities Co., Ltd.'s Corporate Finance and
Services Dept. from 1992 to 1995.
Ronald D. Fisher. Ronald D. Fisher has been the Vice Chairman of SOFTBANK
Holdings Inc. since 1995 and the Vice Chairman of SOFTBANK America Inc. since
1998. Mr. Fisher has been a director of Ziff-Davis Inc. since 1998 and his
current term will expire in 1999. From 1990 to 1995, Mr. Fisher was the Chief
Executive Officer of Phoenix Technologies Ltd., a leading developer and
marketer of system software products for personal computers. From 1984 through
1989, Mr. Fisher was the President of Interactive Systems Corporation. His
prior experience also includes senior management positions at Visicorp, TRW and
ICL (USA). In addition to being a Board member of SOFTBANK Corp., Mr. Fisher
serves on the board of directors of Phoenix Technologies Ltd., Segue Software
Inc. and Message Media Inc.
Jonathan D. Lazarus. Jonathan D. Lazarus has been a director of Ziff-Davis
Inc. since 1998 and his current term expires in 1999. Mr. Lazarus was with
Microsoft Corporation from 1985 through 1996, in a series of executive
positions serving most recently as Vice President, Strategic Relations. Mr.
Lazarus serves on the board of directors of HomeGrocer.com, Liquid Audio,
NetGravity and Vision Solutions. Mr. Lazarus has served as an advisor to
Microsoft Corporation, the Universal Studios New Media Group and ZDTV.
Jerry Yang. Jerry Yang has been a director of Ziff-Davis Inc. since 1998 and
his current term expires in 2000. Mr. Yang co-founded Yahoo! Inc. in 1995 and
has served as an officer and a member of the board of directors of Directors of
Yahoo! Inc. since March 1995. Mr. Yang co-developed Yahoo! Inc. in 1994 while
he was working towards his Ph.D. in electrical engineering at Stanford
University.
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EXECUTIVE COMPENSATION
Summary Compensation Table
The table below sets forth the compensation paid to, deferred or accrued for
the benefit of, our Chief Executive Officer and each of the four other most
highly compensated executive officers for services rendered in all capacities
to Ziff-Davis Inc. during the last two fiscal years.
<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation
----------------------- ---------------------
Name and Principal Securities Underlying All Other
Position Year Salary($) Bonus($) Options (#)(1) Compensation($)(2)
------------------ ---- --------- -------- --------------------- ------------------
<S> <C> <C> <C> <C> <C>
Eric Hippeau............ 1998 1,050,000 0 1,665,032(3) 17,566
Chairman and Chief 1997 1,350,000 14,063 31,000 17,566
Executive Officer
Jason E. Chudnofsky..... 1998 800,000 288,493 378,395(4) 95,023(5)
President and Chief 1997 800,000 300,000 10,000 28,269
Executive Officer, ZD
Events
Claude P. Sheer......... 1998 537,500 27,524 277,798(6) 17,866
Chief Internet 1997 457,500 342,656 9,500 17,566
Strategist
Timothy C. O'Brien...... 1998 485,833 136,163 312,988(7) 42,892
Chief Financial Officer 1997 462,500 305,850 7,700 36,806
Terri S. Holbrooke...... 1998 430,000 137,993 193,410(8) 14,018
President, ZD Brand & 1997 380,000 143,993 5,000 6,868
Market Services
</TABLE>
- -------
(1) The options granted in 1997 are options to purchase common stock of
SOFTBANK Corp. under the SOFTBANK Group Executive Stock Option Plans (the
"Softbank Options"). The options listed for 1998 include the Softbank
Options granted in 1996 and 1997 which were repriced in 1998 to (Yen)4,000
(the "Repriced Softbank Options"). No additional Softbank Options were
granted in 1998 to any of the persons named in the table above.
(2) All Other Compensation for 1998 reflects contributions to Ziff-Davis Inc.'s
defined contribution plan, group term life insurance and reimbursement of
certain medical expenses and housing costs.
(3) Includes options to purchase 860,000 shares of common stock of Ziff-Davis
Inc., options to purchase 560,000 shares of ZDNet stock (assumes that the
initial total number of notional ZDNet shares deemed outstanding will be
70,000,000; to the extent that this is not the case, these options and the
corresponding exercise price per share will be appropriately adjusted) and
245,032 Repriced Softbank Options (including the 31,000 granted in 1997).
(4) Includes options to purchase 300,000 shares of common stock of Ziff-Davis
Inc., options to purchase 52,500 shares of ZDNet stock (assumes that the
initial total number of notional ZDNet shares deemed outstanding will be
70,000,000; to the extent that this is not the case, these options and the
corresponding exercise price per share will be appropriately adjusted) and
25,895 Repriced Softbank Options (including the 10,000 granted in 1997).
(5) Includes a payment of $75,735 relating to the termination of a defined
benefit plan.
(6) Includes options to purchase 200,000 shares of common stock of Ziff-Davis
Inc., options to purchase 52,500 shares of ZDNet stock (assumes that the
initial total number of notional ZDNet shares deemed outstanding will be
70,000,000; to the extent that this is not the case, these options and the
corresponding exercise price per share will be appropriately adjusted) and
25,298 Repriced Softbank Options (including the 9,500 granted in 1997).
(7) Includes options to purchase 150,000 shares of common stock of Ziff-Davis
Inc., options to purchase 140,000 shares of ZDNet stock (assumes that the
initial total number of notional ZDNet shares deemed outstanding will be
70,000,000; to the extent that this is not the case, these options and the
corresponding exercise price per share will be appropriately adjusted) and
22,988 Repriced Softbank Options (including the 7,700 granted in 1997).
(8) Includes options to purchase 135,000 shares of common stock of Ziff-Davis
Inc., options to purchase 52,500 shares of ZDNet stock (assumes that the
initial total number of notional ZDNet shares deemed outstanding will be
70,000,000; to the extent that this is not the case, these options and the
corresponding exercise price per share will be appropriately adjusted) and
5,910 Repriced Softbank Options (including the 5,000 granted in 1997).
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Option Grants and Exercises in 1998
The following two tables summarize stock option grants to, and exercises by,
each of the executive officers named in the Summary Compensation Table during
1998 and the value of the options held by them as of December 31, 1998.
Option Grants in 1998
<TABLE>
<CAPTION>
Percent of Potential Realized
Total Value at Assumed
Number of Options Annual Rates of Stock
Securities Granted to Exercise Price Appreciation
Underlying Employees or Base for Option Term
Name and Principal Option in Fiscal Price ----------------------
Position Granted(#) Year(%) ($/Sh) Expiration Date 5%($) 10%($)
------------------ ---------- ---------- -------- ----------------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Eric Hippeau............ 860,000(1) 12.7 6.00(2) June 24, 2008 3,245,096 8,223,711
Chairman and Chief 560,000(3) 5.6 4.29 December 21, 2008 1,509,347 3,824,982
Executive Officer 245,032(4) 24.6 31.03(5) January 31, 2007 4,781,702 12,117,771
Jason E. Chudnofsky .... 300,000(1) 4.4 6.00(2) June 24, 2008 1,132,010 2,868,736
President and Chief 52,500(3) .5 4.29 December 21, 2008 141,501 358,592
Executive Officer, 25,895(4) 2.6 31.03(5) January 31, 2007 505,331 1,280,607
ZD Events
Claude P. Sheer......... 200,000(1) 3.0 6.00(2) June 24, 2008 754,674 1,912,491
Chief Internet 52,500(3) .5 4.29 December 21, 2008 141,501 358,592
Strategist 25,298(4) 2.5 31.03(5) January 31, 2007 493,680 1,251,083
Timothy C. O'Brien...... 150,000(1) 2.2 6.00(2) June 24, 2008 566,005 1,434,368
Chief Financial 140,000(3) 1.4 4.29 December 21, 2008 377,337 956,245
Officer 22,988(4) 2.3 31.03(5) January 31, 2007 448,602 1,136,845
Terri S. Holbrooke...... 135,000(1) 2.0 6.00(2) June 24, 2008 509,405 1,290,931
President, ZD Brand 52,500(3) .5 4.29 December 21, 2008 141,501 358,592
& Market Services 5,910(4) .6 31.03(5) January 31, 2007 115,331 292,272
</TABLE>
- --------
(1) Represents options to purchase shares of common stock of Ziff-Davis Inc.
(2) Ziff-Davis Inc. stock options were repriced from $16.00 to $6.00 per share
in 1998.
(3) Represents options to purchase shares of ZDNet stock. Assumes that the
initial total number of notional ZDNet shares deemed outstanding will be
70,000,000; to the extent this is not the case, these options and the
corresponding exercise price per share will be appropriately adjusted.
(4) Represents Repriced Softbank Options.
(5) Softbank Options were repriced from (Yen)9,170 and (Yen)7,500 to (Yen)4,000
per share in 1998; the exercise price per share is based on an assumed
exchange rate of 128.90 (Yen)/USD per share, the exchange rate as of
January 19, 1998, the date the Softbank Options were repriced.
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Aggregated Option Exercises in 1998 and Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Number of Securities Underlying Value of Unexercised
Unexercised In-The-Money Options at
Options at Fiscal Year-End (#) Fiscal Year-End($)
Shares ------------------------------------- -------------------------
Name and Principal Acquired On Value
Position Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
------------------ ------------ ------------ -------------- ---------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Eric Hippeau............ -- -- -- 860,000(1) -- 8,438,750
Chairman and Chief -- -- -- 560,000(2) -- --
Executive Officer -- -- 28,062(3) 216,970(3) 694,849 5,372,438
Jason E. Chudnofsky..... -- -- -- 300,000(1) -- 2,943,750
President and Chief -- -- -- 52,500(2) -- --
Executive Officer, -- -- 9,358(3) 16,537(3) 231,715 409,476
ZD Events
Claude P. Sheer......... -- -- -- 200,000(1) -- 1,962,500
Chief Internet -- -- -- 52,500(2) -- --
Strategist 7,548(4) 133,788 -- 17,750(3) -- 439,511
Timothy C. O'Brien...... -- -- -- 150,000(1) -- 1,471,875
Chief Financial -- -- -- 140,000(2) -- --
Officer -- -- 7,005(3) 15,983(3) 173,452 395,758
Terri S. Holbrooke...... -- -- -- 135,000(1) -- 1,324,688
President, ZD Brand -- -- -- 52,500(2) -- --
& Market Services 1,325(4) 24,650 -- 4,585(3) -- 113,530
</TABLE>
- --------
(1) Represents options to purchase shares of common stock of Ziff-Davis Inc.
(2) Represents options to purchase shares of ZDNet stock. Assumes that the
initial total number of notional ZDNet shares deemed outstanding will be
70,000,000; to the extent this is not the case, these options and the
corresponding exercise price per share will be appropriately adjusted.
(3) Represents Repriced Softbank Options.
(4) Represents shares of SOFTBANK Corp.
Composition of the Board of Directors
The board of directors currently consists of nine members. The board of
directors intends to nominate for election one additional "independent
director" within the meaning of the regulations of the NYSE. Our directors are
currently elected annually by the stockholders to serve during the ensuing year
or until their respective successors are duly elected and qualified. The board
of directors is divided into three classes each of whose members serves for a
staggered three-year term. Upon the expiration of the term of a class of
directors, directors in such class are elected for three-year terms at the
annual meeting of stockholders in the year in which such term expires. See
"Description of Capital Stock--Certain Other Provisions of the Amended and
Restated Charter and By-laws".
Committees of the Board of Directors; Compensation Committee Interlocks and
Insider Participation
The board of directors currently has two committees: an audit committee and a
compensation committee. The audit committee currently consists of Messrs.
Lazarus and Yang. The compensation committee currently consists of Messrs.
Fisher, Lazarus and Yang.
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<PAGE>
Our audit committee reviews and recommends to the board of directors, as it
deems necessary, our internal accounting and financial controls and the
accounting principles and auditing practices and procedures to be employed in
preparation and review of our financial statements. Our audit committee makes
recommendations to the board of directors concerning the engagement of
independent public accountants and the scope of the audit to be undertaken by
such accountants. PricewaterhouseCoopers LLP presently serves as our
independent accountants.
Our compensation committee reviews and, as it deems appropriate, recommends
to the board of directors policies, practices and procedures relating to the
compensation of the officers and other managerial employees and the
establishment and administration of employee benefit plans. The compensation
committee also advises and consults with the officers of Ziff-Davis Inc. as may
be requested regarding managerial personnel policies. The compensation
committee will have such additional powers and be granted additional authority
as may be conferred upon it from time to time by the board of directors.
Each of Messrs. Fisher, Lazarus and Yang is independent of management. Mr.
Fisher is the Vice Chairman of SOFTBANK America, our majority stockholder, and
Mr. Yang is a co-founder and Chief Yahoo of Yahoo! Inc. Mr. Hippeau, Ziff-Davis
Inc.'s chairman and chief executive officer, is a director and serves on the
compensation committee of Yahoo! Inc. For information concerning certain
relationships between Ziff-Davis Inc. and SOFTBANK America and its officers or
between Ziff-Davis Inc. and Yahoo! Inc., see "Certain Relationships With Our
Majority Stockholders And Related Transactions".
Compensation of Directors
Directors who are not executive officers or employees of Ziff-Davis Inc. or
SOFTBANK Corp., SOFTBANK Holdings or SOFTBANK America will receive an annual
retainer of $25,000 for board of directors service and a fee of $2,000 for each
meeting of the board of directors or any committee thereof attended.
Directors of Ziff-Davis Inc. who are not employees of Ziff-Davis Inc.,
SOFTBANK Corp., SOFTBANK Holdings or SOFTBANK America will automatically
participate in the 1998 Non-Employee Directors' Stock Option Plan (the "Non-
Employee Directors' Plan"). The Non-Employee Directors' Plan is administered by
the compensation committee and is summarized below.
Shares Reserved For Issuance
The aggregate number of shares reserved for issuance under the Non-Employee
Directors' Plan is 300,000 shares of common stock, regardless of series,
subject to adjustment by the compensation committee in the event of any change
in the outstanding shares of common stock by reason of any:
. stock dividend or split,
. recapitalization,
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<PAGE>
. merger,
. consolidation,
. spinoff,
. combination,
. exchange of shares
. other corporate change or
. distributions to common stockholders other than regular cash dividends.
Shares subject to or underlying an option that expires unexercised, or is
forfeited, terminated or canceled, or is paid in cash in lieu of common stock
and shares that are tendered to pay for the exercise of an option will
thereafter be available for grant under the Non-Employee Directors' Plan.
Pursuant to the Non-Employee Directors' Plan, each non-employee director will
receive upon election as a member of the board of directors an initial grant of
stock options to purchase 15,000 shares of common stock which shall be composed
of shares of ZD stock or following an initial public offering of the ZDNet
stock, shares of ZD stock and shares of ZDNet stock in such proportion as
determined by the committee administering the Non-Employee Directors' Plan;
provided that:
. each non-employee director who is on the board of directors on the date
of the initial public offering of ZDNet stock will receive a grant of
stock options to purchase 25,000 shares of ZDNet stock on the date of
such offering at the initial public offering price which will vest and
become exercisable with respect to 25% of the shares on December 31 of
the year in which the consummation of the offering occurs, and an
additional 6.25% of the shares at the end of each three-month period
thereafter and
. each non-employee director who was on the board of directors on the date
of the initial public offering of Ziff-Davis Inc.'s common stock in April
1998 received such initial grant on the date of such initial public
offering.
On the date of each annual shareholders meeting thereafter, each non-employee
director shall automatically receive an annual grant of stock options to
purchase 7,500 additional shares of common stock which shall be composed of
shares of ZD stock or following an initial public offering of the ZDNet stock,
shares of ZD stock and shares of ZDNet stock in such proportion as determined
by the committee administering the Non-Employee Directors' Plan.
Except as otherwise provided with respect to the initial grant of options to
purchase 25,000 shares of ZDNet stock, and unless otherwise determined by the
committee administering the Non-Employee Directors' Plan, the terms of each
stock option granted to a non-employee director will provide that:
. the option price will be equal to 100% of the fair market value (as
defined in the 1998 Incentive Compensation Plan) of the common stock on
the date of grant,
. such option will be exercisable for a period of 10 years following the
date of grant,
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<PAGE>
. such option will vest and become exercisable in five equal installments
beginning on the first anniversary of the date of grant and
. upon ceasing to be a non-employee director, such option will terminate
except with respect to any portion of such option then exercisable, which
portion will remain exercisable for a period of:
. 90 days, if the termination as director resulted from any reason other
than death, disability or cause or
. one year, if the termination resulted from death or disability;
provided that, in the event the termination resulted from a removal for cause,
such option will immediately terminate and no longer be exercisable to any
extent; provided, further, that in no event will any such option remain
exercisable past the remainder of its scheduled ten-year term.
Change In Control
Upon a change in control of Ziff-Davis Inc., each outstanding option will
fully vest and become immediately exercisable in full. In addition, the
compensation committee may provide in its sole discretion that upon a change in
control of Ziff-Davis Inc., each non-employee director will be entitled to
receive in cancellation of such non-employee director's outstanding and
unexercised stock options, a cash payment in an amount equal to the difference
between the option price of such stock options and:
. in the event the change of control is the result of a tender offer or
exchange offer for the common stock, the final offer price per share
paid for the common stock, multiplied by the number of shares of common
stock covered by such stock options or
. in the event the change of control is the result of any other
occurrence, the aggregate value of the common stock covered by such
stock options, as determined by the compensation committee at such time.
Amendment And Termination
The board of directors may amend, suspend or terminate the Non-Employee
Directors' Plan or any portion thereof at any time; provided that, no amendment
shall be made:
. without stockholder approval if such approval is necessary in order for
the Non-Employee Directors' Plan to comply with any applicable law,
regulation or stock exchange rule and
. except in the case of a change in control of Ziff-Davis Inc., that would
adversely affect the rights of any non-employee director under any
outstanding option without such non-employee director's written consent.
Incentive Compensation Plan
General
Ziff-Davis Inc. has adopted the 1998 Incentive Compensation Plan (the
"Incentive Plan") to provide long-term incentives for its key employees and
enhance stockholder value, the principal terms and conditions of which are set
forth below.
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<PAGE>
The Incentive Plan will be administered by the board of directors or the
incentive compensation plan committee which:
. selects the participants and determines the type of awards and the
number of shares or share units subject to awards and
. interprets the Incentive Plan and makes all other determinations
necessary or advisable for its administration.
All employees and consultants of Ziff-Davis Inc. and our affiliates who have
demonstrated significant management potential or the capacity for contributing
substantially to the successful performance of Ziff-Davis Inc. and our
affiliates, are eligible to be participants in the Incentive Plan. Awards may
consist of stock awards, stock options (either incentive stock options within
the meaning of Section 422 of the Internal Revenue Code of 1986, as amended, or
nonstatutory stock options), stock appreciation rights, performance shares
(which may be granted as performance share units) and restricted stock, which
may be granted as restricted stock units.
Under the Incentive Plan up to 23,000,000 shares of common stock, regardless
of series, will be available for issuance out of authorized and unissued shares
or treasury shares, as the incentive compensation plan committee may from time
to time determine, and up to an additional 327,500 shares will be available out
of outstanding shares of common stock to be supplied by Ziff-Davis Inc.'s
majority stockholder in respect of awards of stock options granted to certain
participants in connection with the cancellation of corresponding options to
purchase stock of SOFTBANK Corp. For additional information concerning options
granted in connection with the cancellation of corresponding options to
purchase stock of SOFTBANK Corp., see "Certain Relationships With Our Majority
Stockholders And Related Transactions" and the Financial Statements for each of
Ziff-Davis Inc. and ZD.
In the event of any change in the outstanding shares by reason of any:
. stock dividend or split,
. recapitalization,
. merger,
. consolidation,
. spin-off,
. combination,
. exchange of shares,
. other corporate change or
. distributions to common stockholders other than regular cash dividends
the incentive compensation plan committee may make such substitution or
adjustment, if any, as it deems to be equitable, as to the number or kind of
shares of common stock or other securities issued pursuant to the Incentive
Plan and to outstanding awards. Shares
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<PAGE>
subject to an award that expires unexercised or is forfeited, terminated,
canceled or paid in cash in lieu of common stock, and shares tendered to pay
for the exercise of a stock option, will thereafter again be available for
grant under the Incentive Plan.
Each award under the Incentive Plan will be evidenced by an agreement setting
forth the terms and conditions, as determined by the incentive compensation
plan committee, which apply to such award. In the sole discretion of the
incentive compensation plan committee, a participant may be permitted to defer
the receipt of cash or common stock otherwise deliverable under any award.
Stock Options
The incentive compensation plan committee will establish the option price at
the time each stock option is granted, which price will generally not be less
than 100% of the fair market value of the common stock on the date of grant,
unless otherwise specifically determined by the incentive compensation plan
committee. Stock options will vest and become exercisable at a rate determined
by the incentive compensation plan committee, and will remain exercisable for
such period as specified by the incentive compensation plan
committee. The award agreements in respect of options that are intended to
qualify as incentive stock options will contain any additional provisions
necessary to comply with the requirements of Section 422 of the Internal
Revenue Code. In no event may any employee receive in any calendar year grants
of stock options with respect to more than 1,000,000 shares of common stock;
provided that, solely for the 1998 calendar year, no individual employee may
receive grants of options with respect to more than 2,600,000 shares of common
stock.
The option price of each share as to which a stock option is exercised will
be paid in full at the time of such exercise in cash, by tender of shares of
common stock owned by the participant valued at fair market value, by a "sale
to cover" broker transaction or other cashless exercise method permitted under
Regulation T of the Federal Reserve Board, or by a combination of cash, shares
of common stock and other consideration as the incentive compensation plan
committee deems appropriate.
Stock Appreciation Rights
Stock appreciation rights, also known as SARs, may be granted in tandem with
a stock option or may be unrelated to a stock option. SARs will vest and become
exercisable at a rate determined by the incentive compensation plan committee,
and will remain exercisable for such period as specified by the incentive
compensation plan committee. SARs entitle holders to receive from Ziff-Davis
Inc. an amount equal to the excess of the fair market value of a share of
common stock on the exercise of the SAR over the fair market value of a share
of common stock on the date of grant. The incentive compensation plan committee
will determine in its sole discretion whether a SAR will be settled in cash,
common stock or a combination thereof. In no event may any employee receive in
any calendar year grants of SARs with respect to more than 500,000 shares of
common stock.
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<PAGE>
Performance Shares
Performance shares may be granted in the form of actual shares of common
stock or share units having a value equal to an identical number of shares of
common stock. The performance conditions and the length of the performance
period will be determined by the incentive compensation plan committee but in
no event may a performance period be less than one year. The incentive
compensation plan committee will determine in its sole discretion whether
performance shares granted in the form of share units shall be paid in cash,
common stock or a combination thereof.
Unless the incentive compensation plan committee determines otherwise, awards
of performance shares to a covered employee will be subject to performance
conditions based on the achievement by Ziff-Davis Inc. of target levels of
items such as consolidated net income, return on stockholders' equity, return
on net assets or share price performance. For purposes of the Incentive Plan, a
"covered employee" generally includes any employee that would be a covered
employee within the meaning of Section 162(m) of the Code and any other
employee of Ziff-Davis Inc. or its subsidiaries designated by the Committee in
its discretion. The maximum number of performance shares subject to any award
to a Covered Employee is 500,000 for the first 12 months during the performance
period and each 12-month period thereafter.
Restricted Stock
Restricted stock may be granted in the form of actual shares of common stock
or share units having a value equal to an identical number of shares of common
stock. The employment conditions and the length of the period for vesting of
restricted stock will be established by the incentive compensation plan
committee at time of grant, except that each restriction period will not be
less than 12 months. During the restricted period, shares of restricted stock
may not be:
.sold,
.assigned,
.transferred,
.otherwise disposed of,
. pledged or hypothecated as collateral for a loan or as security for the
performance of any obligation
. or for any other purpose as the incentive compensation plan committee
determines.
The incentive compensation plan committee will determine in its sole discretion
whether restricted stock granted in the form of share units will be paid in
cash, common stock or a combination thereof.
Stock Awards
In addition to awards of performance shares and restricted stock, awards of
common stock may be granted under the Incentive Plan in the form of actual
shares of common
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<PAGE>
stock. Full ownership of such shares, whether issued in the form of a
certificate or in book entry, including the right to vote and receive
dividends, will immediately vest in such participant.
Change In Control
In the event of a Change in Control (as defined below):
. all stock options will be fully vested and exercisable in full,
. all SARs which have not been granted in tandem with stock options will
become exercisable in full,
. the restrictions applicable to all shares of restricted stock will lapse
and such shares will be deemed fully vested and all restricted stock
granted in the form of share units will be paid in cash,
. all performance shares will be deemed to be earned at target level and
. all performance shares granted in the form of share units will be paid in
cash.
For purposes of the Incentive Plan, "Change in Control" is generally defined
as:
(1) a change in the majority of the board of directors except upon consent
of the previous board of directors,
(2) certain mergers, consolidations or similar corporate transactions in
which Ziff-Davis Inc. is not the surviving corporation or entity or
(3) a plan of complete liquidation or dissolution of Ziff-Davis Inc. or a
sale of all or substantially all of Ziff-Davis Inc.'s assets that is
approved by the stockholders of Ziff-Davis Inc.;
provided that, a Change in Control will not be deemed to occur under clause (2)
if SOFTBANK Corp., directly or indirectly, is the beneficial owner of more than
25% of the Ziff-Davis Inc.'s voting securities or of the voting securities of
any surviving corporation, respectively.
Amendment And Termination
The board of directors may amend, suspend or terminate the Incentive Plan or
any portion thereof at any time; provided that:
. no amendment will be made without stockholder approval (including an
increase in the number of shares reserved for issuance under the
Incentive Plan) if such approval is necessary in order for the Incentive
Plan to comply with any applicable law, regulations or stock exchange
rule and
. except as otherwise provided under the cashout provisions in the event of
a Change in Control, no amendment will be made that would adversely
affect the rights of a participant under any award previously granted,
without such participant's written consent.
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<PAGE>
Effective Date
The Incentive Plan has a term of 10 years from February 13, 1998, subject to
earlier termination.
Repricing
On September 23, 1998, the incentive compensation plan committee authorized
the amendment of options granted under the Incentive Plan prior to that date
including those granted on June 24, 1998. Pursuant to such amendment, the
exercise price of such options was reduced from $16.00 to $6.00 (the closing
price of our common stock on September 23, 1998), but the options will not vest
until three months after the dates on which the options were originally to
become vested.
Employee Stock Purchase Plan
General
Ziff-Davis Inc. has adopted the 1998 Employee Stock Purchase Plan (the "Stock
Purchase Plan"), the principal terms and conditions of which are set forth
below.
The Stock Purchase Plan is intended to meet the applicable requirements of
Section 423 of the Internal Revenue Code and will be administered by a
committee appointed by the board of directors.
Shares Subject To Plan
The aggregate maximum number of shares of common stock, regardless of series,
purchasable under the Stock Purchase Plan is 2,500,000, subject to adjustment
by the committee in its sole discretion in the event of any change in the
outstanding shares of common stock by reason of any:
.stock dividend or split,
. recapitalization,
. merger,
. consolidation,
. spin-off,
. combination,
. exchange of shares,
. other corporate change or
. distribution to common stockholders other than regular cash dividends.
Upon the dissolution or liquidation of Ziff-Davis Inc., or upon a
reorganization, merger or consolidation of Ziff-Davis Inc., as a result of
which Ziff-Davis Inc. is not the surviving corporation, or upon a sale of
substantially all of Ziff-Davis Inc.'s assets or a sale or
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<PAGE>
distribution of a subsidiary of Ziff-Davis Inc., any affected participant will
thereafter be entitled to receive, for each share of common stock subject to
such participant's option, the cash, securities and/or property which a holder
of one share of common stock was entitled to receive upon and at the time of
such transaction.
Option To Purchase
Under the Stock Purchase Plan, all full-time and certain part-time employees
of Ziff-Davis Inc. who meet certain minimum service requirements will be
eligible to purchase shares of common stock by means of payroll deductions.
Eligible employees may elect to participate in offering periods by authorizing
after-tax payroll deductions of between 1% and 10% (in whole percentages) of
their base pay for the purchase of shares of common stock.
The price at which shares of common stock will be purchased at the end of
each purchase period will be the lesser of:
. 85% of the fair market value of a share of common stock on the first
business day of such purchase period or
. 85% of the fair market value on the last business day of such purchase
period. No participating employee will be entitled in any calendar year
to purchase common stock having an aggregate fair market value as of the
first business day in any purchase period in excess of $25,000.
Amendment And Termination
The board of directors may at any time terminate or amend the Stock Purchase
Plan. No such termination will adversely affect options previously granted and
no amendment may make any change in any option theretofore granted which
adversely affects the rights of any participant. No amendment will be effective
unless approved by the stockholders of Ziff-Davis Inc. if such stockholder
approval of such amendment is required to comply with any law, regulation or
stock exchange rule.
Softbank Executive Stock Option Plans
The SOFTBANK Group Executive Stock Option Plans authorize the grant of
options to those officers, directors and key employees of Softbank as selected
by a committee appointed by the board of directors of SOFTBANK Holdings. The
Softbank Plans authorize the granting of options to purchase SOFTBANK Corp.
common stock at not less than 100% of the closing market price on the date the
option is granted. As of December 31, 1997, 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.
As of December 31, 1997, 966,986 options had been granted under the Softbank
Plans. On January 19, 1998, the exercise price of all options was reset at
(Yen)4,000 per share, the market price of SOFTBANK Corp.'s common stock on that
date.
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For information concerning the grant of certain Ziff-Davis Inc. options in
connection with the cancellation of certain Softbank Corp. options, see
"Certain Relationships With Our Majority Stockholders And Related
Transactions".
Employment Agreements
Eric Hippeau
Ziff-Davis Inc. has entered into an employment agreement with Mr. Hippeau,
dated as of April 1, 1998, pursuant to which Mr. Hippeau will serve as our
Chairman and Chief Executive Officer through March 31, 2004. Pursuant to this
agreement, Mr. Hippeau will receive an annual base salary of not less than
$900,000 and an annual incentive bonus of not less than $600,000, as determined
by a compensation committee assuming the achievement of performance targets.
Pursuant to the Incentive Plan, we have granted Mr. Hippeau options to acquire
up to 860,000 shares of our existing common stock, of which 430,000 shares are
based upon the achievement of certain performance targets, and options to
acquire up to 560,000 shares of ZDNet stock.
Upon certain terminations of employment, we will pay Mr. Hippeau his base
salary plus his average incentive bonus for the preceding two years for a
period ending on the later of the date that is two years after the date of
termination or March 31, 2001. In the event that Mr. Hippeau's employment is
terminated in connection with a Change of Control, Ziff-Davis Inc. will pay Mr.
Hippeau an amount which, on an after-tax basis, will equal any excise tax
imposed by Section 4999 of the Internal Revenue Code as a result of payments
made under the agreement.
Jason Chudnofsky
We have entered into an employment agreement with Mr. Chudnofsky, dated as of
April 1, 1998, pursuant to which Mr. Chudnofsky will serve as the President and
Chief Executive Officer of ZD Events, Inc. through March 31, 2001. Pursuant to
this agreement, Mr. Chudnofsky will receive an annual base salary of not less
than $800,000 and an annual incentive bonus of $300,000, subject to adjustment
and assuming the achievement of earnings and other performance targets, as
determined by the board of directors of ZD Events, Inc. Pursuant to the
Incentive Plan, we have granted Mr. Chudnofsky options to acquire up to 300,000
shares of our existing common stock and options to acquire up to 52,500 shares
of ZDNet stock.
Upon certain terminations of employment, we will pay Mr. Chudnofsky his base
salary plus his average incentive bonus for the year of termination and the
preceding two years for a period ending on the later of the date that is two
years after the date of termination or March 31, 2001.
Timothy C. O'Brien
We have entered into an employment agreement with Mr. O'Brien, dated as of
April 1, 1998, pursuant to which Mr. O'Brien will serve as Vice President,
Chief Financial Officer of
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Ziff-Davis Inc. through March 31, 2001. Pursuant to this agreement, Mr. O'Brien
will receive an annual base salary of not less than $490,000 and an annual
incentive bonus of $300,000, subject to adjustment and assuming the achievement
of earnings and other performance targets, as determined by the board of
directors of Ziff-Davis Inc. Pursuant to the Incentive Plan, we have granted
Mr. O'Brien options to acquire up to 150,000 shares of our existing common
stock and options to acquire up to 140,000 shares of ZDNet stock.
Upon certain terminations of employment, we will pay Mr. O'Brien severance
equal to the sum of his then current base salary and his annual incentive
compensation, using the average amount of incentive compensation earned in the
preceding two calendar years.
Terri S. Holbrooke
We have entered into an employment agreement with Ms. Holbrooke, dated as of
April 1, 1998, pursuant to which Ms. Holbrooke will serve as President of ZD
Brand & Market Services through March 31, 2001. Pursuant to this agreement, Ms.
Holbrooke will receive an annual base salary of not less than $420,000 and an
annual incentive bonus of $150,000, subject to adjustment and assuming the
achievement of earnings and other performance targets, as determined by the
board of directors of Ziff-Davis Inc. Pursuant to the Incentive Plan, we have
granted Ms. Holbrooke options to acquire up to 135,000 shares of our existing
common stock and options to acquire up to 52,500 shares of ZDNet stock.
Upon certain terminations of employment, we will pay Ms. Holbrooke severance
equal to the sum of her then current base salary and her annual incentive
compensation, using the average amount of incentive compensation earned in the
preceding two calendar years.
Michael S. Perlis
We have entered into an employment agreement with Mr. Perlis, dated as of
November 6, 1998, pursuant to which Mr. Perlis will serve as President of ZD
Publishing through December 31, 2001. Pursuant to this agreement, Mr. Perlis
will receive an annual base salary of not less than $650,000 and an annual
incentive bonus equal to a percentage of the EBITDA for ZD Publishing above a
base amount. Pursuant to the Incentive Plan, we have granted Mr. Perlis options
to acquire up to 250,000 shares of our existing common stock and options to
acquire up to 78,750 shares of ZDNet stock.
Upon certain terminations of employment, we will pay Mr. Perlis severance
equal to the sum of his then current base salary and his annual incentive
compensation, using the amount earned in the most recent completed year.
----------------
The number of shares of ZDNet stock covered by the options described under
"--Employment Agreements" above assumes that the initial total number of
notional ZDNet Shares deemed outstanding will be 70,000,000; to the extent this
is not the case, these options and the corresponding exercise price per share
will be appropriately adjusted.
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CERTAIN RELATIONSHIPS WITH OUR MAJORITY STOCKHOLDERS
AND RELATED TRANSACTIONS
Arrangements Between Majority Stockholders and Ziff-Davis Inc.
We have entered into certain agreements with Softbank governing ongoing
business relationships. It is possible that the terms of these agreements are
not those that would result from an arm's-length dealing among unrelated
parties.
In July 1997, we entered into a license agreement with SOFTBANK Corp. for
SOFTBANK Corp. to operate a localized edition of ZDNet in Japan. Pursuant to
the agreement, we paid SOFTBANK Corp. $146,000 on July 9, 1998, in connection
with the 1997 launch of the localized edition of ZDNet.
In April 1998, we entered into a master license agreement with SOFTBANK Corp.
for Softbank to produce and distribute ZD publications in Japan. Pursuant to
the agreement, SOFTBANK Corp. incurred royalties equal to approximately
$709,000 in 1998.
In April 1998, we entered into a series of agreements with Softbank,
including:
.a trademark license agreement,
.a technical assistance agreement and
.an accounting and administrative agreement,
pursuant to which Softbank produces ZD Events trade shows and conferences in
Japan and we provide management and other services for those trade shows and
conferences. Total revenue earned by us from such trade shows and conferences
agreements was approximately 50% of the pre-tax income generated by such trade
shows and conferences, which was $787,000 in 1998.
In May 1998, we entered into an undertaking with SOFTBANK Corp. whereby
SOFTBANK Corp., on behalf of it and its affiliates, agreed that as long as it
owns 40% of the voting power in our stock and can elect a majority of the board
of directors, it will not expand its operations outside Japan in competition
with us without our prior approval which involve:
. publishing information on computing and Internet-related technology
through the media of print, CD-Rom/DVD, Internet and television or
. producing trade shows, conferences, exhibitions and similar events
primarily related to computing and Internet-related technology.
This undertaking does not preclude investments by venture capital funds managed
by Softbank which invest in, among other things, computer and Internet-related
companies. These funds may be able to co-invest with or compete with us with
respect to new investments. In addition, Softbank may also develop new funds in
the future which may compete with us for investment opportunities. We have
agreed not to compete with Softbank in Japan without the prior approval of
SOFTBANK Corp.'s board of directors and
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have given Softbank the continuing right to license all of our products and
services in Japan. See "Risk Factors--Other Ziff-Davis Inc. Risks--Ziff-Davis
Inc. Is Controlled by Its Principal Stockholders. This Creates Potential
Conflicts Of Interest".
We entered into a registration rights agreement, dated as of April 1, 1998,
in connection with the initial public offering of our existing common stock.
The agreement gives Softbank the right to require us to register any or all of
our existing common stock held by it in a public offering pursuant to the
Securities Act, and to "piggyback" or include its shares of our existing common
stock in any registration of our existing common stock made by us.
The Reorganization
Prior to our initial public offering in April 1998, our businesses were
conducted through various indirect subsidiaries of SOFTBANK Corp. and were
acquired through a series of acquisitions and internal reorganizations
undertaken by Softbank as follows:
. Softbank acquired the computer technology publishing operations of Ziff-
Davis Publishing Company, which was renamed Ziff-Davis Inc. and
subsequently named ZD Inc., in February 1996 for $1.8 billion in cash,
. Softbank acquired the SB COMDEX computer-related trade show operations,
which was renamed SOFTBANK COMDEX Inc., in April 1995 for $803 million in
cash, and
. Softbank acquired the computer and network-related trade show operations
of Ziff-Davis Exposition and Conference Company, which was subsequently
renamed SOFTBANK Forums Inc., in December 1994 for $127 million in cash.
Concurrently with the ZD Publishing and ZD Expos acquisitions described
above, MAC purchased certain operations and assets of these companies for $302
million and $75 million, respectively (the "MAC Assets"). The MAC Assets
consisted of certain publications, international trade shows and the ZDNet
business, most of which were still under development. The MAC Assets and
related operations were managed by ZD Inc. and ZD Events after their
acquisition by MAC and were acquired by us for approximately $370 million in
May 1998.
In October 1997, Softbank combined the businesses of ZD Inc., SOFTBANK COMDEX
and SOFTBANK Forums. SOFTBANK Forums and SOFTBANK COMDEX were merged as of
December 31, 1997, with the surviving corporation named ZD COMDEX and Forums
Inc., which is now ZD Events Inc.
The amount of intercompany indebtedness converted to equity consisted of:
. the obligations due to Softbank as of December 31, 1997 other than those
repaid with borrowings under our credit facility and the proceeds of our
offering of senior subordinated notes and
. a $94.2 million note which matures on February 28, 2009.
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At an initial public offering price of $15.50 per share, the value of the
capitalized intercompany indebtedness was equal to 59.9 million shares of our
existing common stock.
In addition, we exchanged 580,645 shares of our existing common stock, valued
at the initial public offering price, and $100,000 in funds for approximately
$9.1 million of fixed assets from Kingston Technology Company. Kingston
Technology is a subsidiary of SOFTBANK Kingston Inc., which in turn is a wholly
owned subsidiary of SOFTBANK Holdings. We subsequently leased back the assets
we received in this exchange to Kingston Technology and on May 4, 1998,
Kingston Technology transferred the shares of our existing common stock to
SOFTBANK Kingston.
At the time of the initial public offering of our existing common stock and
senior subordinated notes in April 1998, we reorganized our structure so that:
. All of the stock of the corporations owning our publishing and events
businesses, ZD Inc. and ZD Events, was contributed to Ziff-Davis Inc. in
exchange for approximately 72% of our existing common stock.
. We purchased certain operations owned by MAC but managed by our
publishing business, including certain publications, international trade
shows and ZDNet.
. We entered into a $1.35 billion credit facility with a group of financial
institutions and borrowed $1.25 billion under that facility.
. Approximately $909 million of our obligations to SOFTBANK Corp. were
converted to equity.
. We repaid approximately $1.6 billion of our obligations to Softbank.
Certain Related Party Transactions
We are a member of a group of companies affiliated through common ownership
under SOFTBANK Corp. Accordingly, we have had various transactions and have
various relationships with members of the group, including SOFTBANK Corp.'s
wholly owned U.S. subsidiary, SOFTBANK Holdings. It is possible that the terms
of the various transactions are not those that would result from an arm's-
length dealing among unrelated parties.
In December 1994, as part of the acquisition of ZD Expos, MAC purchased a
portion of the trade show assets for $45 million and its parent company, Son
Kosan Ltd., purchased an additional portion for $30 million. At that time,
SOFTBANK Forums and Son Kosan Inc. entered into a management agreement pursuant
to which SOFTBANK Forums agreed to provide management services with respect to
certain Son Kosan operations in Japan, France and Germany. SOFTBANK Forums
earned approximately $0.8 million, $1.7 million and $2.6 million for such
services for the years ended December 31, 1995, 1996 and 1997 respectively. Son
Kosan's trade show assets were sold to SOFTBANK Forums for $10 million in
January 1997 and certain of MAC's trade show assets were contributed to ZD
Events as part of the reorganization.
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<PAGE>
In February 1996, as part of the acquisition of ZD Publishing, MAC purchased
certain publishing assets for $302 million in cash. At that time, we entered
into a management agreement with MAC pursuant to which we agreed to provide
management services with respect to the purchased assets. We earned
approximately $2 million for such services for each of the years ended
December 31, 1996 and 1997 and $667,000 in 1998, respectively. Of these assets,
a portion was transferred to us for $100 million as of October 31, 1997 and the
balance was sold to us for $270 million concurrently with our initial public
offering in May 1998. The purchase price for the assets sold to ZD Inc. was not
more than fair market value as determined by an independent appraiser.
We entered into a series of license and syndication agreements with Softbank
pursuant to which Softbank was granted the license to publish or use in Japan
certain materials from certain publications, including PC Week, Computer
Shopper, PC/Computing, Computer Gaming World and PC Magazine. We earned
approximately $963,948 and $1,817,986 in connection therewith for the years
ended December 31, 1996 and 1997, respectively. Such agreements were combined
into the master license agreement described above.
We have advanced funds for the account of MAC in managing the MAC Assets and
ZDTV, bearing interest at the 30-day LIBOR rate plus .50%; subject to periodic
reimbursement by MAC. Such advances totaled $68.2 million, $71.6 million and
$55.2 million in 1996, 1997 and 1998, respectively. The remaining outstanding
amount as of December 31, 1997 of $42.6 million was reimbursed in May 1998, in
connection with our reorganization.
For information concerning the development of ZDTV and our purchase from an
affiliate, see "Ziff-Davis Inc. Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources--ZDTV".
During 1997 and 1998, we entered into an operating lease with GE Capital
Corp. for certain television production equipment that we subleased to ZDTV on
similar terms. The total amount of leased equipment does not exceed $10
million.
During 1996, 1997 and 1998, we recorded revenue of approximately $.9 million,
$2.7 million and $3.1 million, respectively, from sales of advertising space
and trade show services to Kingston Technology, an 80%-owned Softbank
partnership. These services were provided under terms consistent with those
provided to unaffiliated customers. See Note 10 to the Notes to the
Consolidated Financial Statements of Ziff-Davis Inc. appearing in this
prospectus. Concurrently with the initial public offering of our existing
common stock, we entered into a sale-leaseback transaction with Kingston
Technology.
In 1997, we had an arrangement with SOFTBANK Interactive, a 65.3%-owned
Softbank subsidiary, for it to be ZDNet's advertising sales representative. We
paid SOFTBANK Interactive approximately $0.6 million and $1.8 million in
commissions for the years ended December 31, 1996 and 1997, respectively.
Effective December 31, 1997, SOFTBANK Interactive was acquired by an unrelated
third party and we terminated our representation agreement with SOFTBANK
Interactive. See Note 10 to the Notes to the Consolidated Financial Statements
of Ziff-Davis Inc. appearing in this prospectus.
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<PAGE>
During 1996, 1997 and 1998, we were party to a joint venture agreement with
Softbank pursuant to which we managed all ZD Events trade shows and conferences
conducted outside the U.S. We earned approximately $3.4 million, $4.0 million
and $1.1 million for such services for the years ended December 31, 1996, 1997
and 1998, respectively.
During 1996, 1997 and 1998, we incurred $2 million, approximately $1.6
million and $0.3 million, respectively, in advertising expenses with Yahoo!
Inc., which is approximately 30.1% owned by Softbank. Mr. Yang, one of our
directors, is a co-founder and Chief Yahoo, and Mr. Hippeau, our Chief
Executive Officer, is a director of, Yahoo! Inc.
During 1996 to 1997, we issued notes payable to Softbank in an aggregate
principal amount of $2.5 billion as of December 31, 1997, principally for
indebtedness incurred in the acquisition of ZD Exposition and Conference
Company, SB COMDEX and ZD Publishing. In the course of our reorganization and
initial public offering, all but $83.1 million of these notes were either
repaid or converted into equity. See Notes 2 and 12 to the Notes to the
Consolidated Financial Statements of Ziff-Davis Inc. appearing in this
prospectus.
As part of the acquisition by our former owner in 1994, we agreed to assume
certain obligations to management arising out of prior employment arrangements
with Ziff Communications Company. In 1995 and immediately after the end of the
1996 calendar year, under such arrangements we paid approximately $29.7 million
to Mr. Hippeau, our Chairman and CEO and one of our directors, and
approximately $1.0 million to Mr. Sheer, our Chief Internet Strategist. See
Note 12 to the Notes to the Consolidated Financial Statements of Ziff-Davis
Inc. appearing in this prospectus.
Prior to the initial public offering of our existing common stock, we
participated in the Softbank cash management program for its U.S. operations.
Under this program we periodically transferred excess cash to SOFTBANK Holdings
and in turn received cash advances from SOFTBANK Holdings to fund our 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. Interest expense was incurred at such rate plus .50%. As of
December 31, 1996 and 1997, such net cash transfers from us to SOFTBANK
Holdings amounted to $41.3 million and $76.5 million, respectively. We have not
participated in this program since our initial public offering. See Note 12 to
the Notes to the Consolidated Financial Statements of Ziff-Davis Inc.
During 1997, we were a guarantor under SOFTBANK Holdings' $150 million loan
agreement with The Bank of New York. As of December 31, 1997, $102.5 million
was outstanding under this agreement, bearing interest at a weighted average
rate of 6.5% per year. In March, 1998 this agreement was amended and restated
to increase the loan amount to $450 million. Under the amended agreement, we
were a guarantor under SOFTBANK Holdings' $450 million credit facility with The
Bank of New York, as agent, The Bank of New York and Morgan Stanley Senior
Funding, Inc., as lenders, and certain affiliate guarantors. Concurrently with
the initial public offering of our existing common stock, we repaid obligations
due to SOFTBANK Holdings and SOFTBANK Holdings used a portion of such proceeds
to prepay the loans under the credit facility and the guarantees were
terminated.
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SOFTBANK Holdings and its subsidiary, SOFTBANK Holdings Delaware, agreed to
act as guarantors for payments under our lease for our new headquarters located
at 28 East 28th Street, New York, New York. In addition, the various
intercompany loans from SOFTBANK Holdings Delaware to us were subordinated to
the lease agreement. In accordance with the terms of these agreements, those
arrangements were terminated at the time of our reorganization.
From 1997 to date, we have participated in a global insurance program
implemented by SOFTBANK Holdings. The total amount of insurance expenses
allocated to us for the period from August 1, 1997 to July 30, 1999 does not
exceed $1.4 million.
On May 14, 1998, SOFTBANK Kingston sold 50,000 shares of our existing common
stock to an unrelated third party.
On May 28, 1998, the U.S. underwriters for our initial public offering
exercised their option to purchase two million additional shares of Ziff-Davis
Inc. common stock to cover over-allotments. We purchased the additional shares
from SOFTBANK Holdings resulting in no change to the total number of shares
outstanding.
On December 29, 1998, SOFTBANK Kingston sold 30,000 shares of Ziff-Davis Inc.
common stock to an unrelated third party. On December 31, 1998, SOFTBANK
Holdings contributed 71,619,355 shares of Ziff-Davis Inc. common stock to
SOFTBANK America Inc., an affiliate of SOFTBANK Corp. On March 12, 1999,
SOFTBANK Kingston sold 500,000 shares of Ziff-Davis Inc. common stock to an
unrelated third party.
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 and (2)
Ziff-Davis 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
million over three years as a result of these grants. An affiliate of SOFTBANK
Corp. has agreed to reimburse Ziff-Davis Inc. for any compensation expense
recognized by it for accounting purposes as a result of such grants. Any such
reimbursement would likely not be treated as income for accounting purposes,
but would restore Ziff-Davis Inc.'s stockholders' equity to the level it would
have been in the absence of such expense. Each reimbursement will be credited
to ZD or ZDNet, as appropriate, to reflect the amount of expense appropriate to
ZD or ZDNet.
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SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Certain Beneficial Owners
The following table sets forth, as of March 23, 1999, certain information
with respect to the beneficial ownership of:
. our existing common stock prior to the offering and
. ZD stock assuming completion of the offering
by each person or entity which beneficially owns more than five percent of the
outstanding shares of the common stock of Ziff-Davis Inc. None of these
entities will own any ZDNet stock upon completion of the offering.
<TABLE>
<CAPTION>
Prior to the Offering After the Offering
--------------------- ---------------------
Number of
shares of
common stock Number of
of Ziff- Percent shares of ZD Percent
Beneficial Owner Davis Inc. of Class Stock(1) of Class
- ---------------- ------------ -------- ------------ --------
<S> <C> <C> <C> <C> <C>
SOFTBANK America(2)............. 71,619,355 69.5% 71,619,355 69.5%
SOFTBANK Holdings(3)............ 71,620,000 69.5 71,620,000 69.5
SOFTBANK Corp.(4)............... 71,620,000 69.5 71,620,000 69.5
Masayoshi Son(5)................ 71,620,000 69.5 71,620,000 69.5
</TABLE>
- --------
(1) Assumes no exercise of the underwriters' over-allotment option in the
offering and does not include 25,800,000 shares of Ziff-Davis Inc. common
stock (regardless of series) reserved for issuance under Ziff-Davis Inc.'s
Incentive Compensation, Non-Employee Directors' and Employee Stock Purchase
Plans. See "Management of Ziff-Davis Inc.--Stock Plans".
(2) SOFTBANK America's address is 10 Langley Road, Suite 403, Newton Center, MA
02459.
(3) Includes shares owned by SOFTBANK America and 645 shares owned by SOFTBANK
Kingston, all of which may be deemed to be beneficially owned by SOFTBANK
Holdings. SOFTBANK Holdings' address is 10 Langley Road, Suite 403, Newton
Center, MA 02459.
(4) Includes shares owned by SOFTBANK America and SOFTBANK Kingston, all of
which may be deemed to be beneficially owned by SOFTBANK Corp. SOFTBANK
Corp.'s address is 24-1 Nihonbashi-Hakozakicho, Chuo-ku, Tokyo 103, Japan.
(5) Includes shares owned by SOFTBANK America and SOFTBANK Kingston, all of
which may be deemed to be beneficially owned by Mr. Son (who owns 42.2% of
SOFTBANK Corp. and is its President). Mr. Son's address is c/o SOFTBANK
Corp., 24-1 Nihonbashi-Hakozakicho, Chuo-ku, Tokyo 103, Japan.
As a result of its beneficial ownership of common stock, Softbank is able to
influence significantly matters affecting Ziff-Davis Inc. Softbank is able to
elect all members of the board of directors and to control those actions that
require the approval of holders of a majority of the voting stock of Ziff-Davis
Inc., including amendments to our amended and restated certificate of
incorporation and approval of any business combinations. See "Risk Factors--
Other Ziff-Davis Inc. Risks--Ziff Davis Inc. Is Controlled By Its Principal
Stockholders. This Creates Potential Conflicts Of Interest" and "Description of
Capital Stock--Certain Other Provisions of the Amended Charter and By-laws".
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Management
The following table sets forth, as of March 23, 1999, certain information
with respect to the beneficial ownership of:
. our existing common stock prior to the offering,
. ZD stock assuming completion of the offering,
. ZDNet stock assuming completion of the offering and
. the common stock of SOFTBANK Corp.
by:
. each executive officer named in the Summary Compensation Table,
. each director of Ziff-Davis Inc. and
. all executive officers and directors of Ziff-Davis Inc. as a group.
<TABLE>
<CAPTION>
Prior to the Offering After the Offering
--------------------------- ----------------------------------------------------------
Number of
Number of shares of
shares of Number of Number of common
common shares of shares of stock of
stock of Percent ZD Percent ZDNet Percent SOFTBANK Percent
Beneficial Owner(1) Ziff-Davis Inc. of Class(2) Stock of Class Stock of Class Corp.(3) of Class
- ------------------- --------------- ----------- ---------- -------- --------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Eric Hippeau(4)......... 97,608 *% 97,608 *% 7,500 * 77,068 *%
Jason E. Chudnofsky(4).. 60,000 * 60,000 * 7,500 * 14,537 *
Timothy C. O'Brien(4)... 40,000 * 40,000 * 0 * 11,603 *
Claude P. Sheer(5)...... 42,000 * 42,000 * 500 * 5,059 *
Terri S. Holbrooke(5)... 28,000 * 28,000 * 500 * 1,182 *
Daniel L. Rosensweig.... 30,600 * 30,600 * 0 * 3,137 *
Masayoshi Son(6)........ 71,620,000 69.5 71,620,000 69.5 0 * 43,760,748 42.2
Yoshitaka Kitao......... 0 * 0 * 0 * 118,747 *
Ronald D. Fisher(7)..... 45,000 * 45,000 * 8,200 * 274,450 *
Jonathan D. Lazarus(8).. 39,000 * 39,000 * 7,500 * 0 *
Jerry Yang(9)........... 18,300 * 18,300 * 0 * 0 *
Officers and directors
as a group............. 72,149,459 70.0 72,149,459 70.0 35,200 * 44,276,895 42.7
</TABLE>
- --------
* Less than one percent.
(1) The percentage of ownership is based on (a) 103,108,291 shares of common
stock of Ziff-Davis Inc. outstanding as of the date referenced above, (b)
103,108,291 shares of ZD stock upon consummation of the offering and (c)
103,694,929 shares of common stock of SOFTBANK Corp. outstanding as of
December 10, 1998. Shares of common stock subject to options which are
currently exercisable or exercisable within 60 days of the date referenced
above, are deemed outstanding for computing the percentages of the person
holding such options, but are not deemed outstanding for computing the
percentages of any other person. Beneficial ownership is determined in
accordance with the rules of the Securities and Exchange Commission and
includes voting and investment power with respect to shares. Unless
otherwise indicated, the persons named in the table have sole voting and
sole investment control with respect to all shares beneficially owned.
(2) Assumes no exercise of the underwriters' over-allotment option in the
offering and does not include 25,800,000 shares of Ziff-Davis Inc. common
stock, regardless of series, reserved for issuance under Ziff-Davis Inc.'s
Incentive Compensation, Non-Employee Directors' and Employee Stock Purchase
Plans. See "Management of Ziff-Davis Inc.--Stock Plans".
(3) Reflecting options granted in 1996 and 1997 to purchase common stock of
SOFTBANK Corp. under the SOFTBANK Group Executive Stock Option Plans.
(4) Both a director and an executive officer named in the Summary Compensation
Table.
(5) An executive officer named in the Summary Compensation Table.
(6) Includes shares owned by SOFTBANK America and SOFTBANK Kingston, all of
which may be deemed to be beneficially owned by Mr. Son.
(7) Including shares owned by 1995 Fisher Family Trust.
(8) Including shares owned by Lazarus Family Investments LLC, all of which may
be deemed to be beneficially owned by Jonathan D. Lazarus, a member of such
LLC.
(9) Including shares owned by Red Husky Foundation.
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CERTAIN CASH MANAGEMENT AND ALLOCATION POLICIES
In order to prepare separate financial statements for ZD and ZDNet, Ziff-
Davis Inc. has allocated all of its consolidated assets, liabilities, revenue,
expenses and cash flow between ZD and ZDNet. In this prospectus, each of ZD and
ZDNet is sometimes called a group. Thus, the financial statements of ZD and
ZDNet, taken together, comprise all of the accounts included in the
corresponding consolidated financial statements of Ziff-Davis Inc.
The financial statements of ZD and ZDNet reflect the application of certain
cash management and allocation policies adopted by the board of directors.
These policies are summarized below.
The board of directors may, in its sole discretion, modify, rescind or add to
any of these policies, although it has no present intention to do so. The
decision of the board of directors to modify, rescind or add to any of these
policies would, however, be subject to the board of directors' general
fiduciary duties.
Even though Ziff-Davis Inc. has allocated all of its consolidated assets,
liabilities, revenue, expenses and cash flow between ZD and ZDNet, holders of
ZDNet stock will continue to be common stockholders of Ziff-Davis Inc. and, as
such, will be subject to all risks associated with an investment in Ziff-Davis
Inc. and all of its businesses, assets and liabilities. See "Risk Factors--Risk
Factors Relating To ZDNet Stock--Holders Of ZDNet Stock Will Be Common
Stockholders Of Ziff-Davis Inc. And Will Be Subject To Risks Associated With An
Investment In Ziff-Davis Inc. As A Whole".
Treasury Activities
Ziff-Davis Inc. manages most treasury activities on a centralized,
consolidated basis. These activities include the investment of surplus cash,
the issuance, repayment and repurchase of short-term and long-term debt, and
the issuance and repurchase of common stock and preferred stock. Each group
generally remits its cash receipts, other than receipts of foreign operations
or operations that are not wholly owned, to Ziff-Davis Inc., and Ziff-Davis
Inc. generally funds each group's cash disbursements, other than disbursements
of foreign operations or operations that are not wholly owned, on a daily
basis.
In the historical financial statements of ZD and ZDNet:
. all external debt and equity transactions, and the proceeds thereof,
were attributed to ZD,
. whenever ZDNet held cash, other than cash of ZDNet's foreign
operations or of ZDNet's operations that are not wholly owned, that
cash was transferred to ZD and accounted for as a return of capital,
i.e., as a reduction in ZDNet's division equity and ZD's retained
interest in ZDNet and
. whenever ZDNet had a cash need, other than cash needs of ZDNet's
foreign operations or of ZDNet's operations that are not wholly
owned, that cash need was funded by ZD and accounted for as a capital
contribution, i.e., as an increase in ZDNet's division equity and
ZD's retained interest in ZDNet.
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Ziff-Davis Inc. intends to continue these practices until ZDNet stock is first
issued. Accordingly, no interest expense has been or will be reflected in the
financial statements of ZDNet, and no interest income from ZDNet has been or
will be reflected in the financial statements of ZD, for any period prior to
the date on which ZDNet stock is first issued.
After the date on which ZDNet stock is first issued:
(1) Ziff-Davis Inc. will attribute each future incurrence or issuance of
external debt or preferred stock and the proceeds thereof to ZD, unless the
board of directors determines otherwise. The board of directors may, but is
not required to, attribute an incurrence or issuance of debt or preferred
stock, and the proceeds thereof, to ZDNet to the extent that Ziff-Davis
Inc. incurs or issues the debt or preferred stock for the benefit of ZDNet.
(2) Ziff-Davis Inc. will attribute each future issuance of ZD stock, and
the proceeds thereof, to ZD. Ziff-Davis Inc. may attribute any future
issuance of ZDNet stock and the proceeds thereof:
. to ZD in respect of its retained interest in ZDNet, in a manner
analogous to a secondary offering of common stock of a subsidiary
owned by a corporate parent, or
. to ZDNet, in a manner analogous to a primary offering of common
stock.
Dividends on and repurchases of ZD stock will be charged against ZD, and
dividends on and repurchases of ZDNet stock will be charged against ZDNet.
In addition, at the time of any dividend on ZDNet stock, Ziff-Davis Inc.
will credit to ZD, and charge against ZDNet, a corresponding amount in
respect of ZD's retained interest in ZDNet. See "--Description of Capital
Stock--ZD's Retained Interest in ZDNet".
(3) Whenever ZDNet holds cash, other than cash of ZDNet's foreign
operations or cash of ZDNet's operations that are not wholly owned, ZDNet
will normally transfer that cash to ZD. Conversely, whenever ZDNet has a
cash need, other than cash needs of ZDNet's foreign operations or cash
needs of ZDNet's operations that are not wholly owned, ZD will normally
fund that cash need. However, the board of directors will determine, in its
sole discretion, whether to provide any particular funds to either ZD or
ZDNet and will not be obligated to do so.
(4) Ziff-Davis Inc. will account for all cash transfers from one group to
or for the account of the other group, other than transfers in return for
assets or services rendered or transfers in respect of ZD's retained
interest that correspond to dividends paid on ZDNet stock, as inter-group
revolving credit advances unless:
. the board of directors determines that a given transfer or type of
transfer should be accounted for as a long-term loan,
. the board of directors determines that a given transfer or type of
transfer should be accounted for as a capital contribution increasing
ZD's retained interest in ZDNet or
. the board of directors determines that a given transfer or type of
transfer should be accounted for as a return of capital reducing ZD's
retained interest in ZDNet.
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There are no specific criteria to determine when Ziff-Davis Inc. will
account for a cash transfer as a long-term loan, a capital contribution or
a return of capital rather than an inter-group revolving credit advance.
The board of directors would make such a determination in the exercise of
its business judgment at the time of such transfer, or the first of such
type of transfer, based upon all relevant circumstances. Factors the board
of directors would consider include:
. the current and projected capital structure of each group,
. the relative levels of internally generated funds of each group,
. the financing needs and objectives of the recipient group,
. the investment objectives of the transferring group,
. the availability, cost and time associated with alternative financing
sources and
. prevailing interest rates and general economic conditions.
(5) Any cash transfer accounted for as an inter-group revolving credit
advance will bear interest at the rate at which the board of directors, in
its sole discretion, determines Ziff-Davis Inc. could borrow such funds on
a revolving credit basis. Any cash transfer accounted for as a long-term
loan will have interest rate, amortization, maturity, redemption and other
terms that generally reflect the then prevailing terms on which the board
of directors, in its sole discretion, determines Ziff-Davis Inc. could
borrow such funds.
(6) Any cash transfer from ZD to ZDNet or for ZDNet's account accounted
for as a capital contribution will correspondingly increase ZDNet's
division equity and ZD's retained interest in ZDNet. As a result, the
number of shares of ZDNet stock that Ziff-Davis Inc. may issue for the
account of ZD in respect of its retained interest (which we call the number
of shares issuable with respect to ZD's retained interest in ZDNet) will
increase by the amount of such capital contribution divided by the market
value of ZDNet stock on the date of transfer.
This increase in the number of shares issuable with respect to ZD's
retained interest in ZDNet may also be expressed as follows:
Amount of Capital Contribution to ZDNet
-----------------------------------------
Market Value of ZDNet on the Date of Transfer
(7) Any cash transfer from ZDNet to ZD, or for ZD's account, accounted
for as a return of capital will correspondingly reduce ZDNet's division
equity and ZD's retained interest in ZDNet. As a result, the number of
shares issuable with respect to ZD's retained interest in ZDNet will
decrease by the amount of such return of capital divided by the market
value of ZDNet stock on the date of transfer.
This decrease in the number of shares issuable with respect to ZD's
retained interest in ZDNet may also be expressed as follows:
Amount of Return of Capital to ZDNet
----------------------------------------------
Market Value of ZDNet stock on the Date of Transfer
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Corporate General and Administrative Expenses
Ziff-Davis Inc. allocates the cost of certain corporate general and
administrative services and shared services to the groups generally based on
utilization. These shared services include:
.legal,
.accounting (tax and financial),
.information services,
.telecommunications,
.purchasing,
.marketing,
.intellectual property,
.public relations,
.corporate office and
.travel expenses.
Where determinations based on utilization alone are impracticable, Ziff-Davis
Inc. uses other methods and criteria that management believes are fair to
provide a reasonable estimate of the cost attributable to each group.
Taxes
Federal income taxes, which are determined on a consolidated basis, are
allocated to each group and reflected in their respective financial statements
in accordance with Ziff-Davis Inc.'s tax allocation policy. In general, this
policy provides that the consolidated tax provision and related tax payments or
refunds are allocated between the groups based principally upon the financial
income, taxable income, credits and other amounts directly related to the
respective groups. Tax benefits that cannot be used by the group generating
such attributes, but can be utilized on a consolidated basis, are allocated to
the group that generated such benefits. As a result, the allocated group
amounts of taxes payable or refundable are not necessarily comparable to those
that would have resulted if the groups had filed separate tax returns. State
income taxes generally are computed on a separate company basis.
Royalty Charges
ZD charges ZDNet an annual fee for the use of various ZD brands and editorial
content. The current annual fee, which is reflected in ZDNet's financial
statements as part of its production and content costs and in ZD's financial
statements as a reduction in selling, general and administrative expenses, is
equal to 5% of the first $100 million of ZDNet's revenue for the year, 4% of
the next $50 million of ZDNet's revenue for that year and 3% of any incremental
revenue over $150 million for that year. The board of directors may, in its
sole discretion, at some point in the future change this fee as it deems
appropriate in light of the circumstances from time to time.
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DESCRIPTION OF CAPITAL STOCK
The following description is not complete and should be read with the
restated charter, which we have filed as an exhibit to the registration
statement of which this prospectus is a part.
General
Our current certificate of incorporation authorizes us to issue 130 million
shares, consisting of 120 million shares of common stock, par value $.01 per
share, and 10 million shares of preferred stock, par value $.01 per share. Only
the preferred stock is currently issuable in series by the Board. As of March
23, 1999, we had approximately 103 million shares of common stock and no shares
of preferred stock issued and outstanding.
Before the offering, we will file an amended and restated certificate of
incorporation which would further amend and restate our current certificate of
incorporation. This restated charter will:
. Increase the number of authorized shares of common stock from 120 million
to 210 million.
. Authorize the board of directors to issue common stock in two series--
Ziff-Davis Inc.--ZD Common Stock, which we refer to in this prospectus as
ZD stock and Ziff-Davis Inc.--ZDNet Common Stock, which we refer to in
this prospectus as ZDNet stock. Initially, we will designate 130 million
shares as ZD stock and80 million shares as ZDNet stock.
. We intend ZDNet stock to reflect the performance of ZDNet.
. We intend ZD stock to reflect the performance of ZD.
. We have allocated all of Ziff-Davis Inc.'s consolidated assets,
liabilities, revenue, expenses and cash flow between ZD and ZDNet. In
the future, we will publish combined financial statements of ZD and
combined financial statements of ZDNet together with consolidated
financial statements of Ziff-Davis Inc.
. Re-classify each outstanding share of common stock into a share of ZD
stock. The filing would not change the authorized preferred stock.
The full definitions of the terms "ZD" and "ZDNet" are set forth under "--
Mandatory Dividend, Redemption or Exchange on Disposition of All or
Substantially All of the Assets of a Group" below.
Before the time of the offering, the board of directors will designate the
initial number of shares issuable with respect to ZD's retained interest in
ZDNet. See "--ZD's Retained Interest in ZDNet" and "--Number of Shares Issuable
with Respect to ZD's Retained Interest in ZDNet" and our restated charter for
additional information about ZD's retained interest in ZDNet and the number of
shares issuable with respect to ZD's retained interest in ZDNet.
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The board of directors will have the authority to increase or decrease from
time to time the total number of authorized shares comprising either series of
common stock. However, the board of directors could not increase the number of
authorized shares of a series above a number which, when added to all of the
authorized shares of the other series of common stock, would exceed the total
authorized number of shares of common stock. Likewise, the board of directors
could not decrease the number of authorized shares of a series below the number
of shares of such series then outstanding.
The board of directors will have the authority in its sole discretion to
issue authorized but unissued shares of common stock from time to time for any
proper corporate purpose. The board of directors will have the authority to do
so without stockholders approval, except as provided by Delaware law or the
rules and regulations of any securities exchange on which any series of
outstanding common stock may then be listed.
Dividends
We currently intend to retain all of our earnings to finance operations,
repay our indebtedness and fund future growth. We do not expect to pay
dividends on ZD stock or ZDNet stock for the foreseeable future.
Although our various debt instruments currently prohibit the payment of
dividends, and in any event, as stated above, we do not expect to pay any
dividends for the foreseeable future on any series of common stock, we will
otherwise be permitted to pay dividends on
. ZD stock out of assets of Ziff-Davis Inc. legally available for the
payment of dividends under Delaware law, but the total amounts paid as
dividends on ZD stock cannot exceed the available dividend amount for ZD
and
. ZDNet stock out of the assets of Ziff-Davis Inc. legally available for
the payment of dividends under Delaware law, and transfer corresponding
amounts to ZD in respect of its retained interest in ZDNet. However, the
total amounts paid as dividends on ZDNet stock and the corresponding
amounts transferred to ZD in respect of its retained interest in ZDNet
cannot exceed the available dividend amount for ZDNet.
The available dividend amount for ZD at any time is the amount that would
then be legally available for the payment of dividends on ZD's common stock
under Delaware law if
. ZD and ZDNet were each a separate Delaware corporation,
. ZD had outstanding (a) a number of shares of common stock, par value
$0.01 per share, equal to the number of shares of ZD stock that are then
outstanding and (b) a number of shares of preferred stock, par value
$0.01 per share, equal to the number of shares of preferred stock of
Ziff-Davis Inc. that have been attributed to ZD and are then outstanding,
. the assumptions about ZDNet set forth in the next sentence were true and
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. ZD owned a number of shares of ZDNet stock equal to the number of shares
issuable with respect to ZD's retained interest in ZDNet.
Similarly, the available dividend amount for ZDNet at any time is the amount
that would then be legally available for the payment of dividends on ZDNet's
common stock under Delaware law if ZDNet were a separate Delaware corporation
having outstanding:
. a number of shares of common stock, par value $0.01 per share, equal to
the number of shares of ZDNet stock that are then outstanding plus the
number of shares issuable with respect to ZD's retained interest in ZDNet
and
. a number of shares of preferred stock, par value $0.01 per share, equal
to the number of shares of preferred stock of Ziff-Davis Inc. that have
been attributed to ZDNet and are then outstanding.
The amount legally available for the payment of dividends on common stock of
a corporation under Delaware law is generally limited to:
. the total assets of the corporation less its total liabilities less
. the aggregate par value of the outstanding shares of its common and
preferred stock.
However, if that amount is not greater than zero, the corporation may also
pay dividends out of the net profits for the corporation for the fiscal year in
which the dividend is declared and/or the preceding fiscal year. As mentioned
above, these restrictions will form the basis for calculating the available
dividend amounts for ZD and ZDNet. These restrictions will also form the basis
for calculating the aggregate amount of dividends that Ziff-Davis Inc. as a
whole can pay on its common stock, regardless of series. Thus, net losses of
either group, and any dividends and distributions on, or repurchases of, either
series of common stock, will reduce the assets legally available for dividends
on both series of common stock.
Subject to the foregoing limitations and to any other limitations set forth
in any future series of preferred stock or in any agreements binding on Ziff-
Davis Inc. from time to time, we have the right to pay dividends on both, one
or neither series of common stock in equal or unequal amounts, notwithstanding
the performance of either group, the amount of assets available for dividends
on either series, the amount of prior dividends paid on either series, the
respective voting rights of each series or any other factor.
At the time of any dividend on the outstanding shares of ZDNet stock,
including any dividend required as a result of a disposition of all or
substantially all of the assets of ZDNet, but excluding any dividend payable in
shares of ZDNet stock, we will credit to ZD, and charge against ZDNet, a
corresponding amount in respect of ZD's retained interest in ZDNet.
Specifically, the corresponding amount will equal (1) the aggregate amount of
such dividend times (2) a fraction, the numerator of which is the number of
shares issuable with respect to ZD's retained interest in ZDNet and the
denominator of which is the number of shares of ZDNet stock then outstanding.
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This amount can also be expressed as follows:
<TABLE>
<S> <C>
(Aggregate Amount of Dividend) X (Number of Shares Issuable with Respect of ZD's Retained Interest)
-----------------------------------------------------------------------------------------------------
(Number of Shares of ZDNet stock Outstanding)
</TABLE>
Mandatory Dividend, Redemption or Exchange on Disposition of All or
Substantially All of the Assets of a Group
If we dispose of all or substantially all of the assets of a group to one or
more persons or entities, in one transaction or a series of related
transactions, collectively, a "disposition", and the disposition is not an
exempt disposition as defined below, we would be required, by the 85th trading
day after the consummation of such disposition, to choose one of the following
three alternatives:
. declare and pay a dividend to holders of the series of common stock that
relates to that group in cash, securities (other than common stock of
Ziff-Davis Inc.) or other property, or a combination thereof, in an
amount having a fair value equal to their proportionate interest in the
net proceeds of such disposition,
. redeem from holders of the series of common stock that relates to that
group, for cash, securities, other than common stock of Ziff-Davis Inc.,
or other property, or a combination thereof, in an amount having a fair
value equal to their proportionate interest in the net proceeds of such
disposition, all of the outstanding shares of the relevant series of
common stock (or, if such group continues after such disposition to own
any material assets other than the proceeds of such disposition, a number
of shares of such series of common stock having an aggregate average
market value, during the 20 consecutive trading day period beginning on
the 16th trading day immediately following the date on which the
disposition is consummated, equal to such fair value) or
. issue shares of the series of common stock that does not relate to that
group in exchange for all of the outstanding shares of the series of
common stock that relates to that group at a 10% premium, based on the
average market value of the relevant series of common stock as compared
to the average market value of the other series of common stock during
the 20 consecutive trading day period beginning on the 16th trading day
immediately following the date on which the disposition is consummated.
In connection with any special dividend on, or redemption of, ZDNet stock as
described above, we will credit to ZD, and charge against ZDNet, a
corresponding amount in respect of ZD's retained interest in ZDNet.
Specifically, the corresponding amount will equal
. the aggregate fair value of such dividend or redemption times
. a fraction, the numerator of which is the number of shares issuable with
respect to ZD's retained interest in ZDNet and the denominator of which is
the number of shares of ZDNet stock then outstanding.
This amount can also be represented by the following:
<TABLE>
<S> <C>
(Aggregate Fair Value) X (Number of Shares Issuable with Respect to ZD's Retained Interest)
---------------------------------------------------------------------------------------------
(Number of Shares of ZDNet stock Outstanding)
</TABLE>
In addition, in connection with any redemption of ZDNet stock as described
above, we will decrease the number of shares issuable with respect to ZD's
retained interest in ZDNet by the same proportion as the proportionate
decrease in outstanding shares of ZDNet caused by such redemption.
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At any time within one year after completing any dividend or partial
redemption of the sort referred to above, we will have the right to issue
shares of the series of common stock that does not relate to the group in
question in exchange for outstanding shares of the series of common stock that
relates to that group at a 10% premium. The exchange ratio that will result in
a 10% premium will be calculated based on the average market value of the
relevant series of common stock as compared to the average market value of the
other series of common stock during the 20 consecutive trading day period
ending on the 5th trading day immediately preceding the date on which Ziff-
Davis Inc. mails the notice of exchange to holders of the relevant series. In
determining whether to effect any such exchange following such a dividend or
partial redemption, we would, in addition to other matters, consider:
. whether the remaining assets of such group continue to constitute a
viable business,
. the number of shares of such common stock remaining issued and
outstanding,
. the per share market price of such common stock and
. the ongoing cost of continuing to have a separate series of such common
stock outstanding.
The following terms used in this prospectus have the meanings specified in
our restated charter and are set forth below:
All or substantially all of the assets of either group means a portion of
such assets that represents at least 80% of the then-current fair value of the
assets of such group.
Exempt disposition means any of the following:
. a disposition in connection with the liquidation, dissolution or winding-
up of Ziff-Davis Inc. and the distribution of assets to stockholders,
. a disposition to any person or entity controlled by Ziff-Davis Inc., as
determined by the board of directors in its sole discretion,
. a disposition by either group for which Ziff-Davis Inc. receives
consideration primarily consisting of equity securities, including,
without limitation:
. capital stock of any kind,
. interests in a general or limited partnership,
. interests in a limited liability company or
. debt securities convertible into or exchangeable for any of the
above, or options or warrants to acquire any of the above,
in each case without regard to the voting power or other management or
governance rights associated therewith, of:
. an entity which is primarily engaged or proposes to engage primarily
in one or more businesses similar or complementary to businesses
conducted by such group prior to the disposition, as determined by
the board of directors in its sole discretion,
. a dividend, out of ZDNet's assets, to holders of ZDNet stock, and a
transfer of a corresponding amount to ZD in respect of its retained
interest in ZDNet,
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. a dividend, out of ZD's assets, to holders of ZD stock and
. any other disposition, if
. at the time of the disposition there are no shares of ZD stock
outstanding,
. at the time of the disposition there are no shares of ZDNet stock
outstanding or
. before the 30th trading day following the disposition we have mailed
a notice stating that we are exercising our right to exchange all of
the outstanding shares of ZD stock or ZDNet stock for newly issued
shares of the other series of common stock as contemplated under "--
Optional Exchange of One Series of Common Stock for the Other Series"
below.
Fair value means:
. in the case of cash, the amount thereof,
. in the case of capital stock that has been publicly traded for a period
of at least 15 months, the market value thereof and
. in the case of other assets or securities, the fair market value thereof
as the board of directors shall determine in good faith.
Any good faith board of directors' determination of fair value shall be
conclusive and binding on all stockholders.
Market capitalization of either series of common stock on any date means the
market value of a share of such series on such date times the number of shares
of such series outstanding on such date. Shares issuable with respect to ZD's
retained interest in ZDNet are not considered to be outstanding unless and
until they are in fact issued to third parties.
Market value of a share of any class or series of capital stock on any
trading day generally means the average of the high and low reported sale
prices of a share of such class or series on such trading day, subject to
certain exceptions described in our restated charter.
The net proceeds of a disposition of any assets of a group means the positive
amount, if any, remaining from the gross proceeds of such disposition after any
payment of, or reasonable provision for:
.any taxes payable by Ziff-Davis Inc. in respect of such disposition,
. any taxes payable by Ziff-Davis Inc. in respect of any resulting dividend
or redemption,
. any transaction costs, including, without limitation, any legal,
investment banking and accounting fees and expenses and
. any liabilities, contingent or otherwise, of, attributed to or related
to, such group, including, without limitation, any liabilities for
deferred taxes, any indemnity or guarantee obligations which are
outstanding or incurred in connection with the disposition or otherwise,
any liabilities for future purchase price adjustments and any
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obligations with respect to outstanding securities, other than common
stock, attributed to such group, as determined in good faith by the board
of directors.
Proportionate interest of holders of ZDNet stock in the net proceeds of a
ZDNet disposition, or in the outstanding shares of common stock of any
subsidiaries holding ZDNet's assets and liabilities, means
. the amount of such net proceeds, or the number of such shares, times
. the number of shares of ZDNet stock outstanding divided by
. the total number of notional ZDNet shares deemed outstanding.
This amount can also be expressed as follows:
(Total Number of Notional ZDNet Shares
Deemed Outstanding)
(Net Proceeds or Number of Shares) X ----------------------------------------
Total Number of ZDNet Shares Outstanding
Proportionate interest of holders of ZD stock in the net proceeds of a ZD
disposition or in the outstanding shares of common stock of any subsidiaries
holding ZD's assets and liabilities, means the amount of such net proceeds or
the number of such shares.
Publicly traded with respect to any security means:
. registered under Section 12 of the Securities Exchange Act of 1934, as
amended, or any successor provision of law, and
. listed for trading on the NYSE, or any other national securities exchange
registered under Section 7 of the Exchange Act, or any successor
provision of law, or
. listed on the Nasdaq National Market, or any successor market system.
Total number of notional ZDNet shares deemed outstanding means the number of
shares of ZDNet stock outstanding plus the number of shares issuable with
respect to ZD's retained interest in ZDNet.
Trading day means each weekday on which the relevant security or, if there
are two relevant securities, each relevant security, is traded on the principal
national securities exchange on which it is listed or admitted to trading or on
the Nasdaq National Market or, if such security is not listed or admitted to
trading on a national securities exchange or quoted on the Nasdaq National
Market, traded in the principal over-the-counter market in which it trades.
ZD means:
. all of the businesses, assets and liabilities of Ziff-Davis Inc. and its
subsidiaries, other than the businesses, assets and liabilities that are
part of ZDNet,
. the rights and obligations of ZD under any inter-group debt deemed to be
owed to or by ZD, as such rights and obligations are defined in
accordance with policies established from time to time by the board of
directors, and
. a proportionate interest in ZDNet, after giving effect to any options,
preferred stock, other securities or debt issued or incurred by Ziff-
Davis Inc. and attributed to ZDNet, equal to the retained interest
percentage; provided that:
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. Ziff-Davis Inc. may re-allocate assets from one group to the other
group in return for other assets or services rendered by that other
group in the ordinary course of business or in accordance with
policies established by the board of directors from time to time and
. if Ziff-Davis Inc. transfers cash, other assets or securities to
holders of shares of ZDNet stock as a dividend or other distribution
on shares of ZDNet stock, other than a dividend or distribution
payable in shares of ZDNet stock, or as payment in a redemption of
shares of ZDNet stock effected as a result of a ZDNet disposition,
then the board of directors shall re-allocate from ZDNet to ZD cash
or other assets having a fair value equal to the aggregate fair value
of the cash, other assets or securities so transferred times a
fraction, the numerator of which shall equal the number of shares
Issuable with respect to ZD's retained interest in ZDNet on the
record date for such dividend or distribution, or on the date of such
redemption, and the denominator of which shall equal the number of
shares of ZDNet stock outstanding on such date.
This last amount can also be expressed as follows:
<TABLE>
<S> <C>
(Fair Value of Cash, Assets or Securities Transferred) X (Number of Shares Issuable with Respect to
ZD's Retained Interest in ZDNet)
-----------------------------------------
(Number of Shares of ZDNet Outstanding)
</TABLE>
ZDNet means:
. the online business division of Ziff-Davis Inc., including all of the
businesses, assets and liabilities of Ziff-Davis Inc. and its
subsidiaries that the board of directors has allocated to ZDNet but
excluding any ownership interest in Ziff-Davis Inc.'s ZDU and ZDTV
businesses, as of the date on which our restated charter becomes
effective under Delaware law. We call the date our restated charter
becomes effective, the "effective date".
. any assets or liabilities acquired or incurred by Ziff-Davis Inc. or any
of its subsidiaries after the effective date in the ordinary course of
business and attributable to ZDNet,
. any businesses, assets or liabilities acquired or incurred by Ziff-Davis
Inc. or any of its subsidiaries after the effective date that the board
of directors has specifically allocated to ZDNet or that Ziff-Davis Inc.
otherwise allocates to ZDNet in accordance with policies established from
time to time by the board of directors and
. the rights and obligations of ZDNet under any inter-group debt deemed to
be owed to or by ZDNet, as such rights and obligations are defined in
accordance with policies established from time to time by the board of
directors; provided that:
. Ziff-Davis Inc. may re-allocate assets from one group to the other
group in return for other assets or services rendered by that other
group in the ordinary course of business or in accordance with
policies established by the board of directors from time to time and
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. if Ziff-Davis Inc. transfers cash, other assets or securities to
holders of shares of ZDNet stock as a dividend or other distribution
on shares of ZDNet stock, other than a dividend or distribution
payable in shares of ZDNet stock, or as payment in a redemption of
shares of ZDNet stock effected as a result of a ZDNet disposition,
then the board of directors shall re-allocate from ZDNet to ZD cash
or other assets having a fair value equal to the aggregate fair value
of the cash, other assets or securities so transferred times a
fraction, the numerator of which shall equal the number of shares
Issuable with respect to ZD's retained interest in ZDNet on the
record date for such dividend or distribution, or on the date of such
redemption, and the denominator of which shall equal the number of
shares of ZDNet stock outstanding on such date.
This last amount can also be expressed as follows:
<TABLE>
<S> <C>
(Fair Value of Cash, Assets or Securities Transferred) X (Number of Shares Issuable with Respect to
ZD's Retained Interest in ZDNet)
------------------------------------------
(Number of Shares of ZDNet Outstanding)
</TABLE>
Optional Exchange of One Series of Common Stock for the Other Series
We will have the right, at any time before ZDNet stock exceeds the 65% of
total market capitalization trigger, to issue shares of ZD stock in exchange
for outstanding shares of ZDNet stock at a premium. The premium will initially
be 25%, for exchanges occurring in the first quarter after issuance, and will
decline each quarter over a period of 3 years to 15%.
We will have the right, at any time after ZDNet stock exceeds the 65% of
total market capitalization trigger but before ZDNet stock falls below the 50%
of total market capitalization threshold, to issue shares of ZDNet stock in
exchange for outstanding shares of ZD stock at a 15% premium.
The exchange ratio that will result in the specified premium will be
calculated based on the average market value of ZD stock as compared to the
average market value of ZDNet stock during the 20 consecutive trading day
period ending on, and including, the 5th trading day immediately preceding the
date on which we mail the notice of exchange to holders of the outstanding
shares being exchanged.
In addition, we will have the right, if ZDNet stock exceeds the 65% of total
market capitalization trigger and thereafter falls below the 50% of total
market capitalization threshold, and regardless of whether ZDNet stock
thereafter remains below the 50% of total market capitalization threshold or
the 65% of total market capitalization trigger, to issue shares of either
series of common stock in exchange for outstanding shares of the other series
of common stock on a value for value basis.
The exchange ratio that will result in a value for value exchange will be
based on the average market value of the series of the common stock being
exchanged as compared to the average market value of the other series of common
stock during the 20 consecutive
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trading day period ending on, and including, the 5th trading day immediately
preceding the date on which we mail the notice of exchange to holders of the
outstanding shares being exchanged.
ZDNet stock will exceed the 65% of total market capitalization trigger if the
market capitalization of the outstanding ZDNet stock exceeds 65% of the total
market capitalization of both series of common stock for 30 trading days during
any 60 consecutive trading day period. Thereafter, ZDNet stock will fall below
the 50% of total market capitalization threshold if, after exceeding the 65% of
total market capitalization trigger, the market capitalization of the
outstanding ZDNet stock falls below 50% of the total market capitalization of
both series of common stock for 30 trading days during any 60 consecutive
trading day period.
If we have the right, on the date on which we mail a notice of exchange as
contemplated above, to issue shares of ZD stock or ZDNet stock in exchange for
outstanding shares of the other series of common stock as described above, we
will not lose that right even if ZDNet stock subsequently exceeds the 65% of
total market capitalization trigger or falls below the 50% of total market
capitalization threshold.
Optional Exchange for Stock of a Subsidiary
At any time at which all of the assets and liabilities of a group, and no
other assets or liabilities of Ziff-Davis Inc. or any subsidiary thereof, are
held directly or indirectly by one or more wholly owned subsidiaries of Ziff-
Davis Inc., the "group subsidiaries", we will have the right to deliver to
holders of the relevant series of common stock their proportionate Interest in
all of the outstanding shares of the common stock of the group subsidiaries in
exchange for all of the outstanding shares of such series of common stock.
. If the series of common stock being exchanged is ZD stock and the number
of shares issuable with respect to ZD's retained interest in ZDNet is
greater than zero, we will also issue a number of shares of ZDNet stock
equal to the then current number of shares issuable with respect to ZD's
retained interest in ZDNet and deliver those shares to the holders of ZD
stock or to one of the group subsidiaries, at our option.
. If the series of common stock being exchanged is ZDNet stock and the
number of shares issuable with respect to ZD's retained interest in ZDNet
is greater than zero, so that less than all of the shares of common stock
of the group subsidiaries are being delivered to the holders of ZDNet
stock, we may retain the remaining shares of common stock of the group
subsidiaries or distribute those shares as a dividend on ZD stock.
General Dividend, Exchange and Redemption Provisions
If we complete a disposition of all or substantially all of the assets of a
group, other than an exempt disposition, we would be required, not more than
the 10 Trading Days after the consummation of such disposition, to issue a
press release specifying:
. the net proceeds of such disposition,
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. the number of shares of the series of common stock related to such group
then outstanding,
. the number of shares of such series of common stock issuable upon
conversion, exchange or exercise of any convertible or exchangeable
securities, options or warrants and the conversion, exchange or exercise
prices thereof and
. if the group is ZDNet, the number of shares issuable with respect to ZD's
retained interest in ZDNet.
Not more than 30 trading days after such consummation, we would be required to
announce by press release which of the actions specified in the first paragraph
under "--Mandatory Dividend, Redemption or Exchange on Disposition of All or
Substantially All of the Assets of a Group" we have determined to take, and
upon making that announcement, that determination would become irrevocable. In
addition, we would be required, not more than 30 trading days after such
consummation and not less than 10 trading days before the applicable payment
date, redemption date or exchange date, to send a notice by first-class mail,
postage prepaid, to holders of the relevant series of common stock at their
addresses as they appear on our transfer books.
. If we determine to pay a special dividend, we would be required to
specify in the notice (1) the record date for such dividend, (2) the
payment date of such dividend, which cannot be more than 85 trading days
after such consummation, and (3) the aggregate amount and type of
property to be paid in such dividend and the approximate per share amount
thereof.
. If we determine to undertake a redemption, we would be required to
specify in the notice (1) the date of redemption, which cannot be more
than 85 trading days after such consummation, (2) the aggregate amount
and type of property to be paid as a redemption price and the approximate
per share amount thereof, (3) if less than all shares of the relevant
series of common stock are to be redeemed, the number of shares to be
redeemed and (4) the place or places where certificates for shares of
such series of common stock, properly endorsed or assigned for transfer,
unless we waive such requirement, should be surrendered in return for
delivery of the cash, securities or other property to be paid by Ziff-
Davis Inc. in such redemption.
. If we determine to undertake an exchange, we would be required to specify
in the notice (1) the date of exchange, which cannot be more than 85
trading days after such consummation, (2) the number of shares of the
other series of common stock to be issued in exchange for each
outstanding share of such series of common stock and (3) the place or
places where certificates for shares of such series of common stock,
properly endorsed or assigned for transfer, unless we waive such
requirement, should be surrendered in return for delivery of the other
series of common stock to be issued by Ziff-Davis Inc. in such exchange.
If we determine to complete any exchange described under "--Optional Exchange
of One Series of Common Stock for the Other Series" or "Optional Exchange for
Stock of a Subsidiary", we would be required, between 10 to 30 trading days
before the exchange date, to send a notice by first-class mail, postage
prepaid, to holders of the relevant series of common stock at their addresses
as they appear on our transfer books, specifying (1) the
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exchange date and the other terms of the exchange and (2) the place or places
where certificates for shares of such series of common stock, properly endorsed
or assigned for transfer, unless we waive such requirement, should be
surrendered for delivery of the stock to be issued or delivered by Ziff-Davis
Inc. in such exchange.
Neither the failure to mail any required notice to any particular holder nor
any defect therein would affect the sufficiency thereof with respect to any
other holder or the validity of any dividend, redemption or exchange.
If we are redeeming less than all of the outstanding shares of a series of
common stock as described above, we would redeem such shares pro rata or by lot
or by such other method as the board of directors determines to be equitable.
No holder of shares of a series of common stock being exchanged or redeemed
will be entitled to receive any cash, securities or other property to be
distributed in such exchange or redemption until such holder surrenders
certificates for such shares, properly endorsed or assigned for transfer, at
such place as we specify, unless we waive such requirement. As soon as
practicable after our receipt of certificates for such shares, we would deliver
to the person for whose account such shares were so surrendered, or to the
nominee or nominees of such person, the cash, securities or other property to
which such person is entitled, together with any fractional payment referred to
below, in each case without interest. If less than all of the shares of common
stock represented by any one certificate were to be exchanged or redeemed, we
would also issue and deliver a new certificate for the shares of such common
stock not exchanged or redeemed.
We would not be required to issue or deliver fractional shares of any capital
stock or any other fractional securities to any holder of common stock upon any
exchange, redemption, dividend or other distribution described above. If more
than one share of common stock were held at the same time by the same holder,
we may aggregate the number of shares of any capital stock that would be
issuable or any other securities that would be distributable to such holder
upon any such exchange, redemption, dividend or other distribution. If there
are fractional shares of any capital stock or any other fractional securities
remaining to be issued or distributed to any holder, we would, if such
fractional shares or securities were not issued or distributed to such holder,
pay cash in respect of such fractional shares or securities in an amount equal
to the fair value thereof, without interest.
From and after the date set for any exchange or redemption, all rights of a
holder of shares of common stock that were exchanged or redeemed would cease
except for the right, upon surrender of the certificates representing such
shares, to receive the cash, securities or other property for which such shares
were exchanged or redeemed, together with any fractional payment as provided
above, in each case without interest and, if such holder was a holder of record
as of the close of business on the record date for a dividend not yet paid, the
right to receive such dividend. A holder of shares of common stock being
exchanged would not be entitled to receive any dividend or other distribution
with respect to shares of the other series of common stock until after the
shares being exchanged are surrendered as contemplated above. Upon such
surrender, we would pay to the holder the
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amount of any dividends or other distributions, without interest, which
theretofore became payable with respect to a record date occurring after the
exchange, but which were not paid by reason of the foregoing, with respect to
the number of whole shares of the other series of common stock represented by
the certificate or certificates issued upon such surrender. From and after the
date set for any exchange, we would, however, be entitled to treat the
certificates for shares of common stock being exchanged that were not yet
surrendered for exchange as evidencing the ownership of the number of whole
shares of the other series of common stock for which the shares of such common
stock should have been exchanged, notwithstanding the failure to surrender such
certificates.
We would pay any and all documentary, stamp or similar issue or transfer
taxes that might be payable in respect of the issue or delivery of any shares
of capital stock and/or other securities on any exchange or redemption
described herein. We would not, however, be required to pay any tax that might
be payable in respect of any transfer involved in the issue or delivery of any
shares of capital stock and/or other securities in a name other than that in
which the shares so exchanged or redeemed were registered, and no such issue or
delivery will be made unless and until the person requesting such issue pays to
Ziff-Davis Inc. the amount of any such tax or establishes to our satisfaction
that such tax has been paid.
We may, subject to applicable law, establish such other rules, requirements
and procedures to facilitate any dividend, redemption or exchange contemplated
as described above as the board of directors may determine to be appropriate
under the circumstances.
Voting Rights
Holders of ZD stock and ZDNet stock will vote together as one class on all
matters as to which common stockholders generally are entitled to vote, unless
a separate class vote is required by applicable law. On all such matters for
which no separate vote is required,
. each outstanding share of ZD stock entitles the holder to one vote and
. each outstanding share of ZDNet stock entitles the holder to a number of
votes, calculated to the nearest five decimal places, equal to the
average market value of a share of ZDNet stock divided by the average
market value of a share of ZD stock during the 20 consecutive trading day
period ending on, and including, the 5th trading day before the
applicable record date.
The voting formula is intended to equate the proportionate voting rights of
each series of common stock to its respective market values at the time of any
vote. On matters where holders of either series of common stock are entitled to
vote as a separate class, each share of that series would be entitled to one
vote in the separate vote on such matter.
The relative voting rights of ZD stock and ZDNet stock will fluctuate from
time to time based on the respective market values of the two series of common
stock. Fluctuations in the relative voting rights of ZD stock and ZDNet stock
could influence an investor interested in acquiring and maintaining a fixed
percentage of the voting power in Ziff-Davis Inc. to acquire such percentage of
all series of common stock, and would limit the ability of
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investors in one series to acquire for the same consideration relatively more
or less votes per share than investors in the other series.
When holders of ZD stock and ZDNet stock vote together as a single class, the
holders of the series of common stock having a majority of the votes will be in
a position to control the outcome of the vote even if the matter involves a
conflict of interest between the holders of ZD stock and holders of ZDNet
stock.
The Delaware general corporation law requires a separate vote of holders of
shares of common stock of any series on any amendment if the amendment would
increase or decrease the par value of the shares of such series or alter or
change the powers, preferences or special rights of the shares of such series
so as to affect them adversely.
After ZDNet stock is issued, we will set forth the number of outstanding
shares of ZD stock and ZDNet stock in our annual and quarterly reports filed
pursuant to the Exchange Act, and disclose in any proxy statement for a
stockholder meeting the number of outstanding shares and per share voting
rights of ZD stock and ZDNet stock.
Liquidation
Upon voluntary or involuntary liquidation, dissolution or winding-up of Ziff-
Davis Inc., holders of ZD stock and ZDNet stock will be entitled to receive
their proportionate interest in the net assets of Ziff-Davis Inc., if any,
remaining for distribution to stockholders after (1) payment of or provision
for all liabilities, including contingent liabilities, of Ziff-Davis Inc. and
(2) payment of the liquidation preference payable to any holders of our
preferred stock.
Such distributions will be made pro rata in accordance with the average
market value of a share of ZD stock divided by the average market value of a
share of ZDNet stock during the 20 consecutive trading day period ending on,
and including, the 5th trading day before the date of the first public
announcement of (1) a voluntary liquidation, dissolution or winding-up by Ziff-
Davis Inc. or (2) the institution of any proceeding for the involuntary
liquidation, dissolution or winding-up of Ziff-Davis Inc.
The liquidation formula is intended to provide liquidation rights for each
series of common stock proportionate to the respective market values at the
time of any liquidation.
Neither the merger nor consolidation of Ziff-Davis Inc. with any other
entity, nor a sale, transfer or lease of all or any part of the assets of Ziff-
Davis Inc., would alone be deemed a liquidation, dissolution or winding-up for
these purposes.
ZD's Retained Interest in ZDNet
In this document, we call the percentage interest in ZDNet intended to be
represented at any time by the outstanding shares of ZDNet stock the
outstanding interest percentage, and we call the remaining percentage interest
in ZDNet intended to be represented at any time by ZD's retained interest in
ZDNet the retained interest percentage. At any time, the outstanding interest
percentage equals the number of shares of ZDNet stock outstanding
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divided by the total number of notional ZDNet shares deemed outstanding,
expressed as a percentage. The outstanding interest percentage can also be
expressed as follows:
Number of Shares of ZDNet Stock Outstanding
---------------------------------------------------------
Total Number of Notional ZDNet Shares Deemed Outstanding
The retained interest percentage equals the number of shares issuable with
respect to ZD's retained interest in ZDNet divided by the total number of
notional ZDNet shares deemed outstanding, expressed as a percentage. The
retained interest can also be expressed as follows:
Number of Shares Issuable with Respect to ZD's Retained Interest In ZDNet
----------------------------------------------------------------------
Total Number of Notional ZDNet Shares Deemed Outstanding
The sum of the outstanding interest percentage and the retained interest
percentage always equals 100%. Thus:
Outstanding Interest Percentage + Retained Interest Percentage = 100%
--------------------------------------------------------------------------
At the time that we file the restated charter, the retained interest
percentage will be 100% and the outstanding interest percentage will be 0%.
Number of Shares Issuable with Respect to ZD's Retained Interest in ZDNet
The board of directors has determined that the initial number of shares
issuable with respect to ZD's retained interest in ZDNet will be 70,000,000. In
the offering, we will attribute the net proceeds of 1,500,000 shares to the
equity of ZDNet and will attribute the net proceeds of the remaining shares to
ZD in respect of its retained interest. The issuance of the 1,500,000 shares
will have no effect on the number of shares issuable with respect to ZD's
retained interest in ZDNet, but the issuance of the shares in respect of ZD's
retained interest will correspondingly reduce that number. Thus, after giving
effect to the offering,
. there will be 10,000,000 shares of ZDNet stock outstanding, or 11,500,000
shares if the underwriters fully exercise their option to purchase
additional shares,
. the number of shares issuable with respect to ZD's retained interest in
ZDNet will decline to 61,500,000, or 60,000,000 if the underwriters fully
exercise their option to purchase additional shares,
. the total number of notional ZDNet shares deemed outstanding will be
71,500,000,
. the outstanding interest fraction will be approximately 14.0%, or
approximately 16.1% if the underwriters fully exercise their option to
purchase additional shares and
. the retained interest fraction will be approximately 86.0%, or
approximately 83.9% if the underwriters fully exercise their option to
purchase additional shares.
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Attribution of Issuances of ZDNet Stock
After the offering, whenever we decide to issue shares of ZDNet stock, we
would determine, in our sole discretion, whether to attribute that issuance,
and the proceeds thereof:
. to ZD in respect of its retained interest in ZDNet, in a manner analogous
to a secondary offering of common stock of a subsidiary owned by a
corporate parent, or
. to ZDNet, in a manner analogous to a primary offering of common stock.
If we issue any shares of ZDNet stock and attribute that issuance, and the
proceeds thereof, to ZD in respect of its retained interest in ZDNet, the
number of shares issuable with respect to ZD's retained interest in ZDNet would
be reduced by the number of shares so issued, the number of outstanding shares
of ZDNet stock would be increased by the same amount, the total number of
notional ZDNet shares deemed outstanding would remain unchanged, the retained
interest percentage would be reduced and the outstanding interest percentage
would be correspondingly increased. If we instead attribute that issuance and
the proceeds thereof to ZDNet, the number of shares issuable with respect to
ZD's retained interest in ZDNet would remain unchanged, the number of
outstanding shares of ZDNet stock and the total number of notional ZDNet shares
deemed outstanding would be increased by the number of shares so issued, the
retained interest percentage would be reduced and the outstanding interest
percentage would be correspondingly increased.
Issuances of ZDNet Stock as Distributions on ZD Stock
We reserve the right to issue shares of ZDNet stock as a distribution on ZD
stock, although we do not currently intend to do so. If we did so, we would
attribute that distribution to ZD in respect of its retained interest in ZDNet.
As a result, the number of shares issuable with respect to ZD's retained
interest in ZDNet would be reduced by the number of shares so distributed, the
number of outstanding shares of ZDNet stock would be increased by the same
amount, the total number of notional ZDNet shares deemed outstanding would
remain unchanged, the retained interest percentage would be reduced and the
outstanding interest percentage would be correspondingly increased. If instead
we issued shares of ZDNet stock as a distribution on ZDNet stock, we would
attribute that distribution to ZDNet, in which case we would proportionately
increase the number of shares issuable with respect to ZD's retained interest
in ZDNet. As a result, the number of shares issuable with respect to ZD's
retained interest in ZDNet and the total number of notional ZDNet shares deemed
outstanding would each be increased by the same percentage as the number of
outstanding shares of ZDNet stock is increased and the retained interest
percentage and outstanding interest percentage would remain unchanged.
Dividends on ZDNet Stock
At the time of any dividend on the outstanding shares of ZDNet stock,
including any dividend required as a result of a disposition of all or
substantially all of the assets of
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ZDNet, but excluding any dividend payable in ZDNet stock, we will credit to ZD,
and charge against ZDNet, a corresponding amount in respect of ZD's retained
interest in
ZDNet. Specifically, the corresponding amount will equal the aggregate amount
of such dividend times a fraction, the numerator of which is the number of
shares issuable with respect to ZD's retained interest in ZDNet and the
denominator of which is the number of shares of ZDNet stock then outstanding.
This amount can also be expressed as follows:
<TABLE>
<C> <S> <C>
(Aggregate Amount of Dividend on X (Number of Shares Issuable with Respect
ZDNet Stock) to ZD's Retained Interest in ZDNet)
---------------------------------------
(Number of Shares of ZDNet Stock
Outstanding)
</TABLE>
Repurchases of ZDNet Stock
If we decide to repurchase shares of ZDNet stock, we would determine, in our
sole discretion, whether to attribute that repurchase and the cost thereof to
ZD, in a manner analogous to a purchase of common stock of a subsidiary by a
corporate parent, or to ZDNet, in a manner analogous to an issuer repurchase.
If we repurchase shares of ZDNet stock and attribute that repurchase and the
cost thereof to ZD, the number of shares issuable with respect to ZD's retained
interest in ZDNet would be increased by the number of shares so purchased, the
number of outstanding shares of ZDNet stock would be decreased by the same
amount, the total number of notional ZDNet shares deemed outstanding would
remain unchanged, the retained interest percentage would be increased and the
outstanding interest percentage would be correspondingly decreased. If we
instead attribute that repurchase and the cost thereof to ZDNet, the number of
shares issuable with respect to ZD's retained interest in ZDNet would remain
unchanged, the number of outstanding shares of ZDNet stock and the total number
of notional ZDNet shares deemed outstanding would be decreased by the number of
shares so repurchased, the retained interest percentage would be increased and
the outstanding interest percentage would be correspondingly reduced.
Transfers of Cash or Other Property between ZD and ZDNet
We may, in our sole discretion, determine to transfer cash or other property
of ZDNet to ZD in return for a decrease in ZD's retained interest in ZDNet, in
a manner analogous to a return of capital, or to transfer cash or other
property of ZD to ZDNet in return for an increase in ZD's retained interest in
ZDNet, in a manner analogous to a capital contribution. If we determine to
transfer cash or other property of ZDNet to ZD in return for a decrease in ZD's
retained interest in ZDNet, the number of shares issuable with respect to ZD's
retained interest in ZDNet and the total number of notional ZDNet shares deemed
outstanding would each be decreased by an amount equal to the fair value of
such cash or other property divided by the market value of a share of ZDNet
stock on the day of transfer, the number of outstanding shares of ZDNet stock
would remain unchanged, the retained interest percentage would be decreased and
the outstanding interest percentage would be correspondingly increased.
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If we instead determine to transfer cash or other property of ZD to ZDNet in
return for an increase in ZD's retained interest in ZDNet, the number of shares
issuable with respect to ZD's retained interest in ZDNet and the total number
of notional ZDNet shares deemed outstanding would each be increased by an
amount equal to the fair value of such cash or other property divided by the
market value of a share of ZDNet stock on the day of transfer, the number of
outstanding shares of ZDNet stock would remain unchanged, the retained interest
percentage would be increased and the outstanding interest percentage would be
correspondingly decreased.
We may not attribute issuances of ZDNet stock to ZD, transfer cash or other
property of ZDNet to ZD in return for a decrease in its retained interest in
ZDNet or take any other
action to the extent that doing so would cause the number of shares issuable
with respect to ZD's retained interest in ZDNet to decrease below zero.
For illustrations showing how to calculate the retained interest percentage,
the outstanding interest percentage, the number of shares issuable with respect
to ZD's retained interest in ZDNet and the total number of notional ZDNet
shares deemed outstanding after giving effect to certain hypothetical
dividends, issuances, repurchases and transfers, see "Illustration of Certain
Terms".
Effectiveness of Certain Terms
The terms described under "-- Dividends", "--Mandatory Dividend, Redemption
or Exchange on Disposition of All or Substantially All of the Assets of a
Group", "--Optional Exchange of One Series of Common Stock for the Other
Series", "--Optional Exchange for Stock of a Subsidiary", "--Voting Rights" and
"--Liquidation" above apply only when there are shares of both series of common
stock outstanding.
Determinations by the Board
The restated charter will provide that, subject to applicable law, any
determinations made by the board of directors in good faith under the charter
or in any certificate of designation filed pursuant thereto would be final and
binding on all stockholders of Ziff-Davis Inc.
Preemptive Rights
Holders of ZD stock and ZDNet stock will not have any preemptive rights to
subscribe for any additional shares of capital stock or securities that we may
issue in the future.
Certain Other Provisions of the Amended Charter and By-laws
Preferred Stock
The restated charter, like our current charter, provides that the board of
directors may issue shares of preferred stock in one or more series from time
to time. The board of
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directors has the authority to fix by resolution or resolutions the
designations and the powers, preferences and rights, and the qualifications,
limitations and restrictions thereof, of the shares of each series of preferred
stock, including without limitation, the following:
. the distinctive serial designation of such series which shall distinguish
it from other series,
. the number of shares included in such series,
. the dividend rate, or method of determining such rate, payable to holders
of the shares of such series,
. any condition upon which such dividends shall be paid and the date or
dates upon which such dividends shall be payable,
. whether dividends on the shares of such series shall be cumulative and,
in the case of shares of any series having cumulative dividend rights,
the date or dates or method of determining the date or dates from which
dividends on the shares of such series shall be cumulative,
. the amount or amounts which shall be payable out of the assets of Ziff-
Davis Inc. to holders of the shares of such series upon voluntary or
involuntary liquidation, dissolution or winding-up Ziff-Davis Inc. and
the relative rights of priority, if any, of payment of the shares of such
series,
. the price or prices at which, the period or periods within which and the
terms and conditions upon which the shares of such series may be
redeemed, in whole or in part, at the option of Ziff-Davis Inc. or at the
option of the holder or holders thereof or upon the happening of a
specified event or events,
. the obligation, if any, of Ziff-Davis Inc. to purchase or redeem shares
of such series pursuant to a sinking fund or otherwise and the price or
prices at which, the period or periods within which and the terms and
conditions upon which the shares of such series shall be redeemed or
purchased, in whole or in part, pursuant to such obligation,
. whether or not the shares of such series shall be convertible or
exchangeable, at any time or times at the option of the holder or holders
thereof or at the option of Ziff-Davis Inc. or upon the happening of a
specified event or events, into shares of any other class or classes or
any other series of the same or any other class or classes of stock of
Ziff-Davis Inc. and the price or prices or rate or rates of exchange or
conversion and any adjustments applicable thereto and
. whether or not holders of the shares of such series shall have voting
rights, in addition to the voting rights provided by law, and if so the
terms of such voting rights.
Unless a corporation's certificate provides otherwise, Section 242(b)(2) of
the Delaware general corporation law automatically gives holders of the
outstanding shares of a class the option to vote as a class on amendments to
increase or decrease the number of authorized shares of such class. Our
restated charter provides, however, that, subject to the rights of holders of
any series of preferred stock, the number of authorized shares of any class or
series of preferred stock may be increased or decreased, but not below the
number of
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shares thereof then outstanding, by the affirmative vote of holders of a
majority of the outstanding shares entitled to vote, irrespective of the
provisions of Section 242(b)(2) of the Delaware general corporation law or any
corresponding provision hereafter enacted.
Staggered Board of Directors
The board of directors is divided into three classes, each of whose members
serve for a staggered three-year term. Upon the expiration of the term of a
class of directors, directors in such class are elected for three-year terms at
the annual meeting of stockholders in the year in which such term expires. The
classification of the board of directors has the effect of making it more
difficult for stockholders to change the composition of the board of directors,
because only a minority of the directors are up for election at each annual
meeting, and the board of directors may not be replaced by vote of the
stockholders at any one time.
Number of Directors; Removal; Filling Vacancies
The number of members of the board of directors will be fixed from time to
time pursuant to our by-laws. Our by-laws provide that the board of directors
will consist of one or more members, the number of which is determined from
time to time by the board of directors. In the event of any increase or
decrease in the authorized number of directors:
. a director shall nevertheless continue as a director of the class of
which he is a member until the expiration of his current term, or his
earlier death, retirement, resignation or removal and
. newly created or eliminated directorships resulting from such increase or
decrease shall be apportioned by the board of directors among the three
classes of directors so as to maintain such classes as nearly equal in
number as reasonably possible.
Directors may be removed only for cause. However, a director who is also an
officer may be removed upon ceasing to be an officer. Vacancies, whether
arising through death, retirement, resignation or removal of a director or
through an increase in the authorized number of directors of any class, may
only be filled by a majority vote of the remaining directors of the class in
which such vacancy occurs, the sole remaining director of that class if one
such director remains, the majority vote of the directors of the remaining
classes if no such director remains or stockholders at an annual meeting of
stockholders of Ziff-Davis Inc.
A director elected to fill a vacancy shall serve for the remainder of his
term of office of the class to which he is elected. These provisions prevent
any stockholder from enlarging the board of directors and then filling the new
directorships with such stockholder's own nominees.
No Stockholder Action by Written Consent; Special Meetings
Any action required or permitted to be taken by the stockholders of Ziff-
Davis Inc. must be duly effected at a duly called annual or special meeting of
such holders and may not be taken by any consent in writing by such holders.
Special meetings of stockholders of
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Ziff-Davis Inc. may be called only by the chairman of the board of directors or
the board of directors pursuant to a resolution stating the purpose or purposes
of the special meeting. Any power of stockholders to call a special meeting is
specifically denied. No business other than that stated in the notice shall be
transacted at any special meeting. These provisions have the effect of delaying
consideration of a stockholder proposal until the next annual meeting unless a
special meeting is called by the Chairman, Vice Chairman, President or the
board of directors for consideration of such proposal.
Advance Notice for Stockholder Nominations and Proposals of New Business
Our by-laws establish an advance notice procedure. This procedure requires
stockholders to deliver to Ziff-Davis Inc. notice of any proposal to be
presented or of a candidate to be nominated for election as a director of Ziff-
Davis Inc. not less than 60 nor more than 90 days prior to the date of the
meeting. However, if the date of the meeting is first publicly announced or
disclosed, in a public filing or otherwise, is less than 70 days prior to the
date of the meeting, such advance notice shall be given not more than 10 days
after such date is first so announced or disclosed. Accordingly, failure by a
stockholder to act in compliance with the notice provisions will mean that the
stockholder will not be able to nominate directors or propose new business.
Amendments
The affirmative vote of holders of at least 80% of the stock entitled to vote
generally in the election of directors, voting together as a single class, or a
majority of the board of directors, is required to amend provisions of our by-
laws relating to stockholder action without a meeting, the calling of special
meetings, the number, or manner of determining the number, of Ziff-Davis Inc.'s
directors, the election and term of Ziff-Davis Inc.'s directors, the filling of
vacancies and the removal of directors.
Certain Provisions of Delaware Law
Ziff-Davis Inc. is subject to the business combination provisions of Section
203 of the Delaware general corporation law. In general, such provisions
prohibit a publicly-held Delaware corporation from engaging in various business
combination transactions with any interested stockholder for a period of three
years after the date of the transaction in which the person became an
interested stockholder unless:
. the business combination transaction, or the transaction in which the
interested stockholder became an interested stockholder, is approved by
the board of directors prior to the date the interested stockholder
obtained such status,
. upon consummation of the transaction which resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding for purposes of determining the
number of shares outstanding those shares owned by
. persons who are directors and also officers and
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. employee stock plans in which employee participants do not have the
right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer or
. on or subsequent to such date the business combination is approved by the
board of directors and authorized at an annual or special meeting of
stockholders by the affirmative vote of at least 66 2/3% of the
outstanding voting stock which is not owned by the interested
stockholder.
A business combination is defined to include mergers, asset sales and other
transactions resulting in financial benefit to a stockholder. In general, an
interested stockholder is a person who, together with affiliates and
associates, owns or, within three years, did own, 15% or more of a
corporation's voting stock. The statute could prohibit or delay mergers or
other takeover or change in control attempts with respect to Ziff-Davis Inc.
and, accordingly, may discourage attempts to acquire Ziff-Davis Inc. Since the
board of directors approved the acquisition of common stock by SOFTBANK
Holdings before SOFTBANK Holdings acquired such common stock, SOFTBANK Holdings
is not an interested stockholder for these purposes.
Limitations on Liability and Indemnification of Officers and Directors
Section 102 of the Delaware general corporation law authorizes a Delaware
corporation to include a provision in its certificate of incorporation limiting
or eliminating the personal liability of its directors to the corporation or
its stockholders for monetary damages for breach of the directors' fiduciary
duty of care. The duty of care requires that, when acting on behalf of the
corporation, directors exercise an informed business judgment based on all
material information reasonably available to them. Absent the limitations
authorized by such provision, directors are accountable to corporations or
their stockholders for monetary damages for conduct constituting gross
negligence in the exercise of their duty of care. Although Section 102 of the
Delaware general corporation law does not change a director's duty of care, it
enables corporations to limit available relief to equitable remedies such as
injunction or rescission. Our restated charter and by-laws include provisions
which limit or eliminate the personal liability of Ziff-Davis Inc.'s directors
to the fullest extent permitted by Section 102 of the Delaware general
corporation law. Consequently, a director will not be personally liable to
Ziff-Davis Inc. or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for any breach of the directors' duty of
loyalty to Ziff-Davis Inc. or its stockholders, acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
unlawful payments of dividends or unlawful stock repurchases, redemptions or
other distributions and any transaction from which the director derived an
improper personal benefit.
Our by-laws provide that the Ziff-Davis Inc. indemnify to the full extent
permitted by law any person made or threatened to be made a party to any
action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that such person or such person's testator
or intestate is or was a director, officer or employee of Ziff-Davis Inc. or
serves or served at the request of Ziff-Davis Inc. any other enterprise as a
director, officer or employee. Our by-laws provide that expenses, including
attorneys' fees,
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incurred by any such person in defending any such action, suit or proceeding
will be paid or reimbursed by Ziff-Davis Inc. promptly upon receipt by it of an
undertaking of such person to repay such expenses if it shall ultimately be
determined that such person is not entitled to be indemnified by Ziff-Davis
Inc. The inclusion of these indemnification provisions in our by-laws is
intended to enable Ziff-Davis Inc. to attract qualified persons to serve as
directors and officers who might otherwise be reluctant to do so.
The directors and officers of Ziff-Davis Inc. are insured under policies of
insurance maintained by Ziff-Davis Inc., subject to the limits of such
policies, against certain losses arising from any claim made against them by
reason of being or having been such officers or directors. In addition to the
protection available under our restated charter, by-laws and insurance
policies, we have entered into agreements with our outside directors to
indemnify them to the fullest extent permitted by law against losses arising
from any claim against them by reason of being or having been a director. In
addition, the limited liability provisions in our restated charter and the
indemnification provisions in our by-laws may discourage stockholders from
bringing a lawsuit against directors for breach of their fiduciary duty,
including breaches resulting from grossly negligent conduct, and may have the
effect of reducing the likelihood of derivative litigation against directors
and officers, even though such an action, if successful, might otherwise have
benefitted Ziff-Davis Inc. and our stockholders. Furthermore, a stockholder's
investment in Ziff-Davis Inc. may be adversely affected to the extent we pay
the costs of settlement and damage awards against directors and officers of
Ziff-Davis Inc. pursuant to the indemnification provisions in our by-laws. The
limited liability provisions in our restated charter will not limit the
liability of directors under federal securities laws.
Section 203 of the Delaware general corporation law, and the provisions of
our restated charter and by-laws described above, may make it more difficult
for a third party to acquire or discourage bids for Ziff-Davis Inc. Section 203
and these provisions could have the effect of inhibiting attempts to change the
membership of the board of directors.
Stock Transfer Agent and Registrar
The Bank of New York is the registrar and transfer agent for ZD stock and
ZDNet stock.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to the offering, there has been no public market for ZDNet stock. We
cannot predict the effect, if any, that sales of shares or the availability of
shares for sale will have on the market price prevailing from time to time.
Future sales of substantial amounts of ZDNet stock in the public market, or the
perception that such sales may occur, could adversely affect the prevailing
market price of ZDNet stock. See "Risk Factors--Risk Factors Relating To ZDNet
Stock--The Market Price Of ZDNet Stock May Decline Due To Shares Of ZDNet Stock
Eligible For Future Sale".
Upon completion of the offering, Ziff-Davis Inc. expects to have 10,000,000
shares of ZDNet stock outstanding or 11,500,000 shares if the underwriters
fully exercise their option to purchase additional shares. These shares will be
freely tradeable without restriction under the Securities Act, except for any
such shares which may be acquired by an affiliate of Ziff-Davis Inc. Rule 144
defines an affiliate of Ziff-Davis Inc. as a person that, directly or
indirectly, through one or more intermediaries, controls or is controlled by,
or is under common control with, Ziff-Davis Inc.
Softbank has indicated it will not purchase any shares of ZDNet stock. Ziff-
Davis Inc. expects that certain directors and officers who may be considered to
be affiliates will acquire up to 100,000 shares of ZDNet stock in the offering.
These shares will be restricted securities (as that phrase is defined in Rule
144) and may not be resold without registration under the Securities Act unless
exempted from such registration, including among others, the exemption provided
by Rule 144 under the Securities Act. One year after the date of this
prospectus these shares of ZDNet stock will be eligible for sale in the public
market pursuant to Rule 144, subject to the volume limitations and other
restrictions described below.
In general, under Rule 144 if a period of at least one year has elapsed since
the later of the date the restricted shares were acquired from Ziff-Davis Inc.
and the date they were acquired from an affiliate, then the holder of such
restricted shares, including an affiliate, is entitled to sell a number of
shares within any three-month period that:
. does not exceed the greater of 1% of the then outstanding shares or
. the average weekly reported volume of trading of such shares on the NYSE
during the four calendar weeks preceding such sale.
The holder may only sell such shares through unsolicited brokers'
transactions. Sales under Rule 144 are also subject to certain requirements
pertaining to:
. the manner of such sales,
. notices of such sales and
. the availability of current public information concerning Ziff-Davis Inc.
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Under Rule 144 (k), a holder of restricted shares may sell shares immediately
without regard to the volume limitations and other restrictions described above
if:
. a period of at least two years has passed between the later of (1) the
date restricted securities were acquired from Ziff-Davis Inc. and (2) the
date they were acquired from an affiliate, as applicable,
. the holder is not an affiliate at the time of the sale and
. has not been an affiliate for at least three months prior to the sale.
After the offering is completed, certain employees of Ziff-Davis Inc. will
have the right to purchase approximately 10,026,000 additional shares of ZDNet
stock under employee stock options, subject to vesting periods. Also, assuming
the underwriters do not exercise their option to purchase additional shares,
after the offering is completed, Ziff-Davis Inc. will be entitled to issue up
to 70,000,000 shares of ZDNet stock. Of these shares, up to 61,500,000 shares
may be for the account of ZD in respect of its retained interest in ZDNet.
Notwithstanding the information above, in connection with the offering, Ziff-
Davis Inc.
and the officers and directors referred to above have agreed that, during the
period ending 180 days after the date of the prospectus, they will not,
directly or indirectly:
. offer,
. pledge,
. sell,
. contract to sell,
. sell any option or contract to purchase,
. purchase any option or contract to sell,
. grant any option, right or warrant to purchase,
. lend or
. otherwise transfer or dispose of,
any shares of ZDNet stock or any securities convertible into or exercisable or
exchangeable for ZDNet stock, unless they obtain the prior written consent of
the representatives of the underwriters on behalf of the underwriters. This
restriction applies whether such shares or any such securities are owned by
such person at the time or are thereafter acquired directly from Ziff-Davis
Inc.
Ziff-Davis Inc. and the officers and directors referred to above have also
agreed that, during the period ending 180 days after the date of the
prospectus, they will not, directly or indirectly, enter into any swap or other
arrangement that transfers to another, in whole or in part, any of the economic
consequences of ownership of ZDNet stock.
These restrictions apply whether any such transaction described above is to
be settled by delivery of ZDNet stock or such other securities, in cash or
otherwise.
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The restrictions described above do not apply to:
. the sale to the underwriters of the shares of ZDNet stock under the
underwriting agreement,
. the issuance by Ziff-Davis Inc. of shares of ZDNet stock upon the
exercise of an option or a warrant or the conversion of a security
outstanding on the date of this prospectus of which the underwriters have
been advised in writing,
. the grant of options under existing employee benefit plans or
. transactions by any person other than Ziff-Davis Inc. relating to shares
of ZDNet stock or other securities acquired in open market transactions
after the offering is completed.
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ZIFF-DAVIS INC.'S DEBT
The following summaries highlight key provisions of Ziff-Davis Inc.'s 8
1/2% senior subordinated notes and credit facility. These summaries are not
substitutes for the more detailed information contained in Ziff-Davis Inc.'s
indenture and credit facility, copies of which have been filed as exhibits to
this registration statement.
Notes
General
Concurrently with the initial public offering of our existing common stock on
April 28, 1998, Ziff-Davis Inc. sold $250 million in principal amount of 8 1/2%
senior subordinated notes due May 1, 2008. The notes are general unsecured
senior subordinated obligations of Ziff-Davis Inc. and rank on parity with all
other unsecured and subordinated indebtedness of Ziff-Davis Inc. The notes are
subordinated in right of payment to all senior indebtedness of Ziff-Davis Inc.,
as defined in the indenture for the notes.
The notes are redeemable, at Ziff-Davis Inc.'s option, in whole or in part,
at any time after May 1, 2003, at redemption prices starting at 104.250% of
their principal amount and declining to 100% of their principal amount on or
after May 1, 2006, plus accrued and unpaid interest. In addition, upon a change
of control of Ziff-Davis Inc., as defined in the indenture for the notes, each
holder of notes will have the right to require Ziff-Davis Inc. to purchase such
holder's notes. Ziff-Davis Inc. will be permitted to redeem a portion of the
notes following one or more public equity offerings consummated prior to May 1,
2001.
Covenants
The indenture for the notes contains certain restrictive covenants, including
the following:
. a limitation on the ability of Ziff-Davis Inc. and its restricted
subsidiaries, as defined in the indenture, to incur any indebtedness
other than permitted indebtedness, as defined in the indenture, or to
incur senior subordinated indebtedness or certain indebtedness secured by
liens,
. a limitation on the ability of Ziff-Davis Inc. and its restricted
subsidiaries to, directly or indirectly, make any restricted payment, as
defined in the indenture, including payment of dividends, prepayment of
subordinated indebtedness and the repurchase of capital stock,
. a limitation on the ability of Ziff-Davis Inc. to suffer to exist certain
dividend and other payment restrictions affecting its restricted
subsidiaries,
. a limitation on the ability of Ziff-Davis Inc. to sell or to permit any
restricted subsidiary to issue or sell capital stock of a restricted
subsidiary,
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. a limitation on the ability of Ziff-Davis Inc. and its restricted
subsidiaries to consummate certain asset sales, as defined in the
indenture, unless certain conditions are fulfilled and
. limitations on any transaction with affiliates.
Certain of these covenants will terminate if and when the notes receive an
investment grade rating. In addition, the indenture limits the ability of Ziff-
Davis Inc. to merge with or to transfer all or substantially all of its assets
to another person. The notes provide for acceleration upon customary events of
default.
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 to provide a $1.35 billion term credit facility. The
amount outstanding under this facility at December 31, 1998 was $1.220 billion.
The credit facility consists of:
. a seven-year $400 million reducing revolving credit facility, with $270
million drawn as of December 31, 1998,
. a seven-year $450 million term loan and
. an eight-year $500 million term loan.
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 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.
The $500 million term loan 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 credit facility is secured, in part, by a first priority security
interest in capital stock of certain subsidiaries of Ziff-Davis Inc. and is
guaranteed by certain wholly owned domestic subsidiaries of Ziff-Davis Inc., in
each case, including ZD Inc. and ZD Events.
The credit facility contains certain customary affirmative and negative
covenants, including covenants with respect to:
. the delivery of financial statements and other information,
. limitations on dispositions of assets,
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. changes of business and ownership,
. mergers or acquisitions,
. restricted payments,
. indebtedness,
. loans and investments,
. transactions with affiliates,
. negative pledge of assets,
. maintenance of adequate and customary insurance coverage,
. compliance with all applicable laws and regulations and
. restriction on modifications of certain agreements, charter documents or
other material documents without the consent of the lenders.
The credit facility also contains certain financial covenants.
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.
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CERTAIN UNITED STATES TAX CONSEQUENCES
The following discussion summarizes certain U.S. federal income tax
consequences of the ownership of ZDNet stock, including certain anticipated
U.S. income and estate tax consequences of the ownership and disposition of
ZDNet stock applicable to non-U.S. holders, as defined below, of such ZDNet
stock. This discussion does not consider the specific facts and circumstances
that may be relevant to particular holders and does not address the treatment
of holders of common stock under the laws of any state, local or foreign taxing
jurisdiction. This discussion is based on the tax laws of the U.S., including
the Internal Revenue Code, as amended to the date hereof, existing and proposed
regulations thereunder, and administrative and judicial interpretation thereof,
as currently in effect. These laws are subject to change, possibly on a
retroactive basis.
You should consult your own tax advisors with regard to the application of
the federal income tax laws to your particular situation, as well as to
the applicability and effect of any state, local or foreign tax laws to
which you may be subject.
General
We believe that for federal income tax purposes ZDNet stock will be
considered common stock of Ziff-Davis Inc. Accordingly, we believe that for
federal income tax purposes neither we nor any U.S. holder will recognize any
income, gain or loss as a result of the issuance of ZDNet stock. You are a
"U.S. holder" for U.S. federal income tax purposes if you are a beneficial
owner of common stock and are:
. a citizen or resident of the U.S.,
. a corporation organized under the laws of the U.S. or any state,
. an estate, the income of which is subject to U.S. federal income tax
without regard to its source or
. a trust, if a court within the U.S. is able to exercise primary
supervision over the administration of the trust and one or more U.S.
persons have the authority to control all substantial decisions of the
trust.
There are, however, no court decisions or other authorities bearing directly
on the classification of instruments with characteristics similar to those of
ZDNet stock. In addition, the IRS has announced that it will not issue advance
rulings on the classification of an instrument that has certain voting and
liquidation rights in an issuing corporation but whose dividend rights are
determined by reference to the earnings of a segregated portion of the issuing
corporation's assets, including assets held by a subsidiary.
The current Presidential administration's budget proposals released on
February 1, 1999 would require the recognition of gain on the issuance of
certain tracking stock, such as ZDNet stock, and gives the Treasury Department
the authority to treat tracking stock as nonstock or as stock of another entity
as appropriate to prevent tax avoidance. The Treasury Department's explanation
expresses the view that the use of
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tracking stock "is clearly outside the contemplation of" the Internal Revenue
Code and that "no inference regarding the tax treatment of [such stock] under
current law is intended by [the] proposal". Because the proposal would only be
effective for tracking stock issued on or after the date of enactment, the
proposal will likely not affect the re-classification of existing common stock
into ZD stock or the issuance of the ZDNet stock in the offering. If, however,
the proposals were to become law, it would affect future issuances of ZDNet
stock. Under such circumstances, Ziff-Davis Inc. might decide to exercise its
right to redeem all of the outstanding shares of ZDNet stock for ZD stock at a
premium, in order to eliminate any tracking stock from its capital structure.
Certain United States Tax Consequences to Non-U.S. Holders
The following discussion summarizes certain U.S. federal income and estate
tax consequences of the ownership and disposition of common stock by "Non-U.S.
Holders". You are a "non-U.S. holder" for U.S. federal income tax purposes if
you are:
. a non-resident alien individual,
. a foreign corporation,
. a foreign partnership or
. an estate or trust that in either case is not subject to U.S. federal
income tax on a net income basis on income or gain from common stock.
Dividends
If you are a non-U.S. holder of common stock, dividends paid to you are
subject to withholding of U.S. federal income tax at a 30% rate or at a lower
rate if so specified in an applicable income tax treaty. If, however, the
dividends are effectively connected with your conduct of a trade or business
within the U.S., and they are attributable to a permanent establishment that
you maintain in the U.S., if that is required by an applicable income tax
treaty as a condition for subjecting you to U.S. income tax on a net income
basis on such dividends, then such "effectively connected" dividends generally
are not subject to withholding tax. Instead, such effectively connected
dividends are taxed at rates applicable to U.S. citizens, resident aliens and
domestic U.S. corporations.
Effectively connected dividends received by a non-U.S. corporation may, under
certain circumstances, be subject to an additional "branch profits tax" at a
30% rate or at a lower rate if so specified in an applicable income tax treaty.
Under currently effective U.S. Treasury regulations, dividends paid to an
address in a foreign country are presumed to be paid to a resident of that
country, unless the payor has knowledge to the contrary, for purposes of the
30% withholding tax discussed above. Under current interpretations of U.S.
Treasury regulations, this presumption that dividends paid to an address in a
foreign country are paid to a resident of that country, unless the payor has
knowledge to the contrary, also applies for the purposes of determining whether
a lower tax treaty rate applies.
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Under U.S. Treasury regulations, which will generally apply to dividends paid
after December 31, 1999 (the "final withholding regulations"), if you claim the
benefit of a lower treaty rate, you must satisfy certain certification
requirements. In addition, in the case of common stock held by a foreign
partnership, the certification requirements generally will apply to the
partners of the partnership and the partnership must provide certain
information, including a U.S. taxpayer identification number. The final
withholding regulations also provide look-through rules for tiered
partnerships.
If you are eligible for a reduced rate of U.S. withholding tax under a tax
treaty, you may obtain a refund of any excess amounts withheld by filing a
refund claim with the IRS.
Gain On Disposition Of Common Stock
If you are a non-U.S. holder you generally will not be subject to U.S.
federal income tax on gain recognized on a disposition of common stock unless:
. the gain is effectively connected to your conduct of a trade or business
in the U.S. (and the gain is attributable to a permanent establishment
that you maintain in the U.S., if that is required by an applicable income
tax treaty as a condition for subjecting you to U.S. taxation on a net
income basis on gain from the sale or other disposition of the common
stock),
. you are an individual, you hold the common stock as a capital asset and
you are present in the U.S. for 183 or more days in the taxable year of
the sale and certain other conditions exist or
. Ziff-Davis Inc. is or has been a "United States real property holding
corporation" for federal income tax purposes and you held, directly or
indirectly, at any time during the five-year period ending on the date of
disposition, more than 5% of the common stock of Ziff-Davis Inc. (and you
are not eligible for any treaty exemption).
Effectively connected gains recognized by a corporate non-U.S. holder may
also, under certain circumstances, be subject to an additional "branch profits
tax" at a 30% rate or at a lower rate if so specified in an applicable income
tax treaty.
Ziff-Davis Inc. has not been, is not, and does not anticipate becoming a
"United States real property holding corporation" for federal income tax
purposes.
Federal Estate Taxes
Common stock held by a non-U.S. holder at the time of death will be included
in the holder's gross estate for U.S. federal estate tax purposes, unless an
applicable estate tax treaty provides otherwise.
Information Reporting And Backup Withholding
In general, U.S. information reporting requirements and backup withholding
tax will not apply to dividends paid to you if you are either:
. subject to the 30% withholding tax discussed above or
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. not subject to the 30% withholding tax because an applicable tax treaty
reduces or eliminates such withholding tax,
although dividend payments to you will be reported for purposes of the
withholding tax (see "--Dividends" above). If you do not meet either of these
requirements for exemption and you fail to provide certain information
(including your U.S. taxpayer identification number) or otherwise establish
your status as an "exempt recipient", you may be subject to backup withholding
of U.S. federal income tax at a rate of 31% on dividends paid with respect to
common stock.
Under current law, the payor may generally treat dividends paid to a payee
with a foreign address as exempt from backup withholding and information
reporting unless the payor has definite knowledge that the payee is a U.S.
person. However, under the final withholding regulations, dividend payments
generally will be subject to information reporting and backup withholding
unless certain certification requirements are met. (See the discussion under
"--Dividends" for the rules applicable to foreign partnerships under the final
withholding regulations.)
U.S. information reporting and backup withholding requirements generally will
not apply to a payment of the proceeds of a sale of common stock made outside
the U.S. through an office outside the U.S. of a non-U.S. broker. However, U.S.
information reporting, but not backup withholding, will apply to a payment made
outside the U.S. of the proceeds of a sale of common stock through an office
outside the U.S. of a broker that:
. is a U.S. person,
. derives 50% or more of its gross income for certain periods from the
conduct of a trade or business in the U.S.,
. is a "controlled foreign corporation" as to the U.S. or
. with respect to payments made after December 31, 1999, is a foreign
partnership, if at any time during its tax year:
. one or more of its partners are U.S. persons, as defined in U.S.
Treasury regulations, who in the aggregate hold more than 50% of the
income or capital interest in the partnership or
. such foreign partnership is engaged in a U.S. trade or business,
unless the broker has documentary evidence in its records that the
holder or beneficial owner is a non-U.S. person or otherwise
establishes an exemption.
Payment of the proceeds of a sale of common stock to or through a U.S. office
of a broker is subject to both U.S. backup withholding and information
reporting unless the holder certifies its non-U.S. status under penalty of
perjury or otherwise establishes an exemption.
A non-U.S. holder generally may obtain a refund of any excess amounts
withheld under the backup withholding rules by filing a refund claim with the
IRS.
190
<PAGE>
VALIDITY OF ZDNET STOCK
The validity of ZDNet stock offered hereby will be passed upon for Ziff-Davis
Inc. by Sullivan & Cromwell, New York, New York, U.S. counsel to Ziff-Davis
Inc., and for the underwriters by Hale and Dorr LLP, Boston, Massachusetts,
U.S. counsel to the underwriters.
EXPERTS
The consolidated financial statements of Ziff-Davis Inc. as of December 31,
1997 and 1998 and for the three years in the period ended December 31, 1998,
the combined financial statements of ZD as of December 31, 1997 and 1998 and
for the three years in the period ended December 31, 1998 and the combined
financial statements of ZDNet as of December 31, 1997 and 1998, for the period
from February 29, 1996 to December 31, 1996 and for the years ended December
31, 1997 and 1998, included in this prospectus have been so included in
reliance upon the reports of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
WHERE YOU CAN FIND MORE INFORMATION
Ziff-Davis Inc. has filed a registration statement under the Securities Act
that registers ZDNet stock offered by this prospectus.
The registration statement (including the attached exhibits and schedules)
that we filed with the Securities and Exchange Commission contains additional
relevant information about Ziff-Davis Inc. and ZDNet stock. The rules and
regulations of the Commission allow us to omit certain information included in
the Registration Statement from this prospectus.
In addition, we file reports, proxy statements and other information with the
Commission under the Exchange Act. You may read and copy this information at
the following locations of the Commission:
Public Reference Room New York Regional Office Chicago Regional Office
450 Fifth Street, N.W. 7 World Trade Center Citicorp Center
Room 1024 Suite 1300 500 West Madison Street
Washington, D.C. 20549 New York, New York 10048 Suite 1400
Chicago, Illinois 60661-
2511
You may also obtain copies of this information by mail from the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549, at prescribed rates. Further information on the
operation of the Commission's Public Reference Room in Washington, D.C. can be
obtained by calling the Commission at 1-800-SEC-0330.
191
<PAGE>
The Commission also maintains an Internet world wide web site that contains
reports, proxy statements and other information about issuers, such as Ziff-
Davis Inc., who file electronically with the Commission. The address of that
site is http://www.sec.gov.
Our existing common stock is listed on the NYSE. You may also obtain copies
of this information at the offices of the NYSE, 20 Broad Street, New York, New
York 10005.
You should rely only on the information contained in this prospectus. We have
not authorized anyone to give any information or make any representation about
us or this offering that is different from, or in addition to, that contained
in this prospectus or in any of the materials that we have incorporated into
this document. Therefore, if anyone does give you information of this sort, you
should not rely on it. If you are in a jurisdiction where offers to sell, or
solicitations of offers to buy, the securities offered by this document are
unlawful, or if you are a person to whom it is unlawful to direct these types
of activities, then the offer presented in this document does not extend to
you. The information contained in this document speaks only as of the date of
this document unless the information specifically indicates that another date
applies.
192
<PAGE>
ANNEX I
ILLUSTRATION OF CERTAIN TERMS
The following illustrations show how to calculate the Retained Interest
Percentage, the Outstanding Interest Percentage, the Number of Shares Issuable
with Respect to ZD's Retained Interest in ZDNet and the Total Number of
Notional ZDNet Shares Deemed Outstanding after giving effect to certain
hypothetical dividends, issuances, repurchases and transfers, in each case
based on the assumptions set forth herein. In these illustrations, the Number
of Shares Issuable with Respect to ZD's Retained Interest in ZDNet is initially
assumed to be 100. Unless otherwise specified, each illustration below should
be read independently as if none of the other transactions referred to below
had occurred. Actual calculations may be slightly different due to rounding.
"Total Number of Notional ZDNet Shares Deemed Outstanding" means the number
of shares of ZDNet Stock outstanding plus the Number of Shares Issuable with
Respect to ZD's Retained Interest in ZDNet.
At any given time, the percentage interest in ZDNet intended to be
represented by the outstanding shares of ZDNet Stock (i.e., the Outstanding
Interest Percentage) is equal to:
Outstanding Shares of ZDNet Stock
----------------------------------------------------------
Total Number of Notional ZDNet Shares Deemed Outstanding
and the remaining percentage interest in ZDNet intended to be represented by
ZD's Retained Interest in ZDNet (i.e., the Retained Interest Percentage) is
equal to:
Number of Shares Issuable with Respect to ZD's Retained
Interest in ZDNet
----------------------------------------------------------
Total Number of Notional ZDNet Shares Deemed Outstanding
The sum of the Outstanding Interest Percentage and the Retained Interest
Percentage would always equal 100%. In our example, before the first issuance
the Number of Shares Issuable with Respect to ZD's Retained Interest in ZDNet
and the Total Number of Notional ZDNet Shares Deemed Outstanding are each equal
to 100, the Retained Interest Percentage is 100% and the Outstanding Interest
Percentage is 0%.
The Offering
The following illustrations reflect an assumed issuance by Ziff-Davis Inc. of
15 shares of ZDNet Stock in the offering.
Offering For Account Of ZD
Assume the issuance is attributed to ZD in respect of its Retained Interest
(as currently planned), with the net proceeds credited solely to ZD.
I-1
<PAGE>
<TABLE>
<S> <C>
Shares previously issued and outstanding............................. 0
Newly issued shares for account of ZD................................ 15
---
Total issued and outstanding after the offering.................. 15
===
. The Number of Shares Issuable with Respect to ZD's Retained Interest in
ZDNet would decrease by the number of shares of ZDNet Stock sold for the
account of ZD.
Number of Shares Issuable with Respect to ZD's Retained Interest in
ZDNet prior to the offering......................................... 100
Shares issued in the offering........................................ 15
---
Number of Shares Issuable with Respect to ZD's Retained Interest
in ZDNet after the offering..................................... 85
===
</TABLE>
. As a result, the issued and outstanding shares (15) would represent an
Outstanding Interest Percentage of 15%, calculated as follows:
15
--------
15 + 85
The Retained Interest Percentage would accordingly be 85%.
. In this case, in the event of any dividend or other distribution paid on
the outstanding shares of ZDNet Stock (other than a dividend or other
distribution payable in shares of ZDNet Stock), ZD would be credited, and
ZDNet would be charged, with an amount equal to 567% (representing the
ratio of the Number of Shares Issuable with Respect to ZD's Retained
Interest in ZDNet (85) to the total number of shares of ZDNet Stock
issued and outstanding following the offering (15)) of the aggregate
amount of such dividend or distribution. If, for example, a dividend of
$1.00 per share were declared and paid on the 15 shares of ZDNet Stock
outstanding (an aggregate of $15), ZD would be credited with $85, and
ZDNet would be charged with that amount in addition to the $15 dividend
paid to the holders of ZDNet Stock (a total of $100).
Offering For Account Of ZDNet
Assume the issuance is attributed to ZDNet as an increase in its equity, with
the net proceeds credited solely to ZDNet.
<TABLE>
<S> <C>
Shares previously issued and outstanding............................... 0
Newly issued shares for account of ZDNet............................... 15
---
Total issued and outstanding after the offering.................... 15
===
</TABLE>
. The Number of Shares Issuable with Respect to ZD's Retained Interest in
ZDNet (100) would remain unchanged.
I-2
<PAGE>
. As a result, the issued and outstanding shares (15) would represent an
Outstanding Interest Percentage of about 13%, calculated as follows:
15
--------
15 + 100
The Retained Interest Percentage would accordingly be about 87%.
. In this case, in the event of any dividend or other distribution paid on
the outstanding shares of ZDNet Stock (other than a dividend or other
distribution payable in shares of ZDNet Stock), ZD would be credited, and
ZDNet would be charged, with an amount equal to 667% (representing the
ratio of the Number of Shares Issuable with Respect to ZD's Retained
Interest in ZDNet (100) to the total number of shares of ZDNet Stock
issued and outstanding following the offering (15)) of the aggregate
amount of such dividend or distribution.
Additional Offerings of ZDNet Stock
The following illustrations reflect an assumed issuance of an additional 15
shares of ZDNet Stock after the assumed initial issuance of 15 shares for the
account of ZD.
Additional Offering For Account Of ZD
Assume the issuance is attributed to ZD in respect of its Retained Interest,
with the net proceeds credited solely to ZD.
<TABLE>
<S> <C>
Shares previously issued and outstanding............................... 15
Newly issued shares for account of ZD.................................. 15
---
Total issued and outstanding after additional offering............. 30
===
</TABLE>
. The Number of Shares Issuable with Respect to ZD's Retained Interest in
ZDNet would decrease by the number of shares of ZDNet Stock issued for
the account of ZD
<TABLE>
<S> <C>
Number of Shares Issuable with Respect to ZD's Retained Interest in
ZDNet prior to the additional offering............................. 85
Newly issued shares for account of ZD............................... 15
---
Number of Shares Issuable with Respect to ZD's Retained Interest
in ZDNet after the additional offering........................... 70
===
</TABLE>
. As a result, the total issued and outstanding shares (30) would in the
aggregate represent an Outstanding Interest Percentage of 30%, calculated
as follows:
30
--------
30 + 70
The Retained Interest Percentage would accordingly be reduced to 70%.
. In this case, in the event of any dividend or other distribution paid on
ZDNet Stock (other than a dividend or other distribution payable in
shares of ZDNet Stock), ZD
I-3
<PAGE>
would be credited, and ZDNet would be charged, with an amount equal to
233% (representing the ratio of the Number of Shares Issuable with Respect
to ZD's Retained Interest in ZDNet (70) to the total number of shares of
ZDNet Stock issued and outstanding following the additional offering (30))
of the aggregate amount of such dividend or distribution.
Additional Offering For Account Of ZDNet
Assume the issuance is attributed to ZDNet as an increase in its equity, with
the net proceeds credited solely to ZDNet.
<TABLE>
<S> <C>
Shares previously issued and outstanding............................... 15
Newly issued shares for account of ZDNet............................... 15
---
Total issued and outstanding after the additional offering......... 30
===
</TABLE>
. The Number of Shares Issuable with Respect to ZD's Retained Interest in
ZDNet (85) would remain unchanged.
. As a result, the total issued and outstanding shares (30) would in the
aggregate represent an Outstanding Interest Percentage of about 26%,
calculated as follows:
30
--------
30 + 85
The Retained Interest Percentage would accordingly be reduced to about 74%.
. In this case, in the event of any dividend or other distribution paid on
ZDNet Stock (other than a dividend or other distribution payable in
shares of ZDNet Stock), ZD would be credited, and ZDNet would be charged,
with an amount equal to 283% (representing the ratio of the Number of
Shares Issuable with Respect to ZD's Retained Interest in ZDNet (85) to
the total number of shares of ZDNet Stock issued and outstanding
following the additional offering (30)) of the aggregate amount of such
dividend or distribution.
Offerings Of Convertible Securities
If we were to issue any securities convertible into or exercisable for shares
of ZDNet Stock, the Outstanding Interest Percentage and the Retained Interest
Percentage would be unchanged at the time of such issuance. If any shares of
ZDNet Stock were issued upon conversion or exercise of such securities,
however, then the Outstanding Interest Percentage and the Retained Interest
Percentage would be affected as shown above under "Additional Offering for
Account of ZD", if such securities were attributed to ZD, or under "Additional
Offering for Account of ZDNet", if such securities were attributed to ZDNet.
Repurchases of ZDNet Stock
The following illustrations reflect an assumed repurchase by Ziff-Davis Inc.
of 5 shares of ZDNet Stock after the assumed initial issuance of 15 shares of
ZDNet Stock for the account of ZD.
I-4
<PAGE>
Repurchase For The Account Of ZD
Assume the repurchase is attributed to ZD as an increase in its Retained
Interest in ZDNet, with the cost charged solely against ZD.
<TABLE>
<S> <C>
Shares previously issued and outstanding............................... 15
Shares repurchased for account of ZD................................... 5
---
Total issued and outstanding after repurchase...................... 10
===
</TABLE>
. The Number of Shares Issuable with Respect to ZD's Retained Interest in
ZDNet would be increased by the number of any shares of ZDNet Stock
repurchased for the account of ZD.
<TABLE>
<S> <C>
Number of Shares Issuable with Respect to ZD's Retained
Interest in ZDNet prior to repurchase.............................. 85
Number of shares repurchased for the account of ZD.................. 5
---
Number of Shares Issuable with Respect to ZD's Retained Interest
in ZDNet after repurchase...................................... 90
===
</TABLE>
. As a result, the total issued and outstanding shares (10) would in the
aggregate represent an Outstanding Interest Percentage of 10%, calculated
as follows:
10
--------
10 + 90
The Retained Interest Percentage would accordingly be increased to 90%.
Repurchase For Account Of ZDNet Without Participation By ZD
Assume the repurchase is attributed to ZDNet, with the cost being charged
solely against ZDNet. Further assume that the board of directors does not
determine to transfer assets from ZDNet to ZD to hold constant the Outstanding
Interest Percentage and Retained Interest Percentage.
<TABLE>
<S> <C>
Shares previously issued and outstanding............................... 15
Shares repurchased for account of ZDNet................................ 5
---
Total issued and outstanding after repurchase...................... 10
===
</TABLE>
. The Number of Shares Issuable with Respect to ZD's Retained Interest in
ZDNet (85) would remain unchanged.
. As a result, the total issued and outstanding shares (10) would in the
aggregate represent an Outstanding Interest Percentage of about 11%,
calculated as follows:
10
--------
10 + 85
The Retained Interest Percentage would accordingly be increased to about
89%.
I-5
<PAGE>
Repurchase For Account Of ZDNet With Participation By ZD
Assume the repurchase is attributed to ZDNet, with the cost being charged
solely against ZDNet. Further assume that the repurchase is made in connection
with a tender offer for 5, or 33%, of the then outstanding shares at a price of
$20 per share, and that the board of directors determines to transfer cash or
other assets from ZDNet to ZD to hold constant the Outstanding Interest
Percentage and Retained Interest Percentage.
<TABLE>
<S> <C>
Shares previously issued and outstanding............................... 15
Shares repurchased for account of ZDNet................................ 5
---
Total issued and outstanding after repurchase...................... 10
===
</TABLE>
. In order to hold constant the Outstanding Interest Percentage and
Retained Interest Percentage, the board of directors determines that the
Market Value of a share of ZDNet Stock in this context is $20 and
transfer from ZDNet to ZD an amount of cash or other assets equal to 567%
(representing the ratio of the Number of Shares Issuable with Respect to
ZD's Retained Interest in ZDNet (85) to the total number of shares of
ZDNet Stock issued and outstanding (15), in each case immediately prior
to the repurchase) of the aggregate amount of the cash paid in the tender
offer to holders of outstanding shares of ZDNet Stock ($100), or a total
of $567.
. In that case, the Number of Shares Issuable with Respect to ZD's Retained
Interest in ZDNet (85) would decrease by the amount of cash so
transferred ($567) divided by the Market Value per share of ZDNet Stock
($20).
<TABLE>
<S> <C>
Number of Shares Issuable with Respect to ZD's Retained Interest in
ZDNet prior to transfer............................................. 85
Adjustment in respect of ZD's Retained Interest to reflect transfer
to ZD of funds theretofore allocated to ZDNet....................... 28
---
Number of Shares Issuable with Respect to ZD's Retained Interest
in ZDNet after transfer......................................... 57
===
</TABLE>
. As a result, the total issued and outstanding shares (10) would in the
aggregate continue to represent an Outstanding Interest Percentage of
15%, calculated as follows:
10
--------
10 + 57
The Retained Interest Percentage would accordingly continue to be 85%.
. Assuming that the board of directors transferred only half of the $567
amount, or $283.50, from ZDNet to ZD, the Number of Shares Issuable with
Respect to ZD's Retained Interest in ZDNet (85) would decrease by the
amount of cash so transferred ($283.50) divided by the Market Value per
share of ZDNet Stock ($20).
<TABLE>
<S> <C>
Number of Shares Issuable with Respect to ZD's Retained Interest in
ZDNet prior to transfer............................................ 85
Adjustment in respect of ZD's Retained Interest to reflect transfer
to ZD of cash theretofore allocated to ZDNet....................... 14
---
Number of Shares Issuable with Respect to ZD's Retained Interest in
ZDNet after transfer............................................... 71
===
</TABLE>
I-6
<PAGE>
. In that case, as a result, the total issued and outstanding shares (10)
would in the aggregate represent an Outstanding Interest Percentage of
about 12%, calculated as follows:
10
-------
10 + 71
The Retained Interest Percentage would accordingly be increased to about
88%.
ZDNet Stock Dividends
The following illustrations reflect assumed dividends of ZDNet Stock on
outstanding shares of ZD Stock and outstanding shares of ZDNet Stock,
respectively, after the assumed initial issuance of 15 shares of ZDNet Stock
for the account of ZD.
ZDNet Stock Dividend On ZD Stock
Assume 1,000 shares of ZD Stock are outstanding and Ziff-Davis Inc. declares
a dividend of 1/20 of a share of ZDNet Stock on each outstanding share of ZD
Stock.
<TABLE>
<S> <C>
Shares previously issued and outstanding.............................. 15
Newly issued shares for account of ZD................................. 50
---
Total issued and outstanding after dividend......................... 65
===
</TABLE>
. Any dividend of shares of ZDNet Stock to the holders of shares of ZD
Stock would be treated as a reduction in the Number of Shares Issuable
with Respect to ZD's Retained Interest in ZDNet.
<TABLE>
<S> <C>
Number of Shares Issuable with Respect to ZD's Retained Interest in
ZDNet prior to dividend........................................... 85
Number of shares distributed on outstanding shares of ZD Stock for
account of ZD..................................................... 50
---
Number of Shares Issuable with Respect to ZD's Retained Interest
in ZDNet after dividend......................................... 35
===
</TABLE>
. As a result, the total issued and outstanding shares (65) would in the
aggregate represent an Outstanding Interest Percentage of 65%, calculated
as follows:
65
-------
65 + 35
The Retained Interest Percentage would accordingly be reduced to 35%.
Note, however, that after the dividend, the holders of ZD Stock would also
hold 50 shares of ZDNet Stock, which would be intended to represent a 50%
interest in the value attributable to ZDNet.
I-7
<PAGE>
ZDNet Stock Dividend On ZDNet Stock
Assume Ziff-Davis Inc. declares a dividend of 1/5 of a share of ZDNet Stock
on each outstanding share of ZDNet Stock.
<TABLE>
<S> <C>
Shares previously issued and outstanding............................... 15
Newly issued shares for account of ZDNet............................... 3
---
Total issued and outstanding after dividend........................ 18
===
</TABLE>
. The Number of Shares Issuable with Respect to ZD's Retained Interest in
ZDNet would be increased proportionately to reflect the stock dividend
payable in shares of ZDNet Stock to holders of shares of ZDNet Stock.
That is, the Number of Shares Issuable with Respect to ZD's Retained
Interest in ZDNet would be increased by a number equal to 567%
(representing the ratio of the Number of Shares Issuable with Respect to
ZD's Retained Interest in ZDNet (85) to the number of shares of ZDNet
Stock issued and outstanding (15), in each case immediately prior to such
dividend) of the aggregate number of shares issued in connection with
such dividend (3), or 17.
<TABLE>
<S> <C>
Number of Shares Issuable with Respect to ZD's Retained Interest in
ZDNet prior to dividend.............................................. 85
Adjustment in respect of ZD's Retained Interest to reflect shares
distributed on outstanding shares of ZDNet Stock..................... 17
---
Number of Shares Issuable with Respect to ZD's Retained Interest in
ZDNet after dividend............................................... 102
===
</TABLE>
. As a result, the total issued and outstanding shares (18) would in the
aggregate continue to represent an Outstanding Interest Percentage of
15%, calculated as follows:
18
---------
18 + 102
The Retained Interest Percentage would accordingly continue to be 85%.
Capital Transfers of Cash or Other Assets between ZD and ZDNet
Capital Contribution Of Cash Or Other Assets From ZD To ZDNet
The following illustration reflects the assumed contribution by ZD to ZDNet,
after the assumed initial issuance of 15 shares of ZDNet Stock for the account
of ZD, of $40 of assets allocated to ZD at a time when the Market Value of the
ZDNet Stock is $20 per share.
<TABLE>
<S> <C>
Shares previously issued and outstanding............................... 15
Newly issued shares.................................................... 0
---
Total issued and outstanding after contribution.................... 15
===
</TABLE>
I-8
<PAGE>
. The Number of Shares Issuable with Respect to ZD's Retained Interest in
ZDNet would be increased to reflect the contribution to ZDNet of assets
theretofore allocated to ZD by a number equal to the value of the assets
contributed ($40) divided by the Market Value of ZDNet Stock at that time
($20), or 2 shares.
<TABLE>
<S> <C>
Number of Shares Issuable with Respect to ZD's Retained Interest in
ZDNet prior to contribution........................................ 85
Increase to reflect contribution to ZDNet of assets allocated to
ZD................................................................. 2
---
Number of Shares Issuable with Respect to ZD's Retained Interest
in ZDNet after contribution.................................... 87
===
</TABLE>
. As a result, the total issued and outstanding shares (15) would in the
aggregate represent an Outstanding Interest Percentage of a little less
than 15%, calculated as follows:
15
--------
15 + 87
The Retained Interest Percentage would accordingly be increased to a little
more than 85%.
Return Of Capital Transfer Of Cash Or Other Assets From ZDNet To ZD
The following illustration reflects the assumed transfer by ZDNet to ZD,
after the assumed initial issuance of 15 shares of ZDNet Stock for the account
of ZD, of $40 of assets allocated to ZDNet on a date on which the Market Value
of ZDNet Stock is $20 per share.
<TABLE>
<S> <C>
Shares previously issued and outstanding............................. 15
Newly issued shares.................................................. 0
---
Total issued and outstanding after contribution.................. 15
===
. The Number of Shares Issuable with Respect to ZD's Retained Interest in
ZDNet would be decreased to reflect the transfer to ZD of assets
theretofore allocated to ZDNet by a number equal to the value of the
assets transferred ($40) divided by the Market Value of ZDNet Stock at
that time ($20), or 2 shares.
Number of Shares Issuable with Respect to ZD's Retained Interest in
ZDNet prior to contribution......................................... 85
Decrease to reflect transfer to ZD of assets allocated to ZDNet...... 2
---
Number of Shares Issuable with Respect to ZD's Retained Interest
in ZDNet after contribution..................................... 83
===
</TABLE>
. As a result, the total issued and outstanding shares (15) would in the
aggregate represent an Outstanding Interest Percentage of a little more
than 15%, calculated as follows:
15
--------
15 + 83
The Retained Interest Percentage would accordingly be decreased to a little
less than 85%.
I-9
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Ziff-Davis Inc. is offering shares of ZDNet stock by this prospectus. In
order to prepare separate financial statements for ZD and ZDNet, we have
separated ZDNet, our online business division, from ZD, which includes the rest
of our businesses and a retained interest in ZDNet, and we have allocated all
of our consolidated assets, liabilities, revenue, expenses and cash flow
between ZD and ZDNet. Thus, the financial statements of ZD and ZDNet, taken
together, comprise all of the accounts included in the corresponding
consolidated financial statements of Ziff-Davis Inc. Because ZD currently has a
100% Retained Interest in ZDNet, the financials of ZD reflect a 100% equity
interest in ZDNet in a manner similar to the equity method of accounting
provided by APB No. 18, The Equity Method of Accounting for Investments in
Common Stock.
F-1
<PAGE>
ZDNET
(a division of Ziff-Davis Inc.)
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ZDNet
Report of independent accountants....................................... F-5
Combined balance sheets as of December 31, 1997 and 1998 ............... F-6
Combined statements of operations for the period from February 29, 1996
to December 31, 1996, for the years ended December 31, 1997 and 1998 .. F-7
Combined statements of cash flows for the period from February 29, 1996
to December 31, 1996, for the years ended December 31, 1997 and 1998 .. F-8
Combined statements of changes in division equity for the period from
February 29, 1996 to December 31, 1996, for the years ended December
31, 1997 and 1998 ..................................................... F-9
Notes to combined financial statements.................................. F-10
</TABLE>
F-2
<PAGE>
ZD
(a division of Ziff-Davis Inc.)
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ZD
Report of independent accountants....................................... F-33
Combined balance sheets as of December 31, 1997 and 1998 ............... F-34
Combined statements of operations for the years ended December 31, 1996,
1997 and 1998 ......................................................... F-35
Combined statements of cash flows for the years ended December 31, 1996,
1997 and 1998 ......................................................... F-36
Combined statements of changes in division equity for the years ended
December 31, 1996, 1997 and 1998....................................... F-37
Notes to combined financial statements.................................. F-38
</TABLE>
F-3
<PAGE>
ZIFF-DAVIS INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Ziff-Davis Inc.
Report of independent accountants....................................... F-79
Consolidated balance sheets as of December 31, 1997 and 1998 ........... F-80
Consolidated statements of operations for the years ended December 31,
1996, 1997 and 1998.................................................... F-81
Consolidated statements of cash flows for the years ended December 31,
1996, 1997, 1998....................................................... F-82
Consolidated statements of changes in stockholders' equity for the years
ended December 31, 1996, 1997 and 1998................................. F-83
Notes to consolidated financial statements.............................. F-84
</TABLE>
F-4
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Ziff-Davis Inc.
In our opinion, the accompanying combined balance sheets and the related
combined statements of operations, cash flows and changes in division equity,
present fairly, in all material respects, the financial position of ZDNet (a
division of Ziff-Davis Inc., the "Company") at December 31, 1997 and 1998, and
the results of its operations and its cash flows for the period from February
29, 1996 to December 31, 1996 and for the years ended December 31, 1997 and
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 described in Note 1 to the financial statements, ZDNet is a division of
Ziff-Davis Inc.; accordingly, the financial statements of ZDNet should be read
in conjunction with the audited financial statements of Ziff-Davis Inc.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
New York, NY
February 22, 1999
F-5
<PAGE>
ZDNET
(a division of Ziff-Davis Inc.)
COMBINED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
December 31,
---------------
1997 1998
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................................... $ 28 $ 292
Accounts receivable, net of allowance for doubtful accounts
of $522 and $1,866, for 1997 and 1998, respectively.......... 11,396 18,732
Deferred taxes................................................ 69 779
Other current assets.......................................... 28 265
------- -------
Total current assets........................................ 11,521 20,068
Property and equipment, net..................................... 3,145 5,618
Investment, at cost............................................. -- 5,000
Deferred taxes.................................................. 5,496 4,274
Intangible assets, net.......................................... 67,164 62,726
------- -------
Total assets................................................ $87,326 $97,686
======= =======
LIABILITIES AND DIVISION EQUITY
Current liabilities:
Accounts payable.............................................. $ 645 $ 2,553
Accrued expenses.............................................. 2,208 3,495
Unearned income............................................... -- 1,078
------- -------
Total current liabilities................................... 2,853 7,126
Non-current liabilities......................................... 1,181 1,013
------- -------
Total liabilities........................................... 4,034 8,139
------- -------
Commitments and contingencies (Notes 12 and 13)
Division equity................................................. 83,292 89,547
------- -------
Total liabilities and division equity....................... $87,326 $97,686
======= =======
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-6
<PAGE>
ZDNET
(a division of Ziff-Davis Inc.)
COMBINED STATEMENTS OF OPERATIONS
(dollars in thousands)
<TABLE>
<CAPTION>
Period from Year ended
February 29, 1996 December 31,
to December 31, -----------------
1996 1997 1998
----------------- -------- -------
<S> <C> <C> <C>
Revenue, net.............................. $ 16,215 $ 32,218 $56,143
Cost of operations:
Production and content.................. 14,863 23,543 26,208
Selling, general and administrative
expenses............................... 13,280 23,475 30,993
Depreciation and amortization of
property and equipment................. 656 1,495 2,010
Amortization of intangible assets....... 4,829 6,186 4,438
-------- -------- -------
Total operating expenses.............. 33,628 54,699 63,649
-------- -------- -------
Loss from operations...................... (17,413) (22,481) (7,506)
Minority interest......................... -- 400 134
-------- -------- -------
Loss before income taxes.................. (17,413) (22,081) (7,372)
Provision (benefit) for income taxes...... (488) (843) 512
-------- -------- -------
Net loss.................................. $(16,925) $(21,238) $(7,884)
======== ======== =======
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-7
<PAGE>
ZDNET
(a division of Ziff-Davis Inc.)
COMBINED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
Period from Year ended
February 29, 1996 December 31,
to December 31, -----------------
1996 1997 1998
----------------- -------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss................................. $(16,925) $(21,238) $(7,884)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization.......... 656 1,495 2,010
Amortization of intangible assets...... 4,829 6,186 4,438
Minority interest...................... -- (400) (134)
Deferred tax benefit................... (488) (843) 512
Changes in operating assets and
liabilities:
Accounts receivable.................. (1,892) (4,524) (7,336)
Other current assets................. (1,217) 4,093 (237)
Accounts payable and accrued
expenses............................ 2,347 (1,311) 3,195
Unearned income...................... 93 (93) 1,078
Other, net........................... (23) 1,371 (164)
-------- -------- -------
Net cash used in operating activities.... (12,620) (15,264) (4,522)
-------- -------- -------
Cash flows from investing activities:
Capital expenditures................... (1,010) (2,374) (4,483)
Investments and acquisitions, net of
cash acquired......................... -- (2,998) (5,000)
-------- -------- -------
Net cash used in investing activities.... (1,010) (5,372) (9,483)
-------- -------- -------
Cash flows from financing activities:
Capital contributions from ZD.......... 13,630 20,664 14,269
-------- -------- -------
Net cash provided by financing
activities.............................. 13,630 20,664 14,269
-------- -------- -------
Net increase in cash and cash
equivalents............................. -- 28 264
Cash and cash equivalents at beginning of
period.................................. -- -- 28
-------- -------- -------
Cash and cash equivalents at end of
period.................................. $ -- $ 28 $ 292
======== ======== =======
Supplemental Cash Flow Information:
Non-cash capital contribution.......... $ -- $ 5,167 $ --
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-8
<PAGE>
ZDNET
(a division of Ziff-Davis Inc.)
COMBINED STATEMENTS OF CHANGES IN DIVISION EQUITY
(dollars in thousands)
<TABLE>
<CAPTION>
Cumulative Total
Paid-in Deferred Accumulated translation division
capital compensation deficit adjustment equity
-------- ------------ ----------- ----------- --------
<S> <C> <C> <C> <C> <C>
Balance at February 29,
1996................... $ 81,900 $ -- $ -- $ -- $ 81,900
Capital contribution
from ZD................ 13,630 -- -- -- 13,630
Net loss................ -- -- (16,925) -- (16,925)
Foreign currency
translation
adjustment............. -- -- -- (30) (30)
-------- -------- -------- ----- --------
Balance at December 31,
1996................... 95,530 -- (16,925) (30) 78,575
Capital contribution
from ZD................ 25,831 -- -- -- 25,831
Net loss................ -- -- (21,238) -- (21,238)
Foreign currency
translation
adjustment............. -- -- -- 124 124
-------- -------- -------- ----- --------
Balance at December 31,
1997................... 121,361 -- (38,163) 94 83,292
Capital contribution
from ZD................ 14,269 -- -- -- 14,269
Conversion of Softbank
stock options.......... 76 (76) -- -- --
Issuance of ZDNet
Options................ 13,269 (13,269) -- -- --
Net loss................ -- -- (7,884) -- (7,884)
Foreign currency
translation
adjustment............. -- -- -- (130) (130)
-------- -------- -------- ----- --------
Balance at December 31,
1998................... $148,975 $(13,345) $(46,047) $ (36) $ 89,547
======== ======== ======== ===== ========
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-9
<PAGE>
ZDNET
(a division of Ziff-Davis Inc.)
NOTES TO COMBINED FINANCIAL STATEMENTS
(numbers rounded to the nearest thousand, except share and per share amounts)
1. Organization and Basis of Presentation
Formation of Ziff-Davis Inc.
Ziff-Davis Inc. was formed through an initial public offering and
reorganization that were completed on May 4, 1998 (described below). Prior to
that date, the predecessors of Ziff-Davis Inc. (currently named ZD Inc. and ZD
Events Inc.) were wholly owned indirect subsidiaries of SOFTBANK Corp.
(together with its non-Ziff-Davis Inc. affiliates, "Softbank").
ZDNet is the online business division of Ziff-Davis Inc. ZD is the division
of Ziff-Davis Inc. (formerly ZD Inc.) focused on the business of print
publishing, trade shows and conferences, market research and education. Each of
ZD and ZDNet is sometimes referred to herein as a "Group".
In order to prepare separate financial statements for ZD and ZDNet, Ziff-
Davis Inc. has allocated all of its consolidated assets, liabilities, revenue,
expenses and cash flow between ZD and ZDNet. Thus, the financial statements of
ZD and ZDNet, taken together, comprise all of the accounts included in the
corresponding consolidated financial statements of Ziff-Davis Inc.
ZDNet's financial statements reflect the application of certain cash
management and allocation policies adopted by the Board of Directors of Ziff-
Davis Inc. (the "Board"). These policies are summarized in Note 4 under
"Certain Cash Management and Allocation Policies".
Even though Ziff-Davis Inc. has allocated all of its consolidated assets,
liabilities, revenue, expenses and cash flow between ZD and ZDNet, that
allocation and the division of Ziff-Davis Inc.'s common stock will not change
the legal title to any assets or responsibility for any liabilities and will
not affect the rights of any creditors. Holders of ZDNet Stock (as described
below) will continue to be common stockholders of Ziff-Davis Inc. and, as such,
will be subject to all risks associated with an investment in Ziff-Davis Inc.
and all of its businesses, assets and liabilities.
Financial impacts that occur at ZD that affect Ziff-Davis Inc.'s consolidated
results of operations or financial position could affect the results of
operations or financial condition of ZDNet or the market price of ZDNet Stock.
In addition, net losses of ZD, and any dividends or distributions on or
repurchases of ZD Stock, will reduce the assets of Ziff-Davis Inc. legally
available for dividends on ZDNet Stock. Accordingly, financial information for
ZDNet should be read in conjunction with financial information for ZD and
financial information for Ziff-Davis Inc.
F-10
<PAGE>
ZDNET
(a division of Ziff-Davis Inc.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
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.
Acquisition of ZDNet
In February 1996, SOFTBANK Corp. acquired the stock of Ziff-Davis Holdings
Corp. ("Holdings") for an aggregate purchase price of approximately
$1,800,000,000 plus transaction costs. Softbank is a Japanese corporation which
as of December 31, 1997 was 50.2% owned by Mr. Son, its President, including
43.4% directly owned by his wholly owned holding company, MAC Inc. (MAC Inc.
and affiliates hereinafter referred to as "MAC"). Concurrent with the
acquisition, in a separate agreement, MAC, directly or through wholly owned
affiliates, acquired certain assets and assumed certain liabilities of ZD Inc.
(the "MAC Assets"), a wholly owned subsidiary of Holdings (formerly Ziff-Davis
Inc.), for an aggregate purchase price of approximately $302,000,000. ZDNet
comprised a portion of the MAC Assets.
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 relating to ZDNet was
$72,692,000.
Acquisition of GameSpot, Inc.
In January 1997, SOFTBANK Holdings Inc., an affiliate of Ziff-Davis Inc.
("SBH"), acquired 70% of GameSpot, Inc. ("GameSpot", formerly SpotMedia
Communications, Inc.) for approximately $3,000,000. Funds for this acquisition
were provided by Ziff-Davis Inc. to SBH. As part of the initial public offering
and reorganization that was completed on May 4, 1998 (described below),
GameSpot was contributed to ZDNet. Because GameSpot and Ziff-Davis Inc. were
under common control at the time of the transaction, the GameSpot acquisition
has been accounted for in a manner similar to a pooling of interests and
GameSpot's results have been included in ZDNet's results since the time of
common ownership (January 1997). The "pooling" of GameSpot results in a non-
cash capital contribution of $5,167,000 for the year ended December 31, 1997.
Reorganization and initial public offering
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
F-11
<PAGE>
ZDNET
(a division of Ziff-Davis Inc.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
public offering (described below), Ziff-Davis Inc. was renamed ZD Inc., 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, SBH
completed a reorganization whereby the common stock of ZD Inc. and ZD Events
Inc. were contributed to Ziff-Davis Inc. in exchange for 73,619,355 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 purchase 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 herein 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. The ZDNet business was a portion of the MAC Assets
acquired at that time.
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.
Investment in Deja News Inc.
On July 22, 1998, ZDNet purchased $5,000,000 in Series C, convertible, non-
voting preferred shares of Deja News Inc., an Internet discussion network. This
investment is being accounted for at cost.
2. 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
F-12
<PAGE>
ZDNET
(a division of Ziff-Davis Inc.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
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 retained 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.
Currently, Ziff-Davis Inc. provides all funding for ZD and ZDNet as described
in Note 4 under "Certain Cash Management and Allocation Policies". Ziff-Davis
Inc. intends to continue these practices until ZDNet Stock is first issued.
Accordingly, no interest expense or income to or from ZD has been reflected in
the financial statements of ZDNet for any period prior to the date on which
ZDNet Stock is first issued.
After the date on which ZDNet Stock is first issued, for financial statement
purposes, the following policies will apply except to the extent the Board
rescinds, modifies or adds to them:
(a) Ziff-Davis Inc. will attribute each future incurrence or issuance of
external debt or preferred stock (and the proceeds thereof) to ZD, except
in cases where the Board determines otherwise. The Board may determine from
time to time to attribute an incurrence or issuance of debt or preferred
stock (and the proceeds thereof) to ZDNet to the extent that Ziff-Davis
Inc. incurs or issues the debt or preferred stock for the benefit of ZDNet,
but the Board will not be required to do so.
(b) Ziff-Davis Inc. will attribute each future issuance of ZD Stock (and
the proceeds thereof) to ZD. Ziff-Davis Inc. may attribute any future
issuance of ZDNet Stock (and the proceeds thereof) to ZD in respect of its
Retained Interest in ZDNet (in a manner analogous to a secondary offering
of common stock of a subsidiary owned by a corporate parent) or to ZDNet
(in a manner analogous to a primary offering of common stock). Dividends on
and repurchases of ZD Stock will be charged against ZD, and dividends on
and repurchases of ZDNet Stock will be charged against ZDNet. In addition,
at the time of any dividend on ZDNet Stock, Ziff-Davis Inc. will credit to
ZD,
F-13
<PAGE>
ZDNET
(a division of Ziff-Davis Inc.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
and charge against ZDNet, a corresponding amount in respect of ZD's
Retained Interest in ZDNet.
(c) Whenever ZDNet holds cash (other than cash of ZDNet's foreign
operations or cash of ZDNet's operations that are not wholly owned), ZDNet
will normally transfer that cash to ZD. Conversely, whenever ZDNet has a
cash need (other than cash needs of ZDNet's foreign operations or cash
needs of ZDNet's operations that are not wholly owned), ZD will normally
fund that cash need. However, the Board will determine, in its sole
discretion, whether to provide any particular funds to either Group. The
Board is not obligated to cause either Group to provide funds to the other
Group if the Board determines it is not in the best interest of Ziff-Davis
Inc. to do so.
(d) Ziff-Davis Inc. will account for all cash transfers from one Group to
or for the account of the other Group (other than transfers in return for
assets or services rendered or transfers in respect of ZD's Retained
Interest that correspond to dividends paid on ZDNet Stock) as inter-Group
revolving credit advances unless (1) the Board determines that a given
transfer (or type of transfer) should be accounted for as a long-term loan,
(2) the Board determines that a given transfer (or type of transfer) should
be accounted for as a capital contribution increasing ZD's Retained
Interest in ZDNet or (3) the Board determines that a given transfer (or
type of transfer) should be accounted for as a return of capital reducing
ZD's Retained Interest in ZDNet. There are no specific criteria to
determine when Ziff-Davis Inc. will account for a cash transfer as a long-
term loan, a capital contribution or a return of capital rather than an
inter-Group revolving credit advance. The Board would make such a
determination in the exercise of its business judgment at the time of such
transfer (or the first of such type of transfer) based upon all relevant
circumstances. Factors the Board would consider include (1) the current and
projected capital structure of each Group, (2) the relative levels of
internally generated funds of each Group, (3) the financing needs and
objectives of the recipient Group, (4) the investment objectives of the
transferring Group, (5) the availability, cost and time associated with
alternative financing sources and (6) prevailing interest rates and general
economic conditions.
(e) Any cash transfer accounted for as an inter-Group revolving credit
advance will bear interest at the rate at which Ziff-Davis Inc. could
borrow such funds on a revolving credit basis (as the Board determines in
its sole discretion). Any cash transfer accounted for as a long-term loan
will have interest rate, amortization, maturity, redemption and other terms
that generally reflect the then prevailing terms on which Ziff-Davis Inc.
could borrow such funds (as the Board determines in its sole discretion).
(f) Any cash transfer from ZD to ZDNet (or for its account) accounted for
as a capital contribution will correspondingly increase ZDNet's division
equity and ZD's
F-14
<PAGE>
ZDNET
(a division of Ziff-Davis Inc.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
Retained Interest in ZDNet. As a result, the number of shares of ZDNet
Stock that could be issued by Ziff-Davis Inc. for the account of ZD in
respect of its Retained Interest in ZDNet (the "Number of Shares Issuable
with Respect to ZD's Retained Interest in ZDNet") will increase by (1) the
amount of such capital contribution divided by (2) the Market Value of
ZDNet Stock on the date of transfer.
(g) Any cash transfer from ZDNet to ZD (or for its account) accounted for
as a return of capital will correspondingly reduce ZDNet's division equity
and ZD's Retained Interest in ZDNet. As a result, the Number of Shares
Issuable with Respect to ZD's Retained Interest in ZDNet will decrease by
(1) the amount of such return of capital divided by (2) the Market Value of
ZDNet Stock on the date of transfer.
3. Summary of Significant Accounting Policies
Principles of combination
The combined financial statements include the accounts of ZDNet. All
significant transactions within the ZDNet division have been eliminated on
combination.
Cash and cash equivalents
ZDNet considers all highly liquid investments with an original maturity of 3
months or less to be cash equivalents.
Concentration of credit risk
ZDNet places its temporary cash investments with high credit quality
financial institutions. At times, such investments may be in excess of
federally insured limits. ZDNet has not experienced losses in such accounts.
ZDNet's customers represent a variety of technology companies in the U.S. and
other countries. ZDNet extends credit to its customers 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 8 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-15
<PAGE>
ZDNET
(a division of Ziff-Davis Inc.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand)
Intangible assets
Intangible assets consist principally of advertising lists, subscriber lists
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 9 years and goodwill, which represents the excess of the
purchase price over the estimated fair values of net assets acquired, is
amortized over a period of 10 to 20 years. (See Note 6.) ZDNet 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 estimated recoverable value. ZDNet has not
experienced any impairment of its intangible assets.
Revenue recognition
ZDNet's revenue is derived principally from the sale of advertisements on
short-term contracts. Advertising 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.
ZDNet's obligations typically include guarantees of a minimum number of
"impressions", or times that an advertisement appears in pages viewed by users
of ZDNet's online properties. To the extent minimum guaranteed impressions are
not met, ZDNet defers recognition of the corresponding revenue until the
remaining guaranteed impression levels are achieved.
Revenue from subscription based fees and services is recognized evenly over
the term of the contract.
Revenue from barter transactions is recognized during the period in which the
advertisements are displayed. Barter transactions are recorded at the lower of
estimated fair value of the goods or services received or the estimated fair
value of the advertisements given. To date, barter transactions have been
insignificant.
Foreign currency
The effect of translating foreign currency financial statements into U.S.
dollars is included in the cumulative translation adjustment account in
division equity. Gains and losses on foreign currency transactions, which are
not significant to operations, have been included in selling, general and
administrative expenses. ZDNet has not historically entered into forward
currency contracts.
F-16
<PAGE>
ZDNET
(a division of Ziff-Davis Inc.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
Income taxes
ZDNet 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
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
ZDNet 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, ZDNet adopted the disclosure only
provisions of Statement of Financial Accounting Standards ("SFAS") No. 123,
Accounting for Stock-Based Compensation.
Comprehensive income
ZDNet implemented SFAS No. 130 Reporting Comprehensive Income, effective
January 1, 1998. This standard requires ZDNet to report the total changes in
division equity that do not result directly from transactions with
stockholders, including those which do not affect retained earnings. These
changes are not material to ZDNet's combined 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. ZDNet does not expect that the adoption of SFAS
No. 133 will have a material impact on ZDNet's results of operations. ZDNet
will adopt SFAS No. 133 beginning with its 2000 financial statements.
F-17
<PAGE>
ZDNET
(a division of Ziff-Davis Inc.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
4. Certain Cash Management and Allocation Policies
ZDNet's financial statements reflect the application of certain cash
management and allocation policies summarized below. The Board may rescind,
modify or add to any of these policies.
Treasury activities
Ziff-Davis Inc. manages most treasury activities on a centralized,
consolidated basis. These activities include the investment of surplus cash,
the issuance, repayment and repurchase of short-term and long-term debt, and
the issuance and repurchase of common stock and preferred stock. Each of ZDNet
and ZD generally remits its cash receipts (other than receipts of foreign
operations or operations that are not wholly owned) to Ziff-Davis Inc., and
Ziff-Davis Inc. generally funds ZDNet's cash disbursements (other than
disbursements of foreign operations or operations that are not wholly owned),
on a daily basis.
In the financial statements of ZD and ZDNet, (1) all external debt and equity
transactions (and the proceeds thereof) were attributed to ZD, (2) whenever
ZDNet held cash (other than cash of ZDNet's foreign operations or cash of
ZDNet's operations that are not wholly owned), that cash was transferred to ZD
and accounted for as a return of capital (i.e., as a reduction in ZDNet's
division equity and ZD's Retained Interest in ZDNet) and (3) whenever ZDNet had
a cash need (other than cash needs of ZDNet's foreign operations or cash needs
of ZDNet's operations that are not wholly owned), that cash need was funded by
ZD and accounted for as a capital contribution (i.e., as an increase in ZDNet's
division equity and ZD's Retained Interest in ZDNet). Accordingly, no interest
expense or income to or from ZD has been reflected in the financial statements
of ZDNet.
Corporate general and administrative expenses
Ziff-Davis Inc. 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 ZDNet based
on utilization. Where determinations based on utilization alone are
impracticable, Ziff-Davis Inc. uses other methods and criteria that management
believes to be equitable and to provide a reasonable estimate of the cost
attributable to ZDNet.
Taxes
Federal income taxes, which are determined on a consolidated basis, except
for GameSpot, are allocated to ZDNet (and reflected in its financial
statements) in accordance
F-18
<PAGE>
ZDNET
(a division of Ziff-Davis Inc.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
with Ziff-Davis Inc.'s tax allocation policy. In general, this policy provides
that the consolidated tax provision (and related tax payments or refunds) are
allocated between the Groups based principally upon the financial income,
taxable income, credits and other amounts directly related to the respective
Groups. Tax benefits that cannot be used by the Group generating such
attributes, but can be utilized on a consolidated basis, are allocated to the
Group that generated such benefits. As a result, the allocated Group amounts of
taxes payable or refundable are not necessarily comparable to those that would
have resulted if the Groups had filed separate tax returns.
Royalty charges
ZD charges ZDNet an annual fee for the use of various brands and editorial
content. The current annual fee, which is reflected in ZDNet's financial
statements as part of its production and content costs, is equal to 5% of the
first $100,000,000 of ZDNet's revenue for the year, 4% of the next $50,000,000
of ZDNet's revenue for that year and 3% of any incremental revenue over
$150,000,000 for that year. The Board may at some point in the future change
this fee as it, in its sole discretion, deems appropriate in light of the
circumstances from time to time.
5. Property and equipment, net
Property and equipment, net consists of the following:
<TABLE>
<CAPTION>
December 31,
----------------
1997 1998
------- -------
(dollars in
thousands)
<S> <C> <C> <C> <C>
Computers and equipment......................... $ 4,274 $ 8,003
Furniture and fixtures.......................... 708 1,076
Leasehold improvements.......................... 314 700
------- -------
5,296 9,779
Accumulated depreciation and amortization....... (2,151) (4,161)
------- -------
$ 3,145 $ 5,618
======= =======
</TABLE>
F-19
<PAGE>
ZDNET
(a division of Ziff-Davis Inc.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
6. Intangible assets, net
Intangible assets, net consists of the following:
<TABLE>
<CAPTION>
Range of Useful December 31,
Lives ------------------
(years) 1997 1998
--------------- -------- --------
(dollars in
thousands)
<S> <C> <C> <C>
Subscription lists..................... 2 $ 4,300 $ 4,300
Advertising lists...................... 9 2,400 2,400
Goodwill............................... 10-20 71,479 71,479
-------- --------
78,179 78,179
Accumulated amortization............... (11,015) (15,453)
-------- --------
$ 67,164 $ 62,726
======== ========
</TABLE>
Intangible assets primarily relate to the acquisition of the MAC Assets. As
discussed in Note 1, the acquisition was accounted for under the purchase
method of accounting. As such, the purchase price of this acquisition was
allocated to tangible and identifiable intangible assets with the remaining
amount being allocated to goodwill.
Advertising lists and subscriber lists were recorded at estimated fair value
as determined by an income approach.
All intangible assets are being amortized using the straight-line method over
estimated useful lives, up to 20 years. In determining the estimated useful
lives, ZDNet considered its competitive position in the markets in which it
operates, the historical attrition rates of advertisers, subscribes 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.
7. 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............. $ 1,440 $ 2,221
Licenses.......................................... 108 24
Other taxes....................................... 189 302
Other............................................. 471 948
----------- -----------
$ 2,208 $ 3,495
=========== ===========
</TABLE>
F-20
<PAGE>
ZDNET
(a division of Ziff-Davis Inc.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
8. Income Taxes
Provision (benefit) for income taxes and related assets and liabilities
attributed to ZDNet are determined in accordance with Ziff-Davis Inc.'s tax
allocation policy. (See Note 4.)
ZDNet (excluding GameSpot) has been included in a consolidated federal income
tax return, except for the periods in which it was owned by MAC Inc. (described
in Note 1). GameSpot is a 70% owned subsidiary and files separate federal and
state income tax returns on a stand-alone basis.
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. ......................................... $(15,263) $(18,853) $(5,009)
Foreign....................................... (2,150) (3,228) (2,363)
-------- -------- -------
Total......................................... $(17,413) $(22,081) $(7,372)
======== ======== =======
</TABLE>
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........................................ (378) (653) 413
State and local income taxes:
Current......................................... -- -- --
Deferred........................................ (110) (190) 99
Foreign income taxes.............................. -- -- --
------- ------- ------
Total provision (benefit) for income taxes.... $ (488) $ (843) $ 512
======= ======= ======
</TABLE>
A reconciliation of the U.S. federal statutory tax rate to ZDNet's effective
tax rate on loss before income taxes is as follows:
<TABLE>
<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 5.0
Non-recognition of
combined losses of MAC
Assets................. (33.3) (26.8) (29.3)
Change in valuation
allowance.............. (4.9) (9.5) (14.2)
Amortization of non-
deductible goodwill ... -- (0.9) (2.8)
Other................... -- -- (0.6)
----- ----- -----
Effective tax rate...... 2.8% 3.8% (6.9)%
===== ===== =====
</TABLE>
F-21
<PAGE>
ZDNET
(a division of Ziff-Davis Inc.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
The effective tax rate differs from the federal statutory tax rate primarily
as a result of ZDNet's inability to deduct losses incurred by ZDNet while owned
by MAC. In addition, tax benefits attributable to losses in foreign
jurisdictions and certain U.S. losses are subject to the establishment of a
valuation allowance inasmuch as such loss carryforwards are not expected to be
utilized in the future.
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:
Allowance for doubtful accounts................... $ 37 $ 701
Other............................................. 32 78
----------- -----------
Current deferred tax assets....................... 69 779
Non current deferred tax assets
Net operating loss and other carryforwards........ 9,081 9,728
Other............................................. 10 115
----------- -----------
Noncurrent deferred tax assets.................... 9,091 9,843
Valuation allowance................................ (3,595) (5,569)
----------- -----------
Net noncurrent deferred tax assets................ 5,496 4,274
----------- -----------
Net deferred tax assets......................... $ 5,565 $ 5,053
=========== ===========
</TABLE>
The valuation allowance primarily relates to tax benefits of foreign net
operating loss carryforwards acquired in the MAC Asset purchase which are not
expected to be realized. No deferred tax asset has been established for the
U.S. losses generated by ZDNet while owned by MAC since these losses will not
be available for use by Ziff-Davis Inc.
ZDNet has U.S. and foreign net operating loss carryforwards at December 31,
1998 of approximately $23,000,000, which will begin to expire in 2000. The
utilization of certain net operating loss carryforwards of approximately
$10,000,000 is subject to limitations primarily due to the change of ownership
resulting from Softbank's acquisition of Holding's stock. Management believes
that such limitations will not significantly affect Ziff-Davis Inc.'s ability
to recognize the deferred tax asset relating to the carryforwards. Accordingly,
no valuation allowance to reduce the deferred tax asset relating to the
carryforwards has been established.
9. Related Party Transactions
ZDNet transacts business with a group of companies affiliated through common
ownership with Softbank and has various transactions and relationships with
members of
F-22
<PAGE>
ZDNET
(a division of Ziff-Davis Inc.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
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.
ZD provides all necessary funding for the operations and investments of
ZDNet; this funding is accounted for as capital contributions. (See Notes 2 and
4.) For the period from February 29, 1996 to December 31, 1996 and the years
ended December 31, 1997 and 1998, such capital contributions were $13,630,000,
$25,831,000 and $14,269,000, respectively.
The amounts receivable or payable to affiliated companies are included in
accounts receivable, net or accounts payable in the accompanying balance
sheets. Details of these amounts are:
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1998
----------- -----------
(dollars in thousands)
<S> <C> <C>
Accounts receivable:
Softbank Kingston.................................... $ 60 $ 72
E-Trade.............................................. -- 367
US Web............................................... 7 --
Asia Communications Global Limited................... 61 --
Inquiry.com, Inc. ................................... 50 --
Trend Micro, Inc. ................................... 10 --
Sega Entertainment................................... 32 36
----------- -----------
Total.............................................. $ 220 $ 475
=========== ===========
Accounts payable:
SIM.................................................. $ 2 $ --
Yahoo!............................................... -- 60
GeoCities............................................ -- 12
PointCast............................................ 42 16
----------- -----------
Total.............................................. $ 44 $ 88
=========== ===========
</TABLE>
ZDNet purchases advertising in ZD's publications at discounts to market
rates. Had ZD charged market rates for such advertising, ZDNet's operating
expenses would have increased by $2,235,000, $2,671,000 and $1,429,000 for the
period from February 29, 1996 to December 31, 1996 and for the years ended
December 31, 1997 and 1998, respectively.
F-23
<PAGE>
ZDNET
(a division of Ziff-Davis Inc.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
Related party transactions included in the accompanying combined statements
of operations include the following:
<TABLE>
<CAPTION>
Period from Year ending
February 29, 1996 December 31,
to December 31, --------------
1996 1997 1998
----------------- ------ ------
(dollars in thousands)
<S> <C> <C> <C>
Revenue, net
ZD.......................................... $ -- $ 76 $ 160
ZDTV........................................ -- 11 36
GeoCities................................... -- 30 --
E-Trade..................................... -- -- 1,168
Kingston Technology Company................. 88 353 615
US Web...................................... 93 75 --
Asia Communications Global Limited.......... -- 61 --
Electric Minds, Inc. ....................... -- 15 --
Inquiry.com, Inc. .......................... 29 149 --
Trend Micro, Inc. .......................... 28 77 --
Sega Entertainment.......................... 4 248 94
------ ------ ------
Total..................................... $ 242 $1,095 $2,073
====== ====== ======
Expenses
ZD.......................................... $4,496 $8,330 $9,374
ZDTV........................................ -- (120) (532)
SIM......................................... 585 1,613 --
Yahoo!...................................... 27 -- 101
GeoCities................................... -- -- 108
PointCast................................... -- 42 144
------ ------ ------
Total....................................... $5,108 $9,865 $9,195
====== ====== ======
</TABLE>
Included in selling, general and administrative expenses is an allocation for
Ziff-Davis Inc.'s Central Services amounting to $2,391,000, $3,877,000 and
$5,949,000 for the ten month period ended December 31, 1996 and the years ended
December 31, 1997 and 1998, respectively. Also included in selling, general and
administrative expenses is a royalty charge to ZD amounting to $811,000,
$1,611,000 and $2,807,000 for the ten month period ended December 31, 1996 and
the years ended December 31, 1997 and 1998, respectively. (See Note 4.)
ZDNet is reimbursed by certain affiliates for pre-determined costs incurred
by ZDNet on the affiliates' behalf. These reimbursements are reflected as a
reduction of expenses in the accompanying statements of operations.
10. Employee Benefit Plans
Ziff-Davis Inc. maintains various defined contribution retirement plans.
Substantially, all of ZDNet's employees are eligible to participate in one of
the plans under which annual
F-24
<PAGE>
ZDNET
(a division of Ziff-Davis Inc.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
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 ZDNet 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. ZDNet made contributions
to the plan totaling $447,000, $751,000 and $1,111,000 for the period from
February 29, 1996 to December 31, 1996 and the years ended December 31, 1997
and 1998, respectively.
11. 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 were 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 at December 31, 1997 could only be
exercised after July 19, 1998. The repricing of the stock options did not
result in compensation expense to ZDNet.
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 339,000 shares
to ZDNet employees with an exercise price of $16.00 per share representing the
fair value of such options at that date. Such options vest ratably over five
years.
F-25
<PAGE>
ZDNET
(a division of Ziff-Davis Inc.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
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 ZDNet.
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 4,163,000 shares of ZDNet Stock to
certain employees, at a price of $7.50 per share. As a result of the grant
ZDNet has recorded deferred compensation expense of $13,269,000 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 division
equity offset by an addition to paid-in capital. ZDNet expects to recognize
non-cash compensation for accounting purposes of $13,269,000 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 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
F-26
<PAGE>
ZDNET
(a division of Ziff-Davis Inc.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
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, ZDNet expects to recognize
compensation expense for accounting purposes of approximately $76,000 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 division 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.
Option grants
Information relating to the Softbank options during 1996, 1997 and 1998 is as
follows:
<TABLE>
<CAPTION>
Weighted Average
Number of Option Price
Shares Per Share(1)
--------- ----------------
<S> <C> <C> <C>
Shares outstanding under options at December 31,
1995................................................. -- --
Granted............................................. 24,716(2) $87.15
Exercised........................................... -- --
Forfeited........................................... -- --
------
Shares outstanding under options at December 31,
1996................................................. 24,716 $87.15
Granted............................................. 17,800 64.50
Exercised........................................... -- --
Forfeited........................................... (8,096) 78.76
------
Shares outstanding under options at December 31,
1997................................................. 34,420 $77.41
Granted............................................. -- --
Exercised........................................... -- --
Forfeited........................................... -- --
Converted to Ziff-Davis Inc. options................ (2,100) 31.03
------
Shares outstanding under options at December 31,
1998................................................. 32,320 $31.03
======
Shares exercisable as of:.............................
December 31, 1996................................... -- --
December 31, 1997 (price range $64.50 to $87.15).... 5,120 $78.97
December 31, 1998 (price $31.03).................... 11,374 $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.
F-27
<PAGE>
ZDNET
(a division of Ziff-Davis Inc.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
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...................................... 339,000 $6.00
Exercised.................................... -- --
Converted from Softbank options.............. 8,226 8.89
Forfeited.................................... (8,000) 6.00
---------
Shares outstanding under options at December
31, 1998...................................... 339,226 $6.08
=========
Information relating to ZDNet stock options issued during 1998 is as follows:
<CAPTION>
Weighted
Average
Number of Option Price
Shares* Per Share*
--------- ------------
<S> <C> <C>
Shares outstanding under options at December
31, 1997...................................... -- --
Granted...................................... 4,162,943 $7.50
Exercised.................................... -- --
Forfeited.................................... -- --
---------
Shares outstanding under options at December
31, 1998...................................... 4,162,943 $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 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.............................. 400,610 $0.44
========
December 31, 1998.............................. 497,639 $0.44
========
</TABLE>
F-28
<PAGE>
ZDNET
(a division of Ziff-Davis Inc.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
As permitted by SFAS No. 123, ZDNet 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 ZDNet 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
------- ------- -------
<S> <C> <C> <C>
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
<CAPTION>
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
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
<CAPTION>
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
------- ------- -------
<S> <C> <C> <C>
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 options................................ n/a 0.32 0.32
</TABLE>
F-29
<PAGE>
ZDNET
(a division of Ziff-Davis Inc.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
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, ZDNet's net loss would have increased by
approximately $156,000, $167,000 and $1,046,000, respectively.
Employee Stock Purchase Plan
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.
12. Operating Lease Commitments
ZDNet utilizes equipment and space under lease to Ziff-Davis Inc. ZDNet's
allocation of the minimum lease payments are as follows:
<TABLE>
<CAPTION>
(dollars in thousands)
<S> <C>
1999.................. $ 1,332
2000.................. 1,493
2001.................. 1,511
2002.................. 1,064
2003.................. 1,076
Thereafter............ 7,022
-------
Total minimum
payments........... $13,498
=======
</TABLE>
Rental expense from operating leases amounted to $668,000, $1,348,000 and
$1,608,000, for the period February 29, 1996 to December 31, 1996, and the
years ended December 31, 1997 and 1998, respectively.
F-30
<PAGE>
ZDNET
(a division of Ziff-Davis Inc.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
13. Contingencies
ZDNet and Ziff-Davis Inc. are subject to various 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 the Ziff-Davis Inc.'s common 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, recission 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
F-31
<PAGE>
ZDNET
(a division of Ziff-Davis Inc.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
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.
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.
14. Subsequent Events
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-32
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Ziff-Davis Inc.
In our opinion, the accompanying combined balance sheets and the related
combined statements of operations, cash flows and changes in division equity,
present fairly, in all material respects, the financial position of ZD (a
division of Ziff-Davis Inc., the "Company") at December 31, 1997 and 1998, and
the results of its operations and 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.
As described in Note 1 to the financial statements, ZD is a division of Ziff-
Davis Inc.; accordingly the financial statements of ZD should be read in
conjunction with the audited financial statements of Ziff-Davis Inc.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
New York, NY
February 22, 1999
F-33
<PAGE>
ZD
(a division of Ziff-Davis Inc.)
COMBINED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
December 31,
---------------------
1997 1998
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 30,273 $ 32,274
Accounts receivable, net............................... 209,914 208,593
Inventories............................................ 17,853 15,551
Prepaid expenses and other current assets.............. 37,872 34,278
Due from affiliates.................................... 131,290 53,984
Deferred taxes......................................... 8,725 21,483
---------- ----------
Total current assets..................................... 435,927 366,163
Property and equipment, net.............................. 50,391 85,571
Retained interest in ZDNet............................... 83,292 89,547
Intangible assets, net................................... 2,963,169 2,844,317
Other assets............................................. 15,329 44,340
---------- ----------
Total assets............................................. $3,548,108 $3,429,938
========== ==========
LIABILITIES AND DIVISION EQUITY
Current liabilities:
Accounts payable....................................... $ 54,823 $ 71,844
Accrued expenses....................................... 77,886 93,824
Unearned income, net................................... 154,682 151,003
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................................ 815,735 343,572
Notes payable to affiliates.............................. 2,408,240 70,192
Notes payable, net of unamortized discount............... -- 1,469,130
Deferred taxes........................................... 185,613 169,356
Due to management........................................ -- 5,400
Other liabilities........................................ 12,390 19,690
---------- ----------
Total liabilities........................................ 3,421,978 2,077,340
---------- ----------
Commitments and contingencies (Notes 20 and 22)
Division equity.......................................... 126,130 1,352,598
---------- ----------
Total liabilities and division equity.................... $3,548,108 $3,429,938
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-34
<PAGE>
ZD
(a division of Ziff-Davis Inc.)
COMBINED STATEMENTS OF OPERATIONS
(dollars in thousands)
<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
--------- ---------- ----------
938,924 1,121,543 1,052,749
--------- ---------- ----------
Cost of production:
Publishing............................... 181,313 221,367 215,336
Events................................... 87,373 99,533 82,143
--------- ---------- ----------
268,686 320,900 297,479
Selling, general and administrative
expenses.................................. 431,393 521,671 518,349
Depreciation and amortization of property
and equipment............................. 31,647 28,884 27,875
Amortization of intangible assets.......... 102,604 118,375 118,221
Restructuring charge....................... -- -- 52,239
--------- ---------- ----------
Income from operations..................... 104,594 131,713 38,586
Interest expense, net--related party....... (120,646) (190,445) (65,935)
Interest expense, net...................... -- -- (77,612)
Loss related to retained interest in
ZDNet..................................... (16,925) (21,238) (7,884)
Other non-operating income, net............ 6,341 8,322 8,097
--------- ---------- ----------
Loss before income taxes................... (26,636) (71,648) (104,748)
Provision (benefit) for income taxes....... 25,445 (469) (26,939)
--------- ---------- ----------
Net loss................................... $ (52,081) $ (71,179) $ (77,809)
========= ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-35
<PAGE>
ZD
(a division of Ziff-Davis Inc.)
COMBINED 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 by operating activities:
Depreciation and amortization............. 134,251 147,259 146,096
Amortization of debt discount............. -- -- 2,430
Loss from retained interest in ZDNet...... 16,925 21,238 7,884
Income from equity investments............ (115) (2,030) (7,483)
Deferred tax provision (benefit).......... 25,445 (469) (29,484)
Restructuring charge...................... -- -- 52,239
Changes in operating assets and liabili-
ties:
Accounts receivable..................... (36,194) (14,375) 2,437
Inventories............................. 7,788 (853) 2,923
Accounts payable and accrued expenses... 10,503 (6,065) (4,316)
Unearned income......................... 1,299 (20,101) (6,404)
Due to affiliates and management........ (29,303) (38,543) (3,348)
Other, net.............................. (4,354) (2,982) 15,134
---------- -------- ----------
Net cash provided by operating activities... 74,164 11,900 100,299
---------- -------- ----------
Cash flows from investing activities:
Capital expenditures...................... (21,355) (27,822) (32,117)
Capital contributions to ZDNet............ (13,630) (20,664) (14,269)
Investments and acquisitions, net of cash
acquired................................. (2,124,823) (11,002) (22,772)
---------- -------- ----------
Net cash used by investing activities....... (2,159,808) (59,488) (69,158)
---------- -------- ----------
Cash flows from financing activities:
Proceeds from equity offering............. -- -- 380,337
Proceeds from issuance of notes payable... -- -- 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
Payment of deferred financing fees........ -- -- (3,375)
Payments of notes payable to affiliates... -- (31,420) (1,571,264)
Purchase of treasury shares............... -- -- (29,500)
Sale of treasury shares................... -- -- 29,500
Advance from majority shareholder......... -- -- 20,377
Contributed capital....................... 1,015,651 69,366 6,660
Payment of dividends...................... (8,000) -- --
---------- -------- ----------
Net cash provided (used) by financing activ-
ities...................................... 2,087,651 47,946 (29,140)
---------- -------- ----------
Net increase in cash and cash equivalents... 2,007 358 2,001
Cash and cash equivalents at beginning of
period..................................... 27,908 29,915 30,273
---------- -------- ----------
Cash and cash equivalents at end of period.. $ 29,915 $ 30,273 $ 32,274
========== ======== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-36
<PAGE>
ZD
(a division of Ziff-Davis Inc.)
COMBINED STATEMENTS OF CHANGES IN DIVISION EQUITY
(dollars in thousands)
<TABLE>
<CAPTION>
Retained Cumulative Total
Paid-in earnings Deferred translation division
capital (deficit) compensation adjustment equity
---------- --------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Balance at December 31,
1995................... $ 379,586 $ 11,831 $ -- $ 111 $ 391,528
Acquisition of Ziff-
Davis Holdings Corp. .. 1,014,178 1,014,178
Return of capital....... (899,948) (899,948)
Capital contribution.... 1,474 1,474
Dividend paid........... (8,000) (8,000)
Shares contributed to
restricted stock plan.. 3,528 (3,528) --
Compensation earned on
restricted stock....... 1,080 1,080
Net loss................ (52,081) (52,081)
Foreign currency
translation
adjustment............. (475) (475)
---------- --------- ------- ------ ----------
Balance at December 31,
1996................... 498,818 (48,250) (2,448) (364) 447,756
Return of capital....... (381,434) (381,434)
Capital contribution.... 128,482 128,482
Shares contributed to
restricted stock plan.. 2,464 (2,464) --
Compensation earned on
restricted stock....... 3,916 3,916
Net loss................ (71,179) (71,179)
Foreign currency
translation
adjustment............. (1,411) (1,411)
---------- --------- ------- ------ ----------
Balance at December 31,
1997................... 248,330 (119,429) (996) (1,775) 126,130
Capital contribution.... 9,007 9,007
Capitalization of
amounts due to
affiliates............. 908,673 908,673
Contribution of
subsidiaries from SBH
to Ziff-Davis Inc...... 736 736
Initial public
offering............... 375,493 375,493
Acquisition of fixed
assets from an
affiliate.............. 9,000 9,000
Purchase of treasury
shares from SBH........ (29,500) (29,500)
Sale of treasury shares
to the public.......... 29,500 29,500
Stock options vested as
severance.............. 162 162
Conversion of Softbank
stock options.......... 2,942 (2,942) --
Issuance of ZDNet
Options................ 4,993 (4,993) --
Net loss................ (77,809) (77,809)
Compensation earned on
restricted stock....... 252 252
Foreign currency
translation
adjustment............. 954 954
---------- --------- ------- ------ ----------
Balance at December 31,
1998................... $1,559,336 $(197,238) $(8,679) $ (821) $1,352,598
========== ========= ======= ====== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-37
<PAGE>
ZD
(a division of Ziff-Davis Inc.)
NOTES TO COMBINED FINANCIAL STATEMENTS
(numbers rounded to the nearest thousand, except share and per share amounts)
1. Organization and Basis of Presentation
Formation of Ziff-Davis Inc.
Ziff-Davis Inc. was formed through an initial public offering and
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. and ZD
Events Inc.) were wholly owned indirect subsidiaries of SOFTBANK Corp.
(together with its non-Ziff-Davis Inc. affiliates, "Softbank").
As further described below, the combined financial statements include the
accounts of ZDI from its date of acquisition (February 29, 1996) and ZD Events.
Effective December 31, 1997, COMDEX and Forums merged and the surviving company
was renamed ZD COMDEX and Forums Inc. ("ZDCF"). In 1998, ZDCF was renamed ZD
Events Inc.
ZD is the division of Ziff-Davis Inc. (formerly ZD Inc.) focused on the
business of print publishing, trade shows and conferences, market research and
education. ZDNet is the online business division of Ziff-Davis Inc. Each of ZD
and ZDNet is sometimes referred to herein as a "Group".
In order to prepare separate financial statements for ZD and ZDNet, Ziff-
Davis Inc. has allocated all of its consolidated assets, liabilities, revenue,
expenses and cash flow between ZD and ZDNet. Thus, the financial statements of
ZD and ZDNet, taken together, comprise all of the accounts included in the
corresponding consolidated financial statements of Ziff-Davis Inc.
ZD's financial statements reflect the application of certain cash management
and allocation policies adopted by the Board of Directors of Ziff-Davis Inc.
(the "Board"). These policies are summarized in Note 5 under "Certain Cash
Management and Allocation Policies".
Even though Ziff-Davis Inc. has allocated all of its consolidated assets,
liabilities, revenue, expenses and cash flow between ZD and ZDNet, that
allocation and the division of Ziff-Davis Inc. common stock will not change the
legal title to any assets or responsibility for any liabilities and will not
affect the rights of any creditors. Holders of ZD Stock (as defined below) will
continue to be common stockholders of Ziff-Davis Inc. and, as such, will be
subject to all risks associated with an investment in Ziff-Davis Inc. and all
of its businesses, assets and liabilities.
Financial impacts which occur that affect Ziff-Davis Inc.'s consolidated
results of operations or financial position could affect the results of
operations or financial condition of ZD or the market price of ZD Stock. In
addition, net losses of ZDNet, and any dividends or distributions on, or
repurchases of, ZDNet Stock will reduce the assets of Ziff-Davis Inc. legally
available for dividends on ZD Stock. Accordingly, financial information for ZD
should
F-38
<PAGE>
ZD
(a division of Ziff-Davis Inc.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
be read in conjunction with financial information for ZDNet and financial
information for Ziff-Davis Inc.
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
ZD operates in two business segments: (1) publishing and (2)events.
Publishing
The publishing segment is engaged in publishing magazines, journals,
newsletters, electronic information products, training manuals and providing
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. The
publishing segment includes a 100% retained interest in ZDNet.
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.
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.
F-39
<PAGE>
ZD
(a division of Ziff-Davis Inc.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
Subsequent to the acquisition, Holdings and ZDI were merged with ZDI being
the surviving corporation.
Purchase of the MAC Assets
In 1997, ZD 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, ZD 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 combined
financial statements include the results of operations of the MAC Assets from
February 29, 1996. Throughout these financial statements any reference to ZD
includes ZDI, ZD Events and the MAC Assets (including ZD's 100% retained
interest in ZDNet) from February 29, 1996.
Acquisition of Sendai
On May 8, 1996, ZD 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 combined 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
combined results of operations for the year ended December 31, 1996.
Acquisition of Sky TV
On October 28, 1998, ZD 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
provides 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 combined 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 the combined results of operations for the year ended
December 31, 1998.
F-40
<PAGE>
ZD
(a division of Ziff-Davis Inc.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
2. Reorganization and Initial Public Offering
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, 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
73,619,355 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 herein 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. ZD 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-41
<PAGE>
ZD
(a division of Ziff-Davis Inc.)
NOTES TO COMBINED 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)
<S> <C>
Revenue, net........................................ $1,052,749
Depreciation and amortization....................... 146,996
Income from operations.............................. 38,586
Interest expense, net............................... 138,328
Loss before income taxes............................ (99,529)
Income tax benefit.................................. (24,851)
Net loss............................................ $ (74,678)
</TABLE>
3. 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.
F-42
<PAGE>
ZD
(a division of Ziff-Davis Inc.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
The book value associated with ZD's Retained Interest in ZDNet will be
increased proportionately for net income (or decreased proportionately for net
loss) of ZDNet. In addition, that book value will be adjusted from time to time
as set forth below.
Currently, Ziff-Davis Inc. provides all funding for ZD and ZDNet as described
in Note 5 under "Certain Cash Management and Allocation Policies". Ziff-Davis
Inc. intends to continue these practices until ZDNet Stock is first issued.
Accordingly, no interest income or expense from or to ZDNet has been reflected
in the financial statements of ZD for any period prior to the date on which
ZDNet Stock is first issued.
After the date on which ZDNet Stock is first issued, for financial statement
purposes, the following policies will apply except to the extent the Board
rescinds, modifies or adds to them:
(a) Ziff-Davis Inc. will attribute each future incurrence or issuance of
external debt or preferred stock (and the proceeds thereof) to ZD, except
in cases where the Board determines otherwise. The Board may determine from
time to time to attribute an incurrence or issuance of debt or preferred
stock (and the proceeds thereof) to ZDNet to the extent that Ziff-Davis
Inc. incurs or issues the debt or preferred stock for the benefit of ZDNet,
but the Board will not be required to do so.
(b) Ziff-Davis Inc. will attribute each future issuance of ZD Stock (and
the proceeds thereof) to ZD. Ziff-Davis Inc. may attribute any future
issuance of ZDNet Stock (and the proceeds thereof) to ZD in respect of its
Retained Interest in ZDNet (in a manner analogous to a secondary offering
of common stock of a subsidiary owned by a corporate parent) or to ZDNet
(in a manner analogous to a primary offering of common stock). Dividends on
and repurchases of ZD Stock will be charged against ZD, and dividends on
and repurchases of ZDNet Stock will be charged against ZDNet. In addition,
at the time of any dividend on ZDNet Stock, Ziff-Davis Inc. will credit to
ZD, and charge against ZDNet, a corresponding amount in respect of ZD's
Retained Interest in ZDNet.
(c) Whenever ZDNet holds cash (other than cash of ZDNet's foreign
operations or cash of ZDNet's operations that are not wholly owned), ZDNet
will normally transfer that cash to ZD. Conversely, whenever ZDNet has a
cash need (other than cash needs of ZDNet's foreign operations or cash
needs of ZDNet's operations that are not wholly owned), ZD will normally
fund that cash need. However, the Board will determine, in its sole
discretion, whether to provide any particular funds to either Group. The
Board is not obligated to cause either Group to provide funds to the other
Group if the Board determines it is not in the best interest of Ziff-Davis
Inc. to do so.
F-43
<PAGE>
ZD
(a division of Ziff-Davis Inc.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
(d) Ziff-Davis Inc. will account for all cash transfers from one Group to
or for the account of the other Group (other than transfers in return for
assets or services rendered or transfers in respect of ZD's Retained
Interest that correspond to dividends paid on ZDNet Stock) as inter-Group
revolving credit advances unless (1) the Board determines that a given
transfer (or type of transfer) should be accounted for as a long-term loan,
(2) the Board determines that a given transfer (or type of transfer) should
be accounted for as a capital contribution increasing ZD's Retained
Interest in ZDNet or (3) the Board determines that a given transfer (or
type of transfer) should be accounted for as a return of capital reducing
ZD's Retained Interest in ZDNet. There are no specific criteria to
determine when Ziff-Davis Inc. will account for a cash transfer as a long-
term loan, a capital contribution or a return of capital rather than
an inter-Group revolving credit advance. The Board would make such a
determination in the exercise of its business judgment at the time of such
transfer (or the first of such type of transfer) based upon all relevant
circumstances. Factors the Board would consider include (1) the current and
projected capital structure of each Group, (2) the relative levels of
internally generated funds of each Group, (3) the financing needs and
objectives of the recipient Group, (4) the investment objectives of the
transferring Group, (5) the availability, cost and time associated with
alternative financing sources and (6) prevailing interest rates and general
economic conditions.
(e) Any cash transfer accounted for as an inter-Group revolving credit
advance will bear interest at the rate at which Ziff-Davis Inc. could
borrow such funds on a revolving credit basis (as the Board determines in
its sole discretion). Any cash transfer accounted for as a long-term loan
will have interest rate, amortization, maturity, redemption and other terms
that generally reflect the then prevailing terms on which Ziff-Davis Inc.
could borrow such funds (as the Board determines in its sole discretion).
(f) Any cash transfer from ZD to ZDNet (or for its account) accounted for
as a capital contribution will correspondingly increase ZDNet's division
equity and ZD's Retained Interest in ZDNet. As a result, the number of
shares of ZDNet Stock that could be issued by Ziff-Davis Inc. for the
account of ZD in respect of its Retained Interest in ZDNet (the "Number of
Shares Issuable with Respect to ZD's Retained Interest in ZDNet") will
increase by (1) the amount of such capital contribution divided by (2) the
Market Value of ZDNet Stock on the date of transfer.
(g) Any cash transfer from ZDNet to ZD (or for its account) accounted for
as a return of capital will correspondingly reduce ZDNet's division equity
and ZD's Retained Interest in ZDNet. As a result, the Number of Shares
Issuable with Respect to ZD's Retained Interest in ZDNet will decrease by
(1) the amount of such return of capital divided by (2) the Market Value of
ZDNet Stock on the date of transfer.
F-44
<PAGE>
ZD
(a division of Ziff-Davis Inc.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
4. Summary of Significant Accounting Policies
Principles of combination
The combined financial statements include the accounts of ZD. All significant
transactions within the ZD division have been eliminated in combination.
Investments in companies in which ZD's ownership interests range from 20% to
50% and in which ZD 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
ZD considers all highly liquid investments with an original maturity of 3
months or less to be cash equivalents.
Concentration of credit risk
ZD places its temporary cash investments with high credit quality financial
institutions. At times, such investments may be in excess of federally insured
limits. ZD has not experienced losses in such accounts.
ZD's advertisers and exhibitors include principally customers who represent a
variety of technology companies in the U.S. and other countries. ZD 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.
F-45
<PAGE>
ZD
(a division of Ziff-Davis Inc.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
Investment in ZDNet
ZD's Retained Interest in 100% of the division equity of ZDNet is reflected
as "Retained Interest in ZDNet" in ZD's balance sheets. Similarly, ZD's
Retained Interest in 100% of the division net losses of ZDNet is reflected as
"Net loss related to retained interest in ZDNet" in ZD's combined statements of
operations.
Ziff-Davis Inc. accounts for ZD's retained interest in ZDNet in a manner
similar to the method prescribed under APB No. 18, The Equity Method of
Accounting for Investments in Common Stock.
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 using 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 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 9.) ZD 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 ZD'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
F-46
<PAGE>
ZD
(a division of Ziff-Davis Inc.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
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.
Operating costs and expenses
Cost of production includes the direct costs of producing magazines,
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, ZD 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 ZD'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 21.)
Foreign currency
The effect of translating foreign currency financial statements into U.S.
dollars is included in the cumulative translation adjustments account in
division 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.
F-47
<PAGE>
ZD
(a division of Ziff-Davis Inc.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
Other non-operating income
Other non-operating income includes management fee income and ZD's equity
share of income or loss from joint ventures.
Income taxes
ZD 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
ZD'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 ZD for debt with similar
terms and maturities. Fair value of public debt is based on market prices.
ZD 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
ZD 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 ZD pays a fixed interest rate on a notional amount and
receives a variable interest rate on the same notional amount. The differential
between 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.
F-48
<PAGE>
ZD
(a division of Ziff-Davis Inc.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
Stock-based compensation
ZD 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, ZD adopted the disclosure-only provisions
of Statement of Financial Accounting Standard ("SFAS") No. 123, Accounting for
Stock-Based Compensation.
Comprehensive income
ZD implemented SFAS No. 130, Reporting Comprehensive Income, effective
January 1, 1998. This standard requires ZD to report the total changes in
division equity that do not result directly from transactions with
stockholders, including those which do not affect retained earnings. These
changes are not material to ZD's combined 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. ZD does not expect that the adoption of SFAS No.
133 will have a material impact on ZD's results of operations. ZD 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.
5. Certain Cash Management and Allocation Policies
ZD's financial statements reflect the application of certain cash management
and allocation policies summarized below. The Board may rescind, modify or add
to any of these policies.
Treasury activities
Ziff-Davis Inc. manages most treasury activities on a centralized,
consolidated basis. These activities include the investment of surplus cash,
the issuance, repayment and repurchase of short-term and long-term debt, and
the issuance and repurchase of common stock and preferred stock. Each of ZD and
ZDNet generally remits its cash receipts (other than receipts of foreign
operations or operations that are not wholly owned) to Ziff-Davis
F-49
<PAGE>
ZD
(a division of Ziff-Davis Inc.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
Inc., and Ziff-Davis Inc. generally funds ZD's and ZDNet's cash disbursements
(other than disbursements of foreign operations or operations that are not
wholly owned), on a daily basis.
In the financial statements of ZD and ZDNet, (1) all external debt and equity
transactions (and the proceeds thereof) were attributed to ZD, (2) whenever
ZDNet held cash (other than cash of ZDNet's foreign operations or cash of
ZDNet's operations that are not wholly owned), that cash was transferred to ZD
and accounted for as a return of capital (i.e., as a reduction in ZDNet's
division equity and ZD's Retained Interest in ZDNet) and (3) whenever ZDNet had
a cash need (other than cash needs of ZDNet's foreign operations or cash needs
of ZDNet's operations that are not wholly owned), that cash need was funded by
ZD and accounted for as a capital contribution (i.e., as an increase in ZDNet's
division equity and ZD's Retained Interest in ZDNet).
Corporate general and administrative expenses
Ziff-Davis Inc. 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 ZD based on
utilization. Where determinations based on utilization alone are impracticable,
Ziff-Davis Inc. uses other methods and criteria that management believes to be
equitable and to provide a reasonable estimate of the cost attributable to ZD.
Taxes
Federal income taxes, which are determined on a consolidated basis, are
allocated to ZD (and reflected in its financial statements) in accordance with
Ziff-Davis Inc.'s tax allocation policy. In general, this policy provides that
the consolidated tax provision (and related tax payments or refunds) are
allocated between the Groups based principally upon the financial income,
taxable income, credits and other amounts directly related to the respective
Groups. Tax benefits that cannot be used by the Group generating such
attributes, but can be utilized on a consolidated basis, are allocated to the
Group that generated such benefits. As a result, the allocated Group amounts of
taxes payable or refundable are not necessarily comparable to those that would
have resulted if the Groups had filed separate tax returns. State income taxes
generally are computed on a separate company basis.
Royalty charges
ZD charges ZDNet an annual fee for the use of various brands and editorial
content. The current annual fee, which is reflected in ZD's financial
statements as a reduction of its
F-50
<PAGE>
ZD
(a division of Ziff-Davis Inc.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
selling, general and administrative costs, is equal to 5% of the first
$100,000,000 of ZDNet's revenue for the year, 4% of the next $50,000,000 of
ZDNet's revenue for that year and 3% of any incremental revenue over
$150,000,000 for that year. The Board may at some point in the future change
this fee as it, in its sole discretion, deems appropriate in light of the
circumstances from time to time.
6. 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 ZD's magazines, principally
PC Magazine, PC/Computing, Computer Shopper and PC Week. ZD 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).
. 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.
F-51
<PAGE>
ZD
(a division of Ziff-Davis Inc.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
7. Accounts Receivable, Net
Accounts receivable, net, consist of the following:
<TABLE>
<CAPTION>
December 31,
------------------
1997 1998
-------- --------
(dollars in
thousands)
<S> <C> <C>
Accounts receivable.................................. $297,647 $292,108
Allowance for doubtful accounts, returns and
cancellations....................................... (87,733) (83,515)
-------- --------
$209,914 $208,593
======== ========
</TABLE>
8. 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.......................... $ 45,896 $ 70,584
Leasehold improvements........................... 39,719 61,972
Furniture and fixtures........................... 16,911 28,570
----------- -----------
102,526 161,126
Accumulated depreciation and amortization........ (52,135) (75,555)
----------- -----------
$ 50,391 $ 85,571
=========== ===========
</TABLE>
9. 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 $ 885,700 $ 870,000
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 47,175 47,075
Other................................ 2-20 57,599 58,837
Goodwill............................. 5-40 1,316,077 1,348,413
---------- ----------
3,207,428 3,198,913
Accumulated amortization............. (244,259) (354,596)
---------- ----------
$2,963,169 $2,844,317
========== ==========
</TABLE>
F-52
<PAGE>
ZD
(a division of Ziff-Davis Inc.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
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, ZD 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 6, ZD
recorded a $37,175,000 write-down of intangible assets associated with
discontinued publications and events.
10. 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..................... $27,672 $24,408
Accrued interest.......................................... 6,226 13,678
Restructuring reserve..................................... -- 7,260
Other taxes payable....................................... 2,633 2,386
Other..................................................... 41,355 46,092
------- -------
$77,886 $93,824
======= =======
</TABLE>
F-53
<PAGE>
ZD
(a division of Ziff-Davis Inc.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
11. Unearned Income
Unearned income consists of the following:
<TABLE>
<CAPTION>
December 31,
------------------
1997 1998
-------- --------
(dollars in
thousands)
<S> <C> <C>
Unexpired subscriptions................................ $ 82,167 $ 64,940
Prepaid conference fees................................ 80,706 95,706
Reserve for cancellations.............................. (8,191) (9,643)
-------- --------
$154,682 $151,003
======== ========
</TABLE>
12. Income Taxes
Provision (benefit) for income taxes and related assets and liabilities
attributed to ZD are determined in accordance with Ziff-Davis Inc.'s tax
allocation policy. (See Note 5.)
Prior to the Reorganization and initial public offering described in Note 2,
ZD 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
combined balance sheet have been prepared on a separate return basis as though
ZD 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. ....................................... $(21,607) $(73,795) $(101,644)
Foreign..................................... (5,029) 2,147 (3,104)
-------- -------- ---------
Total....................................... $(26,636) $(71,648) $(104,748)
======== ======== =========
</TABLE>
F-54
<PAGE>
ZD
(a division of Ziff-Davis Inc.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and 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.................................... 19,716 (364) (22,008)
State and local income taxes:
Current..................................... -- -- --
Deferred.................................... 5,729 (105) (7,476)
Foreign income taxes:
Current..................................... -- -- 2,545
Deferred.................................... -- -- --
-------- ----- --------
Total provision (benefit) for income
taxes.................................... $ 25,445 $(469) $(26,939)
======== ===== ========
A reconciliation of the U.S. federal statutory tax rate to ZD'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
Loss related to retained interest in ZDNet.... (26.1) (12.2) (2.5)
Non-recognition of combined losses of MAC
Assets....................................... (96.9) (22.2) (2.6)
Amortization of non-deductible goodwill....... (13.3) (5.8) (3.2)
Other......................................... (0.2) (0.1) (5.6)
-------- ----- --------
Effective tax rate............................ (95.5)% 0.7% 25.7%
======== ===== ========
</TABLE>
The effective tax rate differs from the federal statutory tax rate primarily
as a result of ZD's inability to deduct losses of the MAC Assets prior to May
4, 1998, and ZD's policy of recording the losses related to its 100% retained
interest in ZDNet on a net of tax basis. The amortization of non-deductible
goodwill resulted primarily from the acquisition of 100% of the stock of
Holdings in 1996.
F-55
<PAGE>
ZD
(a division of Ziff-Davis Inc.)
NOTES TO COMBINED 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................... $ 8,713 $ 15,068
Unearned Income................................... 965 6,309
Other............................................. (953) 106
--------- ---------
Current deferred net tax assets................. 8,725 21,483
--------- ---------
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........ 124,233 81,909
Other............................................. 6,307 15,034
--------- ---------
Noncurrent deferred tax liabilities............. (150,352) (138,615)
Valuation allowance................................. (35,261) (30,741)
--------- ---------
Net noncurrent deferred tax liabilities......... (185,613) (169,356)
--------- ---------
Total net deferred tax liabilities.................. $(176,888) $(147,873)
========= =========
</TABLE>
As of December 31, 1997 and 1998 ZD had total deferred tax assets of
$112,351,000 and $99,959,000 respectively, and total deferred tax liabilities
of $289,239,000 and $247,832,000 respectively. The December 31, 1997 and 1998
net deferred tax assets are reduced by a valuation allowance of $35,261,000 and
$30,741,000 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 ZD.
At December 31, 1998, ZD has U.S. and foreign net operating loss
carryforwards of approximately $172,943,000, which will begin to expire in
1999. ZD's utilization of certain net operating loss carryforwards, of
approximately $112,549,000, 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 ZD'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, ZD
has alternative minimum tax credit carryforwards of $385,000 which may be
carried forward indefinitely until used.
F-56
<PAGE>
ZD
(a division of Ziff-Davis Inc.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
Undistributed earnings of foreign subsidiaries for which no deferred taxes
have been provided approximated $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.
13. Notes Payable
All of Ziff-Davis Inc.'s external debt has been attributed to ZD.
A summary of ZD'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 14)..... $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 ZD 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 as a reduction of
long-term debt at December 31, 1998 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 ZD 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
F-57
<PAGE>
ZD
(a division of Ziff-Davis Inc.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
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.
The $500 million term loan 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, ZD 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-
F-58
<PAGE>
ZD
(a division of Ziff-Davis Inc.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
default to other indebtedness, bankruptcy, ERISA, judgments and change of
control. At December 31, 1998, management believes that ZD 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 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 14.)
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 unamoritized discount............................... (870)
----------
Notes payable, net....................................... $1,547,014
==========
</TABLE>
Interest rate swaps
On June 10, 1998 ZD 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, ZD receives a floating rate of interest based
on three-month LIBOR, which resets quarterly, and ZD pays a fixed rate of
interest, each quarter, for the terms of the
F-59
<PAGE>
ZD
(a division of Ziff-Davis Inc.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
respective agreements. The terms of these agreements range from 3 to 7 years
and the weighted average fixed rate ZD pays is 5.85%. ZD 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.
14. Related Party Transactions
ZD transacts business with 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
======== =======
Due to affiliates and management consist of the following:
<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, ZD agreed to assume certain
obligations to management arising out of prior employment arrangements with
previous owners. In January 1997, ZD paid all amounts due, including accrued
interest, through the payment date.
F-60
<PAGE>
ZD
(a division of Ziff-Davis Inc.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
Prior to the Reorganization and initial public offering, ZD was a member of
Softbank's central cash management system. Under this system, ZD would
periodically transfer excess cash to Softbank for cash management purposes and
in turn receive cash advances from Softbank to fund ZD'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, ZD 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, ZD incurred
$2,000,000, $1,631,000 and $169,000, respectively, in advertising expense with
Yahoo!, Inc. (Yahoo!), an affiliated company.
ZD sells advertising space and exhibition services to Kingston. During the
years ended December 31, 1996, 1997 and 1998, ZD recorded revenue of $882,000,
$2,667,000 and $2,472,000, 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
relating to this transaction was $2,400,000 in 1998.
ZD has entered into an agreement to manage certain trade shows and
expositions owned by Softbank, whereby ZD earns management, royalty and
licensing fees. The fees earned by ZD for the years ended December 31, 1996,
1997 and 1998 were $3,394,000, $4,057,000 and $1,117,000, respectively.
ZD has an arrangement with SOFTBANK Services, an affiliated company, whereby
ZD is charged for administrative services provided plus a management fee. For
the years ended December 31, 1996, 1997 and 1998 ZD 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.
F-61
<PAGE>
ZD
(a division of Ziff-Davis Inc.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
ZD has entered into certain licensing agreements with Softbank for the
publishing and distribution of Japanese language editions of certain
publications. The fees earned by ZD for the years ended December 31, 1996, 1997
and 1998 were approximately $964,000, $1,818,000 and $709,000, respectively.
Certain ZD 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 15.)
Included in selling, general and administrative expenses is an allocation for
Ziff-Davis Inc.'s Central Services amounting to $61,359,000, $85,739,000 and
$92,032,000 for the years ended December 31, 1996, 1997 and 1998, respectively.
Also included as a reduction in selling, general and administrative expenses is
a royalty charge from ZDNet amounting to $811,000, $1,611,000 and $2,807,000
for the years ended December 31, 1996, 1997 and 1998, respectively. (See Note
5.)
ZD's publications sell advertising to ZDNet at discounts to market rates. Had
ZD charged market rates for such advertising, ZD's revenue would have increased
by $2,235,000, $2,671,000 and $1,429,000 for the years ended December 31, 1996,
1997 and 1998, respectively.
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 23.)
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.
Notes payable to affiliates
See Note 2 for a discussion of ZD's restructuring of its debt and equity
structures through the Reorganization and initial public offering.
F-62
<PAGE>
ZD
(a division of Ziff-Davis Inc.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
ZD'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 ZD 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 ZD, 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, ZD was released from this
guarantee.
Return of capital and dividends
On December 15, 1996, ZD 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, ZD recorded a
return of capital of $381,434,000 in connection with the purchase of companies
under common control.
F-63
<PAGE>
ZD
(a division of Ziff-Davis Inc.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
15. 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 ZD.
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 of the stock options did not
result in compensation expense to ZD.
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 6,418,495 shares
with exercise prices ranging from $6.00 to $16.00 per share representing the
fair value of such options on the date of grant. 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 ZD.
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.
F-64
<PAGE>
ZD
(a division of Ziff-Davis Inc.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
In addition, on December 21, 1998, the Board approved the grant of options to
acquire an aggregate of approximately 1,566,000 shares of ZDNet Stock to
certain employees at a price of $7.50 per share. As a result of the grant ZD
has recorded deferred compensation expense of $4,993,000 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 division equity offset by an
addition to paid-in capital. ZD expects to recognize non-cash compensation for
accounting purposes of $4,993,000 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 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 10,200,000 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, ZD expects to recognize
compensation expense for accounting purposes of approximately $2,942,000 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 division equity as deferred compensation.
F-65
<PAGE>
ZD
(a division of Ziff-Davis Inc.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and 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.................................. 714,777(2) $87.15
Exercised................................ -- --
Forfeited................................ (12,740)(2) 87.15
--------
Shares outstanding under options at
December 31, 1996....................... 702,037 $87.15
Granted.................................. 368,563 61.25
Exercised................................ -- --
Forfeited................................ (138,034) 78.89
--------
Shares outstanding under options at
December 31, 1997....................... 932,566 $78.14
Granted.................................. 258,215 31.03
Exercised................................ (75,982) 31.03
Forfeited/cancelled...................... (309,936) 31.03
Converted to Ziff-Davis Inc. options..... (81,478) 31.03
-------- ------
Shares outstanding under options at
December 31, 1998....................... 723,385 $31.03
========
Shares exercisable as of:
At December 31, 1996................... -- --
At December 31, 1997 (price range
$44.26-$87.15)........................ 102,510 $82.21
At December 31, 1998 (price $31.03).... 243,686 $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.
F-66
<PAGE>
ZD
(a division of Ziff-Davis Inc.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
Information relating to the Ziff-Davis Inc. stock options during 1998 is as
follows:
<TABLE>
<CAPTION>
Weighted Average
Number Option Price
of Shares Per Share
--------- ----------------
<S> <C> <C>
Shares outstanding under options at December
31, 1997................................... -- --
Granted..................................... 6,418,495 $6.09
Exercised................................... -- --
Converted from Softbank options............. 319,174 8.89
Forfeited................................... (385,590) 6.00
---------
Shares outstanding under options at December
31, 1998................................... 6,352,079 $6.22
=========
</TABLE>
Information relating to the ZDNet stock options during 1998 is as follows:
<TABLE>
<CAPTION>
Weighted Average
Number Option Price
of Shares* Per Share*
---------- ----------------
<S> <C> <C>
Shares outstanding under options at December
31, 1997................................... -- --
Granted..................................... 1,566,357 $7.50
Exercised................................... -- --
Forfeited................................... -- --
---------
Shares outstanding under options at December
31, 1998................................... 1,566,357 $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 Ziff-Davis Inc. or ZDNet options
were exercisable.
As permitted by SFAS No. 123, ZD 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 ZD 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:
F-67
<PAGE>
ZD
(a division of Ziff-Davis Inc.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
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
------- ------- -------
<S> <C> <C> <C>
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
<CAPTION>
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
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
The weighted average fair value of options granted in 1996, 1997 and 1998 is
as follows:
<CAPTION>
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
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
</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, ZD's net loss would have been increased by
approximately $3,000,000, $4,000,000 and $14,084,000, respectively.
Other stock compensation plans
During 1996, 1997 and 1998 employees of ZD were 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
ZD's employees has been recorded as additional paid-in capital offset by a
reduction to division equity as deferred compensation. Such amounts were
recorded at the fair value, as established by market price of the shares
F-68
<PAGE>
ZD
(a division of Ziff-Davis Inc.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
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.
16. Employee Benefit Plans
Pension plan
Certain employees of ZD 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. ZD'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, ZD 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 plan obligations were settled during 1998 and a gain of $156,000 was
recognized in 1998 as a result of the plan settlement.
F-69
<PAGE>
ZD
(a division of Ziff-Davis Inc.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
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%.
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 of 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 ZD'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. ZD made contributions to the plans totaling $10,023,000,
$12,974,000 and $11,893,000 in 1996, 1997 and 1998, respectively.
F-70
<PAGE>
ZD
(a division of Ziff-Davis Inc.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
17. Investments
ZD has investments in the following companies/joint ventures/divisions:
<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
</TABLE>
The entities listed above are engaged primarily in the publication or
distribution of print media, 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 ZD's financial statements.
ZD had equity income (loss) from joint ventures of $(796,000), $335,000 and
$7,483,000 in 1996, 1997 and 1998, respectively. In addition, ZD had equity
losses of $16,925,000, $21,238,000 and $7,884,000 in 1996, 1997 and 1998,
respectively, from its 100% Retained Interest in ZDNet.
18. Supplemental Cash Flow Information
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------
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 $ 14,000 $ 55,473
Liabilities assumed........................ 370,518 -- 32,701
---------- -------- --------
Cash paid.................................. 2,138,085 14,000 22,772
Less--cash acquired........................ 13,262 -- --
---------- -------- --------
Net cash paid for acquisitions............. $2,124,823 $ 14,000 $ 22,772
========== ======== ========
Return of capital dividends................ $ 899,948 $381,434 $ --
========== ======== ========
Capital contributions...................... $ 5,002 $ 61,580 $926,096
========== ======== ========
</TABLE>
F-71
<PAGE>
ZD
(a division of Ziff-Davis Inc.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
19. Fair Value of Financial Instruments
ZD's accounting policies with respect to financial instruments are discussed
in Note 4.
The carrying amounts and fair values of ZD'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......... $ 30,273 $ 30,273 $ 32,274 $ 32,274
Accounts receivable............... 209,914 209,914 208,593 208,593
Accounts payable.................. 54,823 54,823 71,844 71,844
Long-term debt (including current
portion)......................... 2,534,030 2,534,030 1,547,014 1,543,839
</TABLE>
Interest rate swaps
ZD utilizes interest rate swaps to reduce the impact on interest expense of
fluctuating interest rates on its variable rate debt. Under ZD's interest rate
swap agreements, ZD agreed with the counterparties to exchange, at quarterly
intervals, the difference between ZD's fixed pay rate and the counterparties'
variable pay rate on three-month LIBOR. At December 31, 1998, ZD 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 ZD would pay if the
agreements were terminated at the balance sheet date. While it is not ZD'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.
20. Operating Lease Commitments
ZD utilizes equipment and space under lease to Ziff-Davis Inc. ZD's portion
of the minimum lease payments based on square feet utilized are as follows:
<TABLE>
<CAPTION>
(dollars in thousands)
<S> <C>
1999..................................................... $ 31,408
2000..................................................... 32,601
2001..................................................... 30,371
2002..................................................... 28,893
2003..................................................... 27,579
Thereafter............................................... 225,952
--------
Total.................................................. $376,804
========
</TABLE>
F-72
<PAGE>
ZD
(a division of Ziff-Davis Inc.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
Netted in the above totals is approximately $5,000,000 for which ZD has
noncancelable subleases in place. Total sublease income approximates ZD's
required payments under the related leases. Rent expense amounted to
approximately $22,347,000, $28,646,000 and $23,087,000 for the years ended
December 31, 1996, 1997and 1998, respectively.
21. Segment Information
ZD has adopted the provisions of SFAS No. 131, Disclosure 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
Reportable segments are based on ZD's 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 charge. ZD's EBITDA is calculated by adding (a)
ZD's EBITDA before losses related to its retained interest in ZDNet and (b)
ZD's proportionate interest in ZDNet's EBITDA. 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 ZD's operating performance or to
cash flows as a measure of liquidity. Although ZD 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 ZD may not be comparable to similarly titled measures
reported by other companies.
ZD'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. The
publishing segment includes a 100% Retained Interest in ZDNet.
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.
F-73
<PAGE>
ZD
(a division of Ziff-Davis Inc.)
NOTES TO COMBINED 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". ZD 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
-------- ---------- ----------
Total.................................... $938,924 $1,121,543 $1,052,749
======== ========== ==========
<CAPTION>
1996 1997 1998
-------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C>
EBITDA:
Publishing................................. $124,467 $ 169,145 $ 124,396*
Events..................................... 108,791 103,749 119,698
-------- ---------- ----------
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................................ $2,441,441 $2,423,822 $2,285,920
Events.................................... 1,143,522 1,124,286 1,144,018
---------- ---------- ----------
Total................................... $3,584,963 $3,548,108 $3,429,938
========== ========== ==========
</TABLE>
A reconciliation of total segment EBITDA to total combined loss before income
taxes, for the years ended December 31, 1996, 1997 and 1998 is as follows:
<TABLE>
<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............... (31,647) (28,884) (27,875)
Amortization of intangible assets......... (102,604) (118,375) (118,221)
Interest expense, net..................... (120,646) (190,445) (143,547)
Non-EBITDA loss related to retained
interest in ZDNet........................ (4,997) (6,838) (6,960)
-------- -------- ---------
Combined loss before income taxes....... $(26,636) $(71,648) $(104,748)
======== ======== =========
</TABLE>
F-74
<PAGE>
ZD
(a division of Ziff-Davis Inc.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
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 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.
Publishing's investment in equity method investees for the years ended
December 31, 1996, 1997 and 1998 was $10,138,000, $25,586,000 and $19,268,000,
respectively. Events' investment in equity method investees for the year 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.
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....................................... $ 838,749 $1,008,681 $ 936,075
Foreign................................... 100,175 112,862 116,674
---------- ---------- ----------
Total................................... $ 938,924 $1,121,543 $1,052,749
========== ========== ==========
Foreign revenue is based on the country in which the sales originate. Revenue
from no single foreign country was material to the combined 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. ..................................... $3,211,881 $3,103,611 $3,049,645
Foreign................................... 9,580 8,570 14,130
---------- ---------- ----------
Total................................... $3,221,461 $3,112,181 $3,063,775
========== ========== ==========
</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-75
<PAGE>
ZD
(a division of Ziff-Davis Inc.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
22. Contingencies
ZD 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 common 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. The 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
F-76
<PAGE>
ZD
(a division of Ziff-Davis Inc.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
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.
Although the outcome of this case 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.
23. Subsequent Events
DTV
On February 4, 1999, ZD purchased ZDTV at a purchase price of approximately
$81,400,000. (See Note 14.) ZD 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. ZD
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 ZD's balance sheet, the
results of operations of ZDTV are not included in ZD'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, 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-77
<PAGE>
ZD
(a division of Ziff-Davis Inc.)
NOTES TO COMBINED 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 effect 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 ZDTV
ZD Transactions Proforma
---------- ------------ ----------
(dollars in thousands)
<S> <C> <C> <C>
Revenue............................. $1,052,749 $ 5,585 $1,058,334
Income (loss) from operations....... 38,586 (55,049) (16,463)
Net loss............................ (77,809) (22,443) (100,252)
</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-78
<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-79
<PAGE>
ZIFF-DAVIS INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
December 31,
----------------------
1997 1998
---------- ---------- ---
<S> <C> <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-80
<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-81
<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-82
<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-83
<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.
F-84
<PAGE>
ZIFF-DAVIS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
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.
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
F-85
<PAGE>
ZIFF-DAVIS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
$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.
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.
F-86
<PAGE>
ZIFF-DAVIS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
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.
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
F-87
<PAGE>
ZIFF-DAVIS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
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 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.
F-88
<PAGE>
ZIFF-DAVIS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
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 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
F-89
<PAGE>
ZIFF-DAVIS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
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.)
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.
F-90
<PAGE>
ZIFF-DAVIS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except per share amounts)
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-91
<PAGE>
ZIFF-DAVIS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and 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.
F-92
<PAGE>
ZIFF-DAVIS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
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).
. 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>
F-93
<PAGE>
ZIFF-DAVIS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
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>
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.
F-94
<PAGE>
ZIFF-DAVIS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except per share amounts)
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.
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
F-95
<PAGE>
ZIFF-DAVIS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
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)
======== ======== =========
Components of the provision (benefit) for income taxes are as follows:
<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-96
<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.
F-97
<PAGE>
ZIFF-DAVIS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
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.
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
F-98
<PAGE>
ZIFF-DAVIS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
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.
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.
F-99
<PAGE>
ZIFF-DAVIS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
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.)
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.
F-100
<PAGE>
ZIFF-DAVIS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
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>
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
F-101
<PAGE>
ZIFF-DAVIS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except per share amounts)
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.
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
F-102
<PAGE>
ZIFF-DAVIS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
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.
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.
F-103
<PAGE>
ZIFF-DAVIS INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except per share amounts)
(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.
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
F-104
<PAGE>
ZIFF-DAVIS INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except per share amounts)
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.
F-105
<PAGE>
ZIFF-DAVIS INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
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 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-106
<PAGE>
ZIFF-DAVIS INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and 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-107
<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-108
<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
</TABLE>
The weighted average fair value of options granted in 1996, 1997 and 1998, is
as follows:
<TABLE>
<CAPTION>
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
<S> <C> <C> <C>
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
F-109
<PAGE>
ZIFF-DAVIS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except per share amounts)
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.
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
F-110
<PAGE>
ZIFF-DAVIS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
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%.
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.
F-111
<PAGE>
ZIFF-DAVIS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
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 --
<CAPTION>
Cost Investments
----------------
<S> <C> <C> <C>
Red Herring Communications, Inc. .............. -- $ 5,000
Deja News, Inc. ............................... -- 5,000
</TABLE>
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>
F-112
<PAGE>
ZIFF-DAVIS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
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.
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.
F-113
<PAGE>
ZIFF-DAVIS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
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.
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.
F-114
<PAGE>
ZIFF-DAVIS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
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-115
<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>
F-116
<PAGE>
ZIFF-DAVIS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except per share amounts)
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.
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-117
<PAGE>
ZIFF-DAVIS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except 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.
F-118
<PAGE>
ZIFF-DAVIS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
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.
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-119
<PAGE>
UNDERWRITING
Ziff-Davis Inc. and the underwriters for the U.S. offering, the U.S.
underwriters, named below have entered into an underwriting agreement with
respect to the shares of ZDNet stock being offered in the United States.
Subject to certain conditions, each U.S. underwriter has severally agreed to
purchase the number of shares indicated in the following table. Goldman, Sachs
& Co., Donaldson, Lufkin & Jenrette Securities Corporation and Hambrecht &
Quist LLC are the representatives of the U.S. underwriters.
<TABLE>
<CAPTION>
Number of
U.S. Underwriters Shares
----------------- ---------
<S> <C>
Goldman, Sachs & Co. .............................................. 2,598,000
Donaldson, Lufkin & Jenrette Securities Corporation................ 2,598,000
Hambrecht & Quist LLC.............................................. 1,299,000
ABN AMRO Incorporated.............................................. 263,000
CIBC Oppenheimer Corp.............................................. 263,000
LaSalle St. Securities, Inc........................................ 95,000
Lazard Freres & Co. LLC............................................ 263,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated................. 263,000
Morgan Stanley & Co. Incorporated.................................. 263,000
Wit Capital Corporation............................................ 95,000
---------
Total............................................................ 8,000,000
=========
</TABLE>
----------------
If the U.S. underwriters sell more shares than the total number set forth in
the table above, the U.S. underwriters have an option to buy up to an
additional 1,500,000 shares from Ziff-Davis Inc. to cover such sales. They may
exercise that option for 30 days. If any shares are purchased pursuant to this
option, the U.S. underwriters will severally purchase shares in approximately
the same proportion as set forth in the table above.
The following table shows the per share and total underwriting discounts to
be paid to the U.S. underwriters by Ziff-Davis Inc. Such amounts are shown
assuming both no exercise and full exercise of the U.S. underwriters' option to
purchase 1,500,000 additional shares.
Paid by Ziff-Davis Inc.
<TABLE>
<CAPTION>
No Full
Exercise Exercise
----------- -----------
<S> <C> <C>
Per Share............................................ $ 1.33 $ 1.33
Total................................................ $10,640,000 $12,635,000
</TABLE>
----------------
Shares sold by the U.S. underwriters to the public will initially be offered
at the initial public offering price set forth on the cover of this prospectus.
Any shares sold by the U.S. underwriters to securities dealers may be sold at a
discount of up to $0.80 per share from the initial public offering price. Any
such securities dealers may resell any shares purchased from the underwriters
to certain other brokers or dealers at a discount of up to $0.10 per share from
the initial public offering price. If all the shares are not sold at the
initial offering price, the representatives may change the offering price and
the other selling terms.
U-1
<PAGE>
Goldman Sachs International, Donaldson, Lufkin & Jenrette International and
Hambrecht & Quist LLC have entered into an underwriting agreement with the
underwriters for the offering of 2,000,000 shares outside of the United States.
The terms and conditions of the offering in the United States and the
international offering outside of the United States are the same and the sale
of shares in both offerings are conditioned on each other.
Goldman Sachs International, Donaldson, Lufkin & Jenrette International and
Hambrecht & Quist LLC are representatives of the underwriters for the
international offering outside the United States. We refer to the U.S.
underwriters and the International underwriters as the underwriters.
The underwriters have entered into an agreement in which they agree to
restrictions on where and to whom they and any dealer purchasing from them may
offer shares as a part of the distribution of the shares. The underwriters also
have agreed that they may sell shares among each of the underwriting groups.
Ziff-Davis Inc. has agreed with the underwriters not to dispose of or hedge
any of its ZDNet stock or securities convertible into or exchangeable for
shares of ZDNet stock during the period from the date of this prospectus
continuing through the date 180 days after the date of this prospectus, except
with the prior written consent of the representatives. This agreement does not
apply to any existing employee benefit plans. See "Shares Eligible for Future
Sale" for a discussion of this agreement and certain other transfer
restrictions.
In December 1998, Donaldson, Lufkin & Jenrette Securities Corporation
acquired 30,000 shares of Ziff-Davis Inc. common stock for a purchase price of
$330,000. These shares may be deemed to be underwriters' compensation to
Donaldson, Lufkin & Jenrette in connection with the offering, and, in
accordance with the Rules of the NASD, Donaldson, Lufkin & Jenrette has agreed
not to sell, transfer, assign or hypothecate such shares for one year following
the effective date of the offering.
In March 1999, Goldman, Sachs & Co. acted as the exclusive private placement
agent for SOFTBANK Kingston in connection with the private placement of shares
of Ziff-Davis Inc. common stock to a disinterested third party. Ziff-Davis Inc.
paid customary placement fees to Goldman, Sachs & Co. for such services.
Prior to the offering, there has been no public market for the shares. The
initial public offering price has been negotiated among Ziff-Davis Inc. and the
representatives. Among the factors considered in determining the initial public
offering price of the shares, in addition to prevailing market conditions, were
Ziff-Davis Inc.'s and ZDNet's historical performance, estimates of the business
potential and earnings prospects of Ziff-Davis Inc. and ZDNet, an assessment of
the management of Ziff-Davis Inc. and ZDNet and the consideration of the above
factors in relation to market valuation of companies in related businesses.
ZDNet stock has been approved for listing on the NYSE under the symbol "ZDZ".
In order to meet one of the requirements for listing ZDNet stock on the NYSE,
the
U-2
<PAGE>
underwriters have undertaken to sell lots of 100 or more shares to a minimum of
2,000 beneficial holders.
In connection with the offering, the underwriters may purchase and sell
shares of ZDNet stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offering.
Stabilizing transactions consist of certain bids or purchases made for the
purpose of preventing or retarding a decline in the market price of ZDNet stock
while the offering is in progress.
The underwriters also may impose a penalty bid. This occurs when a particular
underwriter repays to the underwriters a portion of the underwriting discount
received by it because the representatives have repurchased shares sold by or
for the account of such underwriter in stabilizing or short covering
transactions.
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of ZDNet stock. As a result, the price of ZDNet stock
may be higher than the price that otherwise might exist in the open market. If
these activities are commenced, they may be discontinued by the underwriters at
any time. These transactions may be effected on the NYSE, in the over-the-
counter market or otherwise.
The underwriters do not expect sales to discretionary accounts to exceed five
percent of the total number of shares offered.
Ziff-Davis Inc. estimates that its share of the total expenses of this
offering, excluding underwriting discounts and commissions, will be
approximately $4.2 million.
At the request of Ziff-Davis Inc., up to 700,000 shares have been reserved
for sale by the U.S. underwriters to employees of Ziff-Davis Inc. and its
affiliates and certain other purchasers. Such shares will be sold at the
initial public offering price and, to the extent sold, will not otherwise be
available for sale as a part of the offering. If any such shares are not sold
in this manner they will be offered by the U.S. underwriters as a part of the
offering.
Ziff-Davis Inc. has agreed to indemnify the several underwriters against
certain liabilities, including liabilities under the Securities Act.
This prospectus may be used by the underwriters and other dealers in
connection with offers and sales of the shares, including sales of shares
initially sold by the underwriters in the offering being made outside of the
United States, to persons located in the United States.
U-3
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
No dealer, salesperson or other person is authorized to give any information
or to represent anything not contained in this prospectus. You must not rely
on any unauthorized information or representations. This prospectus is an
offer to sell or to buy only the shares offered hereby, but only under
circumstances where it is lawful to do so. The information contained in this
prospectus is current only as of its date.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary.................................................................. 3
Risk Factors............................................................. 17
Cautionary Statement Regarding Forward-Looking Statements................ 39
Trading Prices of and Dividends on Existing Common Stock................. 40
Use of Proceeds.......................................................... 41
Dividend Policy.......................................................... 42
Capitalization........................................................... 43
Dilution................................................................. 44
ZDNet Selected Historical Combined Financial and Other Data.............. 45
ZDNet Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................... 46
ZDNet Description of Business............................................ 59
Management of ZDNet...................................................... 74
ZD Selected Historical Combined Financial and Other Data................. 76
ZD Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................... 77
ZD Description of Business............................................... 94
Ziff-Davis Inc. Selected Historical Consolidated Financial and Other
Data.................................................................... 110
Ziff-Davis Inc. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................................... 111
Ziff-Davis Inc. Description of Business.................................. 127
Management of Ziff-Davis Inc. ........................................... 128
Executive Compensation................................................... 132
Certain Relationships with Our Majority Stockholders and Related
Transactions............................................................ 146
Security Ownership of Certain Beneficial Owners and Management........... 152
Certain Cash Management and Allocation Policies.......................... 154
Description of Capital Stock............................................. 158
Shares Eligible for Future Sale.......................................... 181
Ziff-Davis Inc.'s Debt................................................... 184
Certain United States Tax Consequences................................... 187
Validity of ZDNet Stock.................................................. 191
Experts.................................................................. 191
Where You Can Find More Information...................................... 191
Illustration of Certain Terms............................................ I-1
Index to Financial Statements............................................ F-1
Underwriting............................................................. U-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
10,000,000 Shares
Ziff-Davis Inc.-- ZDNet
Common Stock
---------------
[LOGO] ZDNet
---------------
Joint Global Coordinators and Joint Book-Running Managers
Goldman, Sachs & Co.
Donaldson, Lufkin & Jenrette
---------------
Hambrecht & Quist
Representatives of the Underwriters
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
SIGNATURE
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.
By: /s/ Timothy C. O'Brien
-------------------------------
Name: Timothy C. O'Brien
Title: Chief Financial Officer
Date: August 4, 1999
-3-
