<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 24, 1998
REGISTRATION NO. 333-53433
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
IDG BOOKS WORLDWIDE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 2731 04-3078409
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
919 E. HILLSDALE BLVD., SUITE 400
FOSTER CITY, CA 94404
(650) 655-3000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
JOHN J. KILCULLEN
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
IDG BOOKS WORLDWIDE, INC.
919 E. HILLSDALE BLVD., SUITE 400
FOSTER CITY, CA 94404
(650) 655-3000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
ALAN K. AUSTIN, ESQ. WINTHROP B. CONRAD, JR., ESQ.
BRIAN C. ERB, ESQ. DAVIS POLK & WARDWELL
WILSON SONSINI GOODRICH & ROSATI 450 LEXINGTON AVENUE
PROFESSIONAL CORPORATION NEW YORK, NY 10017
650 PAGE MILL ROAD (212) 450-4000
PALO ALTO, CA 94304-1050
(650) 493-9300
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: [ ]
- ------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [ ]
- ------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [ ]
------------------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
================================================================================
<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
PROSPECTUS (Subject to Completion)
Issued June 24, 1998
Shares
IDG Books Worldwide, Inc.
CLASS A COMMON STOCK idg logo
------------------------
IDG Books Worldwide, Inc. is offering shares of its Class A common stock. This
is our initial public offering and no public market currently exists for our
shares. We anticipate that the initial public offering price will be between
$ and $ per share.
------------------------
IDG Books Worldwide, Inc. will list the Class A common stock on the Nasdaq
National Market under the symbol "IDGB."
------------------------
INVESTING IN THE CLASS A COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 10.
------------------------
PRICE $ A SHARE
------------------------
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions Company
-------- ------------- -----------
<S> <C> <C> <C>
Per Share............................ $ $ $
Total................................ $ $ $
</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 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 , 1998.
------------------------
MORGAN STANLEY DEAN WITTER
GOLDMAN, SACHS & CO.
MERRILL LYNCH & CO.
, 1998
<PAGE> 3
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 the second inside panel of the front gatefold under the heading
"The Companies Who Know" are a list of certain retailers who sell books
published by the Company and strategic partners of the Company, and set forth
under the heading "The Numbers to Know" are the Company's annual net revenues
from 1990 to 1997.]
2
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary..................... 4
Risk Factors........................... 10
Use of Proceeds........................ 15
Dividend Policy........................ 15
Certain Information.................... 15
Capitalization......................... 16
Dilution............................... 17
Selected Financial Data................ 18
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 20
Industry Overview...................... 27
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Business............................... 28
Management............................. 36
Relationship with IDG and Certain
Transactions......................... 43
Principal Stockholders................. 45
Description of Capital Stock........... 46
Shares Eligible for Future Sale........ 49
Underwriters........................... 51
Legal Matters.......................... 52
Experts................................ 53
Additional Information................. 53
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 , 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.
3
<PAGE> 5
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 20.2%. 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 is comprised of 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.
4
<PAGE> 6
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 planned release of
Windows 98 in mid 1998. 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.
5
<PAGE> 7
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 a subsidiary of IDG Enterprises, Inc., which in turn, is 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 % of
the outstanding shares of our Class A common stock and Class B common stock,
combined, and will control approximately % of our voting power.
6
<PAGE> 8
THE OFFERING
<TABLE>
<S> <C>
Class A common stock offered................. shares(1)
Common stock to be outstanding after this
offering:
Class A common stock.................... shares(1)(2)
Class B common stock.................... shares(3)
--------
Total.............................. shares(1)(2)(3)
========
Overallotment option......................... shares
Voting rights
Class A common stock.................... One vote per share
Class B common stock.................... Ten votes per share(3)
Use of proceeds.............................. Approximately $38.4 million of the net
proceeds from this offering 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.
Proposed Nasdaq National Market symbol....... IDGB
</TABLE>
- ---------------
(1)Unless otherwise specifically stated, the information throughout this
prospectus does not take into account the possible issuance of additional
shares of Class A to the underwriters pursuant to their rights to purchase
additional shares to cover over-allotment.
(2) Based on shares outstanding as of March 31, 1998. Excludes (i) 2,850,000
shares of Class A common stock which has been set aside for stock options
under our 1998 Stock Plan, of which we have granted options to purchase
1,501,300 shares to our employees, and (ii) 350,000 shares of Class A common
stock 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. In addition, the Class B common stock will
be automatically converted into Class A common stock in certain
circumstances. See "Description of Capital Stock."
7
<PAGE> 9
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.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED SEPTEMBER 30,(1) MARCH 31,(1)
------------------------------------------------ -----------------
1993 1994 1995 1996 1997 1997 1998
------- ------- ------- ------- -------- ------- -------
(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)........................... $ $
Pro forma weighted average common shares
outstanding(4).........................
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 MARCH 31, 1998
----------------------------
PRO FORMA
ACTUAL AS ADJUSTED(6)
------- ---------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash...................................................... $ 46 $
Working capital........................................... 25,025
Total assets.............................................. 73,688
Stockholder's equity...................................... 37,264
</TABLE>
8
<PAGE> 10
- ---------------
(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
shares of Class A common stock in the offering at an assumed
initial public offering price of $ 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 as though it had been paid as of March 31, 1998. See "Use of Proceeds"
and "Capitalization."
9
<PAGE> 11
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
has announced the planned release of 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.
10
<PAGE> 12
RISKS OF NEW PRODUCT INTRODUCTIONS
Generally, as book titles get older, we sell fewer of them. 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 adjust our spending to compensate for
this. 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.
11
<PAGE> 13
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; POTENTIAL COMPETITION WITH IDG
We are a subsidiary of IDG Enterprises, Inc., which is 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
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
approximately % 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
approximately % 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.
12
<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 shares of Class A
common stock ( 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 1998, approximately shares of our
common stock will be available for immediate resale (subject to certain volume
restrictions imposed on our affiliates, including 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.
13
<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 will be 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 to be 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 $ in the net tangible
book value per share of Class A common stock from the price you pay for the
Class A common stock.
14
<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 $ and
underwriting discounts and commissions, are estimated to be approximately $
million (approximately $ million if the underwriters exercise their
over-allotment option in full), at an assumed initial public offering price of
$ 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 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 $ million of net proceeds for
general corporate purposes, including approximately $8.0 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 our unclassified
common stock for our 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.
15
<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 and the reclassification of the Company's common stock; and (iii) pro
forma as adjusted to reflect the issuance and sale of shares
of Class A common stock offered hereby by the Company at an initial public
offering price of $ 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;
10,705,749 shares outstanding pro forma,
shares outstanding pro forma as
adjusted............................................ -- 11 --
Class B common stock, $.001 par value; no shares
authorized or outstanding actual, 400,000 shares
authorized pro forma and pro forma as adjusted;
394,251 shares outstanding pro forma and pro forma
as adjusted......................................... -- -- --
Additional paid-in capital............................. -- --
Retained earnings (deficit)............................ 37,634 (766)
Advances due (from) Parent(2).......................... (381) (381) --
------- ------- -------
Total stockholders' equity (deficit).............. $37,264 $(1,136) $
------- ------- -------
Total capitalization........................... $37,264 $(1,136) $
======= ======= =======
</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 a planned initial public offering.
16
<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 shares of Class A Common stock offered hereby (at an assumed
initial public offering price of $ per share, the midpoint of the range set
forth on the cover page of this Prospectus) 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 $ or $ per share. This represents an
immediate increase in pro forma net tangible book value to existing stockholders
of $ per share and an immediate dilution to new investors of $ per
share. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $
Pro forma net tangible book value (deficit) per share as
of March 31, 1998...................................... $
Increase in pro forma net tangible book value per share
attributable to new investors..........................
-------
Pro forma net tangible book value per share after this
offering..................................................
-------
Dilution per share to new investors(1)...................... $
=======
</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 an assumed
initial public offering price of $ per share (the midpoint of the range set
forth on the cover page of this Prospectus), 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)..................... % $ % $
New investors................................
-------- --- -------- ----
Total.............................. 100% $ 100%
======== === ======== ====
</TABLE>
- ---------------
(1) As of March 31, 1998, the Company was an indirect, wholly-owned 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 1,501,300 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.
17
<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)
<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)......................... $ $
Pro forma weighted average common
shares outstanding(4)................
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>
18
<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.
19
<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 39 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,
20
<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>
21
<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.
22
<PAGE> 24
Cost of Sales. Cost of sales increased $7.4 million, or 13.2%, to $63.0
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 Service 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%, 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
23
<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.
24
<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 is currently in discussion with banks regarding a proposed
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 $
and underwriting discounts and commissions, are estimated to be approximately
$ million (approximately $ million if underwriters' over-
allotment option is exercised in full), at an assumed initial public offering
price of $ per share. The Company will use approximately $38.4 million of
the net proceeds from this offering for the payment of indebtedness owed to IDG.
The Company currently expects to use the remaining $ million of net
proceeds for general corporate purposes, including approximately $8.0 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.
25
<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.
26
<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 work 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.
27
<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 39 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-
28
<PAGE> 30
language books 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
planned release of Windows 98 in mid 1998. 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
29
<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>
30
<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>
31
<PAGE> 33
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
32
<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
33
<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
34
<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.
35
<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 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
36
<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
April 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.
37
<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
$ and a fee of $ 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
38
<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 upon consummation of
the offering.
(3) Consists of deferred compensation. The deferred compensation programs
pursuant to which Mr. Berkowitz received such amount will be terminated upon
consummation of the offering.
(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."
39
<PAGE> 41
EMPLOYMENT AGREEMENTS
In May 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, options to purchase 250,000 shares of
Class A common stock of the Company at an exercise price of not more than $11.88
per share 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, options to purchase 250,000 shares of Class A
common stock of the Company at an exercise price of no more than $11.88 per
share 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.
Prior to the offering, the Company intends to enter into employee severance
agreements with each of Messrs. Ball and Doehrman and Ms. McLaughlin.
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 1,501,300
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
40
<PAGE> 42
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 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 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 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 shares on 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.
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
41
<PAGE> 43
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. However, the first offering period shall be the period of approximately
months commencing on the date upon which the Company's registration
statement pursuant to this offering is declared effective by the Commission and
terminating on the last trading day in the period ending August 14, 2000. 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. 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 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 Plan's shares of Class B common stock will be
exchanged 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. 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.
42
<PAGE> 44
RELATIONSHIP WITH IDG AND CERTAIN TRANSACTIONS
PRINCIPAL STOCKHOLDER; CONTROL OF THE COMPANY
The Company is a wholly-owned subsidiary 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
shares of the Class A common stock and all of the outstanding
shares of Class B common stock, representing % of the voting power of the
Company, and approximately % of the outstanding shares of Class A common
stock and % of the voting power will be owned by the public.
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 relation 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 has agreed to pay all
costs, consisting primarily of required filing fees, in connection with such
transfer.
43
<PAGE> 45
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 a fee for the continued use
of the trademarks, including the IDG Books mark, or the Company will be required
over time 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, the 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 the Company's Class A common stock held by IDG Enterprises, Inc.
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."
44
<PAGE> 46
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)...................
John J. Kilcullen(3).......................
Steven H. Berkowitz(4).....................
John P. Ball(5)............................
Brenda L. McLaughlin(6)....................
James A. Doehrman(7).......................
Patrick J. McGovern(8).....................
James A. Casella...........................
All executive officers and directors as a
group (7 persons)(9).....................
</TABLE>
- ---------------
* Less than one percent
(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 at the time of the offering of 394,251 shares
of Class B common stock held by the IDG Books Plan for an equal number of
shares of Class A common stock held by IDG Enterprises, Inc.
(3) Includes shares of Class A common stock issuable pursuant to
options.
(4) Includes shares of Class A common stock issuable pursuant to
options.
(5) Includes shares of Class A common stock issuable pursuant to
options.
(6) Includes shares of Class A common stock issuable pursuant to
options.
(7) Includes shares of Class A common stock issuable pursuant to
options.
(8) 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.
(9) Includes shares of Class A common stock issuable pursuant to
options.
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" and "Description of Capital
Stock -- Certain Provisions of the Company's Certificate of Incorporation and
Bylaws."
45
<PAGE> 47
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, shares of common stock will be issued and
outstanding, consisting of shares of Class A common stock and
394,251 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"; "-- 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.
46
<PAGE> 48
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, IDG, 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
47
<PAGE> 49
- 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 % of the Company's Class A common stock and all of the shares of
Class B common stock, together representing % 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
has been appointed as transfer agent and registrar for the
Company's Class A common stock.
LISTING
Application has been made to have the Class A common stock approved for
quotation on the Nasdaq National Market under the symbol "IDGB."
48
<PAGE> 50
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
shares of Class A common stock outstanding ( shares if the
underwriters' over-allotment is exercised in full) and shares of
Class B common stock outstanding. Of the shares outstanding after the offering,
the 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 shares of Class B common stock,
all of which immediately after this offering will be owned by an indirect,
wholly-owned 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 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 1,500,000 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,
49
<PAGE> 51
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:
S the sale to the underwriters of the shares of common stock under the
underwriting agreement (as described below);
S 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; or
S 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."
50
<PAGE> 52
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...........................
Goldman, Sachs & Co.........................................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...................................
--------
Total.............................................
========
</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 $ a share under the public offering price. Any
underwriter may allow, and such dealers may reallow, a concession not in excess
of $ 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 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
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 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
51
<PAGE> 53
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, or (c)
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.
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.
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 will be determined by negotiations between the
Company and the representatives of the underwriters. Among the factors to be
considered in determining the initial public offering price will be the
Company's record of operations, the Company's 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. The estimated
initial public offering price range set forth on the cover page of this
prospectus is subject to change as a result of market conditions and other
factors.
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.
52
<PAGE> 54
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.
53
<PAGE> 55
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> 56
The accompanying financial statements are required to disclose, pursuant to
rules of the Securities and Exchange Commission, unaudited pro forma basic and
diluted net income per share using common shares outstanding plus the number of
shares to be sold in a planned initial public offering whose proceeds are to be
used to pay a note issued to the Parent as payment for a dividend declared as of
May 6, 1998. The following opinion is in the form which will be signed by
Deloitte & Touche LLP upon inclusion of such disclosure in the accompanying
financial statements, and assuming that from March 31, 1998 to the date such
information has been included, no other events shall have occurred which affect
such financial statements and the notes thereto.
June 23, 1998 DELOITTE & TOUCHE LLP
San Jose, California
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.
March 31, 1998
(May 6, 1998 as to the
twelfth paragraph of
Note 2, and May 22, 1998
as to Note 8 and June 1, 1998 as to the last paragraph of Note 9)
San Jose, California"
F-2
<PAGE> 57
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: 11,100,00
shares -- actual, 10,705,749 shares
Class A and 394,251 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> 58
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)............................ $ $
======== =======
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....
======== =======
</TABLE>
See notes to financial statements.
F-4
<PAGE> 59
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> 60
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> 61
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> 62
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> 63
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 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 plus the number of shares ( ) whose proceeds are to
be used to repay the note payable, assuming a $ offering price reduced by
expected incremental offering costs. The unaudited pro forma balance sheet also
discloses the amended share authorizations 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> 64
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> 65
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 articles
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> 66
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, $11,000 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
1,501,300 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
unleveraged 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. 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 in connection with the Company's planned initial public
offering. 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> 67
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 transferred to Parent, net.......... (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............ $(2,470) $ 2,369 $ 1,281 $2,682 $ 1,063
======= ======== ======= ====== =======
</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 a fee for the continued use
of the trademarks, including the IDG Books name, or the Company will be
required, over time, to cease use of the trademarks covered by the Agreement.
The Agreement may also be terminated by the Parent upon a breach of the
Agreement by the Company or upon the insolvency of the Company.
F-13
<PAGE> 68
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> 69
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
<PAGE> 70
Back Artwork Page:
[Set forth on the outside panel of the back gatefold under the heading "The
Brand People Know" are photographs of various ". . . For Dummies(R)" products
and the ". . . For Dummies(R)" logos.]
[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.]
[Set forth on the second inside panel of the back gatefold under the heading
"The Company You Must Know" is additional press coverage related to the
Company.]
<PAGE> 71
idg logo
<PAGE> 72
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Registrant in connection
with the sale of common stock being registered. All amounts are estimates except
the Securities and Exchange Commission registration fee and the NASD filing fee.
<TABLE>
<CAPTION>
AMOUNT
TO BE PAID
----------
<S> <C>
Securities and Exchange Commission registration fee......... $14,750
NASD filing fee............................................. 5,500
Nasdaq National Market listing fee.......................... *
Printing and engraving expenses............................. *
Legal fees and expenses..................................... *
Accounting fees and expenses................................ *
Blue Sky fees and expenses.................................. *
Transfer agent fees......................................... *
Miscellaneous............................................... *
-------
Total............................................. $ *
=======
</TABLE>
- ---------------
* To be provided by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law provides that a
corporation may indemnify directors and officers as well as other employees and
individuals against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with any threatened, pending or completed actions, suits or
proceedings in which such person is made a party by reason of such person being
or having been a director, officer, employee or agent to the Registrant. The
Delaware General Corporation Law provides that Section 145 is not exclusive of
other rights to which those seeking indemnification may be entitled under any
bylaw, agreement, vote of stockholders or disinterested directors or otherwise.
Section 6.1 of the Registrant's Bylaws provides for indemnification by the
Registrant of its directors, officers and employees to the fullest extent
permitted by the Delaware General Corporation Law.
Section 102(b)(7) of the Delaware General Corporation Law permits a
corporation to provide in its certificate of incorporation that a director of
the corporation shall not be personally liable to the corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (i) for any breach of the director's duty of loyalty to the
corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) for
unlawful payments of dividends or unlawful stock repurchases, redemptions or
other distributions, or (iv) for any transaction from which the director derived
an improper personal benefit. The Registrant's Certificate of Incorporation
provides for such limitation of liability.
The Registrant intends to obtain directors, and officers, insurance
providing indemnification for certain of the Registrant's directors, officers
and employees for certain liabilities.
Reference is also made to Section 7 of the Underwriting Agreement to be
filed as Exhibit 1.1 to the Registration Statement for information concerning
the underwriters' obligation to indemnify the Registrant and its officers and
directors in certain circumstances.
II-1
<PAGE> 73
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
On March 30, 1998, the Registrant issued 11,100,000 shares of its common
stock to IDG Enterprises, Inc., an indirect, wholly-owned subsidiary of
International Data Group, Inc., in return for all of the issued and outstanding
capital stock of IDG Books Worldwide, Inc., a Massachusetts company and the
predecessor to the Registrant. The shares were issued in a private placement in
reliance on Section 4(2) of the Securities Act.
On May 6, 1998, the Registrant issued options to purchase 1,500,000 shares
of common stock to approximately 440 current employees of the Company at an
exercise price of $11.88 per share. The options were issued pursuant to Section
4(2) and Rule 701 of the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -----------
<S> <C>
1.1 Form of Underwriting Agreement.
3.1+ Amended and Restated Certificate of Incorporation of the
Registrant.
3.2+ Bylaws of the Registrant.
4.1* Form of Registrant's Class A common stock certificate.
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation, regarding the legality of the securities being
issued.
10.1* Form of Indemnification Agreement entered into by the
Registrant with each of its directors and executive
officers.
10.2* 1998 Stock Plan and related agreements.
10.3 1998 Employee Stock Purchase Plan.
10.4* Employment Agreement between the Registrant and
.
10.5* Employment Agreement between the Registrant and
.
10.6 Corporate Services Agreement between the Registrant and IDG
dated as of June 1, 1998.
10.7 Registration Rights Agreement between the Registrant and IDG
dated as of June 1, 1998.
10.8* Trademark Licensing Agreement between the Registrant and IDG
dated , 1998.
10.9 Non-competition Agreement between the Registrant and IDG
dated as of June 1, 1998.
10.10 Tax Allocation Agreement between the Registrant and IDG
dated as of June 1, 1998.
10.11 Share Exchange Agreement between the Registrant and IDG
dated May 21, 1998.
23.1* Consent of Wilson Sonsini Goodrich & Rosati, Professional
Corporation (included in Exhibit 5.1).
23.2* Consent and Report on Schedule of Deloitte & Touche LLP,
independent auditors
(see page II-5).
24.1+ Power of Attorney.
27.1+ Financial Data Schedule.
27.2+ Financial Data Schedule.
</TABLE>
- ---------------
* To be supplied by amendment.
+ Previously filed.
(b)Financial Statement Schedule
Schedule II--Valuation and Qualifying Accounts.
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
II-2
<PAGE> 74
ITEM 17. UNDERTAKINGS
(a) The undersigned hereby undertakes to provide to the underwriters at the
closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the provisions referenced in Item 14 of this
Registration Statement or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act, and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered hereunder, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
(c) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
II-3
<PAGE> 75
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment to Registration Statement on Form S-1
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Foster City, State of California, on this 24th day of June, 1998.
IDG Books Worldwide, Inc.
By: /s/ JOHN J. KILCULLEN
------------------------------------
John J. Kilcullen
Chairman of the Board and
Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
TO REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<C> <S> <C>
/s/ JOHN J. KILCULLEN Chairman of the Board and June 24, 1998
- -------------------------------------------------------- Chief Executive Officer
John J. Kilcullen (Principal Executive Officer)
* President and Publisher June 24, 1998
- -------------------------------------------------------- (Principal Financial Officer)
Steven H. Berkowitz
* Vice President and Chief June 24, 1998
- -------------------------------------------------------- Financial Officer (Principal
James A. Doehrman Accounting Officer)
* Director June 24, 1998
- --------------------------------------------------------
Patrick J. McGovern
* Director June 24, 1998
- --------------------------------------------------------
James A. Casella
*
- --------------------------------------------------------
Attorney-in-Fact
</TABLE>
II-4
<PAGE> 76
SCHEDULE II
IDG BOOKS WORLDWIDE, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS-CHARGED NET DEDUCTIONS BALANCE AT END
DESCRIPTION BEGINNING OF PERIOD TO EXPENSE (RECOVERIES) OF PERIOD
----------- ------------------- ----------------- -------------- --------------
<S> <C> <C> <C> <C>
Allowance for sales returns
1995...................... $ 9,900 $17,347 $12,087 $15,160
1996...................... 15,160 26,866 26,636 15,390
1997...................... 15,390 31,026 28,583 17,833
Allowance for doubtful accounts
1995...................... 1,001 1,459 1,439 1,021
1996...................... 1,021 557 78 1,500
1997...................... 1,500 1,811 (154) 3,465
Reserve for inventory obsolescence
1995...................... 2,564 4,764 3,158 4,170
1996...................... 4,170 6,779 2,741 8,208
1997...................... 8,208 5,194 1,468 11,934
Reserve for royalty advances
1995...................... 100 495 -- 595
1996...................... 595 398 -- 993
1997...................... 993 1,006 -- 1,999
</TABLE>
S-1
<PAGE> 77
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
- ------- ----------- ----------
<S> <C> <C>
1.1 Form of Underwriting Agreement..............................
3.1+ Certificate of Incorporation of the Registrant..............
3.2+ Bylaws of the Registrant....................................
4.1* Form of Registrant's Class A common stock certificate.......
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation, regarding the legality of the securities being
issued......................................................
10.1* Form of Indemnification Agreement entered into by the
Registrant with each of its directors and executive
officers....................................................
10.2* 1998 Stock Plan and related agreements......................
10.3 1998 Employee Stock Purchase Plan...........................
10.4* Employment Agreement between the Registrant and ...
10.5* Employment Agreement between the Registrant
and ..........................................
10.6 Corporate Services Agreement between the Registrant and IDG
dated as of June 1, 1998....................................
10.7 Registration Rights Agreement between the Registrant and IDG
dated , 1998....................................
10.8* Trademark Licensing Agreement between the Registrant and IDG
dated , 1998....................................
10.9 Non-competition Agreement between the Registrant and IDG
dated as of June 1, 1998....................................
10.10 Tax Allocation Agreement between the Registrant and IDG
dated as of June 1, 1998....................................
10.11 Share Exchange Agreement between the Registrant and IDG
dated as of May 21, 1998....................................
23.1* Consent of Wilson Sonsini Goodrich & Rosati, Professional
Corporation (included in Exhibit 5.1).......................
23.2* Consent and Report on Schedule of Deloitte & Touche LLP,
independent auditors (see page II-5)........................
24.1+ Power of Attorney...........................................
27.1+ Financial Data Schedule.....................................
27.2+ Financial Data Schedule.....................................
</TABLE>
- ---------------
* To be supplied by amendment.
+ Previously filed.
<PAGE> 1
_______________ SHARES
IDG BOOKS WORLDWIDE, INC.
CLASS A COMMON STOCK, $0.001 PAR VALUE
UNDERWRITING AGREEMENT
July __, 1998
<PAGE> 2
July __, 1998
Morgan Stanley & Co. Incorporated
Goldman, Sachs & Co.
Merrill Lynch, Pierce, Fenner & Smith Incorporated
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, New York 10036
Dear Sirs and Mesdames:
IDG Books Worldwide, Inc., a Delaware corporation (the "COMPANY"),
proposes to issue and sell to the several Underwriters named in Schedule I
hereto (the "UNDERWRITERS") _________ shares of its Class A Common Stock (par
value $0.001 per share) (the "FIRM SHARES"). The Company also proposes to issue
and sell to the several Underwriters not more than an additional ______________
shares of its Class A Common Stock (par value $0.001 per share) (the "ADDITIONAL
SHARES") if and to the extent that you, as Managers of the offering, shall have
determined to exercise, on behalf of the Underwriters, the right to purchase
such shares of Class A Common Stock granted to the Underwriters in Section 2
hereof. The Firm Shares and the Additional Shares are hereinafter collectively
referred to as the "SHARES." The shares of the Class A Common Stock (par value
$0.001 per share) and Class B Common Stock (par value $0.001 per share) of the
Company to be outstanding after giving effect to the sales contemplated hereby
are hereinafter referred to as the "COMMON STOCK."
The Company has filed with the Securities and Exchange Commission (the
"COMMISSION") a registration statement, including a prospectus, relating to the
Shares. The registration statement as amended at the time it becomes effective,
including the information (if any) deemed to be part of the registration
statement at the time of effectiveness pursuant to Rule 430A under the
Securities Act of 1933, as amended (the "SECURITIES ACT"), is hereinafter
referred to as the "REGISTRATION STATEMENT"; the prospectus in the form first
used to confirm sales of Shares is hereinafter referred to as the "PROSPECTUS."
If the Company has filed an abbreviated registration statement to register
additional shares of Common Stock pursuant to Rule 462(b) under the Securities
Act (the "RULE 462 REGISTRATION STATEMENT"), then any reference herein to the
term "REGISTRATION STATEMENT" shall be deemed to include such Rule 462
Registration Statement.
2
<PAGE> 3
As part of the offering contemplated by this Agreement, Morgan Stanley &
Co. Incorporated ("MORGAN STANLEY") has agreed to reserve out of the Shares set
forth opposite its name on Schedule II to this Agreement, up to _____________
shares, for sale to certain persons designated by the Company (collectively,
"PARTICIPANTS"), as set forth in the Prospectus under the heading "Underwriting"
(the "DIRECTED SHARE PROGRAM"). The Shares to be sold by Morgan Stanley pursuant
to the Directed Share Program (the "DIRECTED SHARES") will be sold by Morgan
Stanley pursuant to this Agreement at the public offering price. Any Directed
Shares not orally confirmed for purchase by any Participants by the end of
business day on which this Agreement is executed will be offered to the public
by Morgan Stanley as set forth in this Prospectus.
1. Representations and Warranties. The Company represents and
warrants to and agrees with each of the Underwriters that:
(a) The Registration Statement has become effective; no stop order
suspending the effectiveness of the Registration Statement is in
effect, and no proceedings for such purpose are pending before or
threatened by the Commission.
(b) (i) The Registration Statement, when it became effective, did
not contain and, as amended or supplemented, if applicable, will not
contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading, (ii) the Registration Statement and
the Prospectus comply and, as amended or supplemented, if applicable,
will comply in all material respects with the Securities Act and the
applicable rules and regulations of the Commission thereunder and (iii)
the Prospectus does not contain and, as amended or supplemented, if
applicable, will not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements therein,
in the light of the circumstances under which they were made, not
misleading, except that the representations and warranties set forth in
this paragraph do not apply to statements or omissions in the
Registration Statement or the Prospectus based upon information
relating to any Underwriter furnished to the Company in writing by such
Underwriter through you expressly for use therein.
(c) The Company has been duly incorporated, is validly existing as
a corporation in good standing under the laws of the jurisdiction of
its incorporation, has the corporate power and authority to own its
property and to conduct its business as described in the Prospectus and
is duly qualified to transact business and is in good standing in each
jurisdiction
3
<PAGE> 4
in which the conduct of its business or its ownership or leasing of
property requires such qualification, except to the extent that the
failure to be so qualified or be in good standing would not have a
material adverse effect on the Company.
(d) The Company does not have any subsidiaries.
(e) This Agreement has been duly authorized, executed and delivered
by the Company.
(f) The authorized capital stock of the Company conforms as to
legal matters to the description thereof contained in the Prospectus.
(g) The shares of Common Stock outstanding prior to the issuance of
the Shares have been duly authorized and are validly issued, fully paid
and non-assessable.
(h) The Shares have been duly authorized and, when issued and
delivered in accordance with the terms of this Agreement, will be
validly issued, fully paid and non-assessable, and the issuance of such
Shares will not be subject to any preemptive or similar rights.
(i) The execution and delivery by the Company of, and the
performance by the Company of its obligations under, this Agreement
will not contravene any provision of applicable law or the certificate
of incorporation or by-laws of the Company or any agreement or other
instrument binding upon the Company or any judgment, order or decree of
any governmental body, agency or court having jurisdiction over the
Company, and no consent, approval, authorization or order of, or
qualification with, any governmental body or agency is required for the
performance by the Company of its obligations under this Agreement,
except such as may be required by the securities or Blue Sky laws of
the various states in connection with the offer and sale of the Shares.
(j) There has not occurred any material adverse change, or any
development involving a prospective material adverse change, in the
condition, financial or otherwise, or in the earnings, business or
operations of the Company from that set forth in the Prospectus
(exclusive of any amendments or supplements thereto subsequent to the
date of this Agreement).
(k) There are no legal or governmental proceedings pending or
threatened to which the Company is a party or to which any of the
4
<PAGE> 5
properties of the Company is subject that are required to be described
in the Registration Statement or the Prospectus and are not so
described or any statutes, regulations, contracts or other documents
that are required to be described in the Registration Statement or the
Prospectus or to be filed as exhibits to the Registration Statement
that are not described or filed as required.
(l) Each preliminary prospectus filed as part of the registration
statement as originally filed or as part of any amendment thereto, or
filed pursuant to Rule 424 under the Securities Act, complied when so
filed in all material respects with the Securities Act and the
applicable rules and regulations of the Commission thereunder.
(m) The Company is not and, after giving effect to the offering and
sale of the Shares and the application of the proceeds thereof as
described in the Prospectus, will not be an "investment company" as
such term is defined in the Investment Company Act of 1940, as amended.
(n) The Company (i) is in compliance with any and all applicable
foreign, federal, state and local laws and regulations relating to the
protection of human health and safety, the environment or hazardous or
toxic substances or wastes, pollutants or contaminants ("ENVIRONMENTAL
LAWS"), (ii) has received all permits, licenses or other approvals
required of it under applicable Environmental Laws to conduct its
business and (iii) is in compliance with all terms and conditions of
any such permit, license or approval, except where such noncompliance
with Environmental Laws, failure to receive required permits, licenses
or other approvals or failure to comply with the terms and conditions
of such permits, licenses or approvals would not, singly or in the
aggregate, have a material adverse effect on the Company.
(o) There are no costs or liabilities associated with Environmental
Laws (including, without limitation, any capital or operating
expenditures required for clean-up, closure of properties or compliance
with Environmental Laws or any permit, license or approval, any related
constraints on operating activities and any potential liabilities to
third parties) which would, singly or in the aggregate, have a material
adverse effect on the Company.
(p) There are no contracts, agreements or understandings between
the Company and any person granting such person the right to require
the Company to file a registration statement under the Securities Act
with respect to any securities of the Company or to require the
5
<PAGE> 6
Company to include such securities with the Shares registered pursuant
to the Registration Statement, other than pursuant to the Registration
Rights Agreement dated ______, 1998 between the Company and IDG that is
filed as an exhibit to the Registration Statement.
(q) The Company has complied with all provisions of Section
517.075, Florida Statutes relating to doing business with the
Government of Cuba or with any person or affiliate located in Cuba.
(r) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, (i) the Company
has not incurred any material liability or obligation, direct or
contingent, nor entered into any material transaction not in the
ordinary course of business; (ii) the Company has not purchased any of
its outstanding capital stock, nor declared, paid or otherwise made any
dividend or distribution of any kind on its capital stock other than
ordinary and customary dividends; and (iii) there has not been any
material change in the capital stock, short-term debt or long-term debt
of the Company, except in each case as described in the Prospectus
(exclusive of any amendments or supplements thereto subsequent to the
date of this Agreement).
(s) The Company has good and marketable title in fee simple to all
real property and good title to all personal property owned by it which
is material to the business of the Company, in each case free and clear
of all liens, encumbrances and defects except such as are described in
the Prospectus or such as do not materially affect the value of such
property and do not interfere with the use made and proposed to be made
of such property by the Company; and any real property and buildings
held under lease by the Company are held by it under valid, subsisting
and enforceable leases with such exceptions as are not material and do
not interfere with the use made and proposed to be made of such
property and buildings by the Company, in each case except as described
in the Prospectus.
(t) The Company owns, possesses or has the right to use, or can
acquire on reasonable terms, all material patents, patent rights,
licenses, inventions, copyrights, know-how (including trade secrets and
other unpatented and/or unpatentable proprietary or confidential
information, systems or procedures), trademarks, service marks and
trade names currently employed by it in connection with the business
now operated by it, and the Company has not received any notice of
infringement of or conflict with asserted rights of others with respect
to any of the foregoing which, singly or in the aggregate, if the
subject of an unfavorable decision,
6
<PAGE> 7
ruling or finding, would result in any material adverse change in the
condition, financial or otherwise, or in the earnings, business or
operations of the Company.
(u) No material labor dispute with the employees of the Company
exists, except as described in or contemplated by the Prospectus, or,
to the knowledge of the Company, is imminent; and the Company is not
aware of any existing, threatened or imminent labor disturbance by the
employees of any of its principal suppliers, manufacturers or
contractors that could result in any material adverse change in the
condition, financial or otherwise, or in the earnings, business or
operations of the Company.
(v) The Company is insured by insurers of recognized financial
responsibility against such losses and risks and in such amounts as are
prudent and customary in the businesses in which it is engaged; the
Company has not been refused any insurance coverage sought or applied
for; and the Company has no reason to believe that it will not be able
to renew its existing insurance coverage as and when such coverage
expires or to obtain similar coverage from similar insurers as may be
necessary to continue its business at a cost that would not materially
and adversely affect the condition, financial or otherwise, or the
earnings, business or operations of the Company, except as described in
the Prospectus.
(w) The Company possesses all certificates, authorizations and
permits issued by the appropriate federal, state or foreign regulatory
authorities necessary to conduct its business, and the Company has not
received any notice of proceedings relating to the revocation or
modification of any such certificate, authorization or permit which,
singly or in the aggregate, if the subject of an unfavorable decision,
ruling or finding, would result in a material adverse change in the
condition, financial or otherwise, or in the earnings, business or
operations of the Company, except as described in the Prospectus.
(x) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurance that (i) transactions are
executed in accordance with management's general or specific
authorizations; (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally
accepted accounting principles and to maintain asset accountability;
(iii) access to assets is permitted only in accordance with
management's general or specific authorization; and (iv) the recorded
accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to
any differences.
7
<PAGE> 8
(y) Except as described in the Registration Statement (exclusive of
any amendments thereto subsequent to the date of this Agreement), the
Company has not sold, issued or distributed any shares of Common Stock
during the six-month period preceding the date hereof, including any
sales pursuant to Rule 144A under, or Regulation D or S of, the
Securities Act, other than shares issued pursuant to employee benefit
plans, qualified stock option plans or other employee compensation
plans or pursuant to outstanding options, rights or warrants.
(z) The Company represents and warrants to Morgan Stanley that (i)
the Registration Statement, the Prospectus and any preliminary
prospectus comply, and any further amendments or supplements thereto
will comply, with any applicable laws or regulations of foreign
jurisdictions in which the Prospectus or any preliminary prospectus, as
amended or supplemented, if applicable, are distributed at the request
of the Company in connection with the Directed Share Program, and that
(ii) no authorization, approval, consent, license, order, registration
or qualification of or with any government, governmental
instrumentality or court, other than such as have been obtained, is
necessary under the securities laws and regulations of foreign
jurisdictions in which the Directed Shares are offered at the request
of the Company outside the United States.
(aa) The Company has not offered, or caused the Underwriters to
offer, shares to any person pursuant to the Directed Share Program with
the specific intent to unlawfully influence (i) a customer or supplier
of the Company to alter the customer's or supplier's level or type of
business with the Company, or (ii) a trade journalist or publication to
write or publish favorable information about the Company or its
products.
2. Agreements to Sell and Purchase. The Company hereby agrees to sell to
the several Underwriters, and each Underwriter, upon the basis of the
representations and warranties herein contained, but subject to the conditions
hereinafter stated, agrees, severally and not jointly, to purchase from the
Company the respective numbers of Firm Shares set forth in Schedule I hereto
opposite its name at $______ a share (the "PURCHASE PRICE").
On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, the Company agrees to sell
to the Underwriters the Additional Shares, and the Underwriters shall have a
one-time right to purchase, severally and not jointly, up to _______________
Additional Shares at the Purchase Price. If you, on behalf of the Underwriters,
8
<PAGE> 9
elect to exercise such option, you shall so notify the Company in writing not
later than 30 days after the date of this Agreement, which notice shall specify
the number of Additional Shares to be purchased by the Underwriters and the date
on which such shares are to be purchased. Such date may be the same as the
Closing Date (as defined below) but not earlier than the Closing Date nor later
than ten business days after the date of such notice. Additional Shares may be
purchased as provided in Section 4 hereof solely for the purpose of covering
over-allotments made in connection with the offering of the Firm Shares. If any
Additional Shares are to be purchased, each Underwriter agrees, severally and
not jointly, to purchase the number of Additional Shares (subject to such
adjustments to eliminate fractional shares as you may determine) that bears the
same proportion to the total number of Additional Shares to be purchased as the
number of Firm Shares set forth in Schedule I hereto opposite the name of such
Underwriter bears to the total number of Firm Shares.
The Company hereby agrees that, without the prior written consent of
Morgan Stanley & Co. Incorporated on behalf of the Underwriters, it will not,
during the period ending 180 days after the date of the Prospectus, (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 Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock 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 the Common Stock, whether any such transaction described in
clause (i) or (ii) above is to be settled by delivery of Common Stock or such
other securities, in cash or otherwise. The foregoing sentence shall not apply
to (A) the Shares to be sold hereunder or (B) the issuance by the Company of
shares of Common Stock upon the exercise of an option or warrant or the
conversion of a security outstanding on the date hereof of which the
Underwriters have been advised in writing.
3. Terms of Public Offering. The Company is advised by you that the
Underwriters propose to make a public offering of their respective portions of
the Shares as soon after the Registration Statement and this Agreement have
become effective as in your judgment is advisable. The Company is further
advised by you that the Shares are to be offered to the public initially at
$_____________ a share (the "PUBLIC OFFERING PRICE") and to certain dealers
selected by you at a price that represents a concession not in excess of $______
a share under the Public Offering Price, and that any Underwriter may allow, and
such dealers may reallow, a concession, not in excess of $_____ a share, to any
Underwriter or to certain other dealers.
9
<PAGE> 10
4. Payment and Delivery. Payment for the Firm Shares shall be made to
the Company in Federal or other funds immediately available in New York City
against delivery of such Firm Shares for the respective accounts of the several
Underwriters at 10:00 a.m., New York City time, on ____________, 1998, or at
such other time on the same or such other date, not later than _________, 1998,
as shall be designated in writing by you. The time and date of such payment are
hereinafter referred to as the "CLOSING DATE."
Payment for any Additional Shares shall be made to the Company in
Federal or other funds immediately available in New York City against delivery
of such Additional Shares for the respective accounts of the several
Underwriters at 10:00 a.m., New York City time, on the date specified in the
notice described in Section 2 or at such other time on the same or on such other
date, in any event not later than _______, 1998, as shall be designated in
writing by you. The time and date of such payment are hereinafter referred to as
the "OPTION CLOSING DATE."
Certificates for the Firm Shares and Additional Shares shall be in
definitive form and registered in such names and in such denominations as you
shall request in writing not later than one full business day prior to the
Closing Date or the Option Closing Date, as the case may be. The certificates
evidencing the Firm Shares and Additional Shares shall be delivered to you on
the Closing Date or the Option Closing Date, as the case may be, for the
respective accounts of the several Underwriters, with any transfer taxes payable
in connection with the transfer of the Shares to the Underwriters duly paid,
against payment of the Purchase Price therefor.
5. Conditions to the Underwriters' Obligations. The obligations of the
Company to sell the Shares to the Underwriters and the several obligations of
the Underwriters to purchase and pay for the Shares on the Closing Date are
subject to the condition that the Registration Statement shall have become
effective not later than 2:00 p.m. (New York City time) on the date hereof.
The several obligations of the Underwriters are subject to the following
further conditions:
(a) Subsequent to the execution and delivery of this Agreement and
prior to the Closing Date:
(i) there shall not have occurred any downgrading, nor shall
any notice have been given of any intended or potential downgrading
or of any review for a possible change that does not indicate the
direction of the possible change, in the rating accorded any of the
Company's securities by any "nationally recognized
10
<PAGE> 11
statistical rating organization," as such term is defined for
purposes of Rule 436(g)(2) under the Securities Act; and
(ii) there shall not have occurred any change, or any
development involving a prospective change, in the condition,
financial or otherwise, or in the earnings, business or operations
of the Company from that set forth in the Prospectus (exclusive of
any amendments or supplements thereto subsequent to the date of
this Agreement) that, in your judgment, is material and adverse and
that makes it, in your judgment, impracticable to market the Shares
on the terms and in the manner contemplated in the Prospectus.
(b) The Underwriters shall have received on the Closing Date a
certificate, dated the Closing Date and signed by an executive officer
of the Company, to the effect set forth in Section 5(a)(i) above and to
the effect that the representations and warranties of the Company
contained in this Agreement are true and correct as of the Closing Date
and that the Company has complied with all of the agreements and
satisfied all of the conditions on its part to be performed or
satisfied hereunder on or before the Closing Date.
The officer signing and delivering such certificate may rely upon
the best of his or her knowledge as to proceedings threatened.
(c) The Underwriters shall have received on the Closing Date an
opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation,
outside counsel for the Company, dated the Closing Date, to the effect
that:
(i) the Company has been duly incorporated, is validly existing
as a corporation in good standing under the laws of the
jurisdiction of its incorporation, has the corporate power and
authority to own its property and to conduct its business as
described in the Prospectus and is duly qualified to transact
business and is in good standing in each jurisdiction in which the
conduct of its business or its ownership or leasing of property
requires such qualification, except to the extent that the failure
to be so qualified or be in good standing would not have a material
adverse effect on the Company;
(ii) the authorized capital stock of the Company conforms as to
legal matters to the description thereof contained in the
Prospectus;
11
<PAGE> 12
(iii) the shares of Common Stock outstanding prior to the
issuance of the Shares have been duly authorized and are validly
issued, fully paid and non-assessable;
(iv) the Shares have been duly authorized and, when issued and
delivered in accordance with the terms of this Agreement, will be
validly issued, fully paid and non-assessable, and the issuance of
such Shares will not be subject to any preemptive or similar
rights;
(v) this Agreement has been duly authorized, executed and
delivered by the Company;
(vi) the execution and delivery by the Company of, and the
performance by the Company of its obligations under, this Agreement
will not contravene any provision of applicable law or the
certificate of incorporation or by-laws of the Company or, to the
knowledge of such counsel, any agreement or other instrument
binding upon the Company that is material to the Company, or, to
the knowledge of such counsel, any judgment, order or decree of any
governmental body, agency or court having jurisdiction over the
Company, and no consent, approval, authorization or order of, or
qualification with, any governmental body or agency is required for
the performance by the Company of its obligations under this
Agreement, except such as may be required by the securities or Blue
Sky laws of the various states in connection with the offer and
sale of the Shares;
(vii) the statements (A) in the Prospectus under the captions
"Relationship with IDG and Certain Transactions-- Intercompany
Agreements," "Description of Capital Stock" and "Underwriters" and
(B) in the Registration Statement in Items 14 and 15, in each case
insofar as such statements constitute summaries of the legal
matters, documents or proceedings referred to therein, fairly
present the information called for with respect to such legal
matters, documents and proceedings and fairly summarize the matters
referred to therein;
(viii) after due inquiry, such counsel does not know of any
legal or governmental proceedings pending or threatened to which
the Company is a party or to which any of the properties of the
Company is subject that are required to be described in the
12
<PAGE> 13
Registration Statement or the Prospectus and are not so described
or of any statutes, regulations, contracts or other documents that
are required to be described in the Registration Statement or the
Prospectus or to be filed as exhibits to the Registration Statement
that are not described or filed as required;
(ix) the Company is not and, after giving effect to the
offering and sale of the Shares and the application of the proceeds
thereof as described in the Prospectus, will not be an "investment
company" as such term is defined in the Investment Company Act of
1940, as amended; and
(x) such counsel (A) is of the opinion that the Registration
Statement and Prospectus (except for financial statements and
schedules and other financial and statistical data included therein
as to which such counsel need not express any opinion) comply as to
form in all material respects with the Securities Act and the
applicable rules and regulations of the Commission thereunder, (B)
has no reason to believe that (except for financial statements and
schedules and other financial and statistical data as to which such
counsel need not express any belief) the Registration Statement and
the prospectus included therein at the time the Registration
Statement became effective contained any untrue statement of a
material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein not
misleading and (C) has no reason to believe that (except for
financial statements and schedules and other financial and
statistical data as to which such counsel need not express any
belief) the Prospectus contains any untrue statement of a material
fact or omits to state a material fact necessary in order to make
the statements therein, in the light of the circumstances under
which they were made, not misleading.
(d) The Underwriters shall have received on the Closing Date an
opinion of Davis Polk & Wardwell, counsel for the Underwriters, dated
the Closing Date, covering the matters referred to in Sections
5(c)(iv), 5(c)(v), 5(c)(vii) (but only as to the statements in the
Prospectus under "Description of Capital Stock" and "Underwriters") and
5(c)(x) above.
With respect to Section 5(c)(x) above, Wilson Sonsini Goodrich &
Rosati, Professional Corporation, and Davis Polk & Wardwell may state
that their opinion and belief are based upon their participation in the
preparation of the Registration Statement and Prospectus and any
13
<PAGE> 14
amendments or supplements thereto and review and discussion of the
contents thereof, but are without independent check or verification,
except as specified.
The opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation, described in Section 5(c) above shall be rendered to the
Underwriters at the request of the Company and shall so state therein.
(e) The Underwriters shall have received, on each of the date
hereof and the Closing Date, a letter dated the date hereof or the
Closing Date, as the case may be, in form and substance satisfactory to
the Underwriters, from Deloitte & Touche LLP, independent public
accountants, containing statements and information of the type
ordinarily included in accountants' "comfort letters" to underwriters
with respect to the financial statements and certain financial
information contained in the Registration Statement and the Prospectus;
provided that the letter delivered on the Closing Date shall use a
"cut-off date" not earlier than the date hereof.
(f) The "lock-up" agreements, each substantially in the form of
Exhibit A hereto, between you and certain stockholders, officers and
directors of the Company relating to sales and certain other
dispositions of shares of Common Stock or certain other securities,
delivered to you on or before the date hereof, shall be in full force
and effect on the Closing Date.
The several obligations of the Underwriters to purchase Additional
Shares hereunder are subject to the delivery to you on the Option Closing Date
of such documents as you may reasonably request with respect to the good
standing of the Company, the due authorization and issuance of the Additional
Shares and other matters related to the issuance of the Additional Shares.
6. Covenants of the Company. In further consideration of the agreements
of the Underwriters herein contained, the Company covenants with each
Underwriter as follows:
(a) To furnish to you or your counsel, without charge, 4 signed
copies of the Registration Statement (including exhibits thereto) and
for delivery to each other Underwriter a conformed copy of the
Registration Statement (without exhibits thereto) and to furnish to you
in New York City, without charge, prior to 10:00 a.m. New York City
time on the business day next succeeding the date of this Agreement and
during the period mentioned in Section 6(c) below, as many copies of
the Prospectus
14
<PAGE> 15
and any supplements and amendments thereto or to the Registration
Statement as you may reasonably request.
(b) Before amending or supplementing the Registration Statement or
the Prospectus, to furnish to you or your counsel a copy of each such
proposed amendment or supplement and not to file any such proposed
amendment or supplement to which you reasonably object, and to file
with the Commission within the applicable period specified in Rule
424(b) under the Securities Act any prospectus required to be filed
pursuant to such Rule.
(c) If, during such period after the first date of the public
offering of the Shares as in the opinion of counsel for the
Underwriters the Prospectus is required by law to be delivered in
connection with sales by an Underwriter or dealer, any event shall
occur or condition exist as a result of which it is necessary to amend
or supplement the Prospectus in order to make the statements therein,
in the light of the circumstances when the Prospectus is delivered to a
purchaser, not misleading, or if, in the opinion of counsel for the
Underwriters, it is necessary to amend or supplement the Prospectus to
comply with applicable law, forthwith to prepare, file with the
Commission and furnish, at its own expense, to the Underwriters and to
the dealers (whose names and addresses you will furnish to the Company)
to which Shares may have been sold by you on behalf of the Underwriters
and to any other dealers upon request, either amendments or supplements
to the Prospectus so that the statements in the Prospectus as so
amended or supplemented will not, in the light of the circumstances
when the Prospectus is delivered to a purchaser, be misleading or so
that the Prospectus, as amended or supplemented, will comply with law.
(d) To endeavor to qualify the Shares for offer and sale under the
securities or Blue Sky laws of such jurisdictions as you shall
reasonably request.
(e) To make generally available to the Company's security holders
and to you as soon as practicable an earning statement covering the
twelve-month period ending ________, 1999 that satisfies the provisions
of Section 11(a) of the Securities Act and the rules and regulations of
the Commission thereunder.
(f) Whether or not the transactions contemplated in this Agreement
are consummated or this Agreement is terminated, to pay or cause to be
paid all expenses incident to the performance of its obligations
15
<PAGE> 16
under this Agreement, including: (i) the fees, disbursements and
expenses of the Company's counsel and the Company's accountants in
connection with the registration and delivery of the Shares under the
Securities Act and all other fees or expenses in connection with the
preparation and filing of the Registration Statement, any preliminary
prospectus, the Prospectus and amendments and supplements to any of the
foregoing, including all printing costs associated therewith, and the
mailing and delivering of copies thereof to the Underwriters and
dealers, in the quantities hereinabove specified, (ii) all costs and
expenses related to the transfer and delivery of the Shares to the
Underwriters, including any transfer or other taxes payable thereon,
(iii) the cost of printing or producing any Blue Sky or Legal
Investment memorandum in connection with the offer and sale of the
Shares under state securities laws and all expenses in connection with
the qualification of the Shares for offer and sale under state
securities laws as provided in Section 6(d) hereof, including filing
fees and the reasonable fees and disbursements of counsel for the
Underwriters in connection with such qualification and in connection
with the Blue Sky or Legal Investment memorandum, (iv) all filing fees
and the reasonable fees and disbursements of counsel to the
Underwriters incurred in connection with the review and qualification
of the offering of the Shares by the National Association of Securities
Dealers, Inc. ("NASD"), (v) all fees and expenses in connection with
the preparation and filing of the registration statement on Form 8-A
relating to the Common Stock and all costs and expenses incident to
listing the Shares on the Nasdaq National Market, (vi) the cost of
printing certificates representing the Shares, (vii) the costs and
charges of any transfer agent, registrar or depositary, (viii) the
costs and expenses of the Company relating to investor presentations on
any "road show" undertaken in connection with the marketing of the
offering of the Shares, including, without limitation, expenses
associated with the production of road show slides and graphics, fees
and expenses of any consultants engaged by the Company in connection
with the road show presentations, travel and lodging expenses of the
representatives and officers of the Company and any such consultants,
and the pro rata cost of the seats used by the representatives and
officers of the Company and any such consultants on any aircraft
chartered in connection with the road show, (ix) all fees and
disbursements of counsel incurred by the Underwriters, with the
Company's prior approval, in connection with the Directed Share Program
and stamp duties, similar taxes or duties or other taxes, if any,
incurred by the Underwriters in connection with the Directed Share
Program, (x) all other costs and expenses incident to the perfor mance
of the obligations of the Company hereunder for which provision is not
otherwise made in this Section. It is understood, however, that except
as provided in this Section, Section 7 entitled "Indemnity and
16
<PAGE> 17
Contribution", and the last paragraph of Section 9 below, the
Underwriters will pay all of their costs and expenses, including fees
and disbursements of their counsel, stock transfer taxes payable on
resale of any of the Shares by them and any advertising expenses
connected with any offers they may make.
(g) That in connection with the Directed Share Program, the Company
will direct the transfer agent and registrar for the Common Stock to
place stop transfer restrictions restricting, to the extent required by
the NASD or the NASD rules, the sale, transfer, assignment, pledge or
hypothecation for a period of three months following the date of the
effectiveness of the Registration Statement of the Directed Shares of
Participants as to whom Morgan Stanley has notified the Company require
such restrictions.
(h) To comply with all applicable securities and other applicable
laws, rules and regulations in each foreign jurisdiction in which the
Directed Shares are offered in connection with the Directed Share
Program.
7. Indemnity and Contribution. (a) The Company agrees to indemnify and
hold harmless each Underwriter and each person, if any, who controls any
Underwriter within the meaning of either Section 15 of the Securities Act or
Section 20 of the Securities Exchange Act of 1934, as amended (the "EXCHANGE
ACT"), from and against any and all losses, claims, damages and liabilities
(including, without limitation, any legal or other expenses reasonably incurred
in connection with defending or investigating any such action or claim) caused
by any untrue statement or alleged untrue statement of a material fact contained
in the Registration Statement or any amendment thereof, any preliminary
prospectus or the Prospectus (as amended or supplemented if the Company shall
have furnished any amendments or supplements thereto), or caused by any omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, except
insofar as such losses, claims, damages or liabilities are caused by any such
untrue statement or omission or alleged untrue statement or omission based upon
information relating to any Underwriter furnished to the Company in writing by
such Underwriter through you expressly for use therein; provided, however, that
the foregoing indemnity with respect to any preliminary prospectus shall not
inure to the benefit of any Underwriter from whom the person asserting any such
losses, claims, damages or liabilities purchased Shares, or any person
controlling such Underwriter, if a copy of the Prospectus (as then amended or
supplemented if the Company shall have furnished any amendments or supplements
thereto) was not sent or given by or on behalf of such Underwriter to such
person, if required by
17
<PAGE> 18
law so to have been delivered, at or prior to the written confirmation of the
sale of the Shares to such person, and if the Prospectus (as so amended or
supplemented) would have cured the defect giving rise to such losses, claims,
damages or liabilities unless such failure is the result of non-compliance by
the Company with Sections 6(a) or 6(c) hereof.
(b) Each Underwriter agrees, severally and not jointly, to indemnify
and hold harmless the Company and its directors, the officers of the Company who
sign the Registration Statement and each person, if any, who controls the
Company within the meaning of either Section 15 of the Securities Act or Section
20 of the Exchange Act to the same extent as the foregoing indemnity from the
Company to such Underwriter, but only with reference to information relating to
such Underwriter furnished to the Company in writing by such Underwriter through
you expressly for use in the Registration Statement, any preliminary prospectus,
the Prospectus or any amendments or supplements thereto.
(c) The Company agrees to indemnify and hold harmless Morgan Stanley
and each person, if any, who controls Morgan Stanley within the meaning of
either Section 15 of the Securities Act or Section 20 of the Exchange Act
("MORGAN STANLEY ENTITIES"), from and against any and all losses, claims,
damages and liabilities (including, without limitation, any legal or other
expenses reasonably incurred in connection with defending or investigating any
such action or claim) (i) caused by any untrue statement or alleged untrue
statement of a material fact contained in any prospectus wrapper material
prepared by or with the consent of the Company for distribution in foreign
jurisdictions in connection with the Directed Share Program attached to the
Prospectus or any preliminary prospectus, or caused by any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statement therein, when considered in conjunction with the
Prospectus or any applicable preliminary prospectus, not misleading; (ii) caused
by the failure of any Participant to pay for and accept delivery of the shares
which, immediately following the effectiveness of the Registration Statement,
were subject to a properly confirmed agreement to purchase; or (iii) related to,
arising out of, or in connection with the Directed Share Program, provided that,
the Company shall not be responsible under this subparagraph (iii) for any
losses, claim, damages or liabilities (or expenses relating thereto) that are
finally judicially determined to have resulted from the bad faith or gross
negligence of the Morgan Stanley Entities.
(d) In case any proceeding (including any governmental investigation)
shall be instituted involving any person in respect of which indemnity may be
sought pursuant to Section 7(a), 7(b) or 7(c) such person (the "INDEMNIFIED
PARTY") shall promptly notify the person against whom such indemnity may be
18
<PAGE> 19
sought (the "INDEMNIFYING PARTY") in writing and the indemnifying party, upon
request of the indemnified party, shall retain counsel reasonably satisfactory
to the indemnified party to represent the indemnified party and any others the
indemnifying party may designate in such proceeding and shall pay the fees and
disbursements of such counsel related to such proceeding. In any such
proceeding, any indemnified party shall have the right to retain its own
counsel, but the fees and expenses of such counsel shall be at the expense of
such indemnified party unless (i) the indemnifying party and the indemnified
party shall have mutually agreed to the retention of such counsel or (ii) the
named parties to any such proceeding (including any impleaded parties) include
both the indemnifying party and the indemnified party and representation of both
parties by the same counsel would be inappropriate due to actual or potential
differing interests between them. It is understood that the indemnifying party
shall not, in respect of the legal expenses of any indemnified party in
connection with any proceeding or related proceedings in the same jurisdiction,
be liable for the fees and expenses of more than one separate firm (in addition
to any local counsel) for all such indemnified parties and that all such fees
and expenses shall be reimbursed as they are incurred. Such firm shall be
designated in writing by Morgan Stanley & Co. Incorporated, in the case of
parties indemnified pursuant to Section 7(a) or 7(c), and by the Company, in the
case of parties indemnified pursuant to Section 7(b). The indemnifying party
shall not be liable for any settlement of any proceeding effected without its
written consent, but if settled with such consent or if there be a final
judgment for the plaintiff, the indemnifying party agrees to indemnify the
indemnified party from and against any loss or liability by reason of such
settlement or judgment. Notwithstanding the foregoing sentence, if at any time
an indemnified party shall have requested an indemnifying party to reimburse the
indemnified party for fees and expenses of counsel as contemplated by the second
and third sentences of this paragraph, the indemnifying party agrees that it
shall be liable for any settlement of any proceeding effected without its
written consent if (i) such settlement is entered into more than 30 days after
receipt by such indemnifying party of the aforesaid request and (ii) such
indemnifying party shall not have reimbursed the indemnified party in accordance
with such request prior to the date of such settlement. No indemnifying party
shall, without the prior written consent of the indemnified party, effect any
settlement of any pending or threatened proceeding in respect of which any
indemnified party is or could have been a party and indemnity could have been
sought hereunder by such indemnified party, unless such settlement includes an
unconditional release of such indemnified party from all liability on claims
that are the subject matter of such proceeding. Notwithstanding anything
contained herein to the contrary, if indemnity may be sought pursuant to Section
7(c) hereof in respect of such action or proceeding, then in addition to such
separate firm for the indemnified parties, the indemnifying party shall be
liable for the reasonable fees and expenses of not more than one separate firm
(in addition to any local counsel) for Morgan Stanley
19
<PAGE> 20
for the defense of any losses, claims, damages and liabilities arising out of
the Directed Share Program, and all persons, if any, who control Morgan Stanley
within the meaning of either Section 15 of the Act or Section 20 of the Exchange
Act.
(e) To the extent the indemnification provided for in Section 7(a),
7(b) or 7(c) is unavailable to an indemnified party or insufficient in respect
of any losses, claims, damages or liabilities referred to therein, then each
indemnifying party under such paragraph, in lieu of indemnifying such
indemnified party thereunder, shall contribute to the amount paid or payable by
such indemnified party as a result of such losses, claims, damages or
liabilities (i) in such proportion as is appropriate to reflect the relative
benefits received by the Company on the one hand and the Underwriters on the
other hand from the offering of the Shares or (ii) if the allocation provided by
clause 7(e)(i) above is not permitted by applicable law, in such proportion as
is appropriate to reflect not only the relative benefits referred to in clause
7(e)(i) above but also the relative fault of the Company on the one hand and of
the Underwriters on the other hand in connection with the statements or
omissions that resulted in such losses, claims, damages or liabilities, as well
as any other relevant equitable considerations. The relative benefits received
by the Company on the one hand and the Underwriters on the other hand in
connection with the offering of the Shares shall be deemed to be in the same
respective proportions as the net proceeds from the offering of the Shares
(before deducting expenses) received by the Company and the total underwriting
discounts and commissions received by the Underwriters, in each case as set
forth in the table on the cover of the Prospectus, bear to the aggregate Public
Offering Price of the Shares. The relative fault of the Company on the one hand
and the Underwriters on the other hand shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a material
fact or the omission or alleged omission to state a material fact relates to
information supplied by the Company or by the Underwriters and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. The Underwriters' respective obligations to
contribute pursuant to this Section 7 are several in proportion to the
respective number of Shares they have purchased hereunder, and not joint.
(f) The Company and the Underwriters agree that it would not be just or
equitable if contribution pursuant to this Section 7 were determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation that does not take account of the
equitable considerations referred to in Section 7(e). The amount paid or payable
by an indemnified party as a result of the losses, claims, damages and
liabilities referred to in the immediately preceding paragraph shall be deemed
to include, subject to the limitations set forth above, any legal or other
expenses reasonably incurred by
20
<PAGE> 21
such indemnified party in connection with investigating or defending any such
action or claim. Notwithstanding the provisions of this Section 7, no
Underwriter shall be required to contribute any amount in excess of the amount
by which the total price at which the Shares underwritten by it and distributed
to the public were offered to the public exceeds the amount of any damages that
such Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The remedies provided for in this
Section 7 are not exclusive and shall not limit any rights or remedies which may
otherwise be available to any indemnified party at law or in equity.
(g) The indemnity and contribution provisions contained in this Section
7 and the representations, warranties and other statements of the Company
contained in this Agreement shall remain operative and in full force and effect
regardless of (i) any termination of this Agreement, (ii) any investigation made
by or on behalf of any Underwriter or any person controlling any Underwriter or
by or on behalf of the Company or its respective officers, directors or any
person controlling either of them and (iii) acceptance of and payment for any of
the Shares.
8. Termination. This Agreement shall be subject to termination by
notice given by you to the Company, if (a) after the execution and delivery of
this Agreement and prior to the Closing Date (i) trading generally shall have
been suspended or materially limited on or by, as the case may be, any of the
New York Stock Exchange, the American Stock Exchange, the National Association
of Securities Dealers, Inc., the Chicago Board of Options Exchange, the Chicago
Mercantile Exchange or the Chicago Board of Trade, (ii) trading of any
securities of the Company shall have been suspended on any exchange or in any
over-the-counter market, (iii) a general moratorium on commercial banking
activities in New York shall have been declared by either Federal or New York
State authorities or (iv) there shall have occurred any outbreak or escalation
of hostilities or any change in financial markets or any calamity or crisis
that, in your judgment, is material and adverse and (b) in the case of any of
the events specified in clauses 8(a)(i) through 8(a)(iv), such event, singly or
together with any other such event, makes it, in your judgment, impracticable to
market the Shares on the terms and in the manner contemplated in the Prospectus.
9. Effectiveness; Defaulting Underwriters. This Agreement shall become
effective upon the execution and delivery hereof by the parties hereto.
21
<PAGE> 22
If, on the Closing Date or the Option Closing Date, as the case may be,
any one or more of the Underwriters shall fail or refuse to purchase Shares that
it has or they have agreed to purchase hereunder on such date, and the aggregate
number of Shares which such defaulting Underwriter or Underwriters agreed but
failed or refused to purchase is not more than one-tenth of the aggregate number
of the Shares to be purchased on such date, the other Underwriters shall be
obligated severally in the proportions that the number of Firm Shares set forth
opposite their respective names in Schedule I bears to the aggregate number of
Firm Shares set forth opposite the names of all such non-defaulting
Underwriters, or in such other proportions as you may specify, to purchase the
Shares which such defaulting Underwriter or Underwriters agreed but failed or
refused to purchase on such date; provided that in no event shall the number of
Shares that any Underwriter has agreed to purchase pursuant to this Agreement be
increased pursuant to this Section 9 by an amount in excess of one-ninth of such
number of Shares without the written consent of such Underwriter. If, on the
Closing Date, any Underwriter or Underwriters shall fail or refuse to purchase
Firm Shares and the aggregate number of Firm Shares with respect to which such
default occurs is more than one-tenth of the aggregate number of Firm Shares to
be purchased, and arrangements satisfactory to you and the Company for the
purchase of such Firm Shares are not made within 36 hours after such default,
this Agreement shall terminate without liability on the part of any
non-defaulting Underwriter or the Company. In any such case either you or the
Company shall have the right to postpone the Closing Date, but in no event for
longer than seven days, in order that the required changes, if any, in the
Registration Statement and in the Prospectus or in any other documents or
arrangements may be effected. If, on the Option Closing Date, any Underwriter or
Underwriters shall fail or refuse to purchase Additional Shares and the
aggregate number of Additional Shares with respect to which such default occurs
is more than one-tenth of the aggregate number of Additional Shares to be
purchased, the non-defaulting Underwriters shall have the option to (i)
terminate their obligation hereunder to purchase Additional Shares or (ii)
purchase not less than the number of Additional Shares that such non-defaulting
Underwriters would have been obligated to purchase in the absence of such
default. Any action taken under this paragraph shall not relieve any defaulting
Underwriter from liability in respect of any default of such Underwriter under
this Agreement.
If this Agreement shall be terminated by the Underwriters, or any of
them, because of any failure or refusal on the part of the Company to comply
with the terms or to fulfill any of the conditions of this Agreement, or if for
any reason the Company shall be unable to perform its obligations under this
Agreement, the Company will reimburse the Underwriters or such Underwriters as
have so terminated this Agreement with respect to themselves, severally, for all
out-of-pocket expenses (including the fees and disbursements of their counsel)
22
<PAGE> 23
reasonably incurred by such Underwriters in connection with this Agreement or
the offering contemplated hereunder.
10. Counterparts. This Agreement may be signed in two or more
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
11. Applicable Law. This Agreement shall be governed by and construed
in accordance with the internal laws of the State of New York.
12. Headings. The headings of the sections of this Agreement have been
inserted for convenience of reference only and shall not be deemed a part of
this Agreement.
Very truly yours,
IDG BOOKS WORLDWIDE, INC.
By:
----------------------------------------
Name: John J. Kilcullen
Title: Chief Executive Officer
Accepted as of the date hereof
Morgan Stanley & Co. Incorporated
Goldman, Sachs & Co.
Merrill Lynch, Pierce, Fenner
& Smith Incorporated
Acting severally on behalf of themselves
and the several Underwriters named in
Schedule I hereto.
By: Morgan Stanley & Co. Incorporated
By:
-------------------------------
Name:
Title:
23
<PAGE> 24
SCHEDULE I
<TABLE>
<CAPTION>
NUMBER OF FIRM SHARES
UNDERWRITER TO BE PURCHASED
- ------------------------------ -----------------------
<S> <C>
Morgan Stanley & Co. Incorporated..................
Goldman, Sachs & Co................................
Merrill Lynch, Pierce, Fenner
& Smith Incorporated............................
---------------------------
Total:..................................... ===========================
</TABLE>
1
<PAGE> 25
EXHIBIT A
[FORM OF LOCK-UP LETTER]
July __, 1998
Morgan Stanley & Co. Incorporated
Goldman, Sachs & Co.
Merrill Lynch, Pierce, Fenner & Smith Incorporated
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, NY 10036
Dear Sirs and Mesdames:
The undersigned understands that Morgan Stanley & Co. Incorporated
("MORGAN STANLEY") proposes to enter into an Underwriting Agreement (the
"UNDERWRITING AGREEMENT") with IDG Books Worldwide, Inc., a Delaware corporation
(the "COMPANY"), providing for the public offering (the "PUBLIC OFFERING") by
the several Underwriters, including Morgan Stanley (the "UNDERWRITERS"), of ___
shares (the "SHARES") of the Class A Common Stock (par value $0.001 per share)
of the Company (the "COMMON STOCK").
To induce the Underwriters that may participate in the Public Offering
to continue their efforts in connection with the Public Offering, the
undersigned hereby agrees that, without the prior written consent of Morgan
Stanley on behalf of the Underwriters, it will not, during the period commencing
on the date hereof and ending 180 days after the date of the final prospectus
relating to the Public Offering (the "PROSPECTUS"), (1) 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 Common
Stock or any securities convertible into or exercisable or exchangeable for
Common Stock or (2) enter into any swap or other arrangement that transfers to
another, in whole or in part, any of the economic consequences of ownership of
the Common Stock, whether any such transaction described in clause (1) or (2)
above is to be settled by delivery of Common Stock or such other securities, in
cash or otherwise. The foregoing sentence shall not apply to (a) the sale of any
Shares to the Underwriters pursuant to the Underwriting Agreement or (b)
transactions relating to shares of Common
<PAGE> 26
Stock or other securities acquired in open market transactions after the
completion of the Public Offering. In addition, the undersigned agrees that,
without the prior written consent of Morgan Stanley on behalf of the
Underwriters, it will not, during the period commencing on the date hereof and
ending 180 days after the date of the Prospectus, make any demand for or
exercise any right with respect to, the registration of any shares of Common
Stock or any security convertible into or exercisable or exchangeable for Common
Stock.
Whether or not the Public Offering actually occurs depends on a number
of factors, including market conditions. Any Public Offering will only be made
pursuant to an Underwriting Agreement, the terms of which are subject to
negotiation between the Company and the Underwriters.
Very truly yours,
-------------------------------------
(Name)
--------------------------------------
(Address)
2
<PAGE> 1
EXHIBIT 10.3
IDG BOOKS WORLDWIDE, INC.
1998 EMPLOYEE STOCK PURCHASE PLAN
The following constitute the provisions of the 1998 Employee Stock
Purchase Plan of IDG Books Worldwide, Inc.
1. Purpose. The purpose of the Plan is to provide employees of the
Company and its Designated Subsidiaries with an opportunity to purchase Common
Stock of the Company through accumulated payroll deductions. It is the intention
of the Company to have the Plan qualify as an "Employee Stock Purchase Plan"
under Section 423 of the Internal Revenue Code of 1986, as amended. The
provisions of the Plan, accordingly, shall be construed so as to extend and
limit participation in a manner consistent with the requirements of that section
of the Code.
2. Definitions.
(a) "Board" shall mean the Board of Directors of the Company.
(b) "Code" shall mean the Internal Revenue Code of 1986, as
amended.
(c) "Common Stock" shall mean the common stock of the Company.
(d) "Company" shall mean IDG Books Worldwide, Inc. and any
Designated Subsidiary of the Company.
(e) "Compensation" shall mean all base straight time gross
earnings and commissions, but exclusive of payments for overtime, shift premium,
incentive compensation, incentive payments, bonuses and other compensation.
(f) "Designated Subsidiary" shall mean any Subsidiary which
has been designated by the Board from time to time in its sole discretion as
eligible to participate in the Plan.
(g) "Employee" shall mean any individual who is an Employee of
the Company for tax purposes whose customary employment with the Company is at
least twenty (20) hours per week and more than five (5) months in any calendar
year. For purposes of the Plan, the employment relationship shall be treated as
continuing intact while the individual is on sick leave or other leave of
absence approved by the Company. Where the period of leave exceeds 90 days and
the individual's right to reemployment is not guaranteed either by statute or by
contract, the employment relationship shall be deemed to have terminated on the
91st day of such leave.
(h) "Enrollment Date" shall mean the first Trading Day of each
Offering Period.
<PAGE> 2
(i) "Exercise Date" shall mean the last Trading Day of each
Purchase Period.
(j) "Fair Market Value" shall mean, as of any date, the value
of Common Stock determined as follows:
(1) If the Common Stock is listed on any established
stock exchange or a national market system, including without limitation the
Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market,
its Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system for
the last market trading day on the date of such determination, as reported in
The Wall Street Journal or such other source as the Board deems reliable;
(2) If the Common Stock is regularly quoted by a
recognized securities dealer but selling prices are not reported, its Fair
Market Value shall be the mean of the closing bid and asked prices for the
Common Stock on the date of such determination, as reported in The Wall Street
Journal or such other source as the Board deems reliable;
(3) In the absence of an established market for the
Common Stock, the Fair Market Value thereof shall be determined in good faith by
the Board; or
(4) For purposes of the Enrollment Date of the first
Offering Period under the Plan, the Fair Market Value shall be the initial price
to the public as set forth in the final prospectus included within the
registration statement in Form S-1 filed with the Securities and Exchange
Commission for the initial public offering of the Company's Common Stock (the
"Registration Statement").
(k) "Offering Periods" shall mean the periods of approximately
twenty-four (24) months during which an option granted pursuant to the Plan may
be exercised, commencing on the first Trading Day on or after February 15 and
August 15 of each year and terminating on the last Trading Day in the periods
ending twenty-four months later; provided, however, that the first Offering
Period under the Plan shall commence with the first Trading Day on or after the
date on which the Securities and Exchange Commission declares the Company's
Registration Statement effective and ending on the last Trading Day on or before
February 14. The duration and timing of Offering Periods may be changed pursuant
to Section 4 of this Plan.
(l) "Plan" shall mean this 1998 Employee Stock Purchase Plan.
(m) "Purchase Period" shall mean the approximately six month
period commencing after one Exercise Date and ending with the next Exercise
Date, except that the first Purchase Period of any Offering Period shall
commence on the Enrollment Date and end with the next Exercise Date.
<PAGE> 3
(n) "Purchase Price" shall mean 85% of the Fair Market Value
of a share of Common Stock on the Enrollment Date or on the Exercise Date,
whichever is lower; provided however, that the Purchase Price may be adjusted by
the Board pursuant to Section 20.
(o) "Reserves" shall mean the number of shares of Common Stock
covered by each option under the Plan which have not yet been exercised and the
number of shares of Common Stock which have been authorized for issuance under
the Plan but not yet placed under option.
(p) "Subsidiary" shall mean a corporation, domestic or
foreign, of which not less than 50% of the voting shares are held by the Company
or a Subsidiary, whether or not such corporation now exists or is hereafter
organized or acquired by the Company or a Subsidiary.
(q) "Trading Day" shall mean a day on which national stock
exchanges and the Nasdaq System are open for trading.
3. Eligibility.
(a) Any Employee who shall be employed by the Company on a
given Enrollment Date shall be eligible to participate in the Plan.
(b) Any provisions of the Plan to the contrary
notwithstanding, no Employee shall be granted an option under the Plan (i) to
the extent that, immediately after the grant, such Employee (or any other person
whose stock would be attributed to such Employee pursuant to Section 424(d) of
the Code) would own capital stock of the Company and/or hold outstanding options
to purchase such stock possessing five percent (5%) or more of the total
combined voting power or value of all classes of the capital stock of the
Company or of any Subsidiary, or (ii) to the extent that his or her rights to
purchase stock under all employee stock purchase plans of the Company and its
subsidiaries accrues at a rate which exceeds Twenty-Five Thousand Dollars
($25,000) worth of stock (determined at the fair market value of the shares at
the time such option is granted) for each calendar year in which such option is
outstanding at any time.
4. Offering Periods. The Plan shall be implemented by consecutive,
overlapping Offering Periods with a new Offering Period commencing on the first
Trading Day on or after February 15 and August 15 each year, or on such other
date as the Board shall determine, and continuing thereafter until terminated in
accordance with Section 20 hereof; provided, however, that the first Offering
Period under the Plan shall commence with the first Trading Day on or after the
date on which the Securities and Exchange Commission declares the Company's
Registration Statement effective and ending on the last Trading Day on or before
February 14. The Board shall have the power to change the duration of Offering
Periods (including the commencement dates thereof) with respect to future
offerings without shareholder approval if such change is announced at least five
(5) days prior to the scheduled beginning of the first Offering Period to be
affected thereafter.
<PAGE> 4
5. Participation.
(a) An eligible Employee may become a participant in the Plan
by completing a subscription agreement authorizing payroll deductions in the
form of Exhibit A to this Plan and filing it with the Company's payroll office
prior to the applicable Enrollment Date.
(b) Payroll deductions for a participant shall commence on the
first payroll following the Enrollment Date and shall end on the last payroll in
the Offering Period to which such authorization is applicable, unless sooner
terminated by the participant as provided in Section 10 hereof.
6. Payroll Deductions.
(a) At the time a participant files his or her subscription
agreement, he or she shall elect to have payroll deductions made on each pay day
during the Offering Period in an amount not exceeding ten percent (10%) of the
Compensation which he or she receives on each pay day during the Offering
Period.
(b) All payroll deductions made for a participant shall be
credited to his or her account under the Plan and shall be withheld in whole
percentages only. A participant may not make any additional payments into such
account.
(c) A participant may discontinue his or her participation in
the Plan as provided in Section 10 hereof, or may increase or decrease the rate
of his or her payroll deductions during the Offering Period by completing or
filing with the Company a new subscription agreement authorizing a change in
payroll deduction rate. The Board may, in its discretion, limit the number of
participation rate changes during any Offering Period. The change in rate shall
be effective with the first full payroll period following five (5) business days
after the Company's receipt of the new subscription agreement unless the Company
elects to process a given change in participation more quickly. A participant's
subscription agreement shall remain in effect for successive Offering Periods
unless terminated as provided in Section 10 hereof.
(d) Notwithstanding the foregoing, to the extent necessary to
comply with Section 423(b)(8) of the Code and Section 3(b) hereof, a
participant's payroll deductions may be decreased to zero percent (0%) at any
time during a Purchase Period. Payroll deductions shall recommence at the rate
provided in such participant's subscription agreement at the beginning of the
first Purchase Period which is scheduled to end in the following calendar year,
unless terminated by the participant as provided in Section 10 hereof.
(e) At the time the option is exercised, in whole or in part,
or at the time some or all of the Company's Common Stock issued under the Plan
is disposed of, the participant must make adequate provision for the Company's
federal, state, or other tax withholding obligations, if any, which arise upon
the exercise of the option or the disposition of the Common Stock. At any time,
<PAGE> 5
the Company may, but shall not be obligated to, withhold from the participant's
compensation the amount necessary for the Company to meet applicable withholding
obligations, including any withholding required to make available to the Company
any tax deductions or benefits attributable to sale or early disposition of
Common Stock by the Employee.
7. Grant of Option. On the Enrollment Date of each Offering Period,
each eligible Employee participating in such Offering Period shall be granted an
option to purchase on each Exercise Date during such Offering Period (at the
applicable Purchase Price) up to a number of shares of the Company's Common
Stock determined by dividing such Employee's payroll deductions accumulated
prior to such Exercise Date and retained in the Participant's account as of the
Exercise Date by the applicable Purchase Price; provided that in no event shall
an Employee be permitted to purchase during each Purchase Period more than 3,000
shares of the Company's Common Stock (subject to any adjustment pursuant to
Section 19), and provided further that such purchase shall be subject to the
limitations set forth in Sections 3(b) and 12 hereof. The Board may, for future
Offering Periods, increase or decrease, in its absolute discretion, the maximum
number of shares of the Company's Common Stock an Employee may purchase during
each Purchase Period of such Offering Period. Exercise of the option shall occur
as provided in Section 8 hereof, unless the participant has withdrawn pursuant
to Section 10 hereof. The option shall expire on the last day of the Offering
Period.
8. Exercise of Option.
(a) Unless a participant withdraws from the Plan as provided
in Section 10 hereof, his or her option for the purchase of shares shall be
exercised automatically on the Exercise Date, and the maximum number of full
shares subject to option shall be purchased for such participant at the
applicable Purchase Price with the accumulated payroll deductions in his or her
account. No fractional shares shall be purchased; any payroll deductions
accumulated in a participant's account which are not sufficient to purchase a
full share shall be retained in the participant's account for the subsequent
Purchase Period or Offering Period, subject to earlier withdrawal by the
participant as provided in Section 10 hereof. Any other monies left over in a
participant's account after the Exercise Date shall be returned to the
participant. During a participant's lifetime, a participant's option to purchase
shares hereunder is exercisable only by him or her.
(b) If the Board determines that, on a given Exercise Date,
the number of shares with respect to which options are to be exercised may
exceed (i) the number of shares of Common Stock that were available for sale
under the Plan on the Enrollment Date of the applicable Offering Period, or (ii)
the number of shares available for sale under the Plan on such Exercise Date,
the Board may in its sole discretion (x) provide that the Company shall make a
pro rata allocation of the shares of Common Stock available for purchase on such
Enrollment Date or Exercise Date, as applicable, in as uniform a manner as shall
be practicable and as it shall determine in its sole discretion to be equitable
among all participants exercising options to purchase Common Stock on such
Exercise Date, and continue all Offering Periods then in effect, or (y) provide
that the Company shall make a pro rata allocation of the shares available for
purchase on such Enrollment Date or
<PAGE> 6
Exercise Date, as applicable, in as uniform a manner as shall be practicable and
as it shall determine in its sole discretion to be equitable among all
participants exercising options to purchase Common Stock on such Exercise Date,
and terminate any or all Offering Periods then in effect pursuant to Section 20
hereof. The Company may make pro rata allocation of the shares available on the
Enrollment Date of any applicable Offering Period pursuant to the preceding
sentence, notwithstanding any authorization of additional shares for issuance
under the Plan by the Company's shareholders subsequent to such Enrollment Date.
9. Delivery. As promptly as practicable after each Exercise Date on
which a purchase of shares occurs, the Company shall arrange the delivery to
each participant, as appropriate, of a certificate representing the shares
purchased upon exercise of his or her option.
10. Withdrawal.
(a) A participant may withdraw all but not less than all the
payroll deductions credited to his or her account and not yet used to exercise
his or her option under the Plan at any time by giving written notice to the
Company in the form of Exhibit B to this Plan. All of the participant's payroll
deductions credited to his or her account shall be paid to such participant
promptly after receipt of notice of withdrawal and such participant's option for
the Offering Period shall be automatically terminated, and no further payroll
deductions for the purchase of shares shall be made for such Offering Period. If
a participant withdraws from an Offering Period, payroll deductions shall not
resume at the beginning of the succeeding Offering Period unless the participant
delivers to the Company a new subscription agreement.
(b) A participant's withdrawal from an Offering Period shall
not have any effect upon his or her eligibility to participate in any similar
plan which may hereafter be adopted by the Company or in succeeding Offering
Periods which commence after the termination of the Offering Period from which
the participant withdraws.
11. Termination of Employment.
Upon a participant's ceasing to be an Employee, for any reason,
he or she shall be deemed to have elected to withdraw from the Plan and the
payroll deductions credited to such participant's account during the Offering
Period but not yet used to exercise the option shall be returned to such
participant or, in the case of his or her death, to the person or persons
entitled thereto under Section 15 hereof, and such participant's option shall be
automatically terminated. The preceding sentence notwithstanding, a participant
who receives payment in lieu of notice of termination of employment shall be
treated as continuing to be an Employee for the participant's customary number
of hours per week of employment during the period in which the participant is
subject to such payment in lieu of notice.
12. Interest. No interest shall accrue on the payroll deductions of a
participant in the Plan.
<PAGE> 7
13. Stock.
(a) Subject to adjustment upon changes in capitalization of
the Company as provided in Section 19 hereof, the maximum number of shares of
the Company's Common Stock which shall be made available for sale under the Plan
shall be four hundred thousand (400,000) shares.
(b) The participant shall have no interest or voting right in
shares covered by his option until such option has been exercised.
(c) Shares to be delivered to a participant under the Plan
shall be registered in the name of the participant or in the name of the
participant and his or her spouse.
14. Administration. The Plan shall be administered by the Board or a
committee of members of the Board appointed by the Board. The Board or its
committee shall have full and exclusive discretionary authority to construe,
interpret and apply the terms of the Plan, to determine eligibility and to
adjudicate all disputed claims filed under the Plan. Every finding, decision and
determination made by the Board or its committee shall, to the full extent
permitted by law, be final and binding upon all parties.
15. Designation of Beneficiary.
(a) A participant may file a written designation of a
beneficiary who is to receive any shares and cash, if any, from the
participant's account under the Plan in the event of such participant's death
subsequent to an Exercise Date on which the option is exercised but prior to
delivery to such participant of such shares and cash. In addition, a participant
may file a written designation of a beneficiary who is to receive any cash from
the participant's account under the Plan in the event of such participant's
death prior to exercise of the option. If a participant is married and the
designated beneficiary is not the spouse, spousal consent shall be required for
such designation to be effective.
(b) Such designation of beneficiary may be changed by the
participant at any time by written notice. In the event of the death of a
participant and in the absence of a beneficiary validly designated under the
Plan who is living at the time of such participant's death, the Company shall
deliver such shares and/or cash to the executor or administrator of the estate
of the participant, or if no such executor or administrator has been appointed
(to the knowledge of the Company), the Company, in its discretion, may deliver
such shares and/or cash to the spouse or to any one or more dependents or
relatives of the participant, or if no spouse, dependent or relative is known to
the Company, then to such other person as the Company may designate.
16. Transferability. Neither payroll deductions credited to a
participant's account nor any rights with regard to the exercise of an option or
to receive shares under the Plan may be assigned,
<PAGE> 8
transferred, pledged or otherwise disposed of in any way (other than by will,
the laws of descent and distribution or as provided in Section 15 hereof) by the
participant. Any such attempt at assignment, transfer, pledge or other
disposition shall be without effect, except that the Company may treat such act
as an election to withdraw funds from an Offering Period in accordance with
Section 10 hereof.
17. Use of Funds. All payroll deductions received or held by the
Company under the Plan may be used by the Company for any corporate purpose, and
the Company shall not be obligated to segregate such payroll deductions.
18. Reports. Individual accounts shall be maintained for each
participant in the Plan. Statements of account shall be given to participating
Employees at least annually, which statements shall set forth the amounts of
payroll deductions, the Purchase Price, the number of shares purchased and the
remaining cash balance, if any.
19. Adjustments Upon Changes in Capitalization, Dissolution,
Liquidation, Merger or Asset Sale.
(a) Changes in Capitalization. Subject to any required action
by the shareholders of the Company, the Reserves, the maximum number of shares
each participant may purchase each Purchase Period (pursuant to Section 7), as
well as the price per share and the number of shares of Common Stock covered by
each option under the Plan which has not yet been exercised shall be
proportionately adjusted for any increase or decrease in the number of issued
shares of Common Stock resulting from a stock split, reverse stock split, stock
dividend, combination or reclassification of the Common Stock, or any other
increase or decrease in the number of shares of Common Stock effected without
receipt of consideration by the Company; provided, however, that conversion of
any convertible securities of the Company shall not be deemed to have been
"effected without receipt of consideration". Such adjustment shall be made by
the Board, whose determination in that respect shall be final, binding and
conclusive. Except as expressly provided herein, no issuance by the Company of
shares of stock of any class, or securities convertible into shares of stock of
any class, shall affect, and no adjustment by reason thereof shall be made with
respect to, the number or price of shares of Common Stock subject to an option.
(b) Dissolution or Liquidation. In the event of the proposed
dissolution or liquidation of the Company, the Offering Period then in progress
shall be shortened by setting a new Exercise Date (the "New Exercise Date"), and
shall terminate immediately prior to the consummation of such proposed
dissolution or liquidation, unless provided otherwise by the Board. The New
Exercise Date shall be before the date of the Company's proposed dissolution or
liquidation. The Board shall notify each participant in writing, at least ten
(10) business days prior to the New Exercise Date, that the Exercise Date for
the participant's option has been changed to the New Exercise Date and that the
participant's option shall be exercised automatically on the New Exercise Date,
unless prior to such date the participant has withdrawn from the Offering Period
as provided in Section 10 hereof.
<PAGE> 9
(c) Merger or Asset Sale. In the event of a proposed sale of
all or substantially all of the assets of the Company, or the merger of the
Company with or into another corporation, each outstanding option shall be
assumed or an equivalent option substituted by the successor corporation or a
Parent or Subsidiary of the successor corporation. In the event that the
successor corporation refuses to assume or substitute for the option, any
Purchase Periods then in progress shall be shortened by setting a new Exercise
Date (the "New Exercise Date") and any Offering Periods then in progress shall
end on the New Exercise Date. The New Exercise Date shall be before the date of
the Company's proposed sale or merger. The Board shall notify each participant
in writing, at least ten (10) business days prior to the New Exercise Date, that
the Exercise Date for the participant's option has been changed to the New
Exercise Date and that the participant's option shall be exercised automatically
on the New Exercise Date, unless prior to such date the participant has
withdrawn from the Offering Period as provided in Section 10 hereof.
20. Amendment or Termination.
(a) The Board of Directors of the Company may at any time and
for any reason terminate or amend the Plan. Except as provided in Section 19
hereof, no such termination can affect options previously granted, provided that
an Offering Period may be terminated by the Board of Directors on any Exercise
Date if the Board determines that the termination of the Offering Period or the
Plan is in the best interests of the Company and its shareholders. Except as
provided in Section 19 and this Section 20 hereof, no amendment may make any
change in any option theretofore granted which adversely affects the rights of
any participant. To the extent necessary to comply with Section 423 of the Code
(or any successor rule or provision or any other applicable law, regulation or
stock exchange rule), the Company shall obtain shareholder approval in such a
manner and to such a degree as required.
(b) Without shareholder consent and without regard to whether
any participant rights may be considered to have been "adversely affected," the
Board (or its committee) shall be entitled to change the Offering Periods, limit
the frequency and/or number of changes in the amount withheld during an Offering
Period, establish the exchange ratio applicable to amounts withheld in a
currency other than U.S. dollars, permit payroll withholding in excess of the
amount designated by a participant in order to adjust for delays or mistakes in
the Company's processing of properly completed withholding elections, establish
reasonable waiting and adjustment periods and/or accounting and crediting
procedures to ensure that amounts applied toward the purchase of Common Stock
for each participant properly correspond with amounts withheld from the
participant's Compensation, and establish such other limitations or procedures
as the Board (or its committee) determines in its sole discretion advisable
which are consistent with the Plan.
(c) In the event the Board determines that the ongoing
operation of the Plan may result in unfavorable financial accounting
consequences, the Board may, in its discretion and, to the extent necessary or
desirable, modify or amend the Plan to reduce or eliminate such accounting
consequence including, but not limited to:
<PAGE> 10
(1) altering the Purchase Price for any Offering Period
including an Offering Period underway at the time of the change in Purchase
Price;
(2) shortening any Offering Period so that Offering
Period ends on a new Exercise Date, including an Offering Period underway at the
time of the Board action; and
(3) allocating shares.
Such modifications or amendments shall not require
stockholder approval or the consent of any Plan participants.
21. Notices. All notices or other communications by a participant to
the Company under or in connection with the Plan shall be deemed to have been
duly given when received in the form specified by the Company at the location,
or by the person, designated by the Company for the receipt thereof.
22. Conditions Upon Issuance of Shares. Shares shall not be issued
with respect to an option unless the exercise of such option and the issuance
and delivery of such shares pursuant thereto shall comply with all applicable
provisions of law, domestic or foreign, including, without limitation, the
Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as
amended, the rules and regulations promulgated thereunder, and the requirements
of any stock exchange upon which the shares may then be listed, and shall be
further subject to the approval of counsel for the Company with respect to such
compliance.
As a condition to the exercise of an option, the Company may
require the person exercising such option to represent and warrant at the time
of any such exercise that the shares are being purchased only for investment and
without any present intention to sell or distribute such shares if, in the
opinion of counsel for the Company, such a representation is required by any of
the aforementioned applicable provisions of law.
23. Term of Plan. The Plan shall become effective upon the earlier to
occur of its adoption by the Board of Directors or its approval by the
shareholders of the Company. It shall continue in effect for a term of ten (10)
years unless sooner terminated under Section 20 hereof.
24. Automatic Transfer to Low Price Offering Period. To the extent
permitted by any applicable laws, regulations, or stock exchange rules if the
Fair Market Value of the Common Stock on any Exercise Date in an Offering Period
is lower than the Fair Market Value of the Common Stock on the Enrollment Date
of such Offering Period, then all participants in such Offering Period shall be
automatically withdrawn from such Offering Period immediately after the exercise
of their option on such Exercise Date and automatically re-enrolled in the
immediately following Offering Period as of the first day thereof.
<PAGE> 11
EXHIBIT A
IDG BOOKS WORLDWIDE, INC.
1998 EMPLOYEE STOCK PURCHASE PLAN
SUBSCRIPTION AGREEMENT
_____ Original Application Enrollment Date: ___________
_____ Change in Payroll Deduction Rate
_____ Change of Beneficiary(ies)
1. _______________________ hereby elects to participate in the IDG Books
Worldwide, Inc. 1998 Employee Stock Purchase Plan (the "Employee Stock
Purchase Plan") and subscribes to purchase shares of the Company's
Common Stock in accordance with this Subscription Agreement and the
Employee Stock Purchase Plan.
2. I hereby authorize payroll deductions from each paycheck in the amount
of ____% of my Compensation on each payday (from 1 to 10%) during the
Offering Period in accordance with the Employee Stock Purchase Plan.
(Please note that no fractional percentages are permitted.)
3. I understand that said payroll deductions shall be accumulated for the
purchase of shares of Common Stock at the applicable Purchase Price
determined in accordance with the Employee Stock Purchase Plan. I
understand that if I do not withdraw from an Offering Period, any
accumulated payroll deductions will be used to automatically exercise my
option.
4. I have received a copy of the complete Employee Stock Purchase Plan. I
understand that my participation in the Employee Stock Purchase Plan is
in all respects subject to the terms of the Plan. I understand that my
ability to exercise the option under this Subscription Agreement is
subject to shareholder approval of the Employee Stock Purchase Plan.
5. Shares purchased for me under the Employee Stock Purchase Plan should be
issued in the name(s) of (Employee or Employee and Spouse only):
_________________________.
6. I understand that if I dispose of any shares received by me pursuant to
the Plan within 2 years after the Enrollment Date (the first day of the
Offering Period during which I purchased such shares) or one year after
the Exercise Date, I will be treated for federal income tax purposes
<PAGE> 12
as having received ordinary income at the time of such disposition in an
amount equal to the excess of the fair market value of the shares at the
time such shares were purchased by me over the price which I paid for
the shares. I hereby agree to notify the Company in writing within 30
days after the date of any disposition of my shares and I will make
adequate provision for Federal, state or other tax withholding
obligations, if any, which arise upon the disposition of the Common
Stock. The Company may, but will not be obligated to, withhold from my
compensation the amount necessary to meet any applicable withholding
obligation including any withholding necessary to make available to the
Company any tax deductions or benefits attributable to sale or early
disposition of Common Stock by me. If I dispose of such shares at any
time after the expiration of the 2-year and 1-year holding periods, I
understand that I will be treated for federal income tax purposes as
having received income only at the time of such disposition, and that
such income will be taxed as ordinary income only to the extent of an
amount equal to the lesser of (1) the excess of the fair market value of
the shares at the time of such disposition over the purchase price which
I paid for the shares, or (2) 15% of the fair market value of the shares
on the first day of the Offering Period. The remainder of the gain, if
any, recognized on such disposition will be taxed as capital gain.
7. I hereby agree to be bound by the terms of the Employee Stock Purchase
Plan. The effectiveness of this Subscription Agreement is dependent upon
my eligibility to participate in the Employee Stock Purchase Plan.
8. In the event of my death, I hereby designate the following as my
beneficiary(ies) to receive all payments and shares due me under the
Employee Stock Purchase Plan:
NAME: (Please print)___________________________________________________________
(First) (Middle) (Last)
_______________________________ ____________________________________
Relationship
____________________________________
(Address)
<PAGE> 13
Employee's Social
Security Number: ____________________________________
Employee's Address: ____________________________________
____________________________________
____________________________________
I UNDERSTAND THAT THIS SUBSCRIPTION AGREEMENT SHALL REMAIN IN EFFECT THROUGHOUT
SUCCESSIVE OFFERING PERIODS UNLESS TERMINATED BY ME.
Dated:_________________________ ____________________________________
Signature of Employee
____________________________________
Spouse's Signature
(If beneficiary other than spouse)
<PAGE> 14
EXHIBIT B
IDG BOOKS WORLDWIDE, INC.
1998 EMPLOYEE STOCK PURCHASE PLAN
NOTICE OF WITHDRAWAL
The undersigned participant in the Offering Period of the IDG Worldwide
Books, Inc. 1998 Employee Stock Purchase Plan which began on ____________,
19____ (the "Enrollment Date") hereby notifies the Company that he or she hereby
withdraws from the Offering Period. He or she hereby directs the Company to pay
to the undersigned as promptly as practicable all the payroll deductions
credited to his or her account with respect to such Offering Period. The
undersigned understands and agrees that his or her option for such Offering
Period will be automatically terminated. The undersigned understands further
that no further payroll deductions will be made for the purchase of shares in
the current Offering Period and the undersigned shall be eligible to participate
in succeeding Offering Periods only by delivering to the Company a new
Subscription Agreement.
Name and Address of Participant:
________________________________
________________________________
________________________________
Signature:
________________________________
Date:____________________________
<PAGE> 1
EXHIBIT 10.6
CORPORATE SERVICES AGREEMENT
THIS AGREEMENT is made as of June 1, 1998 between INTERNATIONAL DATA
GROUP, INC., a Massachusetts corporation ("IDG"), and IDG BOOKS WORLDWIDE, INC.,
a Delaware corporation ("IDGB").
Preliminary Statement
In the event that IDGB issues to the public shares of its capital stock
pursuant to a registration statement under the Securities Act of 1933, IDGB
desires to obtain administrative and other services from IDG and IDG is willing
to furnish or make such services available to IDGB, subject to the parties'
agreement on the terms under which such services are to be provided. By this
Agreement, IDG and IDGB desire to confirm their agreement with respect to
services to be provided to IDGB commencing on the effective date of the
aforesaid public offering (the "Effective Date"), and to set forth the basis for
IDG's providing further services of the type referred to herein.
Agreements
IT IS MUTUALLY AGREED by the parties hereto as follows:
1. SERVICES TO BE PROVIDED INITIALLY.. Commencing on the Effective
Date, IDG through its corporate staff will provide or otherwise make available
to IDGB the services described in this section 1, for the term and consideration
as specified herein. Such services shall be performed by IDG in a manner
consistent with that in which such services have been performed by IDG in the
past.
1.1 Tax Services. IDG shall provide IDGB with the following tax
services: preparation of federal tax returns, preparation of state and local tax
returns (including income tax returns); filing of state sales and other state
tax returns; preparation of financial statement disclosures and calculation of
tax provisions for financial statement purposes; conducting negotiations with
tax authorities as necessary; and providing tax research and planning and
assistance with respect to federal, state and local audits. The tax services
described in this section 1.1 shall be provided by IDG until terminated pursuant
to the provisions of section 8. The fee payable by IDGB to IDG for such services
shall be $7,500 per month. Upon termination of such services, IDG shall provide
to IDGB copies of its records relating to federal, state and local tax returns
filed by on behalf of IDGB, and all other correspondence and documentation
reasonably required by IDGB relating to payment of its taxes.
1.2 Accounting Services. IDG shall provide IDGB with the following
accounting services: maintenance of IDGB' general ledger; maintenance of IDGB'
accounts payable records; and maintenance of IDGB' fixed asset records. Such
services shall also include information services support, including account
maintenance and reporting support, access to the on-line intranet reporting
tools, access to Essbase software (or its equivalent), and continued remote
<PAGE> 2
access availability to IDG's corporate databases to the same extent that such
databases are available to other IDG business units. The services described in
this section 1.2 shall be provided by IDG until terminated pursuant to the
provisions of section 8. The fee payable by IDGB to IDG for such services shall
be $27,500 per month.
1.3 Insurance Services. IDG shall from and after the Effective Date
continue in force the then existing liability, property, casualty, indemnity and
other business insurance policies applicable to IDGB. All of such insurance
coverage shall be maintained by IDG until the respective termination dates of
the current policies in effect with respect thereto. Schedule 1.3 attached
hereto and made a part hereof sets forth the insurance coverage to be provided
to IDGB pursuant to this section 1.3, including without limitation the policy
information with respect to such insurance, termination dates of each such
insurance policy and the monthly fee payable by IDGB with respect to current
coverage under each such policy. Unless IDGB gives IDG at least 30 days notice
prior to the termination date specified in Schedule 1.3 applicable to each such
insurance policy of its desire for continued coverage thereunder, coverage under
such policy shall expire with respect to IDGB on the expiration or renewal date
of such policy as specified therein.
1.4 Employee Benefit Services. From and after the Effective Date, and
through September 30, 1998, IDG shall provide administrative services, including
without limitation filing of all governmental reports, with respect to the
participation of IDGB employees in the following benefit plans: (a) the IDG
401(k) Plan; (b) the IDGB Section 125 Cafeteria Plan; (c) the IDGB medical,
dental, vision, life, AD&D and LTD insurance programs; and (d) the IDG Books
Worldwide, Inc. Employee Stock Ownership Plan (the "IDGB ESOP"). Prior to
September 30, 1998, IDGB shall at its expense amend the IDGB ESOP into a KSOP
and the 401(k) accounts of IDGB employees shall be transferred to such plan as
of September 30, 1998. Upon termination of the administration services provided
under this section 1.4, IDG shall provide IDGB with such information and records
as are reasonably requested by IDGB to enable it to administer the benefit plans
in which its employees are enrolled from and after October 1, 1998. The fee
payable by IDGB with respect to such services shall be $2,000 per month. IDGB
shall also reimburse IDG for the cost of any legal services incurred by IDG in
connection any required amendment of the IDG 401(k) plan, establishment of the
IDGB KSOP and the establishment of the benefit plans referred to in (b) and (d)
above.
1.5 Corporate Record-Keeping Services. IDG shall at no cost to IDGB
maintain all past tax, accounting and payroll records relating to IDGB, until
such time as such records shall be disposed of in accordance with applicable
legal requirements and IDG's normal record disposition policies. IDG shall give
IDGB 30 days' prior written notice of its intention to dispose of such records
and shall provide IDGB with the opportunity to retain the same.
1.6 Director Services. In the event that any officer or employee of
IDG acts as a director of IDGB, IDGB shall remit to IDG all director and other
fees which would otherwise be payable to such person for acting in such
capacity.
-2-
<PAGE> 3
1.7 Payroll Services. IDG shall provide IDGB with payroll services,
including payment processing by an outside vendor, Form 1099 preparation, and
distribution and maintenance of the IDGB employee database. Such services shall
continue until September 30, 1998, provided that such services may be extended
on a month-to-month basis upon 30 days' prior written notice by IDGB to IDG.
Upon termination of such services, IDG shall provide IDGB with all payroll
records for IDGB employees, including information for calendar year 1998. The
fee payable by IDGB to IDG for the services described in this section 1.7 shall
be $4,000 per month.
1.8 Trademark Transfers. IDG and IDGB have previously agreed that IDG
would transfer to IDGB approximately 400 trademark registrations and
applications that are currently in the name of IDG, are used by IDGB in
connection with its business, and are not covered by the Trademark License
Agreement between the parties of even date herewith. IDG agrees to take all
necessary action and file all necessary documents in order to complete the
transfer of such registrations and applications, and IDGB confirms its agreement
to reimburse IDG in accordance with the terms of this Agreement for the actual
costs incurred by IDG in connection with such transfers.
1.9 Trademark Maintenance Services. With respect to the trademarks
transferred or to be transferred to IDGB pursuant to section 1.8, IDG shall
continue to maintain such trademark applications and registrations, including
filing of appropriate renewals and maintenance of the trademark files and
databases, through September 30, 1998. IDG shall use reasonable efforts prior to
September 30, 1998 to train IDGB employees in the preparation and submission of
trademark applications and maintenance of trademarks generally. Upon termination
of the trademark services provided pursuant to this section 1.9, IDG shall
transfer the physical trademark files, current and historical, to IDGB. The fee
payable by IDGB to IDG for the trademark services described in this section 1.9
shall be $3,000 per month through September 30, 1998. Thereafter, if and to the
extent that additional services are requested by IDGB concerning the trademarks
to which this section 1.9 relates, IDGB shall pay IDG $75 for each hour of time
expended by IDG personnel in providing such services. In any event, prior and
subsequent to September 30, 1998, IDGB shall reimburse IDG promptly for all
out-of-pocket costs incurred by IDG in providing the services described in this
section 1.9
2. FUTURE SERVICES. Beginning on such date or dates subsequent to
the Effective Date as are mutually agreed to in writing by the parties, IDG and
its corporate staff will provide or otherwise make available to IDGB such
services in addition to those described in section 1 hereof as are reasonably
requested by IDGB, subject in each case to the parties' agreement to financial
consideration and other terms. In the event that IDGB desires to avail itself of
any of such additional services, the parties shall negotiate in good faith to
reach agreement on the scope and term of such services. When and if an agreement
is reached, the parties shall prepare an appropriate schedule or addendum to
this Agreement, in which the nature, scope and quality of such services is
described in detail and the compensation to be paid by IDGB to IDG for such
services is specified. Each such addendum shall be executed on behalf of each
party hereto, shall
-3-
<PAGE> 4
be effective as of its date and shall, upon such effective date, be incorporated
into and made an integral part of this Agreement.
3. SPECIAL SERVICES. In addition to service programs of the type
described in sections 1 and 2 hereof, certain specific services may be made
available to IDGB by IDG subsequent to the Effective Date on an as-requested
basis. These may include, but shall not be limited to, services specifically
requested by IDGB in writing which, in IDG's reasonable judgment, are not
routine administrative services or create unusual burdens or demands on IDG's
resources, such as litigation support, legal services, acquisition services,
corporate development, and public or investor relations services other than
routine shareholder communications. IDG will charge IDGB the costs actually
incurred (including an appropriate allocation for overhead and general and
administrative costs) for any such services that are requested by IDGB. Any
agreement for the provision of services pursuant to this section 3 shall be in
writing and shall include a description of the nature of such services, the
compensation to be paid by IDGB to IDG for such services, and any standards
applicable to such services.
4. OUT-OF-POCKET COSTS. In the event that IDG incurs out-of-pocket
costs, such as travel costs, in connection with services provided under this
Agreement, such costs will be paid by IDGB. To the extent that IDGB is billed by
an outside provider directly, IDGB shall pay such bill directly. If IDG is
billed for services provided by outside providers, IDG may pay the bill and
charge IDGB the amount of the bill or forward the bill to IDGB for payment by
IDGB.
5. PAYMENT OF FEES. The fees payable by IDGB for services provided
by IDG under this Agreement shall be payable from and after the first day of the
month following the month in which the Effective Date occurs. Thereafter, such
fees shall be paid quarterly. Within 15 days after the end of each calendar
quarter, IDG shall submit to IDGB a detailed statement of such fees, and such
statement shall be paid within 30 days of receipt by IDGB. The parties
acknowledge that, between the Effective Date and the last day of the month in
which the Effective Date occurs, the services of the type provided by IDG
hereunder are covered by the $50,000 monthly inter-company services fee
currently being paid by IDGB to IDG.
6. DIRECTORS AND OFFICERS OF IDGB. Nothing contained herein will be
construed to relieve the directors or officers of IDGB from responsibility for
the proper performance of their respective duties or to limit the exercise of
their powers in accordance with the Certificate of Incorporation or By-Laws of
IDGB or in accordance with any applicable statute or regulation.
7. LIABILITIES. In furnishing IDGB with management advice and other
services as herein provided, neither IDG nor any of its officers, directors or
agents shall be liable to IDGB or its creditors or shareholders for errors of
judgment or for anything except willful malfeasance, bad faith or gross
negligence in the performance of their duties or reckless disregard of their
obligations and duties under the terms of this Agreement. The provisions of this
Agreement are for the sole benefit of IDG and IDGB and will not, except to the
extent otherwise expressly stated herein, inure to the benefit of any third
party.
-4-
<PAGE> 5
8. TERM AND TERMINATION.
8.1 Term. The initial term of this Agreement shall commence on the
Effective Date and continue through the end of the then current fiscal year.
This Agreement shall automatically renew at the end of the initial term for
successive one-year terms until terminated in accordance with section 8.2
hereof. In the event that IDGB shall not have closed a public offering of its
capital stock by December 31, 1998, this Agreement shall not become effective
and shall no longer be binding on either party hereto in any respect.
8.2 Termination Generally. This Agreement may be terminated (a) by
IDGB at anytime on 90 days' prior notice to IDG, or (b) at the option of IDG
exercisable by written notice to IDGB, as of the date that IDG ceases to hold,
directly or indirectly, a majority of the outstanding voting stock of IDGB.
8.3 Termination of Specific Services. Specific services provided
hereunder may be terminated, or shall expire, as described in section 1 or in
any schedule or addendum hereto. If and to the extent that IDG incurs expenses
in connection with and resulting from termination of any specific services
provided hereunder, IDGB shall reimburse IDG for such costs or expenses promptly
upon receipt of an itemized account thereof; provided, however, that the
aggregate of such costs and expenses payable with respect to the termination of
any specific services hereunder shall not exceed $25,000.
8.4 Post-Termination Services. In the event of termination of this
Agreement, or a service provided hereunder, pursuant to section 8.2(a), IDG
shall be required at IDGB's option to continue to provide the terminated
services of the type then being provided to IDGB during the 90-day period
referred to in section 8.2(a) and, whether or not IDGB requests continuation of
such services, IDGB shall continue to pay IDG the costs of such services for
such 90-day period. Subsequent to such 90-day period, or in the event of
termination of this Agreement pursuant to section 8.2(b), corporate
administrative services of the kind provided under the Agreement may continue to
be provided to IDGB on an as-requested basis by IDGB, in which event IDGB shall
be charged by IDG a fee equal to the market rate for comparable services charged
by third-party vendors. Such fee will be charged monthly and payable by IDGB
within 30 days. The obligations of IDGB set forth in this section 8.4 shall
survive the termination of this Agreement.
9. STATUS. IDG shall be deemed to be an independent contractor and,
except as expressly provided or authorized in this Agreement, shall have no
authority to act for or represent IDGB.
10. OTHER ACTIVITIES OF IDG. IDGB recognizes that IDG now renders and
may continue to render management and other services to other companies that may
or may not have policies and conduct activities similar to those of IDGB. IDG
shall be free to render such advice and other services, and IDGB hereby consents
thereto. IDG shall devote so much of its time and attention to the performance
of its duties under this Agreement as it deems reasonable or necessary to
perform the services required hereunder in a manner consistent with that in
which such services have been performed by IDG in the past.
-5-
<PAGE> 6
11. NOTICES. All notices, requests, consents, and other
communications under this Agreement shall be in writing and shall be delivered
by hand, by guaranteed overnight delivery by means of a nationally recognized
overnight delivery service, by fax, or by first class certified or registered
mail, return receipt requested, postage prepaid, to the following addresses.
(a) If to IDGB, at 919 East Hillsdale Boulevard, Suite 400,
Foster City, California 94404, Attention: Chief Financial Officer, or at such
other address or addresses as may have been furnished in writing by IDGB to IDG,
with a copy in each case to Brian C. Erb, Esq., Wilson Sonsini Goodrich &
Rosati, 650 Page Mill Road, Palo Alto, CA 94304.
(b) If to IDG, at 5 Speen Street, Framingham, Massachusetts
01701, Attention: Vice President and Controller, or at such other address or
addresses as may have been furnished to IDGB in writing by IDG, with a copy in
each case to Edward N. Gadsby, Jr., Esq., Foley, Hoag & Eliot LLP, One Post
Office Square, Boston, Massachusetts 02109.
Notices provided in accordance with this section 11 shall be deemed delivered
upon personal delivery, upon actual receipt or on the third business day after
deposit in the mail.
12. NO ASSIGNMENT. This Agreement shall not be assignable by either
party except with the prior written consent of the other party to this
Agreement; provided, however, that this Agreement may without IDGB' consent be
assigned by IDG to another subsidiary of IDG or by any such subsidiary to an
affiliated corporation.
13. APPLICABLE LAW. This Agreement shall be governed by and construed
under the laws of the State of Delaware, without regard to its principles of
conflicts of laws.
14. PARAGRAPH TITLES. The paragraph titles used in this Agreement are
for convenience of reference only and will not be considered in the
interpretation or construction of any of the provisions thereof.
-6-
<PAGE> 7
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first written above.
INTERNATIONAL DATA GROUP, INC.
By:______________________________________
IDG BOOKS WORLDWIDE, INC.
By:______________________________________
-7-
<PAGE> 8
Schedule 1.3
IDGB Insurance Coverage
<TABLE>
<CAPTION>
Monthly
Type of Insurer and Expiration Date Fee Payable
Insurance Policy Number of Current Policy By IDGB
- --------- ------------- ----------------- -------
<S> <C> <C> <C>
Property and liability - Chubb-35-3332322 9/30/98 $ 702
basic
Property and liability - Chubb (98) 7975-38-96 9/30/98 125
umbrella
Workers' compensation Chubb (98) 7164-67-66 9/30/98 1,164
(federal)
</TABLE>
-8-
<PAGE> 1
EXHIBIT 10.7
REGISTRATION RIGHTS AGREEMENT
THIS AGREEMENT is made as of June 1, 1998 between IDG Enterprises, Inc.,
a Delaware corporation (the "Original Stockholder"; together with its permitted
successors and assigns, the "Stockholders"), and IDG BOOKS WORLDWIDE, INC., a
Delaware corporation (the "Company").
Preliminary Statement
The Original Stockholder currently owns all of the outstanding Class A
common stock, $.001 par value, of the Company ("Class A Common Stock"). The
Original Stockholder and the Company contemplate that the Company will issue to
the public shares of Class A Common Stock pursuant to a registration statement
under the Securities Act of 1933 filed with the Commission on May 22, 1998 (the
"IPO").
The Company and the Original Stockholder desire to provide for certain
arrangements with respect to the registration by the Company under the
Securities Act of 1933 of shares of Class A Common Stock held by the
Stockholders following the public offering. The purpose of this Agreement is to
set forth the understanding of the parties with respect to the registration
rights to be granted to the Stockholders by the Company as of the effective date
of the IPO (the "Effective Date").
Agreements
IT IS MUTUALLY agreed by the parties hereto as follows:
1. Certain Definitions.
As used in this Agreement, the following terms shall have the following
respective meanings:
"Commission" means the Securities and Exchange Commission, or any
other Federal agency at the time administering the Securities Act.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended, or any similar Federal statute, and the rules and regulations of the
Commission issued under such Act, as they each may, from time to time, be in
effect.
"Registration Statement" means a registration statement filed by
the Company with the Commission for a public offering and sale of Class A Common
Stock (other than a registration statement on Form S-8 or Form S-4, or their
successors, or any other form for a
<PAGE> 2
similar limited purpose, or any registration statement covering only securities
proposed to be issued in exchange for securities or assets of another
corporation).
"Registration Expenses" means the expenses described in
Section 4.
"Registrable Shares" means (a) the shares of Class A Common Stock
that are owned as of the date of this Agreement by the Original Stockholder, (b)
any shares of Class A Common Stock hereafter acquired by the Original
Stockholder in any transaction whatsoever, including without limitation on
conversion of shares of Class B common stock, $.001 par value, of the Company
hereafter acquired by the Original Stockholder pursuant to a Share Exchange
Agreement dated as of May 21, 1998 to which the Company the Original Stockholder
are parties, (c) any shares of Class A Common Stock referred to in (a) or (b)
that are transferred to, and with respect to which the rights provided by this
Agreement are assigned to, a successor Stockholder by virtue of Section 9 of
this Agreement, and (d) any other shares of Class A Common Stock issued in
respect of such shares (because of stock splits, stock dividends,
reclassifications, recapitalizations or similar events); provided, however, that
shares of Class A Common Stock which are Registrable Shares shall cease to be
Registrable Shares (i) upon any sale pursuant to a Registration Statement or
pursuant to Rule 144 under the Securities Act, (ii) if, in the written opinion
of counsel to the Company addressed to the Stockholder, all of such Shares held
by the Stockholder may be sold without restriction pursuant to Rule 144(k) under
the Securities Act, or (iii) upon any sale in any manner to a person or entity
which is not entitled, by virtue of Section 9 of this Agreement, to the rights
provided by this Agreement.
"Securities Act" means the Securities Act of 1933, as amended, or
any similar Federal statute, and the rules and regulations of the Commission
issued under such Act, as they each may, from time to time, be in effect.
2. Registration.
2.1 Whenever the Company proposes to file a Registration Statement
(either for its own account or in order to register stock held by any other
stockholder) at any time and from time to time (other than in connection with
its IPO), it will, prior to such filing, give written notice to all Stockholders
of its intention to do so and, upon the written request of a Stockholder or
Stockholders given within 15 days after receipt of such notice from the Company
(which request shall state the intended method of disposition of such
Registrable Shares), the Company shall use its reasonable best efforts to cause
all Registrable Shares which the Company has been requested by such Stockholder
or Stockholders to register to be registered under the Securities Act to the
extent necessary to permit their sale or other disposition in accordance with
the intended methods of distribution specified in the request of such
Stockholder or Stockholders; provided that the Company shall have the right to
postpone or withdraw any registration effected pursuant to this Section 2
without obligation to any Stockholder.
2.2 In connection with any registration under this Section 2
involving a firm commitment underwriting, the Company shall not be required to
include any Registrable Shares in such registration unless the holders thereof
accept the terms of the underwriting as agreed upon between the Company and the
underwriters selected by it. If in the opinion (which shall be either written
or, if not written, presented orally to the Board of Directors of International
Data
-2-
<PAGE> 3
Group, Inc., who shall have an opportunity to discuss the rationale of the
opinion) of the managing underwriter selected by the Board of Directors of the
Company, if there is only one managing underwriter of such an underwriting, or
in the opinion of a majority of the managing underwriters selected by the Board
of Directors of the Company, if there is more than one, it is appropriate
because of marketing factors to limit the number of Registrable Shares to be
included in the offering, then the Company shall be required to include in the
registration only that number of Registrable Shares, if any, which the majority
of such principal underwriters believes should be included therein. If the
number of Registrable Shares to be included in the offering in accordance with
the foregoing is less than the total number of shares which the holders of
Registrable Shares have requested to be included, then the holders of
Registrable Shares who have requested registration and other holders of
securities entitled to include them in such registration shall participate in
the registration pro rata based upon their total ownership of shares of Class A
Common Stock. If any holder would thus be entitled to include more securities
than such holder requested to be registered, the excess shall be allocated among
other requesting holders pro rata in the manner described in the preceding
sentence.
3. Registration Procedures.
If and whenever the Company is required by the provisions of this
Agreement to use its reasonable best efforts to effect the registration of any
of the Registrable Shares under the Securities Act, the Company shall:
3.1 file with the Commission a Registration Statement with respect to
such Registrable Shares and, subject to the provisions of section 2.1 of this
Agreement, use its reasonable best efforts to cause that Registration Statement
to become and remain effective;
3.2 as expeditiously as possible prepare and file with the Commission
any amendments and supplements to the Registration Statement and the prospectus
included in the Registration Statement as may be necessary to keep the
Registration Statement effective, in the case of a firm commitment underwritten
public offering, until each underwriter has completed the distribution of all
securities purchased by it and, in the case of any other offering, until the
earlier of the sale of all Registrable Shares covered thereby or 180 days after
the effective date thereof;
3.3 as expeditiously as possible furnish to each selling Stockholder
such reasonable numbers of copies of the prospectus, including a preliminary
prospectus, in conformity with the requirements of the Securities Act, and such
other documents as the selling Stockholder may reasonably request in order to
facilitate the public sale or other disposition of the Registrable Shares owned
by the selling Stockholder; and
3.4 as expeditiously as possible use its reasonable best efforts to
register or qualify the Registrable Shares covered by the Registration Statement
under the securities or Blue Sky laws of such states as the selling Stockholders
shall reasonably request, and do any and all other acts and things that may be
reasonably necessary to enable the selling Stockholders to consummate
-3-
<PAGE> 4
the public sale or other disposition in such states of the Registrable Shares
owned by the selling Stockholder; provided, however, that the Company shall not
be required in connection with this Section to qualify as a foreign corporation
or execute a general consent to service of process in any jurisdiction.
If the Company has delivered preliminary or final prospectuses to the
selling Stockholders and after having done so the prospectus is amended or
supplemented to comply with the requirements of the Securities Act, the Company
shall promptly notify the selling Stockholders and, if requested, the selling
Stockholders shall immediately cease making offers of Registrable Shares and
return all prospectuses to the Company. The Company shall promptly provide the
selling Stockholders with revised prospectuses and, following receipt of the
revised prospectuses, the selling Stockholders shall be free to resume making
offers of the Registrable Shares.
4. Allocation of Expenses.
The Company will pay all Registration Expenses of all registrations
under this Agreement. For purposes of this Section 4, the term "Registration
Expenses" shall mean all expenses incurred by the Company in complying with this
Agreement, including, without limitation, all registration and filing fees,
exchange and Nasdaq listing fees, printing expenses, fees and expenses of
counsel for the Company, state Blue Sky fees and expenses, and the expense of
any special audits incident to or required by any such registration, but
excluding underwriting discounts, selling commissions and the fees and expenses
of selling Stockholders' own counsel, if any.
5. Indemnification and Contribution.
5.1 In the event of any registration of any of the Registrable Shares
under the Securities Act pursuant to this Agreement, the Company will indemnify
and hold harmless the seller of such Registrable Shares, each underwriter of
such Registrable Shares, and each other person, if any, who controls such seller
or underwriter within the meaning of the Securities Act or the Exchange Act
against any losses, claims, damages or liabilities, joint or several, to which
such seller, underwriter or controlling person may become subject under the
Securities Act, the Exchange Act, state securities or Blue Sky laws or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in any Registration Statement
under which such Registrable Shares were registered under the Securities Act,
any preliminary prospectus or final prospectus contained in the Registration
Statement, or any amendment or supplement to such Registration Statement, or
arise out of or are based upon the omission or alleged omission to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading; and the Company will reimburse such seller, underwriter
and each such controlling person for any legal or any other expenses reasonably
incurred by such seller, underwriter or controlling person in connection with
investigating or defending any such loss, claim, damage, liability or action;
provided, however, that the Company
-4-
<PAGE> 5
will not be liable in any such case to the extent that any such loss, claim,
damage or liability arises out of or is based upon any untrue statement or
omission made in such Registration Statement, preliminary prospectus or final
prospectus, or any such amendment or supplement, in reliance upon and in
conformity with information furnished to the Company, in writing, by or on
behalf of such seller, underwriter or controlling person specifically for use in
the preparation thereof.
5.2 In the event of any registration of any of the Registrable Shares
under the Securities Act pursuant to this Agreement, each seller of Registrable
Shares, severally and not jointly, will indemnify and hold harmless the Company,
each of its directors and officers and each underwriter (if any) and each
person, if any, who controls the Company or any such underwriter within the
meaning of the Securities Act or the Exchange Act, against any losses, claims,
damages or liabilities, joint or several, to which the Company, such directors
and officers, underwriter or controlling person may become subject under the
Securities Act, Exchange Act, state securities or Blue Sky laws or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon any untrue statement or alleged untrue
statement of a material fact contained in any Registration Statement under which
such Registrable Shares were registered under the Securities Act, any
preliminary prospectus or final prospectus contained in the Registration
Statement, or any amendment or supplement to the Registration Statement, or
arise out of or are based upon any omission or alleged omission to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading, if the statement or omission was made in reliance upon
and in conformity with information relating to such seller furnished in writing
to the Company by or on behalf of such seller specifically for use in connection
with the preparation of such Registration Statement, prospectus, amendment or
supplement; provided, however, that the obligations of each such Stockholder to
the Company hereunder shall be limited to an amount equal to the net proceeds to
such Stockholder of Registrable Shares sold in connection with such
registration.
5.3 Each party entitled to indemnification under this Section 5 (the
"Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom; provided, that counsel for the Indemnifying
Party who shall conduct the defense of such claim or litigation shall be
approved by the Indemnified Party (whose approval shall not be unreasonably
withheld); and, provided further, that the failure of any Indemnified Party to
give notice as provided herein shall not relieve the Indemnifying Party of its
obligations under this Section 5 except to the extent that the failure to give
such notice has caused actual harm to the Indemnifying Party. The Indemnified
Party may participate in such defense at such party's expense; provided,
however, that the Indemnifying Party shall pay such expense if representation of
such Indemnified Party by the counsel retained by the Indemnifying Party would
be inappropriate due to actual or potential differing interests between the
Indemnified Party and any other party represented by such counsel in such
proceeding. No Indemnifying Party, in the defense of any such claim or
litigation, shall, except with the consent of each Indemnified Party, consent to
entry of any judgment or enter into any
-5-
<PAGE> 6
settlement which does not include as an unconditional term thereof the giving by
the claimant or plaintiff to such Indemnified Party of a release from all
liability in respect of such claim or litigation, and no Indemnified Party shall
consent to entry of any judgment or settle such claim or litigation without the
prior written consent of the Indemnifying Party.
5.4 In order to provide for just and equitable contribution to joint
liability under the Securities Act in any case in which either (i) any holder of
Registrable Shares exercising rights under this Agreement, or any controlling
person of any such holder, makes a claim for indemnification pursuant to this
Section 5 but it is judicially determined (by the entry of a final judgment or
decree by a court of competent jurisdiction and the expiration of time to appeal
or the denial of the last right of appeal) that such indemnification may not be
enforced in such case notwithstanding the fact that this Section 5 provides for
indemnification in such case, or (ii) contribution under the Securities Act may
be required on the part of any such selling Stockholder or any such controlling
person in circumstances for which indemnification is provided under this Section
5; then, in each such case, the Company and such Stockholder will contribute to
the aggregate losses, claims, damages or liabilities to which they may be
subject (after contribution from others) in such proportions so that such holder
is responsible for the portion represented by the percentage that the public
offering price of its Registrable Shares offered by the Registration Statement
bears to the public offering price of all securities offered by such
Registration Statement, and the Company is responsible for the remaining
portion; provided, however, that, in any such case, (A) no such holder will be
required to contribute any amount in excess of the net proceeds to it of all
Registrable Shares sold by it pursuant to such Registration Statement, and (B)
no person or entity guilty of fraudulent misrepresentation within the meaning of
Section 11(f) of the Securities Act shall be entitled to contribution from any
person or entity who is not guilty of such fraudulent misrepresentation.
6. Information by Holder.
Each Stockholder including Registrable Shares in any registration shall
furnish to the Company such information regarding such Stockholder and the
distribution proposed by such Stockholder as the Company may reasonably request
in writing and as shall be required in connection with any registration,
qualification or compliance referred to in this Agreement.
7. Reports Under the Exchange Act.
With a view to making available to the Stockholders the benefits of Rule
144 under the Securities Act and any other rule or regulation of the Commission
that may at any time permit a Stockholder to sell securities of the Company to
the public without registration, the Company agrees to use its reasonable best
efforts to:
7.1 make and keep public information available, as those terms are
understood and defined in Rule 144, at all times subsequent to 90 days after the
effective date of the first Registration Statement covering an underwritten
public offering filed by the Company;
-6-
<PAGE> 7
7.2 file with the Commission in a timely manner all reports and other
documents required of the Company under the Securities Act and the Exchange Act;
and
7.3 furnish to any Stockholder promptly upon request a written
statement by the Company that it has complied with the reporting requirements of
Rule 144 (at any time after 90 days after the effective date of said first
Registration Statement filed by the Company), and of the Securities Act and the
Exchange Act (at any time after it has become subject to such reporting
requirements), a copy of the most recent annual or quarterly report of the
Company, and such other reports and documents so filed by the Company as may be
reasonably requested in availing any such holder to take advantage of any rule
or regulation of the Commission permitting the selling of any such securities
without registration.
8. Effective Date and Termination.
This Agreement shall commence on the Effective Date and shall remain in
effect so long as any Registrable Shares are outstanding. This Agreement may be
terminated by the written agreement of the Company and the holders of at least
90% in interest of the voting power of the Registrable Shares. In the event that
the Company shall not have closed the IPO by December 31, 1998, this Agreement
shall not become effective and shall no longer be binding on either party hereto
in any respect.
9. Transfers of Rights.
This Agreement, and the rights and obligations of the Stockholders
hereunder, may be assigned by the Stockholders as follows:
9.1 by the Original Stockholder, to any person or entity (a) to whom
or which the Original Stockholder transfers Registrable Shares or grants the
right or option to purchase Registrable Shares, and (b) who or which is an
officer or director of the Original Stockholder or an "affiliate" or "associate"
(as such terms are defined under the Securities Act) of the Original Stockholder
(an "IDG Affiliated Stockholder"), in which event the rights provided to the
Original Stockholder under this Agreement shall automatically and without
further action be assigned to such transferee or grantee in respect of such
shares;
9.2 by any IDG Affiliated Stockholder, to any other person or entity
to whom the IDG Affiliated Stockholder transfers Registrable Shares and who is
also an IDG Affiliated Stockholder, in which event the rights provided to
Stockholders under this Agreement shall automatically and without further action
be assigned to such transferee in respect of such shares;
9.3 by any Stockholder, to any person or entity, other than a
transferee pursuant to Section 9.1 or 9.2, to whom the Stockholder transfers
Registrable Shares, in which event the rights provided to Stockholders under
this Agreement may be assigned to such transferee in respect of such shares;
provided that the number of Registrable Shares so transferred is not less than
100,000 shares (as adjusted for future stock splits, stock dividends,
reclassifications, recapitalization or similar events); and provided further
that the Company receives written notice
-7-
<PAGE> 8
from such transferee within 30 days of such transfer and assignment to the
effect that such transferee has been assigned the rights provided to
Stockholders under this Agreement.
In any case in which rights are assigned pursuant to this Section 9, the
transferee shall be deemed a "Stockholder" for purposes of this Agreement and be
bound by all the obligations to which Stockholders are bound under this
Agreement.
10. General.
10.1 Notices.
(a) All notices, requests, consents and other communications
under this Agreement shall be in writing and shall be delivered by hand, by
guaranteed overnight delivery by means of a nationally recognized overnight
delivery service, by fax, or by first class certified or registered mail, return
receipt requested, postage prepaid, to the following addresses:
(i) If to the Company, at 919 East Hillsdale Boulevard, Suite
400, Foster City, California 94404, Attention: Jim Doehrman, Vice
President and Chief Financial Officer, or at such other address or
addresses as may have been furnished in writing by the Company to the
Stockholder or Stockholders, with a copy to Brian C. Erb, Esq., Wilson
Sonsini Goodrich & Rosati, 650 Page Mill Road, Palo Alto, CA 94304;
(ii) If to the Original Stockholder, at One Exeter Plaza,
Boston, Massachusetts 02116, Attention: James G. Ghirardi, Vice
President - Finance, or at such other address or addresses as may have
been furnished to the Company in writing by the Original Stockholder,
with a copy to Edward N. Gadsby, Jr. Esq., Foley, Hoag & Eliot LLP, One
Post Office Square, Boston, Massachusetts 02109; and
(iii) If to a Stockholder other than IDG Enterprises, Inc., at
such address or addresses as may have been furnished to the Company by
such Stockholder or, if no such address has been furnished, at the
address specified in subparagraph (ii).
(b) Notices provided in accordance with this Section 10 shall
be deemed delivered upon personal delivery, upon actual receipt or on the third
business day after deposit in the mail.
10.2 Entire Agreement. This Agreement embodies the entire agreement and
understanding between the parties hereto with respect to the subject matter
hereof and supersedes all prior agreements and understandings relating to such
subject matter.
10.3 Amendments and Waivers. Any term of this Agreement may be amended
and the observance of any term of this Agreement may be waived (either generally
or in a particular instance and either retroactively or prospectively), with the
written consent of the Company and the holders of at least 90% in interest of
the voting power of the Registrable Shares; provided, however, that this
Agreement may be amended with the consent of the holders of less than all
-8-
<PAGE> 9
Registrable Shares only in a manner which affects all Registrable Shares in the
same fashion. No waivers of or exceptions to any term, condition or provision of
this Agreement, in any one or more instances, shall be deemed to be, or
construed as, a further or continuing waiver of any such term, condition or
provision.
10.4 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original, but all of which
shall be one and the same document.
10.5 Severability. The invalidity or unenforceability of any provision
of this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement.
10.6 Governing Law. This Agreement shall be governed by and construed
in accordance with the substantive laws of Delaware, without regard to its
principles of conflicts of laws.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first written above.
IDG ENTERPRISES, INC.
By:_____________________________________
Name:
Title:
IDG BOOKS WORLDWIDE, INC.
By:_____________________________________
Name:
Title:
-9-
<PAGE> 1
EXHIBIT 10.9
NON-COMPETITION AGREEMENT
THIS NON-COMPETITION AGREEMENT is made as of the 1st day of June, 1998,
by and between INTERNATIONAL DATA GROUP, INC., a Massachusetts corporation
("IDG"), and IDG BOOKS WORLDWIDE, INC., a Delaware corporation ("IDGB").
Preliminary Statement
IDGB and IDG, which is currently the parent corporation of IDGB,
contemplate that in 1998 IDGB may issue shares of its capital stock in a
registered public offering, and that upon consummation of that offering IDGB
will engage primarily in the business of book publishing. The purpose of this
Agreement is to set forth the understanding of the parties with respect to
restrictions upon IDG's participation in certain activities engaged in by IDGB.
Agreements
IT IS MUTUALLY AGREED by the parties hereto as follows:
1. During the term of this Agreement, IDG 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 (a "Competitive Business"), nor
will IDG itself engage primarily in a Competitive Business.
2. Notwithstanding the provisions of section 1, IDG and its
subsidiaries and affiliates may (i) continue to produce Dummies Daily
Internet-based content, and (ii) own, directly or indirectly, any amount of the
capital stock of IDGB and not more than 5% of any class of "publicly traded
securities," or 50% of any class of securities other than "publicly traded
securities," of any corporation or other entity which is engaged in a
Competitive Business. For purposes of this section 2, the term "publicly traded
securities" shall mean securities that are listed on a U.S. or foreign
securities exchange or traded on either the Nasdaq National Market or the Nasdaq
SmallCap Market.
3. The parties acknowledge that money damages alone will not
adequately compensate IDGB for breach of any of the covenants and agreements
herein and, therefore, agree that in the event of the breach or threatened
breach of any such covenant or agreement, in addition to all other remedies
available to IDGB, at law, in equity or otherwise, IDGB shall be entitled to
injunctive relief compelling specific performance of, or other compliance with,
the terms hereof.
4. (a) In the event that any provision of this Agreement shall be
determined to be unenforceable by any court of competent jurisdiction by reason
of its extending for too great a period of time or over too large a geographic
area or over too great a range of activities, it
<PAGE> 2
shall be interpreted to extend only over the maximum period of time, geographic
area or range of activities as to which it may be enforceable.
(b) If, after application of the immediately preceding
paragraph, any provision of this Agreement shall be determined to be invalid,
illegal or otherwise unenforceable by any court of competent jurisdiction, the
validity, legality and enforceability of the other provisions of this Agreement
shall not be affected thereby. Any invalid, illegal or unenforceable provision
of this Agreement shall be severable, and after any such severance, all other
provisions hereof shall remain in full force and effect.
5. This Agreement shall become effective upon the consummation of a
registered public offering by IDGB of its capital stock. This Agreement shall
terminate upon the earlier of (a) the date on which IDG ceases to hold shares of
capital stock of IDGB constituting a majority of the voting power of all such
shares, or (b) the fifth anniversary of the effective date of this Agreement. In
the event that IDGB has not consummated a public offering of its capital stock
by December 31, 1998, this Agreement shall terminate in all respects and shall
not thereafter be effective or binding on either party for any purpose
whatsoever.
6. (a) All notices, requests, consents, and other communications
under this Agreement shall be in writing and shall be delivered by hand, by
guaranteed overnight delivery by means of a nationally recognized overnight
delivery service, by fax, or by first class certified or registered mail, return
receipt requested, postage prepaid, to the following addresses:
(i) If to IDGB, at 919 East Hillsdale Boulevard, Suite 400,
Foster City, California 94404, Attention: Chief Financial Officer, or at
such other address or addresses as may have been furnished in writing by
IDGB to IDG; or
(ii) If to IDG, at One Exeter Plaza, Boston, Massachusetts
02116, Attention: Vice President - Finance, or at such other address or
addresses as may have been furnished to IDGB in writing by IDG.
(b) Notices provided in accordance with this section 6 shall
be deemed delivered upon personal delivery, upon actual receipt or on the third
business day after deposit in the mail.
7. No failure or delay by IDGB in exercising any right or remedy
hereunder shall operate as a waiver thereof, and a waiver of a particular right
or remedy on one occasion shall not be deemed a waiver of any other right or
remedy or a waiver on any subsequent occasion.
8. This Agreement shall be binding upon and inure to the benefit of
the parties hereto and their respective legal representatives, successors, and
assigns.
9. Neither this Agreement nor any part hereof may be modified,
amended, terminated, waived or discharged except by a writing duly signed on
behalf of each party hereto.
-2-
<PAGE> 3
10. This Agreement shall be governed by, and construed and enforced
in accordance with, the substantive laws of the State of Delaware, without
regard to its principles of conflicts of laws.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first written above.
INTERNATIONAL DATA GROUP, INC.
By:_____________________________________
IDG BOOKS WORLDWIDE, INC.
By:_____________________________________
-3-
<PAGE> 1
EXHIBIT 10.10
TAX ALLOCATION AGREEMENT
THIS AGREEMENT is made as of June 1, 1998 between INTERNATIONAL DATA
GROUP, INC., a Massachusetts corporation ("IDG"), and IDG BOOKS WORLDWIDE, INC.,
a Delaware corporation ("IDGB"; the term "IDGB" meaning IDGB and those of its
subsidiaries that are members of an affiliated group of corporations including
IDGB within the meaning of Section 1504(a) of the Internal Revenue Code of 1986,
as amended (the "Code")).
Preliminary Statement
IDG is currently the parent of an affiliated group of corporations
(including IDGB) within the meaning of Section 1504(a) of the Code ("IDG
Group"). IDG Group files consolidated returns for United States federal income
tax purposes ("Federal Returns"), files state income tax returns on a combined,
consolidated, unitary or similar basis ("State Returns"), and also files various
sales, property and miscellaneous tax returns ("Other Returns").
IDG and IDGB contemplate that in 1998 IDGB will issue shares of its
capital stock in a registered public offering, with the result that IDGB,
effective as of the closing date of the public offering (the "Separation Date"),
will no longer be part of IDG Group. On the Separation Date, after IDGB ceases
to be part of IDG Group for purposes of filing Federal Returns and most State
Returns, the Continuing IDG Group (as defined hereinafter) and IDGB may still be
required, or may find it advantageous, to file State Returns and Other Returns
in certain states where a combined or unitary tax return is available, even
though consolidation for purposes of Federal Returns is not then available. Such
continuing State Returns and Other Returns are referred to herein as "Continuing
Non-Federal Returns." The purpose of this Agreement is to set forth the
understanding of the parties with respect to the Federal Returns, State Returns,
Other Returns and Continuing Non-Federal Returns. Foreign tax returns are not
subject to this Agreement.
Agreements
IT IS MUTUALLY agreed by the parties hereto as follows:
1. CERTAIN DEFINITIONS; CONSTRUCTION.
1.1 The term "Continuing IDG Group" means the group of corporations
of which IDG is the common parent and with which IDG files an affiliated
consolidated federal income tax return, but excluding IDGB and subsidiaries of
IDGB that may exist now or in the future. For purposes of this Agreement, the
Continuing IDG Group shall be treated as a single corporate entity. The
Continuing IDG Group, on the one hand, and IDGB and its subsidiaries, on the
other, are sometimes herein referred to collectively as the "Two Companies" or
the "Companies." This Agreement anticipates that IDG will set aside and retain
certain sums calculated as provided herein. All references to IDG paying sums to
itself pursuant to this Agreement shall be satisfied by IDG setting aside sums
in respect of the obligations established under this Agreement.
<PAGE> 2
-2-
1.2. The section titles used herein are for convenience of reference
only and will not be considered in the interpretation or construction of any of
the provisions hereof. Words may be construed in the singular or the plural as
the context requires. All references to years refer to the tax year of IDG and
IDGB, which in each case end on September 30th in each year, although nothing
contained in this Agreement shall require either IDG or IDGB to maintain
September 30th as its tax year end.
2. FILING OF TAX RETURNS.
2.1. Federal Returns. For all fiscal periods ending on the Separation
Date as to which a consolidated Federal Return is appropriate in accordance with
the terms of this Agreement, IDG as the common parent will prepare and file or
cause to be prepared and filed the Federal Returns and any estimated payments
related thereto for the Continuing IDG Group and IDGB. IDGB will reimburse IDG
for IDGB's portion of the tax in accordance with this Agreement. Such
reimbursement will be the tax IDGB would have paid on a separate return basis.
2.2 State Returns and Other Returns. For all fiscal periods ending on
the Separation Date as to which a combined, consolidated, unitary or similar
State Return or Other Return is appropriate in accordance with the terms of this
Agreement, IDG as the common parent will prepare and file or cause to be
prepared and filed the State Returns and the Other Returns and any estimated
payments related thereto for the Continuing IDG Group and IDGB. Such State or
Other Returns may be filed on a combined, consolidated, or unitary basis or
using any other basis that IDG believes will result in a lower overall tax
liability to the Two Companies, for all States and other jurisdictions. IDGB
will reimburse IDG for IDGB's portion of the tax in accordance with this
Agreement. Such reimbursement will be the tax IDGB would have paid on a separate
return basis, but only if it was required to file a return in that jurisdiction.
2.3 Continuing Non-Federal Returns. For all fiscal periods commencing
after the Separation Date as to which a combined, consolidated, unitary or
similar Continuing Non-Federal Return is appropriate in accordance with the
terms of this Agreement, IDG will prepare and file or cause to be prepared and
filed the Continuing Non-Federal Returns and any estimated payments related
thereto for the Continuing IDG Group and IDGB. Such Continuing Non-Federal
Returns may be filed on a combined, consolidated or unitary basis, or any other
basis that IDG believes will result in lower overall tax liability to the Two
Companies, for all jurisdictions,. IDGB will reimburse IDG for IDGB's portion of
the tax in accordance with this Agreement. Such reimbursement will be the tax
IDGB would have paid on a separate return basis, but only if it was required to
file a return in that jurisdiction.
3. TIME OF PAYMENT OF TAX OBLIGATIONS TO IDG.
With respect to any fiscal period for which it is contemplated that IDG
will prepare and file a return pursuant to Section 2 of this Agreement, the
obligations of the Companies for tax payments in connection with Federal
Returns, State Returns, Other Returns and Continuing Non-Federal Returns will be
determined and paid as follows:
<PAGE> 3
-3-
3.1 Not later than the 15th day after the end of the fourth, sixth,
ninth and twelfth months of each consolidated taxable year of IDG, IDG will make
a reasonable determination (consistent with the provisions of Section 6655 of
the Code and any comparable provisions of state or local law) of the separate
Federal and State income tax liability, and the separate sales tax, property tax
and miscellaneous tax liability, that each Company would be required to pay as
estimated payments on a separate return basis for that period. Each Company
shall pay to IDG the amount of such liability within ten days.
3.2 After the end of IDG's fourth accounting quarter and before the
15th day of the third month thereafter, each Company will promptly pay to IDG
the entire amounts estimated to be due and payable under such Company's Federal
Returns and State Returns, and under such Company's Other Returns and Continuing
Non-Federal Returns, in each case as if filed on a separate return basis, less
all amounts previously paid with respect to that year pursuant to Section 3.1
hereof.
3.3 If, upon the filing of any combined, consolidated, unitary or
similar Federal Return or State Return, Other Return, or Continuing Non-Federal
Return, a revised calculation is made in the manner set forth in Section 3.2
hereof, and it is determined that either Company has paid to IDG with respect to
the consolidated taxable year an amount greater than that required by Section
3.2, then that excess will be promptly paid by IDG to that Company.
3.4 The parties acknowledge that IDGB shall accrue on its books the
taxes payable to IDG hereunder for periods prior to the Separation Date and that
such amounts shall not be included in the amounts to be distributed to IDG in
connection with the public offering of IDGB's shares.
4. TAX OBLIGATIONS OF IDG.
IDG will timely pay to the appropriate tax authority (and provide to
IDGB evidence of payment to the extent applicable to IDGB) the consolidated tax
liabilities of the Companies arising from filing a consolidated Federal Return
or a combined, consolidated, unitary or similar State Return, Other Return or
Continuing Non-Federal Return.
5. PAYMENT OF FUNDS BY IDG OR IDGB IN CERTAIN CASES.
With respect to any fiscal period for which it is contemplated that IDG
will prepare and file a return pursuant to Section 2 of this Agreement, after
the end of IDG's fourth quarter and before the 15th day of the third month
thereafter, if in any year one of the Companies incurs a loss, the other Company
shall pay to the first Company a sum equal to the amount of benefit realized by
the other Company that is attributable to the loss incurred by the first
Company. Any payment by IDGB shall be made to IDG.
6. CHANGES IN PRIOR YEAR'S TAX LIABILITIES.
<PAGE> 4
-4-
In the event that the consolidated, combined, unitary or similar tax
liability or the separate tax liability referred to in Sections 3, 4 and 5
hereof for any year for which a consolidated, combined, unitary or similar tax
return for the Two Companies was filed is or would be increased or decreased
by reason of filing an amended return or returns (including carry-back claims),
or by reason of the examination of the returns by the Internal Revenue Service
or any state or local taxing authority, the amounts of the payments under
Sections 3, 4 or 5, as the case may be, for each such year will be recomputed by
IDG to reflect the adjustments to taxable income or other basis of tax and tax
credits for the taxable year and interest or penalties, if any. In accordance
with those recomputations, additional sums will be paid by the Companies to IDG
or paid by IDG to the Companies regardless of whether a member (including IDGB)
has become a Departing Member (as defined hereinafter) subsequent to the taxable
year of recomputation.
7. NEW MEMBERS.
With respect to any fiscal period for which it is contemplated that IDG
will prepare and file a return pursuant to Section 2 of this Agreement, the
Companies agree that if IDG becomes the parent, as that term is used in Section
1504 of the Code, of one or more subsidiary corporations in addition to IDGB,
then, at IDG's election, each newly acquired subsidiary corporation may become a
separate party to this Agreement or an agreement substantially similar hereto by
consenting in writing to be bound by its provisions, effective immediately upon
its delivery to IDG, but the income and deductions or other basis for tax and
the tax credits of the newly acquired subsidiary corporations will first be
included in the consolidated Federal, State, Other or Continuing NonFederal
Returns as required by the Code or the applicable law of any state or other
jurisdiction.
8. DEPARTING MEMBERS.
8.1. The term "Departing Member" means a Company that is no longer
permitted under the Code or applicable state or local law to be included in the
consolidated Federal Return, a State Return, or Other Return with the other
Company. The parties contemplate that IDGB will become a Departing Member as to
Federal Returns and most State and Other Returns on the Separation Date and may
become a Departing Member as to Continuing Non-Federal Returns at some time in
the future.
8.2. In applying this Agreement to a Departing Member for the final
taxable year in which its income and deductions or other basis for tax and the
tax credits are required to be included in the consolidated Federal, State,
Other or Continuing Non-Federal Return: (i) the amount required to be paid by a
Departing Member under the provisions of Section 3 hereof and (ii) the amount
that the Departing Member is entitled to receive under the provisions of Section
5 hereof, will be determined by taking into account the income and deductions or
other basis for tax and the tax credits of the Departing Member only for the
fractional part of such year as the Departing Member was a member of the
consolidated group and included in the consolidated Federal, State, Other or
Continuing NonFederal Return.
<PAGE> 5
-5-
8.3. After the filing of the consolidated Federal, State, Other or
Continuing Non-Federal Return for the last taxable year that the Departing
Member was included therein, the Departing Member will be informed, if
applicable, of the amount of consolidated carry-overs as of the end of the
taxable year or period which are attributable to the Departing Member, as
provided by Treasury Regulations Section 1.1502-79 or comparable state or local
law or otherwise, including the agreement of the parties.
9. NO LIABILITY OF IDGB FOR TAXES OF OTHER IDG GROUP MEMBERS.
IDG shall pay, and shall indemnify and hold harmless IDGB from and
against, all taxes attributable to the IDG Group other than IDGB, whether
heretofore or hereafter arising or incurred, including, without limitation,
liability arising by reason of IDGB being severally liable for any taxes of the
IDG Group pursuant to Treasury Regulations Section 1.1502-6.
10. DETERMINATION OF SUMS DUE FROM AND PAYABLE TO MEMBERS.
IDG will determine the sums due from and payable to the Companies under
the provisions of this Agreement (including, without limitation, determinations
for purposes of Section 6 hereof). The Companies agree to provide IDG with such
information as may reasonably be necessary to make these determinations.
11. COOPERATION; TAX CLAIMS.
11.1 COOPERATION IN GENERAL. To the extent necessary to enable the
party preparing or filing a tax return or handling a tax claim as provided
herein, each of IDG and IDGB agrees to make available to the other party records
in its custody or control, to furnish other information, and otherwise to
cooperate to the extent reasonably required for the filing of tax returns the
handling of a tax claim.
11.2 NOTICE, DEFENSE, AND SETTLEMENT OF TAX CLAIMS.
(a) If the IDG Group or IDGB receives written notice of a
deficiency contest, audit, or other proceeding with respect to a proposed tax
liability for the other party is liable under this Agreement (including
liability hereunder to indemnify or reimburse a member of the other group), then
the recipient shall notify the other party of such matter by promptly sending
written notice thereof to IDG or IDGB, as the case may be. IDG and IDGB shall
cooperate to contest and defend any such proposed tax liability. The party that
is liable under applicable law for such proposed tax liability (without regard
to this Agreement) shall not settle, compromise, or otherwise agree to pay such
liability without the consent of the party that is liable for such tax under
this Agreement. Such consent shall not be unreasonably withheld.
(b) IDG shall be responsible for responding to any notice of
deficiency, contest, audit, or other proceedings with respect to a proposed tax
liability with respect to a Federal Return,
<PAGE> 6
-6-
State Return, Other Return or Continuing Non-Federal Return in which IDGB is
included. IDGB shall be responsible for responding to any notice of deficiency,
contest, audit, or other proceedings with respect to a proposed tax liability of
a stand alone tax return of IDGB. The cost and expense of IDG's handling of a
tax controversy, including legal and accounting fees, will be allocated to and
paid by the Company to which the tax controversy relates. If the tax controversy
relates to both Companies, the cost and expense will be allocated between the
Companies in the proportion that each Company's potential additional tax
liability bears to the total potential additional tax liability of both
Companies (determined in accordance with Section 6 hereof and assuming that the
tax controversy is resolved in favor of the taxing authority) for the taxable
year in issue. If the tax controversy encompasses more than one taxable year,
IDG will first allocate the cost and expense to each taxable year in the
proportion that the potential additional tax liability for each taxable year
bears to the total potential additional tax liability for the taxable years in
issue.
11.3 CONFIDENTIALITY. IDG and IDGB understand the confidential nature
of financial information disclosed in tax returns and the related supporting
documentation. Each of IDG and IDGB hereby agree to not release any tax and
supporting documentation or information with respect to the other party to any
outside party (other than taxing authorities pursuant to a legal obligation to
provide such information) without the consent of the other party.
12. RESOLUTION OF DISPUTES.
The parties hereto agree that litigation can be both costly and
inefficient and that alternative dispute resolution methods are, in general,
desirable. Accordingly, in case of any dispute or ambiguity concerning the
amount of any payment provided for under this Agreement, the parties shall
consider whether such dispute or ambiguity shall be resolved, in a manner
consistent with the principles and procedures set forth in this Agreement, by an
internationally recognized accounting firm (a so-called "Big Six" accounting
firm) jointly selected by the parties hereto. The parties may agree, but are not
required to agree, that the judgment of such accounting firm shall be conclusive
and binding upon each of the parties to this Agreement. The accounting firm's
fee shall be borne equally by each of the parties to this Agreement. If the
parties do not agree to pursue this or another method of alternative dispute
resolution, or if they do not agree that the resolution determined by the
accounting firm shall be binding, then the parties shall have the right to seek
resolution of the matter in the forums provided in Section 14.3.
13. EFFECTIVE DATE AND EXPIRATION.
This Agreement shall be effective beginning on the Separation Date, and
will continue until the expiration of the last statute of limitations applicable
to taxes governed by this Agreement. If the Separation Date shall not have
occurred by December 31, 1998, this Agreement shall not become effective and
shall no longer be binding on either party hereto in any respect.
14. GENERAL.
<PAGE> 7
-7-
14.1 WAIVER. Any waiver by any party of any default by the other
hereunder shall not be deemed to be a continuing waiver of such default or a
waiver of any other default or of any of the terms and conditions of this
Agreement.
14.2 AMENDMENTS. The terms and conditions of this Agreement may not be
superseded, modified, or amended except in writing stating that it is such a
modification and signed by an authorized representative of each party hereto.
14.3 GOVERNING LAW; FORUM SELECTION. This Agreement shall be governed
by the laws of the State of Delaware, without reference to its conflict of laws
principles. With respect to disputes arising out of this Agreement, unless the
parties otherwise agree, (i) any proceeding instituted by IDGB shall be subject
to the exclusive jurisdiction and venue of the Massachusetts state courts of
Middlesex County or Suffolk County, at the election of IDG (or, if there is
exclusive Federal jurisdiction, the United States District Court for the
District of Massachusetts), and (ii) any proceeding instituted by IDG shall be
subject to the exclusive jurisdiction and venue of the California state courts
of Santa Mateo County (or, if there is exclusive Federal jurisdiction, the
United States District Court for the Southern District of California), and the
parties consent to the personal and exclusive jurisdiction and venue of these
courts.
14.4 COMPLETE AGREEMENT. This Agreement constitutes the entire
agreement between the parties as to the subject matter hereof, and supersedes
and replaces all prior or contemporaneous agreements, written or oral, regarding
such subject matter.
14.5 BINDING AGREEMENT. This Agreement shall be binding upon and inure
to the benefit of each party hereto, its respective successors and assigns, and
each member of the IDG Group not a party hereto.
14.6 NOTICES. All notices, requests, consents, and other
communications under this Agreement shall be in writing and shall be delivered
by hand, by guaranteed overnight delivery by means of a nationally recognized
overnight delivery service, by fax, or by first class certified or registered
mail, return receipt requested, postage prepaid, to the following addresses.
(a) If to IDGB, at 919 East Hillsdale Boulevard, Suite 400,
Foster City, California 94404, Attention: Chief Financial Officer, or at such
other address or addresses as may have been furnished in writing by IDGB to IDG,
with a copy in each case to Brian C. Erb, Esq., Wilson Sonsini Goodrich &
Rosati, 650 Page Mill Road, Palo Alto, CA 94304.
(b) If to IDG, at 5 Speen Street, Framingham, Massachusetts
01701, Attention: Vice President and Controller, or at such other address or
addresses as may have been furnished to IDGB in writing by IDG, with a copy in
each case to Edward N. Gadsby, Jr., Esq., Foley, Hoag & Eliot LLP, One Post
Office Square, Boston, Massachusetts 02109.
<PAGE> 8
-8-
Notices provided in accordance with this Section shall be deemed
delivered upon personal delivery, upon actual receipt or on the third business
day after deposit in the mail.
14.7 HEADINGS; COUNTERPARTS. Headings to Sections of this Agreement
are to facilitate reference only, do not form a part of this Agreement, and
shall not in any way affect the interpretation hereof.
14.8 PARTIAL INVALIDITY. If any provision in this Agreement shall be
found or be held to be invalid or unenforceable in any jurisdiction in which
this Agreement is being performed, then the meaning of said provision shall be
construed, to the extent feasible, so as to render the provision enforceable,
and if no feasible interpretation would save such provision, it shall be severed
from the remainder of this Agreement which shall remain in full force and
effect. In such event, the parties shall negotiate, in good faith, a substitute,
valid and enforceable provision which most nearly effects the parties' intent in
entering into this Agreement.
14.9 FORCE MAJEURE. Nonperformance of either party shall be excused to
the extent that performance is rendered impossible by strike, fire, flood,
governmental acts or orders or restrictions, failure of suppliers, or any other
reason where failure to perform is beyond the reasonable control of and is not
caused by the negligence of the nonperformance party.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized officers as of the date first above written.
INTERNATIONAL DATA GROUP, INC.
By:_____________________________________
IDG BOOKS WORLDWIDE, INC.
By:_____________________________________
<PAGE> 1
EXHIBIT 10.11
SHARE EXCHANGE AGREEMENT
This Agreement is dated as of May 21, 1998 and is by and among IDG
Books Worldwide, Inc., a Delaware corporation (the "Company"), IDG Enterprises,
Inc., a Delaware corporation ("Enterprises"), International Data Group, Inc., a
Massachusetts corporation ("IDG"), and State Street Bank and Trust Company, not
in its individual or corporate capacities but solely in its capacity as trustee
(the "Trustee") of the IDG Books Worldwide, Inc. Employee Stock Ownership Trust
(the "Trust"), which implements and forms a part of the IDG Books Worldwide,
Inc. Employee Stock Ownership Plan (the "Plan").
PRELIMINARY STATEMENT
The Trust owns 1619.1 shares of the Class A common stock, $.01 par
value, of IDG (the "IDG Shares"). Subject to the terms and conditions of this
Agreement, the Trust will deliver the IDG Shares to Enterprises in exchange for
(a) the sum of $12,896, and (b) 394,251 shares (the "Company Shares") of the
Class B common stock, $.001 par value, of the Company (the "Class B Common
Stock").
AGREEMENTS
1. Exchange of Shares
1.1 Transfer of IDG Shares. The Trust hereby transfers and assigns to
Enterprises all of the IDG Shares, and hereby delivers to Enterprises
certificate no. 196 representing the IDG Shares, accompanied by a duly executed
stock power providing for the transfer of the IDG Shares to Enterprises.
<PAGE> 2
1.2 Transfer of Company Shares. Enterprises hereby transfers and
assigns to the Trust all of the Company Shares, and hereby delivers to the Trust
a check in the amount of $12,896 and certificate no. CB-2 representing the
Company Shares.
2. Representations and Warranties of the Company
The Company hereby represents and warrants to the Trust as follows:
2.1 Corporate Organization and Good Standing of the Company. The
Company is a corporation duly organized, validly existing and in good standing
under the laws of the State of Delaware and has all requisite corporate power
and authority to own, operate and lease its properties and to carry on its
business as such business is now being conducted.
2.2 Capitalization. The Company's authorized capital stock consists
of 25,000,000 shares of Class A common stock, $.001 par value (the "Class A
Common Stock") and 400,000 shares of Class B Common Stock, of which immediately
prior to the transactions contemplated hereby 10,705,749 shares of Class A
Common Stock and 394,251 shares of Class B Common Stock were issued, outstanding
and held of record by Enterprises. All of such shares, including the Company
Shares, have been duly authorized and validly issued and are fully paid and
non-assessable, and (assuming the accuracy of the representations and warranties
of IDG and Enterprises contained in section 3.2 hereof) the delivery of the
Company Shares to the Trust pursuant to this Agreement will convey to the Trust
indefeasible title thereto. Except for options issued to employees of the
Company for the purchase of an aggregate of not exceeding 1,700,000 shares of
Class A Common Stock, there are no outstanding options, warrants or other rights
to subscribe for or purchase, or securities convertible into or exchangeable
for, shares of the Company's capital stock, and there are no agreements,
arrangements or understandings to which
-2-
<PAGE> 3
the Company is a party or by which it is bound pursuant to which the Company is
or may be required to issue or sell additional shares of its capital stock.
2.3 Authority. The Company has all requisite corporate power and
authority to enter into, deliver and perform this Agreement and to consummate
the transactions contemplated herein. The execution, delivery and performance of
this Agreement and the consummation of the transactions contemplated herein have
been duly authorized by all necessary corporate action on the part of the
Company. This Agreement has been duly executed and delivered by the Company and
constitutes its valid and binding obligation, enforceable against the Company in
accordance with its terms except as the same may be limited by the Employment
Retirement Income Security Act of 1974, as amended ("ERISA"), or by bankruptcy,
insolvency, reorganization or other laws affecting the enforcement of creditors'
rights generally, now or hereafter in effect, and subject to the availability of
equitable remedies.
2.4 No Conflicts. The execution, delivery and performance of this
Agreement by the Company, and the consummation of the transactions contemplated
herein, do not and will not (a) require the consent, approval, authorization,
order, filing, registration or qualification of or with any court, governmental
authority or third person which has not been obtained, (b) conflict with or
result in any violation of or default under any provision of the Amended and
Restated Certificate of Incorporation or By-laws of the Company, or any material
mortgage, indenture, lease, agreement or other material instrument, permit,
concession, grant, franchise or license to which the Company is a party or by
which it or its properties are bound, (c) violate any law, ordinance, rule,
regulation, judgment, order or decree applicable to the Company, or (d) result
in the creation of any security interest, claim, lien, charge or encumbrance
upon any of the Company Shares.
-3-
<PAGE> 4
2.5 ESOP Plan and Trust. The Plan and the Trust have been duly
adopted, and the Trustee has been duly appointed as trustee of the Trust, by all
necessary action on the part of the Company. The Plan and Trust are designed to
be in compliance with applicable provisions of ERISA, and the Company is not
aware of any respects in which the Plan and Trust are not in compliance
therewith.
2.6 Employer Securities. The Company Shares will constitute "employer
securities" within the meaning of Section 409(l) of the Internal Revenue Code of
1986, as amended (the "Code").
3. Representations and Warranties of Enterprises and IDG.
IDG and Enterprises hereby jointly and severally represent and warrant
to the Trust as follows:
3.1 Corporate Organization and Good Standing of Enterprises.
Enterprises is a corporation duly incorporated, validly existing and in good
standing under the laws of the State of Delaware and has all requisite corporate
power and authority to own, operate and lease its properties and to carry on its
business as such business is now being conducted.
3.2 Title to Stock. Enterprises has not caused any pledge, lien,
security interest, encumbrance, restriction on transfer or other defect to be
imposed on the Company Shares. Upon delivery of the Company Shares to the Trust
in accordance with this Agreement, the Trust will have indefeasible title to the
Company Shares.
3.3 Capitalization of IDG. IDG's authorized capital stock consists of
1,000,000 shares of Class A voting common stock, $.01 par value, of which
512,476 shares are presently issued and outstanding, and 1,000,000 shares of
Class B non-voting common stock, $.01 par value, of which no shares are
presently issued or outstanding. Except for outstanding options
-4-
<PAGE> 5
under which IDG is required to purchase, and the optionees are required to sell,
all shares as to which such options are exercised, there are no outstanding
options, warrants or other rights to subscribe for or purchase, or securities
convertible into or exchangeable for, shares of IDG's capital stock, and there
are no agreements, arrangements or understandings to which IDG is a party or by
which it is bound pursuant to which IDG is or may be required to issue or sell
additional shares of its capital stock.
3.4 Necessary Authority. Enterprises and IDG have all requisite power
and authority to enter into, deliver and perform this Agreement and to
consummate the transactions contemplated herein. The execution, delivery and
performance of this Agreement and the consummation of the transactions
contemplated herein have been duly authorized by all necessary action on the
part of Enterprises and IDG. This Agreement has been duly executed and delivered
by Enterprises and IDG and constitutes the valid and legally binding obligation
of each corporation, enforceable against each corporation in accordance with its
terms except as the same may be limited by ERISA or by bankruptcy, insolvency,
reorganization or other laws affecting the enforcement of creditors' rights
generally, now or hereafter in effect, and subject to the availability of
equitable remedies.
3.5 No Conflicts. The execution, delivery and performance of this
Agreement by Enterprises and IDG, and the consummation by each of the
transactions contemplated herein, do not and will not (a) require the consent,
approval, authorization, order, filing, registration or qualification of or with
any court, governmental authority or third person which has not been obtained,
(b) conflict with or result in any violation of or default under, any provision
of the Certificate of Incorporation or By-laws of Enterprises, the Articles of
Organization or By-laws of IDG, or any mortgage, indenture, lease, agreement or
other instrument, permit, concession, grant, franchise or license to which
Enterprises or IDG is a party or by which either corporation or its properties
are bound, (c) violate any
-5-
<PAGE> 6
law, ordinance, rule, regulation, judgment, order or decree applicable to
Enterprises or IDG, or (d) result in the creation of any security interest,
claim, lien, charge or encumbrance upon any of the Company Shares.
4. Representations and Warranties of the Trust.
The Trustee, on behalf of the Trust, hereby represents and warrants to
the Company and to Enterprises as follows:
4.1 Title to the IDG Shares. The Trustee has not caused any pledge,
lien, security interest, encumbrance or restriction on transfer or other defect
in title to be imposed on the IDG Shares.
4.2 Necessary Authority. The Trustee, on behalf of the Trust, has
full power and authority to execute and deliver this Agreement and to consummate
the transactions contemplated hereby. This Agreement has been duly authorized,
executed and delivered by the Trustee, on behalf of the Trust, and constitutes
the legal, valid and binding obligation of the Trust, enforceable against the
Trust in accordance with its terms, except as the same may be limited by ERISA
or by bankruptcy, insolvency, reorganization or other laws affecting the
enforcement of creditors' rights generally, now or hereinafter in effect, and
subject to the availability of equitable remedies.
4.3 No Conflicts. The execution, delivery and performance of this
Agreement by the Trustee, on behalf of the Trust, and the consummation of the
transactions contemplated herein, do not and will not (a) require the consent or
approval of, or filing with, any person or public authority, or (b) constitute
or result in a breach of any provision of the Plan, the Trust, or any other
agreement or arrangement to which the Trust is a party or by which it or its
properties are bound.
4.4 Valuation Opinion. The Trustee has received an opinion of
Marshall & Stevens dated as of the date of this Agreement to the effect that (a)
the consideration to be received by the Trust in exchange for the IDG Shares is
no less than the fair market value, within the meaning of Section
-6-
<PAGE> 7
3(18)(B) of ERISA, of the IDG Shares, and (b) the exchange transaction provided
for herein is fair to the Trust from a financial point of view.
5. Agreements Relating to IPO.
The Company acknowledges that, as soon as practicable after the date
hereof, it intends to file a registration statement under the Securities Act of
1933, as amended (the "Act"), providing for an offering to the public of shares
of its authorized and unissued Class A Common Stock (the "IPO"). The parties
hereto hereby agree that, on and as of the date of the closing of the IPO (the
"IPO Closing Date"), the Trustee will transfer and assign all of the Company
Shares to Enterprises, and Enterprises shall transfer and assign to the Trust
such number of shares of Class A Common Stock held by it as shall equal the
number of Company Shares. The parties hereto agree to execute and deliver such
documents and take such other action, including without limitation the delivery
of certificates and stock powers, as shall be necessary to carry out the
provisions of this section 5. For purposes of section 6 of this Agreement: the
term "Company Shares" as applied to periods prior to the IPO Closing Date shall
mean the shares of Class B Common Stock transferred by Enterprises to the Trust
pursuant to this Agreement; and the term "Company Shares" as applied to periods
from and after the IPO Closing Date shall mean the shares of Class A Common
Stock transferred by Enterprises to the Trust pursuant to this section 5.
-7-
<PAGE> 8
6. Certain Covenants of the Company.
6.1 Valuation of Company Shares Prior to IPO Closing Date. The
Company acknowledges and agrees that, prior to the IPO Closing Date, so long as
any Company Shares are held by the Trust and the Class B Common Stock is not
eligible for trading in an established securities market, the Company Shares
will be appraised by an independent appraiser, as defined in Section 401(a)(28)
of the Code, at least once each Plan year, as required by Article I, paragraph
(x), of the Plan (the "Annual Appraisal").
6.2 Repurchase Obligation. The Company acknowledges and agrees that,
subsequent to the IPO Closing Date, the Company will purchase Company Shares
distributed to beneficiaries of the Trust if, and to the extent and on terms as,
required by any beneficiary put option that may hereafter be included in the
Plan.
6.3 Purchase of Shares from the Trustee. Within 90 days of the date
of this Agreement, the Company agrees to enter into an agreement or undertaking
with the Trustee pursuant to which the Company will agree: (a) during the period
prior to the IPO Closing Date, to purchase Company Shares at no less than the
value ascribed to them as set forth in the opinion of Marshall & Stevens
referred to in Section 4.4 hereof or, after the first Annual Appraisal has been
completed, at no less than the value ascribed to them in the most recent Annual
Appraisal, as applicable, in the event that the Trustee offers Company Shares to
the Company in the exercise of its fiduciary duty as trustee of the Trust; (b)
during the period commencing 180 days after the IPO Closing Date, and until the
first anniversary of the IPO Closing Date, to purchase Company Shares from the
Trustee at their then current market value in the event that the Trustee offers
Company Shares to the Company in the exercise of its fiduciary duty as trustee
of the Trust; and (c) to register the Company Shares under the
-8-
<PAGE> 9
Act as soon as practicable after any request by the Trustee for such
registration delivered to the Company in writing at any time after the first
anniversary of the IPO Closing Date.
7. General
7.1 Notices. All notices or other communications given or made
hereunder shall be duly given when received if delivered in person or by
facsimile or by registered or certified mail, return receipt requested, postage
prepaid, to any party at the address for such party set forth on the signature
page of this Agreement, or such other address as the party to whom notice is to
be given has previously furnished in writing to the notifying party in the
manner set forth above.
7.2 Entire Agreement. Other than the engagement agreement between the
Company and the Trustee dated May 6, 1998, this Agreement constitutes the entire
agreement among the parties hereto with respect to the subject matter hereof and
supersedes all prior and contemporaneous agreements and understandings, oral or
written, between the parties hereto with respect to such subject matter.
7.3 Governing Law. Except to the extent that ERISA applies, this
Agreement shall be construed in accordance with and governed by the internal
laws of The Commonwealth of Massachusetts applicable to contracts made and
performed in The Commonwealth of Massachusetts.
7.4 Headings. The section, paragraph and other headings contained in
this Agreement are for reference only and shall not be deemed to be a part of
this Agreement or to affect the meaning or interpretation of this Agreement.
7.5 Assignment. Neither this Agreement nor any interest herein or
right or obligation hereunder may be assigned by the Company or by the Trust in
any manner, by operation of law or otherwise, without the prior written consent
of the other party.
-9-
<PAGE> 10
7.6 Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
assigns.
7.7 Severability. Whenever possible, each provision of this Agreement
shall be interpreted in such a manner as to be effective and valid under
applicable law, but if any provision of this Agreement, or the application
thereof to any person or under any circumstances, shall be invalid or
unenforceable to any extent under applicable law, and the extent of such
invalidity or unenforceability does not destroy the basis for the bargain among
the parties as expressed herein, then such provision shall be deemed severed
from this Agreement with respect to such person or such circumstance and without
invalidating the remainder of this Agreement with respect to such person or such
circumstance, without invalidating the remainder of this Agreement or the
application of such provision to other persons or circumstances, and a new
provision shall be automatically substituted in lieu of the provision so
severed, which new provision shall be as similar in terms to the invalid or
unenforceable provision as possible.
-10-
<PAGE> 11
7.8 Amendment. This Agreement may be amended only by an instrument in
writing executed on behalf of all of the parties hereto.
7.9 Counterparts. This Agreement may be executed in counterpart, each
of which shall be deemed an original, but all of which shall constitute the same
instrument.
IN WITNESS WHEREOF, the parties have caused this agreement to be
executed on and as of the date first above written.
IDG BOOKS WORLDWIDE, INC. STATE STREET BANK AND TRUST
COMPANY, as Trustee
By____________________ By___________________________
Title:________________ Title:_______________________
Address: Address:
919 East Hillsdale Blvd. John Marshall Building
Suite 400 Battery March Park,
Foster City, CA 94404 3 Pine Hill Dr.
Fax No.: 650-655-3072 Quincy, MA 02169
Fax No.: 617-376-7313
IDG ENTERPRISES, INC. INTERNATIONAL DATA GROUP, INC.
By____________________ By___________________________
Title:________________ Title:_______________________
Address: Address:
c/o International Data One Exeter Plaza
Group, Inc. Boston, MA 02116
One Exeter Plaza Fax No.: 617-262-3636
Boston, MA 02116
Fax No.: 617-262-3636
-11-
