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Filed pursuant to Rule 424(b)(4)
Registration Statement No. 333-53433
PROSPECTUS
3,180,000 Shares
idg logo
IDG Books Worldwide, Inc.
CLASS A COMMON STOCK
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IDG Books Worldwide, Inc. is offering 3,180,000 shares of its Class A common
stock. This is our initial public offering and no public market currently exists
for our shares.
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The Class A common stock has been approved for quotation on the Nasdaq
National Market under the symbol "IDGB".
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INVESTING IN THE CLASS A COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 11.
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PRICE $15 1/2 A SHARE
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<TABLE>
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Underwriting
Price to Discounts and Proceeds to
Public Commissions Company
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Per Share............................ $15.50 $1.085 $14.415
Total................................ $49,290,000 $3,450,300 $45,839,700
</TABLE>
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities, or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
IDG Books Worldwide, Inc. has granted the underwriters the right to purchase up
to an additional 477,000 shares of Class A common stock to cover
over-allotments. Morgan Stanley & Co. Incorporated expects to deliver the shares
of Class A common stock to purchasers on July 31, 1998.
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MORGAN STANLEY DEAN WITTER
GOLDMAN, SACHS & CO.
MERRILL LYNCH & CO.
July 27, 1998
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Front Artwork Page:
[Set forth on the outside panel of the front gatefold under the heading "How the
World Knows IDG Books Worldwide" are the Company's logo and photographs of some
of the books that the Company publishes.]
[Set forth on one inside panel of the front gatefold under the heading "The
People You Know" are photographs of some of the authors of the Company's books.]
[Set forth on one inside panel of the back gatefold under the heading "The
Quality Consumers Know" are certain awards the Company has received, a list of
best seller books published by the Company and press coverage related to the
Company.]
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TABLE OF CONTENTS
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PAGE
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Prospectus Summary..................... 5
Risk Factors........................... 11
Use of Proceeds........................ 16
Dividend Policy........................ 16
Certain Information.................... 16
Capitalization......................... 17
Dilution............................... 18
Selected Financial Data................ 19
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 21
Industry Overview...................... 28
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PAGE
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Business............................... 29
Management............................. 37
Relationship with IDG and Certain
Transactions......................... 45
Principal Stockholders................. 47
Description of Capital Stock........... 48
Shares Eligible for Future Sale........ 51
Underwriters........................... 53
Legal Matters.......................... 55
Experts................................ 55
Additional Information................. 55
Index to Financial Statements.......... F-1
</TABLE>
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of Class A common stock only in jurisdictions where offers and sales
are permitted. The information contained in this prospectus is accurate only as
of the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of the Class A common stock. In this prospectus, the
"Company," "IDG Books," "we," "us" and "our" refer to IDG Books Worldwide, Inc.
and its predecessor.
Until August 21, 1998, all dealers that buy, sell or trade Class A common
stock, whether or not participating in this offering, may be required to deliver
a prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
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PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding our company and the Class A common stock being sold in
this offering and our financial statements and notes thereto appearing elsewhere
in this prospectus.
We are a leading publisher of computer, business and self-help books
designed to make learning accessible and fun. In 1997, we produced more number
one best-selling computer books than any other publisher, according to
Publishers Weekly. The computer book category has been the fastest growing
sector in the U.S. book industry in each of the past six years. We publish and
market 18 book series under well-known brand names, including our popular
". . . For Dummies(R)" series. These books have created widespread recognition
of our brands by consumers, enabling us to successfully publish across a variety
of categories in technology, business and self-help. Our portfolio of brand
names includes more than 700 active titles. We have approximately 65 million
English-language books in print and have translated our books into 36 languages.
We believe that our readers value and trust our products and brands to help
obtain computer proficiency and professional certification, general business
know-how, career growth and personal enrichment.
Since our founding in 1990, we have grown rapidly. During the last four
completed fiscal years, our net revenue grew at a compound annual growth rate of
46.2%, and our net income grew at a compound annual growth rate of 16.7%. Our
net revenue was $120.7 million in our most recently completed fiscal year, and
our net income was $7.0 million during that time. Our net revenue increased
86.3% in 1994, 47.4% in 1995, 34.9% in 1996 and 23.3% in 1997 compared to the
prior year. Our net income increased 71.3% in 1994, decreased 2.0% in 1995, and
increased 1.9% and 8.4% in 1996 and 1997 compared to the prior year. For the six
months ended March 31, 1998, our net revenue was $71.9 million, and our net
income was $6.9 million. During that time, our net revenue increased 15.1% from
the comparable period in the previous year, and our net income increased by
37.8%.
We publish our books in two general publishing groups, ". . . For
Dummies(R)" and IDG Books Technology, which target the distinct needs of
readers. Our ". . . For Dummies(R)" series is a best-selling line of computer,
business, personal finance, study aids, cooking, gardening, do-it-yourself,
health and fitness, and self-help books. The group consists of more than 350
active titles and approximately 50 million copies in print, as well as
extensions into multimedia, music, on-line information and board games. Windows
For Dummies(R) has more than six million copies in print across all editions,
and the current edition was the best-selling computer book in 1997 according to
Publishers Weekly and USA Today. Other best-selling ". . . For Dummies(R)"
titles include Internet for Dummies(R), Personal Finance For Dummies(R), Golf
For Dummies(R) and Cooking For Dummies(R). Sales of our ". . . For Dummies(R)"
books accounted for approximately 68% of our net revenue in our fiscal year
ended September 30, 1997.
The IDG Books Technology group includes an expanding collection of
information technology books published in multiple book series under a variety
of brand names. These series and brands include 3-D Visual(R), One Step at a
Time, Bible, ". . . Secrets(R)", MCSE Study and Novell Press. These books appeal
to a wide range of readers, from beginners to knowledgeable professionals. For
the fiscal year ended September 30, 1997, sales from our IDG Books Technology
group represented approximately 32% of our net revenue.
The market for computer related books has increased for many reasons.
First, the number of new computer users, both at work and at home, has increased
dramatically. Also, computer hardware and software continues to become more
complex, and manufacturers are not providing users with sufficient guidance on
these products. The market for books devoted to the use of computer hardware and
software grew from $678.0 million in 1995 to $844.0 million in 1997.
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Our books compete in the general interest book market covering most
categories, other than fiction, biography and children's books. As demands on
people's time increase and life in general becomes more complex, we believe
people are turning to self-help and similar books to increase personal
productivity, enhance career success and provide competitive advantages in a
rapidly changing economy, as well as to provide personal enrichment.
OPERATING STRATEGY
We strive to provide a consistent, accessible and rewarding learning
experience to our readers. To achieve these objectives, we have adopted the
following operating strategies:
Focus on Branded Content and Mass Marketing. We create quality products
which we market extensively. This helps build brand recognition. We believe that
our valuable name recognition generates repeat demand for our books and that the
strength of our brand names enables us to extend these brands into additional
licensed products and services.
Make Knowledge Accessible and Enjoyable. We believe millions of
individuals, businesses and families are challenged by technologies or are
trying to acquire new skills or enrich their lives. We specifically design our
products to make learning accessible and fun.
Maintain Efficient and Proven Publication Process. We have developed a
successful process to conceive, acquire and produce new and revised titles on a
timely and cost-effective basis. Our staff of creative personnel identifies and
develops new titles and subject areas and draws on a highly recognized and
respected list of leading authorities, media celebrities and experienced
computer/Internet authors. This collaboration, in conjunction with our
experienced editorial team, assures brand consistency through high quality,
easy-to-read publications. In addition, our close working relationships with
technology industry leaders enable us to release high quality and well supported
products and services in a timely manner.
GROWTH STRATEGY
Building on our operating strategy and upon industry trends, we have
pursued the following strategies to expand our business:
Expand Technology, Business and Self-Help Publishing Programs. We have
identified numerous opportunities to take advantage of our market position in
the technology, business and self-help markets by adding new titles to existing
categories and expanding into new categories. For example, we are releasing
about 20 new and revised books in concert with Microsoft's release of Windows
98. These books will be supported by aggressive retail incentives and marketing
programs. We have also expanded our ". . . For Dummies(R)" branded products into
other successful categories, such as the best-selling Golf For Dummies(R) title.
We expect to expand this category into other golf-related book topics.
Increase Distribution Penetration and Expand Network. We are working to
increase our shelf space among our existing retailers and distributors and to
add new retailers, distributors and distribution channels. We have developed
sales and marketing programs that provide additional compensation to
distributors for sales to the ultimate consumer, the reader, in an effort to
increase shelf space devoted to our books at existing retail customers. To
expand our sales network, we are also establishing new distribution channels,
such as on-line retailers and other nontraditional channels for the distribution
of our books.
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Develop Business-to-Business Opportunities. We intend to sell our core
products directly to businesses for training purposes. In addition, we plan to
expand our custom publishing activities, including production of documentation
and booklets, corporate training and special projects, for a broad range of
customers.
Develop Brand Ventures. We believe that there are numerous opportunities to
extend our brands through domestic and international licensing arrangements,
strategic joint ventures, retail alliances and on-line services.
Selectively Acquire Titles and Companies in the U.S. and
Internationally. We believe that opportunities exist to acquire selected
technology, business and self-help properties that will complement and enhance
our existing portfolio.
RELATIONSHIP WITH IDG
We are owned by a subsidiary of International Data Group, Inc. ("IDG"), a
leading global provider of information technology media, research, conferences
and expositions. IDG's publications include more than 280 magazines and
newspapers, including PC World, Computerworld and Infoworld, in over 75
countries. In addition, through its International Data Corporation division, IDG
is one of the world's leading providers of information technology data, analysis
and consulting. IDG also produces more than 110 globally branded conferences and
expositions in 33 countries. After completion of this offering, IDG will own
approximately 74.97% of the outstanding shares of our Class A common stock and
Class B common stock, combined, and will control 77.77% of our voting power.
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THE OFFERING
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Class A common stock offered................ 3,180,000 shares(1)
Common stock to be outstanding after this
offering:
Class A common stock................... 14,080,000 shares(1)(2)
Class B common stock................... 200,000 shares(3)
Total............................. 14,280,000 shares(1)(2)(3)
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Over-allotment option....................... 477,000 shares
Voting rights
Class A common stock................... One vote per share
Class B common stock................... Ten votes per share(3)
Use of proceeds............................. The Company will receive net proceeds from
this offering of approximately $44.0
million. Approximately $38.4 million of the
proceeds will be paid to International Data
Group, Inc., our parent company. We intend
to use the remaining net proceeds for
working capital and capital expenditures.
Dividend policy............................. We do not intend to pay dividends on our
common stock. We plan to retain any earnings
for use in the operation of our business and
to fund future growth.
Nasdaq National Market symbol............... IDGB
</TABLE>
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(1) Unless otherwise specifically stated, the information throughout this
prospectus does not take into account the possible issuance of additional
shares of Class A common stock to the underwriters pursuant to their rights
to purchase additional shares to cover over-allotments.
(2) Based on shares outstanding as of March 31, 1998. Excludes (i) 2,850,000
shares of Class A common stock that have been set aside for stock options
under our 1998 Stock Plan, of which we have granted options to purchase
1,500,900 shares to our employees, and (ii) 350,000 shares of Class A common
stock that have been set aside for those employees who elect to participate
in our Employee Stock Purchase Plan. See "Management -- 1998 Stock Plan,"
"-- Employee Stock Purchase Plan," "Description of Capital Stock" and note 8
of notes to financial statements.
(3) Holders of our Class B common stock can choose to convert their shares into
shares of Class A common stock at any time. In addition, the Class B common
stock will be automatically converted into Class A common stock in certain
circumstances. See "Description of Capital Stock."
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SUMMARY FINANCIAL AND OTHER DATA
The following statement of income data for the years ended September 30,
1995, 1996 and 1997 are derived from our audited financial statements included
elsewhere in this prospectus. The summary financial data for the years ended
September 30, 1993 and 1994 have been derived from our accounting records and
are unaudited. The statement of income data for the six-month periods ended
March 31, 1997 and 1998 and the balance sheet data as of March 31, 1998 are
derived from our unaudited financial statements which, in our opinion, have been
prepared on the same basis as the audited financial statements and reflect all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of our results of operations and financial position. Results
for the six months ended March 31, 1998 are not necessarily indicative of
results that may be expected for the entire year. The financial data set forth
below should be read in conjunction with, and are qualified by reference to,
"Selected Financial Data," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the financial statements and notes
thereto included elsewhere in this prospectus.
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<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED SEPTEMBER 30,(1) MARCH 31,(1)
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1993 1994 1995 1996 1997 1997 1998
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(IN THOUSANDS, EXCEPT PER SHARE DATA)
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STATEMENT OF INCOME DATA:
Net revenue.............................. $26,419 $49,218 $72,523 $97,847 $120,688 $62,464 $71,916
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Cost of sales............................ 13,115 23,497 40,598 55,703 63,064 32,075 37,856
Selling, general and administrative
expenses............................... 6,913 13,984 19,573 28,369 42,032 20,218 21,240
Parent corporate services fee............ 277 939 1,464 2,779 3,669 1,836 1,175(2)
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Total operating costs and expenses..... 20,305 38,420 61,635 86,851 108,765 54,129 60,271
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Income before provision for income
taxes.................................. 6,114 10,798 10,888 10,996 11,923 8,335 11,645
Provision for income taxes............... 2,321 4,301 4,522 4,508 4,888 3,348 4,775
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Net income............................... $ 3,793 $ 6,497 $ 6,366 $ 6,488 $ 7,035 $ 4,987 $ 6,870
======= ======= ======= ======= ======== ======= =======
Basic and diluted net income per
share(3)............................... $ .34 $ .59 $ .57 $ .58 $ .63 $ .45 $ .62
======= ======= ======= ======= ======== ======= =======
Weighted average common shares
outstanding(3)......................... 11,100 11,100 11,100 11,100 11,100 11,100 11,100
Pro forma basic and diluted net income
per share(4)........................... $ .51 $ .50
Pro forma weighted average common shares
outstanding(4)......................... 13,873 13,873
OTHER DATA:
EBITDA(5)................................ $ 6,167 $10,978 $11,270 $12,351 $ 13,586 $ 9,047 $13,313
Capital expenditures..................... 302 1,061 1,250 2,430 3,246 681 1,514
Net cash provided (used) by operating
activities............................. 1,625 3,253 (1,858) 1,855 7,820 (1,647) 974
Net cash used in investing activities.... (302) (1,061) (1,250) (2,430) (3,246) (681) (4,953)
Net cash provided (used) by financing
activities............................. (1,229) (2,200) 3,066 614 (4,583) 2,323 3,951
</TABLE>
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AS OF MARCH 31, 1998
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PRO FORMA
ACTUAL AS ADJUSTED(6)
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(IN THOUSANDS)
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BALANCE SHEET DATA:
Cash...................................................... $ 46 $ 6,062
Working capital........................................... 25,025 31,041
Total assets.............................................. 73,688 79,704
Stockholder's equity...................................... 37,264 43,280
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(footnotes appear on following page)
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(1) Our fiscal year ends on the Saturday closest to September 30. Fiscal years
1995, 1996 and 1997 ended on September 30, 1995, September 28, 1996 and
September 27, 1997, respectively. For convenience, fiscal year-ends are
denoted as September 30. Similarly, the 26-week periods ended March 29, 1997
and March 28, 1998 are referred to as the six months ended March 31, 1997
and March 31, 1998, respectively.
(2) Effective January 1, 1998, we assumed responsibility for certain corporate
administrative functions, as well as for our own strategic marketing and
brand-building, the costs for which had constituted a significant portion of
the parent corporate services fee. Accordingly, the parent corporate
services fee decreased to $150,000 per quarter as of January 1, 1998.
(3) See note 2 of notes to financial statements for an explanation of shares
used to compute basic and diluted net income per share.
(4) In May 1998, we paid a $38.4 million dividend by issuance of a note payable
to IDG. We intend to pay such note using a portion of the proceeds from this
offering. Unaudited pro forma basic and diluted net income per share amounts
are calculated using common stock outstanding plus the number of shares
whose proceeds are to be used to pay the note.
(5) "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 our operating performance or to cash flows as
a measure of liquidity. We believe that EBITDA is a standard measure
commonly reported and widely used by analysts, investors and other
interested parties in the publishing and media industries, however, EBITDA
as presented herein may not be comparable to similarly titled measures
reported by other companies.
(6) Pro forma as adjusted amounts give effect to the issuance and sale of
3,180,000 shares of Class A common stock in the offering at the initial
public offering price of $15.50 per share and the application of the net
proceeds therefrom (after deducting estimated underwriting discounts and
commissions and offering expenses payable by us) as set forth under "Use of
Proceeds," including the payment of a $38.4 million dividend paid by us to
IDG and a payment in settlement of the intercompany balance by IDG to us, as
though such payments had been paid as of March 31, 1998. See "Use of
Proceeds" and "Capitalization."
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RISK FACTORS
You should carefully consider the risks described below before making an
investment decision. The risks and uncertainties described below are not the
only ones facing our company. Additional risks and uncertainties not presently
known to us or that we currently deem immaterial may also impair our business
operations.
If any of the following risks actually occur, our business, financial
condition or results of operations could be materially adversely affected. In
such case, the trading price of our Class A common stock could decline, and you
may lose all or part of your investment.
This prospectus also contains forward-looking statements that involve risks
and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including the risks faced by us described below and elsewhere in this
prospectus.
DEPENDENCE ON THE COMPUTER INDUSTRY
We write many of our books for users of information technology,
particularly personal computers and software. Our technology-related books
accounted for a substantial majority of our net revenue in fiscal 1997, and we
expect that technology books will continue to account for a substantial majority
of our book sales for the foreseeable future. As a result, our future success
depends on the growth and development of the market for personal computers and
related applications. If this market grows at a rate that is less than we
expect, or if consumer demand for technology-related books declines for any
reason, our future financial results could be adversely affected.
DEPENDENCE ON MICROSOFT PRODUCTS AND COMPETITION WITH MICROSOFT PRESS
Sales of our books devoted to the use of software products sold by
Microsoft Corporation ("Microsoft"), including its Windows operating system,
accounted for approximately half of our net revenue in fiscal 1997. As a result,
our future financial results will depend in large part on continued consumer
demand for Microsoft products. A decline in the use of Microsoft products would
likely result in decreased demand for our books and could adversely affect our
future financial results. Prospective investors should be aware that Microsoft
released its Windows 98 operating system in mid 1998. We have devoted
substantial time and resources to developing and writing books in anticipation
of the release of Windows 98.
Federal and various state regulators have filed lawsuits against Microsoft
claiming that certain practices by Microsoft with respect to Windows 98 in its
current form violate antitrust laws. Windows 98 was released in late June 1998.
A hearing regarding the federal regulators' request for an injunction relating
to Windows 98 is currently scheduled for September 1998. We have printed our
Windows 98 products for Windows 98 in its current form. If Microsoft is required
to make significant modifications to Windows 98 as a result of these lawsuits,
we may be required to revise our Windows 98 books which could adversely affect
our financial results. In addition, any failure of Windows 98 to gain market
acceptance, due to these lawsuits or for any other reason would adversely affect
sales of our Windows 98 books. In such event, our financial results could be
adversely effected.
In addition to relying on the sales of our books devoted to Microsoft
products, we compete with Microsoft's publishing division, Microsoft Press, for
readers of computer-related books, including books covering Microsoft products.
Microsoft Press has substantially greater financial resources than we do and,
because it is owned by Microsoft, may have better access to planned and new
Microsoft products. As a result, Microsoft Press may have a competitive
advantage over us in providing books devoted to the use of software products
sold by Microsoft.
DEPENDENCE ON " . . . FOR DUMMIES(R)" PUBLICATIONS
We derive a substantial proportion of our net revenue from the sale of our
" . . . For Dummies(R)" family of books. In addition, we have devoted
substantial resources to the publication of these books and the development of
our " . . . For Dummies(R)" brand name. As a result, any change in reader
preferences leading to a decline in demand for our " . . . For Dummies(R)" books
would likely have a material adverse effect on our future financial results.
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RISKS OF NEW PRODUCT INTRODUCTIONS
Generally, as a particular book gets older, we sell fewer copies of that
book. Consequently, our future success depends on our ability to identify trends
in the technology and business and self-help markets and to offer new titles, as
well as other products and services, that address the changing needs of our
target audiences. To establish market acceptance of a new publication, we must
dedicate significant resources to research and editorial development, production
and sales and marketing. We incur significant costs in developing, publishing
and selling a new book, which often significantly precede meaningful revenues
from its sale. Consequently, new publications can require significant time and
investment to achieve profitability. Prospective investors should note, however,
that there can be no assurance that our efforts to introduce new publications or
other products or services will be successful or profitable.
We record as an expense the costs related to the development of new
publications and products, other than author advances, as they are incurred. As
a result, our profitability from quarter-to-quarter and from year-to-year may be
adversely affected by the number and timing of new publications and product
launches in any period and the level of acceptance gained by such publications
and products.
RISKS ASSOCIATED WITH FLUCTUATIONS IN PAPER COSTS; DEPENDENCE ON SIGNIFICANT
SUPPLIER
Paper is the principal raw material used in our business. We generally
purchase paper from merchants representing the paper mills. We do not have
long-term paper supply contracts with these paper merchants. Our arrangements
with merchants are negotiated each year and provide for quarterly price
adjustments. Paper prices have been volatile over the past several years and are
affected by many factors, including demand, mill capacity, pulp supply, energy
costs and general economic conditions. Consequently, our cost of producing books
can vary from period-to-period. In the past, paper has also been difficult to
obtain due to industry-wide shortages. Significant paper price increases,
sustained over a period of time, could adversely affect our future financial
condition or operating results.
We rely on a number of printing companies to print our books. Our largest
printing supplier, Banta Corporation, accounted for more than 25% of our total
printing and binding purchases in fiscal 1997. If the relationship with this
vendor were to be interrupted, or service from this or any other significant
supplier were to be delayed for any reason, our future financial or operating
results could be adversely affected.
FLUCTUATIONS IN QUARTERLY RESULTS AND CYCLICALITY OF REVENUE
Our operating expenses, which include product development costs and
selling, general and administrative expenses, are relatively fixed in the
short-term. If we sell fewer books or otherwise have lower revenue than we
expect, we may not be able to quickly reduce our spending in response. Any
shortfall in our revenue would have a direct impact on our results of
operations, and fluctuations in quarterly results could affect the market price
of our Class A common stock in a manner unrelated to our long-term operating
performance. We typically sell more books during our first and second quarters
because of increased sales during the Christmas season. In addition, we sell
more books in quarters in which software manufacturers release new or updated
versions of popular software products. Because a substantial portion of our
selling, general and administrative expenses is incurred evenly throughout the
year, we generally experience relatively lower net profit during quarters not
impacted by increases in net revenue due to seasonal or other factors discussed
above.
In addition, we typically publish books relating to new trends and
technologies. Accordingly, if general economic conditions worsen, people may
defer spending on these new trends and technologies, which could reduce the
number of books that we sell.
RISKS ASSOCIATED WITH PRODUCT DISTRIBUTION CHANNELS
We sell our books primarily to large retail chains, large wholesalers,
warehouse clubs, office superstores and computer and electronics superstores. In
fiscal 1997, our three largest customers, Barnes & Noble, Inc., Ingram Book
Company and Borders, Inc., accounted for approximately 14.8%, 12.4% and 10.1% of
net revenue. Our future financial results depend in large part on our
relationship with our customers. Any disruption in our relationships with
customers could adversely affect our financial performance.
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RISK OF PRODUCT RETURN
Our sales policy generally permits our book customers to return any unsold
or damaged books for full credit. We record as revenue all books sold to our
customers in a particular quarter and, at the same time, record a provision for
estimated returns. During our fiscal year 1997, we recorded a provision for
returns of approximately 21.0% of our gross sales. If, during any period, our
customers return more books than we previously estimated, our financial results
in that period would be adversely affected.
COMPETITION
We face competition directly from other book publishers and indirectly from
nonprint media. Competition in book publishing mainly stems from editorial
quality, timely introduction of new titles, product positioning, pricing and
brand name recognition. In addition to our company, Simon & Schuster, Microsoft
Press and McGraw-Hill all have a strong market presence in the United States and
internationally in technology publishing. The principal competitors for our
business and self-help titles include Random House, Simon & Schuster and
HarperCollins. Each of these competitors has substantially greater financial
resources than we do.
Nonprint media, such as the Internet and CD-ROMs, may also present
substantial competition. If computer users increase their reliance on
instruction and other information disseminated on-line, our business could be
adversely affected.
RISKS ASSOCIATED WITH SEPARATION FROM IDG
We are owned by a subsidiary of IDG, and we have never operated as a
stand-alone company. As a result, we have historically depended on IDG for
corporate administrative functions, as well as for strategic marketing and brand
building, financing, cash management, tax and payroll administration,
property/casualty insurance, employee benefits administration and certain other
services. We have entered into agreements with IDG for the continued provision
of certain of these services after the offering. If we are no longer able to
obtain these services from IDG, we would be required to provide such services
internally or find a third-party provider of these services. There can be no
assurance that, if required, we will be able to secure the provision of these
services on acceptable terms. If we are unsuccessful in obtaining acceptable
provision of services upon termination of the transitional service agreements,
our future financial performance could be adversely affected.
CONTROL BY IDG; POTENTIAL CONFLICTS OF INTERESTS; BENEFITS TO IDG; POTENTIAL
COMPETITION WITH IDG
IDG owns all of the shares of the Class B common stock, each share of which
entitles its holder to ten votes on most stockholder actions, and IDG will have
77.77% of the combined voting power of both classes of common stock after this
offering. The purchasers of the shares of Class A common stock offered hereby
will be entitled to one vote per share and will have 19.78% of the combined
voting power. After the offering, IDG will have two representatives on our Board
of Directors and will have enough votes to elect all members of the Board of
Directors. As a result of its stock ownership after this offering, IDG will be
in a position, without the approval of our public stockholders, to:
- amend our charter or approve a merger, sale of assets or other major
corporate transaction;
- defeat any non-negotiated takeover attempt that might otherwise benefit
the public stockholders;
- determine the amount and timing of dividends paid to itself and to our
public stockholders; and
- otherwise control our management and operations and the outcome of all
matters submitted for a stockholder vote that could conflict with the
interests of our public stockholders.
IDG publishes magazines and on-line services and, to a lesser extent, books
that may be competitive with our publications. Certain of IDG's current
publications and products compete with our books. As a result, we may compete
with IDG for certain readers. IDG has substantially greater resources than we
do. Any increased competition from IDG for readers could have an adverse impact
on our business and operating results.
In May 1998, we paid a dividend to IDG in the amount of $38.4 million. This
dividend represented substantially all of our retained earnings through April
1998.
13
<PAGE> 14
DEPENDENCE ON KEY PERSONNEL
We rely, and will continue to rely, on our senior executive officers and
other key management personnel. If any of these people leaves our company, the
relationships that these people have with our authors, customers or
manufacturers could be lost, and we would need to find people that could develop
new relationships. In addition, we expect that we will need to hire additional
employees, including senior executive officers for marketing, worldwide sales
and information systems. The competition for employees at all levels of the book
publishing industry is intense and is increasing. In our Northern California
operations, in particular, we have experienced increased turnover of employees
and are experiencing difficulty in attracting new employees. If we do not
succeed in attracting new employees or retaining and motivating our current
employees, our business could suffer significantly.
TRANSITION TO NEW COMPUTER SYSTEM AND NEW DISTRIBUTION SERVICE
We are in the process of upgrading our existing computer system. We expect
the total cost for this upgrade to be $3.6 million, of which $1.2 million had
been spent through March 31, 1998. We outsource distribution and fulfillment
functions to retail and wholesale customers through two vendors. Our contracts
with these vendors expire in September 1999. One of these vendors accounted for
approximately 60% of our distribution and order fulfillment costs in each of
fiscal 1996 and 1997 and in the six months ended March 31, 1998. We expect to
select a single-source vendor for distribution and fulfillment, but have not
done so at this time. Any difficulties in implementing our new computer system
or transitioning to a new distribution vendor could adversely impact our
day-to-day operating performance and future financial results.
RISKS ASSOCIATED WITH POTENTIAL ACQUISITIONS
As part of our growth strategy, we may buy, or make investments in,
complementary companies, publications or products. If we buy a company, we could
have difficulty assimilating the personnel and operations of the acquired
company. This may cause a disruption of our ongoing business, distraction of
management and other resources, and difficulty in maintaining our uniform
standards, controls and procedures. There can be no assurance that we would
succeed in overcoming these risks or any other problems encountered in
connection with any acquisitions we may make. In addition, we may be required to
incur debt or issue equity to pay for any future acquisitions.
SHARES ELIGIBLE FOR FUTURE SALE
After this offering, we will have outstanding 14,080,000 shares of Class A
common stock (14,557,000 shares if the underwriters exercise their option to
purchase additional shares of Class A common stock in the offering) and will
have reserved an additional 3,200,000 shares of Class A common stock for
issuance pursuant to our stock option and stock purchase plans. We intend to
register for resale the shares of Class A common stock reserved for issuance
under our stock option and stock purchase plans approximately 180 days after the
date of this prospectus. The federal securities laws impose certain restrictions
on the ability of stockholders to resell their shares. In addition, IDG and the
holders of options to purchase our Class A common stock have agreed that, for a
period of 180 days from the date of this prospectus, they will not sell their
shares. Accordingly, on January 25, 1999, all of the 10,705,749 shares of our
common stock held by IDG will be available for immediate resale (subject to
certain volume restrictions imposed on IDG by the securities laws).
We and IDG have entered into a registration rights agreement which permits
IDG to include shares of common stock in offerings of common stock made by us in
the future. Sales of a substantial number of shares of common stock into the
public market after this offering, or the perception that such sales could
occur, could materially and adversely affect our stock price or could impair our
ability to obtain capital through an offering of equity securities.
14
<PAGE> 15
ABSENCE OF PRIOR MARKET FOR THE SHARES; POSSIBLE VOLATILITY OF SHARE PRICE
Prior to this offering, there has been no public market for our common
stock. The initial public offering price was determined through negotiations
between the underwriters and us. You may not be able to resell your shares at or
above the initial public offering price due to a number of factors, including:
- actual or anticipated fluctuations in our operating results;
- changes in expectations as to our future financial performance or changes
in financial estimates of securities analysts;
- announcements of new publications or technological innovations; and
- the operating and stock price performance of other comparable companies.
In addition, the stock market in general has experienced extreme volatility
that often has been unrelated to the operating performance of particular
companies. These broad market and industry fluctuations may adversely affect the
trading price of our Class A common stock, regardless of our actual operating
performance.
You should read the "Underwriters" section for a more complete discussion
of the factors considered in determining the initial public offering price.
IMMEDIATE AND SUBSTANTIAL DILUTION TO NEW INVESTORS
The initial public offering price is substantially higher than the net
tangible book value per share of the outstanding common stock immediately after
the offering. Accordingly, if you purchase Class A common stock in the offering,
you will incur immediate dilution of approximately $12.76 in the net tangible
book value per share of Class A common stock from the price you pay for the
Class A common stock.
15
<PAGE> 16
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the Class A
common stock in the offering, after deducting estimated expenses of $1.8 million
and underwriting discounts and commissions, are estimated to be approximately
$44.0 million (approximately $50.9 million if the underwriters exercise their
over-allotment option in full), at the initial public offering price of $15.50
per share. The principal purposes of this offering are to repay certain
indebtedness owed to IDG, to obtain additional capital, to create a public
market for the Company's Class A common stock and to facilitate future access by
the Company to public equity markets.
The Company will use approximately $38.4 million (plus or minus any
advances owed to or due from IDG on the date of payment) of the net proceeds
from this offering to pay indebtedness owed to IDG. The Company incurred the
indebtedness in connection with the dividend paid by the Company prior to this
offering in the form of a promissory note. See "Dividend Policy" and
"Relationship with IDG and Certain Transactions -- Pre-Offering Dividend." The
Company currently expects to use the remaining $5.6 million of net proceeds for
general corporate purposes, including approximately $3.6 million for working
capital and approximately $2.0 million to complete the Company's computer system
upgrade. A portion of the net proceeds from this offering may also be used to
acquire or invest in complementary businesses, publications or products, or to
invest in geographic expansion. The Company has no agreements or commitments
with respect to any such transactions. Pending use of the net proceeds for the
above purposes, the Company intends to invest such funds in short-term,
interest-bearing, investment grade obligations.
DIVIDEND POLICY
Although the Company has paid dividends with respect to its capital stock
to IDG from time to time, the Company does not intend to pay any cash dividends
with respect to its common stock for the foreseeable future after this offering.
After consummation of the offering, the Company intends to retain any earnings
for use in the operation of its business and to fund future growth. Prior to
this offering, the Company paid a $38.4 million dividend to its sole
stockholder, IDG. Any determination to pay dividends in the future will be at
the discretion of the Company's Board of Directors and will depend upon the
Company's financial condition and results of operations and capital
requirements. See "Use of Proceeds" and "Relationship with IDG and Certain
Transactions -- Pre-Offering Dividend."
CERTAIN INFORMATION
The Company's principal executive offices are located at 919 E. Hillsdale
Blvd., Suite 400, Foster City, California 94404 and the Company's telephone
number is (650) 655-3000. The Company maintains World Wide Web site addresses at
www.idgbooks.com and www.dummies.com. The reference to these World Wide Web site
addresses does not constitute incorporation by reference of the information
contained therein.
The Company's logo and certain titles and logos of the Company's
publications and products mentioned in this prospectus are either (i) the
Company's trademarks or (ii) trademarks of International Data Group, Inc. that
have been licensed to the Company. Each trademark, trade name or service mark of
any other company appearing in this prospectus belongs to its holder.
This prospectus includes statistical data regarding the publishing sector
which was obtained from industry publications, including reports generated by
International Data Corporation, the Company's market research affiliate,
Cowles/Simba Information ("Simba") and Publishers Weekly. These industry
publications generally indicate that they have obtained information from sources
believed to be reliable, but do not guarantee the accuracy and completeness of
such information. While the Company believes these industry publications to be
reliable, the Company has not independently verified such data. The Company also
has not sought the consent of any of these organizations to refer to their
reports in this prospectus.
Unless otherwise specifically stated, the information in this prospectus
has been adjusted to reflect the exchange in May 1998 of all of the Company's
unclassified common stock for Class A common stock and Class B common stock, but
does not take into account the possible issuance of additional shares of Class A
common stock to the underwriters pursuant to their right to purchase additional
shares to cover over-allotments.
16
<PAGE> 17
CAPITALIZATION
The following table sets forth the total capitalization of the Company at
March 31, 1998: (i) on an actual basis; (ii) on a pro forma basis after giving
retroactive effect to a dividend paid in May 1998 to IDG in the form of a note
payable, amended share authorizations effected May 1998, and planned share
exchanges and conversions to occur simultaneously with the offering; and (iii)
pro forma as adjusted to reflect the issuance and sale of 3,180,000 shares of
Class A common stock offered hereby by the Company at the initial public
offering price of $15.50 per share, after deducting underwriting discounts and
commissions and estimated offering expenses, and the application of the
estimated net proceeds therefrom to pay the note payable to IDG and settle the
intercompany balance with IDG. See "Use of Proceeds" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations." This
table should be read in conjunction with the Financial Statements and Notes
thereto appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1998
----------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- -------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Note payable to IDG(1)................................... $ -- $38,400 $ --
======= ======= =======
Stockholders' equity:
Preferred stock, $.001 par value; 5,000,000 shares
authorized actual, no shares authorized or
outstanding pro forma and pro forma as adjusted..... $ -- $ -- $ --
Undesignated common stock, $.001 par value; 25,000,000
shares authorized and 11,100,000 shares outstanding
actual, no shares authorized or outstanding pro
forma and pro forma adjusted........................ 11 -- --
Class A common stock, $.001 par value; no shares
authorized or outstanding actual, 25,000,000 shares
authorized pro forma and pro forma as adjusted;
10,900,000 shares outstanding pro forma, 14,080,000
shares outstanding pro forma as adjusted............ -- 11 14
Class B common stock, $.001 par value; no shares
authorized or outstanding actual, 400,000 shares
authorized pro forma and pro forma as adjusted;
200,000 shares outstanding pro forma and pro forma
as adjusted......................................... -- -- --
Additional paid-in capital............................. -- -- 44,032
Retained earnings (deficit)............................ 37,634 (766) (766)
Advances due (from) Parent(2).......................... (381) (381) --
------- ------- -------
Total stockholders' equity (deficit).............. 37,264 (1,136) 43,280
------- ------- -------
Total capitalization........................... $37,264 $(1,136) $43,280
======= ======= =======
</TABLE>
- ---------------
(1) In May 1998, the Company paid a $38.4 million dividend by issuance of a note
payable to IDG. The Company intends to pay such note using a portion of the
proceeds from this offering. This dividend represented substantially all of
the Company's retained earnings through April 1998.
(2) Advances due (from) Parent are included as a component of stockholder's
equity, as no interest was charged for such balances and there was no
scheduled repayment. The Company intends to settle such balance in
connection with this offering.
17
<PAGE> 18
DILUTION
The pro forma net tangible book value (deficit) of the Company as of March
31, 1998 was $(4,969,000) or $(.45) per share of common stock. Pro forma net
tangible book value per share is determined by dividing the tangible net worth
of the Company (total assets less intangible assets of $3,833,000 for publishing
rights and less total liabilities) after giving retroactive effect to the
dividend paid to IDG in the form of a note payable by the aggregate number of
shares of common stock outstanding. After giving effect to the sale by the
Company of the 3,180,000 shares of Class A common stock offered hereby (at the
initial public offering price of $15.50 per share) and the receipt and
application of the net proceeds therefrom, the Company's pro forma net tangible
book value at March 31, 1998 would have been $39,066,000 or $2.74 per share.
This represents an immediate increase in pro forma net tangible book value to
existing stockholders of $3.19 per share and an immediate dilution to new
investors of $12.76 per share. The following table illustrates this per share
dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share..................... $15.50
Pro forma net tangible book value (deficit) per share as
of March 31, 1998...................................... $(.45)
Increase in pro forma net tangible book value per share
attributable to new investors.......................... 3.19
-----
Pro forma net tangible book value per share after this
offering.................................................. 2.74
------
Dilution per share to new investors(1)...................... $12.76
======
</TABLE>
- ---------------
(1) Dilution is determined by subtracting pro forma net tangible book value per
share after the offering from the initial public offering price per share.
The following table sets forth, on a pro forma basis, as of March 31, 1998,
the number of shares of common stock purchased from the Company, the total
consideration paid (or to be paid), and the average price per share paid (or to
be paid) by existing stockholders and by the new investors, at the initial
public offering price of $15.50 per share, before deducting estimated
underwriting discounts and commissions and offering expenses payable by the
Company:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------- --------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
----------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1)................ 11,100,000 78% $ 0 0% $ 0
New investors........................... 3,180,000 22 49,290,000 100 15.50
----------- --- ----------- ---
Total......................... 14,280,000 100% $49,290,000 100%
=========== === =========== ===
</TABLE>
- ---------------
(1) As of March 31, 1998, the Company was owned by a subsidiary of IDG. On May
21, 1998, 394,251 shares of the Company's common stock were transferred by
IDG to the Company's employee stock ownership plan in exchange for shares of
IDG common stock owned by the employee stock ownership plan. See
"Relationship with IDG and Certain Transactions -- Share Exchange
Agreement." No cash was paid by IDG or its subsidiary in consideration for
the common stock of the Company, including such shares of common stock
transferred to the employee stock ownership plan. Accordingly, the cash
consideration related to existing stockholders is reported as zero in the
above table.
The foregoing table assumes no exercise of the underwriters' over-allotment
option. See "Underwriters." The foregoing table also excludes (i) 2,850,000
shares of Class A common stock reserved for issuance pursuant to the Company's
1998 Stock Plan, of which options to purchase 1,500,900 shares are currently
outstanding but not exercisable, and (ii) 350,000 shares of Class A common stock
reserved for issuance pursuant to the Company's Employee Stock Purchase Plan.
See "Management -- 1998 Stock Plan," "-- Employee Stock Purchase Plan,"
"Description of Capital Stock" and note 8 of notes to financial statements.
18
<PAGE> 19
SELECTED FINANCIAL DATA
The following statement of income data for the years ended September 30,
1995, 1996 and 1997 and the balance sheet data as of September 30, 1996 and 1997
are derived from the financial statements of the Company included elsewhere in
this prospectus, which have been audited by Deloitte & Touche LLP, independent
auditors. The balance sheet data as of September 30, 1995 are derived from
audited financial statements not included herein. The selected financial data as
of and for the years ended September 30, 1993 and 1994 have been derived from
the accounting records of the Company and are unaudited. The statement of income
data for the six-month periods ended March 31, 1997 and 1998 and the balance
sheet data as of March 31, 1998 are derived from the Company's unaudited
financial statements which, in the opinion of management, have been prepared on
the same basis as the audited financial statements and reflect all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the Company's results of operations and financial position.
Results for the six months ended March 31, 1998 are not necessarily indicative
of results that may be expected for the entire year. The selected financial data
set forth below should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Company's
financial statements, including the notes thereto, appearing elsewhere in this
prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED SEPTEMBER 30,(1) MARCH 31,(1)
------------------------------------------------ -----------------
1993 1994 1995 1996 1997 1997 1998
------- ------- ------- ------- -------- ------- -------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net revenue............................ $26,419 $49,218 $72,523 $97,847 $120,688 $62,464 $71,916
------- ------- ------- ------- -------- ------- -------
Cost of sales.......................... 13,115 23,497 40,598 55,703 63,064 32,075 37,856
Selling, general and administrative
expenses............................. 6,913 13,984 19,573 28,369 42,032 20,218 21,240
Parent corporate services fee.......... 277 939 1,464 2,779 3,669 1,836 1,175(2)
------- ------- ------- ------- -------- ------- -------
Total operating costs and expenses... 20,305 38,420 61,635 86,851 108,765 54,129 60,271
------- ------- ------- ------- -------- ------- -------
Income before provision for income
taxes................................ 6,114 10,798 10,888 10,996 11,923 8,335 11,645
Provision for income taxes............. 2,321 4,301 4,522 4,508 4,888 3,348 4,775
------- ------- ------- ------- -------- ------- -------
Net income............................. $ 3,793 $ 6,497 $ 6,366 $ 6,488 $ 7,035 $ 4,987 $ 6,870
======= ======= ======= ======= ======== ======= =======
Basic and diluted net income per
share(3)............................. $ .34 $ .59 $ .57 $ .58 $ .63 $ .45 $ .62
======= ======= ======= ======= ======== ======= =======
Weighted average common shares
outstanding(3)....................... 11,100 11,100 11,100 11,100 11,100 11,100 11,100
Pro forma basic and diluted net income
per share(4)......................... $ .51 $ .50
Pro forma weighted average common
shares outstanding(4)................ 13,873 13,873
OTHER DATA:
EBITDA(5).............................. $ 6,167 $10,978 $11,270 $12,351 $ 13,586 $ 9,047 $13,313
Capital expenditures................... 302 1,061 1,250 2,430 3,246 681 1,514
Net cash provided (used) by operating
activities........................... 1,625 3,253 (1,858) 1,855 7,820 (1,647) 974
Net cash used in investing
activities........................... (302) (1,061) (1,250) (2,430) (3,246) (681) (4,953)
Net cash provided (used) by financing
activities........................... (1,229) (2,200) 3,066 614 (4,583) 2,323 3,951
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,(1)
------------------------------------------------ AS OF
1993 1994 1995 1996 1997 MARCH 31, 1998
------- ------- ------- ------- -------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash................................... $ 94 $ 86 $ 44 $ 83 $ 74 $ 46
Working capital........................ 2,911 5,377 13,662 18,778 18,708 25,025
Total assets........................... 8,549 20,199 39,101 43,636 57,163 73,688
Stockholder's equity................... 3,160 7,457 16,889 23,991 26,443 37,264
</TABLE>
(footnotes appear on following page)
19
<PAGE> 20
- ---------------
(1) The Company's fiscal year ends on the Saturday closest to September 30.
Fiscal years 1995, 1996 and 1997 ended on September 30, 1995, September 28,
1996 and September 27, 1997, respectively. For convenience, fiscal year-ends
are denoted as September 30. Similarly, the 26-week periods ended March 29,
1997 and March 28, 1998 are referred to as the six months ended March 31,
1997 and March 31, 1998, respectively.
(2) Effective January 1, 1998, the Company assumed responsibility for certain
corporate administrative functions, as well as for its own strategic
marketing and brand-building, the costs for which had constituted a
significant portion of the parent corporate services fee. Accordingly, the
parent corporate services fee decreased to $150,000 per quarter as of
January 1, 1998.
(3) See note 2 of notes to financial statements for an explanation of shares
used to compute basic and diluted net income per share.
(4) In May 1998, the Company paid a $38.4 million dividend by issuance of a note
payable to IDG. The Company intends to pay such note using a portion of the
proceeds from this offering. Unaudited pro forma basic and diluted net
income per share amounts are calculated using common shares outstanding plus
the number of shares whose proceeds are to be used to pay such note.
(5) "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 the Company's operating performance or to cash
flows as a measure of liquidity. The Company 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,
however, EBITDA as presented herein may not be comparable to similarly
titled measures reported by other companies.
20
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
IDG Books is a leading publisher of computer, business and self-help books
designed to make learning accessible and fun. In 1997, the Company produced more
number one best-selling computer books than any other publisher, according to
Publishers Weekly. The Company publishes and markets 18 book series under
well-known brand names, including its popular ". . . For Dummies(R)" series.
These books have created widespread recognition of the Company's brands by
consumers enabling it to successfully publish across a variety of categories in
technology, business and self-help. The Company's portfolio of brand names
includes more than 700 active titles. The Company has approximately 65 million
English-language books in print and has translated its books into 36 languages.
The Company believes that its readers value and trust its products and brands to
help obtain computer proficiency and professional certification, general
business know-how, career growth and personal enrichment. The computer book
category grew 8.2% in 1997 according to Simba and has been the fastest growing
sector in the U.S. book industry in each of the past six years.
The Company's principal source of revenue is from sales of books through
its two general publishing groups, ". . . For Dummies(R)" and IDG Books
Technology. For the six months ended March 31, 1998, the Company derived
approximately 63.9% of its net revenue from sales of books through its
". . . For Dummies(R)" group and approximately 32.9% from sales through the IDG
Books Technology group. For the six months ended March 31, 1998, other revenue,
principally licensing, accounted for 3.2% of total revenue.
Sales of technology-related books account for a substantial majority of the
Company's net revenue. In this regard, sales of books devoted to the use of
software products sold by Microsoft, including its Windows operating system,
accounted for approximately one-half of the Company's net revenue in fiscal
1997. The Company expects to continue to depend upon sales of technology books,
particularly those related to Microsoft products, for a substantial majority of
the Company's net revenue for the foreseeable future. Federal and various state
regulators have raised legal issues with respect to Windows 98 in its current
form. The Company has printed Windows 98 products for Windows 98 in its current
form. A hearing regarding the federal regulators' request for an injunction
relating to Windows 98 is currently scheduled for September 1998. Any
significant modification in Windows 98 as a result of these regulatory concerns
could require the Company to revise its Windows 98 books which could have an
adverse effect on the Company's financial results.
The Company's customers consist principally of national retail chain
booksellers, wholesale distributors, office superstores, membership clubs and
computer/electronic superstores located primarily in the United States and
Canada. Over the last several years, there has been significant consolidation in
the distribution channels for books, including retail outlets, although
alternative distribution channels have emerged. As a result, the Company expects
that this trend will lead to increased concentration within each distribution
channel. During the six months ended March 31, 1998, the Company's top three
customers accounted for approximately 40.0% of the Company's net revenue, and
the Company's top ten customers accounted for approximately 65.7% of the
Company's net revenue.
The Company's sales policy, consistent with industry practice, generally
permits book distributors to return any unsold or damaged books for full credit.
The Company records a provision for estimated returns using historical
experience and other industry factors. Net revenue includes gross product sales,
less a provision for estimated future returns. For the six months ended March
31, 1998 and for the year ended September 30, 1997, the Company's provision for
returns and allowances accounted for approximately 23.0% and 21.0% of gross
sales, respectively.
The principal components of the Company's cost of net revenue are paper and
printing, royalty expense, product development, fulfillment and inventory
obsolescence costs. Paper is the principal raw material used in the Company's
business. The Company does not have long-term paper supply contracts, and its
arrangements are negotiated each year and provide for quarterly price
adjustments. Paper prices have been volatile over the past several years and are
affected by many factors, including demand, mill capacity, pulp supply, energy
costs,
21
<PAGE> 22
and general economic conditions. Consequently, the Company's cost of paper,
relative to net revenue, can vary from period-to-period. Product development
comprises editorial, production and pre-publication costs. The Company generally
must dedicate significant resources to research and editorial development,
production and sales and marketing. The Company incurs significant costs in
developing, publishing and selling a new book, which often significantly precede
meaningful revenues from its sale. Consequently, new publications can require
significant time and investment to achieve profitability. The Company
anticipates that product development costs will increase as a percentage of the
total cost of net revenue, as the volume of both new and revised products
increases due to accelerated changes in technology and related software. The
other principal operating costs for the Company are selling, general and
administrative expenses, which include applicable salaries, benefits, sales
commissions, travel and entertainment, advertising and promotion, customer
incentives, occupancy and depreciation. Selling, general and administrative
expenses comprised approximately 35% of the Company's total operating expenses
for the six months ended March 31, 1998.
The Company has historically depended on IDG, the Company's parent, for
corporate administrative functions, as well as for strategic marketing and brand
building, financing, cash management, tax and payroll administration, insurance,
employee benefits administration and certain other services. The fees for these
services have been charged to the Company through a corporate services fee based
on a percentage of budgeted net revenue plus a fixed charge. These costs were
1.9% of the Company's total operating expenses for the six months ended March
31, 1998. The Company and IDG have agreed to continue certain of these services
on a cost-for-services basis after the offering. The Company will perform the
remainder of these services independently after the offering. The Company
currently expects that the amount it will pay to IDG for these services will
initially be approximately $600,000 per year. Because IDG has provided the
Company with cash management and financing requirements, the Company has
historically not had interest income or expense. The Company anticipates that
its seasonal working capital requirements may require short-term borrowings and
that it will earn interest income on cash balances. See "Relationship with IDG
and Certain Transactions -- Intercompany Agreements."
The Company's fiscal year ends on the Saturday closest to September 30.
Fiscal years 1995, 1996 and 1997 ended on September 30, 1995, September 28, 1996
and September 27, 1997, respectively. For convenience, throughout this
Management's Discussion and Analysis of Financial Condition and Results of
Operations, fiscal year-ends are denoted as September 30. Similarly, the 26-week
periods ended March 29, 1997 and March 28, 1998 are referred to as the six
months ended March 31 and the 13-week periods comprising each fiscal quarter are
denoted by the last day of the calendar month.
RESULTS OF OPERATIONS
The following table summarizes historical results of operations as a
percentage of net revenue for the periods shown.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED SEPTEMBER 30, ENDED MARCH 31,
-------------------------- ----------------
1995 1996 1997 1997 1998
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net Revenue:
". . . For Dummies(R)"............................. 67.6% 69.9% 68.1% 72.0% 65.2%
IDG Books Technology............................... 32.4 30.1 31.9 28.0 34.8
----- ----- ----- ----- -----
Total Net Revenue.................................. 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
Cost of sales...................................... 56.0% 56.9% 52.3% 51.3% 52.6%
Selling, general and administrative expenses....... 27.0 29.0 34.8 32.4 29.5
Parent corporate services fee...................... 2.0 2.8 3.0 2.9 1.6
Income before provision for income taxes........... 15.0 11.2 9.9 13.3 16.2
Net income......................................... 8.8 6.6 5.8 8.0 9.6
</TABLE>
22
<PAGE> 23
SIX MONTHS ENDED MARCH 31, 1998 COMPARED TO SIX MONTHS ENDED MARCH 31, 1997
Net Revenue. Net revenue increased $9.5 million, or 15.1%, to $71.9 million
for the six months ended March 31, 1998 from $62.4 million for the six months
ended March 31, 1997. This increase was primarily the result of an increase in
net sales of $6.3 million, or 35.3%, for the IDG Technology Group and $2.7
million, or 6.4%, for the ". . . For Dummies(R)" group. Of the Company's net
revenue in the first six months of 1998, $10.2 million was attributable to sales
of new titles first published during that period as compared to $6.7 million for
new titles first published during the same period for 1997.
Cost of Sales. Cost of sales increased $5.8 million, or 18.0%, to $37.9
million for the six months ended March 31, 1998 from $32.1 million for the six
months ended March 31, 1997. Cost of sales as a percentage of net revenue was
52.6% and 51.3% for the six month periods ended March 31, 1998 and March 31,
1997, respectively. Product development costs increased as a percentage of net
revenue to 11.3% for the six months ended March 31, 1998 from 9.7% for the six
months ended March 31, 1997, reflecting the Company's planned increase in title
output for the remainder of 1998. Paper and printing costs as a percentage of
net revenue remained unchanged at approximately 17.0% for both periods.
Fulfillment expense decreased as a percentage of net revenue to 7.0% for the six
months ended March 31, 1998 from 8.1% for the six months ended March 31, 1997 as
a result of efficiencies achieved in the Company's distribution facilities.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $1.0 million, or 5.1%, to $21.2 million for
the six months ended March 31, 1998 from $20.2 million for the six months ended
March 31, 1997. This increase was primarily attributable to increased general
and administrative expenses, primarily depreciation of fixed assets and
amortization of publishing rights. Selling expenses were relatively unchanged in
absolute dollars on a period-to-period basis. Selling, general and
administrative expenses decreased as a percentage of net revenue to 29.5% for
the six months ended March 31, 1998 from 32.4% for the six months ended March
31, 1997. The Company's selling and marketing costs decreased to 17.0% of net
revenue for the six months ended March 31, 1998 compared to 19.6% for the same
period the prior year primarily as a result of increased efficiencies.
Parent Corporate Services Fee. Parent corporate services fee decreased $.6
million, or 36.0%, to $1.2 million for the six months ended March 31, 1998 from
$1.8 million for the six months ended March 31, 1997. Effective January 1, 1998,
the Company assumed responsibility for certain corporate administrative
functions, as well as for its own strategic marketing and brand-building, the
costs for which had constituted a significant portion of the parent corporate
services fee.
Income before Provision for Income Taxes. Income before provision for
income taxes increased $3.3 million, or 39.7%, to $11.6 million for the six
months ended March 31, 1998 from $8.3 million for the six months ended March 31,
1997. Income before provision for income taxes increased as a percentage of net
revenue to 16.2% in the six months ended March 31, 1998 from 13.3% for the same
period the prior year due to an increase in sales and decrease in selling,
general and administrative expense as a percentage of net revenue, offset by an
increase in cost of sales as a percentage of net revenue, as described above.
Net Income. Net income of $6.9 million for the six months ended March 31,
1998 increased $1.9 million, or 37.8%, from net income of $5.0 million for the
six months ended March 31, 1997. This increase was primarily the result of an
increase in sales and decrease in selling, general and administrative expenses
as a percentage of net revenue, offset by an increase in cost of sales as a
percentage of net revenue, as described above.
YEAR ENDED SEPTEMBER 30, 1997 COMPARED TO YEAR ENDED SEPTEMBER 30, 1996
Net Revenue. Net revenue increased $22.8 million, or 23.3%, to $120.7
million for the year ended September 30, 1997 from $97.8 million for the year
ended September 30, 1996. This increase was primarily the result of an increase
in net sales of $8.4 million, or 28.6%, for the IDG Technology group and $14.7
million, or 22.9%, for the ". . . For Dummies(R)" group. Of the Company's net
revenue in fiscal 1997, $19.6 million was attributable to sales of new titles
first published during that period, as compared to $25.8 million for new titles
first published during fiscal 1996.
23
<PAGE> 24
Cost of Sales. Cost of sales increased $7.4 million, or 13.2%, to $63.1
million for the year ended September 30, 1997 from $55.7 million for the year
ended September 30, 1996. Cost of sales as a percentage of net revenue was 52.3%
and 56.9% for the years ended September 30, 1997 and September 30, 1996,
respectively. Costs of sales as a percentage of net revenue decreased primarily
because paper costs, fulfillment expenses and inventory obsolescence all
decreased as a percentage of net revenue, though royalty expenses and, to a
lesser extent, product development costs increased as a percentage of net
revenue. Royalty expense increased as a percentage of net revenue to 10.6% for
the year ended September 30, 1997 from 9.7% for the year ended September 30,
1996, reflecting additions to reserves for paid but unearned author advances.
Product development costs increased as a percentage of net revenue to 11.3% for
the year ended September 30, 1997 from 11.2% for the year ended September 30,
1996. Paper and printing costs as a percentage of net revenue decreased to 15.9%
for the year ended September 30, 1997 from 18.1% for the year ended September
30, 1996 due to lower paper costs and better printing rates resulting from
higher volumes. Fulfillment expenses decreased as a percentage of net revenue to
8.3% for the year ended September 30, 1997 from 9.8% for the prior year as a
result of efficiencies achieved in distribution, including increased shipments
in carton quantities, a renegotiated fulfillment contract with a third party
vendor and lower returns and related handling fees. Inventory obsolescence
decreased to 4.3% of net revenue for the year ended September 30, 1997 from 6.9%
for the year ended September 30, 1996.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $13.6 million, or 48.2%, to $42.0 million
for the year ended September 30, 1997 from $28.4 million for the year ended
September 30, 1996. This increase was attributable to increased selling expenses
of approximately $9.3 million, resulting primarily from more aggressive customer
incentive programs, and increased general and administrative expenses of
approximately $4.3 million, which reflected increased investments in
infrastructure (salaries and bonuses for additional headcount, occupancy and
depreciation). Selling, general and administrative expenses as a percentage of
net revenue increased to 34.8% for the year ended September 30, 1997 from 29.0%
for the year ended September 30, 1996. Selling expenses increased as a
percentage of net revenue to 20.5% for the year ended September 30, 1997 from
15.7% for the year ended September 30, 1996, and general and administrative
expenses increased to 14.3% of net revenue for the year ended September 30, 1997
from 13.3% for the year ended September 30, 1996.
Parent Corporate Services Fee. Parent corporate services fee increased $.9
million, or 32.0% to $3.7 million for the year ended September 30, 1997 from
$2.8 million for the year ended September 30, 1996, primarily as a result of the
increase in net sales.
Income before Provision for Income Taxes. Income before provision for
income taxes increased $.9 million, or 8.4%, to $11.9 million for the year ended
September 30, 1997 from $11.0 million for the year ended September 30, 1996.
Income before provision for income taxes decreased as a percentage of net
revenue to 9.9% from 11.2% for the same periods due to an increase in sales more
than offset by higher selling, general and administrative expenses.
Net Income. Net income of $7.0 million for the year ended September 30,
1997 increased $.5 million, or 8.4%, from net income of $6.5 million for the
year ended September 30, 1996. This increase was primarily the result of
increased sales partially offset by increased selling, general and
administrative expenses as described above.
YEAR ENDED SEPTEMBER 30, 1996 COMPARED TO YEAR ENDED SEPTEMBER 30, 1995
Net Revenue. Net revenue increased $25.3 million, or 35%, to $97.8 million
for the year ended September 30, 1996 from $72.5 million for the year ended
September 30, 1995. This increase was primarily the result of an increase in net
sales of $5.8 million, or 24.9%, for the IDG Technology Group and $17.9 million,
or 38.6%, for the ". . . For Dummies(R)" group. Of the Company's net revenue in
fiscal 1996, $25.8 million was attributable to sales of new titles first
published during that period as compared to $20.8 million for new titles first
published during fiscal 1995.
Cost of Sales. Cost of sales increased by $15.1 million, or 37.2%, to $55.7
million for the year ended September 30, 1996 from $40.6 million for the year
ended September 30, 1995. Cost of sales as a percentage
24
<PAGE> 25
of net revenue was 56.9% and 56.0% for the years ended September 30, 1996 and
September 30, 1995, respectively. Paper and printing costs as a percentage of
net revenue decreased to 18.1% for the year ended September 30, 1996 from 18.7%
for the year ended September 30, 1995 due to a decrease in paper prices in 1996.
Product development costs increased to 11.2% of net revenue for the year ended
September 30, 1996 from 9.8% for the prior year as a result of the Company's
efforts to increase title output in 1996. Fulfillment expenses increased as a
percentage of net revenue to 9.8% for the year ended September 30, 1996 from
8.7% for the year ended September 30, 1995 primarily due to a large increase in
book returns and the related processing costs in 1996.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $8.8 million, or 44.9%, to $28.3 million
for the year ended September 30, 1996 from $19.5 million for the year ended
September 30, 1995. This increase was attributable to increased general and
administrative expenses of approximately $5.5 million, reflecting increased
investments in infrastructure (salaries and bonuses for additional headcount,
occupancy and depreciation) and increased selling expenses of approximately $3.3
million. Selling, general and administrative expenses as a percentage of net
revenue increased to 29.0% for the year ended September 30, 1996 from 27.0% for
the year ended September 30, 1995. General and administrative expenses increased
to 13.3% of net revenue for the year ended September 30, 1996 from 10.3% for the
year ended September 30, 1995. Selling and marketing expenses decreased to 15.7%
of net revenue for the year ended September 30, 1996 from 16.6% for the year
ended September 30, 1995, primarily as a result of a bad debt write-off for a
bankrupt wholesaler of the Company's books in 1995.
Parent Corporate Services Fee. Parent corporate services fee increased $1.3
million, or 89.8% to $2.8 million for the year ended September 30, 1996 from
$1.5 million for the year ended September 30, 1995, primarily as a result of the
increase in net sales.
Income before Provision for Income Taxes. Income before provision for
income taxes increased by $.1 million, or 1.0%, to $11.0 million for the year
ended September 30, 1996 from $10.9 million for the year ended September 30,
1995.
Net Income. Net income of $6.5 million for the year ended September 30,
1996 increased by $.1 million, or 1.9%, from net income of $6.4 million for the
year ended September 30, 1995.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the financing requirements of the Company were funded through
intercompany advances from IDG, the Company's parent, while excess cash
generated by the Company was remitted to IDG. Accordingly, the Company
maintained minimal cash balances. In addition, balances owed to or due from IDG
were non-interest bearing and periodic settlements of the net amounts have not
been made. Accordingly, such amounts are reflected as a component of
stockholders' equity. The Company intends to settle any outstanding balance owed
to or due from IDG concurrently with this offering.
Working capital was $25.0 million and $18.7 million at March 31, 1998 and
September 30, 1997, respectively. The increase in working capital at March 31,
1998 was seasonal in nature and reflected a $7.0 million increase in accounts
receivable resulting from increased billings due to increased selling volume
during the Company's first and second quarters of fiscal 1998.
The Company's net cash provided by operations was $1.0 million for the six
months ended March 31, 1998 compared to net cash used by operations of $1.6
million for the six months ended March 31, 1997. The increase in cash provided
by operations was primarily due to increased net income and a smaller increase
in accounts receivable and inventory partially offset by a smaller increase in
accrued liabilities. Net cash provided by operations was $7.8 million for the
year ended September 30, 1997, which was primarily the result of net income of
$7.0 million and an increase of accrued liabilities ($10.9 million) partially
offset by increases in accounts receivable ($5.6 million), inventory ($1.8
million) and deferred tax assets ($4.0 million). The Company's net cash provided
by operations was $1.9 million in fiscal year 1996 and net cash used by
operations was $1.9 million in fiscal year 1995.
25
<PAGE> 26
The Company's net cash used in investing activities for the six months
ended March 31, 1998 was $4.9 million and included $3.4 million used to acquire
certain publishing rights and $1.5 million used for capital expenditures,
including computer equipment and leasehold improvements. The Company's net cash
used in investing activities was $3.2 million, $2.4 million and $1.3 million in
fiscal year 1997, 1996 and 1995, respectively.
The Company's cash flows from financing activities related solely to
changes in the net amount of intercompany advances from IDG or excess cash
generated by the Company and retained by IDG. The Company's net cash used by
financing activities was $4.6 million in fiscal year 1997, and the Company's net
cash provided by financing activities was $.6 million and $3.1 million in fiscal
years ended 1996 and 1995, respectively. Subsequent to March 31, 1998, the
Company paid a dividend of $38.4 million to IDG in the form of a promissory
note, which the Company intends to pay with a portion of the net proceeds from
the offering. See "Use of Proceeds" and "Relationship with IDG and Certain
Transactions -- Pre-Offering Dividend."
The Company has received a commitment letter from a bank regarding a
revolving credit facility in an amount of up to $20.0 million which would be
available to the Company for seasonal working capital requirements and general
corporate purposes.
The net proceeds to be received by the Company from the sale of the Class A
common stock in the offering, after deducting estimated expenses of $1.8 million
and underwriting discounts and commissions, are estimated to be approximately
$44.0 million (approximately $50.9 million if underwriters' over-allotment
option is exercised in full), at the initial public offering price of $15.50 per
share. The Company will use approximately $38.4 million (plus or minus any
advances owed to or due from IDG as of the date of payment) of the net proceeds
from this offering for the payment of indebtedness owed to IDG. The Company
currently expects to use the remaining $5.6 million of net proceeds for general
corporate purposes, including approximately $3.6 million for working capital and
approximately $2.0 million to complete the Company's computer system upgrade.
The Company believes that the net proceeds from this offering, together with any
cash generated from operations and any funds available under any future credit
facilities, will be sufficient to meet the liquidity requirements of the Company
for the foreseeable future. The Company's future capital requirements will
depend on many factors, including, but not limited to, the levels at which the
Company maintains inventory, the market acceptance of the Company's products,
the levels of promotional activities and advertising required to launch the
Company's products and any future acquisitions. To the extent that the funds
generated by this offering, together with existing resources and future
earnings, are insufficient to fund the Company's future activities, the Company
may need to raise additional funds through public or private financing. No
assurance can be given that any such additional funding will be available or
that, if available, it can be obtained on terms favorable to the Company.
SEASONALITY AND FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
Historically, the Company's business has been seasonal. The Company's net
revenue and net income has been higher during fiscal quarters when major
software manufacturers release new or revised versions of popular products, as
exemplified by the Company's fiscal quarter ending December 31, 1995 and the
fiscal quarter ending March 31, 1997, corresponding to the release of
Microsoft's Office 95 and Office 97 products. In addition, personal computer
sales, especially to entry-level users, are traditionally higher during the
Christmas selling season, and the Company has benefited from increased purchases
of its products during the Christmas season, as well as in the immediately
following months, generally resulting in higher net revenue and net income
during the Company's first two fiscal quarters. Because a substantial portion of
the Company's selling, general and administrative expenses are incurred evenly
throughout the year, the Company generally experiences relatively lower net
profit during quarters not impacted by increases in sales due to seasonal or
other factors discussed above.
26
<PAGE> 27
The following table sets forth certain unaudited quarterly statement of
operations data for each of the ten quarters in the period ended March 31, 1998.
In the opinion of the Company's management, the unaudited information has been
prepared on a basis consistent with the audited financial statements of the
Company 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 financial
statements and notes thereto.
<TABLE>
<CAPTION>
QUARTERS ENDED
---------------------------------------------------------------------------
DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1995 1996 1996 1996 1996 1997 1997
-------- -------- -------- --------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Net Revenue........... $25,065 $24,534 $23,568 $24,680 $26,676 $35,788 $26,210
Percent of total net
revenue year ended
September 30........ 25.6% 25.1% 24.1% 25.2% 22.1% 29.7% 21.7%
Net Income............ $ 1,941 $ 1,851 $ 1,438 $ 1,258 $ 1,536 $ 3,381 $ 1,236
Percent of total net
income year ended
September 30........ 29.9% 28.5% 22.2% 19.4% 21.8% 48.1% 17.6%
<CAPTION>
QUARTERS ENDED
-------------------------------
SEPT. 30, DEC. 31, MAR. 31,
1997 1997 1998
--------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net Revenue........... $32,014 $32,971 $38,945
Percent of total net
revenue year ended
September 30........ 26.5% -- --
Net Income............ $ 882 $ 2,535 $ 4,335(1)
Percent of total net
income year ended
September 30........ 12.5% -- --
</TABLE>
- ------------------------
(1) The net income for the quarter ended March 31, 1998 was favorably impacted
by the reduction in the parent corporate services fee.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
Reporting Comprehensive Income, which requires that an enterprise report, by
major components and as a single total, the change in its net assets during the
period from nonowner sources; and No. 131, Disclosures about Segments of an
Enterprise and Related Information, which establishes annual and interim
reporting standards for an enterprise's operating segments and related
disclosures about its products, services, geographic areas and major customers.
Management has not yet determined the Company's SFAS 131 reporting segments.
These statements will not affect the Company's financial position, results of
operations or cash flows. Both statements are effective for the Company in
fiscal year 1999, with earlier application permitted.
YEAR 2000 COMPLIANCE
The Company uses and is installing a number of computer software programs
and operating systems, including applications for its internal electronic
communications network and for various administrative and billing functions. The
Company has assessed the scope of the Company's risks related to problems these
computer systems may have related to the year 2000 and believes such risks are
not significant.
The Company has identified all of its significant internal software
applications which contain source codes that may be unable to appropriately
interpret the year 2000 and has already begun to modify or replace those
applications. The estimated costs to modify or replace these applications are
not material to the Company.
In addition, the Company is in the process of inquiring of its vendors and
business partners about their progress in identifying and addressing problems
related to the year 2000. All major vendors with whom the Company exchanges
electronic information or on whose internal software applications the Company
may be dependent have committed to the Company that plans are in place to be
compliant before processing of information related to calendar year 2000 would
be required. No assurance can be given that all of these third party systems
will be year 2000 compliant.
FORWARD-LOOKING STATEMENTS
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and other sections of this prospectus contain forward-looking
statements which are subject to various risks and uncertainties. Actual results
could differ materially from those discussed herein. Important factors that
could cause or contribute to such differences include those discussed under
"Risk Factors" as well as those discussed elsewhere in this prospectus.
27
<PAGE> 28
INDUSTRY OVERVIEW
The increase in the market for computer-related books is attributable to
the increase in the size of the personal computer market, an increase in the
number of new users of computers at home and on-the-job, the continued
complexity of computer hardware and software applications and an inadequate
supply of information by technology manufacturers. The Company believes that the
number of personal computers in use in the United States has increased
approximately 50% from 88.6 million in 1995 to 133.8 million in 1997, and the
percentage of households in the United States owning computers grew from 35% to
43% during the same period, based on studies by the Company's market research
affiliate. As a consequence, the market for books devoted to the use of computer
hardware and software grew from $678.0 million in 1995 to $844.0 million in
1997. The Company believes that the increase in the numbers of new and generally
inexperienced personal computer users is the result of falling personal computer
prices, expanding technology requirements in the workplace and the mass appeal
of the Internet. Although much computer-related technology is becoming more
user-friendly, it remains complex for new users and the abundance of new
technology products with added features is often too complex even for the more
experienced users. Due to cost considerations, many technology suppliers have
ceased or reduced their supply of product documentation. Moreover, typical
product documentation provided by technology manufacturers is itself often too
complex to be of much help to the end user. In addition, software more
frequently reaches end users through organization-wide installation, pre-
installation by the OEM and downloading from the Internet than through retail
purchases where software is generally accompanied with better explanatory
information.
The Company's books compete in the general interest book market covering
most categories, other than fiction, biography and children's books. Because of
the increasing demand on people's time and the increasing complexity of life in
general, the Company believes people are turning to self-help and similar books
to increase personal productivity, enhance career success and provide
competitive advantages in a rapidly changing economy, as well as to provide
personal enrichment.
Books are traditionally distributed to large distributors and directly to
retail chains and independent book stores. More recently, books are being
distributed through the Internet, as well as to new outlets such as general mass
merchant retailers. As a result of the continuing trend of consolidation among
book distributors and retailers, increased competition will force these
distributors and retailers to focus more sharply on ways to increase
profitability.
28
<PAGE> 29
BUSINESS
OVERVIEW
IDG Books is a leading publisher of computer, business and self-help books
designed to make learning accessible and fun. In 1997, the Company produced more
number one best-selling computer books than any other publisher, according to
Publishers Weekly. The Company publishes and markets 18 book series under
well-known brand names, including its popular ". . . For Dummies(R)" series.
These books have created widespread recognition of the Company's brands by
consumers enabling it to successfully publish across a variety of categories in
technology, business and self-help. The Company's portfolio of brand names
includes more than 700 active titles. The Company has approximately 65 million
English-language books in print and has translated its books into 36 languages.
The Company believes that its readers value and trust its products and brands to
help obtain computer proficiency and professional certification, general
business know-how, career growth and personal enrichment. The computer book
category grew 8.2% in 1997 according to Simba and has been the fastest growing
sector in the U.S. book industry in each of the past six years.
The Company publishes its books in two general publishing groups,
". . . For Dummies(R)" and IDG Books Technology, which target the distinct needs
of readers.
". . . For Dummies(R)." The ". . . For Dummies(R)" series is a best-selling
line of computer, business, personal finance, study aids, cooking, gardening,
do-it-yourself, health and fitness, and self-help books. The group consists of
more than 350 active titles and approximately 50 million copies in print, as
well as extensions into multimedia, music, on-line information and board games.
Windows For Dummies(R) has more than six million copies in print across all
editions, and the current edition was the best-selling computer book in 1997
according to Publishers Weekly and USA Today. Other best-selling ". . . For
Dummies(R)" titles include The Internet for Dummies(R), Personal Finance For
Dummies(R), Golf For Dummies(R) and Cooking For Dummies(R). Sales of the
Company's ". . . For Dummies(R)" books accounted for approximately 68% of the
Company's net revenue in the Company's fiscal year ended September 30, 1997.
IDG Books Technology. The IDG Books Technology group is comprised of an
expanding collection of information technology books published in multiple book
series under a variety of brands names. These books appeal to a wide range of
readers, from beginners to knowledgeable professionals, including:
- 3-D Visual(R) -- an exclusive, award winning, four-color computer
hardware and software learning system packaged primarily in the
". . . Simplified(TM)" series and the Teach Yourself . . . VISUALLY(TM)
and Master . . . VISUALLY(TM) sub-series;
- One Step at a Time series -- self-paced, step-by-step lessons in a book
combined with a computer-based training CD ROM;
- Bible series -- comprehensive tutorial/reference on all major computing
topics; positioned as "100% comprehensive, 100% authoritative, 100% of
what you need";
- ". . . Secrets(R)" -- featuring key leading authorities targeted to
knowledgeable information technology professionals with over 20 titles
and two million books in print;
- Certification Study Guide series -- quality books and learning materials
for both core courses and electives for Microsoft certification training;
and
- Novell Press(TM) series -- the only official series of Novell product
training and user guides authorized and approved by Novell.
For the year ended September 30, 1997, IDG Books Technology group book sales
accounted for approximately 32% of the Company's net revenue.
The Company's revenue is principally derived from sales in the United
States, which accounted for approximately 84% of sales in fiscal 1997. The
Company also markets its books in numerous countries throughout the world and
licenses its established brands and titles to third parties. Export sales of
English-language books
29
<PAGE> 30
accounted for approximately 13% of the Company's sales in fiscal 1997, while
licensing and custom publishing revenue contributed 3% of sales in fiscal 1997.
OPERATING STRATEGY
The Company strives to provide a consistent, accessible and rewarding
learning experience to readers by offering quality products supported by mass
marketing which is timed to coincide with the introduction of new technology or
the emergence of new trends. To implement these objectives, the Company has
adopted the following operating strategies:
Focus on Branded Content and Mass Marketing. The Company creates quality
products, supported by extensive marketing campaigns which help build brand
recognition. The Company believes its valuable name recognition generates repeat
demand for its books and enables it to extend these brands into additional
licensed products and services.
Make Knowledge Accessible and Enjoyable. The Company believes millions of
individuals, businesses and families are challenged by technologies or are
trying to acquire new skills or enrich their lives. The Company specifically
designs its products to make learning accessible and fun.
Maintain Efficient and Proven Publication Process. The Company has
developed a successful process to conceive, acquire and produce new and revised
titles on a timely and cost-effective basis. The Company's staff of creative
personnel identifies and develops new titles and subject areas and draws on a
recognized and highly respected list of leading authorities, media celebrities
and experienced computer/Internet authors. This collaboration, in conjunction
with the Company's experienced editorial team, assures brand consistency through
high quality, easy-to-read publications. The Company's close working
relationships with technology industry leaders enable the Company to release
high quality and well supported products and services in a timely manner. The
Company believes this strategic focus has created a competitive advantage for
its technology books by enabling the Company to anticipate and meet customer
needs and to bring new and updated titles concurrently with the introduction of
new technologies. In addition, because of the popularity and demand for its
flagship brands, the Company can easily integrate new title and brand launches
into its existing marketing programs.
GROWTH STRATEGY
Building on its operating strategy and on industry trends, the Company has
pursued the following strategies:
Expand Technology, Business and Self-Help Publishing Programs. The Company
has identified numerous opportunities to take advantage of its market position
in technology, business and self-help markets by adding new titles to existing
categories and expanding into new categories. For example, the Company is
releasing approximately 20 new and revised books in concert with Microsoft's
release of Windows 98. These books will be supported by aggressive retail
incentives and marketing programs. The Company has also expanded its ". . . For
Dummies(R)" branded products into other successful categories, such as the
best-selling Golf For Dummies(R) title. The Company expects to expand this
category into other golf-related book topics. The Company believes that the
existing audiences for its brands and brand extensions, together with its
publishing, branding and operating experience, gives it a competitive advantage
in conceiving, identifying, acquiring and developing new brands, products and
services. For example, the Company launched its One Step at a Time series and,
as a result of the success of the first book, has expanded the imprint to eight
titles, and additional titles in that series are planned by mid-1999.
Increase Distribution Penetration and Expand Network. The Company is
working to increase its shelf space among its existing retailers and
distributors and to add new retailers, distributors and distribution channels.
The Company has developed sales and marketing programs that provide additional
compensation to distributors for sales to the ultimate consumer, the reader, in
an effort to increase shelf space devoted to the Company's books at existing
retail customers. Based on its industry experience, the Company believes that
its incentive compensation programs that reward retailers for sale to their
customers are unlike programs of most
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<PAGE> 31
competitors which generally reward volume of purchases rather than sales to
readers. The Company has identified opportunities for further expansion in other
retail outlets, including retail stores that do not traditionally sell books. To
expand its sales network, the Company is also establishing new distribution
channels, such as on-line retailers and other nontraditional channels for the
distribution of the Company's books. For example, the Company recently developed
a cross promotion with John Deere's Homelite division to sell and merchandise
Lawn Care For Dummies(R) through John Deere's distribution network, which
includes outlets for gardening equipment, hardware stores and nurseries.
Develop Business-to-Business Opportunities. The Company intends to expand
sales of its core products directly to businesses for training purposes. The
Company also plans to expand its custom publishing activities, including
production of documentation and booklets, corporate training and special
projects, for a broad range of customers. For example, in late 1997 the Company
produced a custom book for Siemens to be included as the primary documentation
with Siemens's PCS cellular phones.
Develop Brand Ventures. The Company believes that there are numerous
opportunities to extend its brands through domestic and international licensing
arrangements, strategic joint ventures, retail alliances and online services.
The Company has recently licensed the ". . . For Dummies(R)" brand name to
Angel/EMI Records for use on compact disc multimedia music recordings and to
Pressman Toy for board games.
Selectively Acquire Titles and Companies in the U.S. and
Internationally. Management believes that opportunities exist to acquire
selected technology, business and self-help properties that will complement and
enhance its existing portfolio. Such acquisitions would enable the Company to
take advantage of its efficient operating structure and the Company's focus on
brand development. For example, in December 1997, the Company acquired the
rights for MIS:Press and M&T Books, specialty technology book series. These
imprints include two successful series, the Teach Yourself (R) and In Plain
English series, and hundreds of other popular titles covering a variety of
computer networking, operating systems and programming topics.
PUBLICATIONS
The Company publishes 18 branded computer and general interest book series
and sub-series for readers at a variety of learning levels and styles.
Technology titles in the Company's flagship ". . . For Dummies(R)" series
offer practical, fun and easy-to-use reference books that present topics with
humor and entertainment and are filled with "plain English" explanations,
helpful icons and cartoons. Sub-series include: "MORE . . . For Dummies(R)"
(sequel titles); Dummies 101(R) (tutorial); ". . . For Dummies(R) Quick
Reference"; Dummies Guides to Family Computing(TM) and ". . . For Teachers(TM)".
The following list sets forth the top ten best-selling books, each of which has
more than one million copies in print over the past six years, in the ". . . For
Dummies(R)" series:
<TABLE>
<CAPTION>
TITLE EDITIONS
----- --------
<S> <C>
Windows(R) For Dummies(R)........................... 5
DOS For Dummies(R).................................. 3
Internet For Dummies(R)............................. 5
PCs For Dummies(R).................................. 5
Windows(R) For Dummies(R) Quick Reference........... 5
WordPerfect(R) For Dummies(R)....................... 5
Word For Dummies(R)................................. 4
Excel For Dummies(R)................................ 4
Macs(R) For Dummies(R).............................. 5
Microsoft(R) Office For Dummies(R).................. 3
</TABLE>
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<PAGE> 32
Business and self-help ". . . For Dummies(R)" titles cover personal
finance, business, real estate, study aids, automotive, health and fitness,
cooking, do-it-yourself, and other self-help and reference topics. Reference
titles are the fastest growing category of books in the ". . . For Dummies(R)"
line. The top ten best-selling books in the Company's first three years of
publishing books in the business and self-help market, each of which has been
printed in excess of 150,000 copies, are set forth below:
<TABLE>
<CAPTION>
TITLE EDITIONS
----- --------
<S> <C>
Personal Finance For Dummies(R)..................... 2
Golf For Dummies(R)................................. 1
Taxes For Dummies(R)................................ 4
Investing For Dummies(R)............................ 1
Wine For Dummies(R)................................. 1
Gardening For Dummies(R)............................ 1
Sex For Dummies(R).................................. 1
Cooking For Dummies(R).............................. 1
Mutual Fund$ For Dummies(R)......................... 1
Selling For Dummies(R).............................. 1
</TABLE>
IDG Books Technology titles target a broad range of computer users, and
each series is positioned to meet the needs of a specific target audience, from
beginning through advanced level users, including information technology
professionals and software developers. Set forth below are the Company's top ten
IDG Books Technology publications, each of which has more than 200,000 copies in
print over the past eight years:
<TABLE>
<CAPTION>
TITLE EDITIONS
----- --------
<S> <C>
Windows(R) Secrets(R)............................... 4
Windows(R) Simplified(R)............................ 3
Computers Simplified(R)............................. 3
Teach Yourself Windows(R) VISUALLY(TM).............. 2
Internet and WWW Simplified(R)...................... 2
Macworld(R) Macs(R) Secrets(R)...................... 4
Word Simplified(R).................................. 4
Photoshop(R) Bible(R)............................... 5
Excel Simplified(R)................................. 3
Windows(R) Visual Pocket Guide(R)................... 2
</TABLE>
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The following presents a list of the Company's IDG Books Technology
brands/services, a description of the distinguishing features of the product
line and the target audience:
<TABLE>
<CAPTION>
SERIES/BRAND DESCRIPTION/KEY FEATURES USER LEVEL
------------ ------------------------ ----------
<S> <C> <C>
3-D Visual(TM)
- ". . . Simplified(TM)"...... Full color visual learning Beginner
system; topics explained simply
- Teach . . . Yourself
VISUALLY(TM)............... Full color visual learning Beginner to intermediate
system; step-by-step graphics
- Master . . . VISUALLY(TM)... Comprehensive visual learning Beginner to advanced
system
Teach Yourself(R)............... Tutorial and reference guide to Beginner to intermediate
popular software
One Step at a Time.............. Step-by-step lessons with Beginner to intermediate
interactive software support
Bible........................... Comprehensive reference/tutorial Intermediate
with software
". . . In Plain English"........ Quick reference for Intermediate to professional
professionals with A-Z directory
". . . Studio Secrets(TM)"...... Full color undocumented tips on Intermediate to advanced
graphic design from the pros
". . . Secrets(R)".............. Comprehensive undocumented tips Intermediate to advanced
and techniques from the pros
Certification Study Guides
(MCSE, MCSD).................. Study guides and exam question Intermediate to professional
preparation
Novell Press(TM)................ Authorized test preparation Intermediate to professional
guides for CNE and CNA
certification; user and
administrator guides
Professional Guides............. In-depth examination of advanced Advanced to professional
topics with software code
</TABLE>
EXPORT AND FOREIGN EDITIONS
The Company has licensed more than 3,400 of its titles for translation and
publication by third-party publishers in 36 languages throughout the world. The
Company serves the international English-language market and exports U.S.
editions through third-party distributors and booksellers throughout the world
and by licensing reprint rights to a third-party publisher in India. The
Company's publication of special editions for English markets outside the United
States has been initiated with Personal Finance For Dummies(R) For Canadians.
SALES AND MARKETING
The Company organizes its sales and marketing activities around customer
types to implement the Company's operating and growth strategies, focus on
building brands and expand the breadth and depth of its distribution network.
More than one quarter of the Company's employees are employed in its sales and
marketing organization.
Sales
The Company's domestic sales force consists of: (i) a national account
group working directly with national bookstore chains; (ii) a wholesale and mass
market group working with the centralized buying offices of national
wholesalers, memberships clubs, office superstores, mass merchandisers and
computer/electronic superstores; (iii) a field sales and new business
development group servicing regional and independent booksellers and wholesalers
who develop new channels of distribution for selected titles; and (iv) a special
markets group which services the education, corporate, government, on-line
retailer, catalog and custom
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<PAGE> 34
publishing channels. With respect to certain customers, primarily non-bookstore
accounts, the Company also utilizes commissioned sales representatives to
support its own sales force.
The Company believes that booksellers have not traditionally been rewarded
for sales of books to the consumer, but rather on their purchases from book
publishers. The Company's sales and marketing efforts take advantage of the
Company's brand recognition with the consumer to create innovative sales
programs directed to the readers of the Company's books. Accordingly, the
Company has developed sales and marketing programs that, unlike those of other
book publishers, reward distributors and retailers for sales to the ultimate
consumer, the reader.
During fiscal 1997, Barnes and Noble, Inc., Ingram Book Company and Borders
Group, Inc. each accounted for more than 10%, and together accounted for
approximately 37%, of the Company's net revenue.
Marketing
The Company organizes its marketing activities around its brands to support
its sales efforts and brand identity. The Company's marketing professionals
engage in a variety of marketing promotions and activities, including: (i)
developing consumer-focused point of purchase and display materials; (ii)
creating account-focused promotional programs; (iii) coordinating cooperative
advertising spending strategies; and (iv) maximizing media exposure. In
addition, the Company's marketing staff hosts three sales and training seminars
per year and produces eight product catalogs annually.
Sales and Marketing Awards
The Company's marketing activities have earned numerous industry awards
including:
- The 1997 Publisher's Marketing Association Award for "Overall Excellence
in Editorial, Design and Independent Publishing";
- The 1997 Inc. magazine Marketing Masters Award in the Communications
Services Category; and
- Being listed by Advertising Age magazine as one of the Top 100 Companies
in the United States for Marketing Excellence.
In addition to its traditional sales and marketing efforts, the Company
maintains World Wide Web sites (www.idgbooks.com and www.dummies.com) where
individual consumers can learn about and purchase the Company's titles.
PRODUCTION, DISTRIBUTION AND FULFILLMENT
The Company's own staff edits the manuscripts of the authors of the books
it publishes. Freelance resources are utilized when workload exceeds in-house
capacity. Outside experts are used when necessary to ensure technical accuracy
of content and compatibility with final published software. The Company employs
state-of-the-art desktop publishing technology to graphically design book
content, create graphics and prepare the typographic layout for the book. Final
electronic files for all text and cover material are delivered to printers for
reproduction via direct line and Internet connection.
Distribution and fulfillment services to both retail and wholesale
customers are outsourced by the Company to two vendors. The Company's contracts
with these vendors expire in September 1999. One of these vendors accounted for
more than 60% of the Company's distribution and fulfillment costs in each of
fiscal 1996 and 1997 and in the six months ended March 31, 1998. It is
anticipated that a single-source vendor will be selected for distribution and
fulfillment services to take advantage of the efficiencies provided by the
Company's new management information system and order entry function.
PRINTING AND RAW MATERIALS
The Company utilizes a number of outside printers to print and bind its
books. Printing prices are negotiated annually with vendors who perform all
printing and binding in their plants. Due to the significant
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<PAGE> 35
increase in printing volume from year-to-year, the Company does not believe it
is strategically beneficial to negotiate multi-year printing contracts.
The Company's principal raw material is paper. The Company purchases paper
as needed from intermediaries representing paper mills and supplies it to its
printers. Paper accounts for approximately 50% of total inventory costs. Prior
to 1996, printers supplied paper to the Company for the books they printed. The
Company currently purchases paper from suppliers as needed and does not maintain
significant inventories of paper. Paper prices have been volatile over the past
several years and are affected by many factors, including demand, mill capacity,
pulp supply, energy, and general economic conditions. In the past, paper has
been difficult to obtain due to industry-wide shortages. Paper supply agreements
are negotiated annually. Paper prices have been volatile over the past several
years. Currently, the Company has quarterly "price protection" (prices cannot be
increased within a quarter after an initial increase) and price caps per
quarter. Significant increases in paper prices could adversely affect the
Company's future financial condition or results of operations. The Company
believes that the existing arrangements providing for the supply of paper are
adequate and that, in any event, alternative sources are available.
INTELLECTUAL PROPERTY
The Company regards its copyrights, trademarks, trade dress, trade secrets
and similar intellectual property rights in general, and its ". . . For
Dummies(R)" related trademarks, logos and trade dress in particular, as critical
to its success. The Company relies on copyright, trademark and trade secrets
laws and licensing and confidentiality agreements to protect its intellectual
property rights.
The Company registers each of its publications with the United States
Copyright Office, and all of the Company's publications are protected by
copyright laws. The Company pursues the registration of its material trademarks
in the United States and, based upon anticipated use, in certain other
countries. Effective trademark, copyright and trade secret protection, however,
may not be available in every country in which the Company's products are
available. Although individual book titles are generally not subject to
trademark protection, the Company has registered trademarks of certain series of
its books, such as ". . . For Dummies(R)", ". . . Simplified(TM)", Teach
Yourself. . . VISUALLY(TM), 3-D Visual(R) and ". . . Secrets(R)" in the United
States and numerous other countries.
The Company has licensed in the past, and it expects that it may license in
the future, elements of its trademarks, trade dress and similar proprietary
rights to third parties, including in connection with the international editions
of the Company's books that may be controlled operationally by third parties.
While the Company attempts to ensure that the quality of its brands is
maintained by such licensees, there can be no assurance that such licensees will
not take actions that might materially and adversely affect the value of the
Company's proprietary rights or the reputation of its products, either of which
could have a material adverse effect on the Company's business. Moreover, while
the Company believes that it has the right to use ". . . For Dummies(R)" and its
other marks in connection with its business and generally to prohibit others
from using such marks in certain fields of use, there can be no assurance that
the Company will be able to maintain such rights.
The Company may be subject to claims of alleged infringement by it or its
licensees of trademarks and other intellectual property rights from time to time
in the ordinary course of business. The Company 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 the Company's business, financial
condition or results of operations.
Certain of the trademarks and trade names used by the Company are the
property of and are licensed from IDG. See "Relationship with IDG and Certain
Transactions."
EMPLOYEES AND AUTHORS
As of March 31, 1998, the Company had a total of 436 employees. None of the
Company's employees is represented by a labor union, and the Company has never
experienced a work stoppage. The Company considers its relations with employees
to be good. The Company also relies on a recognized and highly
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<PAGE> 36
respected author list of leading authorities, media celebrities and
computer/Internet experts. The Company generally does not have long-term
contracts with its authors.
COMPETITION
The Company faces competition in each of its areas of publication directly
from other publishers and indirectly from nonprint media and expects that
competition will remain intense in the future.
The Company competes on the basis of editorial quality, timely introduction
of new titles, product positioning, pricing and brand name recognition. In
addition to the Company, Simon & Schuster, Microsoft Press and McGraw-Hill all
share a strong market presence in the United States and internationally in
technology publishing. The principal competitors for the Company's
business/self-help/lifestyle titles include Random House, Simon & Schuster and
HarperCollins. Each of these competitors has substantially greater financial
resources than the Company.
Nonprint media, such as the Internet, CD-ROMs and instructional video
tapes, may also present substantial competition to the Company. If computer
users increase their reliance on instructions and information disseminated
on-line, the Company's business could be adversely affected.
FACILITIES
The Company's headquarters are in Foster City, California, and the Company
has editorial, production and sales offices in Indianapolis, Chicago and New
York. The Company leases all of its offices pursuant to leases terminating in
1998 through 2000. The Company believes that its properties are in good
operating condition and adequately serve the Company's current business
operations. The Company also anticipates that suitable additional or alternative
space, including those under lease options, will be available at commercially
reasonable terms for future expansion.
LEGAL PROCEEDINGS
The Company from time to time is a party to various litigation matters
incidental to the conduct of its business. There is no pending or threatened
legal proceeding to which the Company is a party that, in the opinion of the
Company's management, is likely to have a material adverse effect on the
Company's future financial results.
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<PAGE> 37
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information regarding the executive
officers and directors of the Company as of May 22, 1998:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
John J. Kilcullen....... 39 Chairman of the Board of Directors and Chief
Executive Officer
Steven H. Berkowitz..... 39 President and Publisher
John P. Ball............ 51 Executive Vice President, Operations and
Administration, and Secretary
Brenda L. McLaughlin.... 37 Senior Vice President and Group Publisher --
Technology
James A. Doehrman....... 41 Vice President and Chief Financial Officer
Patrick J. McGovern..... 60 Director
James A. Casella........ 49 Director
</TABLE>
John J. Kilcullen. Mr. Kilcullen has served as Chief Executive Officer of
the Company since July 1991 and has been a director of the Company and Chairman
of the Board since March 1998. Prior to that, Mr. Kilcullen served as Vice
President, Sales and Marketing and Publisher of the Company from April 1990 to
July 1991. For the nine years prior to joining the Company, Mr. Kilcullen worked
in various sales and marketing capacities for two publishing industry leaders,
Bantam/Doubleday, Dell, Inc. and Prentice-Hall, and computer book publisher Que
Corporation.
Steven H. Berkowitz. Mr. Berkowitz has served as President and Publisher of
the Company since October 1996. Prior to that, Mr. Berkowitz served as Chief
Operating Officer and Publisher from October 1995 to September 1996, as
Executive Vice President, Worldwide Publishing Operations, from October 1994 to
September 1995, and as Chief Financial Officer and Vice President, Finance, from
June 1994 to October 1994. Prior to joining the Company, Mr. Berkowitz served as
Publisher of MIS:Press and M&T Books, a division of Henry Holt and Company, from
June 1991 to May 1994. Prior to 1991, Mr. Berkowitz worked for eight years at
Macmillan Publishing Company in numerous financial capacities including Vice
President of Finance and Administration during the period 1988 to 1991 and
before joining Macmillan Publishing Company he had three years of finance
experience with Paramount Pictures, Inc.
John P. Ball. Mr. Ball has served as Executive Vice President, Operations
and Administration, of the Company since joining the Company in April 1996 and
as Secretary of the Company since March 1998. Prior to joining the Company, Mr.
Ball acted as an independent publishing and graphic arts consultant from March
1995 to March 1996. From December 1986 to February 1994, Mr. Ball served as
Senior Vice President of Macmillan Publishing Company. Prior to joining
Macmillan Publishing Company, Mr. Ball worked in the publishing industry in a
senior production and manufacturing capacity for over 22 years, including the
last 17 years of the period as Vice President -- Production and Manufacturing
for William Morrow & Company, a leading publisher of trade and reference books.
Brenda L. McLaughlin. Ms. McLaughlin has served as Senior Vice President
and Group Publisher -- Technology, of the Company since joining the Company in
September 1994. Prior to joining the Company, Ms. McLaughlin served as Associate
Publisher of MIS:Press and M&T Books from August 1993 to September 1994. From
August 1989 to July 1993, Ms. McLaughlin served as Acquisitions Editor,
Editor-in-Chief and Associate Publisher of M&T Books. Prior to joining M&T
Books, Ms. McLaughlin worked for five years in various editorial capacities in
the technology magazine businesses of Ziff-Davis, Inc. and McGraw-Hill, Inc.
James A. Doehrman. Mr. Doehrman has served as Vice President and Chief
Financial Officer of the Company since March 1998. Prior to that, Mr. Doehrman
served as Vice President and General Manager, International Division, from July
1997 to March 1998. Prior to joining the Company, Mr. Doehrman served as Vice
President and Business Manager of the Latin American Division of Simon &
Schuster from January
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<PAGE> 38
1996 to April 1997. From October 1993 to January 1996, Mr. Doehrman served as
Vice President and International Controller of Simon & Schuster, Inc. Mr.
Doehrman joined Simon & Schuster, Inc. as Vice President -- Accounting Services
in April 1992. Prior to joining Simon & Schuster, Inc., Mr. Doehrman had four
years of financial experience with Federated Department Stores, Inc., serving as
Operating Vice President -- Capital Control from 1989 to 1992. Prior thereto,
Mr. Doehrman had nine years of financial experience which included seven years
of experience in public accounting with Arthur Andersen & Co.
Patrick J. McGovern. Mr. McGovern has been a director of the Company since
its inception in February 1990. Mr. McGovern is the founder and chairman of the
board of the directors of International Data Group, Inc., the parent company of
the Company. Mr. McGovern has served as the Chairman and Chief Executive Officer
of IDG and its predecessor since February 1964. Mr. McGovern also serves on the
boards of directors of the Massachusetts Institute of Technology, the Magazine
Publishers Association and a number of IDG subsidiaries.
James A. Casella. Mr. Casella has been a director of the Company since May
1998. Mr. Casella has served as the Chief Operating Officer of IDG since March
1995. From March 1992 to March 1995, Mr. Casella served as the President of
Infoworld Media Group, Inc., a subsidiary of IDG. Mr. Casella also serves on the
board of directors of BPA International, a privately-held company.
Executive officers of the Company are appointed by the Board of Directors
and serve at the discretion of the Board. There are no family relationships
among any of the directors or executive officers of the Company.
BOARD COMPOSITION
Directors of the Company are currently elected annually by its stockholders
to serve during the ensuing year and until their respective successors are duly
elected and qualified. The Company's Board of Directors is currently set at five
directors and has two vacancies, which the Company's Bylaws authorize the Board
of Directors to fill. The Company intends to appoint two people who are not
officers or employees of the Company or of IDG to the Board of Directors within
90 days after consummation of this offering and is required to do so to maintain
its listing on the Nasdaq National Market.
The Company's Bylaws provide that the authorized number of directors may be
changed by an amendment to the Bylaws adopted by the Board of Directors or by
the stockholders. Vacancies on the Board may be filled either by holders of a
majority of the Company's voting stock or a majority of directors in office,
although less than a quorum.
BOARD COMMITTEES
The Company's Board of Directors currently has no committees. After this
offering, the Board of Directors intends to create an Audit Committee and a
Compensation Committee.
The Audit Committee will be comprised of two independent directors. The
Audit Committee will review and, as it deems appropriate, recommend to the Board
of Directors the internal accounting and financial controls for the Company and
the accounting principles and auditing practices and procedures to be employed
in preparation and review of the financial statements of the Company. The Audit
Committee will also make recommendations to the Board concerning the engagement
of independent public auditors and the scope of the audit to be undertaken by
such auditors.
The Compensation Committee will be comprised of two independent directors.
The Compensation Committee will review and, as it deems appropriate, recommend
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 Committee will
also exercise all authority under the Company's employee equity incentive plans
and advise and consult with the officers of the Company as may be requested
regarding managerial personnel policies.
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<PAGE> 39
DIRECTOR COMPENSATION
Effective upon consummation of this offering, the Company's directors who
are not officers or employees of the Company will be paid an annual retainer of
$10,000 and a fee of $1,000 for each meeting attended of the Board of Directors
or of a committee of the Board. The Company has recently established the 1998
Stock Plan which provides for automatic grants of options to non-employee
directors commencing upon consummation of this offering. See "-- 1998 Stock
Plan."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's Board of Directors does not have, and has not in the past
had, a Compensation Committee. Decisions regarding compensation of officers and
employees of the Company have been made by the full Board of Directors. After
this offering, the Board of Directors intends to appoint a Compensation
Committee comprised of a majority of independent directors. Mr. McGovern, a
director of the Company, is Chairman of the Board of Directors of IDG. In
addition, Mr. Casella, a director of the Company, is an executive officer of
IDG.
LIMITATION ON LIABILITY AND INDEMNIFICATION MATTERS
Section 102 of the Delaware General Corporation Law (the "DGCL") 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 generally 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 and their stockholders for monetary damages for
conduct constituting gross negligence in the exercise of their duty of care.
Although Section 102 of the DGCL does not change a director's duty of care, it
enables corporations to limit available relief to equitable remedies such as
injunction or rescission. The Company's Certificate of Incorporation and Bylaws
include provisions which limit or eliminate the personal liability of its
directors to the fullest extent permitted by Section 102 of the DGCL.
Consequently, a director or officer will not be personally liable to the Company
or its stockholders for monetary damages for breach of fiduciary duty as a
director, except for:
- any breach of the director's duty of loyalty to the Company 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 purchases, redemptions or
other distributions; and
- any transaction from which the director derived an improper personal
benefit.
The Company's Certificate of Incorporation and Bylaws provide that the
Company will 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 the Company or serves or served at the request of the Company as a
director, officer or employee. The Certificate of Incorporation and Bylaws
provide that expenses, including attorneys' fees, incurred by any such person in
defending any such action, suit or proceeding will be paid or reimbursed by the
Company promptly upon receipt by it of an undertaking of such person to repay
such expenses if it is ultimately determined that such person is not entitled to
be indemnified by the Company.
The Company has entered into agreements to indemnify its directors and
executive officers, in addition to indemnification provided for in the Company's
Certificate of Incorporation and Bylaws. These agreements, among other things,
indemnify the Company's directors and executive officers for certain expenses
(including attorneys' fees), judgments, fines and settlement amounts incurred by
any such person in any action or proceeding, including any action by or in the
right of the Company, arising out of such person's services as a director or
executive officer of the Company, any subsidiary of the Company or any other
company or enterprise to which the person provides services at the request of
the Company. In addition, the Company intends to obtain directors' and officers'
insurance providing indemnification for certain of the Company's
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<PAGE> 40
directors, officers and employees for certain liabilities. The Company believes
that these indemnification provisions and agreements are necessary to attract
and retain qualified directors and officers.
The limited liability and indemnification provisions in the Company's
Certificate of Incorporation and Bylaws 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 benefit the
Company and its stockholders. Furthermore, a stockholder's investment in the
Company may be adversely affected to the extent the Company pays the costs of
settlement and damage awards against directors and officers of the Company
pursuant to the indemnification agreements and the indemnification provisions in
the Company's Certificate of Incorporation and Bylaws.
At present, there is no pending litigation or proceeding involving any
director, officer or employee of the Company where indemnification is expected
to be required or permitted, and the Company is not aware of any threatened
litigation or proceeding that might result in a claim for such indemnification.
EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation paid
to the Company's Chief Executive Officer and the Company's four other most
highly compensated executive officers (collectively, the "Named Executive
Officers") during the Company's fiscal year ended September 30, 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM
---------------------- COMPENSATION ALL OTHER
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) AWARDS(1) COMPENSATION($)
--------------------------- --------- -------- ------------ ---------------
<S> <C> <C> <C> <C>
John J. Kilcullen............................ $260,000 $336,975 $21,000 $559,012(2)
Chief Executive Officer
Steven H. Berkowitz.......................... 200,000 281,358 21,000 88,783(3)
President and Publisher
John P. Ball................................. 175,000 114,775 21,000 --
Executive Vice President, Operations and
Administration, and Secretary
Brenda L. McLaughlin......................... 144,769 66,675 21,000 --
Senior Vice President and Group
Publisher --
Technology
James A. Doehrman............................ 28,558(4) -- 16,773 50,000(5)
Vice President and Chief Financial Officer
</TABLE>
- ---------------
(1) Represents contribution by the Company to its Employee Stock Ownership Plan.
(2) Consists of $468,378 of deferred compensation and $90,634 of relocation
expense reimbursement. The deferred compensation programs pursuant to which
Mr. Kilcullen received such amounts will be terminated at the end of fiscal
1998.
(3) Consists of deferred compensation. The deferred compensation programs
pursuant to which Mr. Berkowitz received such amount will be terminated at
the end of fiscal 1998.
(4) Represents compensation from July to September 1997 based on an annual
salary of $165,000.
(5) Represents Mr. Doehrman's relocation expense allowance.
The Company did not grant stock options to any of the Named Executive
Officers or any other officer or employee during the calendar year ended
December 31, 1997 and no options were exercised during 1997 or outstanding as of
December 31, 1997. In May 1998, the Company granted options to purchase 250,000,
250,000, 100,000, 75,000 and 50,000 shares of Class A common stock at an
exercise price of $11.88 per share to Mr. Kilcullen, Mr. Berkowitz, Mr. Ball,
Ms. McLaughlin and Mr. Doehrman, respectively, under the 1998 Stock Plan. See
"--1998 Stock Plan."
40
<PAGE> 41
EMPLOYMENT AGREEMENTS
In July 1998, the Company entered into three-year employment agreements
with each of Messrs. Kilcullen and Berkowitz. Mr. Kilcullen's agreement entitles
him to a base salary of $289,000 per year effective October 1, 1998 and a bonus
if the Company meets certain performance targets. Mr. Kilcullen's agreement also
requires IDG to use its best efforts to elect him as a director of the Company
and requires Mr. Kilcullen to continue to serve as a director without
compensation. Mr. Kilcullen is currently the Chairman of the Company's Board of
Directors. Mr. Berkowitz's agreement entitles him to a base salary of $235,000
per year effective October 1, 1998 and a bonus if the Company meets certain
performance targets.
In addition, each agreement provides certain benefits upon the termination
of the employment of the respective executive. If the Company terminates the
executive without cause (as defined in the agreement), or if the executive
terminates voluntarily for good reason (as defined in the agreement and
including any change in position or responsibilities or any voluntary
termination following a change in control), the executive is entitled to any
accrued but unpaid salary and bonus, plus a year of salary (or, if terminated
within the first year, an amount equal to such executive's salary for the
remainder of the three year term), his maximum target bonus for the fiscal year
in which he leaves (or, if terminated within the first year, an amount equal to
such executive's maximum target bonus for the remainder of the three year term)
and credit for twenty-four additional months of vesting of his options. If
within 12 months after a change in control, the Company terminates the
employment of the executive without cause or the executive terminates
voluntarily for good reason, the executive is entitled to accrued but unpaid
salary and bonus plus an amount equal to two hundred percent of his yearly base
salary and of his maximum target bonus for the fiscal year in which he leaves.
In addition, all of the executive's unvested options shall vest. If the Company
terminates the employment of the executive for cause, or if the executive
terminates voluntarily without good reason, the Company will not be obligated to
pay any termination benefits or accelerate vesting of any of the executive's
options. The employment agreements also include provisions regarding the
protection of confidential information of the Company, non-solicitation of other
employees of the Company and indemnification of the executives by the Company.
In July 1998, the Company entered into compensation agreements with each of
Messrs. Ball and Doehrman and Ms. McLaughlin. Mr. Ball's agreement entitles him
to a base salary of $200,000 per year effective October 1, 1998 and a bonus if
the Company meets certain performance targets. Mr. Doehrman's agreement entitles
him to a base salary of $178,000 per year effective October 1, 1998 and a bonus
if the Company meets certain performance targets. Ms. McLaughlin's agreement
entitles her to a base salary of $178,000 per year effective October 1, 1998 and
a bonus if the Company meets certain performance targets.
In addition, each agreement provides certain benefits upon the termination
of the employment of the respective executive. If the Company terminates the
executive without cause (as defined in the agreement), or if the executive
terminates voluntarily, the executive is entitled to any accrued but unpaid
salary and bonus, plus a year of salary (or, if terminated within the first
year, an amount equal to such executive's salary for the remainder of the three
year term), the maximum target bonus for the fiscal year in which he or she
leaves (or, if terminated within the first year, an amount equal to such
executive's maximum target bonus for the remainder of the three year term) and
credit for twenty-four additional months of vesting of options. If within 12
months after a change in control, the Company terminates the employment of the
executive without cause, the executive is entitled to accrued but unpaid salary
and bonus plus an amount equal to two hundred percent of his or her yearly base
salary and of the maximum target bonus for the fiscal year in which he or she
leaves. In addition, all of the executive's unvested options shall vest. If the
Company terminates the employment of the executive for cause, or if the
executive terminates voluntarily without good reason, the Company will not be
obligated to pay any termination benefits or accelerate vesting of any of the
executive's options. The compensation agreements also include provisions
regarding the protection of confidential information of the Company,
non-solicitation of other employees of the Company and indemnification of the
executives by the Company.
41
<PAGE> 42
1998 STOCK PLAN
The Company's 1998 Stock Plan (the "1998 Stock Plan") was approved by the
Board of Directors and the stockholders of the Company in May 1998. The 1998
Stock Plan provides for the grant of incentive stock options within the meaning
of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), to
employees (including officers and employee directors) and for the grant of
nonstatutory stock options and stock purchase rights ("SPRs") to employees,
directors and consultants. A total of 2,850,000 shares of Class A common stock
are currently reserved for issuance pursuant to the 1998 Stock Plan. Unless
terminated sooner, the 1998 Stock Plan will terminate automatically in 2008. On
May 6, 1998, the Company granted options to purchase an aggregate of 1,500,900
shares of Class A common stock at an exercise price of $11.88 per share under
the 1998 Stock Plan.
The 1998 Stock Plan will be administered by the Board of Directors or a
committee of the Board of Directors (as applicable, the "Administrator"). The
Administrator has the power to determine the terms of the options or SPRs
granted, including the exercise price of the option or SPR, the number of shares
subject to each option or SPR, the exercisability thereof, and the form of
consideration payable upon such exercise. In addition, the Administrator has the
authority to amend, suspend or terminate the 1998 Stock Plan, provided that no
such action may affect any share of Class A common stock previously issued and
sold or any option or SPR previously granted under the 1998 Stock Plan.
The exercise price of all incentive stock options granted under the 1998
Stock Plan must be at least equal to the fair market value of the Class A common
stock on the date of grant. The exercise price of nonstatutory stock options and
SPRs granted under the 1998 Stock Plan will be determined by the Administrator,
but with respect to nonstatutory stock options intended to qualify as
"performance-based compensation" within the meaning of Section 162(m) of the
Code, the exercise price must at least be equal to the fair market value of the
Class A common stock on the date of grant. With respect to any participant who
owns stock representing more than 10% of the voting power of all classes of the
Company's outstanding capital stock, the exercise price of any incentive or
nonstatutory stock option granted must equal at least 110% of the fair market
value on the grant date and the term of such incentive or nonstatutory stock
option must not exceed five years. The term of all other options granted under
the 1998 Stock Plan may not exceed ten years. Options and SPRs granted under the
1998 Stock Plan are not generally transferable by the optionee, and each option
and SPR is exercisable during the lifetime of the optionee only by such
optionee. Options granted under the 1998 Stock Plan that are vested must
generally be exercised within 30 days after the end of the optionee's status as
an employee, director or consultant of the Company, or within 30 days after such
optionee's termination by death or disability, but in no event later than the
expiration of the option's term.
The 1998 Stock Plan provides that in the event of a merger of the Company
with or into another corporation, or a sale of all or substantially all of the
Company's assets, each option and SPR shall be assumed or an equivalent option
or SPR substituted for by the successor corporation. If the outstanding options
or SPRs are not assumed or substituted for by the successor corporation, the
Administrator, in its discretion, may provide, unless otherwise provided in any
employment, compensation or other agreement with an optionee, for the optionee
to have the right to exercise the option or SPR as to all of the optioned stock,
including shares underlying options or SPRs that would not otherwise be vested
or exercisable.
The 1998 Stock Plan also provides that, upon consummation of this offering,
each director that is not also an officer or employee of the Company (a
"non-employee director") shall be automatically granted an option to purchase
10,000 shares of Class A common stock on the date on which such person first
becomes a non-employee director. Each non-employee director shall also be
automatically granted an option to purchase 5,000 shares on March 1 of each
year, provided he or she is then a non-employee director and, as of such date,
he or she shall have served on the Board of Directors for at least the preceding
six months. Options granted to non-employee directors vest in three annual
installments commencing on the first anniversary of the date of grant and have a
term of ten years. The exercise price of options granted to non-employee
directors shall be 100% of the fair market value per share of the Class A common
stock on the date of grant. The 1998 Stock Plan provides that options issuable
to directors of the Company who are also officers or directors of IDG will, at
the election of IDG, be issued to IDG or an officer, director or employee of IDG
designated by IDG.
42
<PAGE> 43
Section 162(m) of the Code may limit the Company's ability to deduct for
United States federal income tax purposes compensation in excess of $1,000,000
paid to the Company's Chief Executive Officer and its four other most highly
compensated executive officers in any one fiscal year. Certain grants of option
or SPRs to employees under the 1998 Stock Plan will not be subject to the
deduction limitation if such grants are approved by stockholders or are provided
for in a plan that has been previously approved by stockholders. In order to
preserve the Company's ability to deduct the compensation associated with
options and SPRs granted to such persons, the 1998 Stock Plan, as approved by
the Company's stockholders, provides that no employee may be granted options and
SPRs to purchase more than 500,000 shares of Class A common stock in any one
fiscal year. Notwithstanding this limit, however, in connection with an
employee's initial employment, he or she may be granted options or SPRs to
purchase up to an additional 500,000 shares of Class A common stock.
EMPLOYEE STOCK PURCHASE PLAN
In May 1998, the Board of Directors adopted the Employee Stock Purchase
Plan (the "Purchase Plan") covering an aggregate of 350,000 shares of Class A
common stock which became effective upon its adoption. The Purchase Plan, which
is intended to qualify as an employee stock purchase plan within the meaning of
Section 423 of the Code, is administered by the Board of Directors or by a
committee appointed by the Board. Employees of the Company are eligible to
participate in the Purchase Plan if they are employed by the Company or a
subsidiary of the Company designated by the Board for at least 20 hours per week
and are customarily employed for more than five months in any calendar year. The
Purchase Plan permits eligible employees to purchase Class A common stock
through payroll deductions, which may not exceed 10% of an employee's
compensation, subject to certain limitations. The Purchase Plan will be
implemented in a series of consecutive offering periods, each of approximately
24 months duration. Offering periods will begin on the first trading day on or
after February 15 and August 15 each year and terminate on the last trading day
in the periods 24 months later. Each participant in the Purchase Plan will be
granted an option on the first day of the offering period and such option will
be automatically exercised on the last date of each offering period. The
purchase price of the Class A common stock under the Purchase Plan will be equal
to 85% of the lesser of the fair market value per share of Class A common stock
on the start date of the offering period or on the last day of the offering
period. Employees may end their participation in the offering at any time during
the offering period, and participation ends automatically on termination of an
employee's employment with the Company. The Purchase Plan will terminate in 2008
unless earlier terminated by the Board of Directors.
EMPLOYEE STOCK OWNERSHIP PLAN
Prior to May 6, 1998, eligible employees of the Company participated in an
employee stock ownership plan of IDG (the "IDG Plan"). On that date, the Company
adopted its own employee stock ownership plan (the "IDG Books Plan") and the
accounts of the active employees of the Company as of that date were transferred
from the IDG Plan to the IDG Books Plan, together with the shares of IDG common
stock held in the IDG Plan that were allocated to the accounts of such Company
employees. In May 1998, the IDG common stock held in the IDG Books Plan was
exchanged for 394,251 shares of Class B common stock of the Company, pursuant to
an appraisal of each class of stock by the financial advisor to the trustee of
the IDG Books Plan. On the effective date of the offering, the IDG Books Plan's
shares of Class B common stock will be transferred to IDG Enterprises, Inc., a
wholly-owned subsidiary of IDG, in return for an equal number of shares of Class
A common stock.
The Company may make future contributions to the IDG Books Plan for the
accounts of Company employees who are then qualified for participation in the
plan, in amounts determined by the Board of Directors from year to year
(subject, however, to certain limits contained in the IDG Books Plan and in the
Code). Contributions are at the discretion of the Board and depend, in part, on
the amount of Company profits during a plan year. Any such contributions may be
made in Class A common stock, or may be made in cash with the intent that the
cash contribution be used to purchase Class A common stock. Benefits from the
IDG Books Plan, in the form of Class A common stock allocated to the account of
a participant, are generally distributable to the participant upon retirement,
disability, death or over a period beginning on termination of employment of the
participant by the Company. The IDG Books Plan provides that employees become
eligible to participate when hired and are vested in their employer-provided
account balances over seven years.
43
<PAGE> 44
The IDG Books Plan is intended to qualify as an employee stock ownership plan
under Section 4975(e)(7) of the Code.
The Company's employees presently participate in a Section 401(k) plan of
IDG. After the offering, the Company expects to amend and restate the IDG Books
Plan to provide participants with the benefits of Section 401(k) of the Code, by
permitting them to make elective contributions to the IDG Books Plan. On October
1, 1998, the Company intends to have the accounts of its employees transferred
from the IDG 401(k) plan to the IDG Books Plan, as so amended and restated.
Thereafter, an eligible participating employee may make elective cash
contributions to the IDG Books Plan in the amount of a maximum of 8% of his or
her compensation (as defined in the IDG Books Plan) for any plan year (the
12-month period ending September 30 of each year), but not to exceed $10,000
(subject to adjustment each year based on cost of living adjustments determined
by the Internal Revenue Service) for any calendar year. The Company expects to
match employee contributions to the IDG Books Plan. The percentage of the match
will be set by the Company's Board of Directors each plan year, and the matching
contribution may, at the discretion of the Board, be made in cash or in Class A
common stock.
44
<PAGE> 45
RELATIONSHIP WITH IDG AND CERTAIN TRANSACTIONS
PRINCIPAL STOCKHOLDER; CONTROL OF THE COMPANY
The Company is a wholly-owned subsidiary of IDG Enterprises, Inc., a
Delaware corporation and wholly-owned subsidiary of IDG Holdings, Inc., a
Delaware corporation. IDG Holdings, Inc. is a wholly-owned subsidiary of
International Data Group, Inc., a Massachusetts corporation ("IDG"), the
majority of the capital stock of which is owned by Mr. Patrick J. McGovern, its
founder and chairman of the board of directors and a director of the Company.
Upon completion of this offering, IDG, through its subsidiaries, will own
10,505,749 shares of the Class A common stock and all of the 200,000 shares of
Class B common stock, together representing 77.77% of the voting power of the
Company, and the public will own 3,180,000 shares of Class A common stock,
representing 19.78% of the voting power of the Company.
As a result of its ownership of Class A common stock and Class B common
stock, IDG will be able to influence significantly matters affecting the Company
and will be in a position to control all actions that require the approval of a
majority of the voting share capital of the Company, including amendments to the
Company's Certificate of Incorporation and any business combinations, and to
direct the election of all members of the Board of Directors. Nonetheless,
Delaware law requires that the members of the Board of Directors and officers
owe a fiduciary duty to the Company regardless of conflicting interests of any
other entity with which they may be affiliated.
INTERCOMPANY AGREEMENTS
In connection with the offering, the Company and IDG have entered into
certain agreements for the purpose of defining their ongoing relationship. These
agreements were developed in the context of a parent/subsidiary relationship and
therefore are not the result of arms-length negotiations between independent
parties. Although there can be no assurance that these agreements or the
transactions contemplated by these agreements have been effected on terms at
least as favorable to the Company as could have been obtained from unaffiliated
third parties, the Company believes that such agreements taken as a whole are
fair to both parties and that the amount of the expenses contemplated by the
agreements would not be materially different if the Company operated on a
stand-alone basis.
Corporate Services Agreement. The Company and IDG have entered into a
Corporate Services Agreement (the "Corporate Services Agreement") pursuant to
which IDG will provide certain administrative services to the Company following
the offering. Pursuant to the agreement, IDG will provide tax services,
accounting, insurance, employee benefits, corporate record keeping, payroll and
trademark maintenance services to the Company. The initial monthly fee under the
Corporate Services Agreement is $44,000. After an initial period of service, the
Company will be entitled to have these services provided on a monthly basis at
the same monthly fee. In addition, the Company may request certain additional
services, including legal, corporate development and public relations services,
to be provided from time-to-time in the future.
The Corporate Services Agreement may be terminated by either the Company on
90 days notice or may be terminated by IDG when it ceases to own a majority of
the outstanding voting stock of the Company. There can be no assurance that, if
required, the Company will be able to secure the provision of these services
from others on acceptable terms. If the Company is unsuccessful in obtaining
acceptable provision of services upon termination of the transitional service
agreements, its future financial performance could be adversely affected.
Registration Rights Agreement. The Company and IDG Enterprises, Inc., an
indirect wholly-owned subsidiary of IDG, have entered into a Registration Rights
Agreement (the "Registration Rights Agreement") in connection with the offering.
The Registration Rights Agreement entitles IDG Enterprises, Inc. to include its
shares of common stock of the Company in any future registration of common stock
made by the Company. The Company has agreed pursuant to the terms of the
Registration Rights Agreement to pay all costs and expenses, other than
underwriting discounts and commissions related to shares to be sold by IDG
Enterprises, Inc. and expenses of legal counsel for IDG Enterprises, Inc., in
connection with any such registration.
Trademark License Agreement. In connection with the offering, IDG will
transfer to the Company certain trademarks owned by IDG that relate to
publications and products of the Company. The Company agreed to pay all costs,
consisting primarily of required filing fees, in connection with such transfer.
45
<PAGE> 46
In addition, the Company and IDG have entered into a Trademark License
Agreement (the "Trademark License Agreement") pursuant to which IDG has granted
to the Company a royalty-free license to use certain trademarks in conjunction
with publications and products currently produced and held by the Company.
Currently all of the Company's publications use trademarks covered by the
Trademark License Agreement. These trademarks generally include references to
"IDG," but do not include the ". . . For Dummies" trademark or the names of the
Company's other publications, which are owned by the Company. The Trademark
License Agreement provides that if IDG's voting interest in the Company is
reduced to less than 30%, the parties will negotiate in good faith to reach an
agreement providing for the continued use of the trademarks, including the IDG
Books mark. If the parties were unable to reach such an agreement, the Company
would be required to cease using marks covered by the Trademark License
Agreement. The license also may be terminated by IDG upon a breach of the
Trademark License Agreement or the insolvency of the Company. The Company does
not believe that the termination of the Trademark License Agreement would have a
material adverse impact on its business, financial position or results of
operations.
Noncompetition Agreement. In connection with the offering, IDG has agreed
that, until the earlier of five years after the offering or such time as IDG
ceases to own at least a majority of the voting power of the Company, it will
not, directly or indirectly, as a partner, stockholder, investor or otherwise,
own a majority share or be responsible for the management of any corporation or
other entity the business objectives or activities of which are carried on
anywhere in the world and consist primarily of book publishing.
Tax Allocation Agreement. IDG and the Company have entered into a Tax
Allocation Agreement (the "Tax Allocation Agreement") that will provide for the
allocation between IDG and the Company of all responsibilities, liabilities and
benefits relating to taxes paid or payable by either IDG or the Company for all
taxable periods, whether beginning before, on, or after this offering. Prior to
the consummation of this offering, the Company has been included in the
consolidated tax returns of IDG. The Company intends to pay to IDG, in cash, its
share of IDG's consolidated income tax liability for the period from October 1,
1997 through the date on which IDG owns less than 80% of the Company (which will
occur upon the consummation of this offering). For the post-offering period, the
Company will file its own federal and most state income tax returns.
SHARE EXCHANGE AGREEMENT
Employees of the Company were historically covered by the IDG Employee
Stock Ownership Plan (the "IDG ESOP"), pursuant to which their accounts were
invested primarily in common stock of IDG. The IDG Books Plan was adopted
effective May 6, 1998 with respect to the eligible employees of the Company as
of October 1, 1997. Participants in the IDG ESOP who were then employees of the
Company then became participants in the IDG Plan.
As of May 21, 1998, the accounts of the employees of the Company and the
shares of common stock of IDG attributable to such accounts were transferred
from the IDG ESOP to the IDG Books Plan. As of May 21, 1998 all of the common
stock of IDG held by the IDG Books Plan was exchanged for an aggregate of
394,251 shares of Class B common stock of the Company on behalf of employees of
the Company pursuant to the terms of a Share Exchange Agreement among the
Company, IDG and a subsidiary of IDG. In connection with the exchange of the
shares of common stock of IDG for shares of Class B common stock of the Company,
the trustee of the IDG Books Plan received an opinion of an independent
valuation firm to the effect that the consideration to be received by the IDG
Books Plan in exchange for the IDG shares was no less than the fair market
value, within the meaning of ERISA, of such IDG shares, and that the exchange
was fair to the IDG Books Plan from a financial point of view. In connection
with the offering, 194,251 shares of the Company's Class B common stock held by
the IDG Books Plan will be transferred to IDG Enterprises, Inc. in exchange for
an equal number of shares of the Company's Class A common stock held by IDG
Enterprises, Inc. and will be immediately converted into 194,251 shares of Class
A common stock. Subsequently, the remaining 200,000 shares of Class B common
stock held by the IDG Books Plan will be transferred to IDG Enterprises, Inc. in
exchange for an equal number of the Company's Class A common stock held by IDG
Enterprises, Inc. The Company may be obligated in certain circumstances to
repurchase shares from the IDG Books Plan or register shares for resale under
the federal securities laws.
PRE-OFFERING DIVIDEND
In May 1998, the Company paid a $38.4 million dividend to IDG in the form
of a promissory note which will be paid out of the proceeds of the offering. See
"Use of Proceeds."
46
<PAGE> 47
PRINCIPAL STOCKHOLDERS
The Company is a wholly-owned subsidiary of IDG Enterprises, Inc., a
Delaware corporation and wholly-owned subsidiary of IDG Holdings, Inc., a
Delaware corporation. IDG Holdings, Inc. is a wholly-owned subsidiary of
International Data Group, Inc., a Massachusetts corporation, a majority of the
capital stock of which is owned by Mr. Patrick J. McGovern, its founder and
chairman of the board of directors and a director of the Company. IDG's address
is One Exeter Plaza, Boston, Massachusetts 02116. The following table sets
forth, as of March 31, 1998, the beneficial ownership of the Company's common
stock by the Company's principal stockholder, each of the Named Executive
Officers, each of the Company's directors and by all executive officers and
directors of the Company as a group.
<TABLE>
<CAPTION>
CLASS B
COMMON
CLASS A COMMON STOCK STOCK COMMON STOCK
---------------------------------- ------------ -------------------
PERCENT OF PERCENT OF TOTAL
OWNERSHIP VOTING POWER
SHARES ------------------- SHARES -------------------
BENEFICIALLY BEFORE AFTER BENEFICIALLY BEFORE AFTER
NAME OWNED(1) OFFERING OFFERING OWNED(1) OFFERING OFFERING
---- ------------ -------- -------- ------------ -------- --------
<S> <C> <C> <C> <C> <C> <C>
IDG Enterprises, Inc.(2)(3).................. 10,505,749 96.38% 74.61% 200,000 96.94% 77.77%
John J. Kilcullen............................ -- -- -- -- -- --
Steven H. Berkowitz.......................... -- -- -- -- -- --
John P. Ball................................. -- -- -- -- -- --
Brenda L. McLaughlin......................... -- -- -- -- -- --
James A. Doehrman............................ -- -- -- -- -- --
Patrick J. McGovern(2)(3).................... 10,505,749 96.38 74.61 200,000 96.94 77.77
James A. Casella............................. -- -- -- -- -- --
All executive officers and directors as a
group (7 persons)(2)(3).................... 10,505,749 96.38 74.61 200,000 96.94 77.77
</TABLE>
- ---------------
(1) The number and percentage of shares beneficially owned are based on
11,100,000 shares of common stock outstanding as of March 31, 1998.
Beneficial ownership is determined in accordance with the rules and
regulations of the Securities and Exchange Commission. Shares of Class A
common stock subject to options that are currently exercisable or
exercisable within 60 days of March 31, 1998 are deemed to be outstanding
and beneficially owned by the person holding such options for the purpose of
computing the number of shares beneficially owned and the percentage
ownership of such person, but are not deemed to be outstanding for the
purpose of computing the percentage ownership of any other person. Except as
indicated in the footnotes to this table, and subject to applicable
community property laws, such persons have sole voting and investment power
with respect to all shares of the Company's common stock shown as
beneficially owned by them.
(2) Gives effect to the exchange by IDG Enterprises, Inc. at the time of the
offering of (i) 194,251 shares of Class A common stock held by it for an
equal number of shares of Class B common stock held by the IDG Books Plan,
which Class B common stock will be immediately converted by IDG Enterprises,
Inc. into 194,251 shares of Class A common stock, and (ii) 200,000 shares of
Class A common stock held by it for an equal number of shares of Class B
common stock held by the IDG Books Plan.
(3) Represents shares of Class A common stock and Class B common stock owned by
IDG Enterprises, Inc., an indirect, wholly-owned subsidiary of International
Data Group, Inc. of which Mr. McGovern is chairman of the board of directors
and of which Mr. McGovern owns a majority of the issued and outstanding
capital stock.
As a result of its ownership of common stock, IDG will be able to influence
significantly matters affecting the Company and will be in a position to direct
the election of all members of the Board of Directors and to control all actions
that require the approval of a majority of the voting share capital of the
Company, including amendments to the Company's Certificate of Incorporation and
any business combinations. See "Risk Factors -- Control by IDG; Potential
Conflicts of Interest; Benefits to IDG; Potential Competition with IDG" and
"Description of Capital Stock -- Certain Provisions of the Company's Certificate
of Incorporation and Bylaws."
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<PAGE> 48
DESCRIPTION OF CAPITAL STOCK
The following summary of certain provisions of the Company's capital stock
describes all material provisions of the Company's Certificate of Incorporation
and Bylaws. This summary, however, does not purport to be complete and is
subject to, and qualified in its entirety by, the Certificate of Incorporation
and Bylaws, copies of which have been filed as exhibits to the Registration
Statement of which this prospectus is a part and by the provisions of applicable
law.
GENERAL
The authorized capital stock of the Company is 25,400,000 shares of common
stock, par value $0.001 per share, consisting of 25,000,000 shares of Class A
common stock and 400,000 shares of Class B common stock. Upon consummation of
this offering, 14,280,000 shares of common stock will be issued and outstanding,
consisting of 14,080,000 shares of Class A common stock and 200,000 shares of
Class B common stock.
COMMON STOCK
The shares of Class A common stock and Class B common stock are identical
in all respects, except for voting rights and certain conversion rights, as
described below.
Voting Rights. Each holder of Class A common stock outstanding is entitled
to one vote per share on all matters submitted to a vote of the Company's
stockholders, including the election of directors, and each share of Class B
common stock entitles the holder to ten votes on each such matter. Except as
required by applicable law, holders of the Class A common stock and Class B
common stock vote together as a single class on all matters submitted to a vote
of the stockholders of the Company. There is no cumulative voting in the
election of directors. See "Risk Factors -- Control by IDG; Potential Conflicts
of Interest; Benefits to IDG; Potential Competition with IDG"; "-- Certain
Anti-Takeover Effects of Delaware Law" and "-- Certain Provisions of the
Company's Certificate of Incorporation and Bylaws."
Any action that may be taken at a meeting of the stockholders may be taken
by written consent in lieu of a meeting if the Company receives consents signed
by stockholders having the minimum number of votes that would be necessary to
approve the action at a meeting at which all shares entitled to vote on the
matter were present and voted. This could permit IDG to take action regarding
certain matters without providing other stockholders the opportunity to voice
dissenting views or raise other matters.
Dividends, Distributions and Stock Splits. Holders of Class A common stock
and Class B common stock are entitled to receive dividends out of assets legally
available therefor at the same rate, at such time and in such amounts as the
Board of Directors may from time to time determine. See "Dividend Policy."
In the case of dividends or distributions payable in Class A common stock
or Class B common stock, only shares of Class A common stock will be distributed
with respect to the Class A common stock and only shares of Class B common stock
will be distributed with respect to the Class B common stock. In the case of
dividends or other distributions consisting of other voting shares of the
Company, the Company will declare and pay such dividends in two separate classes
of such voting securities, identical in all respects, except that the voting
rights of each such security paid to the holders of the Class A common stock
shall be one-tenth of the voting rights of each such security paid to the
holders of Class B common stock, and such security paid to the holders of Class
B common stock shall convert into the security paid to the holders of the Class
A common stock upon the same terms and conditions applicable to the Class B
common stock. In the case of dividends or other distributions consisting of
nonvoting securities convertible into, or exchangeable for, voting securities of
the Company, the Company will provide that such convertible or exchangeable
securities and the underlying securities be identical in all respects, except
that the voting rights of each security underlying the convertible or
exchangeable security paid to the holders of the Class A common stock shall be
one-tenth of the voting rights of each security underlying the convertible or
exchangeable security paid to the holders of Class B common stock, and such
underlying securities paid to the holders of Class B common stock shall convert
into the security paid to the holders of the Class A common stock upon the same
terms and conditions applicable to the conversion of Class B common stock into
Class A common stock.
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<PAGE> 49
Neither the Class A common stock nor the Class B common stock may be
subdivided or combined in any manner unless the other class is subdivided or
combined in the same proportion.
Conversion. The shares of Class A common stock are not convertible.
The Class B common stock is convertible into Class A common stock, in whole
or in part, at any time and from time to time at the option of the holder, on
the basis of one share of Class A common stock for each share of Class B common
stock converted. Each share of Class B common stock will also automatically
convert into one share of Class A common stock upon the sale or transfer of such
share of Class B common stock by the initial holder thereof, other than to a
person or entity controlling, controlled by or under common control with the
initial holder or a qualified employee stock ownership plan. The holders of
Class B common stock shall have, upon conversion of their shares of Class B
common stock into Class A common stock, one vote per share of Class A common
stock held on all matters submitted to a vote of the Company's stockholders.
Liquidation. In the event of any dissolution, liquidation, or winding up of
the affairs of the Company, whether voluntary or involuntary, after payment of
the debts and other liabilities of the Company, the remaining assets of the
Company will be distributed ratably among the holders of the Class A common
stock and the Class B common stock, treated as a single class.
Mergers and Other Business Combinations. Upon a merger, combination, or
other similar transaction of the Company in which shares of common stock are
exchanged for or changed into other stock or securities, cash and/or any other
property, holders of the Class A common stock and Class B common stock will be
entitled to receive an equal per share amount of stock, securities, cash, and/or
any other property, as the case may be, into which or for which each share of
any other class of common stock is exchanged or changed; provided that in any
transaction in which shares of capital stock are distributed, such shares so
exchanged for or changed into may differ as to voting rights and certain
conversion rights to the extent and only to the extent that the voting rights
and certain conversion rights of Class A common stock and Class B common stock
differ at that time.
Other Provisions. The holders of the Class A common stock and Class B
common stock are not entitled to preemptive rights. There are no redemption
provisions or sinking fund provisions applicable to the Class A common stock or
the Class B common stock.
All shares of Class A common stock and Class B common stock outstanding are
fully paid and nonassessable, and all of the shares of Class A common stock and
Class B common stock to be outstanding upon completion of this offering will be
fully paid and nonassessable.
CERTAIN ANTI-TAKEOVER EFFECTS OF DELAWARE LAW
Following consummation of this offering, the Company will be subject to the
"business combination" provisions of Section 203 of the DGCL. 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 transaction 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 stockholder owned at least 85% of
the shares of stock entitled to vote generally in the election of
directors (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 (a) persons who are
directors and also officers and (b) 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
49
<PAGE> 50
- 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 the Company and, accordingly, may discourage attempts to
acquire the Company even though such a transaction may offer the
Company's stockholders the opportunity to sell their stock at a price
above the prevailing market price.
CERTAIN PROVISIONS OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS
The Company's Certificate of Incorporation and Bylaws provide that any
action required or permitted to be taken by the stockholders of the Company may
be effected at a duly called annual or special meeting of the stockholders or
may be taken by a consent in writing by stockholders. The Company's Bylaws also
provide that special meetings of the stockholders of the Company may be called
by the Board of Directors, the Chairman of the Board, the Chief Executive
Officer of the Company or by any person or persons holding shares representing
at least 20% of the voting power of the outstanding capital stock. The Company's
Bylaws require advance written notice by a stockholder of a proposal or director
nomination which such stockholder desires to present at an annual or special
meeting of stockholders. No business other than that stated in the notice shall
be transacted at any special meeting. As a result of these provisions, IDG, as
holder of 74.61% of the Company's Class A common stock and all of the shares of
Class B common stock, together representing 77.77% of the voting power of the
Company after the offering, will be able to take any action to be taken by
stockholders without the necessity of holding a stockholder meeting and will be
able to call a special meeting of stockholders to consider certain corporate
actions.
The Company's Bylaws also provide that unanimous board approval, including
the approval of all non-employee directors and directors selected by IDG, will
be required to approve the incurrence of indebtedness by the Company in an
aggregate amount that exceeds five times the Company's EBITDA in its most
recently completed fiscal year.
Amendments to certain provisions of the Company's Bylaws, including those
provisions relating to stockholder action by written consent, the ability of
stockholders to call a special meeting and the requirement of unanimous board
approval for certain borrowings, require the approval of stockholders holding a
majority of the voting power of the outstanding common stock.
LIMITATIONS ON LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Company's Certificate of Incorporation limits the liability of
directors to the fullest extent permitted by the DGCL. In addition, the
Certificate of Incorporation and Bylaws provide that the Company shall indemnify
directors and officers of the Company to the fullest extent permitted by
Delaware law. The Company has entered into separate indemnification agreements
with its directors and executive officers which provide such persons
indemnification protection in the event the Certificate of Incorporation is
subsequently amended. See "Management -- Limitation on Liability and
Indemnification Matters."
TRANSFER AGENT AND REGISTRAR
BankBoston, N.A. has been appointed as transfer agent and registrar for the
Company's Class A common stock.
LISTING
The Class A common stock has been approved for quotation on the Nasdaq
National Market under the symbol "IDGB," subject to official notice of issuance.
50
<PAGE> 51
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for the common
stock of the Company. The Company cannot predict the effect, if any, that sales
of shares of the Class A common stock to the public or the availability of
shares for sale to the public will have on the market price of the Class A
common stock prevailing from time to time. Nevertheless, sales of a significant
number of shares of Class A common stock in the public market, or the perception
that such sales may occur, could adversely affect the prevailing market price of
the Class A common stock.
Upon consummation of this offering, the Company will have 14,080,000 shares
of Class A common stock outstanding (14,557,000 shares if the underwriters'
over-allotment is exercised in full) and 200,000 shares of Class B common stock
outstanding. Of the shares outstanding after the offering, the 3,180,000 shares
of Class A common stock sold in the offering will be freely tradeable without
restriction under the Securities Act of 1933, as amended (the "Securities Act"),
except for any such shares which may be acquired by an "affiliate" of the
Company, which shares will be subject to the volume limitations of Rule 144
under the Securities Act. As defined in Rule 144, an "affiliate" of an issuer is
a person who, directly or indirectly, through one or more intermediaries,
controls or is controlled by, or is under common control with, such issuer. The
remaining 11,100,000 shares of Class A common stock and Class B common stock,
10,705,749 of which immediately after this offering will be owned by a
subsidiary of IDG, will be "restricted securities" (as that phrase is defined in
Rule 144) and may not be resold in the absence of registration under the
Securities Act or pursuant to an exemption from such registration, including the
exemption provided by Rule 144 under the Securities Act.
Subject to the foregoing and to the lock-up agreements described below,
under Rule 144 as currently in effect, beginning 180 days after the date of this
prospectus, IDG will be entitled to sell a number of shares of common stock
within any three-month period equal to the greater of 1% of the then outstanding
shares of the common stock (approximately 142,800 shares immediately after the
offering) or the average weekly reported volume of trading of the common stock
on the Nasdaq National Market during the four calendar weeks preceding such
sale, provided that certain manner of sale and notice requirements and
requirements as to the availability of current public information concerning the
Company are satisfied.
Immediately after the offering, there will be options to purchase
approximately 1,500,900 shares of Class A common stock outstanding. Subject to
the provisions of the lock-up agreements described below, holders of these
options may rely on the resale provisions of Rule 701 under the Securities Act,
which permits nonaffiliates to sell their shares without having to comply with
the current public information, holding period, volume limitation or notice
provisions of Rule 144 and permits affiliates to sell their shares without
having to comply with the holding period provision of Rule 144, in each case
beginning 90 days after the consummation of this offering. In addition,
immediately after this offering, the Company intends to file a registration
statement on Form S-8 covering all options granted under the 1998 Stock Plan.
Shares of Class A common stock registered under such registration statement
will, subject to Rule 144 volume limitations applicable to affiliates, be
available for sale in the open market, unless such shares are subject to vesting
restriction with the Company or the lock-up agreements described below. See
"Management -- 1998 Stock Plan."
The Company and IDG have entered into a Registration Rights Agreement in
connection with the offering which provides IDG with the right, subject to
certain exceptions, to include its common stock in any registration of common
stock made by the Company for its own account or for the account of other
stockholders of the Company. The Company does not currently have any other
registration rights outstanding. See "Relationship with IDG and Certain
Transactions."
Notwithstanding the foregoing, in connection with this offering, each of
the Company, IDG and the Company's directors and officers has agreed that,
without the prior written consent of Morgan Stanley & Co. Incorporated on behalf
of the underwriters, during the period ending 180 days after the date of this
prospectus, it 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,
51
<PAGE> 52
directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock (whether
such shares or any such securities are then owned by such person or are
thereafter acquired directly from the Company); or
- enter into any swap or other arrangement that transfers, in whole or in
part, any of the economic consequences of ownership of the common stock.
The above 180-day restriction does not apply, however, to the following:
- the sale to the underwriters of the shares of common stock under the
underwriting agreement (as described below);
- the issuance by the Company of shares of common stock upon the exercise
of an option or warrant or the conversion of any security outstanding on
the date of this prospectus of which the underwriters have been advised
in writing;
- the grant by the Company of options pursuant to existing benefit plans of
the Company, the recipient of which having agreed in writing to
restrictions on transfer of such options and any shares of common stock
received upon the exercise thereof to the same effect as the foregoing;
or
- transactions by any person other than the Company relating to shares of
common stock or other securities acquired in open market transactions
after completion of the offering of the shares of common stock. See
"Underwriters."
52
<PAGE> 53
UNDERWRITERS
Under the terms and subject to the conditions contained in the underwriting
agreement dated the date hereof (the "underwriting agreement"), the underwriters
named below, for whom Morgan Stanley & Co. Incorporated, Goldman, Sachs & Co.
and Merrill Lynch, Pierce, Fenner & Smith Incorporated are acting as
representatives, have severally agreed to purchase, and the Company has agreed
to sell to them, severally, the respective number of shares of Class A common
stock set forth opposite the names of such underwriters below:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- ---------
<S> <C>
Morgan Stanley & Co. Incorporated........................... 810,000
Goldman, Sachs & Co. ....................................... 810,000
Merrill Lynch, Pierce, Fenner & Smith
Incorporated................................... 810,000
BT Alex. Brown Incorporated................................. 100,000
Donaldson, Lufkin & Jenerette Securities Corporation........ 100,000
A.G. Edwards & Sons, Inc.................................... 100,000
Gerard Klauer Mattison & Co., Inc. ......................... 50,000
Hoefer & Arnett, Incorporated............................... 50,000
Janney Montgomery Scott Inc. ............................... 50,000
Jefferies & Company, Inc. .................................. 50,000
Edward D. Jones & Co., L.P. ................................ 100,000
Smith Barney Inc. .......................................... 50,000
Wasserstein Perella Securities, Inc. ....................... 100,000
---------
Total............................................. 3,180,000
=========
</TABLE>
The underwriters are offering the shares subject to their acceptance of the
shares from the Company and subject to prior sale. The underwriting agreement
provides that the obligations of the several underwriters to pay for and accept
delivery of the shares of Class A common stock offered hereby are subject to the
approval of certain legal matters by their counsel and to certain other
conditions. The underwriters are obligated to take and pay for all of the shares
of Class A common stock offered hereby (other than those covered by the over-
allotment option described below) if any such shares are taken.
The underwriters initially propose to offer part of the shares of Class A
common stock directly to the public at the public offering price set forth on
the cover page hereof and part to certain dealers at a price that represents a
concession not in excess of $.65 a share under the public offering price. Any
underwriter may allow, and such dealers may reallow, a concession not in excess
of $.10 a share to other underwriters or to certain other dealers. After the
initial offering of the shares of Class A common stock, the offering price and
other selling terms may from time to time be varied by the representatives of
the underwriters.
Pursuant to the underwriting agreement, the Company has granted to the
underwriters an option, exercisable for 30 days from the date of this
prospectus, to purchase up to an aggregate of 477,000 additional shares of Class
A common stock at the public offering price set forth on the cover page hereof,
less underwriting discounts and commissions. The underwriters may exercise such
option solely for the purpose of covering over-allotments, if any, made in
connection with the offering of the shares of Class A common stock offered
hereby. To the extent such option is exercised, each underwriter will become
obligated, subject to certain conditions, to purchase approximately the same
percentage of such additional shares of Class A common stock as the number set
forth next to such underwriter's name in the preceding table bears to the total
number of shares of Class A common stock set forth next to the names of all
underwriters in the preceding table.
At the request of the Company, the underwriters have reserved up to 159,000
shares of Class A common stock to be issued by the Company and offered hereby
for sale, at the initial public offering price, to directors, officers,
employees, business associates and related persons of the Company. The number of
shares of Class A
53
<PAGE> 54
common stock available for sale to the general public will be reduced to the
extent such individuals purchase such reserved shares. Any reserved shares which
are not so purchased will be offered by the underwriters to the general public
on the same basis as the other shares offered hereby.
Each of the Company, IDG and the Company's directors and officers has
agreed that, without the prior written consent of Morgan Stanley & Co.
Incorporated on behalf of the underwriters, during the period ending 180 days
after the date of this prospectus, it will not, directly or indirectly (i)
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, directly or indirectly, any
shares of Class A common stock or any securities convertible into or exercisable
or exchangeable for Class A common stock (whether such shares or any such
securities are then owned by such person or are thereafter acquired directly
from the Company), or (ii) enter into any swap or other arrangement that
transfers to another, in whole or in part, any of the economic consequences of
ownership of Class A common stock, whether any such transaction described in
clause (i) or (ii) above is to be settled by delivery of Class A common stock or
such other securities, in cash or otherwise. The restrictions described in this
paragraph do not apply to (a) the sale to the underwriters of the shares of
Class A common stock under the underwriting agreement, (b) the issuance by the
Company of shares of Class A common 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, (c) the grant
by the Company of options pursuant to existing benefit plans of the Company, the
recipient of which having agreed in writing to restrictions on transfer of such
options and any shares of common stock received upon the exercise thereof to the
same effect as the foregoing, or (d) transactions by any person other than the
Company relating to shares of Class A common stock or other securities acquired
in open market transactions after the completion of the offering of the shares
of Class A common stock.
The underwriters have informed the Company that they do not intend sales to
discretionary accounts to exceed five percent of the total number of shares of
Class A common stock offered by them.
The Class A common stock has been approved for quotation on the Nasdaq
National Market under the symbol "IDGB".
In order to facilitate the offering of the Class A common stock, the
underwriters may engage in transactions that stabilize, maintain or otherwise
affect the price of the Class A common stock. Specifically, the underwriters may
over-allot in connection with the offering, creating a short position in the
Class A common stock for their own account. In addition, to cover
over-allotments or to stabilize the price of the Class A common stock, the
underwriters may bid for, and purchase, shares of Class A common stock in the
open market. Finally, the underwriting syndicate may reclaim selling concessions
allowed to an underwriter or a dealer for distributing the Class A common stock
in the offering if the syndicate repurchases previously distributed shares of
Class A common stock in transactions to cover syndicate short positions, in
stabilization transactions or otherwise. Any of these activities may stabilize
or maintain the market price of the Class A common stock above independent
market levels. The underwriters are not required to engage in these activities
and may end any of these activities at any time.
The Company and the underwriters have agreed to indemnify each other
against certain liabilities, including liabilities under the Securities Act.
The underwriters have agreed to pay certain expenses of the Company
incurred in connection with the offering.
Certain of the underwriters have in the past performed various banking
services for IDG, for which such underwriters received customary compensation.
PRICING OF THE OFFERING
Prior to this offering, there has been no public market for the shares of
Class A common stock. Consequently, the initial public offering price for the
shares of Class A common stock was determined by negotiations between the
Company and the representatives of the underwriters. Among the factors
considered in determining the initial public offering price were the Company's
record of operations, the Company's
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<PAGE> 55
current financial position and future prospects, the experience of its
management, the economics of the publishing industry in general, the general
condition of the equity securities markets, sales, earnings and certain other
financial and operating information of the Company in recent periods, the
price-earnings ratios, price-sales ratios, market prices of securities and
certain financial and operating information of companies engaged in activities
similar to those of the Company.
LEGAL MATTERS
The validity of the issuance of the shares of Class A common stock offered
hereby will be passed upon for the Company by Wilson Sonsini Goodrich & Rosati,
Professional Corporation, Palo Alto, California. Certain legal matters in
connection with this offering will be passed upon for the underwriters by Davis
Polk & Wardwell, New York, New York.
EXPERTS
The financial statements of the Company as of September 30, 1997 and 1996,
and for each of the three years in the period ended September 30, 1997 included
in this prospectus and the related financial statement schedule included
elsewhere in the registration statement have been audited by Deloitte & Touche
LLP, independent auditors, as stated in their reports appearing herein and
elsewhere in the registration statement, and are included in reliance upon the
reports of such firm given upon their authority as experts in accounting and
auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), a registration statement on Form S-1 under the Securities Act,
and the rules and regulations promulgated thereunder, with respect to the Class
A common stock offered hereby. This prospectus, which constitutes a part of the
registration statement, does not contain all of the information set forth in the
registration statement and the exhibits and schedules thereto. Statements
contained in this prospectus as to the contents of any contract or other
document that is filed as an exhibit to the registration statement are not
necessarily complete and each such statement is qualified in all respects by
reference to the full text of such contract or document. For further information
with respect to the Company and the Class A common stock, reference is hereby
made to the registration statement and the exhibits and schedules thereto, which
may be inspected and copied at the principal office of the Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the regional offices of the
Commission located at Seven World Trade Center, Suite 1300, New York, New York
10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661, and copies of all or any part thereof may be obtained at
prescribed rates from the Commission's Public Reference Section at such
addresses. Also, the Commission maintains a World Wide Web site on the Internet
at http://www.sec.gov that contains reports, proxy and information statements
and other information regarding registrants that file electronically with the
Commission. Upon approval of the Class A common stock for quotation on the
Nasdaq National Market, such reports, proxy and information statements and other
information also can be inspected at the office of Nasdaq Operations, 1735 K
Street, N.W., Washington, D.C. 20006.
Upon completion of this offering, the Company will become subject to the
information and periodic reporting requirements of the Securities and Exchange
Act, as amended, and, in accordance therewith, will file periodic reports, proxy
statements and other information with the Commission. Such periodic reports,
proxy statements and other information will be available for inspection and
copying at the regional offices, public reference facilities and Web site of the
Commission referred to above.
55
<PAGE> 56
IDG BOOKS WORLDWIDE, INC.
(AN INDIRECT SUBSIDIARY OF INTERNATIONAL DATA GROUP, INC.)
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ F-2
Balance Sheets as of September 30, 1996 and 1997 and
(Unaudited) March 31, 1998............................. F-3
Statements of Income for the Years Ended September 30,
1995, 1996 and 1997 and (Unaudited) the Six Months
Ended March 31, 1997 and March 31, 1998................ F-4
Statements of Stockholder's Equity for the Years Ended
September 30, 1995, 1996 and 1997 and (Unaudited) the
Six Months Ended March 31, 1998........................ F-5
Statements of Cash Flows for the Years Ended September 30,
1995, 1996 and 1997 and (Unaudited) the Six Months
Ended March 31, 1997 and March 31, 1998................ F-6
Notes to Financial Statements............................. F-7
</TABLE>
F-1
<PAGE> 57
INDEPENDENT AUDITORS' REPORT
IDG Books Worldwide, Inc.:
We have audited the accompanying balance sheets of IDG Books Worldwide,
Inc., an indirect subsidiary of International Data Group, Inc., as of September
30, 1996 and 1997, and the related statements of income, stockholder's equity,
and cash flows for the each of the three years in the period ended September 30,
1997. 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of IDG Books Worldwide, Inc. at September 30,
1996 and 1997, and the results of its operations and its cash flows for each of
the three years in the period ended September 30, 1997 in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
San Jose, California
March 31, 1998
(May 6, 1998 as to the twelfth paragraph of Note 2,
May 22, 1998 as to Note 8 and
June 1, 1998 as to the last paragraph of Note 9)
F-2
<PAGE> 58
IDG BOOKS WORLDWIDE, INC.
(AN INDIRECT SUBSIDIARY OF INTERNATIONAL DATA GROUP, INC.)
BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
PRO FORMA
SEPTEMBER 30, SEPTEMBER 30, MARCH 31, MARCH 31,
1996 1997 1998 1998
------------- ------------- ----------- -----------
(UNAUDITED)
(UNAUDITED) (NOTE 2)
<S> <C> <C> <C> <C>
Current Assets:
Cash................................... $ 83 $ 74 $ 46 $ 46
Accounts receivable -- net............. 20,915 26,561 33,553 33,553
Inventory -- net....................... 6,119 7,927 8,735 8,735
Other current assets................... 446 6 598 598
Deferred tax assets.................... 10,860 14,860 18,517 18,517
------- ------- ------- -------
Total current assets........... 38,423 49,428 61,449 61,449
Royalty Advances -- net.................. 2,139 3,078 3,736 3,736
Property and Equipment -- net............ 3,074 4,657 4,670 4,670
Publishing Rights (Note 11) -- net....... 3,833 3,833
------- ------- ------- -------
TOTAL.......................... $43,636 $57,163 $73,688 $73,688
======= ======= ======= =======
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current Liabilities:
Accounts payable....................... $ 2,960 $ 3,128 $ 4,697 $ 4,697
Accrued liabilities.................... 16,685 27,592 31,727 31,727
Note payable to Parent (Note 2)........ 38,400
------- ------- ------- -------
Total current liabilities...... 19,645 30,720 36,424 74,824
------- ------- ------- -------
Commitments and Contingencies (Note 10)
Stockholder's Equity (Deficit):
Preferred stock, $.001 par value;
authorized: 5,000,000
shares -- actual; issued and
outstanding: 0 shares -- actual and
pro forma...........................
Common stock, $.001 par value;
authorized: 25,000,000
shares -- actual, 25,000,000 Class A
shares and 400,000 Class B
shares -- pro forma; issued and
outstanding: 11,100,000
shares -- actual, 10,900,000 shares
Class A and 200,000 shares Class
B -- pro forma...................... 11 11 11 11
Retained earnings (deficit)............ 23,729 30,764 37,634 (766)
Advances due to (from) Parent.......... 251 (4,332) (381) (381)
------- ------- ------- -------
Total stockholder's equity
(deficit).................... 23,991 26,443 37,264 (1,136)
------- ------- ------- -------
Total.......................... $43,636 $57,163 $73,688 $73,688
======= ======= ======= =======
</TABLE>
See notes to financial statements.
F-3
<PAGE> 59
IDG BOOKS WORLDWIDE, INC.
(AN INDIRECT SUBSIDIARY OF INTERNATIONAL DATA GROUP, INC.)
STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED SEPTEMBER 30, MARCH 31,
---------------------------- -----------------
1995 1996 1997 1997 1998
------- ------- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Net sales................................. $69,712 $93,435 $116,488 $60,561 $69,583
Licensing revenues and other.............. 2,811 4,412 4,200 1,903 2,333
------- ------- -------- ------- -------
Net revenue............................ 72,523 97,847 120,688 62,464 71,916
------- ------- -------- ------- -------
Operating Costs and Expenses:
Cost of sales............................. 40,598 55,703 63,064 32,075 37,856
Selling, general and administrative....... 19,573 28,369 42,032 20,218 21,240
Parent corporate services fee............. 1,464 2,779 3,669 1,836 1,175
------- ------- -------- ------- -------
Total operating costs and
expenses........................ 61,635 86,851 108,765 54,129 60,271
------- ------- -------- ------- -------
Income Before Provision for Income Taxes.... 10,888 10,996 11,923 8,335 11,645
Provision for Income Taxes.................. 4,522 4,508 4,888 3,348 4,775
------- ------- -------- ------- -------
Net Income.................................. $ 6,366 $ 6,488 $ 7,035 $ 4,987 $ 6,870
======= ======= ======== ======= =======
Basic and Diluted Net Income per Share...... $ 0.57 $ 0.58 $ 0.63 $ 0.45 $ 0.62
======= ======= ======== ======= =======
Pro Forma Basic and Diluted Net Income per
Share (Note 2)............................ $ .51 $ .50
======== =======
Shares Used in per Share Calculations:
Basic and diluted net income.............. 11,100 11,100 11,100 11,100 11,100
======= ======= ======== ======= =======
Pro forma basic and diluted net income.... 13,873 13,873
======== =======
</TABLE>
See notes to financial statements.
F-4
<PAGE> 60
IDG BOOKS WORLDWIDE, INC.
(AN INDIRECT SUBSIDIARY OF INTERNATIONAL DATA GROUP, INC.)
STATEMENTS OF STOCKHOLDER'S EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADVANCES
DUE
COMMON STOCK TO
---------------- RETAINED (FROM)
SHARES AMOUNT EARNINGS PARENT TOTAL
------ ------ --------- -------- -------
<S> <C> <C> <C> <C> <C>
Balance, October 1, 1994................... 11,100 $11 $10,875 $(3,429) $ 7,457
Net income............................... 6,366 6,366
Change in Advances due to (from)
Parent................................ 3,066 3,066
------ --- ------- ------- -------
Balance, September 30, 1995................ 11,100 11 17,241 (363) 16,889
Net income............................... 6,488 6,488
Change in Advances due to (from)
Parent................................ 614 614
------ --- ------- ------- -------
Balance, September 30, 1996................ 11,100 11 23,729 251 23,991
Net income............................... 7,035 7,035
Change in Advances due to (from)
Parent................................ (4,583) (4,583)
------ --- ------- ------- -------
Balance, September 30, 1997................ 11,100 11 30,764 (4,332) 26,443
Net income*.............................. 6,870 6,870
Change in Advances due to (from) Parent*... -- -- -- 3,951 3,951
------ --- ------- ------- -------
Balance, March 31, 1998*................... 11,100 $11 $37,634 $ (381) $37,264
====== === ======= ======= =======
</TABLE>
- ---------------
* unaudited
See notes to financial statements.
F-5
<PAGE> 61
IDG BOOKS WORLDWIDE, INC.
(AN INDIRECT SUBSIDIARY OF INTERNATIONAL DATA GROUP, INC.)
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED SEPTEMBER 30, MARCH 31,
--------------------------- ------------------
1995 1996 1997 1997 1998
------- ------- ------- -------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net income................................ $ 6,366 $ 6,488 $ 7,035 $ 4,987 $ 6,870
------- ------- ------- -------- -------
Adjustments to reconcile net income to net
cash provided (used) by operating
activities:
Depreciation and amortization........ 382 1,355 1,663 712 1,668
Deferred income taxes................ (3,308) (2,017) (4,000) (2,784) (3,657)
Changes in operating assets and
liabilities:
Accounts receivable............... (7,615) (3,460) (5,646) (11,929) (7,942)
Inventory......................... (7,230) 3,378 (1,808) (2,332) (308)
Royalty advances.................. (279) (910) (939) (614) (258)
Other current assets.............. 355 (412) 440 207 (592)
Accounts payable.................. 1,786 (1,075) 168 2,553 1,569
Accrued liabilities............... 7,685 (1,492) 10,907 7,553 3,624
------- ------- ------- -------- -------
Net cash provided (used) by
operating activities............ (1,858) 1,855 7,820 (1,647) 974
------- ------- ------- -------- -------
Cash Flows from Investing Activities:
Capital expenditures...................... (1,250) (2,430) (3,246) (681) (1,514)
Acquisition of publishing rights and
related assets......................... -- -- -- -- (3,439)
------- ------- ------- -------- -------
Net cash used in investing
activities...................... (1,250) (2,430) (3,246) (681) (4,953)
------- ------- ------- -------- -------
Cash Flows from Financing Activities:
Advances due to (from) Parent -- net
change................................. 3,066 614 (4,583) 2,323 3,951
------- ------- ------- -------- -------
Net Increase (Decrease) in Cash............. (42) 39 (9) (5) (28)
Cash, Beginning of Period................... 86 44 83 83 74
------- ------- ------- -------- -------
Cash, End of Period......................... $ 44 $ 83 $ 74 $ 78 $ 46
======= ======= ======= ======== =======
Noncash Investing Activity:
Acquisition of publishing rights and
related assets (Note 11):
Current assets......................... $ 1,400
Publishing rights...................... 4,000
Less cash paid......................... (3,439)
-------
Liabilities assumed.................... $ 1,961
=======
</TABLE>
See notes to financial statements.
F-6
<PAGE> 62
IDG BOOKS WORLDWIDE, INC.
(AN INDIRECT SUBSIDIARY OF INTERNATIONAL DATA GROUP, INC.)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997 AND
SIX MONTHS ENDED MARCH 31, 1997 AND 1998
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE SIX MONTHS ENDED MARCH 31, 1997
AND MARCH 31, 1998 IS UNAUDITED)
1. BASIS OF PRESENTATION
Organization and Description of Business -- IDG Books Worldwide, Inc., a
Massachusetts company ("Books-Massachusetts"), was founded in 1990 as a
wholly-owned subsidiary (through intermediate companies) of International Data
Group, Inc. ("Parent"). On March 24, 1998, the Parent formed a new intermediate
subsidiary, IDG Books Worldwide, Inc., a Delaware company ("Books-Delaware"), to
be the holding company of Books-Massachusetts. Subsequently Books-Massachusetts
was merged into Books-Delaware.
The formation of the Books-Delaware and subsequent merger with
Books-Massachusetts was a combination of companies under common control by the
Parent and is accounted for similar to a pooling of interests. Accordingly, the
accompanying financial statements report the operations of Books-Massachusetts
for periods prior to the formation of Books-Delaware. Books-Delaware and
Books-Massachusetts are collectively referred to in the accompanying financial
statements as "IDG Books Worldwide, Inc." or "the Company."
The Company is a publisher of computer, business, personal finance, study
aids, cooking, gardening, do-it-yourself, health and fitness and self-help
books. The Company publishes and markets its books under brand names, including
the ". . . For Dummies(R)" series.
Basis of Presentation and Transactions with Parent -- The Company has
conducted its business as an operating division of the Parent, with separate
management, personnel, facilities and accounting records. The Company has
historically depended on the Parent (or affiliates thereof) for corporate
administrative functions, as well as for strategic marketing and brand-building,
financing, cash management, tax and payroll administration, property/casualty
insurance, employee benefits administration, and certain other services. The
fees for these services have been charged to the Company, and reflected in the
accompanying financial statements, through a Parent corporate services fee based
on a percentage of budgeted net sales plus a fixed charge which is consistent
with the method that the Parent charges its other controlled subsidiaries.
Effective January 1, 1998, the Company assumed responsibility for certain
corporate administrative functions, as well as for the Company's strategic
marketing and brand-building, the costs for which had constituted a significant
portion of the parent corporate services fee. Accordingly, the parent corporate
services fee decreased to $150,000 per quarter. In the opinion of management,
the parent corporate services fees included in the accompanying financial
statements reflect a reasonable amount for the services received; however, such
amounts were not established on an arm's-length basis and may not be the same as
would have been incurred had the Company operated independent of its Parent (see
Note 9). Nevertheless, management does not believe the Company would have
incurred materially different operating expenses as an independent company.
2. SIGNIFICANT ACCOUNTING POLICIES
Fiscal Year -- The Company's fiscal year ends on the Saturday closest to
September 30. Fiscal years 1995, 1996 and 1997 ended on September 30, 1995,
September 28, 1996, and September 27, 1997, respectively, and each consisted of
52 weeks. For convenience, fiscal year-ends are denoted in the accompanying
financial statements as September 30. Similarly, the twenty-six-week periods
ended March 29, 1997 and March 28, 1998 are referred to as the six-month periods
ended March 31, 1997 and 1998, respectively.
Revenue Recognition -- Sales are recorded upon shipment of products, net of
provisions for estimated returns and allowances, which are estimated based on
historical experience by type of book. For the years
F-7
<PAGE> 63
IDG BOOKS WORLDWIDE, INC.
(AN INDIRECT SUBSIDIARY OF INTERNATIONAL DATA GROUP, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
ended September 30, 1995, 1996 and 1997 and the six months ended March 31, 1997
and 1998, the provision for returns and allowances represented approximately
19.9%, 22.3%, 20.9%, 20.5% and 22.7% of gross sales for the respective period.
The accompanying income statements do not reflect any material adjustments for
actual returns and allowances as compared to amounts estimated in prior periods.
Revenue from the licensing of titles, editorial content and design are
recognized when received.
Concentrations of Credit Risk -- Financial instruments which potentially
expose the Company to concentrations of credit risk consist primarily of
accounts receivable. The Company's customers consist principally of retail chain
booksellers, wholesale distributors, office superstores, membership clubs and
computer/electronic superstores located primarily in the United States and
Canada. Certain customers account for over 10% of sales (Note 12). The Company
performs ongoing credit evaluations of its customers and maintains allowances
for estimated probable credit losses.
Use of Estimates -- The preparation of financial statements in accordance
with generally accepted accounting principles requires the use of estimates. The
primary estimates underlying the Company's financial statements include
allowances for sales returns, doubtful accounts, inventory obsolescence,
reserves for royalty advances and the recoverability of deferred tax assets.
Actual results could differ from those estimates.
Inventory -- Inventory is stated at lower of cost or market. Cost is
determined using the first-in, first-out method.
Royalty Advances -- Royalty advances are recorded as cash is advanced to
authors and are expensed as earned by authors or reserved when future recovery
appears doubtful. Royalty advances are reported net of reserves of $993,000,
$1,999,000 and $2,699,000 at September 30, 1996 and 1997, and March 31, 1998,
respectively.
Property and Equipment -- Property and equipment are stated at cost.
Depreciation is provided using the straight- line method over the estimated
useful lives of the assets ranging from three to five years. Leasehold
improvements are amortized over the shorter of the lease term or the remaining
useful life of the related assets. The Company capitalizes internal-use software
in accordance with AICPA Statement of Position 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use. As of March 31, 1998,
such software had not been placed into service and accordingly, no depreciation
has been provided.
Long-Lived Assets -- Long-lived assets held and used by the Company are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. For purposes of
evaluating the recoverability of long-lived assets, the Company evaluates the
carrying value of its long-lived assets on an ongoing basis and recognizes an
impairment when the estimated future undiscounted cash flows from operations are
less than the carrying value of the related assets.
Advances due to (from) Parent are included as a component of stockholder's
equity, as no interest was charged for such balances and there was no scheduled
repayment. The Company intends to settle such balance in connection with a
planned initial public offering.
Income Taxes -- The Company's taxable income has been included in the
Parent's consolidated tax returns. The accompanying financial statements include
a charge in lieu of taxes paid which approximates the current income tax
provision, as if the Company were a separate taxpayer. Amounts which would
represent current income taxes payable are included in Advances due to (from)
Parent. The Company accounts for deferred income taxes in accordance with
Statement of Financial Accounting Standards (SFAS) No. 109, which requires that
deferred tax assets and liabilities are recognized for the expected future tax
consequences of temporary differences between the financial statement carrying
amount and the tax bases of assets and liabilities. Valuation allowances are
established when necessary to reduce deferred tax assets to the amounts, more
likely than not, to be realized.
F-8
<PAGE> 64
IDG BOOKS WORLDWIDE, INC.
(AN INDIRECT SUBSIDIARY OF INTERNATIONAL DATA GROUP, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Net Income Per Share -- Net income per share is computed using the basic
and diluted weighted average number of common shares outstanding during the year
in accordance with SFAS No. 128, Earnings Per Share. Basic net income per share
excludes dilution and is computed using the weighted average number of common
shares outstanding for the period. Diluted net income per share reflects the
potential dilution that could occur if securities or other contracts to issue
common stock (stock options) were exercised or converted into common stock.
Shares used in the basic and diluted calculations are identical for the periods
presented and, accordingly, no separate amounts for diluted net income per share
are reported. No stock options have been granted through March 31, 1998.
Unaudited Pro Forma Balance Sheet and Earnings Per Share -- On May 6, 1998,
the Company declared a $38,400,000 dividend, which was paid on that date by
issuance of a non-interest bearing note payable to the Parent. The Company
intends to repay such note using a portion of the proceeds from its planned
initial public offering. The unaudited pro forma balance sheet as of March 31,
1998 gives retroactive effect to such dividend, as though it had been declared
as of that date. Unaudited pro forma basic and diluted net income per share
amounts are calculated using common shares outstanding (11,100,000) plus the
number of shares (2,773,000) whose proceeds are to be used to repay the note
payable, at the $15.50 offering price reduced by estimated per share offering
costs. The unaudited pro forma balance sheet also gives effect to the amended
share authorizations discussed in Note 8, as well as planned share exchanges and
conversions to be effected by the Parent and the Company's ESOP in connection
with such initial public offering, as also discussed in Note 8.
Stock-Based Compensation is accounted for using the intrinsic value method
in accordance with the provisions of APB Opinion No. 25, Accounting for Stock
Issued to Employees, as allowed by SFAS No. 123, Accounting for Stock-Based
Compensation.
New Accounting Pronouncements -- In June 1997, the Financial Accounting
Standards Board issued SFAS No. 130, Reporting Comprehensive Income, which
requires that an enterprise report, by major components and as a single total,
the change in its net assets during the period from nonowner sources; and No.
131, Disclosures about Segments of an Enterprise and Related Information, which
establishes annual and interim reporting standards for an enterprise's operating
segments and related disclosures about its products, services, geographic areas,
and major customers. Management has not yet determined its SFAS 131 reporting
segments. These Statements will not affect the Company's financial position,
results of operations or cash flows. Both statements are effective for the
Company in fiscal year 1999, with earlier application permitted.
3. ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------ MARCH 31,
1996 1997 1998
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Accounts receivable......................................... $37,805 $47,859 $62,847
Allowance for doubtful accounts............................. (1,500) (3,465) (3,555)
Allowance for sales returns................................. (15,390) (17,833) (25,739)
------- ------- -------
Total............................................. $20,915 $26,561 $33,553
======= ======= =======
</TABLE>
F-9
<PAGE> 65
IDG BOOKS WORLDWIDE, INC.
(AN INDIRECT SUBSIDIARY OF INTERNATIONAL DATA GROUP, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. INVENTORIES
Inventories consisted of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------- MARCH 31,
1996 1997 1998
------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Books (finished goods)................................... $13,505 $ 17,038 $ 18,924
Paper.................................................... 822 2,823 3,374
------- -------- --------
Total inventory................................ 14,327 19,861 22,298
Reserve for obsolescence................................. (8,208) (11,934) (13,563)
------- -------- --------
Net inventory............................................ $ 6,119 $ 7,927 $ 8,735
======= ======== ========
</TABLE>
5. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------ MARCH 31,
1996 1997 1998
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Computers and equipment................................... $ 3,469 $ 5,094 $ 5,470
Furniture and fixtures.................................... 1,330 1,334 1,337
Leasehold improvements.................................... 304 1,286 1,891
Internal-use software..................................... -- 635 1,164
------- ------- -------
Total........................................... 5,103 8,349 9,862
Less accumulated depreciation and amortization............ (2,029) (3,692) (5,192)
------- ------- -------
Property and equipment -- net............................. $ 3,074 $ 4,657 $ 4,670
======= ======= =======
</TABLE>
6. ACCRUED LIABILITIES
Accrued liabilities consisted of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------ MARCH 31,
1996 1997 1998
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Accrued royalties......................................... $ 6,559 $ 9,403 $11,075
Accrued compensation and benefits......................... 3,896 6,389 6,584
Accrued promotion......................................... 3,329 7,518 10,689
Other accrued liabilities................................. 2,901 4,282 3,379
------- ------- -------
Total........................................... $16,685 $27,592 $31,727
======= ======= =======
</TABLE>
F-10
<PAGE> 66
IDG BOOKS WORLDWIDE, INC.
(AN INDIRECT SUBSIDIARY OF INTERNATIONAL DATA GROUP, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES
The provision for federal, state and foreign income taxes consisted of the
following for the years ended September 30 (in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Current:
Federal................................................... $ 6,500 $ 5,325 $ 7,200
State..................................................... 1,209 1,048 1,539
Foreign................................................... 121 152 149
------- ------- -------
Total current............................................. 7,830 6,525 8,888
------- ------- -------
Deferred:
Federal................................................... (3,025) (1,662) (3,227)
State..................................................... (283) (355) (773)
------- ------- -------
Total deferred............................................ (3,308) (2,017) (4,000)
------- ------- -------
Total..................................................... $ 4,522 $ 4,508 $ 4,888
======= ======= =======
</TABLE>
Federal and state income tax expense is allocated to the Company by the
Parent through the Advances due to (from) Parent account.
Deferred tax assets were comprised of the following at September 30 (in
thousands):
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Reserve for returns......................................... $ 5,902 $ 6,842
Reserve for obsolescence.................................... 3,123 4,558
Loss accruals............................................... 1,014 2,221
Uniform capitalization...................................... 486 582
Other....................................................... 335 657
------- -------
Deferred tax assets......................................... $10,860 $14,860
======= =======
</TABLE>
The differences between the effective income tax rate and the statutory
federal income tax rate were as follows for the years ended September 30:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Statutory federal tax rate.................................. 35.0% 35.0% 35.0%
State taxes net of federal tax.............................. 5.5 4.1 4.2
Other....................................................... 1.0 1.9 1.8
---- ---- ----
Effective tax rate.......................................... 41.5% 41.0% 41.0%
==== ==== ====
</TABLE>
8. STOCKHOLDER'S EQUITY AND BENEFIT PLANS
Capital Stock
As of March 31, 1998, the Company had authorized capital of 30,000,000
shares, par value $.001 per share, consisting of 5,000,000 shares of preferred
stock and 25,000,000 shares of common stock, of which 11,100,000 shares of
common stock were outstanding. On May 19, 1998, the Company amended its
certificate of incorporation to change the total amount of authorized capital
stock to 25,400,000, consisting of 25,000,000 shares of Class A common stock and
400,000 shares of Class B common stock. All outstanding shares were converted to
Class A common stock on a share-for-share basis except for 394,251 shares which
were converted to Class B common stock on a share-for-share basis.
F-11
<PAGE> 67
IDG BOOKS WORLDWIDE, INC.
(AN INDIRECT SUBSIDIARY OF INTERNATIONAL DATA GROUP, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
No amounts have been paid in by the Parent for common stock since inception
of the Company in 1990. In connection with formation of the Delaware company
referred to in Note 1, $11,100 was allocated to common stock from retained
earnings.
Each outstanding share of Class A common stock is entitled to one vote and
each outstanding share of Class B common stock is entitled to ten votes. Holders
of Class A common stock and Class B common stock are entitled to receive
dividends at the same rate and in such amounts as the Board of Directors may
from time to time determine.
Class A common stock is not convertible. Class B common stock is
convertible at any time into Class A common stock on a share-for-share basis and
will automatically convert upon the transfer by the holder thereof.
In the event of any dissolution, liquidation, or winding up of the affairs
of the Company, whether voluntary or involuntary, after payment of the debts and
other liabilities of the Company, the remaining assets of the Company will be
distributed ratably among the holders of the Class A common stock and the Class
B common stock, treated as a single class.
Stock Option Plan
Effective May 6, 1998, the Company's Board of Directors approved a stock
option plan under which 2,850,000 shares of Class A common stock are reserved
for issuance to employees, consultants and directors. Under the plan, both
incentive and nonstatutory stock options may be granted to purchase Class A
common stock at not less than the fair market value of the common stock at the
date of grant. Effective May 6, 1998, the Company granted options to purchase
1,500,900 shares of Class A common stock at $11.88 per share. Options generally
vest over 4 years and expire ten years after date of grant.
Employee Stock Purchase Plan
Effective May 22, 1998, the Company adopted an employee stock purchase plan
and reserved a total of 350,000 shares of Class A common stock for issuance
thereunder. The purchase plan permits eligible employees to purchase common
stock through payroll deductions, subject to certain limitations, at a purchase
price of 85% of the lower of the fair market value of the common stock on the
first day of the offering period or on the last day of the purchase period.
Employee Stock Ownership Plan
The Company's employees have historically participated in the Parent's ESOP
("ESOP-P") and, as discussed in Note 9, the Company has recorded the applicable
plan contribution expense in its financial statements. As of May 6, 1998, the
Company adopted a new ESOP ("Books ESOP"). In connection therewith, the accounts
of the Company employees, and the shares of common stock of the Parent
attributable to such accounts, were transferred from ESOP-P to Books ESOP. Such
Parent common shares received by Books ESOP were tendered on May 21, 1998 to the
Parent in exchange for 394,251 shares of Company Class B common stock, based on
an exchange ratio determined by an independent valuation firm of the relative
fair value of one Company Class B common share to one Parent common share. In
connection with the Company's initial public offering, the shares of Class B
common stock owned by Books ESOP are to be transferred to an affiliate of the
Parent in exchange for 394,251 shares of Class A common stock held by such
affiliate (194,251 of which Class B shares such affiliate intends to immediately
convert to 194,251 shares of Class A common stock). Effective as of May 6, 1998,
employees of the Company no longer participate in ESOP-P.
The Company also participates in the Parent's defined 401(k) contribution
plan that covers substantially all U.S. employees of the Company who have been
employed for one year and have attained the age of 21. The plan provides that
eligible employees electing to become participants can contribute to the plan
through
F-12
<PAGE> 68
IDG BOOKS WORLDWIDE, INC.
(AN INDIRECT SUBSIDIARY OF INTERNATIONAL DATA GROUP, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
payroll deferrals up to 8% of their base compensation. The Company and Parent
make no contribution to the plan on the participant's behalf.
9. RELATED PARTY TRANSACTIONS
Net revenue from affiliated customers amounted to approximately $66,000,
$188,000 and $700,000 in 1995, 1996 and 1997, respectively.
Operating expenses allocated from the Parent, through the Advances due to
(from) Parent account, consist of (1) Parent Corporate Services Fee (Note 1),
(2) Employee Stock Ownership Plan expenses, which are based on the applicable
ESOP contribution rate applied to Company salaries, and (3) income tax
provisions, which are calculated as though the Company were a separate taxpayer.
Neither party pays interest on intercompany balances, and, accordingly, no such
interest income or expense has been recorded in the accompanying financial
statements.
A summary of activity in the Advances due to (from) Parent account, and the
average outstanding balance by period, is as follows (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED SEPTEMBER 30, MARCH 31,
------------------------------ -----------------
1995 1996 1997 1997 1998
------- -------- ------- ------ -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period........... $(3,429) $ (363) $ 251 $ 251 $(4,332)
Parent corporate services fee............ 1,464 2,779 3,669 1,836 1,175
ESOP expense............................. 822 1,307 1,811 798 --
Total current federal and state income
tax provision.......................... 7,709 6,373 8,739 6,183 8,352
Cash collections less trade
disbursements, transferred to Parent... (7,497) (10,861) (20,719) (7,067) (6,853)
Employee Benefits........................ 754 1,379 1,980 896 1,277
Other, primarily transactions with
affiliates, net........................ (186) (363) (63) (221) --
------- -------- ------- ------ -------
Balance at end of period................. $ (363) $ 251 $(4,332) $2,676 $ (381)
======= ======== ======= ====== =======
Average balance during period............ $(2,616) $ 2,224 $ 880 $2,006 $ 809
======= ======== ======= ====== =======
</TABLE>
Effective October 1, 1997, no further contributions were made to the
Parent's ESOP with respect to Company employees. During the six-month period
ended March 31, 1998, the Company accrued $850,000 of contributions to be made
to the newly established Books ESOP as described in Note 8.
In connection with the Company's planned initial public offering, the
Parent has agreed to transfer to the Company certain trademarks owned by the
Parent that relate to publications and products of the Company. The Company has
agreed to pay all costs, consisting primarily of required filing fees, in
connection with such transfer.
In addition, the Company and the Parent have entered into a Trademark
License Agreement (the "Agreement") pursuant to which the Parent has granted to
the Company a royalty-free license to use certain trademarks in conjunction with
publications and products currently produced and held by the Company. The
Agreement provides that if the Parent's voting interest in the Company is
reduced to less than 30%, the parties will negotiate in good faith to reach an
agreement providing for the continued use of the trademarks, including the IDG
Books mark. If the parties were unable to reach such an agreement, the Company
would be required to cease using marks covered by the Agreement. The Agreement
also may be terminated by the Parent upon a breach of the Agreement by the
Company or upon the insolvency of the Company. The Company does not believe that
the termination of the Trademark License Agreement would have a material adverse
impact on its business, financial position or results of operations.
F-13
<PAGE> 69
IDG BOOKS WORLDWIDE, INC.
(AN INDIRECT SUBSIDIARY OF INTERNATIONAL DATA GROUP, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. COMMITMENTS AND CONTINGENCIES
Leases -- The Company leases equipment and facilities under operating
leases which expire at various dates through January 2000. Total rental expense
for operating leases amounted to approximately $1,045,000, $1,861,000 and
$2,212,000 in 1995, 1996 and 1997, respectively.
At September 30, 1997, the aggregate minimum rental commitments under
noncancelable operating leases in excess of one year were as follows (in
thousands):
<TABLE>
<S> <C>
Years ending September 30,
1998...................................................... $2,990
1999...................................................... 2,440
2000...................................................... 483
------
Total............................................. $5,913
======
</TABLE>
The Company is subject to various legal actions and claims which have
arisen in the ordinary course of business. In the opinion of management and
counsel, the ultimate resolution of such legal proceedings and claims will not
have a material effect on the financial position or results of operations of the
Company.
11. PUBLISHING RIGHTS
On December 1, 1997, the Company acquired from Henry Holt and Company the
publishing rights for the books published under the names "MIS:Press" and "M&T
Books," and the related inventory and other assets, for $5,400,000 in cash and
assumed liabilities. The cost of this acquisition was allocated to the assets
acquired, including $4,000,000 allocated to publishing rights which is being
amortized over eight years.
12. MAJOR CUSTOMERS AND INTERNATIONAL SALES AND OPERATIONS
Net sales to individual customers representing greater than 10% of the
Company's net sales were as follows for the years ended September 30 (in
thousands):
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Company A............................. $ 7,667 $10,876 $17,805
Company B............................. 11,104 11,854 14,942
Company C............................. 10,712 * *
Company D............................. * 10,303 12,204
</TABLE>
- ---------------
* Less than 10% of sales.
The Company operates in one business segment, namely publishing, and
develops, publishes and markets products including professional and reference
works, consumer books, for the educational, technical, professional and trade
markets around the world.
Net sales to unaffiliated international customers were as follows (in
thousands):
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Canada................................ $ 4,542 $ 5,481 $ 5,813
Europe................................ 2,984 3,965 5,191
Other................................. 2,476 3,734 4,418
------- ------- -------
Total................................. $10,002 $13,180 $15,422
======= ======= =======
</TABLE>
F-14
<PAGE> 70
IDG BOOKS WORLDWIDE, INC.
(AN INDIRECT SUBSIDIARY OF INTERNATIONAL DATA GROUP, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
13. UNAUDITED INTERIM FINANCIAL STATEMENTS
Unaudited interim financial statements as of March 31, 1998 and for the
six-month periods ended March 31, 1997 and 1998 are unaudited but have been
prepared in accordance with generally accepted accounting principles for interim
financial statements. In the opinion of management, all adjustments (consisting
only of normal recurring adjustments) considered necessary for a fair
presentation have been included. The results of operations of any interim period
are not necessarily indicative of the results of operations for the full year.
F-15
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Back Artwork Page:
[Set forth on the inside back cover under the heading "The Brand People Know"
are photographs of various ". . . For Dummies(R)" products and the ". . . For
Dummies(R)" logos.]
<PAGE> 75
idg logo
