<PAGE>
As filed with the Securities and Exchange Commission on December 27, 2000
Registration No. 333-48014
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
ZIFF DAVIS MEDIA INC.
(Exact name of registrant as specified in its charter)
Delaware 2721 36-4336460
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification Number)
incorporation or Classification Code
organization) Number)
--------------
28 East 28th Street
New York, NY 10016
(212) 503-3500
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
--------------
James D. Dunning, Jr.
28 East 28th Street
New York, NY 10016
(212) 503-3500
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
--------------
Copy to:
Andrew E. Nagel
Kirkland & Ellis
153 East 53rd Street
New York, New York 10022-4675
Telephone: (212) 446-4800
--------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [_]
--------------
The Registrant hereby amends this Registration Statement on any 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 this Registration Statement shall become
effective on the date as the Commission, acting pursuant to said Section 8(a),
may determine.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
ZIFF DAVIS PUBLISHING HOLDINGS INC.
(Exact name of registrant as specified in its charter)
Delaware 2721 13-4105756
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification Number)
incorporation or Classification Code
organization) Number)
28 East 28th Street
New York, NY 10016
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
--------------
James D. Dunning, Jr.
28 East 28th Street
New York, NY 10016
(Address, including zip code, and telephone number, including area code, of
agent for service)
--------------
ZIFF DAVIS INTERNET INC.
(Exact name of registrant as specified in its charter)
Delaware 7331 13-4105758
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification Number)
incorporation or Classification Code
organization) Number)
28 East 28th Street
New York, NY 10016
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
--------------
James D. Dunning, Jr.
28 East 28th Street
New York, NY 10016
(Address, including zip code, and telephone number, including area code, of
agent for service)
--------------
ZIFF DAVIS DEVELOPMENT INC.
(Exact name of registrant as specified in its charter)
Delaware 2721 13-4105761
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification Number)
incorporation or Classification Code
organization) Number)
28 East 28th Street
New York, NY 10016
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
--------------
James D. Dunning, Jr.
28 East 28th Street
New York, NY 10016
(Address, including zip code, and telephone number, including area code, of
agent for service)
--------------
<PAGE>
ZIFF DAVIS PUBLISHING INC.
(Exact name of registrant as specified in its charter)
Delaware 2721 13-4105763
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification Number)
incorporation or Classification Code
organization) Number)
28 East 28th Street
New York, NY 10016
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
--------------
James D. Dunning, Jr.
28 East 28th Street
New York, NY 10016
(Address, including zip code, and telephone number, including area code, of
agent for service)
--------------
eTESTING LABS INC.
(Exact name of registrant as specified in its charter)
Delaware 7372 13-4127896
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification Number)
incorporation or Classification Code
organization) Number)
28 East 28th Street
New York, NY 10016
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
--------------
James D. Dunning, Jr.
28 East 28th Street
New York, NY 10016
(Address, including zip code, and telephone number, including area code, of
agent for service)
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+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 is not soliciting an offer to +
+buy these securities in any state where the offer or sale is not +
+permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to completion, dated December 27, 2000
PROSPECTUS
, 2001
ZIFF DAVIS MEDIA Inc.
Exchange Offer for $250,000,000 12% Senior Subordinated Notes due 2010
in exchange for 12% Series B Senior Subordinated Notes due 2010
This exchange offer will expire at 5:00 p.m., New York City time on [ ],
2001 unless we extend this date.
If you decide to participate in this exchange offer, you will receive
exchange notes that will be the same as the old notes, except the exchange
notes will be registered with the Securities and Exchange Commission and you
will be able to offer and sell them freely to any potential buyer. This is
beneficial to you since your old notes are not registered with the Securities
and Exchange Commission and you may not offer or sell the old notes without
registration or an exemption from registration under federal securities laws.
There is no public market for the old notes or the exchange notes. However,
you may trade the old notes and the exchange notes in the PORTAL market.
This investment involves risk. See "Risk Factors" beginning on page 11.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the exchange notes or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 1
Risk Factors............................................................. 11
Use of Proceeds.......................................................... 19
Capitalization........................................................... 20
Unaudited Pro Forma Consolidated Financial Statements.................... 21
Selected Historical Financial Information................................ 28
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 30
Business................................................................. 45
Management............................................................... 59
Certain Relationships and Related Transactions........................... 63
Security Ownership of Certain Beneficial Owners and Management........... 66
Description of Senior Credit Facilities.................................. 67
Description of the Exchange Notes........................................ 68
Exchange Offer........................................................... 108
United States Federal Income Tax Considerations.......................... 115
Plan of Distribution..................................................... 116
Legal Matters............................................................ 118
Experts.................................................................. 118
Available Information.................................................... 118
Index to Financial Statements............................................ F-1
</TABLE>
----------------
In this prospectus, unless the context otherwise requires, the terms "we,"
"our" and "us" refer to Ziff Davis Media Inc. and its subsidiaries and their
predecessor companies. "InternetCo" refers to our subsidiary Ziff Davis
Internet Inc., and "LaunchCo" refers to our subsidiary Ziff Davis Development
Inc. InternetCo and LaunchCo are unrestricted subsidiaries under the indenture
and guarantors of the exchange notes offered by this prospectus.
The following are trademarks and service marks belonging to or licensed to
Ziff Davis Media Inc. which have been referred to in this prospectus: PC
Magazine; Ziff Davis SMART BUSINESS for the NewEconomy; eWeek; Yahoo! Internet
Life (under license); FamilyPC; Interactive Week; Sm@rt Partner; Electronic
Gaming Monthly; Official U.S. Playstation Magazine (under license); Computer
Gaming World; Expert Gamer; The Net Economy; Expedia Travels (under license)
and Macworld (joint venture).
<PAGE>
PROSPECTUS SUMMARY
The following summary contains basic information about this exchange offer
and highlights the most important features of this exchange offer. For a more
complete understanding of this exchange offer, we encourage you to read this
entire document and the documents we have referred you to.
Our management has estimated the market share percentages provided in this
prospectus. We believe these estimates to be reliable, but these numbers have
not been verified by an independent source.
The Old Note Offering
Old Notes................. We sold the old notes to Deutsche Bank Alex. Brown
and CIBC World Markets, the initial purchasers, on
July 21, 2000. Deutsche Bank and CIBC subsequently
resold the old notes to qualified institutional
buyers under Rule 144A of the Securities Act of
1933 and to persons outside the U.S. under
Regulation S under the Securities Act.
Exchange and Registration
Rights Agreement......... We, Deutsche Bank Alex. Brown, CIBC World Markets
and Ziff Davis Publishing Holdings Inc., Ziff Davis
Internet Inc., Ziff Davis Development Inc., Ziff
Davis Publishing Inc. and eTESTING LABS Inc., our
Subsidiary Guarantors, entered into a registration
rights agreement on July 21, 2000. The registration
rights agreement granted Deutsche Bank, CIBC and
any subsequent holders of the old notes exchange
and registration rights. We intend that the
exchange offer satisfy those exchange and
registration rights. The exchange and registration
rights we granted will terminate upon the
consummation of our exchange offer.
The Exchange Offer
Securities Offered........ Up to $250,000,000 of 12% series B senior
subordinated notes due 2010 which we call the
"exchange notes." The terms of the exchange notes
and old notes are identical in all material
respects, except for transfer restrictions and
registration rights relating to the old notes.
The Exchange Offer........ We are offering to exchange the old notes for a
principal amount equal to the principal amount of
exchange notes. Old notes may be exchanged only in
integral principal multiples of $1,000.
Expiration Date;
Withdrawal of Tender.....
Our exchange offer will expire 5:00 p.m. New York
City time, on [ ], 2001, or a later date and
time if we choose to extend this exchange offer.
You may withdraw your tender of old notes at any
time prior to the expiration date. We will return
any old notes not accepted by us for exchange for
any reason at our expense as promptly as possible
after the expiration or termination of our exchange
offer.
1
<PAGE>
Conditions to the Based on an interpretation by the staff of the SEC
Exchange Offer........... in no-action letters issued to third parties, we
believe that you may offer for resale, resell or
otherwise transfer the exchange notes without
complying with the registration and prospectus
delivery provisions of the Securities Act, provided
that:
. the exchange notes are acquired in the
ordinary course of your business;
. you do not intend to participate and have no
arrangement or understanding with any person
to participate in the distribution of the
exchange notes; and
. you are not our "affiliate" within the
meeting of Rule 405 under the Securities Act.
Our obligation to accept for exchange or to issue
the exchange notes in exchange for, any old notes
is subject to:
. customary conditions relating to compliance
with any applicable law,
. any applicable interpretation by the staff of
the SEC, or
. any order of any governmental agency or court
of law.
We currently expect that each of the conditions
will be satisfied and that no waivers will be
necessary. See "The Exchange Offer--Conditions."
Procedures for Tendering
Old Notes................ Each holder of old notes wishing to accept the
exchange offer must complete sign and date the
Letter of Transmittal, or a facsimile. The holder
must mail or otherwise deliver the Letter of
Transmittal, or facsimile, together with the old
notes and any other required documentation, to the
exchange agent at the address in the section "The
Exchange Offer" under the heading "Procedures for
Tendering Old Notes."
Use of Proceeds...........
We will not receive any proceeds from the exchange
of notes according to the terms of our exchange
offer.
Exchange Agent............ Bankers Trust Company is serving as the exchange
agent in connection with our exchange offer.
Federal Income Tax
Consequences............. Ziff Davis Media Inc. has received an opinion from
Kirkland & Ellis that the exchange of old notes in
accordance with the terms of this exchange offer
will not be a taxable event to you for federal
income tax purposes. See "United States Federal
Income Tax Considerations."
2
<PAGE>
The Exchange Notes
Issuer.................... Ziff Davis Media Inc.
Securities Offered........ $250,000,000 in aggregate principal amount of 12%
Series B Senior Subordinated Notes due 2010.
Maturity.................. July 15, 2010.
Interest Rate............. 12% per year (calculated using a 360-day year).
Interest Payments......... Payment frequency--every six months on January 15
and July 15. First payment January 15, 2001.
Ranking...................
The exchange notes will be unsecured senior
subordinated obligations of Ziff Davis Media Inc.
and will rank junior to our existing and future
senior debt, including obligations under our senior
credit facilities. The guarantees of the notes by
our domestic subsidiaries will be subordinated to
existing and future senior debt of our subsidiaries
that guarantee the exchange notes. As of November
30, 2000, we and our subsidiaries had approximately
$260 million of senior debt (excluding the $50.0
million of unused commitment under the revolving
portion of our senior credit facilities).
Guarantees................
All of our existing and future restricted domestic
subsidiaries will fully, unconditionally guarantee
the exchange notes, jointly and severally.
Make Well Agreement....... If our ratio of debt to EBITDA is greater than 4.5
to 1.0 on March 31, 2001 either we will repay
indebtedness under our senior credit facilities or
Willis Stein and its co-investors will contribute
to us up to a maximum of $50.0 million in
additional equity (less certain amounts already
contributed) so that we may repay indebtedness
under our senior credit facilities (and permanently
reduce commitments thereunder in an amount equal to
such repayment), in either case in order to reduce
our ratio of debt to EBITDA.
Optional Redemption....... Except as described below, we cannot redeem the
notes until July 15, 2005. Thereafter we may redeem
some or all of the notes at the redemption prices
listed in the "Description of the Exchange Notes"
section under the heading "Optional Redemption,"
plus accrued and unpaid interest.
Optional Redemption After
Public Equity At any time (which may be more than once) before
Offerings................ July 15, 2003, we may redeem up to 35% of the
outstanding exchange notes with funds that we raise
in one or more public equity offerings, as long as:
. we pay 112.00% of the face amount of the
exchange notes plus interest;
3
<PAGE>
. we redeem the exchange notes within 90 days
of completing the equity offering; and
. at least 65% of the aggregate principal
amount of the exchange notes issued on the
issue date remains outstanding after each
redemption.
Change of Control Offer...
If a change of control, as defined in the
indenture, occurs, we must give holders of the
exchange notes the opportunity to sell us their
exchange notes at 101% of their face amount, plus
accrued interest.
We might not be able to pay you the required price
for exchange notes you present to us at the time of
a change of control, because:
. we might not have enough funds at the time;
or
. the terms of our senior debt may prevent us
from paying.
Asset Sale Proceeds.......
If we or our subsidiaries engage in asset sales, we
generally must either invest the net cash proceeds
from such sales in our business within a period of
time, prepay senior debt or make an offer to
purchase a principal amount of the exchange notes
equal to excess net cash proceeds. The purchase
price of the exchange notes will be 100% of their
principal amount, plus accrued and unpaid interest.
Basic Covenants of
Indenture................ The indenture governing the exchange notes contains
covenants limiting our and our subsidiary
guarantors' ability to:
. incur additional debt;
. pay dividends or distributions on our capital
stock or repurchase our capital stock;
. make certain investments;
. create liens on our assets to secure debt;
. enter into transactions with affiliates;
. enter into agreements restricting dividends
and other payment restrictions;
. merge or consolidate with another company;
and
. transfer and sell assets.
These covenants are subject to a number of
important limitations and exceptions.
4
<PAGE>
RISK FACTORS
You should carefully consider all of the information in this prospectus. In
particular, you should evaluate the specific risk factors set forth under "Risk
Factors" beginning on page 11 for a discussion of the material risks involved
with an investment in the exchange notes.
ZIFF DAVIS MEDIA INC.
We are the largest technology publisher and the sixth largest magazine
publisher in the United States. We are also the leading publisher of electronic
games magazines. Our 11 U.S. titles, excluding our recently announced launches
and our Macworld joint venture, have a combined domestic circulation of
approximately 5.9 million and estimated domestic readership of approximately 21
million individuals. Our titles include PC Magazine and eWeek, which were the
number one and number three ranked technology magazines, respectively, in the
United States in 1999 as measured by advertising revenue. We have an acclaimed
staff of editors and columnists who consistently produces high-quality, award-
winning editorial content. In 1999, we won more Computer Press Association
awards than any other media company, and four of our editors were named to
Marketing Computer's prestigious list of the "The Influencers" the 30 most
influential technology journalists.
EXECUTIVE OFFICES
Ziff Davis Media Inc. is a Delaware corporation with its principal executive
offices located at 28 East 28th Street, New York, New York 10016. Our main
phone number is (212) 503-3500.
THE TRANSACTIONS
On December 6, 1999, WS-ZD Acquisition, Inc., a company organized by Willis
Stein & Partners in November 1999, entered into a purchase agreement with ZD
Inc. and ZD Holdings (Europe) Ltd., two subsidiaries of Ziff-Davis Inc., to
acquire publishing assets of ZD Inc.'s publishing division and the publishing
subsidiaries of ZD Holdings (Europe) Ltd. This acquisition closed on April 5,
2000 and WS-ZD Acquisition, Inc. immediately changed its name to Ziff Davis
Media Inc. WS-ZD Acquisition, Inc. conducted no operations prior to the closing
of the acquisition. The assets acquired from ZD Inc. did not include assets
related to the Computer Shopper publication or ZD Inc.'s investment in Red
Herring Communications, Inc. The aggregate purchase price for the acquired
assets and the acquired companies was $780.0 million in cash.
The amount necessary to fund the acquisition and related fees and expenses
was approximately $815 million. These funds came primarily from the following
sources:
(1) approximately $285 million in cash from Willis Stein and its co-
investors in exchange for capital stock of our 100% parent company,
Ziff Davis Holdings Inc. ("Parent"), which was formed in April 2000;
(2) $175.0 million from the issuance by us of the original senior
subordinated notes in a private transaction consummated simultaneously
with the closing of the acquisition; and
(3) $355.0 million from borrowings by us under our senior credit
facilities.
In addition, Willis Stein and its equity co-investors (1) contributed an
additional $50.0 million of equity to be used to fund the working capital and
financing needs of LaunchCo and InternetCo and (2) committed to make up to
$50.0 million in additional equity contributions if our ratio of debt to EBITDA
is greater than 4.5 to 1.0 on March 31, 2001.
5
<PAGE>
As of the closing date, we made a decision to sell our wholly-owned
international operations (excluding our international licensing operations and
our international joint ventures). The net assets related to these operations
have been recorded as assets held for sale in our balance sheet. See "--Recent
Developments" for a discussion of the sale, which closed on August 3, 2000.
On July 21, 2000, we completed the sale of $250.0 million principal amount
of old notes. Proceeds from these notes were used to redeem in full the $175.0
million in principal amount outstanding represented by the original senior
subordinated notes, $59.7 million outstanding under our senior credit
facilities and $6.9 million of accrued interest related to the senior and
subordinated debt.
The transactions described above are collectively referred to in this
prospectus as the "transactions."
6
<PAGE>
CORPORATE AND CAPITAL STRUCTURE
In connection with the acquisition, we formed Ziff Davis Publishing Holdings
Inc. to hold the intellectual property assets described in this prospectus. We
also formed Ziff Davis Publishing Inc. to operate our businesses in the United
States and Ziff Davis Europe Ltd. to hold our European businesses. Ziff Davis
Media Inc., the issuer of the notes, is now a holding company with no
operations or assets other than its equity interests in Ziff Davis Publishing
Holdings Inc., Ziff Davis Development Inc. (LaunchCo) and Ziff Davis Internet
Inc. (InternetCo) and cash balances. We recently created eTESTING LABS Inc., to
operate our eTESTING LABS business. The following chart sets forth our
corporate and capital structure after giving effect to the offering of the old
notes:
[Flow chart showing corporate and capital structure]
(1) Consists of equity contributed by Willis Stein, its equity co-investors and
management. Includes $50.0 million earmarked for LaunchCo and InternetCo.
All $335.0 million has been contributed to us by our Parent.
(2) Includes $50.0 million available under the revolving portion of our senior
credit facilities.
(3) LaunchCo and InternetCo are unrestricted subsidiaries and guarantors under
the indenture governing the exchange notes.
(4) Ziff Davis Publishing Holdings Inc. and all of its direct and indirect
domestic subsidiaries are restricted subsidiaries and guarantors under the
indenture governing the exchange notes.
(5) These joint ventures are not guarantors under the indenture governing the
exchange notes.
(6) In August 2000, we completed the sale of our International publications.
7
<PAGE>
RECENT DEVELOPMENTS
Since the closing of the transactions, we have launched The Net Economy,
which addresses the needs of competitive network operators and service
providers, and Expedia Travels, an Internet/travel magazine. We have also begun
to implement our strategy of streamlining our overhead and cost structure,
which has resulted in our achievement of significant operating cost savings
since the completion of the transactions.
On November 10, 2000, we prepaid $35.0 million of principal owed under our
senior credit facilities, reducing our total debt balance to $510.3 million and
our senior debt balance to $260.3 million.
8
<PAGE>
SUMMARY HISTORICAL FINANCIAL INFORMATION
The following table presents our summary historical financial information
and the notes thereto. The summary historical financial information as of
December 31, 1998 and 1999 and for the three years in the period ended December
31, 1999 were derived from our audited financial statements and the related
notes included elsewhere in this prospectus. The balance sheet data as of
December 31, 1997 is unaudited. The summary historical financial data as of and
for the six months ended September 30, 1999 and September 30, 2000 as well as
financial data as of and for the three months ended March 31, 2000, are
unaudited and have been prepared on the same basis as our audited carve-out
financial statements and, in our opinion, reflect all adjustments (consisting
only of normal recurring adjustments) necessary to present fairly our results
of operations for the periods then ended and our financial position as of such
dates. Financial data of the Predecessor for the period between April 1, 2000
and April 4, 2000 is not material. Operating results for the six months ended
September 30, 2000 are not necessarily indicative of the results that may be
expected in the future. During the periods prior to April 5, 2000, we were a
division of Ziff-Davis Inc. On April 5, 2000, the publishing division of Ziff-
Davis Inc. was purchased by Willis Stein & Partners, establishing a different
accounting basis. In relation to this acquisition, we changed our fiscal year
end from December 31 to March 31. Accordingly, we have separated the periods of
different ownership in the tables below. The summary historical financial
information should be read in conjunction with the "Selected Historical
Financial Information," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our financial statements and the notes
to those statements, included elsewhere in this prospectus.
<TABLE>
<CAPTION>
Fiscal
Years
Ended
December Three Months Ended Six Months Ended
31, March 31, September 30,
----------------------------------- ------------------ -----------------------
(Predecessor) (Predecessor) (Predecessor) (Company)
1997 1998 1999 2000 1999 2000
---------- ------------- --------- ------------------ ------------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenue, net............ $ 575,206 $ 540,977 $ 535,709 $128,941 $ 254,780 $227,390
Cost of production...... 165,794 167,284 158,040 38,733 75,459 64,581
Selling, general and
administrative expenses
(excluding stock based
compensation expense of
$ -- , $ -- , $866,
$446, $920 and $ -- ,
respectively).......... 294,166 284,098 277,736 74,425 138,004 121,174
Depreciation and
amortization........... 81,556 82,263 82,477 12,066 42,252 28,699
Write-down of intangible
assets and other
expenses (/1/)......... -- 39,995 782,653 446 920 --
---------- ---------- --------- -------- --------- --------
Income (loss) from
operations........... 33,690 (32,663) (765,197) 3,271 (1,855) 12,936
Equity in income from
joint ventures......... 335 2,154 1,874 266 1,244 1,216
Interest expense, net... -- -- -- -- -- 27,426
---------- ---------- --------- -------- --------- --------
Income (loss) before
income taxes......... 34,025 (30,509) (763,323) 3,537 (611) (13,274)
Income tax provision
(benefit).............. 30,596 (6,858) (180,289) 2,095 (151) 333
---------- ---------- --------- -------- --------- --------
Net income (loss)..... $ 3,429 $ (23,651) $(583,034) $ 1,442 $ (460) $(13,607)
========== ========== ========= ======== ========= ========
Other Financial Data:
EBITDA (as
defined) (/2/)......... $ 113,766 $ 89,955 $ 103,581 16,453 $ 43,429 $ 42,851
Capital expenditures.... 8,016 17,559 10,840 1,792 2,575 7,016
Net cash provided by
operating activities... 75,140 80,784 91,429 18,296 36,432 34,658
Net cash used by
investing activities... (17,967) (18,159) (16,338) (2,608) (10,269) (776,328)
Net cash (used) provided
by financing
activities............. (55,440) (60,581) (78,913) (13,543) (24,079) 857,563
Balance Sheet Data (end
of period):
Cash and cash
equivalents(/3/)....... $ 4,265 $ 6,309 $ 2,487 $ 4,632 $ 7,240 $117,985
Total assets............ 1,791,756 1,727,883 931,248 913,389 1,683,171 972,186
Total debt.............. -- -- -- -- -- 537,461
Division equity (/4/)... 1,546,198 1,466,616 826,725 814,629 1,437,466 --
Total stockholder's
equity................. -- -- -- -- -- 321,393
</TABLE>
(see footnotes on the following page)
9
<PAGE>
NOTES TO SUMMARY HISTORICAL FINANCIAL INFORMATION
(1) Write-down of intangible assets and other expenses includes the following:
<TABLE>
<CAPTION>
Fiscal Years Ended December Three Months Six Months
31, Ended March 31, Ended September 30,
----------------------------- --------------- -----------------------
(Predecessor) (Predecessor) (Predecessor) (Company)
1997 1998 1999 2000 1999 2000
------ ------------- -------- --------------- ------------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Year 2000
remediation expense.... $ -- $ -- $ 3,027 $-- $-- $--
Non-cash stock-based
compensation expense... -- -- 866 446 920 --
Write-down of
intangible assets...... -- -- 778,760 -- -- --
Restructuring charge.... -- 39,995 -- -- -- --
------ ------- -------- ---- ---- ----
$ -- $39,995 $782,653 $446 $920 $--
====== ======= ======== ==== ==== ====
</TABLE>
(2) EBITDA is defined as income before interest expense, income taxes,
depreciation and amortization, non-cash and non-recurring charges. EBITDA
is not a measure of performance under GAAP, and EBITDA should not be
considered in isolation or as a substitute for net income, cash flows from
operating activities and other income or cash flow statement data prepared
in accordance with GAAP or as a measure of profitability or liquidity.
EBITDA is presented because it is commonly used by certain investors and
analysts to analyze companies' ability to service debt. However, our method
of computation may not be comparable to similarly titled measures of other
companies.
The following table details the calculation of EBITDA:
<TABLE>
<CAPTION>
Three Months Six months
Fiscal Year Ended December 31, Ended March 31, Ended September 30,
--------------------------------- --------------- -----------------------
(Predecessor) (Predecessor) (Predecessor) (Company)
1997 1998 1999 2000 1999 2000
-------- ------------- --------- --------------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Income (loss) from operations.................... $ 33,690 $(32,663) $(765,197) $ 3,271 $(1,855) $12,936
Equity in income from joint ventures............. 335 2,154 1,874 266 1,244 1,216
Non-cash rent expense (credits).................. (1,815) (1,794) 1,774 404 868 --
Write-down of intangible assets and other
expenses........................................ -- 39,995 782,653 446 920 --
Depreciation and amortization.................... 81,556 82,263 82,477 12,066 42,252 28,699
--------------------------------------------------
-------- -------- --------- ------- ------- -------
EBITDA......................................... $113,766 $ 89,955 $ 103,581 $16,453 $43,429 $42,851
</TABLE>
(3) Balance at September 30, 2000 includes restricted cash. See Note 2 to the
unaudited consolidated financial statements included elsewhere in this
prospectus.
(4) Division equity is presented because prior to the closing of the
transactions we were a division of Ziff-Davis Inc. and were not a separate
legal entity.
10
<PAGE>
RISK FACTORS
An investment in the exchange notes involves various risks, including those
described below. You should carefully consider these risk factors, together
with the other information in this prospectus, before deciding to purchase any
exchange notes.
Because we have substantial debt, we may not be able to make payments on the
exchange notes.
As a result of the transactions, we have a significant amount of
indebtedness. As of November 30, 2000 we had total indebtedness of
approximately $510.3 million (excluding unused commitments under the revolving
portion of our senior credit facilities) and total stockholder's equity of
$317.5 million. We may be able to incur substantial additional indebtedness in
the future, including $50.0 million of additional debt under the revolving
portion of our senior credit facilities.
Our substantial indebtedness could have important consequences to you. For
example, it could:
. make it more difficult for us to satisfy our obligations with respect to
the exchange notes;
. require us to dedicate a substantial portion of our cash flow from
operations to payments on our indebtedness, thereby reducing the
availability of our cash flow to fund our operations;
. increase our vulnerability to general adverse economic and industry
conditions;
. limit our flexibility in planning for, or reacting to, changes in our
business and the publishing industry generally;
. place us at a competitive disadvantage compared to our competitors that
have less debt;
. prevent us from raising the funds necessary to repurchase all of the
exchange notes tendered to us upon the occurrence of change of control
events, which would constitute an event of default under the exchange
notes; and
. limit, along with the financial and other restrictive covenants in our
indebtedness, among other things, our ability to borrow additional funds;
if we fail to comply with those covenants we could trigger an event of
default under the agreements governing our indebtedness that, if not
cured or waived, could have a material adverse effect on us.
Our projected sources of cash may be insufficient to meet our obligations under
the exchange notes.
We expect to pay our expenses and principal and interest on the exchange
notes and other debt with cash flow from operations and future borrowings under
the revolving portion of our senior credit facilities. Our ability to make
payments on and to refinance our indebtedness, including these exchange notes,
and to fund our business strategy, working capital and capital expenditures
will depend on our ability to generate cash in the future, which is subject to
general economic, financial, competitive, legislative, regulatory and other
factors that are beyond our control. We cannot assure you that our business
will generate sufficient cash flow from operations, or that future borrowings
will be available to us and our subsidiaries under the revolving portion of our
senior credit facilities in an amount sufficient to enable us to pay our
indebtedness, including with respect to the exchange notes, or to fund our
other liquidity needs. If we cannot service our indebtedness we will be forced
to take actions such as delaying or reducing the implementation of our business
strategy or capital expenditures, selling assets, restructuring or refinancing
our indebtedness (which could include these exchange notes) or seeking
additional equity capital or bankruptcy protection. We cannot assure you that
any of these remedies can be effected on commercially reasonable terms or at
all.
11
<PAGE>
Your right to receive payments on the exchange notes will be junior to our
senior debt and may be subject to other restrictions.
Payment on the exchange notes offered by this prospectus will be
subordinated in right of payment to all of our senior debt, including
borrowings under our senior credit facilities. On November 30, 2000, the
exchange notes were subordinated to approximately $260.3 million of senior
debt, and $50.0 million was available for borrowing as additional senior debt
under the revolving portion of our senior credit facilities. Because of the
subordination provisions in the indenture, in the event of our insolvency,
liquidation, reorganization, dissolution or other winding-up, holders of the
exchange notes will not receive any payment on the exchange notes until all
senior debt, including borrowings under our senior credit facilities, is paid
in full. In addition, the credit agreement relating to our senior credit
facilities does not (and other agreements relating to our senior debt may not)
permit us to make any payments on the exchange notes during the continuance of
payment defaults under the credit agreement (or such other agreements), and
payments on the exchange notes may be prohibited for up to 179 consecutive days
in the event of certain nonpayment defaults on our senior debt. The exchange
notes will be unsecured, and will also be effectively subordinated to all
secured obligations to the extent of the value of the assets securing such
obligations or the obligations being secured. The guarantees of our
subsidiaries will also be subordinated to the senior debt of these subsidiaries
(which includes guarantees of our debt under the credit agreement relating to
our senior credit facilities). See "Description of Senior Credit Facilities."
Our foreign subsidiaries will not guarantee the exchange notes. The exchange
notes will be structurally subordinated to all existing and future debt and
other liabilities (including trade payables) of these subsidiaries. The right
of the holders of exchange notes to participate in any distribution of the
assets of these subsidiaries upon their liquidation, reorganization or
insolvency will be subject to the prior claims of these subsidiaries'
creditors.
If we do not receive the cash flow of our subsidiaries we will be unable to
satisfy our obligations under the exchange notes.
We are a holding company with no assets other than our ownership of the
capital stock of our subsidiaries. Accordingly, our operating cash flow and our
ability to service our indebtedness, including the exchange notes, depends upon
the operating cash flow of our subsidiaries and their payments to us in the
form of loans, dividends or otherwise. In addition, our subsidiaries' payment
of dividends and the making of loans, advances and other payments to us may be
subject to regulatory and contractual restrictions. Subsidiary payments are
contingent upon earnings and various business and other considerations.
Restrictive debt covenants in the credit agreement relating to our senior
credit facilities, the indenture relating to the exchange notes and future debt
agreements significantly restrict our operations.
The credit agreement relating to our senior credit facilities and the
indenture relating to the exchange notes restrict our and our guarantors'
ability to:
. incur additional indebtedness;
. pay dividends and make other distributions;
. make investments and other restricted payments;
. create liens;
. sell and otherwise dispose of assets; and
. enter into transactions with affiliates.
12
<PAGE>
We cannot assure you that these restrictions will not adversely affect our
ability to finance future operations, implement our business strategy, fund our
capital needs or engage in other business activities that may be in our
interest. In addition, the credit agreement relating to our senior credit
facilities requires that we maintain compliance with certain financial ratios.
Our ability to comply with these ratios may be affected by events beyond our
control. Any future credit agreements or other agreement relating to our
indebtedness to which we or any of our subsidiaries is a guarantor may include
the covenants described above and other restrictive covenants.
Noncompliance with our senior credit facilities could accelerate our
obligations.
A breach of any of the restrictive covenants under the credit agreement
relating to our senior credit facilities or our inability to comply with the
required financial ratios could result in a default under our senior credit
facilities. In the event of any such default, the lenders under our senior
credit facilities may elect to declare all outstanding borrowings, together
with accrued and unpaid interest and other fees, to be immediately due and
payable, to require us to use all of our available cash to repay such
borrowings or to prevent us from making debt service payments on the exchange
notes, which would result in an event of default under the exchange notes. Our
senior lenders also have the right in such circumstances to terminate any
commitments they have to provide further financing, including under the
revolving portion of our senior credit facilities.
Because our credit agreement is secured by our assets, a default could
negatively effect our noteholders.
If we are unable to repay any of these borrowings when due, the lenders
under our senior credit facilities also will have the right to proceed against
the collateral, which consist of substantially all of our assets, 100% of the
capital stock of each of our domestic subsidiaries held by us and 65% of the
capital stock of each of our foreign subsidiaries. If the indebtedness under
our senior credit facilities and the exchange notes were to be accelerated, we
cannot assure you that our assets would be sufficient to repay such
indebtedness in full.
We may not succeed as an independent company.
The historical financial information we have included in this prospectus may
not reflect what our results of operations, financial position and cash flow
would have been had we been a stand-alone company during the periods presented
or what our results of operations, financial position and cash flow will be in
the future. Various adjustments and allocations were made in preparing the
historical financial statements in this prospectus because the seller did not
account for us as a stand-alone business for all periods presented. We cannot
assure you that the adjustments and allocations we have made in preparing our
historical and pro forma consolidated financial statements appropriately
reflect our operations during the periods presented as if we had operated as a
stand-alone company.
In addition, as a result of the transactions, we will now be required to
provide the infrastructure, resources and services necessary to operate our
business independently. We have estimated the costs of replacing the
infrastructure, resources and services necessary to successfully operate our
business independently, but actual results could differ from the estimates
used.
Recent trends in our industry may harm us if they continue.
The technology magazine and newspaper publishing industry has recently
experienced a decrease in advertising revenue in both trade and consumer
publications. For the year ended December 31, 1999 (the latest period for which
data is available), the worldwide revenue for the industry declined by 4.9%
compared to 1998. According to industry sources, several factors have
contributed to a reduced demand for advertising in our industry, including
margin pressure on smaller computer equipment manufacturers.
13
<PAGE>
This contributed to the consolidation of the distribution channel that included
the catalog and off-brand direct sellers of PCs and peripherals. In addition,
product and advertising delays, reduced advertising budgets to fund Year 2000
concerns and lower demand in Asia in late 1998 contributed to a reduced demand
for advertising in our industry. While some of these factors, such as the Year
2000 transition and the 1998 economic downturn in Asia, are not expected to
affect the industry going forward, other factors and general economic
conditions may continue to affect the trends in the industry in which we
compete.
We may not achieve the cost savings anticipated in our business plan.
Our business plan anticipates that we will have the ability to operate our
subsidiaries with lower costs than we had when we were a division of Ziff-Davis
Inc. The potential cost savings are based on analyses completed by members of
our management. Such analyses involve assumptions as to future events,
including general business and industry conditions, competitive factors, local
labor markets and labor productivity, many of which are beyond our control and
may not materialize. While we believe these analyses and the underlying
assumptions to be reasonable, and while we have been successfully operating
under our business plan since the closing of the transactions, there could be
unforeseen factors that may offset the estimated cost savings or other
components of our business plan in whole or in part. As a result, actual cost
savings, to the extent realized, may vary considerably, or be considerably
delayed, compared to the estimates described in this prospectus.
If we are not successful in evolving established publications to a rapidly
changing market we may not be able to compete effectively.
As a result of the rapidly changing market in which we compete, we are in
the process of evolving some of our publications in order to maintain a leading
position in the marketplace. Although every effort is and will continue to be
made to ensure such evolution is successful, we cannot guarantee that we will
continue to retain current levels of circulation and advertising revenue.
Our title acquisition strategy may not succeed.
As part of our growth and diversification strategy, we intend to pursue
acquisitions of titles that are complementary to our core businesses. Our
ability to grow through such acquisitions will depend on the availability of
suitable titles and the availability of capital to complete such acquisitions.
The risks inherent in this strategy could be heightened if we complete several
acquisitions within a relatively short period of time. The benefits of an
acquisition may often take considerable time to develop, and we cannot
guarantee that any acquisition will in fact produce the intended benefits.
In addition, title acquisitions and the integration of those acquired titles
involve a number of risks, including:
. diversion of management's attention from our present businesses;
. difficulties in assimilating the titles or in realizing projected
efficiencies, cost savings and revenue synergies; and
. increase in our indebtedness and contingent liabilities, which could in
turn restrict our ability to access additional capital when needed or to
pursue other important elements of our business strategy.
In addition, some acquisitions may require the consent of our lenders and we
cannot predict whether we would receive approvals or the terms on which the
lenders would approve such acquisitions. We currently have no agreement or
understanding regarding any material acquisition.
14
<PAGE>
We may not be able to protect our owned intellectual property or use our
licensed intellectual property.
We rely on copyright and trademark rights to protect our publishing
products. Effective trademark and copyright protection may be unavailable or
limited, or we may not have applied for such protection in the United States or
abroad. In addition, we have been, and may in the future be, notified of claims
that our publishing products may infringe trademarks, copyrights and/or other
intellectual property rights of others. Such claims, including any related
litigation, could result in significant expense to us and adversely affect our
cash flow, whether or not such litigation is resolved in our favor.
We have been granted a license to use certain trademarks owned by Yahoo
Corporation in connection with the publishing of Yahoo! Internet Life magazine
both in print and online. The term of our right to use these marks expires on
January 15, 2016. We have been granted an exclusive license to use certain
trademarks owned by Sony Computer Entertainment Corp. in connection with the
publishing of the magazine Official U.S. Playstation Magazine in the United
States and Canada. The initial term of our right to use these marks extends
until December 31, 2000 and automatically renews for one year, until December
31, 2001. We have also been granted an exclusive license to use certain
trademarks owned by Expedia, Inc. in connection with the publishing of the
magazine Expedia Travels in the United States and its territories and
possessions. The initial term of our right to use these marks expires on
January 28, 2010.
Our business might suffer if we fail to retain our senior management or to
recruit and retain key personnel.
We believe that our success depends on our ability to retain our senior
management team, including, in particular, James D. Dunning, Jr., our Chief
Executive Officer. Our business is managed by a small group of key executive
officers. The loss of services of Mr. Dunning or one or more of these senior
executives could adversely affect our ability to effectively manage our overall
operations or successfully execute current or future business strategies. We
have entered into executive agreements with several of our key executives,
including Mr. Dunning. See "Management."
In addition, our success depends on our continued ability to recruit and
retain highly skilled, knowledgeable and sophisticated editorial, sales and
technical personnel. Competition for highly skilled personnel is intense.
Accordingly, we cannot assure you of our ongoing ability to attract and retain
such qualified employees.
Because we depend on advertising as a principal source of revenue, we may be
harmed by reduced advertising.
For the twelve months ended March 31, 2000, we derived more than 70% of our
domestic revenue from advertising sales. We expect that advertising revenue
will continue to be the principal source of our revenue in the foreseeable
future. Most of our advertising contracts are either short-term contracts
and/or can be terminated by the advertiser at any time with little notice. We
cannot assure you that we will be able to retain current advertisers or obtain
new advertising contracts. Advertising revenue for the magazine industry is
cyclical and dependent upon general economic conditions. If a general economic
downturn or a U.S. recession occurs in the future, our advertisers may reduce
their advertising budgets. In addition, factors such as pricing pressures,
delays and new product launches may affect technology product advertisers. We
cannot assure you that advertisers will maintain current levels of advertising
in special-interest magazines and events instead of advertising in more
general-interest media.
Because our revenue is seasonal, quarterly comparisons are difficult to make.
Our business is seasonal. Revenue typically reaches its highest level during
the fourth quarter of each calendar year, our fiscal third quarter. These
seasonal trends materially affect our quarter-to-quarter
15
<PAGE>
operating results. Thus, the operating results of one quarter are not
indicative of the operating results of the following quarter. This is largely
due to the general increase in publishing revenue in our fiscal third quarter
as a result of increased consumer buying activity during the holiday season.
We cannot assure you that our fiscal third quarter revenue will continue to be
higher than revenue for our other quarters.
To remain competitive, we must constantly expand and develop new publications
and services.
Our future success depends in part on our ability to continue offering new
publications and services that successfully gain market acceptance by
addressing the needs of specific audience groups within our target markets.
The process of internally researching and developing, launching, gaining
acceptance and establishing profitability for a new publication or service, or
assimilating and marketing an acquired publication or service, is inherently
risky and costly. We cannot assure you that our efforts to introduce new
publications or services or assimilate acquired publications or services will
be successful.
We face significant competition for advertising and circulation.
We face significant competition with respect to our print publications from
a number of technology publishers, some of which may have greater financial
and other resources than we have, which may enhance their ability to compete
in the technology publishing market. We principally compete for advertising
and circulation revenue with publishers of other technology publications. We
also face broad competition from media companies that produce general-interest
magazines and newspapers. Competition for advertising revenue is primarily
based on advertising rates, the nature and scope of readership, reader
response to advertisers' products and services and the effectiveness of sales
teams. Overall competitive factors in publishing include product positioning,
editorial quality, circulation, price and customer service.
Our principal vendors are consolidating and this may adversely affect our
business and operations.
Our principal vendors include paper suppliers, printers, subscription
fulfillment houses and national newsstand distributors. Each of these
industries is currently experiencing consolidation among its principal
participants. Such consolidation may result in:
. decreased competition, which may lead to increased prices;
. interruptions and delays in services provided by such vendors; and
. greater dependence on certain vendors.
Such factors could adversely affect our results of operations. In 1999
approximately half of our total printing expenses for our domestic
publications were for printing services supplied by R.R. Donnelley. Four of
our paper suppliers for our U.S. operations each accounted for more than 10%
of our paper supply in 1999 as measured by tonnage. While we believe there are
adequate alternatives available, an interruption or delay in service from, or
the loss of, this printer or any of these paper suppliers could have a
material adverse effect on our cash flow.
We may be adversely affected by fluctuations in paper and postage costs.
Our principal raw material is paper. Paper costs constitute a significant
expense, accounting for 36.8% of our total cost of production in 1997, 36.5%
in 1998 and 33.5% in 1999. Paper prices have fluctuated over the past several
years, rising from 1994 through 1996, declining in 1997. During 1998 and 1999,
paper prices were relatively flat with a price increase occurring in 2000. We
generally enter into contracts for the purchase of paper which adjust the
price on a quarterly basis. We have not entered, and do not currently plan to
enter, into long-term forward price or option contracts for paper.
Accordingly, significant increases in paper prices could adversely affect our
future results of operations.
16
<PAGE>
Postage for magazine distribution is also one of our significant expenses,
accounting for 17.9% of our cost of production in 1997, 17.1% in 1998 and 16.7%
in 1999. We primarily use the U.S. Postal Service to distribute magazine
subscriptions. Recently, a 9.9% increase in postal rates for 2001 has been
approved. We may not be able to recover, in whole or in part, paper or postage
cost increases. Accordingly, significant cost increases could have a material
adverse effect on our cash flow.
Our controlling stockholder, Willis Stein, may have interests that conflict
with yours.
All of our equity securities (other than equity securities held by
management) are held by Willis Stein and its equity co-investors. Through their
controlling interest in us and pursuant to the terms of an investor rights
agreement among our Parent's stockholders, as more fully described under the
section "Certain Relationships and Related Transactions," Willis Stein has the
ability to control our operations and policies. Circumstances may occur in
which the interests of Willis Stein and its affiliates, as the controlling
stockholders, could be in conflict with your interests. In addition, our equity
investors may have an interest in pursuing acquisitions, divestitures or other
transactions that, in their judgment, could enhance their equity investment,
even though such transactions might involve risks to you.
If we are unable to raise funds at the time of a change of control, we may be
unable to finance the change of control offer required by the indenture.
If we undergo a "change of control," as defined later in this prospectus
under the heading "Description of the Exchange Notes--Change of Control," we
must offer to buy back your exchange notes for a price equal to 101% of the
principal amount, plus interest that has accrued but has not been paid as of
the repurchase date. We cannot assure you that we will have sufficient funds
available to make the required repurchases of the exchange notes in the event
of a change of control, or that we will have sufficient funds to pay our other
debts. In addition, our senior credit facilities prohibit us from repurchasing
the exchange notes after a change of control until we have repaid in full our
debt under such credit facilities. If we fail to repurchase the exchange notes
upon a change of control, we will be in default under both the exchange notes
and our senior credit facilities. Any future debt that we incur may also
contain restrictions on repurchases in the event of a change of control or
similar event. These repurchase restrictions may delay or make it harder for
others to obtain control of us.
Federal and state statutes allow courts, under specific circumstances, to void
guarantees and require noteholders to return payments received from guarantors,
which could negatively affect the validity of our subsidiaries' guarantees of
the exchange notes.
Under the federal bankruptcy law and comparable provisions of state
fraudulent transfer laws, the exchange notes and the subsidiary guarantees
could be voided, or claims in respect of the exchange notes or a subsidiary
guarantee could be subordinated to all other debts of a guarantor issuing a
subsidiary guarantee if, among other things, such guarantor, at the time it
incurred the indebtedness evidenced by the exchange notes or its subsidiary
guarantee:
. incurred such indebtedness with the intent to hinder, delay or defraud
creditors; or
. received less than reasonably equivalent value or fair consideration for
the incurrence of such indebtedness; and
--was insolvent or rendered insolvent by reason of such incurrence; or
--was engaged in a business or transaction for which the guarantor's
remaining assets constituted unreasonably small capital; or
--intended to incur, or believed that it would incur, debts beyond its
ability to pay such debts as they mature.
17
<PAGE>
In addition, any payment by such guarantor pursuant to its subsidiary
guarantee could be voided and required to be returned to such guarantor, or to
a fund for the benefit of the creditors of such guarantor.
The measures of insolvency for purposes of these fraudulent transfer laws
will vary depending upon the law applied in any proceeding to determine whether
a fraudulent transfer has occurred. Generally, however, a guarantor would be
considered insolvent if:
. the sum of its debts, including contingent liabilities, was greater than
the fair saleable value of all of its assets, or
. the present fair saleable value of its assets was less than the amount
that would be required to pay its probable liability on its existing
debts, including contingent liabilities, as they become absolute and
mature.
Based on historical financial information, recent operating history and
other factors, we believe that each guarantor of the exchange notes offered
hereby, after giving effect to its subsidiary guarantee of these exchange
notes, will not be insolvent, will not have unreasonably small capital for the
business in which it is engaged and will not have incurred debts beyond its
ability to pay such debts as they mature. There can be no assurance, however,
as to what standard a court would apply in making these determinations or that
a court would agree with our conclusion in this regard.
You cannot be sure that an active trading market will develop for the exchange
notes, which have no prior market.
Prior to the offering, there was no public market for the old notes. The
initial purchasers have made a market in the old notes, and we have been
informed that they intend to make a market, after this exchange offer is
completed, in the exchange notes, which will replace the old notes. However,
the initial purchasers have no obligation to make a market and may cease their
market-making activities at any time. The old notes were offered and sold only
to qualified institutional buyers and foreign purchasers and are subject to
restrictions on transfer, which are described later in this prospectus under
the heading "Notice to Investors."
We have applied to have the exchange notes designated as eligible for
trading in the PORTAL Market; however, we do not intend to apply for listing of
the exchange notes on any securities exchange or for quotation through the
Nasdaq National Market.
The liquidity of any market for the exchange notes, and the market price
quoted for the exchange notes, will depend on the number of holders of the
exchange notes, our performance, the market for similar securities, the
interest of securities dealers in making a market in the exchange notes and
other factors. A liquid trading market may not develop for the exchange notes.
18
<PAGE>
USE OF PROCEEDS
We will not receive any proceeds from this exchange offer. The net proceeds
from the $250 million old note offering, after deducting estimated fees and
expenses, were approximately $241.5 million. We used the net proceeds of the
old note offering to repay the $175.0 million in principal amount outstanding
represented by the original senior subordinated notes, $16.8 million
outstanding under our senior tranche A term facility, $42.9 million outstanding
under our senior tranche B term facility and $6.9 million of accrued interest
related to the senior and subordinated debt. The interest rate on the $250.0
million of existing notes from the old note offering and this exchange offer is
12.0%. As of September 30, 2000 the average interest rate on borrowings under
the senior tranche A term loan facility was 9.70% and the interest rate on
borrowings under the senior tranche B term loan facility was 10.26%. The senior
term loans are payable in quarterly installments beginning March 31, 2001 with
the final installment due on September 30, 2006 for the senior tranche A term
loan facility and on March 31, 2007 for the senior tranche B term loan
facility. The net proceeds from the issuance of the original senior
subordinated notes and the borrowings under the senior term loan facilities
were used to finance a portion of the transactions. See "Prospectus Summary--
The Transactions," "Capitalization" and "Description of Senior Credit
Facilities."
19
<PAGE>
CAPITALIZATION
The following table sets forth our cash and capitalization as of September
30, 2000 on (1) an actual basis and (2) on a pro forma basis giving effect to
the exchange offer described herein as if the exchange offer had occurred on
such date. You should read this table in conjunction with "Prospectus Summary--
The Transactions," "Use of Proceeds," "Unaudited Pro Forma Consolidated
Financial Statements," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the audited financial statements and
notes thereto included elsewhere in this prospectus.
<TABLE>
<CAPTION>
As of September
30, 2000
----------------
Actual Pro Forma
------ ---------
(in millions)
<S> <C> <C> <C>
Cash and cash equivalents(/1/)(/2/)........................ $118.0 $118.0
====== ======
Long-term debt (including current portion):
Senior credit facilities:(/2/)
Revolving credit facility (/3/)........................... $ -- $ --
Tranche A term loan facility.............................. 83.1 83.1
Tranche B term loan facility.............................. 212.2 212.2
------ ------
Total senior credit facilities........................... 295.3 295.3
Old notes.................................................. 250.0 --
Exchange notes............................................. -- 250.0
------ ------
Total long-term debt..................................... 545.3 545.3
Total stockholder's equity............................... 321.4 321.4
------ ------
Total capitalization..................................... $866.7 $866.7
====== ======
</TABLE>
--------
(1) Includes $26.8 million of restricted cash. See Note 2 to the consolidated
financial statements at September 30, 2000.
(2) Does not reflect $35.0 million prepayment made on the senior credit
facilities on November 10, 2000.
(3) The revolving credit facility provides for up to $50.0 million of
borrowings to be used to finance capital expenditures and acquisitions
permitted under the credit agreement relating to our senior credit
facilities and for working capital and other general corporate purposes.
See "Description of Senior Credit Facilities."
20
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma consolidated financial statements have
been derived from our financial statements. The unaudited pro forma balance
sheet as of September 30, 2000 is presented as if this exchange offer had
occurred on such date. The unaudited pro forma statements of operations data
for the twelve months ended March 31, 2000 and the six months ended September
30, 2000 are presented as if the transactions and the exchange note offering
had occurred at the beginning of each such period. The information in the
column titled "Actual" is derived from the financial statements included
elsewhere in this prospectus. Information for the twelve months ended March 31,
2000 represents the sum of the fiscal year ended December 31, 1999 and the
three months ended March 31, 2000, less the three months ended March 31, 1999.
The unaudited pro forma financial statements are presented for illustrative
purposes and are not necessarily indicative of the financial position or
results of operations that would actually have been reported had the
transactions actually occurred as of the periods presented or which may be
reported in the future. We have based the unaudited pro forma financial
statements upon assumptions that we believe are reasonable. The unaudited pro
forma consolidated financial statements should be read in conjunction with the
notes thereto and with our financial statements and the notes thereto included
elsewhere in this prospectus.
21
<PAGE>
ZIFF DAVIS MEDIA INC.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
As of September 30, 2000
<TABLE>
<CAPTION>
Exchange
Offer
Actual Adjustments Pro Forma
-------- ----------- ---------
(in thousands)
<S> <C> <C> <C>
Assets:
Cash and cash equivalents................. $ 91,235 $ -- $ 91,235
Accounts receivable, net ................. 67,955 -- 67,955
Inventories............................... 4,649 -- 4,649
Prepaid expenses and other current
assets................................... 11,807 -- 11,807
Due from affiliate........................ 256 -- 256
-------- -------- --------
Total current assets.................... 175,902 -- 175,902
Restricted cash........................... 26,750 -- 26,750
Property and equipment, net............... 60,209 -- 60,209
Equity investments ....................... 5,935 -- 5,935
Intangible assets, net.................... 673,699 -- 673,699
Other assets.............................. 29,691 -- 29,691
-------- -------- --------
Total assets............................ $972,186 $ -- $972,186
======== ======== ========
Liabilities and shareholder's equity:
Accounts payable.......................... $ 5,437 $ -- $ 5,437
Accrued expenses and other current
liabilities.............................. 47,626 -- 47,626
Current portion of long term debt......... 7,829 -- 7,829
Unexpired subscriptions, net ............. 46,251 -- 46,251
-------- -------- --------
Total current liabilities............... 107,143 -- 107,143
-------- -------- --------
Senior credit facilities.................. 287,143 -- 287,143
Existing notes............................ 250,000 (250,000)(/1/) --
Exchange notes............................ -- 250,000 (/1/) 250,000
Other non-current liabilities............. 6,189 -- 6,189
-------- -------- --------
Total liabilities....................... 650,793 -- 650,793
Total stockholder's equity.............. 321,393 -- 321,393
-------- -------- --------
Total liabilities and stockholder's
equity................................. $972,186 $ -- $972,186
======== ======== ========
</TABLE>
(1) Represents the exchange notes replacing the existing notes.
22
<PAGE>
ZIFF DAVIS MEDIA INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
For the Twelve Months Ended March 31, 2000
<TABLE>
<CAPTION>
Transaction Offering
Actual Adjustments Adjustments Pro Forma
--------- ----------- ----------- ---------
(in thousands)
<S> <C> <C> <C> <C>
Revenue, net............ $ 537,832 $ (78,517)(/1/) $ -- $459,315
Cost of production...... 157,295 (28,168)(/1/) -- 129,127
Selling, general and
administrative
expenses............... 288,283 (55,214)(/1/) -- 233,069
Depreciation and
amortization........... 74,406 (12,751)(/1/)(/2/) -- 61,655
Write-down of intangible
assets and other
expenses............... 782,640 (779,613)(/1/)(/3/) -- 3,027
--------- ---------- -------- --------
Income (loss) from
operations........... (764,792) 797,229 -- 32,437
Equity in income from
joint ventures......... 2,214 -- -- 2,214
Interest expense........ -- -- 61,402(/5/) 61,402
--------- ---------- -------- --------
Income (loss) before
income taxes......... (762,578) 797,229 (61,402) (26,751)
Income tax provision
(benefit).............. (178,883) 178,017(/4/) 1,535(/4/) 669
--------- ---------- -------- --------
Net income (loss) .... $(583,695) $ 619,212 $(62,937) $(27,420)
========= ========== ======== ========
Other Data:(/7/)
Ratio of earnings to
fixed charges ......... -- (/6/)
</TABLE>
(see footnotes on page 25)
23
<PAGE>
ZIFF DAVIS MEDIA INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
For the Six Months Ended September 30, 2000
<TABLE>
<CAPTION>
Offering
Actual Adjustments Pro Forma
-------- ----------- ---------
(in thousands)
<S> <C> <C> <C> <C>
Revenue, net.................. $227,390 $ -- $227,390
Cost of production............ 64,581 -- 64,581
Selling, general and
administrative expenses...... 121,174 -- 121,174
Depreciation and
amortization................. 28,699 -- 28,699
-------- ------- --------
Income from operations...... 12,936 -- 12,936
Equity in income from joint
ventures..................... 1,216 -- 1,216
Interest expense.............. 27,426 2,647(/5/) 30,073
-------- ------- --------
Loss before income taxes.... (13,274) (2,647) (15,921)
Income tax provision
(benefit).................... 333 66(/4/) 399
-------- ------- --------
Net loss.................... $(13,607) $(2,713) $(16,320)
======== ======= ========
Other Data:(/7/)
Ratio of earnings to fixed
charges ..................... -- (/6/) -- (/6/)
</TABLE>
(see footnotes on page 25)
24
<PAGE>
ZIFF DAVIS MEDIA INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
(1) We determined that all of our wholly-owned international operations
(excluding international licensing operations and international joint
ventures) did not meet our long-term strategic objective, and therefore, we
sold these operations in August 2000. As a result, we have excluded the
results of these operations from our pro forma statements of operations.
Such excluded amounts are detailed below:
<TABLE>
<CAPTION>
Twelve Months
Ended
March 31,
2000
-------------
<S> <C>
Revenue, net.................................................. $ 78,517
Cost of production............................................ 28,168
Selling, general and administrative expenses.................. 55,214
Depreciation and amortization................................. 2,858
Other expenses................................................ 2,822
---------
Loss from operations........................................ $ 10,545
=========
(2) Reflects adjustments to amortization expense as a result of the new
accounting basis of the assets established by the transactions. Our current
estimate of the fair value of the intangible assets acquired is
approximately $700,000. This amount is subject to adjustment as we finalize
our plans with respect to establishing a stand-alone infrastructure and
restructuring the operations of ZDP. We do not expect such adjustments to
be material.
The adjustment is comprised of the following:
<CAPTION>
Twelve Months
Ended
March 31,
2000
-------------
<S> <C>
Removal of depreciation and amortization associated with the
international operations which were sold in August 2000 (see
Note 4)...................................................... $ (2,858)
Removal of amortization of domestic intangibles under the
Predecessor's accounting basis............................... (59,392)
Addition of amortization expense based on the new accounting
basis established as a result of the transactions............ 49,499
---------
$ (12,751)
=========
(3) Adjustments include the following:
<CAPTION>
Twelve Months
Ended
March 31,
2000
-------------
<S> <C>
Remove stock-based compensation expense related to seller's
benefit plans................................................ $ (853)
Remove write-down of net assets as a result of the
acquisition.................................................. (778,760)
---------
$(779,613)
=========
</TABLE>
25
<PAGE>
ZIFF DAVIS MEDIA INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS--(continued)
(in thousands)
The write-down of net assets as a result of the acquisition is comprised of
the following amounts:
<TABLE>
<CAPTION>
Writedown
Amount
---------
<S> <C>
Subscriber lists.................................................. $ 36,757
Advertiser lists.................................................. 13,699
Trademarks/Tradenames............................................. 990
Lic. Agreements................................................... 408
Goodwill.......................................................... 856,445
--------
908,299
Accumulated amortization.......................................... (129,539)
--------
$778,760
========
</TABLE>
The writedown is further discussed in Note 8 to the Carve Out Financial
statements included elsewhere in this prospectus.
(4) Adjustments necessary to reflect pro forma income tax expense at an
effective income tax rate of negative 2.5%, our estimated effective tax
rate for the fiscal year ended March 31, 2001. This rate is based on our
expectation of incurring minimal state and local income taxes despite our
net loss position.
(5) Reflects the following interest expense adjustments:
<TABLE>
<CAPTION>
Twelve
Months Six Months
Ended Ended
March 31, September 30,
2000 2000
--------- -------------
<S> <C> <C>
Interest expense - senior subordinated notes at
12%............................................... $30,000 $ 15,000
Interest expense - revolving credit facility unused
commitment fee of 0.5%............................ 250 125
Interest expense - term loan A at 9.64%............ 8,020 4,010
Interest expense - term loan B at 10.26%........... 21,762 10,881
Amortization of debt issuance costs................ 2,626 1,313
Interest expense allocated to assets held for
sale.............................................. (1,256) (1,256)
Less actual interest expense incurred.............. -- (27,426)
------- --------
Transaction interest expense adjustment.......... $61,402 $ 2,647
======= ========
</TABLE>
Based on our existing financing arrangements, a one-eighth of a percent
change in interest rates would impact annual interest expense by $339.
(6) For purposes of the computations, earnings before fixed charges consist of
income (loss) before income taxes and equity in income (loss) from joint
ventures, plus fixed charges. Fixed charges are defined as interest expense
plus one-third of rent expense which is deemed to be representative of
interest. For the pro forma twelve months ended March 31, 2000 our earnings
were insufficient to cover fixed charges by $18,957. Our earnings were
insufficient to cover fixed charges by $11,990 and $14,637 for the actual
and pro forma periods ended September 30, 2000, respectively.
26
<PAGE>
ZIFF DAVIS MEDIA INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS--(continued)
(in thousands)
(7) EBITDA is defined as income before interest expense, income taxes,
depreciation and amortization, non-cash and non-recurring charges. EBITDA
is not a measure of performance under GAAP, and EBITDA should not be
considered in isolation or as a substitute for net income, cash flows from
operating activities and other income or cash flow statement data prepared
in accordance with GAAP or as a measure of profitability or liquidity.
EBITDA is presented because it is commonly used by certain investors and
analysts to analyze companies' ability to service debt. However, our method
of computation may not be comparable to similarly titled measures of other
companies.
The following table details the calculation of pro forma EBITDA:
<TABLE>
<CAPTION>
Twelve
Months Six Months
Ended Ended
March 31, September 30,
2000 2000
--------- -------------
<S> <C> <C>
Income from operations... $ 37,437 $12,936
Equity in income from
joint ventures.......... 2,214 1,216
Non-cash rent expense.... 2,848 --
Write-down of intangible
assets and other
expenses................ 3,027 --
Depreciation and
amortization............ 61,655 28,699
-------- -------
Pro forma EBITDA........ $107,181 $42,851
======== =======
</TABLE>
27
<PAGE>
SELECTED HISTORICAL FINANCIAL INFORMATION
The following table presents our selected historical financial information.
The selected financial information as of December 31, 1998 and 1999 and for the
three years in the period ended December 31, 1999 were derived from our audited
financial statements and the related notes included elsewhere in this
prospectus. The balance sheet information at December 31, 1997 and financial
information for 1995 and 1996 is unaudited. The selected historical financial
data as of and for the six months ended September 30, 1999 and September 30,
2000 as well as financial data as of and for the three months ended March 31,
2000, are unaudited, have been prepared on the same basis as our audited
combined financial statements and, in our opinion, reflect all adjustments
(consisting only of normal recurring adjustments) necessary to present fairly
our results of operations for the periods then ended and our financial position
as of such dates. Financial data of the Predecessor for the period between
April 1, 2000 and April 4, 2000 is not material. Operating results for the six
months ended September 30, 2000 are not necessarily indicative of our future
results of operations or financial position. During the periods prior to
February 29, 1996, we were a division of Ziff-Davis Holdings Corp. On February
29, 1996, Ziff-Davis Inc., our former parent company, was acquired by SOFTBANK
Corp., establishing a different accounting basis. Another accounting basis was
established on April 5, 2000 when our predecessor, the publishing division of
Ziff-Davis, Inc., was purchased by Willis Stein & Partners. Accordingly we have
separated both periods of different ownership in the table below. The selected
historical financial information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our financial statements and the notes to those statements,
included elsewhere in this prospectus.
<TABLE>
<CAPTION>
Fiscal Year Period Period Three Months Six Months
Ended Jan. 1 to Mar. 1 to Fiscal Years Ended Dec. 31, Ended Mar. 31 Ended Sept. 30,
Dec. 31, Feb. 29, Dec. 31, -------------------------------- ------------- ---------------------
1995(/1/) 1996(/1/) 1996(/1/) 1997(/1/) 1998(/1/) 1999(/1/) 2000(/1/) 1999(/1/) 2000(/2/)
--------------------------------- ---------- ---------- --------- ------------- ---------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenue, net..... $ 527,645 $ 84,412 $ 467,252 $ 575,206 $ 540,977 $ 535,709 $128,941 $ 254,780 $227,390
Cost of
production...... 133,252 25,419 135,022 165,794 167,284 158,040 38,733 75,459 64,581
Selling, general
and
administrative
expenses
(excluding stock
based
compensation
expense of $ --
,
$ --, $ -- ,
$ -- , $ -- ,
$866, $446,
$460, and $ -- ,
respectively)... 303,828 40,689 256,320 294,166 284,098 277,736 74,425 138,004 121,174
Depreciation and
amortization.... 68,646 11,052 66,659 81,556 82,263 82,477 12,066 42,252 28,699
Year 2000
remediation
expense......... -- -- -- -- -- 3,027 -- -- --
Write-down of
intangible
assets (3)...... -- -- -- -- -- 778,760 -- -- --
Restructuring
charge (4)...... -- -- -- -- 39,995 -- -- -- --
Income (loss)
from
operations...... 21,919 7,252 9,251 33,690 (32,663) (765,197) 3,271 (1,855) 12,936
Net income
(loss).......... 11,969 4,562 (13,412) 3,429 (23,651) (583,034) 1,442 (460) (13,607)
Other Financial Data:
Capital
expenditures.... $ 10,622 $ 414 $ 10,993 $ 8,016 $ 17,559 $ 10,840 $ 1,792 $ 2,575 $ 7,016
Ratio of earnings
to fixed
charges (5)..... 5.8x 13.3x 4.6x 10.8x -- -- 4.8x 2.2x --
Balance Sheet Data (end of period):
Cash and cash
equivalents
(6)............. $ 2,493 $ 5,271 $ 2,532 $ 4,265 $ 6,309 $ 2,487 $ 4,632 $ 7,240 $117,985
Total assets..... 1,320,602 1,312,813 1,840,984 1,791,756 1,727,883 931,248 913,389 1,683,171 972,186
Total Debt....... -- -- -- -- -- -- -- -- 545,290
Division equity
(7)............. 1,132,685 1,148,858 1,617,759 1,546,198 1,466,616 826,725 814,628 1,437,466 --
Total
Stockholder's
equity.......... -- -- -- -- -- -- -- -- 321,393
</TABLE>
(see footnotes on the following page)
28
<PAGE>
NOTES TO SELECTED HISTORICAL FINANCIAL INFORMATION
(in thousands)
(1) Financial data presented below is for the Predecessor company.
(2) Financial data presented below is for the Company.
(3) Reflects an adjustment by the seller to write-down the intangible assets to
reflect Ziff Davis Media's $780.0 million acquisition price. Prior to the
decision of Ziff Davis Inc. to explore strategic initiatives, Ziff Davis
Publishing had assessed the recoverability of its intangible assets using
an undiscounted cash flow model and determined that its intangible assets
were recoverable on a held for use basis. Under SFAS 121 when Ziff Davis
Inc's board of directors approved of a plan of disposal and decided to sell
its publishing assets the facts and circumstances surrounding the
publishing business had changed significantly requiring an impairment
review for assets to be disposed in accordance with SFAS 121. ZDP tested
for impairment on a held for sale basis which requires measuring the fair
value of assets to be disposed of using a fair value model. The negotiated
purchase price of $780 million for the publishing business's assets
represented the fair value of such business at the time, and accordingly,
ZDP recorded an impairment charge to write-down its intangible assets to
fair value.
(4) The restructuring charge incurred in 1998 related to the closure of three
magazines and includes the write-off of intangible assets, severance costs
and facilities closure costs.
(5) For purposes of the computations, earnings consist of income/(loss) before
income taxes and equity earnings/losses, plus fixed charges. Fixed charges
are defined as interest expense plus one-third of rent expense which is
deemed to be representative of interest. For the years ended December 31,
1999 and 1998 and for the six months ended September 30, 2000, our earnings
were insufficient to cover fixed charges by $765,197 and $32,663,
respectively.
(6) Includes $26,750 of restricted cash at September 30, 2000. See Note 2 to
the consolidated financial statements at September 30, 2000.
(7) Division equity is presented because prior to the closing of the
transactions we were a division of Ziff-Davis Inc. and were not a separate
legal entity.
29
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion in conjunction with our financial
statements and our unaudited pro forma consolidated financial information,
including the notes to those statements, that are included elsewhere in this
prospectus. The following discussion and analysis of our financial condition
and results of operations covers periods prior to the consummation of the
transactions and does not reflect the impact of these events or of the business
strategy implemented after the consummation of the transactions. The following
discussion includes forward-looking statements that involve risks and
uncertainties. See "Disclosure Regarding Forward Looking Statements," "Risk
Factors" and "--Liquidity and Capital Resources."
Overview
We publish and license magazines, provide editorial content about the
technology industry and the Internet and to a lesser extent provide custom
testing services and software and produce conferences, seminars and webcasts.
On April 5, 2000, we acquired certain publishing assets ("Ziff Davis
Publishing", "ZDP" or the "Predecessor") from Ziff-Davis Inc. ("ZDI"), an
unrelated company for $780.0 million plus expenses (the "Acquisition"). The
Acquisition was accounted for under the purchase method of accounting.
We had no operations prior to April 5, 2000. Our financial statements as of
September 30, 2000, and for the six-month period then ended are prepared on a
consolidated basis and include the accounts of the Company and its
subsidiaries. The combined financial statements of the Predecessor for periods
prior to April 5, 2000 are prepared on a carve-out basis, as ZDP was not a
separate legal entity owned by ZDI.
Since April 5, 2000, we have formed two subsidiaries which are focused on
developing and launching new products and businesses. These subsidiaries, Ziff
Davis Development Inc. ("LaunchCo") and Ziff Davis Internet Inc.
("InternetCo"), are collectively referred to, and defined under our debt
agreements, as "Unrestricted Subsidiaries". We are developing Internet-related
ventures leveraged off our expertise in technology and the Internet through
InternetCo and developing new publications and businesses through LaunchCo.
Where appropriate in our discussion below, we have separately identified
amounts associated with the Unrestricted Subsidiaries when comparing amounts to
prior year periods, as they relate to new business begun in the current fiscal
year and are reported separately under our credit agreements.
In connection with the Acquisition, we determined that ZDP's wholly-owned
international operations (excluding international licensing operations and
international joint ventures) did not meet our long-term strategic objectives
and implemented plans for the sale of the operations. In August 2000, we and
our European subsidiaries completed the sale of our wholly-owned International
operations (excluding international licensing and international joint ventures)
for a purchase price of approximately $42.0 million.
The purchase price for these assets consists of:
(1) $31.0 million in cash, subject to post closing adjustments, plus
(2) $3.2 million related to purchase of inventory, prepaid expenses and
fixed assets, excluding leasehold improvements offset by
approximately $3.5 million of net subscription liabilities assumed;
and
(3) an additional $15.0 million to be paid over a period of five years
in five annual payments of $3.0 million which we have recorded at a
net present value of $11.3 million.
30
<PAGE>
We have retained most of our accounts receivable, other than accounts
receivable in respect of advertising and subscriptions for issues of the
publications to be published after the closing. The buyer has agreed to collect
these accounts on our behalf. We have also retained most of our liabilities,
excluding deferred subscription liabilities.
The results of these operations are excluded from our consolidated statement
of operations for the period from April 5, 2000 to the sale date, August 4,
2000. (See Note 1 to the Unaudited Consolidated Financial Statements). Our 1999
financial statements include the operating results of ZDP's wholly-owned
international operations.
Revenue
Our principal sources of revenue are advertising (72.9% of 1999 total
revenue), circulation (22.5%) and other (4.6%). Circulation comprises both paid
subscriptions (11.2%) and newsstand sales (11.3%) while other includes lab
testing and royalties. No single advertiser has comprised more than 6% of our
advertising revenue during any of the last three years. We record revenue net
of agency commissions, estimated subscription cancellations and newsstand
returns.
Advertising. Advertising rates and rate structures vary among our
publications and are based on, among other things, the circulation of the
particular publication, the readership demographics, the scheduled frequency
and the size and placement of the advertisement in the publication. Our
advertising revenue is influenced by a number of external factors, including
the volume of new technology product introductions, the amount and allocation
of marketing expenditures by our advertising clients and the extent to which
our customers elect to advertise using print media.
Newsstand. We sold approximately 13 million single copy magazines for the
year ended December 31, 1999. Generally we receive approximately 55% of the
cover price of an individual magazine sold through a newsstand with the balance
of the cover price going to the magazine's distributor, wholesaler and
retailer.
Subscriptions. Generally, we sell subscriptions to our publications either
directly by our circulation force or by an independent subscription direct
marketing companies or agents. We receive approximately 20% of the total price
of subscriptions sold through agents. In addition to agents, we have
historically sold subscriptions using a variety of techniques including direct
reply subscription cards, direct mail and the Internet.
Other Revenue Sources. We derive other sources of revenue from benchmarking
and testing services, royalty arrangements and mailing list rentals. We
generate revenue from benchmarking and testing services through eTESTING LABS,
which provides for-hire testing services that is independent of our editorial
testing groups. Our most significant licensing royalty is from ZDNet, the
Internet business of the seller, in exchange for use of our editorial content
on ZDNet's website. Under this arrangement, ZDNet pays royalties to us based on
its annual revenue, net of bad debt expense and discounts and subject to
minimum and maximum annual payments. On August 22, 2000, we gave notice to
ZDNet pursuant to the terms of our licensing agreement (see "Business") that it
would terminate effective March 31, 2001 due to ZDNet's failure to comply with
the terms of the agreement. Upon termination of the agreement on March 1, 2001,
we will not be entitled to receive the minimum annual royalty payments under
the agreement. We have a services agreement with ZD Inc. under which we produce
and distribute ZD Inc.'s Computer Shopper magazine in return for a $5.0 million
fee, which we recognize as revenue. ZD Inc. will reimburse us for all costs
incurred in producing and distributing Computer Shopper. The Computer Shopper
agreement may be terminated with 90 days notice.
Operating Costs
The principal components of our production costs are raw materials, printing
and distribution, which represented 33.5%, 36.8% and 29.7%, respectively of
total 1999 publishing production expenses.
31
<PAGE>
Our principal raw material is paper. Paper supply and prices are subject to
volatility and may be significantly affected by many factors, including market
and economic conditions.
Our other principal operating costs are selling, general and administrative
expenses, including editorial costs. Included in these costs are salaries,
sales commissions and benefits along with marketing and promotion expenses
related to advertising and circulation. Prior to the transactions, we received
an allocation of centralized costs from the seller based on estimated
utilization. We have since built an infrastructure to service our needs as a
stand-alone entity.
Results of Operations
Comparison of the six months ended September 30, 2000 and the six months
ended September 30, 1999.
The table below sets forth our consolidated summary of operations in
(millions of dollars and as a percentage of net revenue) for the six months
ended September 30, 1999 (predecessor) and 2000, respectively. For comparative
purposes, pro forma adjustments have been made to the 1999 figures to exclude
the operating results of ZDP's wholly-owned international operations which, as
described above, have been sold.
<TABLE>
<CAPTION>
For the six months ended September 30,
--------------------------------------------------------
1999 2000
1999 Pro Forma Actual
------------------------------- --------- ------
International 2000 As a percent of
Actual Operations Pro Forma Actual Revenue, net
------ ------------- --------- ------ ----------------
<S> <C> <C> <C> <C> <C> <C>
Revenue, net............ $254.8 $37.6 $217.2 $227.4 100.0% 100.0%
Cost of production...... 75.4 13.2 62.2 64.6 28.6 28.4
Selling, general and
administrative
expenses............... 137.2 27.0 110.2 121.1 50.7 53.3
Non cash charges
included in selling,
general and
administrative
expenses............... 1.7 -- 1.7 -- 0.8 --
Depreciation and
amortization........... 42.3 1.5 40.8 28.7 18.8 12.6
------ ----- ------ ------ ----- -----
Income (loss) from
operations............. (1.8) (4.1) (2.3) 13.0
Equity in income from
joint ventures......... 1.2 -- 1.2 1.2 0.6 0.5
Interest expense, net... -- -- -- 27.4 N/A 12.0
Income tax (benefit)
provision (0.1) -- (0.1) 0.3
------ ----- ------ ------
Net loss................ $ (0.5) $(4.1) $ (3.6) $(13.5)
====== ===== ====== ======
Other Data
EBITDA, as defined...... $ 43.4 $(2.6) $ 46.0 $ 42.9
EBITDA, as defined--
Restricted
Subsidiaries........... n/a n/a n/a 53.3
EBITDA, as defined--
Unrestricted
Subsidiaries........... n/a n/a n/a (10.4)
</TABLE>
International operations
As discussed above, we determined to sell our international operations at
the time of the transactions and completed the sale in August 2000.
Accordingly, the net assets related to these operations were recorded as assets
held for sale at the estimated net proceeds from the sale, as adjusted for
estimated cash flows from these operations and an allocation of interest
expense for the estimated holding period. As a result, the financial statements
for the six months ended September 30, 2000 do not reflect any results of
operations of the international operations. For the six months ended September
30, 1999, the International operations generated $37.6 million in revenue, a
net loss of $4.1 million and an EBITDA loss of $2.6 million. The discussion
below for the six month period ended September 30, 1999 and 2000 excludes the
impact of the above-described International operations in 1999.
32
<PAGE>
Revenue, net
Revenue increased $10.2 million, or 4.7%, from $217.2 million in the six
months ended September 30, 1999 to $227.4 million for the six months ended
September 30, 2000. Revenue from the Unrestricted Subsidiaries was $0.4 million
for the six months ended September 30, 2000 which related to advertising
revenue from the first issue of The Net Economy. Excluding the Unrestricted
Subsidiaries, advertising revenue increased by $9.1 million, or 5.7%. This
advertising revenue increase was due to a 11.4% increase in average revenue per
page which was primarily a result of rate increases partially offset by a 7.0%
decline in advertising pages. Other revenue, which is primarily derived from
licensing and other services, increased $4.4 million, or 39.0%. This increase
is due primarily to (1) $2.5 million of fees related to certain services we
provide to Computer Shopper, an unaffiliated magazine, and (2) $1.9 million of
service fees earned by eTESTING Labs, which began offering its testing services
to third parties during the first quarter of Fiscal 2001, partially offset by a
decline in licensing revenue. These advertising and other revenue increases
were partially offset by a $3.7 million, or 8.2%, decrease in total circulation
revenue related to fewer single-copy sales as compared to the same prior year
period. Excluding the Unrestricted Subsidiaries, advertising, circulation and
other revenue accounted for 74.8%, 18.3% and 6.9% of our consolidated net
revenue during the six months ended September 30, 2000, as compared to 74.0%,
20.8% and 5.2% in the comparable prior year period.
Cost of production
Cost of production was $64.6 million for the six months ended September 30,
2000, compared to $62.2 million for the six months ended September 30, 1999, an
increase of $2.4 million, or 3.9%. Cost of production related to the
Unrestricted Subsidiaries was $0.1 million which primarily related to the first
issue of The Net Economy. Excluding the Unrestricted Subsidiaries, cost of
production increased $2.2 million or 3.5%. This increase was due to a 9.1%
increase in the total number of copies printed to meet increased circulation
levels in our aggregate magazine portfolio, partially offset by decline in
total pages produced in our magazine portfolio and an increase in our average
price per pound of paper driven by (1) the mix of paper used in our
publications and (2) an increase in paper prices. Cost of production, excluding
Unrestricted Subsidiaries, decreased as a percentage of net revenue to 28.4%
from 28.7% for the same periods, indicative of the higher advertising revenue
per page being achieved. Recently, a 9.9% increase in postage rates for
calendar year 2001 was approved. This increase is in line with our expectations
and has been considered in our pricing policies, although we may not be able to
recover the postage price increase in whole or in part in our pricing, we do
not believe that this increase will have a material adverse effect on our cash
flows or results of operations.
Selling, general and administrative expenses
Selling, general and administrative expenses for the six months ended
September 30, 2000 were $121.1 million compared to $110.2 million for the six
months ended September 30, 1999, an increase of $10.1 million, or 9.9%.
Selling, general and administrative expenses related to the Unrestricted
Subsidiaries were $10.7 million and consisted mainly of operating, pre-
publication and business development expenses. Excluding Unrestricted
Subsidiaries, selling, general and administrative expenses decreased $0.6
million, or 0.5 %. This decrease was primarily related to $7.6 million of cost
reductions realized in administrative areas such as corporate sales,
information technology, finance and human resources, as well as reduced bad
debt expense. Cost savings realized were largely offset by increased editorial,
brand development, sales and marketing spending in support of our magazine
portfolio, brand repositionings and growth initiatives. Excluding Unrestricted
Subsidiaries, selling, general and administrative expenses as a percentage of
revenue declined from 51.1% to 48.6% for the six months ended September 30,
1999 and 2000, respectively. In the second half of fiscal 2001, we anticipate
that the cost savings realized will begin to level off and that we will
continue investing in the areas of sales, marketing, editorial and brand
development in support of our growth initiatives and brand
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repositionings. Additionally, selling, general and administrative expenses
related to the Unrestricted Subsidiaries are anticipated to increase as
development of these new businesses continues. As a result, selling, general
and administrative expenses, both in total and as a percentage of revenue, are
expected to increase in the second half of fiscal year 2001 in relation to the
comparable prior year period.
Interest Expense
Interest expense was $27.4 million for the six months ended September 30,
2000 compared to no interest expense in the comparable prior period. This
increase is the result of indebtedness incurred in connection with the
transactions, and the 12% senior subordinated notes due 2010, proceeds from
which were used to partially repay the senior credit facility and fully repay
the senior subordinated notes. Our weighted average debt outstanding was
approximately $536.2 million and our weighted average interest rate was 11.06%
for the six months ended September 30, 2000. Prior to the transactions,
external financing transactions were executed and funded by ZDI, as a result,
interest expense of the Predecessor is not applicable or representative of our
ongoing business.
Income taxes
The income tax provision of $0.3 million for the six months ended September
30, 2000 and the income tax benefit of $0.2 million in the comparable period in
1999 represent effective rates of negative 2.5% and 24.7%, respectively. The
negative effective rate for the six months ended September 30, 2000 results
from our full year estimate of certain minimum state and local taxes despite
the consolidated entity being forecast in a pre-tax loss position. As a result
of the transactions and the different tax profiles of our company and the
Predecessor, the effective tax rate of the Predecessor is not applicable or
representative of our ongoing business and income tax position.
Net Loss
Net loss of $13.5 million for the six months ended September 30, 2000
increased $13.0 million compared to net loss of $0.5 million for the comparable
prior year period. Excluding the results of ZDP's wholly-owned international
operations, net income for the six months ended September 30, 1999 was $3.6
million.
EBITDA
EBITDA is defined as income before provision for income taxes, interest
expense, depreciation and amortization expense and other non-cash charges.
EBITDA, as defined is not a measure of performance under GAAP, and EBITDA
should not be considered in isolation or as a substitute for net income, cash
flows from operating activities and other income or cash flow statement data
prepared in accordance with GAAP or as a measure of profitability or liquidity.
EBITDA is presented because it is commonly used by certain investors and
analysts to analyze a company's ability to service debt. EBITDA is also a
component of our debt compliance calculations. However, our method of
computation may not be comparable to similarly titled measures of other
companies.
EBITDA for the six months ended September 30, 2000, was $42.9 million.
EBITDA related to the Unrestricted Subsidiaries was a loss of $10.4 million.
Excluding Unrestricted Subsidiaries, EBITDA was $53.3 million compared to $46.0
million for the comparable prior year period, a $7.3 million or 15.9% increase.
Excluding Unrestricted Subsidiaries, the ratio of EBITDA to revenue was 23.5%
and 21.2% for the six months ended September 30, 2000 and 1999, respectively.
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Comparison of the three months ended March 31, 2000 and the three months ended
March 31, 1999
Revenue, net
Revenue increased by $2.1 million, or 1.7%, from $126.8 million in the three
months ended March 31, 1999 to $128.9 million in the comparable period in 2000.
This increase reflects significant growth in the emerging publications
partially offset by lower advertising in the established publications. Margin
pressures on smaller computer equipment manufacturers, and the resulting
consolidation in that industry have contributed to a reduced demand for
advertising in our established publications. Revenue from international
operations, which generated 15.2% of revenue, decreased $0.5 million, or 2.7%.
Other revenue increased $2.1 million, or 45.5%, due to an increase in royalties
from ZDNet and the launch of eTESTING LABS external testing services.
Cost of production
Production costs decreased by $0.8 million, or 1.9%, from $39.5 million in
the three months ended March 31, 1999 to $38.7 million in the comparable period
in 2000. This represents a decrease in cost of production as a percent of
revenue from 31.1% in 1999 to 30.0% in 2000. These decreases were primarily due
to a net decline in advertising pages and an increase in advertising revenue
per page.
Selling, general and administrative expenses
Selling, general and administrative expenses increased by $10.5 million, or
16.5%, from $63.9 million in the three months ended March 31, 1999 to $74.4
million in the comparable period in 2000. This represents an increase in
selling, general and administrative expenses as a percent of revenue from 50.4%
in 1999 to 57.7% in 2000. This increase was primarily related to increased
spending in support of our emerging publications such as Yahoo! Internet Life
and Interactive Week. The areas of such spending and the increase over all
domestic titles include editorial ($2.1 million), circulation ($1.9 million)
and sales and marketing ($5.7 million). In addition, expenses at the newly
launched eTESTING LABS increased $1.3 million, as the business pursues third
party opportunities. Some savings were realized in administrative areas as a
result of the cost reductions prior to the transactions.
Stock-based compensation expense
Stock-based compensation of $0.4 million in the three months ended March 31,
2000 is a non-cash charge that is recorded over the vesting period of certain
ZDNet stock option grants to our employees. This represents a slight decrease
from the 1999 period due to forfeitures of options.
Depreciation and amortization
Total depreciation and amortization decreased $8.0 million, or 40.1%, from
$20.1 million in the three months ended March 31, 1999 to $12.1 million in the
comparable period in 2000. This decline resulted from the $778.8 million write-
down of intangible assets that was recorded in December 1999 to reflect the
fair value of the business based on the $780.0 million purchase price. This
write-down resulted in lower goodwill amortization in subsequent periods.
Equity in income and loss from joint ventures
Our equity share in income and losses from joint ventures increased $0.4
million from a loss of $0.1 million in the three months ended March 31, 1999 to
$0.3 million in the three months ended March 31, 2000 primarily due to stronger
performance from the Mac Publishing LLC joint venture.
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Income taxes
The income tax expenses of $0.7 million in the three months ended March 31,
1999 and $2.1 million in the comparable period in 2000 represent effective
rates of 24.6% and 59.2%, respectively. This 2000 effective rate is
significantly higher than the federal statutory rate of 35.0% due to non-
recognition of losses in foreign jurisdictions and the impact of state and
local taxes. The 1999 effective rate, which is based on the full year effective
rate, is lower than the federal statutory rate of 35.0% primarily due to the
amortization of non-deductible goodwill.
Net income
As a result of the factors described above, net income of $1.4 million for
the three months ended March 31, 2000 decreased $0.7 million from $2.1 million
for the three months ended March 31, 1999.
Comparison of the year ended December 31, 1999 and the year ended December 31,
1998
Revenue, net
Revenue decreased by $5.3 million, or 1.0%, from $541.0 million in 1998 to
$535.7 million in 1999. This decline was primarily due to the absence of
revenue from three publications discontinued in October 1998. Excluding
discontinued publications, revenue increased $18.8 million, or 3.6%, from 1998.
This growth was due to advertising and circulation increases in our emerging
publications, partially offset by lower advertising revenues in our established
publications. Margin pressures on smaller computer equipment manufacturers,
industry and product delays, lower demand in Asia and reduced advertising
budgets to fund expenses associated with the Year 2000 transition contributed
to a reduced demand for advertising pages in our established magazines.
However, this decline was partially offset by higher advertising revenue per
page in 1999. Revenue from international operations, which generated 14.8% of
revenue, was relatively unchanged. Other revenue increased $4.3 million, or
21.4%, from 1998 due to an increase in royalties from ZDNet and the launch of
eTESTING LABS' external testing services.
Cost of production
Production costs decreased by $9.3 million, or 5.5%, from $167.3 million in
1998 to $158.0 million in 1999. This represents a decrease in production costs
as a percent of revenue from 30.9% in 1998 to 29.5% in 1999. The decrease was
primarily due to the absence of costs related to three publications that were
discontinued in the fourth quarter of 1998. In addition, a net decline in
advertising pages and higher advertising revenue per page contributed to the
decline in production costs as a percent of revenue.
Selling, general and administrative expenses
Selling, general and administrative expenses decreased by $6.4 million, or
2.2%, from $284.1 million in 1998 to $277.7 million in 1999. This represents a
decrease in selling, general and administrative expenses as a percent of
revenue from 52.5% in 1998 to 51.8% in 1999. The decrease reflects efficiencies
gained through the 1998 restructuring in which three magazines were
discontinued.
Stock-based compensation expense
Stock-based compensation is a non-cash charge that is recorded over the
vesting period of certain ZDNet stock option grants to our employees. These
options were granted on December 21, 1998, as such 1999 is the first period in
which the related expense is incurred.
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Year 2000 remediation costs
Year 2000 remediation costs represent the costs we incurred to ensure our
various computer systems were Year 2000 compliant. No such charges were
incurred in 1998. Further, as no material Year 2000 issues were encountered, no
such costs are expected during 2000.
Depreciation and amortization
Total depreciation and amortization increased $0.2 million from $82.3
million in 1998 to $82.5 million in 1999.
Write-down of intangible assets
The $778.8 million write-down of intangible assets was recorded to reflect
the fair value of the business based on the $780.0 million purchase price of
such assets (excluding deferred taxes which were not sold). Prior to the
decision to sell ZDP, ZDP assessed the recoverability of its intangible assets
using an undiscounted cash flow model as required by current accounting
pronouncements. ZDP has historically generated significant levels of cash and
due to this strong cash flow, no impairment of its intangible assets (exclusive
of the restructuring charge recorded in 1998) had existed. Once a decision to
sell ZDP was reached, the intangible assets were evaluated on a held for sale
basis using a fair value model as required by current accounting
pronouncements. The current fair value of ZDP's net assets was significantly
less than carrying value, and thus an impairment loss was recorded.
Restructuring
In 1998, we incurred a charge related to a restructuring program we
instituted in an effort to reduce our cost basis. The components of this charge
are described in further detail below. There was no similar charge in the 1999
period.
Equity in income from joint ventures
Our equity share in income from joint ventures decreased $0.3 million, or
13.0%, from $2.2 million in 1998 to $1.9 million in 1999 primarily due to the
acquisition of the remaining 50% interest of FamilyPC in May 1998. This
resulted in FamilyPC being consolidated from that time, therefore its earnings
are no longer reflected as earnings from joint ventures.
Income taxes
The 1999 income tax benefit of $180.3 million represents an effective tax
rate of 23.6%, slightly higher than the 22.5% effective rate experienced in
1998. These effective rates are lower than the federal statutory rate of 35.0%
primarily due to the amortization of non-deductible goodwill.
Net loss
As a result of the factors described above, net loss of $583.0 million for
the year ended December 31, 1999 increased $559.3 million from a net loss of
$23.7 million for the year ended December 31, 1998.
Comparison of the year ended December 31, 1998 and the year ended December 31,
1997
Revenue, net
Revenue decreased by $34.2 million, or 6.0%, from $575.2 million in 1997 to
$541.0 million in 1998. This decline was primarily due to the transfer of
certain publications to a joint venture and the
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closure of three publications due to the restructuring discussed below. The
remainder of the decrease was primarily due to lower advertising in established
publications partially offset by growth in the emerging publications. Margin
pressures on smaller computer equipment manufacturers, industry and product
delays, lower demand in Asia and reduced advertising budgets to fund expenses
associated with the Year 2000 transition contributed to a reduced demand for
advertising pages in our magazines in 1998. However, this decline was partially
offset by higher advertising revenue per page in 1998. Revenue from
international operations, which generated 14.8% of the total revenue was
relatively unchanged.
In 1997, the MacUser and MacWeek publications were contributed to a newly
formed joint venture, Mac Publishing LLC. Prior to their contribution to the
joint venture, operating results for these publications were consolidated and
resulted in $32.5 million of revenue in 1997. As these publications are no
longer consolidated, no revenue was recognized in 1998, only our 50% share of
earnings from the joint venture was reflected. On May 1, 1998, we acquired our
joint venture partner's 50% interest in FamilyPC magazine, and we have included
the magazine's performance in the consolidated results from the acquisition
date. Revenue from FamilyPC included in the 1998 results was $11.1 million.
Revenue related to the three discontinued publications as part of the
restructuring was $12.5 million lower in the fourth quarter of 1998 as compared
to the fourth quarter of 1997. Excluding the impact of the discontinued
publications and the shift of publications to/from joint ventures, our revenue
increased 1.6% in 1998 compared to 1997.
Cost of production
Production costs increased by $1.5 million or, 0.9%, from $165.8 million in
1997 to $167.3 million in 1998. This represents an increase in production costs
as a percent of revenue from 28.8% in 1997 to 30.9% in 1998. Costs associated
with the growth in emerging publications' advertising pages more than offset
cost declines associated with the discontinuation of three magazines in 1998
and the shift of certain publications to a joint venture. In addition, the
launch of IT Week in the UK increased international production costs.
Selling, general and administrative expenses
Selling, general and administrative expenses decreased by $10.1 million, or
3.4%, from $294.2 million in 1997 to $284.1 million in 1998. This represents an
increase in selling, general and administrative expenses as a percent of
revenue from 51.1% in 1997 to 52.5% in 1998. The decrease in expenses reflects
the shift of certain publications to a joint venture as well as the impact from
discontinuing three publications in late 1998. This decrease is partially
offset by increased spending in support of our emerging publications, such as
Yahoo! Internet Life and Interactive Week. The increase as a percentage of
revenue results primarily from the impact on revenue and cost mix from shifting
of publications to/from joint ventures and discontinuing three publications.
Depreciation and amortization
Total depreciation and amortization increased less than 1% from $81.6
million in 1997 to $82.3 million in 1998.
Restructuring
Margin pressure on smaller computer equipment manufacturers, industry and
product delays, lower demand in Asia and reduced advertising budgets to fund
expenses associated with the Year 2000 transition contributed to a reduced
demand for advertising in our magazines, principally PC Magazine, Ziff Davis
SMART BUSINESS for the New Economy (formerly PC/Computing) and eWeek (formerly
PC Week).
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As a result of this reduced demand, in October 1998 we announced a
restructuring program with the intent of significantly reducing our cost base.
We incurred a pre-tax charge of $40.0 million in connection with this
restructuring program. The charge was reported as a component of income from
operations for the fourth quarter of 1998. The charge included asset impairment
costs ($34.2 million), employee termination costs ($3.9 million) and costs to
exit activities ($1.9 million) principally resulting from the discontinuation
of three publications, Windows Pro, Internet Business and Equip, and the
reduction of our work force by 184 employees. The following sets forth
additional detail concerning the principal components of the charge:
. Asset impairment costs were a non-cash write-off of intangible assets,
primarily subscriber lists, advertising lists and tradenames associated
with the discontinued publications.
. Employee termination costs related to severed personnel at the closed
publications as well as a rationalization and resulting workforce
reduction of the remainder of our operations. Employee termination costs
included payments for severance and earned vacation as well as the costs
of outplacement services and the provision of continued benefits to
personnel.
. Costs to exit activities reflect the costs associated with the final
closure of discontinued publications including the costs to reduce
office space under lease as a result of the reduced level of employees.
Equity in income from joint ventures
Our equity share in income from joint ventures increased $1.9 million from
$0.3 million in 1997 to $2.2 million in 1998. The increase primarily relates to
our equity share in earnings of Mac Publishing LLC, an entity that was formed
in August 1997.
Income taxes
The 1998 income tax benefit of $6.9 million represents an effective tax rate
of 22.5% as compared to an effective rate of negative 89.9% in 1997. The 1998
effective rate differs from the federal statutory rate of 35.0% primarily due
to the amortization of non-deductible goodwill. The significant variance in
effective tax rates results from the non-deductibility of losses from
operations accounted for under the pooling method of accounting prior to their
acquisition by us in May 1998.
Net loss
As a result of the factors described above, net loss of $23.7 million for
the year ended December 31, 1998 increased $27.1 million from net income of
$3.4 million for the year ended December 31, 1997.
Liquidity and Capital Resources
Total cash at September 30, 2000 was $118.0 million. This balance is
comprised of; (1) $53.4 million of net cash generated by the Restricted
Subsidiaries during the six months ended September 30, 2000, (2) $26.8 million
of net cash proceeds from the sale of our international operations and (3)
$37.8 million of cash earmarked for the Unrestricted Subsidiaries.
Under our senior credit facility, we have Restricted and Unrestricted
Subsidiaries. As described above, the Unrestricted Subsidiaries are LaunchCo
and InternetCo and, at the time of the transactions, $50.0 million of our
equity proceeds (contributed by Willis Stein and co-investors) were earmarked
for funding of these subsidiaries. The Restricted Subsidiaries are our
remaining subsidiaries and are generally comprised of businesses that were
acquired from ZDI. The senior credit facility and indenture governing the
$250.0 million 12% notes due 2010 place restrictions on funding from the
Restricted Subsidiaries to the Unrestricted Subsidiaries.
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Details of changes in cash and cash equivalents during the six-month period
ended September 30, 2000, are discussed below. Prior to April 5, 2000, the
Predecessor participated in ZDI's centralized cash management system. As such,
external financing transactions including debt service and capital spending for
major capital projects were executed and funded by ZDI. Predecessor cash
balances primarily represent cash held by international operations.
Operating Activities. We currently rely primarily upon cash flow from
operating activities and borrowings under our revolving credit facility to
finance our operations and expansion. Cash provided by operating activities was
$34.7 million for the six month period ended September 30, 2000, compared to
$36.4 million for the comparable prior year period, a decrease of $1.7 million
or 4.7%. The decrease in cash provided by operating activities was due
primarily to $17.4 million of cash interest paid and was partially offset by
increased cash flow associated with certain working capital improvements
achieved during the six months ended September 30, 2000. These working capital
improvements mainly related to reductions in accounts receivable and inventory
primarily due to increased credit and collection activities since the
transactions and our decision to outsource a significant portion of our paper
buying operations to our printers resulting in a decreased investment in paper
inventory. Cash flow from accounts receivable and inventory increased $8.0
million and $6.0 million, respectively when compared to the prior year period.
Investing Activities. Cash used by investing activities of $776.2 million in
the six month period ended September 30, 2000 reflects cash used primarily for
our purchase of ZDP at a total cost of $798.3 million, including fees and
expenses, and $7.0 million of capital expenditures ($5.5 million associated
with the Restricted Subsidiaries). These cash investments were partially offset
by net proceeds from the sale of our international operations of $26.8 million
and $2.6 million of dividends received from our MacWorld joint venture. We
estimate that our capital expenditures for fiscal 2001 will be approximately
$10 million with respect to the Restricted Subsidiaries. We have earmarked $2.0
million of our international proceeds to fund these capital expenditures. We
anticipate making additional investments in the development of the businesses
of the Unrestricted Subsidiaries, however, the amount and timing of such
investments has not yet been determined and will vary depending upon the
implementation of the related business plans
Financing Activities. Cash provided by financing activities was $857.6
million for the six month period ended September 30, 2000. In conjunction with
the transactions, we (1) entered into a $405.0 million senior credit facility
of which $355.0 million was funded at the closing of the transactions, (2)
issued $175.0 million senior subordinated notes and (3) received equity
contributions from our parent company, Ziff Davis Holdings Inc., of $335.0
million ($333.0 million of which was received during the six months ended
September 30, 2000) that was funded by Willis Stein and its co-investors. In
addition to these transactions in July 2000, we completed an offering of $250.0
million 12% senior subordinated notes due 2010 ("the Notes"), the proceeds of
which were primarily used to repay indebtedness. In connection with the
foregoing financing activities, we paid approximately $20.7 million in costs
and expenses related to our various debt agreements.
Proceeds from the old notes offering were used to (1) repay the $175.0
million senior subordinated notes in full, (2) partially repay approximately
$59.7 million of the senior credit facilities, (3) pay $6.9 million of accrued
interest related to senior and subordinated debt and (4) pay approximately $8.4
million of transaction related fees. Following the Notes offering, the senior
credit facility consisted of a $295.3 million term loan and a $50.0 million
revolving credit facility, of which up to $10.0 million may be utilized for
letters of credit. As of September 30, 2000, the full $50.0 million was
available for future borrowing. The term loan matures in two tranches one due
September 30, 2006 and the other due March 31, 2007, respectively, with
quarterly payments beginning March 31, 2001. Borrowings under the revolving
credit facility are due September 30, 2006.
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The senior credit facility is secured by a first priority security interest
in substantially all of our existing and future tangible and intangible assets.
The senior credit facility requires the Restricted Subsidiaries to meet certain
financial tests, including maximum total leverage ratio, maximum senior
leverage rate, minimum interest coverage ratio, minimum fixed charge coverage
ratio and maximum capital expenditure tests. The senior credit facility and
indenture governing the $250.0 million 12% notes due 2010, both contain certain
restrictive covenants, including restrictions on (1) indebtedness, liens and
guarantees; (2) mergers, consolidations and certain types of acquisitions and
asset sales; (3) dividends and stock repurchases; (4) restrictions on the types
of business which we can engage and (5) restrictions on funding from the
restricted subsidiaries to the unrestricted subsidiaries.
At March 31, 2001, we are required to have a ratio of debt to EBITDA of 4.5
to 1.0. Should the ratio be in excess of 4.5 to 1.0, either we will repay
indebtedness under our senior credit facilities or Willis Stein and its co-
investors will contribute to us up to a maximum of $50.0 million in additional
equity (less any amounts previously contributed) so that we may repay
indebtedness under our senior credit facilities (and permanently reduce
commitments thereunder in an amount equal to such repayment), in either case in
order to reduce our ratio of debt to EBITDA. In no event will Willis Stein and
its co-investors be required to contribute more than $50.0 million for this
purpose. We are currently in compliance with our debt covenants and anticipate
that at March 31, 2001, we will remain in compliance.
Our senior credit facility requires that we enter into hedge agreements so
that at least 50% of our funded debt be effectively set at a fixed rate of
interest. On September 27, 2000, we entered into an interest rate swap
agreement in the notional amount of $25.0 million and a maturity date of
October 11, 2003. Under this swap agreement, we receive a floating rate of
interest based on three-month LIBOR, which resets quarterly, and pay a fixed
rate of interest each quarter for the term of the agreement. This swap
agreement, coupled with the Notes, results in $275.0 million or 50.4% of our
funded debt being effectively set at a fixed rate of interest as of September
30, 2000.
In connection with the transactions, we earmarked $50.0 million of our
equity proceeds, contributed by Willis Stein and co-investors, for funding the
working capital and financing needs of LaunchCo and InternetCo. At September
30, 2000, there was $37.8 million remaining from the original $50.0 million
earmarked for funding of the Unrestricted Subsidiaries. As we continue to
develop and launch additional products or business lines within LaunchCo and
InternetCo, we may seek additional funding. The amount and timing of such
funding needs will vary depending upon approval and implementation of the
related business plans. As these needs arise, we will review potential
financing options, however, there can be no assurance that we will be
successful in raising the needed funds.
In August 2000, we and our European subsidiaries completed the sale of our
wholly-owned International operations (excluding international licensing and
international joint ventures) to VNU N.V. and affiliates for a purchase price
of approximately $42.0 million.
The purchase price for these assets consists of:
(1) $31.0 million in cash subject to post closing adjustments, plus
(2) $3.2 million related to purchase of inventory, prepaid expenses and
fixed assets, excluding leasehold improvements offset by approximately $3.5
million of net subscription liabilities assumed; and
(3) an additional $15.0 million to be paid over a period of five years in
five annual payments of $3.0 million which we have recorded at a net present
value of $11.3 million.
We retained most of the related accounts receivable and liabilities. At
closing, we received net proceeds of $30.9 million and have incurred $4.1
million in costs and expenses associated with the sale and liquidation of these
operations. Under our senior credit agreement, these net proceeds must be used
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for certain permitted capital expenditures and acquisitions within 360 days
from the sale date or they must be used to prepay principal due under our
senior credit facility. As a result, these net proceeds have been classified as
restricted cash, a non-current asset in our Consolidated Balance Sheet.
As discussed in Note 3 to our financial statements, on August 22, 2000 we
gave notice pursuant to the terms of the ZDNet Agreement that it would
terminate effective March 1, 2001 due to ZDNet's failure to comply with the
terms of the agreement. There is a $7.0 and $9.0 million minimum guaranteed
royalty due under this agreement for fiscal 2001 and 2002, respectively. Upon
termination of the agreement on March 1, 2001, we will not be entitled to
receive the minimum guaranteed royalties after such date. We have earned and
collected $3.5 million related to our first and second quarter payments under
this agreement. The third quarter payment is due February 14, 2001.
On November 10, 2000, we prepaid $35.0 million of our bank debt primarily
attributable to operating cash flow generated during the six months ended
September 30, 2000. We have $7.8 million in principal payments due under our
senior credit facility through March 31, 2001.
With respect to our Restricted Subsidiaries, we expect that our current cash
balances, combined with cash provided by operations and the availability of
funds under our revolving credit facility, will continue to provide the capital
necessary to fund operations, as well as meet existing obligations for the next
twelve months. We continuously evaluate potential acquisitions of businesses,
which complement our existing operations. Depending on various factors,
including, among others, the cash consideration required in such potential
acquisitions, we may determine to finance any such transaction with existing
sources of liquidity and may determine to consider such acquisition as a
component of either the Restricted or Unrestricted Subsidiaries.
Seasonality
Historically, our business has been seasonal because we have earned a
significant portion of our annual revenue in our third fiscal quarter. This is
largely due to the general increase in publishing revenue in the third quarter
as a result of increased consumer buying activity during the holiday season.
Factors affecting the seasonality of our business are holiday spending,
customer budgetary spending patterns, new product introductions and general
economic trends. Quarterly results may also be affected by the timing and
magnitude of acquisitions and related costs, variations in the number of
magazines sold in any quarter, customer spending patterns, termination of
existing agreements, costs incurred in connection with internal growth, changes
in our mix of customers, contracts of our business, fluctuation in raw
materials costs and other general economic conditions. Accordingly, our
operating results in any particular quarter may not be indicative of the
results that can be expected for any other quarter or for the entire year.
Management cannot assure that our third quarter revenue will continue to be
higher than revenue for our other quarters. We have not had significant
overhead and other costs generally associated with large seasonal fluctuations.
Inflation and Fluctuations in Paper Prices and Postage Costs
We continually assess the impact of inflation and changes in paper and
postage prices as these costs represent a significant portion of our cost of
production. Paper prices began to rise in 1994, rose significantly in 1995 and
1996, and then decreased in 1997. During 1998 and 1999, paper prices were
relatively flat with a price increase occurring in 2000. We generally enter
into contracts for the purchase of paper which adjust the price on a quarterly
basis. We have not entered, and do not currently plan to enter, into long-term
forward price or option contracts for paper.
Postage rates increased 14% in January 1995 and 5% in January 1999. Recently
a 9.9% increase in postal rates for calendar year 2001 has been approved.
Management estimates postage and paper costs
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will increase slightly in fiscal year 2001 and has considered these estimated
increases in setting its pricing policies, although we may not be able to
recover, in whole or in part, paper and postage costs increases in its pricing.
We do not believe that anticipated paper and postage cost increases would have
a material adverse effect on our cash flow and results of operations in fiscal
2001.
We continually review our purchasing and manufacturing processes for
opportunities to reduce costs and mitigate the impact of paper price and
postage rate increases such as purchasing lighter-grade paper stock or, when
paper prices are at cyclical lows, increasing paper inventory or entering into
longer term contracts with suppliers.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", ("SFAS 133").
SFAS 133 requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. In July 1999, SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities Deferral of the Effective Date of
FASB Statement 133" ("SFAS 137") was issued. SFAS 137 deferred the effective
date of SFAS 133 until the first quarter of fiscal years beginning after June
15, 2000. In June 2000, SFAS 133 was further amended by SFAS No. 138,
"Accounting for Certain Derivative Instruments and Hedging Activities--an
amendment of FASB Statement No. 133" ("SFAS 138"). We expect to adopt SFAS 133,
as amended by SFAS 137 and SFAS 138, effective April 1, 2001. We are currently
reviewing the impact, if any, that the adoption of SFAS 133 (as amended) will
have on our financial position or results of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements. This
bulletin summarizes the SEC's views in applying generally accepted accounting
principles to revenue recognition in financial statements and is required to be
adopted in our fourth fiscal quarter of 2001. We have determined that adoption
of this bulletin will not have a material impact on our financial statements.
Quantitative and Qualitative Disclosures about Market Risk
Commodity Price Risk. Our results of operations could be significantly
affected by changes in the price of paper. Paper prices have fluctuated over
the past several years, rising from 1994 through 1996, declining in 1997,
remaining relatively flat in 1998 and 1999, and rising in 2000. We do not use
forward contracts and most of our paper supply contracts, which are generally
for a two-to-three year renewable term, provide for price adjustments to
reflect changing market prices. Accordingly, significant increases in paper
prices could adversely affect our future results of operations.
Interest Rate Risk. Our earnings could be affected by changes in short-term
interest rates related to our senior secured credit facilities. Our senior
secured credit facilities are based on floating rates with fixed margins above
those rates. As part of the obligations under the senior secured credit
facility, we are required to enter into hedging arrangements with respect to
those loans by October 5, 2000, to reduce risk. On September 27, 2000, we
entered into an interest rate swap agreement with a notional amount of $25.0
million and a maturity date of October 11, 2003. Under this swap agreement, we
receive a floating rate of interest based on three-month LIBOR, which resets
quarterly, and pay a fixed rate of interest each quarter for the term of the
agreement. Based on our current debt structure (prior to entering into any
interest rate hedging agreements) a 1% increase in our borrowing rates would
result in an additional $2.7 million of annual interest expense.
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Statement Regarding Forward-looking Disclosure
This prospectus includes "forward-looking statements". All statements
regarding our expected financial position, business and financing plans are
forward-looking statements. The words "believes," "expects," "plans,"
"intends," "anticipates" and similar expressions identify forward-looking
statements. Forward-looking statements also include representations of our
expectations or beliefs concerning future events that involve risks and
uncertainties, including those associated with economic conditions, the overall
level of advertising spending in magazines, customer acceptance of our new
business, financial difficulties encountered by customers, the effects of
vigorous competition in the markets in which we operate, the integration and
restructuring of our operations as a result of the transactions, the
termination or non-renewal of material licenses, pending litigation and
investigations, changes in the costs of raw materials, labor and advertising,
and our ability to secure and protect trademarks and other intellectual
property rights.
All statements other than statements of historical facts included in this
prospectus, including, without limitation, the statements under Management's
Discussion and Analysis of Financial Condition and Results of Operations," are
forward-looking statements. Although we believe that the expectations reflected
in such forward-looking statements are reasonable, such expectations may prove
to be incorrect. Important factors that could cause actual results to differ
materially from our expectations ("Cautionary Statements") are disclosed in
this prospectus in conjunction with the forward-looking statements. All
subsequent written and oral forward-looking statements attributable to us or
persons acting on its behalf are expressly qualified in their entirety by the
Cautionary Statements.
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BUSINESS
Our Business
We are the largest technology publisher and the sixth largest magazine
publisher in the United States as measured by revenue. In 1999, we had an
estimated 30.2% share of the technology magazine industry based on advertising
revenue. Our 11 U.S. titles, excluding our recent launches and our Macworld
joint venture, have a combined domestic circulation of approximately 5.9
million and estimated domestic readership of approximately 21 million
individuals. Our magazines are well-known, leading publications that offer
readers comprehensive market and product coverage as well as access to lab-
based testing and award-winning editorial content. Our titles include PC
Magazine and eWeek (formerly PC Week), which were the number one and number
three ranked technology magazines, respectively, in the United States in 1999
as measured by advertising revenue. PC Magazine was the tenth largest domestic
magazine in 1999 as measured by advertising revenue, placing it among the
leading domestic business and entertainment magazines such as Business Week's
North America edition, Forbes, Fortune and People. In addition, two of our
Internet publications, Yahoo! Internet Life and Interactive Week, were named
two of the top 20 magazine launches of the 1990s by Folio: magazine and are the
leading publications in their respective spaces. We are also the leading
publisher of electronic games magazines, with an estimated 41.6% market share
based on advertising revenue in 1999.
We believe that because many of our readers are well-educated, influential
buyers of technology and other products and decision-makers in their
professional fields and households, our diverse portfolio of leading technology
magazines is attractive to a broad base of advertisers. For example, the more
than 3.4 million estimated business influencers (professionals who recommend,
specify and/or approve product purchases) who read PC Magazine spent an
estimated average of $303,000 on technology products in 1999, according to
IntelliQuest. Similarly, in 1999, according to BPA International, the average
technology budget for readers of eWeek was $14.7 million. Furthermore according
to Mediamark Research Inc.'s Fall 2000 data release, the average household
incomes of the PC Magazine and Yahoo! Internet Life reader are approximately
$77,000 and $71,000, respectively, which are significantly higher than the
average U.S. household income. The size and composition of our readership
offers advertisers concentrated exposure to their target audiences and, as a
result, our top 10 advertisers, including Microsoft, IBM, Toshiba and Dell,
have consistently advertised in our publications. Importantly, as technology
has become more pervasive, our publications are becoming more appealing to new
advertisers, such as Cisco, General Motors, American Airlines, American
Express, E*TRADE and Fidelity, which are attracted to both our core readership
of technology professionals and our expanding base of consumer readers who are
interested in the Internet. For the twelve months ended March 31, 2000, we
derived more than 70% of our domestic revenue from advertising sales.
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Our current portfolio of domestic titles can be divided into the following
three categories: (1) established publications; (2) emerging publications; and
(3) electronic games publications. Our portfolio includes six publications that
appeal to a business-oriented readership and seven publications that target a
consumer audience. The following table sets forth information regarding these
titles:
<TABLE>
<CAPTION>
Primary Year 2000
Magazine Title (/1/) First Issue Audience Rate Base (/2/)
-------------------- ----------- -------- ---------------
<S> <C> <C> <C>
Established Publications
PC Magazine 1981 Business 1,225,000
Ziff Davis SMART BUSINESS for the New
Economy 1988 Business 1,000,000
eWeek 1983 Business 400,000
Emerging Publications
Yahoo! Internet Life 1995 Consumer 1,000,000
FamilyPC 1994 Consumer 700,000
Interactive Week 1994 Business 250,000
Sm@rt Partner 1998 Business 85,000
The Net Economy 2000 Business 70,000
Expedia Travels 2000 Consumer 200,000
Electronic Games Publications
Electronic Gaming Monthly 1988 Consumer 425,000
Official U.S. Playstation Magazine 1997 Consumer 375,000
Computer Gaming World 1981 Consumer 340,000
Expert Gamer 1988 Consumer 200,000
</TABLE>
--------
(1) Does not include Macworld (our joint venture).
(2) Rate base is the level of circulation we guarantee to our advertisers.
We have substantial testing capabilities through our PC Labs, Macworld Labs,
Usability Labs, eWeek Labs and eTESTING LABS. PC Labs, Macworld Labs, Usability
Labs and eWeek Labs provide product testing services for our publications.
eTESTING LABS develops the benchmark tests for our publications and is also an
independent for-hire testing service independent of our editorial testing
groups. eTESTING LABS develops benchmarking and testing software, which
management believes has become the de facto industry standard. Benchmarking is
a competitive analysis tool that allows the user to compare competing products.
eTESTING LABS' results provide the basis for some of the editorial content of
PC Magazine, eWeek and Sm@rt Partner and are instrumental in helping readers
with their technology purchasing decisions. We believe that our labs give us a
competitive advantage with respect to our editorial content and in acquiring
and retaining readers.
Competitive Strengths
We believe that we have a number of competitive strengths that have resulted
in our strong market position with both our readers and our advertisers. These
strengths complement one another and together with each other, place us in a
strong competitive position from which to achieve our strategic objectives.
Market Leader with Strong Brand Names. We are the largest technology
publisher and the sixth largest magazine publisher in the United States as
measured by revenue. We have been the largest technology publisher as measured
by advertising revenue for the past 10 years (with an estimated 30.2% market
share in 1999), and we believe that the size of our readership and our
circulation base is more than double that of our nearest competitor in the
technology publishing industry. We believe that our success is directly
attributable to our award-winning editorial content, outstanding circulation
base and the highly desirable demographics of our readership.
Our market leading position, combined with our ability to leverage the Ziff
Davis and magazine brands across our portfolio, provides us with a competitive
advantage in attracting readers and
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advertisers. In addition, PC Magazine, our oldest and most widely circulated
publication, is recognized by more than half of all U.S. adults, according to a
brand awareness study conducted by Bruskin Research. The recognition of our
brands, combined with our highly desirable readership demographics and
outstanding circulation base, allows us to earn significantly higher
advertising rates than those of our competitors. For example, the one-time
four-color ad page rate of PC Magazine is currently the highest ad page rate of
any paid technology publication, with an 10.4% premium over PC World magazine,
its closest competitor.
Award-Winning Editorial Content. Our acclaimed staff of editors and
columnists consistently produce high-quality, award-winning editorial content.
In 1999, we won more Computer Press Association awards than any other media
company, and four of our editors were named to Marketing Computer's prestigious
list of "The Influencers," the 30 most influential technology journalists. In
both 1999 and 2000, Ziff Davis SMART BUSINESS for the New Economy (known as
PC/Computing in 1999) won a National Magazine award. Also, in 1998 Yahoo!
Internet Life was named one of that year's "Best Magazines" by Advertising Age.
As part of our editorial expertise, we have state-of-the-art in-house labs and
testing capabilities that offer comprehensive technology product testing and
have become an industry source for technology benchmarking standards. High-
quality editorial content and leading-edge product testing have always been a
cornerstone of our business and have been central to the long-running success
of our publications.
Ability to Leverage Outstanding Circulation Expertise. We enjoy outstanding
circulation success within each of our publication categories. We publish two
of only three technology magazines with a paid circulation greater than 1
million, and in 1999 the circulation of each of PC Magazine (1,231,678) and
Ziff Davis SMART BUSINESS for the New Economy (1,048,941) was greater than the
circulation of leading business publications Business Week's North America
edition (923,786), Forbes (819,886), Fortune (818,791) and Inc. (663,909). In
addition, Yahoo! Internet Life is among the fastest growing magazines in the
United States with a circulation which exceeded 1 million with its September
2000 issue. Our circulation across all domestic publications (excluding
Macworld) increased an average of 14.5% from 1998 to 1999, and we earned top
awards in five of eight possible categories in Circulation Management magazine.
Our effective circulation process allows us to attract quality readers in a
cost-efficient manner. For example, for the 12 months ended March 31, 2000, we
generated approximately 900,000 subscriptions via the Internet. This process
has produced a database of more than 16 million individuals and 4 million e-
mail addresses, which in 1999 generated approximately $7.3 million in mailing
list rental revenue.
Highly Desirable Readership Demographics. We have a readership with highly
desirable demographics for advertisers. In general, our readers are well
educated and well compensated, as evidenced by the fact that in 1999 the
average household incomes of PC Magazine and Yahoo! Internet Life readers were
significantly greater than that of the average U.S. household. Equally
important, our business publications target powerful buyers of IT products who
control substantial technology budgets. As technology has become more
pervasive, the highly desirable demographics of our readership have attracted a
broader variety of advertisers, including Internet infrastructure, consumer
products, dot-com and financial service companies.
Experienced Management Team and Strong Equity Sponsor. Willis Stein &
Partners, LLC is a leading private equity investment firm based in Chicago,
Illinois that specializes in negotiated investments in the media and
publishing, telecommunications, business services, manufacturing and health
care industries. Willis Stein, through its limited partnership funds, has
approximately $2.5 billion of committed capital under management. Willis Stein
has significant experience in media-related transactions, including investments
in: The Petersen Companies, Inc.; USApubs, Inc.; CTN Media Group, Inc.;
TransWestern Publishing Company, L.P.; SRDS Media Information, L.P.; and Troll
Communications LLC. We cannot assure you that our financial results will be
comparable with those of these other companies.
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As part of the transactions, our equity sponsor, Willis Stein, has again
teamed with our new Chief Executive Officer, James D. Dunning, Jr. Mr. Dunning
previously partnered with Willis Stein when he invested with them in The
Petersen Companies, Inc. and served as its Chairman and Chief Executive
Officer. In addition to Mr. Dunning, we have a deep and experienced management
team that includes: Thomas McGrade, Chief Operating Officer; Alan Perlman,
President of Business Publications and a launch executive of Interactive Week;
and Scott Crystal, Executive Vice President and Publishing Director of Consumer
Publications. These individuals are all media veterans with backgrounds that
include CMP Publications, Doubleday/Dell Publishing and National Geographic
Society. In June 2000, they were joined by Robert Madore, our Chief Financial
Officer.
Business Strategy
Our business strategy is designed to provide strong revenue growth and to
increase profitability by capitalizing on new revenue opportunities from
existing publications, developing ancillary revenue opportunities, implementing
operating improvements and expanding our portfolio of publications. We are
developing Internet-related ventures leveraged off our expertise in technology
and the Internet through InternetCo and developing new publications and
businesses through LaunchCo.
Capitalize on New Revenue Opportunities from Existing Publications. We
intend to leverage the strength of our magazine portfolio and circulation base
to expand and transition our business platform in the following manner:
. Utilize Publishing and Technology Expertise to Evolve Publications and
Editorial Content. As technology continues to evolve, we will continue to
transition our publications, particularly our established publications,
to ensure that our magazines remain influential and relevant with
editorial content that reflects current technology issues in business and
everyday life.
. Broaden Composition of Advertiser Base. The large majority of the
advertisers in our magazines have historically been technology-related
companies interested in reaching our technology-savvy readership. As
technology has become more pervasive, our readership has broadened to
include a more diverse group of business professionals and consumers,
which is attractive to a broader group of advertisers. Consumer products
advertising and Internet-related advertising, while relatively new areas
of focus for our advertising sales force, increased by an estimated
107.8% and 149.5%, respectively, in 1999 over 1998. We intend to
aggressively pursue advertising sales opportunities with companies in
these advertiser segments, and we have already begun to expand the size
and focus of our sales efforts to capitalize on these opportunities.
. Increase Advertising Bundling and Subscriber Cross-Selling
Opportunities. We will continue to leverage our strong and growing
relationships with key advertisers for each of our publications to
successfully sell bundled advertising options. We believe that our
magazines offer attractive options to advertisers; we plan to identify
those advertisers with whom we have a strong relationship for a single
publication and communicate the benefits of broadening their advertising
reach to our other publications. In addition, we will continue to
leverage our extensive database of more than 16 million individuals to
maximize cross-selling opportunities for our titles among our readers.
Develop Ancillary Revenue Opportunities. We intend to use our strong Ziff
Davis and magazine brand names, established and leading market presence and
existing subscriber base to extend our brands into new products and services,
including our eTESTING LABS business, custom publishing, trade shows, licenses,
educational seminars and conferences. The Ziff Davis Custom Media group
identifies and customizes editorial solutions that highlight product benefits
and corporate messages for technology and non-technology companies. We believe
that there is a commercial market for our eTESTING LABS business, and we are
expanding our lab-testing services to third parties. We believe these
activities increase overall brand awareness and are self-perpetuating in their
ability to generate advertising and other revenue.
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Implement Operating Improvements. Management has identified and begun to
implement operating improvements that have resulted in significant cost
savings. These measures include the following:
. Realize Cost Savings Opportunities. As an independent company, we have
already begun operating our business with a more streamlined overhead and
infrastructure cost structure than when we operated as a division of
Ziff-Davis Inc. These cost savings have been realized in the areas of
human resources, information technology, finance and other overhead.
Through September 30, 2000, we have realized the majority of these cost
savings and we anticipate that we will realize $6.5 million in cost
savings for the year ended March 31, 2001.
. Enhance Vendor Relationships. We believe that there are opportunities to
enhance our vendor relationships and improve the economic terms of our
purchasing agreements. In particular, management intends to leverage our
size and market presence to improve upon our agreements with our largest
pre-press and printing partners. By consolidating our needs among a core
set of vendors, we believe that we will be able to negotiate improved
terms. In that regard, we have consolidated from four to three printers
and fully outsourced our pre-press and paper buying operations.
. Optimize Circulation Strategies. We intend to be at the forefront of key
industry circulation initiatives. We are pursuing additional strategies
such as Internet marketing, business partnership development and enhanced
vendor relationships that are intended to result in operational and
financial efficiencies.
Expand Our Portfolio of Publications. Our management team has significant
experience in successfully launching and acquiring new magazines. We plan to
strategically add new titles to our platform in the following ways:
. Develop and Launch New Titles. We believe that rapid advances in
technology and the Internet will continue to create attractive
opportunities to launch new technology magazines and related
publications. We plan to continue to develop and launch, through
LaunchCo, new publications that will complement and enhance our existing
portfolio. In fact, we are in the process of developing Expedia Travels
(targeting consumer travel with a targeted launch date of October 30,
2000) and The Net Economy (targeting service providers and launched
September 18, 2000). A preview issue of The Net Economy was distributed
with Interactive Week's June 5, 2000 issue. To fund the development and
operation of new titles and Internet-related opportunities, we will use
existing earmarked capital contributed by Willis Stein and its equity co-
investors on an as needed basis.
. Selectively Acquire Titles. We intend to selectively acquire titles that
either enhance our readership base in a particular sub-segment of the
technology industry or complement our existing titles by following
technology as it proliferates through special-interest lifestyle segments
such as travel, music and entertainment. We believe that our prior
experience with acquiring and integrating magazines and our ability to
leverage our existing editorial, circulation, sales and marketing
personnel and resources, as well as our operating infrastructure, will
allow us to significantly reduce the operating costs of acquired titles.
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Our Publications
Our portfolio of domestic titles can be summarized as follows:
<TABLE>
<CAPTION>
Readership (/3/)
----------------
Year 2000 Paid/ Publication 1999 Paid
Rate Controlled Frequency Advertising
Magazine Title (/1/) Base (/2/) 1998 1999 Circulation (per year) Pages
-------------------- ---------- -------- -------- ----------- ----------- -----------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Established
Publications:
PC Magazine............. 1,225 6,039 6,406 Paid 22x 4,181
Ziff Davis SMART
BUSINESS for the New
Economy................ 1,000 4,764 5,769 Paid 12x 2,030
eWeek................... 400 1,138 1,265 Controlled 51x 3,995
Emerging Publications:
Yahoo! Internet Life.... 1,000 3,888 5,040 Paid 12x 1,142
FamilyPC................ 700 NA 2,283 Paid 12x 963
Interactive Week........ 250 350 418 Controlled 52x 2,841
Sm@rt Partner........... 85 NA NA Controlled 45x 1,130
The Net Economy(4)...... 70 N/A N/A Controlled 26x N/A
Expedia Travels(4)...... 200 N/A N/A Paid 10x N/A
Electronic Games
Publications:
Electronic Gaming
Monthly................ 425 1,125 1,600 Paid 12x 1,283
Official U.S.
Playstation Magazine... 375 450 1,100 Paid 12x 699
Computer Gaming World... 340 600 990 Paid 12x 1,728
Expert Gamer............ 200 525 800 Paid 12x 434
</TABLE>
--------
(1) Does not include Macworld (our joint venture).
(2) Rate base is the level of circulation that we guarantee to our advertisers.
(3) Based on studies from Mediamark Research, Inc., Intelliquest and the
Strategy Group. Mediamark Research, Inc. has released new readership
numbers for four of our magazines for Spring 2000: 6,647 for PC Magazine;
6,250 for Ziff Davis SMART BUSINESS for the New Economy; 5,300 for Yahoo!
Internet Life; and 2,400 for FamilyPC.
(4) First published in 2000. Frequency is expected frequency at the end of
calendar 2001.
Established Publications
Our titles in this category, PC Magazine, Ziff Davis SMART BUSINESS for the
New Economy and eWeek, are industry-leading publications characterized by
strong market positions, large and stable circulation bases and high subscriber
renewal rates. Each of these magazines provides authoritative, independent
guidance to business influencers and professionals that is considered by its
readers to be a primary resource for technology purchasing decisions and
business solutions.
PC Magazine. PC Magazine is the nation's largest technology magazine, with a
rate base of more than 1.2 million and an estimated readership of more than 6.6
million. The magazine's brand recognition is estimated to be more than 50%
among all U.S. adults and more than 80% among individuals involved in the
purchase of computer-related products and services. PC Magazine differentiates
itself through unique and extensive product reviews based on benchmark testing
performed in its lab, supplemented by its "First Looks" section covering
recently released technology products and by its widely respected
opinion/analysis columns. As the Internet becomes more pervasive, we are
broadening PC Magazine's focus to increase its emphasis on Internet
infrastructure products and services.
PC Magazine readers possess demographics attractive to advertisers. They
have an average household income that is comparable to that of readers of
mainstream business titles and higher than
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that of readers of many consumer titles, including Golf Digest, Newsweek, Time
and GQ. In addition, PC Magazine's readers are highly Internet-savvy, with
approximately 4.3 million logging online every day and 2.4 million reporting
having made purchases online for either business or personal use. We believe
the powerful technology, Internet and consumer demographics of PC Magazine have
made it an ideal vehicle not only for technology advertisers but also for
Internet infrastructure, dot-com and consumer products advertisers.
Beginning with the April 18, 2000 issue, PC Magazine launched a special
bound-in section entitled "Internet Business." This section will be published
every other month and will target the magazine's readership of top management
and other professionals as well as readers who are e-business buyers.
Ziff Davis SMART BUSINESS for the New Economy. As of the May 2000 issue,
PC/Computing was retitled Ziff Davis SMART BUSINESS for the New Economy. This
publication's editorial evolution began with the December 1999 issue. With a
rate base of 1.0 million, Ziff Davis SMART BUSINESS for the New Economy is
larger than Business Week's North America edition, Forbes, Fortune and Inc. The
magazine is uniquely focused on the needs of managers intent on using
technology to grow their businesses, build competitive advantages, and solve
everyday business problems. According to the Mediamark Research, Inc. Spring
2000 data release, the Ziff Davis SMART BUSINESS for the New Economy's
readership grew by 20%. This magazine's approximately 6.3 million U.S. adult
readers make it an estimated 68% larger than Fortune, 47% larger than Business
Week and 40% larger than Forbes. Total readership for Ziff Davis SMART BUSINESS
for the New Economy increased by more than 1 million since Mediamark Research,
Inc.'s Spring 1999 data release, placing it among the top 10 magazines in the
United States in absolute readership growth. It is the only business
publication in this elite group. We believe this publication attracts
advertisers because its readership has both technology-savvy business and
consumer lifestyle profiles. Many new advertisers in the automotive, enterprise
software, e-commerce, consumer products, financial, telecommunications and
leisure categories have purchased advertisements in this publication.
eWeek. As of the May 8, 2000 issue, we changed the title of this magazine
from PC Week to eWeek to reflect its evolving Internet focus. With a rate base
of 400,000, eWeek is one of the largest controlled-circulation technology
publications. Controlled-circulation publications are distributed directly to
qualified professionals without charge. Through print, the Internet, webcast,
interactive and face-to-face seminars and conferences, eWeek helps leading e-
business IT decision makers evaluate and deploy Internet technology solutions
in their enterprises. In order to qualify for subscriptions, eWeek readers must
have a minimum budget authority of $25,000, must purchase Internet/intranet
products and services and work at a site that has the Internet installed, as
audited by BPA International. eWeek has an estimated 46% more e-business buyers
than its largest competitor, Information Week, and an estimated 22% more than
its next largest competitor, InfoWorld, according to IntelliQuest. We have
recently changed the criteria we use to qualify readers for this magazine, and
eWeek now has some of the highest qualification standards in the industry. We
believe this makes eWeek attractive to advertisers selling products and
services to IT professionals and businesses building dot-com enterprises, such
as consulting, telecommunications and Internet infrastructure companies.
eWeek is aggressively expanding its franchise to other branded products and
services that are advertiser- or sponsor-supported, such as special report
series, online content and online events, such as the eWeek Live! platform. The
regularly scheduled online seminars focus on eWeek content areas, including
eWeek eValuations, Fast@Tracks special reports and eWeek Labs.
Emerging Publications
Our titles in this category include consumer magazines Yahoo! Internet Life
and FamilyPC as well as business magazines Interactive Week and Sm@rt Partner.
These publications address the changes and new opportunities that technology
and the Internet present in people's personal and professional lives. The
increasing interest in and use of the Internet has contributed to the rapid
growth of these titles.
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Yahoo! Internet Life. Launched in 1995, Yahoo! Internet Life has been one of
the fastest growing technology magazines and among the fastest growing
magazines in the publishing industry with a rate base that grew from 0.1
million to 1.0 million (as of the September 2000 issue) in less than five
years. Advertising revenue for this magazine grew from $4.0 million in 1997 to
$21.8 million in 1999, an increase of 445%. The magazine now reaches more than
5.3 million readers and one in ten of all daily Internet users in the United
States. We believe the magazine has firmly established itself as the "Voice of
the Net," helping readers incorporate the benefits of the Internet revolution
into their everyday lives by explaining how and where to access and utilize the
most valuable content available on the Internet. Yahoo! Internet Life measures
the societal impact of the Internet with issues such as "How America Uses the
Net," "America's Most Wired Cities and Towns," and "America's Most Wired
Colleges." Issues like "Online Music" and "Online Film" help capture and
explain cultural and lifestyle changes resulting from the Internet.
The size of this magazine's circulation and its appealing readership
demographics have attracted a diverse advertiser base, with consumer
advertisers now accounting for 68% of Yahoo! Internet Life's advertising
revenue according to CMR/PIB. Major consumer advertising categories include
automotive, distilled spirits, financial services, fashion and consumer
electronics.
We are building successful revenue-generating franchises around key magazine
issues, such as "Online Music." For example, in March 2000, we launched the
first annual Yahoo! Internet Life Online Film Festival in Los Angeles. In July
2000, Yahoo! Internet Life hosted the 3rd Annual Yahoo! Internet Life Online
Music Awards at Studio 54, an award ceremony honoring the new and innovative
ways music artists and labels are using the Internet to market themselves and
reach consumers. These events drew advertisers such as Volkswagen, RCA, 3Com,
Amazon.com and Broadcast.com.
FamilyPC. FamilyPC has a rate base of 700,000 and a readership of more than
2.2 million. We believe that, unlike traditional parenting magazines, FamilyPC
is the only information source that addresses the interaction of technology and
family lifestyle. The magazine encourages reader involvement through the
FamilyTesters program, a group of 9,000 families who have volunteered to guide
the editorial staff on the issues, products, services and websites that are
relevant to families. FamilyPC's readership growth and attractive demographics
attract consumer advertisers, particularly in categories such as automotive,
consumer electronics, e-commerce and packaged goods.
Interactive Week. Launched in 1994, Interactive Week has become one of the
largest newsweeklies focused on the Internet as measured by circulation, with a
rate base of 250,000 as of January 2000. Advertising Age reported that
Interactive Week has been one of the fastest growing business and Internet
technology publications over the last three years. Advertising revenue for this
magazine grew from $14.9 million in 1997 to $31.2 million in 1999, an increase
of 109%. We only distribute the magazine to readers that are business and
technology leaders who are responsible for facilitating and implementing e-
commerce and communications solutions for their organization's Internet
strategies. Interactive Week provides complete coverage of the Internet, from
building the infrastructure to the applications to the devices used to access
the information.
Sm@rt Partner. We changed the title of this magazine from Sm@rt Reseller to
Sm@rt Partner, effective as of the June 5, 2000 issue, to reflect the current
business model for companies involved in the distribution of technology
products. Sm@rt Reseller was launched in 1997 and today has a rate base of
85,000. This magazine provides timely, authoritative news, business and
technology information to a broad cross-section of readers, including IT
solutions providers, value added resellers, systems integrators, consultants,
content providers, Internet service providers, hardware vendors and software
vendors. Topics cover the entire spectrum of business services that solutions
providers offer customers, including consulting, e-commerce strategy, Internet
hosting, virtual private networks, integration, remote access, repair, set-up
and hardware sales. Sm@rt Partner is the only channel publication to record an
advertising page increase in 1999 over 1998, according to Adscope. In 2000,
Sm@rt Partner is targeting
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three primary advertiser categories: traditional technology manufacturers,
distributors and dot-com companies selling to corporate IT departments.
Electronic Games Publications
Our titles in this category, Electronic Gaming Monthly, Official U.S.
Playstation Magazine, Computer Gaming World and Expert Gamer, are positioned to
capitalize on the growing interest in electronic games. The electronic games
industry, which had annual revenues of approximately $7.0 billion in 1999, is
approaching the size of the U.S. motion picture industry. Because our readers
of these magazines are principally 18 to 34 year-old males, these publications
offer advertisers access to a highly focused, difficult-to-reach readership
with attractive demographics and spending patterns. In 1999, we were the leader
in the United States in this growing segment, with a market share of 41.6%
based on advertising revenue, 39.3% based on total circulation and 46.5% based
on newsstand circulation. In 1999, 48.6% of the circulation of these magazines
occurred at the newsstand compared with 36.1% for our audited competitors. On
average, our electronic games publications sell approximately 600,000 copies at
the newsstand each month.
Electronic Gaming Monthly. Electronic Gaming Monthly offers video game
enthusiasts news, information and product reviews about the latest games on 10
different game systems. As in all of our electronic games publications, our
editors of this magazine are experienced electronic games enthusiasts. This
monthly publication has a rate base of 425,000.
Official U.S. Playstation Magazine. Official U.S. Playstation Magazine
provides up-to-date news, interviews and insights to users in getting the most
out of their Sony PlayStation game consoles. This publication has a rate base
of 375,000 and is the only publication in North America to have an exclusive
license with Sony Computer Entertainment America, Inc.
Computer Gaming World. Computer Gaming World provides computer game
enthusiasts with results-oriented games information including reviews, previews
and hardware information. The publication has a rate base of 340,000 game
enthusiasts and is one of the oldest and largest computer game publications.
Expert Gamer. Expert Gamer has a rate base of 200,000 and provides its
readership with comprehensive in-depth strategies, hints and tips for video
games. Readers represent heavy-use video game players who influence other game
players and have significant purchasing power.
Other Operations
Macworld Joint Venture. Macworld is published through a 50:50 joint venture
with International Data Group and has a rate base of 425,000. Macworld provides
Macintosh buyers with comparative, laboratory-based product evaluations,
reviews and information about Macintosh products, supported by its own product
testing facility that we believe is the most advanced in the Macintosh
industry. We believe that Macworld is the only monthly magazine providing
comprehensive coverage for the business marketplace of new products developed
for the Mac platform. Macworld's respected and seasoned industry journalists
provide in-depth product reviews, objective lab-based comparisons, compelling
features and how-to articles, informing the creative professionals who use Mac
technology to create digital media.
eTESTING LABS. eTESTING LABS maintains state-of-the-art Internet and
technology testing capabilities. Building on Ziff Davis Media's history of
leadership in product reviews and benchmark development, eTESTING LABS brings
independent testing, research, development, and analysis directly to e-
businesses, vendors, and large organizations worldwide. We believe our
editorial benchmark software has become the de facto industry standard, with
nearly all of the Fortune 500 technology companies having requested one or more
copies and almost 20 million copies distributed worldwide since 1992. Although
the results produced by our eTESTING LABS have been and continue to be the
basis for some of the editorial
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content of PC Magazine, eWeek and Sm@rt Partner, in 1998 we transitioned
eTESTING LABS from a service department to a commercial enterprise. Today,
eTESTING LABS is a for-hire testing service that is independent of our
editorial testing groups. eTESTING LABS works with clients on custom testing
programs, such as certifications, compatibility tests and other types of third-
party programs.
Assets Held for Sale
In August 2000, we and our European subsidiaries completed the sale to an
unaffiliated third party of certain print-based publishing assets in the United
Kingdom, Germany and France. Our revenue in 1999 from our wholly-owned
international operations, excluding joint ventures and licensing operations,
was $79.1 million in 1999, or 14.8% of our revenue. See "Prospectus Summary--
Recent Developments" for a discussion of the sale.
Editorial
As of November 30, 2000 we had approximately 294 editorial employees across
our 11 domestic publications. Each of our domestic magazines has a dedicated
editorial staff, which includes various editors, designers, photographers, copy
editors and proofreaders. The editorial staff of each magazine is responsible
for identifying appropriate editorial topics, developing and writing the
content and managing the design, photography and layout for each publication
issue.
Our editorial staff is highly acclaimed and have won numerous awards. Recent
awards include 1999 Computer Press Awards for PC Magazine: Best Online Product
Reviews; Ziff Davis SMART BUSINESS for the New Economy (then PC/Computing):
Best Print How-To Article; eWeek (then PC Week): Best Overall Trade Weekly or
Tabloid; and FamilyPC: Best Columnist. We believe our editors are the most
influential in their field. In 1999, Marketing Computers Magazine's "The
Influencers" issue named PC Magazine's Editor-In-Chief (EIC) Michael Miller the
#1 computer journalist. eWeek's Eric Lundquist (EIC) and John Dodge (Editor)
and Ziff Davis SMART BUSINESS for the New Economy's Paul Somerson (EIC) also
won awards.
In 1999, Ziff Davis SMART BUSINESS for the New Economy was honored by the
American Society of Magazine Editors with a 1999 National Magazine Award, the
magazine industry's highest accolade, for its "Undocumented Internet Secrets"
November 1998 cover story. Also in 1999, Ziff Davis SMART BUSINESS for the New
Economy and eWeek won Jesse H. Neal Editorial Achievement Awards, which were
granted by the American Business Press to recognize and reward editorial
excellence in independent business publications. Ziff Davis SMART BUSINESS for
the New Economy received a Neal Award for Editorial Excellence, while eWeek
received two Neal Awards: Best Staff Written Editorials and Best Single Issue
Newspaper.
Advertising Customers
Our top 10 advertising customers in 1999 were Compaq, Hewlett Packard, Dell,
Micron, Microsoft, IBM, Gateway, Seagate, Sony and Toshiba. No single
advertiser contributed more than 3.7% of our total 1999 revenue.
Advertising Sales and Marketing
With our industry-leading publications and strong demographics we deliver
significant returns to advertisers. Because of these factors, advertisers are
willing to pay premiums to reach their target audiences. Our pricing goal is
profitability rather than gaining market share through price discounts.
As of November 30, 2000 we had approximately 250 advertising sales employees
and 55 marketing employees across our 11 domestic publications. Our advertising
sales employees are responsible for selling advertising space in our
publications, while marketing employees are responsible for developing
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sales support materials, conducting sales research and marketing our
publications to advertisers. Each magazine operates its own advertising sales
efforts with responsibilities organized by territories in North America. Each
magazine operates its own sales force. In addition, we have a corporate sales
force that coordinates across magazines and focuses on cross-selling.
Our advertising sales force calls on a wide range of companies, including
companies in all segments of the technology hardware and software industries.
We have recently expanded our selling efforts to focus on industry segments
outside technology, such as consumer products, transportation and financial
industries. We have already begun to experience advertising sales success with
fashion, pharmaceutical, consumer electronics, travel, automotive and financial
companies.
To support the selling efforts of our advertising sales staff, our marketing
departments provide a variety of primary, secondary and syndicated research,
such as Mediamark Research, Inc. and IntelliQuest, to better understand our
readers and help demonstrate the effectiveness of our publications as an
advertising vehicle. Other research services that we rely on include secondary
sources such as Gartner Group/Dataquest and Forrester. Our database of
information from qualified subscribers to our controlled-circulation
publications offers detailed information about IT professionals at more than
230,000 unique business locations in the United States.
Circulation
Our publications include paid-circulation magazines, which generate revenue
from advertising, newsstand sales and subscriptions, and controlled-circulation
publications, which are distributed to business leaders and qualified IT
professionals and generate revenue principally from the sale of advertising.
Our controlled-circulation publications offer business-oriented technology
content that appeals to a professional audience in need of specific technology
information. Our paid-circulation publications offer business and/or consumer-
oriented content that appeals to a broader audience interested in general
Internet technology and electronic games information. In 1999, we published
eight domestic paid-circulation publications, three domestic controlled-
circulation publications and one hybrid publication.
Our subscription strategy is to maintain a focused readership with
attractive demographic characteristics and increase subscriber loyalty and
renewal rates. Our award-winning circulation operations are located in New
York, with our staff of approximately 60 circulation specialists who focus on
subscriber acquisition and retention. We believe that our centralized approach
allows us to generate new subscribers and cross-sell our magazines more
effectively. We are also a leading magazine publisher in terms of acquiring
subscriptions via the Internet, where we generated more than 900,000
subscriptions for the twelve months ended March 31, 2000.
Our newsstand strategy focuses on developing strong relationships with key
distributors and large retail accounts. For example, we are the principal
supplier of technology publications to Warner Publisher Services, a division of
Time Warner, Inc. In addition, we have distribution arrangements with a number
of large retailers, including WalMart, Staples and Barnes & Noble; these
arrangements include prominent magazine displays that we believe strengthen our
brands' identities. We believe that we consistently sell more magazines through
newsstand sales than any other technology magazine publisher and that our
strength at the newsstand allows us to maintain premium shelf space and
positioning.
In 1999, Circulation Management Magazine awarded several of our publications
the 1999 Circulation Excellence Awards, recognizing outstanding achievement,
innovation and strategic performance in circulation marketing and management.
Ziff Davis SMART BUSINESS for the New Economy (then PC/Computing), Yahoo!
Internet Life and Expert Gamer each received a Gold Award, while eWeek (then PC
Week) and Sm@rt Partner (then Sm@rt Reseller) each won a Silver Award.
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Paper and Printing
Paper is our principal raw material, and in 1999 it accounted for 33.5% of
our total production costs. We purchase our paper from five main suppliers for
our domestic publications, four of which each accounted for more than 10% of
our paper supply in 1999 as measured by tonnage. Our paper contracts are
generally two-to-three year agreements, with quarterly pricing adjustments, and
are renewable on a staggered basis. In general, we believe that we maintain
strong relationships with our paper suppliers.
We outsource the printing process for all of our publications. To facilitate
efficient and timely printing of our publications, we have established working
relationships with a number of printing companies, including R.R. Donnelley,
Brown, and Quadgraphics. In 1999, approximately half of our total printing
expenses for our domestic publications were for printing services supplied by
R.R. Donnelley. Since the acquisition, we have been seeking to achieve
operating improvements through enhancing vendor relationships. In that regard,
we have consolidated from four to three printers and outsourced the majority of
our pre-press and paper buying operations to these printers.
Industry and Competition
Technology is the fastest growing sector and an increasingly important part
of the U.S. economy. According to a report by the U.S. Department of Commerce,
information technology producing industries are estimated to have contributed
an average of 30% of total real U.S. economic growth between 1995 and 1999.
Industry forecasts point to the continued proliferation of the Internet.
According to Forrester Research, business-to-business Internet commerce is
expected to grow at an annual rate of 86.9% from $109 billion in 1999 to $1.3
trillion in 2003. Additionally, business-to-consumer Internet commerce in the
United States is expected to grow at an annual rate of 56.5% from $18 billion
in 1999 to $108 billion in 2003. Due to the increasingly rapid penetration of
technology in people's daily lives and their consequent need for information,
the technology magazine publishing industry is poised to capitalize on this
growth. According to industry research, the technology magazine sector is the
third largest magazine sector, behind only newsweeklies and women's magazines,
and the largest business and trade magazine sector, as measured by advertising
revenue.
The magazine publishing industry is highly competitive. We compete for
advertising and circulation revenues principally with publishers of other
technology magazines with similar editorial content as those published by us.
The technology magazine industry has traditionally been dominated by a small
number of large publishers. In 1999, the three largest technology publishing
companies, Ziff-Davis Inc., International Data Group (IDG) and CMP/Miller
Freeman, accounted for 81.3% of total technology magazine advertising revenue
and 65.0% of total technology advertising pages. IDG publishes Computerworld,
InfoWorld, The Industry Standard Network World, PC World, Channel World and the
"Dummies" book series, and CMP/Miller Freeman publishes Network Computing,
Information Week, Computer Reseller News, Electronic Engineering Times and
VARBusiness. We also compete with Imagine Media, Inc., which publishes
magazines and websites and, as part of the Future Network, has become one of
Europe's largest publisher of consumer magazines covering computing and video
games.
We believe that we compete with other technology publications based on our
market leading position within the technology magazine sector, the nature and
quality of our magazines' editorial content and the attractive demographics of
our readers. In addition to other technology magazines, our magazines also
compete for advertising revenues with general-interest magazines and other
forms of media, including broadcast and cable television, radio, newspaper,
direct marketing and electronic media. In competing with general-interest
magazines and other forms of media, we rely on our ability to reach a targeted
segment of the population in a cost-effective manner.
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License Agreements and Services Contracts
Agreements with Affiliates of Ziff-Davis Inc. On April 5, 2000, we entered
into a three-year exclusive license agreement with ZDNet, with an additional
two years on a non-exclusive basis. Under this agreement, we provide the
editorial content of our technology publications existing as of the closing
date (excluding eShopper) to ZDNet and ZDNet maintains websites for those
publications. Beginning in the fourth year, we have the right to provide
content on our own websites while ZDNet will continue to be able to use our
content on their websites. In the fifth and final year of this agreement, the
magazine websites currently hosted by ZDNet will come under our control while
ZDNet will have the right to display the content on other websites. ZDNet pays
royalties to us based on its annual revenue, net of bad debt expense and
discounts and subject to minimum and maximum annual payments. This agreement
does not cover any new publications acquired or developed by us (such as
Expedia Travels and The Net Economy), to which we retain all rights in every
medium, and it specifically allows us in certain circumstances to transact e-
commerce independently of ZDNet. On August 22, 2000, we gave notice pursuant to
the terms of this agreement that it would terminate effective March 1, 2001 due
to ZDNet's failure to comply with the terms of the agreement. Upon termination
of the agreement on March 1, 2001, we will not be entitled to receive the
minimum annual royalty payments under the agreement.
We have a license from ZDNet to use the trademark "ZD" in print in
perpetuity. ZDNet continues to use the trademark "ZD" online and may use
certain derivations of the trademark "ZD" in print. We also have a license from
ZDNet to use the trademark "Interactive Investor" in print in perpetuity.
Currently, our magazine Interactive Week includes the column "Interactive
Investor." ZDNet continues to use the "Interactive Investor" trademark online
and derivations thereof in print.
In connection with the closing of the transactions, we have entered into a
services agreement with ZD Inc. Under this agreement, Ziff Davis Publishing
Inc. provides distribution, circulation and production services to ZD Inc. for
its Computer Shopper magazine, and ZD Inc. pays Ziff Davis Publishing Inc. its
costs in relation to the performance of these services plus an additional $5.0
million annually in fees. ZD Inc. may terminate this agreement at any time with
90 days prior notice.
Agreements with Others. We have been granted a license to use certain
trademarks owned by Yahoo Corporation in connection with the publishing of
Yahoo! Internet Life magazine both in print and online. The term of our right
to use these marks expires on January 15, 2016. We have been granted an
exclusive license to use certain trademarks owned by Sony Computer
Entertainment Corp. in connection with the publishing of the magazine Official
U.S. Playstation Magazine in the United States and Canada. The initial term of
our right to use these marks extends until December 31, 2000 and automatically
renews for one year, until December 31, 2001. We have also been granted an
exclusive license to use certain trademarks owned by Expedia, Inc. in
connection with the publishing of the magazine Expedia Travels in the United
States and its territories and possessions. The initial term of our right to
use these marks expires on January 28, 2010.
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Facilities
Listed below are 17 primary facilities in which we conduct operations, all
of which are leased. The following chart sets forth certain information with
respect to these facilities.
<TABLE>
<CAPTION>
Total Expiration
Our Facilities Location Sq. Ft. of Lease
-------------- -------- ------- ----------
<S> <C> <C> <C>
New York Headquarters (1)......... New York, NY 319,748 07/14/2019
Ziff Davis SMART BUSINESS for the
New Economy...................... San Francisco, CA 80,312 12/31/2004
eWeek............................. Medford, MA 35,404 12/01/2010
eWeek............................. San Francisco, CA 2,055 08/31/2005
eTESTING LABS..................... Foster City, CA 29,808 07/31/2002
eTESTING LABS..................... Morrisville, NC 15,946 04/30/2002
Interactive Week.................. Garden City, NY 16,536 11/30/2006
Video Game Group Base............. Oakbrook, IL 19,469 12/31/2008
Branch Sales Office............... Chicago, IL 3,871 07/31/2005
Branch Sales Office............... Irvine, CA 4,267 03/31/2001
Branch Sales Office............... Los Angeles, CA 7,418 01/31/2004
Branch Sales Office............... Southfield, MI 1,348 04/16/2003
Branch Sales Office............... Dallas, TX 4,536 04/15/2001
West Coast Warehouse.............. San Francisco, CA 8,942 03/31/2003
Ziff-Davis UK (2) London, England 14,849 06/24/2012
Ziff-Davis France (2)............. Levallois-Perret, France 5,924 12/31/2002
Ziff-Davis Germany (2)............ Munich, Germany 8,508 06/30/2007
</TABLE>
--------
(1) Includes PC Magazine, eWeek, Yahoo! Internet Life, FamilyPC, Interactive
Week, Sm@rtPartner; The Net Economy, Expedia Travels, InternetCo and
LaunchCo.
(2) In August 2000, we completed the sale of our International publications. As
of September 30, 2000, we still leased each of these facilities and are
currently in the process of subleasing or assigning each of the facilities.
Employees
As of November 30, 2000 we had approximately 981 domestic employees. None of
our employees are represented by any union or other labor organization, and we
have had no recent strikes or work stoppages. We believe our relations with our
employees are good.
Litigation
From time to time, we are involved in litigation that we consider to be in
the normal course of business. However, we are not presently involved in any
legal proceedings that we expect individually or in the aggregate to have a
material adverse effect on our financial condition, results of operations or
liquidity.
We have been named along with 11 other magazine publishing companies in
several federal class action price fixing lawsuits brought in late summer and
early fall of 2000 in Federal District Court for the Southern District of New
York. All of these complaints have since been consolidated. They allege that
the magazine publishing companies unlawfully conspired to limit the discounting
of magazine subscriptions in violation of the Sherman Act.
We believe that there are substantial defenses to the litigation in which we
are involved and that such litigation will not materially affect our financial
position, future operating results or cash flows, although no assurance can be
given with respect to the ultimate outcome of any such litigation.
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MANAGEMENT
Directors, Executive Officers and Key Employees
The following table contains information as of September 30, 2000 with
respect to our and our Parent's directors and our executive officers and
certain key employees:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
James D. Dunning, Jr.... 53 Chairman, Chief Executive Officer and President of
our Parent, Ziff Davis Media Inc. and Ziff Davis Publishing Inc.
Thomas McGrade.......... 42 Senior Executive Vice President and Chief Operating
Officer, Ziff Davis Media Inc. and Ziff Davis Publishing Inc.
Alan J. Perlman......... 47 President of Business Publications, Ziff Davis Media Inc.
and Ziff Davis Publishing Inc.
Scott Crystal........... 43 Executive Vice President and Publishing Director, Ziff Davis
Consumer Publications
Robert L. Madore........ 35 Senior Vice President and Chief Financial Officer, Ziff
Davis Media Inc. and Ziff Davis Publishing Inc.
Dale Strang............. 40 Vice-President, Ziff Davis Games Group
Carolyn Schurr Levin.... 36 Vice President, General Counsel, Ziff Davis Media Inc.
and Ziff Davis Publishing Inc.
David F. Mullen......... 32 Controller, Ziff Davis Media Inc. and Ziff Davis Publishing Inc.
Avy H. Stein............ 45 Director of our Parent and Ziff Davis Media Inc.
Daniel H. Blumenthal.... 36 Director of our Parent and Ziff Davis Media Inc.
Milton J. "Chip" Block.. 54 Director of our Parent
David M. Wittels........ 35 Director of our Parent
</TABLE>
James D. Dunning, Jr. has been the President, Chief Executive Officer and
Chairman of our Parent, Ziff Davis Media Inc. and Ziff Davis Publishing Inc.
since the closing of the transactions. From 1999 to 2000, Mr. Dunning held the
positions of Chairman and Director of USApubs, Inc. Mr. Dunning served as
Chairman and Chief Executive Officer of The Petersen Companies, Inc. from 1996
to 1999. From 1992 to 1997, Mr. Dunning served as Chairman and Chief Executive
Officer of TransWestern Publishing Company L.P. Mr. Dunning has also served as
Chairman of SRDS Media Information, L.P. and as Chairman, Chief Executive
Officer and President of Multi-Local Media Information Group. From 1985 to 1986
Mr. Dunning served as Executive Vice President of Ziff Communications.
Thomas McGrade has been Senior Executive Vice President and Chief Operating
Officer of Ziff Davis Media Inc. and Ziff Davis Publishing Inc. since the
closing of the transactions. From 1997 to April 2000, Mr. McGrade held the
position of Executive Vice President and General Manager of Ziff-Davis Inc. His
previous positions have included Vice President and Assistant to the Chairman
of Ziff-Davis Inc. from 1995 to 1996 and business manager of Ziff-Davis
Publishing from 1993 to 1994. He spent seven years at Doubleday/Dell Publishing
from 1980 to 1987, where he held several business and finance positions.
Alan J. Perlman has been President, Business Publications of Ziff Davis
Media Inc. and Ziff Davis Publishing Inc. since the closing of the
transactions. From 1995 to April 2000, Mr. Perlman was Senior VP/Publisher of
Interactive Week. Mr. Perlman co-launched Interactive Week in 1994. For 15
years prior to joining Ziff-Davis Inc., Mr. Perlman was a top publishing
executive at CMP Publications, where he was founding publisher of Network
Computing magazine. Prior to that time, Mr. Perlman was Vice President and
Editorial Director at CMP, where he has responsible for all editorial content,
which included the launch of Computer Reseller News, CommunicationsWeek,
VARBusiness and CommunicationsWeek International.
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Scott Crystal has been Executive Vice President and Publishing Director,
Ziff Davis Consumer Publications since the closing of the transactions. Mr.
Crystal oversees Yahoo! Internet Life, Family PC and Expedia Travels. From 1992
until joining Ziff-Davis Inc. in March 2000, Mr. Crystal held various positions
at the National Geographic Society, including Vice President and Publishing
Director of National Geographic Society, from 1998 to March 2000 and Vice
President and Advertising Director from 1994 to 1998.
Robert L. Madore has been Senior Vice President and Chief Financial Officer
of Ziff Davis Media Inc. and Ziff Davis Publishing Inc. since May 2000. From
1998 until May 2000, Mr. Madore was Senior Vice President, International
Finance and Operations of Nine West Group Inc. and from 1995 to 1998 he held
the position of Vice President, Corporate Finance of Nine West Group Inc. From
1993 to 1995, Mr. Madore was a merger and acquisition consultant with Deloitte
& Touche LLP and held various positions in the firm's audit services group from
1987 to 1993.
Dale Strang has been Vice President, Ziff Davis Games Group, Ziff Davis
Publishing Inc. since the closing of the transactions. Mr. Strang held similar
positions at Ziff-Davis Inc. since March 1999. Since joining Ziff-Davis Inc. in
June 1996, Mr. Strang served in several positions, including Group Publisher of
Electronic Gaming Monthly, Expert Gamer and Official U.S. PlayStation Magazine
and Publisher of Computer Gaming World. From 1991 to 1996, Mr. Strang held the
position of President-Publisher of the Active Media Inc. division of
International Data Group.
Carolyn Schurr Levin has been Vice President and General Counsel, Ziff Davis
Media Inc. and Ziff Davis Publishing Inc. since June 2000. From 1991 until
joining us, Ms. Levin served in various legal positions at The Times Mirror
Company. She held the positions of Vice President and General Counsel for
Newsday, a Times Mirror Company, from 1995 to June 2000, and Associate General
Counsel of The Times Mirror Company from 1996 to June 2000. Prior to her tenure
at The Times Mirror Company, Ms. Levin was a litigation attorney with Corbin
Silverman & Sanseverino and Cravath, Swaine & Moore.
David F. Mullen has been Controller of Ziff Davis Media Inc. since the
closing of the transactions. Mr. Mullen was Assistant Controller of Ziff-Davis
Inc. from January 1999 to April 2000 and Director of Financial Reporting of
Ziff-Davis Inc. from June 1998 to January 1999. From November 1997 to June
1998, Mr. Mullen served as Manager of External Reporting of Ziff-Davis Inc.
From 1990 to 1997, Mr. Mullen served in various positions at Deloitte & Touche,
LLP.
Avy H. Stein has been a Director of our Parent since the closing of the
transactions and a Director of Ziff Davis Media Inc. since November 1999. Mr.
Stein is a Managing Director of Willis Stein. Prior to the formation of Willis
Stein in 1994, Mr. Stein served as a Managing Director of Continental Illinois
Venture Capital Corporation (CIVC), a venture capital investment firm, from
1989 to 1994. From 1984 to 1985, Mr. Stein was President of Cook Energy
Corporation and Vice President of Corporate Planning and Legal Affairs at Cook
International, Inc. From 1980 through 1983, Mr. Stein was an attorney with
Kirkland & Ellis. Mr. Stein has also served as a special consultant for mergers
and acquisitions to the chief executive officer of NL Industries, Inc. and as
the Chief Executive Officer of Regent Corporation. He currently serves as a
Director of several companies, including CTN Media Group Inc., Racing Champions
Corporation, USApubs, Inc., Tremont Corporation and Orius Corp.
Daniel H. Blumenthal has been a Director of our Parent since the closing of
the transactions and a Director of Ziff Davis Media Inc. since November 1999.
Mr. Blumenthal has been a Managing Director of Willis Stein since its inception
in 1994. Prior to the formation of Willis Stein in 1994, Mr. Blumenthal served
as Vice President of CIVC from 1993 to 1994. From 1988 to 1993 he was a
corporate tax attorney with Latham & Watkins. Mr. Blumenthal currently serves
as a Director of several companies, including USApubs, Inc., Troll
Communications L.L.C., Aavid Thermal Technologies, Inc., Personal Path Systems,
Inc., and Interval Acquisition Corp.
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Milton J. "Chip" Block has been a Director of our Parent since the closing
of the transactions. Mr. Block is Vice Chairman of USApubs, Inc., a magazine
subscription marketing company. From 1998 to 1999, Mr. Block was President of
the Consumer Marketing Group and General Manager of The Petersen Companies,
Inc. Mr. Block also served on the Board of Directors of The Petersen Companies,
Inc. and was a Director of the Magazine Publishers of America from 1998 until
February 2000. From 1993 to 1999, Mr. Block was Chairman and President of
Applied Interactive Media LLC, which he sold to USApubs, Inc. in 1999. Mr.
Block currently serves as a Director of USApubs, Inc. and Worldwide Media Inc.,
a Hudson News company.
David M. Wittels has been a Director of our Parent since May 2000. Mr.
Wittels has been a Principal of DLJ Merchant Banking, Inc. since January 1997.
For the past five years, Mr. Wittels has held various positions within DLJ
Merchant Banking, Inc. Mr. Wittels currently serves on the boards of AKI
Holding Corp., AKI Inc., Mueller Holdings (N.A.), Inc. and Wilson Greatbatch
Technologies, Inc.
Each director is elected to serve until the next annual meeting of
stockholders or until a successor is duly elected and qualified. The current
directors were elected pursuant to the terms of an investor rights agreement.
See "Certain Relationships and Related Party Transactions--Investor Rights
Agreement." There is no family relationship between any of our executive
officers or directors.
Director Compensation
We will reimburse members of the board of directors for any out-of-pocket
expenses incurred by them in connection with services provided in such
capacity. In addition, we anticipate that outside directors will receive
compensation for serving as director. Although the amount of compensation for
outside directors has not yet been determined, it is expected to be reasonable
and customary.
Executive Compensation
We are a new company with no history of operating as an independent
business; therefore, we do not have historical information relating to the
compensation of our executive officers. Our new Chairman, Chief Executive
Officer and President was hired in connection with the closing of the
transactions and our new Chief Financial Officer was hired in May 2000. For
information relating to the current compensation of our executive officers who
have entered into employment agreements with us, see "Executive Agreements"
below.
Executive Agreements
Mr. Dunning. In connection with the closing of the transactions, our Parent
and Ziff Davis Publishing Inc. entered into an executive agreement with Mr.
Dunning. The agreement provides, among other things, that Mr. Dunning will
serve as President, Chief Executive Officer and Chairman of the Board of Ziff
Davis Publishing, Ziff Davis Media Inc. and our Parent during a term ending on
April 5, 2005. Under his agreement, Mr. Dunning is entitled to a base salary of
$2.0 million per year, subject to annual cost-of-living increases. In addition
to his base salary, Mr. Dunning is eligible to receive an annual bonus of
$500,000 for each of the fiscal years ended March 31, 2001 and March 31, 2002
based upon our Parent's financial performance as measured by EBITDA. Under his
executive agreement, Mr. Dunning contributed $5.0 million in cash to our Parent
in exchange for stock of our Parent.
Mr. McGrade. In connection with the closing of the transactions, our Parent
and Ziff Davis Publishing entered into an executive agreement with Mr. McGrade.
The agreement provides, among other things, that he will serve as Senior
Executive Vice President and Chief Operating Officer of Ziff Davis Publishing
during a term ending on April 5, 2005. His base salary will be $350,000 per
year, subject to annual cost of living adjustments, and he will be eligible to
receive an annual bonus of $250,000, payable in the discretion of our Parent's
board of directors.
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<PAGE>
Mr. Perlman. In connection with the closing of the transactions, our Parent
and Ziff Davis Publishing entered into an executive agreement with Mr. Perlman.
The agreement provides, among other things, that he will serve as President of
Business Publications of Publishing during a term ending on April 5, 2005. His
base salary will be $450,000 per year, subject to annual cost of living
adjustments, and he will be eligible to receive an annual bonus of $250,000,
payable in the discretion of our Parent's board of directors.
Mr. Madore. On May 19, 2000, our Parent and Ziff Davis Publishing entered
into an executive agreement with Mr. Madore. Mr. Madore's agreement provides,
among other things, that he will serve as Senior Vice President and Chief
Financial Officer of Ziff Davis Publishing during a term expiring on May 19,
2005. His base salary will be $250,000 per year, subject to annual cost-of-
living adjustments, and he will be eligible to receive an annual bonus of
$250,000, payable in the discretion of our Parent's board of directors, with a
minimum bonus of $50,000 for the fiscal year ended March 31, 2001. Mr. Madore's
base salary and bonus may be increased based on Mr. Madore's performance.
Equity Incentive Plans
Following the closing of the transactions, we implemented an equity
incentive program. The program provides for the issuance of, or the grant of
options to purchase, restricted common stock to certain of our employees,
directors and officers of the company. Under the program, our Parent intends to
reserve up to 10% (2,600,000 shares) of its fully diluted common equity and we
have reserved up to 10% of the fully-diluted common equity of LaunchCo and up
to 25% of the fully-diluted common equity of InternetCo for our employees,
directors and officers. In connection with the issuance of, or the grant of
options to acquire, these equity interests, the participants in the program
will grant to us customary "drag-along" rights in the event of a sale of the
entity in which they hold equity interests. We also have the option to
repurchase the participants's option shares if his/her employment terminates
for any reason, including upon his/her death, disability or resignation.
401(k) Plan
Ziff Davis Publishing Inc. has established the Ziff Davis Publishing 401(k)
Plan, a tax-qualified 401(k) employee savings and profit sharing plan, for all
of our employees who meet the 401(k) plan's eligibility requirements. The
401(k) plan is intended to qualify under Section 401 of the Internal Revenue
Code so that contributions by employees and income earned on the 401(k) plan
contributions are not taxable to the employees until withdrawn from the 401(k)
plan. Under the 401(k) plan, participants may elect to defer up to 15% of their
annual compensation as a contribution (subject the dollar limitations under the
Internal Revenue Code). We may elect annually to make matching contributions
equal to a percentage of a participant's elective deferral contributions.
Currently, we make matching contributions equal to 50% of the first 4% of a
participants compensation deferred. We may also make profit sharing
contributions to the 401(k) plan in an amount determined by us. No profit
sharing contributions have been made to date. At the direction of each
participant, the trustee of the 401(k) plan invests such participant's 401(k)
plan accounts in selected investment options.
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<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Investor Rights Agreement
Our Parent, Willis Stein, its equity co-investors and the members of
management who hold equity securities of our Parent are parties to an investor
rights agreement entered into in connection with the closing of the
transactions. The investor rights agreement provides that our Parent's board of
directors will be established at seven directors or such other number
designated by Willis Stein. The agreement provides that the board will consist
of:
. our Parent's chief executive officer, who will initially be Mr. Dunning;
. one person designated by DLJ Merchant Banking Partners II, L.P.;
. four persons designated by Willis Stein, who initially include Avy H.
Stein, Daniel H. Blumenthal and Milton J. "Chip" Block; and
. one additional person to be identified by Willis Stein.
The stockholders executing the investor rights agreement other than DLJ have
agreed to vote their shares as directed by Willis Stein in matters relating to
any amendment of our Parent's certificate of incorporation, any merger or other
business combination with, any sale by our Parent of substantially all of the
assets of our Parent or any liquidation of our Parent. Willis Stein may also
control the circumstances under which a public offering of our Parent's equity
securities may take place. References in this section to DLJ refer to DLJ
Merchant Banking Partners II, L.P. and its affiliates that are holders of our
Parent's stock.
The investor rights agreement generally restricts the transfer of shares of
our Parent's stock. The parties to the investor rights agreement have granted
our Parent a right of first refusal with respect to its stock, which, if not
exercised by our Parent, may be exercised by Willis Stein and its equity co-
investors. Each holder of shares generally has the right to participate in any
transfer of shares by Willis Stein, with certain exceptions. In addition, our
Parent has agreed not to issue new equity securities (or securities with equity
features) without giving Willis Stein and its equity co-investors an
opportunity to purchase their pro rata share of the new securities on
substantially the same terms, with certain exceptions. Each of our Parent's
stockholders has agreed to consent to a sale of our Parent or the assets of our
Parent if Willis Stein votes to approve the sale.
The investors rights agreement also provides that Willis Stein may request
at any time that all or any portion of its common stock be registered with the
SEC. If Willis Stein no longer owns at least 50% of the common stock specified
in the investor rights agreement, DLJ may also make one such request. In the
event that Willis Stein or DLJ makes a request for registration, the other
parties to investor rights agreement that hold common stock will be entitled to
participate in the registration. Our Parent has also granted the parties to the
investor rights agreement piggyback registration rights with respect to
registrations by it and our Parent has agreed to pay all expenses relating to
any registrations.
Make-Well Agreement
In connection with the closing of the transactions, we, our Parent, Willis
Stein and its equity co-investors entered into a make-well agreement. Under
this agreement, if our ratio of debt to EBITDA is greater than 4.5 to 1.0 on
March 31, 2001, then either we must repay debt owed by us under our senior
credit facilities or Willis Stein and its equity co-investors must contribute
to us up to a maximum of $50.0 million in additional equity (less any amounts
previously contributed) so that we may repay indebtedness under our senior
credit facilities (and permanently reduce commitments thereunder in an amount
equal to such repayment), in either case so that our ratio of debt to EBITDA is
equal to or less than 4.5 to 1.0 on March 31, 2001, after giving pro forma
effect to any repayment. In no event will Willis
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<PAGE>
Stein and its co-investors be required to contribute more than $50.0 million
for this purpose. In addition, the obligations of Willis Stein and its equity
co-investors under the make-well agreement will terminate when Willis Stein and
its equity co-investors have made such an equity contribution, when all
indebtedness under our senior credit facilities, the existing senior
subordinated notes, the notes offered hereby and the exchange notes referred to
in this prospectus has been repaid or if we deliver to the senior lenders a
balance sheet dated March 31, 2001 and an uncontested performance certificate
stating that our ratio of debt to EBITDA is equal to or less than 4.5 to 1.0 on
March 31, 2001.
Executive Promissory Notes
Under his executive agreement, each of Messrs. Dunning, McGrade, Perlman and
Madore purchased shares of our Parent's stock with one or more promissory
notes.
Mr. Dunning purchased 3,311,333 shares of common stock in April 2000 with
$5.0 million in cash and two promissory notes in the aggregate principal amount
of $4,282,833. The first promissory note is in the principal amount of
$3,900,000 and the second promissory note is in the principal amount of
$382,833. In October 2000, Mr. Dunning purchased an additional 834,667 shares
of common stock with a promissory note in the principal amount of $208,667. All
three notes accrue simple interest at a rate equal to the lesser of 7.0% per
annum or the highest rate permitted by law. The first two notes mature on April
5, 2007 and the third note matures on October 9, 2007. Mr. Dunning must prepay
all amounts due under the notes if his employment terminates for any reason or
if we are (or our Parent is) sold, and if Mr. Dunning receives any cash in
respect of his shares, he must use that cash to repay a portion of the amounts
due under the notes. Mr. Dunning's personal liability under the notes is
limited to no more than 100% of the interest owing under the notes plus 60% of
the aggregate principal amount of $4,491,501 minus the amount of any principal
payments made under his notes. Mr. Dunning has pledged all of his shares of our
Parent's stock to secure his obligations under his notes. As of November 30,
2000, all of the aggregate principal amount of Mr. Dunning's notes (and
interest accrued thereon) was outstanding.
Mr. McGrade purchased 349,236 shares of common stock in April 2000 with two
promissory notes in the aggregate principal amount of $229,809. The first
promissory note in the principal amount of $150,000 was repaid in full as of
May 31, 2000. The second promissory note in the principal amount of $79,809
matures on April 5, 2007. In October 2000, Mr. McGrade purchased an additional
173,681 shares of common stock with a promissory note in the principal amount
of $43,420 that matures on October 9, 2007. The first note accrued and the
second and third notes accrue simple interest at a rate equal to the lesser of
7.0% per annum or the highest rate permitted by law. Mr. McGrade's personal
liability under the second and third promissory notes is limited to no more
than 100% of the interest owing under the notes plus 60% of the aggregate
principal amount of $123,229 minus the amount of any principal payments made
under that note. The prepayment terms under Mr. McGrade's notes are similar to
those under Mr. Dunning's notes. Mr. McGrade has pledged all of his shares of
our Parent's stock to secure his obligations under his notes. As of
November 30, 2000, all of the aggregate principal amount of Mr. McGrade's
second and third promissory notes (and interest accrued thereon) was
outstanding.
Mr. Perlman purchased 379,236 shares of common stock in April 2000 with
$300,000 in cash and a promissory note in the principal amount of $79,809,
which matures on April 5, 2007. In October 2000, Mr. Perlman purchased an
additional 173,681 shares of common stock with a promissory note in the
principal amount of $43,420 that matures on October 9, 2007. Both notes accrue
simple interest at a rate equal to the lesser of 7.0% per annum or the highest
rate permitted by law. Mr. Perlman's personal liability under his promissory
notes is limited to no more than 100% of the interest owing under the notes
plus 60% of the principal amount of $123,229 minus the amount of any principal
payments made under his note. The prepayment terms under Mr. Perlman's note are
similar to those under Mr. Dunning's notes. Mr. Perlman has pledged all of his
shares of our Parent's stock to secure his obligations under his note. As of
November 30, 2000, all of the principal amount of Mr. Perlman's notes (and
interest accrued thereon) was outstanding.
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Mr. Madore purchased 86,617 shares of common stock in May 2000 with two
promissory notes in the aggregate principal amount of $69,154. The first
promissory note is in the principal amount of $50,000.00 and the second
promissory note is in the principal amount of $19,154. In October 2000, Mr.
Madore purchased an additional 41,683 shares of common stock with a promissory
note in the principal amount of $10,421. All three notes accrue simple interest
at a rate equal to the lesser of 7.0% per annum or the highest rate permitted
by law. The first promissory note was paid in full as of September 11, 2000,
the second matures on April 5, 2007 and the third matures on October 9, 2007.
Mr. Madore's personal liability under the second and third promissory notes is
limited to no more than 100% of the interest owing under the notes plus 60% of
the aggregate principal amount of $29,575 minus the amount of any principal
payments made under that note. The prepayment terms under Mr. Madore's notes
are similar to those under Mr. Dunning's notes. Mr. Madore has pledged all of
his shares of our Parent's stock to secure his obligations under his notes. As
of November 30, 2000, all of the principal amount of Mr. Madore's notes (and
interest accrued thereon) was outstanding.
Subscription Services
Investment funds affiliated with Willis Stein are also shareholders of
USApubs, Inc., a marketer of magazine subscriptions and other services. We sell
subscriptions to our publications both directly and through independent
subscription marketing companies, including USApubs, Inc. We believe all of our
arrangements with USApubs, Inc. are on market terms.
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<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
We are authorized to issue a total of 1,000 shares of common stock, par
value $0.01 per share. There are 1,000 shares of common stock issued and
outstanding. We are not authorized to issue any shares of any other class of
capital stock.
All of our outstanding capital stock is owned by our Parent. The table below
lists information about the beneficial ownership of our Parent's capital stock
by each person whom we know to own beneficially more than 5% of any class of
our Parent's stock, by each of our Parent's directors, certain executive
officers and by all of our Parent's directors and our executive officers as a
group. Our Parent has two classes of capital stock authorized for issuance,
Series A preferred stock and common stock. There are 350,000 shares of our
Parent's Series A preferred stock authorized for issuance, 337,155 of which are
issued and outstanding and 80,000,000 shares of our Parent's common stock
authorized for issuance, 76,381,184 of which are issued and outstanding. In the
event of an initial public offering of our Parent's common stock, Willis Stein
and the other holders of our Parent's Series A preferred stock may elect to
convert their shares of Series A preferred stock to shares of our Parent's
common stock. Unless otherwise noted, the address of each director and
executive officer is c/o Ziff Davis Media Inc., 28 East 28th Street, New York,
New York 10016.
<TABLE>
<CAPTION>
Beneficial Ownership (/1/)
--------------------------------------------
Percent of
Shares of Outstanding Percent of
Series A Series A Shares of Outstanding
Preferred Preferred Common Common
Stock Stock Stock Stock
--------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Willis Stein (/2/)................ 213,750.0 63.49% 45,000,000 59.38%
DLJ (/3/)......................... 47,500.0 14.11 10,000,000 13.19
James D. Dunning, Jr.............. 8,455.0 2.51 4,146,000 5.47
Thomas McGrade.................... 142.5 0.04 522,917 0.69
Alan J. Perlman................... 285.0 0.08 552,917 0.73
Robert L. Madore.................. 47.5 0.01 128,300 0.17
Avy H. Stein (/2/)................ -- -- -- --
Daniel H. Blumenthal (/2/)........ -- -- -- --
Milton J. "Chip" Block............ -- -- -- --
David M. Wittels (/3/)............ -- -- -- --
All directors and executive
officers as a group
(12 persons)..................... 8,930.00 2.65 5,778,379 7.62
</TABLE>
--------
(1) "Beneficial ownership" generally means voting or investment power with
respect to a security or the right to acquire such power within 60 days.
Unless otherwise indicated, we believe that each holder has sole voting and
investment power with regard to the equity interests listed as beneficially
owned.
(2) Includes shares held by Willis Stein & Partners II, L.P., Willis Stein &
Partners III, L.P. and Willis Stein & Partners Dutch, L.P. Mr. Stein and
Mr. Blumenthal are Managing Directors of Willis Stein. Each disclaims
beneficial ownership of the shares held by the investment funds associated
with Willis Stein. The address for Willis Stein and Messrs. Stein and
Blumenthal is 227 West Monroe Street, Suite 4300, Chicago, Illinois 60606.
(3) Includes shares held by DLJ Diversified Partners, L.P., DLJ Diversified
Partners-A, L.P., DLJ EAB Partners, L.P., DLJ ESC II L.P., DLJ First Esc
L.P., DLJ Merchant Banking Partners II-A, L.P., DLJ Offshore Partners II,
C.V. and DLJMB Funding II, Inc., which are private equity investment funds
affiliated with DLJ Merchant Banking, Inc. Mr. Wittels is a Principal of
DLJ Merchant Banking, Inc. Mr. Wittels disclaims beneficial ownership of
the shares held by the investment funds associated with DLJ Merchant
Banking, Inc. The address for DLJ Merchant Banking, Inc. and Mr. Wittels is
277 Park Avenue, New York, New York 10172.
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<PAGE>
DESCRIPTION OF SENIOR CREDIT FACILITIES
General. In connection with the transactions, we entered into a credit
agreement relating to our senior credit facilities with Canadian Imperial Bank
of Commerce and its affiliates, Bankers Trust Company, Fleet National Bank and
certain other lenders. Following completion of the transactions, our senior
credit facilities provide for aggregate borrowings of $285.3 million, comprised
of the following:
. a $73.3 million tranche A term loan facility;
. a $187.0 million tranche B term loan facility; and
. a $50.0 million revolving credit facility.
As of November 30, 2000 there was $260.3 million of outstanding principal
under our senior credit facilities and $50.0 million available under the
revolving portion of our senior credit facilities. After application of the
proceeds of the old note offering, there was $295.3 million of outstanding
principal under our senior credit facility and $50.0 million of availability
under the revolving portion.
Use of Proceeds. The proceeds of the tranche A and tranche B term loans were
used to finance the transactions and were fully drawn down at the closing of
the transactions. The proceeds of the revolving credit facility are available
to finance capital expenditures and acquisitions permitted under the credit
agreement relating to our senior credit facilities and for working capital
purposes and other general corporate purposes.
Interest. Amounts outstanding under our senior credit facilities bear
interest, at our option, at a rate per annum equal to either the base rate or
the eurodollar rate, as determined by Canadian Imperial Bank of Commerce, in
each case plus an additional margin. The base rate is the higher of the rate
quoted from time to time by Canadian Imperial Bank of Commerce as its prime
rate and the overnight federal funds rate plus 0.5%. The additional margin for
the revolving credit facility and the tranche A term loans is initially 1.75%
for base rate loans and 3.0% for eurodollar rate loans. The additional margin
for the tranche B term loans is initially 2.5% for base rate loans and 3.75%
for eurodollar rate loans. The additional margin for the revolving credit
facility and the tranche A term loans adjusts according to a performance
pricing grid based on our ratio of total debt to EBITDA, ranging from 1.75% to
0.5% for base rate loans and from 3.0% to 1.75% for eurodollar rate loans. The
additional margin for the tranche B term loans adjusts according to a
performance pricing grid based on our ratio of total debt to EBITDA, ranging
from 2.5% to 2.25% for base rate loans and from 3.75% to 3.5% for eurodollar
rate loans. As of September 30, 2000 our borrowings under our senior credit
facilities bore interest at rates ranging from 9.63% to 10.26%.
Maturity. Borrowings under the revolving credit facility are due September
30, 2006 and may be borrowed, repaid and reborrowed prior to maturity.
Borrowings under the tranche A term loan facility are due September 30, 2006
and borrowings under the tranche B term loan facility are due March 31, 2007.
The maturity of all the loans can be accelerated upon the event or default. The
tranche A and tranche B term loans are payable quarterly in arrears beginning
March 31, 2001 pursuant to the amortization schedule set forth below.
<TABLE>
<CAPTION>
Amortization of
Tranche A Term Loans
--------------------
<S> <C>
March 31, 2001--March 31, 2002.......................... $ 9,165
June 30, 2002--March 31, 2003........................... 9,165
June 30, 2003--March 31, 2004........................... 10,998
June 30, 2004--March 31, 2005........................... 14,664
June 30, 2005--March 31, 2006........................... 14,664
June 30, 2006--September 30, 2006....................... 14,665
-------
Total................................................. $73,321
=======
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Amortization of
Tranche B Term Loans
--------------------
<S> <C>
March 31, 2001--September 30, 2006...................... $ 10,751
December 31, 2006....................................... 88,109
March 31, 2007.......................................... 88,109
--------
Total................................................. $186,969
========
</TABLE>
Security and Guarantees. Our senior credit facilities are secured by a first
priority security interest in substantially all of our existing and future
tangible and intangible assets (including a pledge of the stock of InternetCo,
LaunchCo and LaunchCo's subsidiaries), except that no more than 65% of the
voting stock of any of our foreign subsidiaries is pledged. All of our
obligations under our senior credit facilities are fully and unconditionally
guaranteed by all of our present and future domestic restricted subsidiaries
and by InternetCo, LaunchCo and LaunchCo's subsidiaries.
Covenants. Our senior credit facilities require us to meet certain financial
tests, including maximum total leverage ratio, maximum senior leverage ratio,
minimum interest coverage ratio, minimum fixed charge coverage ratio and
maximum capital expenditure tests. Our senior credit facilities contain
covenants, including the following:
. restrictions on indebtedness, liens and guarantees;
. restrictions on mergers, consolidations and some types of acquisitions
and asset sales;
. restrictions on dividends and stock repurchases;
. restrictions on the types of business in which we can engage; and
. restrictions on funding from the restricted subsidiaries to the
unrestricted subsidiaries.
Events of Default. Our senior credit facilities contain events of default
customary for senior credit facilities of a size and type similar to our senior
credit facilities, including payment defaults, breaches of representations and
warranties, covenant defaults, cross-defaults to certain other indebtedness,
including the notes offered hereby, certain events of bankruptcy and
insolvency, the failure of any guaranty or security document supporting our
senior credit facilities to be in full force and effect, a change of control of
our Parent and the failure of Willis Stein to make additional equity
contributions to our Parent if required to do so in accordance with the terms
of the Make-Well Agreement. See "Certain Relationships and Related
Transactions."
DESCRIPTION OF THE EXCHANGE NOTES
We will issue the exchange notes under an indenture, dated July 21, 2000
among Ziff Davis Media, our guarantors and Bankers Trust Company, as trustee.
The following is a summary of the significant provisions of the indenture. It
does not include all of the provisions of the indenture. We urge you to read
the indenture because it defines your rights. The terms of the exchange notes
include those stated in the indenture and those made part of the indenture by
reference to the Trust Indenture Act of 1939, as amended. A copy of the
indenture may be obtained from us or the initial purchasers. You can find
definitions of capitalized terms used in this description under "Definitions."
The exchange notes will be unsecured obligations of Ziff Davis Media,
ranking subordinate in right of payment to all our senior indebtedness.
The form and terms of the senior subordinated notes due 2010 are the same as
the form of the terms of the old notes except that:
(1) the exchange notes will have been registered under the Securities Act of
1933 and thus will not bear restrictive legends restricting their transfer
under the Securities Act of 1933, and
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<PAGE>
(2) holders of exchange notes will not be entitled to rights of holders of
the old notes under the registration rights agreement that terminate upon the
consummation of the exchange offer.
The following description is a summary of the significant provisions of the
indenture and the registration rights agreement. It does not restate those
agreements in their entirety and sections of this description which correspond
to similar sections of the indenture have been redrafted for clarity in this
description in terms substantially the same as those of the indenture and
registration rights agreement because they, and not this description, define
your rights as holders of these exchange notes. Copies of the proposed form of
indenture and registration rights agreement are available as set forth below
under the subheading "Additional Information."
Any notes that remain outstanding after the completion of the exchange
offer, together with the exchange notes issued in connection with the exchange
offer, will be treated as a single class of securities under the indenture.
Principal, Maturity and Interest
The exchange notes are limited in aggregate principal amount to $250.0
million. The exchange notes will mature on July 15, 2010. Interest on the
exchange notes will accrue at the rate of 12% per annum and will be payable
semiannually in cash on each January 15 and July 15, commencing on January 15,
2001, to the persons who are registered holders at the close of business on the
January 1 and July 1 immediately preceding the applicable interest payment
date. Interest on the exchange notes will accrue from the most recent date to
which interest has been paid or, if no interest has been paid, from and
including the date of issuance.
The exchange notes will not benefit from any mandatory sinking fund.
Redemption
Optional Redemption. Except as described below, the exchange notes are not
redeemable before July 15, 2005. Thereafter, we may redeem the exchange notes
at our option, in whole or in part, upon not less than 30 nor more than 60
days' notice, at the following redemption prices (expressed as percentages of
the principal amount thereof) if redeemed during the twelve-month period
commencing on July 15 of the year set forth below:
<TABLE>
<CAPTION>
Year Percentage
---- ----------
<S> <C>
2005.............................................................. 106.00%
2006.............................................................. 104.00%
2007.............................................................. 102.00%
2008 and thereafter............................................... 100.00%
</TABLE>
In addition, we must pay accrued and unpaid interest on the exchange notes
redeemed.
Optional Redemption upon Public Equity Offerings. At any time, or from time
to time, on or prior to July 15, 2003, we may, at our option, use the net cash
proceeds of one or more Public Equity Offerings (as defined below) to redeem up
to 35% of the principal amount of the exchange notes issued under the indenture
at a redemption price of 112.00% of the principal amount thereof plus accrued
and unpaid interest thereon, if any, to the date of redemption; provided that:
(1) at least 65% of the principal amount of exchange notes issued under
the indenture remains outstanding immediately after any such redemption;
and
(2) we make such redemption not more than 90 days after the consummation
of any such Public Equity Offering.
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<PAGE>
"Public Equity Offering" means any issuance of common stock by Ziff Davis
Media or our Parent (and, in the case of an issuance by our Parent, only if the
proceeds thereof are contributed to Ziff Davis Media) other than Disqualified
Capital Stock that is registered pursuant to the Securities Act, other than
issuances registered on Form S-8 and issuances registered on Form S-4,
excluding issuances of common stock pursuant to employee benefit plans of Ziff
Davis Media or otherwise as compensation to employees of Ziff Davis Media.
Selection and Notice of Redemption
In the event that we choose to redeem less than all of the exchange notes,
selection of the exchange notes for redemption will be made by the trustee
either:
(1) in compliance with the requirements of the principal national
securities exchange, if any, on which the exchange notes are listed; or
(2) on a pro rata basis, by lot or by another method as the trustee
shall deem fair and appropriate.
No exchange notes of a principal amount of $1,000 or less shall be redeemed
in part. If a partial redemption is made with the proceeds of a Public Equity
Offering, the trustee will select the exchange notes only on a pro rata basis
or on as nearly a pro rata basis as is practicable (subject to DTC procedures).
Notice of redemption will be mailed by first-class mail between 30 and 60 days
before the redemption date to each holder of exchange notes to be redeemed at
its registered address. On and after the redemption date, interest will cease
to accrue on exchange notes or portions thereof called for redemption as long
as we have deposited with the Paying Agent funds in satisfaction of the
applicable redemption price.
Subordination
The payment of all Obligations on the exchange notes is subordinated in
right of payment to the prior payment in full in cash or Cash Equivalents of
all Obligations on Senior Indebtedness of Ziff Davis Media.
The holders of Senior Indebtedness will be entitled to receive payment in
full in cash of all Obligations due in respect of Senior Indebtedness
(including interest after the commencement of any bankruptcy or other like
proceeding at the rate specified in the applicable Senior Indebtedness whether
or not such interest is an allowed claim in any such proceeding) before the
holders of exchange notes will be entitled to receive any payment with respect
to the exchange notes in the event of any distribution to our creditors.
(1) in a liquidation or dissolution of Ziff Davis Media;
(2) in a bankruptcy, reorganization, insolvency, receivership or similar
proceeding relating to Ziff Davis Media or its property;
(3) in an assignment for the benefit of creditors; or
(4) in any marshalling of our assets and liabilities.
Ziff Davis Media also may not make any payment in respect of the exchange
notes if:
(1) a payment default on Designated Senior Indebtedness occurs and is
continuing; or
(2) any other default occurs and is continuing on Designated Senior
Indebtedness that permits holders of the Designated Senior Indebtedness to
accelerate its maturity and the trustee receives a notice of such default
(a "Payment Blockage Notice") from the Representative of any Designated
Senior Indebtedness.
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Payments on the exchange notes may and shall be resumed:
(1) in the case of a payment default, upon the date on which the payment
default is cured or waived; and
(2) in case of a nonpayment default, the earlier of the date on which
the nonpayment default is cured or waived (so long as no other event of
default exists) and 180 days after the date on which the applicable Payment
Blockage Notice is received, unless the maturity of any Designated Senior
Indebtedness has been accelerated.
No new Payment Blockage Notice may be delivered unless and until 360 days
have elapsed since the effectiveness of the immediately prior Payment Blockage
Notice.
No nonpayment default that existed or was continuing on the date of
delivery of any Payment Blockage Notice to the trustee shall be, or be made,
the basis for a subsequent Payment Blockage Notice unless such default shall
have been cured or waived for a period of not less than 90 days.
Ziff Davis Media must promptly notify holders of Senior Indebtedness if
payment of the exchange notes is accelerated because of an Event of Default.
As a result of the subordination provisions described above in the event of
a bankruptcy, liquidation or reorganization of Ziff Davis Media, holders of
the exchange notes may recover less ratably than creditors of Ziff Davis Media
who are holders of Senior Indebtedness. See "Risk Factors--Your right to
receive payments on the exchange notes will be junior to our senior debt and
may be subject to other restrictions."
At November 30, 2000, the aggregate amount of Senior Indebtedness
outstanding was $260.3 million.
Guarantees
The guarantors will jointly and severally guarantee Ziff Davis Media's
obligations under the indenture and the exchange notes. Each guarantee will be
subordinated to Guarantor Senior Indebtedness on the same basis as the
exchange notes are subordinated to Senior Indebtedness. The obligations of
each guarantor under its guarantee will be limited as necessary to prevent the
guarantee from constituting a fraudulent conveyance or fraudulent transfer
under applicable law.
Each guarantor may consolidate with or merge into or sell its assets to
Ziff Davis Media or another guarantor that is a Wholly Owned Restricted
Subsidiary or Unrestricted Subsidiary Guarantor of Ziff Davis Media without
limitation, or with other Persons upon the terms and conditions set forth in
the indenture. See "Covenants--Merger, Consolidation and Sale of Assets." In
the event we sell all of the capital stock of a guarantor and the sale
complies with the provisions set forth in "Covenants--Limitation on Asset
Sales," the guarantor's guarantee will be released.
Separate financial statements of the guarantors are not included herein
because such guarantors are jointly and severally liable with respect to its
obligations pursuant to the exchange notes, and the aggregate net assets,
earnings and equity of the guarantors and Ziff Davis Media are substantially
equivalent to the net assets, earnings and equity of Ziff Davis Media on a
consolidated basis.
Holding Company Structure
Ziff Davis Media is a holding company for our subsidiaries, with no
material operations of its own and only limited assets. Accordingly, Ziff
Davis Media is dependent upon the distribution of the earnings
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of its subsidiaries, whether in the form of dividends, advances or payments on
account of intercompany obligations, to service its debt obligations. In
addition, the claims of the holders are subject to the prior payment of all
liabilities (whether or not for borrowed money) and to any preferred stock
interest of such Restricted Subsidiaries. There can be no assurance that, after
providing for all prior claims, there would be sufficient assets available from
Ziff Davis Media and our subsidiaries to satisfy the claims of the holders of
exchange notes. See "Risk Factors--We will depend on the cash flow of our
subsidiaries to satisfy our obligations under the exchange notes."
Change of Control
Upon the occurrence of a Change of Control, each holder of exchange notes
will have the right to require that Ziff Davis Media purchase all or a portion
of such holder's exchange notes pursuant to the offer described below (the
"Change of Control Offer"), at a purchase price equal to 101% of the principal
amount thereof plus accrued interest to the date of purchase.
Within 30 days following the date upon which the Change of Control occurred,
Ziff Davis Media must send, by first class mail, a notice to each holder, with
a copy to the trustee, which notice shall govern the terms of the Change of
Control Offer. Such notice shall state, among other things, the purchase date,
which must be between 30 and 45 days from the date such notice is mailed, other
than as may be required by law (the "Change of Control Payment Date"). Holders
electing to have an exchange note purchased pursuant to a Change of Control
Offer will be required to surrender the exchange note, with the form entitled
"Option of Holder to Elect Purchase" on the reverse of the exchange note
completed, to the paying agent at the address specified in the notice prior to
the close of business on the third business day before the Change of Control
Payment Date.
Prior to the mailing of the notice referred to above, but in any event
within 30 days following any Change of Control, Ziff Davis Media covenants to:
(1) repay in full and terminate all commitments under Indebtedness under
the Credit Facility and all other Senior Indebtedness the terms of which
require re-payment upon a Change of Control or offer to repay in full and
terminate all commitments under all Indebtedness under the Credit Facility
and all other such Senior Indebtedness and to repay the Indebtedness owed
to each lender that has accepted such offer; or
(2) obtain the requisite consents under the Credit Facility and all
other Senior Indebtedness to permit the repurchase of the exchange notes as
provided below. Ziff Davis Media shall first comply with the covenant in
the immediately preceding sentence before it shall be required to
repurchase exchange notes pursuant to the provisions described below. Ziff
Davis Media's failure to comply with the covenant described in the
immediately preceding sentence shall constitute an Event of Default
described in clause (d) and not in clause (b) under "Events of Default"
below.
If a Change of Control Offer is made, there can be no assurance that Ziff
Davis Media will have available funds sufficient to pay the Change of Control
purchase price for all the exchange notes that might be delivered by holders
seeking to accept the Change of Control Offer. In the event Ziff Davis Media is
required to purchase outstanding exchange notes pursuant to a Change of Control
Offer, Ziff Davis Media expects that it would seek third party financing to the
extent it does not have available funds to meet its purchase obligations.
However, there can be no assurance that Ziff Davis Media would be able to
obtain such financing.
Neither the board of directors of Ziff Davis Media nor the trustee may waive
the covenant relating to a holder's right to redemption upon a Change of
Control. Restrictions in the indenture described herein on the ability of Ziff
Davis Media and our Restricted Subsidiaries and Unrestricted Subsidiary
Guarantors to incur additional Indebtedness, to grant liens on its property, to
make restricted payments and to make Asset Sales may also make more difficult
or discourage a takeover of Ziff Davis Media,
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whether favored or opposed by the management of Ziff Davis Media. Consummation
of any such transaction in certain circumstances may require redemption or
repurchase of the exchange notes, and there can be no assurance that Ziff Davis
Media or the acquiring party will have sufficient financial resources to effect
such redemption or repurchase. Such restrictions and the restrictions on
transactions with Affiliates may, in certain circumstances, make more difficult
or discourage any leveraged buyout of Ziff Davis Media or any of our
Subsidiaries by the management of Ziff Davis Media. While such restrictions
cover a wide variety of arrangements that have traditionally been used to
effect highly leveraged transactions, the indenture may not afford the holders
protection in all circumstances from the adverse aspects of a highly leveraged
transaction, reorganization, restructuring, merger or similar transaction.
Ziff Davis Media will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of exchange notes pursuant to a Change of Control Offer. To the
extent that the provisions of any securities laws or regulations conflict with
the "Change of Control" provisions of the indenture, Ziff Davis Media shall
comply with the applicable securities laws and regulations and shall not be
deemed to have breached its obligations under the "Change of Control"
provisions of the indenture by virtue thereof.
Covenants
The indenture contains, among others, the following covenants:
Limitation on Incurrence of Additional Indebtedness. Neither Ziff Davis
Media nor any of our Restricted Subsidiaries or Unrestricted Subsidiary
Guarantors, will directly or indirectly, create, incur, assume, guarantee,
acquire, become liable, contingently or otherwise, with respect to, or
otherwise become responsible for payment of (collectively, "incur") any
Indebtedness (other than Permitted Indebtedness); provided, however, that if no
Default or Event of Default shall have occurred and be continuing at the time
of or as a consequence of the incurrence of any such Indebtedness, Ziff Davis
Media or any of our Restricted Subsidiaries that is or, upon such incurrence,
becomes a guarantor may incur Indebtedness (including, without limitation,
Acquired Indebtedness) or issue shares of Disqualified Capital Stock and any
Restricted Subsidiary of Ziff Davis Media that is not or will not, upon such
incurrence, become a guarantor may incur Acquired Indebtedness, in each case if
the Debt to EBITDA Ratio for Ziff Davis Media's most recently ended four full
fiscal quarters for which internal financial statements are available
immediately preceding the date on which that additional Indebtedness is
incurred or that Disqualified Capital Stock is issued would have been less than
5.50 to 1.0 determined on a consolidated pro forma basis, including a pro forma
application of the net proceeds therefrom, as if the additional Indebtedness
had been incurred, or the disqualified stock had been issued, as the case may
be, at the beginning of that four-quarter period.
Limitation on Restricted Payments. Neither we nor our Restricted
Subsidiaries will, directly or indirectly:
(1) declare or pay any dividend or make any other payment or
distribution on account of Ziff Davis Media's or any of our Restricted
Subsidiaries' Equity Interests other than
. dividends or distributions payable in Equity Interests (other
than Disqualified Capital Stock) or
. dividends or distributions payable by a Restricted Subsidiary to
Ziff Davis Media or any Wholly Owned Restricted Subsidiary of
Ziff Davis Media;
(2) purchase, redeem or otherwise acquire or retire for value any Equity
Interests of Ziff Davis Media or any of our Restricted Subsidiaries (other
than any of those Equity Interests owned by Ziff Davis Media or any of our
Restricted Subsidiaries);
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(3) make any principal payment on or with respect to, or purchase,
defease, redeem, prepay, decrease or otherwise acquire or retire for value
in each case, before any scheduled final maturity, scheduled repayment or
scheduled sinking fund payment, any Indebtedness of Ziff Davis Media that
is subordinate or junior in right of payment to the exchange notes (other
than subordinated Indebtedness acquired in anticipation of satisfying any
such payment) except in accordance with the mandatory redemption or
repayment provisions set forth in the original documentation governing that
Indebtedness (but not pursuant to any mandatory offer to repurchase upon
the occurrence of any event); or
(4) make any Investment other than a Permitted Investment (all such
payments and other actions set forth in clauses (1) through (4) above being
collectively referred to as "Restricted Payments"), unless, at the time of,
and after giving effect to, such Restricted Payment:
(a) no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof;
(b) Ziff Davis Media would, immediately after such Restricted
Payment and after giving pro forma effect thereto as if that Restricted
Payment had been made at the beginning of the applicable four-quarter
period, have been permitted to incur at least $1.00 of additional
Indebtedness pursuant to the Debt to EBITDA Ratio test set forth in the
"Limitation on Incurrence of Additional Indebtedness" covenant; and
(c) such Restricted Payment, together with the aggregate amount of
all other Restricted Payments made by Ziff Davis Media and our
Restricted Subsidiaries after the Issue Date (excluding Restricted
Payments permitted by clauses (1) (to the extent that the declaration
of any dividend referred to therein reduces amounts available for
Restricted Payments pursuant to this clause (c)) and (2) through (15)
of the next succeeding paragraph), is less than the sum, without
duplication, of:
(1) 50% of the cumulative Consolidated Net Income of Ziff Davis
Media for the period (taken as one accounting period) from the Issue
Date to the end of Ziff Davis Media's most recently ended fiscal
quarter for which internal financial statements are available at the
time of that Restricted Payment (or, if Consolidated Net Income for
that period is a deficit, less 100% of the deficit); plus
(2) 100% of the Qualified Proceeds received by Ziff Davis Media
on or after the Issue Date from contributions to Ziff Davis Media's
capital or from the issue or sale since the Issue Date of Equity
Interests of Ziff Davis Media or of Disqualified Capital Stock or
convertible debt securities of Ziff Davis Media to the extent that
they have been converted into those Equity Interests, other than
. Equity Interests, Disqualified Capital Stock or convertible
debt securities sold to a subsidiary of Ziff Davis Media;
. Disqualified Capital Stock or convertible debt securities
that have been converted into Disqualified Capital Stock; and
. the aggregate proceeds from the sale of Capital Stock
pursuant to the Make-Well Agreement and any such proceeds
that are used to make Permitted Investments pursuant to
clauses (9) and (12) of the definition of Permitted
Investments; plus
(3) the amount equal to the net reduction in Investments (or net
gain from Investments) in Persons after the Issue Date who are not
Restricted Subsidiaries of Ziff Davis Media (other than Permitted
Investments) resulting from:
(A) Qualified Proceeds received as a dividend, repayment of a
loan or advance or other transfer of assets (valued at the fair
market value thereof) to Ziff Davis Media or any of our
Restricted Subsidiary from those Persons;
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(B) Qualified Proceeds received upon the sale or liquidation
of those Investments; and
(C) the redesignation of Unrestricted Subsidiaries whose
assets are used or useful in, or which is engaged in, one or
more Permitted Business as Restricted Subsidiaries (valued,
proportionate to Ziff Davis Media's equity interest in that
subsidiary, at the fair market value of the net assets of that
subsidiary at the time of that redesignation);
provided, however, that the sum of clauses (1), (2) and (3) above shall not
exceed the aggregate amount of all such Investments made after the Issue Date.
The foregoing provisions will not prohibit:
(1) the payment of any dividend or distribution within 60 days after the
date of declaration thereof, if at the date of declaration, such payment
would comply with all the provisions of the indenture;
(2) the redemption, repurchase, retirement, defeasance or other
acquisition of any Indebtedness subordinated to the notes or Equity
Interests of Ziff Davis Media or any Restricted Subsidiary by conversion
into, in exchange for, or out of the net cash proceeds of the substantially
concurrent sale (other than to a Subsidiary of Ziff Davis Media) of other
Equity Interests of Parent, Ziff Davis Media or any Restricted Subsidiary
of Ziff Davis Media, as the case may be (other than any Disqualified
Capital Stock);
(3) the defeasance, redemption, repurchase, retirement or other
acquisition of Indebtedness of Ziff Davis Media subordinated to the
exchange notes with the net cash proceeds from an incurrence of, or in
exchange for or by conversion into, Refinancing Indebtedness;
(4) repurchase of Equity Interests deemed to occur upon exercise of
stock options if those Equity Interests represent a portion of the exercise
price of those options;
(5) the payment to WSP and/or its Affiliates of no more than $500,000 in
the aggregate per year in exchange for expenses and indemnities relating to
the provision of management services and, if no Default or Event of Default
shall have occurred or be continuing or shall occur as a consequence
thereof, the provision of the management services;
(6) any purchase or redemption of Disqualified Capital Stock of Ziff
Davis Media or a Restricted Subsidiary made by exchange for, or out of the
proceeds of the substantially concurrent sale of, Disqualified Capital
Stock of Ziff Davis Media or a Restricted Subsidiary that is permitted to
be incurred pursuant to the "--Limitation on Incurrence of Additional
Indebtedness" covenant;
(7) upon the occurrence of a Change of Control and within 60 days after
the completion of the offer to repurchase the exchange notes pursuant to
the indenture (including the purchase of the exchange notes tendered), any
purchase or redemption of subordinated Indebtedness required pursuant to
the terms thereof as a result of such Change of Control at a purchase price
not to exceed the outstanding principal amount thereof, plus any accrued
and unpaid interest; provided, however, that
(A) at the time of such purchase or redemption no Default shall have
occurred and be continuing (or would result therefrom),
(B) Ziff Davis Media would be able to incur an additional $1.00 of
Indebtedness pursuant to the Debt to EBITDA Ratio test set forth in the
"--Limitation on Incurrence of Additional Indebtedness" covenant after
giving pro forma effect to such Restricted Payment and
(C) such purchase or redemption shall be included in the calculation
of the amount of Restricted Payments pursuant to clause (c) above;
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(8) payments not to exceed $250,000 in the aggregate solely to enable
Ziff Davis Media to make payments to holders of its Capital Stock in lieu
of the issuance of fractional shares of its Capital Stock;
(9) Restricted Payments in connection with the repurchase, redemption or
other acquisition or retirement for value of any Equity Interests of Parent
or any of our subsidiaries held by any directors or employees, former
employees and their estates, spouses and former spouses or to make payments
on Management Redemption Debt in an aggregate cash amount not to exceed the
sum of (i) $2.0 million during any fiscal year (with unused amounts in any
fiscal year being carried over to succeeding fiscal years), plus (ii) the
aggregate net cash proceeds received from the proceeds of any "key-man"
life insurance policies;
(10) Restricted Payments in connection with the repurchase, redemption
or other acquisition or retirement for value of any Equity Interests of
Parent or any of our subsidiaries held by directors or employees, former
employees and their estate, spouses and former spouses in exchange for
Management Redemption Debt permitted to be incurred under the "--Limitation
on Incurrence of Additional Indebtedness" covenant;
(11) Restricted Payments to Parent to permit Parent to pay taxes,
salaries, directors fees, indemnities and expenses and other corporate
expenses in the ordinary course of its business;
(12) the declaration and payment of dividends solely in shares of
Capital Stock (other than Disqualified Capital Stock);
(13) the declaration and payment of noncash dividends on Disqualified
Capital Stock incurred without violation of the indenture;
(14) pro rata dividends or other distributions made by a subsidiary of
Ziff Davis Media to minority shareholders;
(15) Ziff Davis Media or any Restricted Subsidiary from purchasing all
(but not less than all) of the Capital Stock or other ownership interests
in a Subsidiary of Ziff Davis Media, excluding directors' qualifying
shares, that were not previously owned by Ziff Davis Media or a subsidiary
of Ziff Davis Media, such that after giving effect to such purchase such
subsidiary becomes a Restricted Subsidiary of Ziff Davis Media;
(16) Restricted Payments in connection with the repurchase, redemption
or other acquisition or retirement for value of any Equity Interests of
Parent or any of our subsidiaries in connection with the cancellation of
Indebtedness owed by the holder of such Equity Interests to Parent or any
of our subsidiaries; and
(17) other Restricted Payments in an aggregate amount not to exceed $5.0
million.
The amount of
(1) all Restricted Payments (other than cash) shall be the fair market
value on the date of the Restricted Payment of the asset(s) or securities
proposed to be transferred or issued by Ziff Davis Media or that Restricted
Subsidiary, as the case may be, pursuant to the Restricted Payment and
(2) Qualified Proceeds (other than cash) shall be the fair market value
on the date of receipt thereof by Ziff Davis Media of those Qualified
Proceeds.
Our board of directors will determine the fair market value of any non-cash
Restricted Payment in excess of $5.0 million, and their resolution with respect
thereto shall be delivered to the trustee. The board of directors'
determination must be based on an opinion or appraisal issued by an accounting,
appraisal or investment banking firm of national standing if the fair market
value exceeds $10.0 million.
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Not later than the date of making any Restricted Payment, Ziff Davis Media
shall deliver to the trustee an Officers' Certificate stating that the
Restricted Payment is permitted and setting forth the basis upon which the
calculations required by this covenant were computed.
Limitation on Asset Sales. Ziff Davis Media will not, and will not permit
any of our Restricted Subsidiaries or Unrestricted Subsidiary Guarantors to,
directly or indirectly, consummate an Asset Sale unless:
(1) Ziff Davis Media or the subsidiary, as the case may be, receives
consideration at the time of that Asset Sale at least equal to the fair
market value (evidenced by a resolution of the board of directors set forth
in an Officers' Certificate delivered to the trustee) of the assets or
Equity Interests issued or sold or otherwise disposed of; and
(2) at least 75% of the consideration therefor received by Ziff Davis
Media or the subsidiary is in the form of cash or Cash Equivalents.
For the purposes of this provision, each of the following shall be deemed to
be cash:
(A) any liabilities, as shown on Ziff Davis Media's or the subsidiary's
most recent balance sheet, of Ziff Davis Media or any subsidiary (other
than contingent liabilities and liabilities that are by their terms
subordinated to the exchange notes or any guarantee thereof) that are
assumed by the transferee of any such assets pursuant to a customary
novation agreement that releases Ziff Davis Media or the subsidiary from
further liability; and
(B) any securities, notes or other obligations received by Ziff Davis
Media or the subsidiary from the transferee that are converted within 270
days of their receipt by Ziff Davis Media or the subsidiary into cash or
Cash Equivalents, but only to the extent of the cash or Cash Equivalents
received.
The 75% limitation referred to in clause (2) above will not apply to any
Asset Sale in which the cash or Cash Equivalents portion of the consideration
received therefrom, determined in accordance with subclauses (i) and (ii)
above, is equal to or greater than what the after-tax proceeds would have been
had that Asset Sale complied with the aforementioned 75% limitation.
Within 365 days after the receipt of any Net Proceeds from an Asset Sale,
Ziff Davis Media or the subsidiary, as the case may be, shall apply the Net
Proceeds, at its option (or to the extent Ziff Davis Media is required to apply
the Net Proceeds pursuant to the terms of the Credit Facility), to:
(1) repay or purchase Senior Indebtedness and, if the Senior
Indebtedness repaid is Indebtedness under a revolving line of credit, to
correspondingly reduce commitments with respect thereto; or
(2) (i) an investment in property, the making of a capital expenditure
or the acquisition of assets that are used or useful in a Permitted
Business; or
(ii) the acquisition of Capital Stock of any Person primarily
engaged in a Permitted Business if as a result of the acquisition that
Person becomes a subsidiary of Ziff Davis Media.
Pending the final application of any Net Proceeds, we may temporarily reduce
Indebtedness or otherwise invest those Net Proceeds in any manner that is not
prohibited by the indenture.
Any Net Proceeds from Asset Sales that are not applied or invested as
provided in the first sentence of the second preceding paragraph will be deemed
to constitute "Excess Proceeds." When the aggregate amount of Excess Proceeds
exceeds $10.0 million, Ziff Davis Media will be required to make an offer to
all holders of exchange notes (an "Asset Sale Offer") to purchase the maximum
principal amount of the exchange notes that may be purchased out of the Excess
Proceeds, at an offer price in cash in an
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amount equal to 100% of the principal amount thereof, plus accrued and unpaid
interest and liquidated damages, if any, to the date of purchase, in accordance
with the procedures set forth in the indenture.
To the extent that any Excess Proceeds remain after consummation of an Asset
Sale Offer, Ziff Davis Media, the Restricted Subsidiaries and the Unrestricted
Subsidiary Guarantors, as applicable, may use those Excess Proceeds for any
purpose not otherwise prohibited by the indenture. If the aggregate principal
amount of the exchange notes surrendered by holders thereof in connection with
an Asset Sale Offer exceeds the amount of Excess Proceeds, the trustee shall
select the exchange notes to be purchased under the appropriate provisions of
the indenture. Upon completion of an offer to purchase, the amount of Excess
Proceeds shall be reset at zero.
Ziff Davis Media will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent those laws and regulations are applicable in connection with the
repurchase of the exchange notes pursuant to an Asset Sale Offer. To the extent
that the provisions of any securities laws or regulations conflict with the
provisions of the indenture relating to an Asset Sale Offer, we will comply
with the applicable securities laws and regulations and shall not be deemed to
have breached its obligations described in the indenture by virtue thereof.
Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries. Ziff Davis Media will not, and will not permit any of our
Restricted Subsidiaries or Unrestricted Subsidiary Guarantors to, directly or
indirectly, create or otherwise cause or suffer to exist or become effective
any encumbrance or restriction on the ability of any Restricted Subsidiary of
Ziff Davis Media or any of the Unrestricted Subsidiary Guarantors to:
(a) pay dividends or make any other distributions to Ziff Davis Media or
any Restricted Subsidiary of Ziff Davis Media (i) on its Capital Stock or
(ii) with respect to any other interest or participation in, or measured
by, its profits;
(b) repay any Indebtedness or any other obligation owed to Ziff Davis
Media or any Restricted Subsidiary of Ziff Davis Media;
(c) make loans or advances or capital contributions to Ziff Davis Media
or any of our Restricted Subsidiaries; or
(d) transfer any of its properties or assets to Ziff Davis Media or any
of our Restricted Subsidiaries; except for such encumbrances or
restrictions existing under or by reason of
(1) encumbrances or restrictions existing at the Issue Date to the
extent and in the manner such encumbrances and restrictions are in
effect at the Issue Date or not materially more restrictive (including
without limitation pursuant to the Credit Facility);
(2) the indenture, the exchange notes and the guarantees;
(3) Applicable Law;
(4) any instrument governing Acquired Indebtedness, which
encumbrance or restriction is not applicable to any Person, or the
properties or assets of any Person, other than the Person, or the
property or assets of the Person (including any subsidiary of the
Person), so acquired;
(5) customary non-assignment provisions in leases or other
agreements entered in the ordinary course of business;
(6) Refinancing Indebtedness; provided that such restrictions are
not materially more restrictive than those contained in the agreements
governing the Indebtedness being refunded, refinanced or extended;
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(7) customary restrictions with respect to a Restricted Subsidiary
pursuant to an agreement that has been entered into for the sale or
disposition of all or substantially all of the Capital Stock or assets
of such Restricted Subsidiary;
(8) customary restrictions contained in Disqualified Capital Stock
permitted to be incurred and in any other Capital Stock;
(9) customary restrictions in Capital Expenditure Indebtedness,
Capitalized Lease Obligations, security agreements or mortgages
securing Indebtedness of Ziff Davis Media or a subsidiary to the extent
such restrictions restrict the transfer of the property subject to such
Capital Expenditure Indebtedness, Capitalized Lease Obligations,
security agreements and mortgages;
(10) customary restrictions with respect to a subsidiary of Ziff
Davis Media pursuant to an agreement that has been entered into for the
sale or disposition of all or substantially all of the Capital Stock or
assets of such subsidiary; or
(11) restrictions contained in agreements governing Indebtedness
incurred by foreign subsidiaries permitted to be incurred under the "--
Limitation on Incurrence of Additional Indebtedness" covenant.
Limitation on Liens. Neither we nor any of our Restricted Subsidiaries or
Unrestricted Subsidiary Guarantors will create, incur or otherwise cause or
suffer to exist or become effective any Liens of any kind (other than Permitted
Liens) upon any property or asset of Ziff Davis Media or any of our Restricted
Subsidiaries or our Unrestricted Subsidiary Guarantors or any shares of Capital
Stock or Indebtedness of any Restricted Subsidiary or our Unrestricted
Subsidiary Guarantors acquired that secures Indebtedness ranking equally in
right of payment or subordinated to the exchange notes unless the exchange
notes are equally and ratably secured.
Prohibition on Incurrence of Senior Subordinated Debt. Neither we nor any of
our Restricted Subsidiary that is a guarantor or any Unrestricted Subsidiary
Guarantor will, incur or suffer to exist Indebtedness that is senior in right
of payment to the exchange notes or such guarantor's guarantee, as the case may
be, and subordinate in right of payment to any other Indebtedness of Ziff Davis
Media or such guarantor, as the case may be.
Merger, Consolidation and Sale of Assets. Ziff Davis Media may not
consolidate or merge with or into (whether or not Ziff Davis Media is the
surviving corporation), or sell, assign, transfer, convey or otherwise dispose
of all or substantially all of its properties or assets in one or more related
transactions to, another Person unless:
(1) Ziff Davis Media is the surviving corporation or the Person formed
by or surviving any such consolidation or merger (if other than Ziff Davis
Media) or to which that sales, assignment, transfer, conveyance or other
disposition shall have been made is a corporation organized or existing
under the laws of the United States, any state thereof or the District of
Columbia;
(2) the Person formed by or surviving any such consolidation or merger
(if other than Ziff Davis Media or a Wholly-Owned Subsidiary) or the Person
to which that sale, assignment, transfer, conveyance or other disposition
shall have been made assumes all the obligations of Ziff Davis Media under
the exchange notes and the indenture pursuant to an amendment in a form
reasonably satisfactory to the trustee;
(3) immediately after that transaction no Default or Event of Default
exists; and
(4) Ziff Davis Media or the Person formed by or surviving any such
consolidation or merger (if other than Ziff Davis Media), or to which that
sale, assignment, transfer, conveyance other disposition shall have been
made will, at the time of such transaction and after giving pro forma
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effect thereto as if the transaction had occurred at the beginning of the
applicable four-quarter period, be permitted to incur at least $1.00 of
additional Indebtedness pursuant to the Debt to EBITDA Ratio test set forth
in the "--Limitation on Incurrence of Additional Indebtedness" covenant.
The foregoing clause (4) will not prohibit
(a) a merger between Ziff Davis Media and a Wholly Owned Subsidiary of
Ziff Davis Media created for the purpose of holding the Capital Stock of
Ziff Davis Media;
(b) a merger between Ziff Davis Media and a Wholly Owned Restricted
Subsidiary; or
(c) a merger between Ziff Davis Media and an Affiliate incorporated
solely for the purpose of reincorporating Ziff Davis Media in another State
of the United States so long as, in the case of clauses (a), (b) and (c),
the amount of Indebtedness of Ziff Davis Media and our Restricted
Subsidiaries is not increased thereby.
For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise, in a single transaction or series of transactions) of all or
substantially all of the properties or assets of one or more Restricted
Subsidiaries of Ziff Davis Media the Capital Stock of which constitutes all or
substantially all of the properties and assets of Ziff Davis Media, shall be
deemed to be the transfer of all or substantially all of the properties and
assets of Ziff Davis Media.
The indenture provides that upon any consolidation, combination or merger or
any transfer of all or substantially all of the assets of Ziff Davis Media in
accordance with the foregoing in which Ziff Davis Media is not the continuing
corporation, the successor Person formed by such consolidation or into which
Ziff Davis Media is merged or to which such conveyance, lease or transfer is
made shall succeed to, and be substituted for, and may exercise every right and
power of, Ziff Davis Media under the indenture and the exchange notes with the
same effect as if such surviving entity had been named as such.
Limitations on Transactions with Affiliates. Neither we nor any of our
Restricted Subsidiaries or Unrestricted Subsidiary Guarantors will, make any
payment to, or sell, lease, transfer or otherwise dispose of any of its
properties or assets to, or purchase any property or assets from, or enter into
or make or amend any transaction, contract, agreement, understanding, loan,
advance or guarantee with, or for the benefit of, any Affiliate of Ziff Davis
Media (each of the foregoing, an "Affiliate Transaction") involving aggregate
payments or consideration in excess of $1.0 million, unless:
(1) that Affiliate Transaction is on terms that are not materially less
advantageous to Ziff Davis Media or that Subsidiary than those that would
have been obtained in a comparable transaction by Ziff Davis Media or that
Subsidiary with an unrelated Person; and
(2) Ziff Davis Media delivers to the trustee:
(a) with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in excess of
$5.0 million, a resolution of the board of directors set forth in an
Officers' Certificate certifying that the relevant Affiliate
Transaction complies with clause (1) above and that the Affiliate
Transaction has been approved by a majority of the disinterested
members of the board of directors; or
(b) with respect to any Affiliate Transaction or series of related
Affiliate Transactions (other than sales of Equity Interests) involving
aggregate consideration in excess of $10.0 million, an opinion as to
the fairness to the holders of that Affiliate Transaction from a
financial point of view issued by an accounting, appraisal or
investment banking firm of national standing.
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Notwithstanding the foregoing, the following items shall not be deemed to
be Affiliate Transactions:
(1) customary directors' fees and expenses, indemnification or similar
arrangements or any employment agreement or other compensation plan or
arrangement entered into by Ziff Davis Media or any of our Restricted
Subsidiaries in the ordinary course of business;
(2) transactions between or among Ziff Davis Media and/or our Restricted
Subsidiaries or any other guarantor;
(3) payments of customary fees by us or any of our Restricted
Subsidiaries to investment banking firms, financial consultants and
financial advisors made for any financial advisory, financing, underwriting
or placement services or in respect of other investment banking activities,
including, without limitation, in connection with acquisitions or
divestitures that are approved by a majority of the board of directors in
good faith;
(4) any agreement as in effect on the date of the indenture or any
amendment thereto (so long as that amendment is not disadvantageous to
noteholders of the exchange notes in any material respect) or any
transaction contemplated thereby;
(5) payments and transactions in connection with the Credit Facility
(including commitment, syndication and arrangement fees payable thereunder)
and the indenture (including underwriting discounts and commissions in
connection therewith) and the application of the proceeds thereof, and the
payment of the fees and expenses with respect thereto;
(6) payments under any tax-sharing agreement or arrangement among Ziff
Davis Media and other members of the affiliated group of corporations of
which Ziff Davis Media is the common parent;
(7) the issuance or sale of Capital Stock (other than Disqualified
Capital Stock) otherwise permitted hereunder;
(8) contracts between Ziff Davis Media and/or any of our Restricted
Subsidiaries and any Unrestricted Subsidiary Guarantor with respect to any
management services or administrative services provided by Ziff Davis Media
and/or any of our Restricted Subsidiaries and any Unrestricted Subsidiary
Guarantor;
(9) Restricted Payments that are not prohibited by the indenture and any
Permitted Investments; and
(10) transactions permitted by the provisions described in the "--
Merger, Consolidation and Sale of Assets" covenant.
Additional Subsidiary Guarantees. If we or any of our Restricted
Subsidiaries shall acquire or create another domestic Restricted Subsidiary
after the date of the indenture, then such newly acquired or created
Subsidiary shall execute and deliver to the trustee a guarantee of the
exchange notes in the form set forth in the indenture and a supplemental
agreement substantially in the form set forth in the indenture pursuant to
which such Subsidiary shall unconditionally guarantee all of Ziff Davis
Media's obligations under the exchange notes on the terms set forth in such
supplemental agreement.
Conduct of Business. Ziff Davis Media and our Restricted Subsidiaries will
not engage in any business that is not a Permitted Business.
Reports to Holders. Whether or not required by the rules and regulations of
the Commission, so long as any exchange notes are outstanding, Ziff Davis
Media will furnish the trustee:
(1) all quarterly and annual financial information that would be
required to be contained in a filing with the Commission on Forms 10-Q and
10-K if Ziff Davis Media were required to file such
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Forms, including a "Management's Discussion and Analysis of Financial
Condition and Results of Operations" that describes the financial condition
and results of operations of Ziff Davis Media and its consolidated
Subsidiaries (showing in reasonable detail, either on the face of the
financial statements or in the footnotes thereto and in Management's
Discussion and Analysis of Financial Condition and Results of Operations,
the financial condition and results of operations of Ziff Davis Media and
its Restricted Subsidiaries separate from the financial condition and
results of operations of the Unrestricted Subsidiaries of Ziff Davis Media,
if any) and, with respect to the annual information only, a report thereon
by Ziff Davis Media's certified independent accounts; and
(2) all current reports that would be required to be filed with the
Commission on Form 8-K if we were required to file such reports, in each
case within the time periods specified in the Commission's rules and
regulations.
In addition, following the consummation of the exchange offer, whether or
not required by the rules and regulations of the Commission, Ziff Davis Media
will file a copy of all such information and reports with the Commission for
public availability within the time periods specified in the Commission's rules
and regulations (unless the Commission will not accept such a filing) and make
such information available to securities analysts and prospective investors
upon request. In addition, Ziff Davis Media has agreed that, for so long as any
notes remain outstanding, it will furnish to the holders and to securities
analysts and prospective investors, upon their request, the information
required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act.
Make-Well Agreement
Pursuant to the Make-Well Agreement, Ziff Davis Media, Willis Stein and its
co-investors have agreed that if at March 31, 2001 Ziff Davis Media's ratio of
debt to EBITDA is greater than 4.5 to 1.0, either (i) Ziff Davis Media will
repay indebtedness under the Credit Facility and permanently reduce commitments
thereunder in an amount equal to such repayment or (ii) Willis Stein and its
co-investors will contribute to Ziff Davis Media up to a maximum of $50.0
million in additional equity (less any amounts previously contributed) to Ziff
Davis Media so that we may repay indebtedness under our Credity Facility, in
either case so that our ratio of debt to EBITDA is no greater than 4.5 to 1.0.
In no event will Willis Stein and its co-investors be required to contribute
more than $50.0 million for this purpose.
Events of Default
The following events are defined in the indenture as "Events of Default":
(a) Ziff Davis Media defaults in the payment when due of interest on the
exchange notes and such default continues for a period of 30 days (whether
or not such payment is otherwise then permitted by the subordination
provisions of the indenture);
(b) Ziff Davis Media defaults in the payment when due of principal of or
premium, if any, on the notes when the same becomes due and payable at its
maturity (whether or not such payment is otherwise then permitted by the
subordination provisions of the indenture);
(c) Ziff Davis Media or any Restricted Subsidiary or any Unrestricted
Subsidiary Guarantor fails to observe or perform any other covenant or
other agreement in the indenture, the exchange notes or the guarantees and
such failure continues for a period of 45 days after Ziff Davis Media has
received a written notice of such failure from the trustee, which notice
must specify the failure, demand that it be remedied and state that the
notice is a "Notice of Default" (except in the case of a default with
respect to the "--Merger, Consolidation and Sale of Assets" covenant, which
will constitute an Event of Default with such notice requirement but
without such passage of time requirement);
(d) a default occurs under the Make-Well Agreement;
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(e) a default occurs under any mortgage, indenture or instrument under
which there may be issued or by which there may be secured or evidenced any
Indebtedness of Ziff Davis Media or any of our Restricted Subsidiaries,
whether such Indebtedness now exists, or is created after the date of the
indenture, which default (i) constitutes a failure to pay principal thereof
at final maturity (a "Payment Default"), which default shall not be cured,
waived or postponed pursuant to an agreement with the holders of such
Indebtedness within 60 days after written notice by any holder, or which
acceleration shall not be rescinded or annulled within 20 days after
written notice to Ziff Davis Media of such default by any holder or (ii)
shall have resulted in such Indebtedness being accelerated or otherwise
becoming or being declared due and payable prior to its stated maturity
which acceleration has not been rescinded, annulled or otherwise cured
within 20 days of receipt by Ziff Davis Media or such Subsidiary of notice
of any such acceleration and, in each case, the principal amount of any
such Indebtedness, together with the principal amount of any other such
Indebtedness under which there has been a Payment Default or the maturity
of which has been so accelerated, aggregates $10.0 million or more;
(f) a final judgment or final judgments for the payment of money are
entered by a court or courts of competent jurisdiction against Ziff Davis
Media or any of our Restricted Subsidiaries or any such Unrestricted
Subsidiary Guarantor and such judgment or judgments remain unpaid,
undischarged or otherwise unsatisfied for a period (during which execution
shall not be effectively stayed) of 60 consecutive days, provided that the
aggregate of all such undischarged judgments exceeds $10.0 million;
(g) any guarantee of a Restricted Subsidiary or any Unrestricted
Subsidiary Guarantor ceases to be in full force and effect or any guarantee
of such a Subsidiary is declared to be null and void and unenforceable or
any guarantee of such a Subsidiary is found to be invalid or any guarantor
denies its liability under its guarantee (other than by reason of release
of a guarantor in accordance with the terms of the indenture); or
(h) certain events of bankruptcy or insolvency with respect to Ziff
Davis Media or any of our Significant Restricted Subsidiaries or
Significant Unrestricted Subsidiary Guarantors.
If an Event of Default (other than an Event of Default specified in clause
(h) above) occurs and is continuing, then and in every such case the trustee or
the holders of 25% or more in principal amount of the then outstanding exchange
notes may declare the principal amount of all the exchange notes to be due and
payable immediately, by a notice in writing to Ziff Davis Media, and upon any
such declaration such principal amount and any accrued interest (i) shall
become immediately due and payable or (ii) if there are any amounts outstanding
or owing under or in respect of the Credit Facility or any commitments remain
in effect under the Credit Facility, shall become due and payable upon the
first to occur of an acceleration of amounts outstanding under or in respect of
the Credit Facility and five business days after receipt by Ziff Davis Media
and the trustee of notice of the acceleration of the exchange notes. For the
avoidance of doubt, if any Payment Default or acceleration that constitutes an
Event of Default under clause (f) above shall have occurred and prior to any
acceleration such Payment Default shall have been cured or waived or such
acceleration shall have been rescinded, then from and after such cure, waiver
or rescission, such Event of Default shall no longer be deemed to be
continuing. If an Event of Default specified in clause (h) above occurs and is
continuing with respect to Ziff Davis Media, the principal amount of and any
accrued interest on the outstanding exchange notes shall automatically, and
without any declaration or other action, become immediately due and payable.
The indenture provides that, at any time after such a declaration of
acceleration has been made and before a judgment or decree for payment of the
money due has been obtained, the holders of a majority in principal amount of
the exchange notes, by written notice to Ziff Davis Media, may rescind and
annul such declaration and its consequences if:
(a) Ziff Davis Media has paid a sum sufficient to pay:
(i) all overdue interest on all exchange notes (other than as a
result of acceleration);
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(ii) the principal of (and premium, if any, on) any exchange notes
that have become due otherwise than by such declaration of acceleration
(including any exchange notes required to have been purchased pursuant
to an offer to purchase that Ziff Davis Media is required to make
hereunder) and any interest thereon at the rate borne by the exchange
notes; and
(iii) to the extent that payment of such interest is lawful,
interest upon overdue interest at the rate provided therefor in the
exchange notes (other than as a result of acceleration); and
(b) all Events of Default, other than the nonpayment of the principal
amount of exchange notes and interest thereon that have become due solely
by such declaration of acceleration, have been cured or waived as provided
below.
The holders of a majority in aggregate principal amount of the exchange
notes may on behalf of the holders of all the exchange notes waive any past
default hereunder and its consequences, except a default:
(a) in the payment of the principal (or premium, if any) or interest on
any exchange note (including any exchange note which is required to have
been purchased pursuant to an offer to purchase that Ziff Davis Media is
required to make hereunder); or
(b) in respect of a covenant or provision hereof which under the
indenture cannot be modified or amended without the consent of the holder
of each outstanding exchange note affected.
Upon any such waiver, such default shall cease to exist, and any Event of
Default arising therefrom shall be deemed to have been cured, for every purpose
of the indenture; provided, however, no such waiver shall extend to any
subsequent or other default or impair any right consequent thereon.
Holders of the exchange notes may not enforce the indenture or the exchange
notes except as provided in the indenture and under the TIA. Subject to the
provisions of the indenture relating to the duties of the trustee, the trustee
is under no obligation to exercise any of its rights or powers under the
indenture at the request, order or direction of any of the holders, unless such
holders have offered to the trustee reasonable indemnity. Subject to all
provisions of the indenture and applicable law, the holders of a majority in
aggregate principal amount of the then outstanding exchange notes have the
right to direct the time, method and place of conducting any proceeding for any
remedy available to the trustee or exercising any trust or power conferred on
the trustee.
Under the indenture, Ziff Davis Media is required to provide an Officers'
Certificate to the trustee promptly upon any such officer obtaining knowledge
of any Default or Event of Default (provided that such officers shall provide
such certification at least annually whether or not they know of any Default or
Event of Default) that has occurred and, if applicable, describe such Default
or Event of Default and the status thereof.
Legal Defeasance and Covenant Defeasance
Ziff Davis Media may, at its option and at any time, elect to have its
obligations and the obligations of the guarantors discharged with respect to
the outstanding exchange notes ("Legal Defeasance"). Such Legal Defeasance
means that Ziff Davis Media shall be deemed to have paid and discharged the
entire indebtedness represented by the outstanding exchange notes, except for:
(1) the rights of holders to receive payments in respect of the
principal of, premium, if any, and interest on the exchange notes when such
payments are due;
(2) Ziff Davis Media's obligations with respect to the notes concerning
issuing temporary notes, registration of notes, mutilated, destroyed, lost
or stolen exchange notes and the maintenance of an office or agency for
payments;
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(3) the rights, powers, trust, duties and immunities of the trustee and
Ziff Davis Media's obligations in connection therewith; and
(4) the Legal Defeasance provisions of the indenture.
In addition, Ziff Davis Media may, at its option and at any time, elect to
have the obligations of Ziff Davis Media released with respect to certain
covenants that are described in the indenture ("Covenant Defeasance") and
thereafter any omission to comply with such obligations shall not constitute a
Default or Event of Default with respect to the exchange notes. In the event
Covenant Defeasance occurs, certain events (not including non-payment,
bankruptcy, receivership, reorganization and insolvency events) described under
"Events of Default" will no longer constitute an Event of Default with respect
to the exchange notes.
In order to exercise either Legal Defeasance or Covenant Defeasance:
(1) Ziff Davis Media must irrevocably deposit with the trustee, in
trust, for the benefit of the holders cash in U.S. dollars, non-callable
U.S. government obligations, or a combination thereof, in such amounts as
will be sufficient, in the opinion of a nationally recognized firm of
independent public accountants, to pay the principal of, premium, if any,
and interest on the exchange notes on the stated date for payment thereof
or on the applicable redemption date, as the case may be;
(2) in the case of Legal Defeasance, Ziff Davis Media shall have
delivered to the trustee an opinion of counsel in the United States
reasonably acceptable to the trustee confirming that:
(a) Ziff Davis Media has received from, or there has been published
by, the Internal Revenue Service a ruling; or
(b) since the date of the indenture, there has been a change in the
applicable federal income tax law, in either case to the effect that,
and based thereon such opinion of counsel shall confirm that, the
holders will not recognize income, gain or loss for federal income tax
purposes as a result of such Legal Defeasance and will be subject to
federal income tax on the same amounts, in the same manner and at the
same times as would have been the case if such Legal Defeasance had not
occurred;
(3) in the case of Covenant Defeasance, Ziff Davis Media shall have
delivered to the trustee an opinion of counsel in the United States
reasonably acceptable to the trustee confirming that the holders will not
recognize income, gain or loss for federal income tax purposes as a result
of such Covenant Defeasance and will be subject to federal income tax on
the same amounts, in the same manner and at the same times as would have
been the case if such Covenant Defeasance had not occurred;
(4) no Default or Event of Default shall have occurred and be continuing
on the date of such deposit or insofar as Events of Default from bankruptcy
or insolvency events are concerned, at any time in the period ending on the
91st day after the date of deposit;
(5) such Legal Defeasance or Covenant Defeasance shall not result in a
breach or violation of, or constitute a default under the indenture or any
other material agreement or instrument to which Ziff Davis Media or any of
our Subsidiaries is a party or by which Ziff Davis Media or any of our
Subsidiaries is bound;
(6) Ziff Davis Media shall have delivered to the trustee an Officers'
Certificate stating that the deposit was not made by Ziff Davis Media with
the intent of preferring the holders over any other creditors of Ziff Davis
Media or with the intent of defeating, hindering, delaying or defrauding
any other creditors of Ziff Davis Media or others;
(7) Ziff Davis Media shall have delivered to the trustee an Officers'
Certificate and an opinion of counsel, each stating that all conditions
precedent provided for or relating to the Legal Defeasance or the Covenant
Defeasance have been complied with;
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(8) Ziff Davis Media shall have delivered to the trustee an opinion of
counsel to the effect that:
(a) the trust funds will not be subject to any rights of holders of
Senior Indebtedness, including, without limitation, those arising under
the indenture; and
(b) assuming no intervening bankruptcy of Ziff Davis Media between
the date of deposit and the 91st day following the date of deposit and
that no holder is an insider of Ziff Davis Media, after the 91st day
following the date of deposit, the trust funds will not be subject to
the effect of any applicable bankruptcy, insolvency, reorganization or
similar laws affecting creditors' rights generally; and
(9) certain other customary conditions precedent are satisfied.
Notwithstanding the foregoing, the opinion of counsel required by clause
(2) above with respect to a Legal Defeasance need not be delivered if all
exchange notes not theretofore delivered to the trustee for cancellation (1)
have become due and payable or (2) will become due an payable on the maturity
date within one year under arrangements satisfactory to the trustee for the
giving of notice of redemption by the trustee in the name, and at the expense,
of Ziff Davis Media.
Satisfaction and Discharge
The indenture will be discharged and will cease to be of further effect
(except as to surviving rights or registration of transfer or exchange of the
notes, as expressly provided for in the indenture) as to all outstanding notes
when:
(1) either:
(a) all the exchange notes theretofore authenticated and delivered
(except lost, stolen or destroyed notes which have been replaced or paid
and notes for whose payment money has theretofore been deposited in
trust or segregated and held in trust by Ziff Davis Media and thereafter
repaid to Ziff Davis Media or discharged from such trust) have been
delivered to the trustee for cancellation; or
(b) all exchange notes not theretofore delivered to the trustee for
cancellation have become due and payable and Ziff Davis Media has
irrevocably deposited or caused to be deposited with the trustee funds
in an amount sufficient to pay and discharge the entire Indebtedness on
the exchange notes not theretofore delivered to the trustee for
cancellation, for principal of, premium, if any, and interest on the
exchange notes to the date of deposit together with irrevocable
instructions from Ziff Davis Media directing the trustee to apply such
funds to the payment thereof at maturity or redemption, as the case may
be;
(2) Ziff Davis Media has paid all other sums payable under the indenture
by Ziff Davis Media; and
(3) Ziff Davis Media has delivered to the trustee an officers'
certificate and an opinion of counsel stating that all conditions precedent
under the indenture relating to the satisfaction and discharge of the
indenture have been complied with.
Modification of the Indenture
From time to time, Ziff Davis Media, the guarantors and the trustee,
without the consent of the holders, may amend the indenture for certain
specified purposes, including curing ambiguities, defects or inconsistencies,
so long as such change does not, in the opinion of the trustee, adversely
affect the rights of any of the holders in any material respect. In
formulating its opinion on such matters, the trustee will be entitled to rely
on such evidence as it deems appropriate, including, without limitation,
solely on an opinion of counsel. Other modifications and amendments of the
indenture may be made
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with the consent of the holders of a majority in principal amount of the then
outstanding exchange notes issued under the indenture, except that, without the
consent of each holder affected thereby, no amendment may:
(1) reduce the amount of exchange notes whose holders must consent to an
amendment;
(2) reduce the rate of or change or have the effect of changing the time
for payment of interest, including defaulted interest, on any exchange
notes;
(3) reduce the principal of or change or have the effect of changing the
fixed maturity of any exchange notes, or change the date on which any
exchange notes may be subject to redemption or reduce the redemption price
therefor;
(4) make any notes payable in money other than that stated in the
exchange notes;
(5) make any change in provisions of the indenture protecting the right
of each holder to receive payment of principal of and interest on such
exchange note on or after the due date thereof or to bring suit to enforce
such payment, or permitting holders of a majority in principal amount of
exchange notes to waive Defaults or Events of Default;
(6) after Ziff Davis Media's obligation to purchase exchange notes
arises thereunder, amend, change or modify in any material respect the
obligation of Ziff Davis Media to make and consummate a Change of Control
Offer in the event of a Change of Control or make and consummate a Net
Proceeds Offer with respect to any Asset Sale that has been consummated or,
after such Change of Control has occurred or such Asset Sale has been
consummated, modify any of the provisions or definitions with respect
thereto;
(7) modify or change any provision of the indenture or the related
definitions affecting the subordination or ranking of the exchange notes or
any guarantee in a manner which adversely affects the holders; or
(8) release any guarantor that is a Significant Subsidiary from any of
its obligations under its guarantee or the indenture otherwise than in
accordance with the terms of the indenture.
Governing Law
The indenture provides that it, the exchange notes and the guarantees will
be governed by, and construed in accordance with, the laws of the State of New
York but without giving effect to applicable principles of conflicts of law to
the extent that the application of the law of another jurisdiction would be
required thereby.
The Trustee
The indenture provides that, except during the continuance of an Event of
Default, the trustee will perform only such duties as are specifically set
forth in the indenture. During the existence of an Event of Default, the
trustee will exercise such rights and powers vested in it by the indenture, and
use the same degree of care and skill in its exercise as a prudent man would
exercise or use under the circumstances in the conduct of his own affairs.
The indenture and the provisions of the TIA contain certain limitations on
the rights of the trustee, should it become a creditor of Ziff Davis Media, to
obtain payments of claims in certain cases or to realize on certain property
received in respect of any such claim as security or otherwise. Subject to the
TIA, the trustee will be permitted to engage in other transactions; provided
that if the trustee acquires any conflicting interest as described in the TIA,
it must eliminate such conflict or resign.
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Certain Definitions
Set forth below is a summary of certain of the defined terms used in the
indenture. Reference is made to the indenture for the full definition of all
such terms, as well as any other terms used herein for which no definition is
provided.
"Accrued Bankruptcy Interest" means, with respect to any Indebtedness of any
Person, all interest accrued or accruing on such Indebtedness after the
commencement of any bankruptcy, reorganization, insolvency, receivership or
similar proceeding, whether voluntary or involuntary, against such Person in
accordance with and at the contract rate (including, without limitation, any
rate applicable upon default) specified in the agreement or instrument
creating, evidencing or governing such Indebtedness, whether or not, pursuant
to applicable law or otherwise, the claim for such interest is allowed as a
claim in such proceeding.
"Acquired Indebtedness" means Indebtedness of a Person existing at the time
such Person becomes a Restricted Subsidiary is merged into or consolidated with
any other Person or which is assumed in connection with the acquisition of
assets from such Person and, in each case, whether or not incurred by such
Person in connection with, or in anticipation or contemplation of, such Person
becoming a Restricted Subsidiary or such merger, consolidation or acquisition.
"Affiliate" means, with respect to any specific Person, any other Person
that directly or indirectly through one or more intermediaries controls, or is
controlled by, or is under common control with, such specified Person. For the
purposes of this definition, "control" (including, with correlative meanings,
the terms "controlling," "controlled by" and "under common control with"), as
used with respect to any Person, means the possession, directly or indirectly,
of the power to direct or cause the direction of the management or policies of
such Person, whether through the ownership of voting securities, by agreement
or otherwise; provided that, for purposes of the "--Limitation on Transactions
with Affiliates" covenant, beneficial ownership of at least 10% of the voting
securities of a Person, either directly or indirectly, will be deemed to be
control.
"Asset Sale" means:
(1) the sale, lease (as lessor), conveyance, disposition or other
transfer (a "disposition") of any properties, assets or rights (including,
without limitation, by way of a sale and lease-back); provided that the
sale, lease, conveyance or other disposition of all or substantially all of
the assets of Ziff Davis Media and our Subsidiaries taken as a whole will
be governed the Change of Control provisions and/or the "--Merger,
Consolidation and Sale of Assets" covenant and not by the "--Limitation on
Asset Sales" covenant; and
(2) the issuance, sale or transfer by Ziff Davis Media or any of our
Restricted Subsidiaries of Equity Interests of any of Ziff Davis Media's
Restricted Subsidiaries, in the case of either clause (1) or (2), whether
in a single transaction or a series of related transactions
(a) that have a fair market value in excess of $1,000,000; or
(b) for aggregate consideration in excess of $1,000,000.
Notwithstanding the foregoing, the following items shall not be deemed to be
Asset Sales:
(1) dispositions in the ordinary course of business, including, without
limitation, the sale or lease of databases, software, subscriber lists or
office or laboratory space or the licensing of intellectual property;
(2) a disposition of assets by Ziff Davis Media to a Restricted
Subsidiary or Unrestricted Subsidiary Guarantor or by a Restricted
Subsidiary or Unrestricted Subsidiary Guarantor to Ziff Davis Media or to
another Restricted Subsidiary or Unrestricted Subsidiary Guarantor;
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(3) a disposition of Equity Interests by Ziff Davis Media to a
Restricted Subsidiary or Unrestricted Subsidiary Guarantor or by an
Unrestricted Subsidiary Guarantor or a Restricted Subsidiary to Ziff Davis
Media or to another Restricted Subsidiary or a Person who becomes a
Restricted Subsidiary or an Unrestricted Subsidiary Guarantor (if otherwise
in accordance with the provisions of the indenture) after giving effect to
such dispositions;
(4) the sale or other disposition of cash or Cash Equivalents;
(5) foreclosures on assets;
(6) the sale or discount, in each case without recourse, of accounts
receivable arising in the ordinary course of business, but only in
connection with the compromise or collection thereof;
(7) the factoring of accounts receivable arising in the ordinary course
of business pursuant to arrangements customary in the publishing industry;
(8) disposals or replacements of obsolete assets in the ordinary course
of business;
(9) leases or subleases to third persons not interfering in any material
respect with the business of Ziff Davis Media or any of its Restricted
Subsidiaries or Unrestricted Subsidiary Guarantors;
(10) any sale of Equity Interests in, or Indebtedness or other
securities of, an Unrestricted Subsidiary;
(11) a Permitted Investment or a Restricted Payment that is permitted by
the "--Limitation on Restricted Payments" covenant; and
(12) an issuance to management of Ziff Davis Media of up to 10% of the
Equity Interests of a Restricted Subsidiary.
"Attributable Indebtedness" in respect of a Sale and Lease-Back Transaction
means, as at the time of determination, the greater of
(1) the fair value of the property subject to such arrangement; and
(2) the present value (discounted at the rate of interest implicit in
such transaction, determined in accordance with GAAP and compounded
annually) of the total obligations of the lessee for rental payments during
the remaining term of the lease included in such Sale and Lease-Back
Transaction (including any period for which such lease has been extended).
"Bankruptcy Law" means Title 11 of the United States Code or any similar
federal, state or foreign bankruptcy, insolvency, reorganization or other law
for the relief of debtors.
"Capital Expenditure Indebtedness" means Indebtedness, including industrial
revenue bonds and purchase money indebtedness, incurred by any Person to
finance or refinance the purchase or construction of any property or assets
acquired or constructed by that Person which have a useful life of more than
one year so long as
(1) the purchase or construction price for that property or assets is
included in "addition to property, plant or equipment" in accordance with
GAAP;
(2) the acquisition or construction of that property or assets is not
part of any acquisition of a Person or line of business; and
(3) that Indebtedness is incurred within 180 days of the acquisition or
completion of construction of that property or assets.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated and whether
or not voting) of corporate stock, partnership or limited liability company
interests or any other participation, right or other interest in the nature of
an
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equity interest in such Person including, without limitation, Common Stock and
Preferred Stock of such Person, or any option, warrant or other security
convertible into any of the foregoing.
"Capitalized Lease Obligation" means, with respect to any Person,
Indebtedness represented by obligations under a lease that is required to be
capitalized for financial reporting purposes in accordance with GAAP, and the
amount of the Indebtedness will be the capitalized amount of the obligations
determined in accordance with GAAP.
"Cash Equivalents" means (1) marketable direct obligations issued by, or
unconditionally guaranteed by, the United States Government or issued by any
agency or instrumentality thereof and backed by the full faith and credit of
the United States, in each case maturing within one year from the date of
acquisition thereof; (2) marketable direct obligations issued by any state of
the United States of America or any foreign governmental entity or any
political subdivision of any such state or any foreign governmental entity or
any public instrumentality thereof maturing within one year from the date of
acquisition thereof and, at the time of acquisition, having one of the two
highest ratings obtainable from either Standard & Poor's Corporation ("S&P") or
Moody's Investors Service, Inc. ("Moody's") or, in the case of foreign
subsidiaries, the equivalent ratings; (3) commercial paper maturing no more
than one year from the date of creation thereof and, at the time of
acquisition, having a rating of at least A-1 from S&P or at least P-1 from
Moody's; (4) time deposit accounts, certificates of deposit or bankers'
acceptances maturing within one year from the date of acquisition thereof
issued by any lender under the Credit Facility or bank organized under the laws
of the United States of America or any state thereof or the District of
Columbia or any U.S. branch of a foreign bank having at the date of acquisition
thereof combined capital and surplus of not less than $250,000,000; (5)
repurchase obligations with a term of not more than seven days for underlying
securities of the types described in clause (1) above entered into with any
bank meeting the qualifications specified in clause (4) above; (6) securities
with maturities of one year or less from the date of acquisition backed by
standby letters of credit issued by any commercial back satisfying the
requirements of clause (4) above; (7) demand deposits with any bank or trust
company maintained in the ordinary course of business; (8) commercial paper,
maturing not more than 180 days after the date of purchase, issued or
guaranteed by a corporation (other than Ziff Davis Media or any of our
Subsidiaries or any of their Affiliates) organized and existing under the laws
of any state of the United States of America with a rating, at the time as of
which any determination thereof is to be made, of at least A-1 from S&P or P-1
from Moody's; and (9) investments in money market, mutual or similar funds that
invest substantially all their assets in securities of the types described in
clauses (1) through (5) above.
"Change of Control" means the occurrence of any of the following:
(1) the sale, lease, transfer, conveyance or other disposition, other
than by way of merger or consolidation, in one or a series of related
transactions, of all or substantially all of the assets of Ziff Davis Media
and our Subsidiaries, taken as a whole, to any "person" or "group" (as
those terms are used in Section 13(d) of the Exchange Act), other than the
Permitted Holders and their Related Parties;
(2) the approval by Ziff Davis Media and the holders of Capital Stock of
Ziff Davis Media of the adoption of a plan for the liquidation or
dissolution of Ziff Davis Media;
(3) any "person" or "group" (as those terms are used in Section 13(d) of
the Exchange Act), other than the Permitted Holders and their Related
Parties, becomes the "beneficial owner" (as that term is defined in Rule
13d-3 and Rule 13d-5 under the Exchange Act), directly or indirectly
through one or more intermediaries, of 50% or more of the voting power or
economic power of the outstanding Capital Stock of Ziff Davis Media;
(4) any "person" or "group" (as those terms are used in Section 13(d) of
the Exchange Act), other than the Permitted Holders and their Related
Parties, becomes the "beneficial owner" (as that
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term is defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act) of
more than 33 1/3% of the total voting power of the Capital Stock of Ziff
Davis Media and the Permitted Holders and their Related Parties
beneficially own, in the aggregate, a lesser percentage of the total voting
power of the Capital Stock of Ziff Davis Media than such other person or
group and do not have the right or ability by voting power, contract or
otherwise to elect or designate for election a majority of the board of
directors of Ziff Davis Media; and
(5) following the consummation of an initial public offering of Common
Stock of Ziff Davis Media, during any period of two consecutive years,
individuals who at the beginning of such period constituted the board of
directors of Ziff Davis Media (together with any new directors whose
election by such board of directors or whose nomination for election by the
shareholders of Ziff Davis Media has been approved by the Permitted Holders
or a majority of the directors then still in office who either were
directors at the beginning of such period or whose election or
recommendation for election was previously so approved) cease to constitute
a majority of the board of directors of Ziff Davis Media.
"Common Stock" of any Person means all Capital Stock of such Person that is
generally entitled to (i) vote in the election of directors of such Person; or
(ii) if such Person is not a corporation, vote or otherwise participate in the
selection of the governing body, partners, managers or others that will control
the management and policies of such Person.
"Consolidated Indebtedness" means, with respect to any specified Person for
any date of determination, the sum, without duplication, of
(1) the total amount of Indebtedness of such Person and our Restricted
Subsidiaries, plus
(2) the total amount of Indebtedness of any other Person, to the extent
that such Indebtedness has been guaranteed by the specified Person or one
or more of our Restricted Subsidiaries, plus
(3) the aggregate liquidation value of all Disqualified Capital Stock of
such Person and our Restricted Subsidiaries, determined on a consolidated
basis and in accordance with GAAP;
provided, however, that Subordinated Seller Debt and intercompany Indebtedness
shall be excluded from Consolidated Indebtedness.
"Consolidated Interest Expense" means, with respect to any Person for any
period, the sum of, without duplication,
(1) the interest expense of such Person and our Restricted Subsidiaries
for such period, on a consolidated basis, determined in accordance with
GAAP (including amortization of original issue discount on any
Indebtedness, all noncash interest payments, the interest component of all
payments associated with Capitalized Lease Obligations, imputed interest
with respect to Attributable Indebtedness, commissions, discounts and other
fees and charges incurred in respect of letters of credit or bankers'
acceptance financings, and net payments, if any, pursuant to hedging
obligations); and
(2) the consolidated capitalized interest of the Person and our
Restricted Subsidiaries for that period, whether paid or accrued.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of that Person and our Restricted Subsidiaries
for that period, on a consolidated basis, determined in accordance with GAAP;
provided that
(1) the Net Income (or loss) of any Person that is not a Restricted
Subsidiary or that is accounted for by the equity method of accounting
shall be included only to the extent of the amount of dividends or
distributions paid in cash to the referent Person or a Restricted
Subsidiary thereof;
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(2) the Net Income (or loss) of any Restricted Subsidiary other than a
Subsidiary organized or having its principal place of business outside the
United States shall be excluded to the extent that the declaration or
payment of dividends or similar distributions by that Restricted Subsidiary
of that Net Income (or loss) is not at the date of determination permitted
without any prior governmental approval (that has not been obtained) or,
directly or indirectly, by operation of the terms of its charter or any
judgment, decree, order, statute, rule or governmental regulation
applicable to that Restricted Subsidiary;
(3) the Net Income (or loss) of any Person acquired in a pooling of
interests transaction for any period before to the date of that acquisition
shall be excluded;
(4) the cumulative effect of a change in accounting principles shall be
excluded; and
(5) (a) nonrecurring fees and expenses incurred, within three months of
the Issue Date, in connection with the consummation of the transaction in
an aggregate amount not to exceed $7.5 million and (b) nonrecurring fees
and expenses incurred in connection with the issuance and sale of the notes
in an aggregate amount not to exceed $10.0 million shall be excluded.
"Credit Facility" means the Credit Agreement, dated as of April 5, 2000,
among Ziff Davis Media, the banks, financial institutions and other
institutional lenders from time to time party thereto and Canadian Imperial
Bank of Commerce, as Administrative Agent for the lender parties thereunder,
together with all "Loan Documents" as defined therein and all other documents
related thereto (including, without limitation, any notes, guarantee agreements
and security documents), in each case as such agreements may be amended
(including any amendment and restatement thereof), supplemented or otherwise
modified from time to time, including any agreement or agreements extending the
maturity of, refinancing, renewing, replacing or otherwise restructuring
(including increasing the amount of available borrowings thereunder (provided
that such increase in borrowings is permitted by the "--Limitation on
Incurrence of Additional Indebtedness" covenant) or adding Subsidiaries of Ziff
Davis Media as additional borrowers or guarantors thereunder), in whole or in
part, all or any portion of the Indebtedness under such agreement or agreements
or any successor or replacement agreement or agreements and whether by the same
or any other agent, lender or group of lenders or other party thereto or by one
or more agreements.
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect Ziff
Davis Media or any Restricted Subsidiary of Ziff Davis Media against
fluctuations in currency values.
"Custodian" means any custodian, receiver, trustee, assignee, liquidator,
sequestrator or similar official under any Bankruptcy Law.
"Debt to EBITDA Ratio" means, with respect to any Person as of the date of
determination (the "Calculation Date"), the ratio of Consolidated Indebtedness
of such Person as of such date to the EBITDA of such Person for the most recent
four-quarter period ending immediately prior to such date for which internal
financial statements are available, determined on a pro forma basis (including
any pro forma cost-savings adjustments calculated on a basis consistent with
Regulation S-X of the Exchange Act) after giving effect to all acquisitions or
dispositions of assets made by such Person and its Restricted Subsidiaries from
the beginning of such period through and including such date of determination
(including any financing transactions in connection with such acquisitions or
dispositions) as if such acquisitions and dispositions had occurred at the
beginning of such period. In addition, for the purposes of making the
computation referred to above, the following shall be included or excluded, as
the case may be:
(1) acquisitions that have been made by Ziff Davis Media or any of our
Restricted Subsidiaries or Unrestricted Subsidiary Guarantors, including
through mergers or consolidations and including any related financing
transactions, during the applicable period or subsequent to such applicable
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period and on or prior to the Calculation Date shall be deemed to have
occurred on the first day of the reference period, and EBITDA for such
period shall be calculated without giving effect to clause (3) of the
proviso set forth in the definition of Consolidated Net Income; and
(2) the EBITDA attributable to discontinued operations, as determined in
accordance with GAAP, and operations of businesses disposed of prior to the
calculation date.
"Default" means an event or condition the occurrence of which is, or with
the lapse of time or the giving of notice or both would be, an Event of
Default.
"Designated Cash Account" means Ziff Davis Media's bank account at The Bank
of New York that will have a cash balance of $50.0 million on the date hereof.
"Designated Senior Indebtedness" means (1) any Senior Indebtedness under the
Credit Facility; and (2) any other Senior Indebtedness which at the time of
determination exceeds $20.0 million in aggregate principal amount (or accreted
value in the case of Indebtedness issued at a discount) outstanding or
available under a committed facility, which is specifically designated in the
instrument evidencing such Senior Indebtedness as "Designated Senior
Indebtedness" by such Person and as to which the trustee have been given
written notice of such designation.
"Disqualified Capital Stock" means any Capital Stock of a Person or a
Subsidiary thereof which, by its terms (or by the terms of any security into
which it is convertible or for which it is exchangeable at the option of the
holder), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or is
redeemable at the option of the holder thereof, in whole or in part, on or
prior to the maturity date of the notes, for cash or securities constituting
Indebtedness. Without limitation of the foregoing, Disqualified Capital Stock
will be deemed to include any preferred stock of a Person or a Subsidiary of
such Person, with respect to either of which, under the terms of such preferred
stock, by agreement or otherwise, such Person or Subsidiary is obligated to pay
current dividends or distributions in cash during the period prior to the
maturity date of the notes; provided, however, that (x) preferred stock of a
Person or any Subsidiary thereof that is issued with the benefit of provisions
requiring a public offering or a change of control offer to be made for such
preferred stock in the event of a change of control of or a public offering by
such Person or Subsidiary, which provisions have substantially the same effect
as the provisions described under "Change of Control" and (y) preferred stock
of a Subsidiary of any Person which is held by such Person, will not be deemed
to be Disqualified Capital Stock solely by virtue of such provisions.
"DLJMB" means D.J. Diversified Partners, L.P., D.J. Diversified Partners-A,
L.P., D.J. EAB Partners, L.P., D.J. ESC II L.P., D.J. First Esc L.P., D.J.
Merchant Banking Partners II-A, L.P., D.J. Merchant Banking Partners II, L.P.,
D.J. Millennium Partners, L.P., D.J. Millennium Partners-A, L.P., D.J. Offshore
Partners II, C.V., DLJMB Funding II, Inc. and their respective Affiliates.
"EBITDA" means, with respect to any specified Person for any period, the
Consolidated Net Income of such Person for such period, plus
(1) an amount equal to any extraordinary loss plus any net loss realized
by such Person or any of its Restricted Subsidiaries in connection with an
Asset Sale, to the extent such losses were deducted in computing such
Consolidated Net Income; plus
(2) provision for taxes based on income or profits of such Person and
our Restricted Subsidiaries for such period, to the extent that such
provision for taxes was deducted in computing such Consolidated Net Income;
plus
(3) Consolidated Interest Expense of such Person and our Restricted
Subsidiaries for such period, whether paid or accrued and whether or not
capitalized (including, without limitation, amortization of debt issuance
costs and original issue discount, noncash interest payments, the
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interest component of any deferred payment obligations, the interest
component of all payments associated with Capitalized Lease Obligations,
commissions, discounts and other fees and charges incurred in respect of
letter of credit or bankers' acceptance financings, and net of the effect
of all payments made or received pursuant to hedging obligations), to the
extent that any such expense was deducted in computing such Consolidated
Net Income; plus
(4) depreciation, amortization (including amortization of goodwill and
other intangibles but excluding amortization of prepaid cash expenses that
were paid in a prior period) and other noncash expenses (excluding any such
noncash expense other than noncash rent expense to the extent that it
represents an accrual of or reserve for cash expenses in any future period
or amortization of a prepaid cash expense that was paid in a prior period)
of such Person and its Restricted Subsidiaries for such period to the
extent that such depreciation, amortization and other noncash expenses were
deducted in computing such Consolidated Net Income; plus
(5) one-time noncash charges recorded in accordance with GAAP resulting
from any merger, recapitalization or acquisition transaction, including the
closing of the transaction; less
(6) noncash items or nonrecurring items increasing such Consolidated Net
Income for such period, other than the accrual of revenue in the ordinary
course of business, in each case, on a consolidated basis and determined in
accordance with GAAP.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Exchange Act" means the Securities Exchange Act of 1934, as amended, or any
successor statute or statutes thereto.
"Existing Indebtedness" means Indebtedness of the Company and its Restricted
Subsidiaries (other than Indebtedness under the Credit Facility) in existence
on the date of the indenture.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession of the United States, which are in effect as of the Issue Date.
"Guarantor Designated Senior Indebtedness" means (1) any Guarantor Senior
Indebtedness under the Credit Facility; and (2) any other Guarantor Senior
Indebtedness which at the time of determination exceeds $20.0 million in
aggregate principal amount (or accreted value in the case of Indebtedness
issued at a discount) outstanding or available under a committed facility,
which is specifically designated in the instrument evidencing such Senior
Indebtedness as "Guarantor Designated Senior Indebtedness" by such Person and
as to which the trustee has been given written notice of such designation.
"Guarantor Senior Indebtedness" means Obligations (including, without
limitation, Accrued Bankruptcy Interest) due pursuant to the terms of all
agreements, documents and instruments providing for, creating, securing,
evidencing, relating to or otherwise entered into in connection with,
(1) all Indebtedness of a guarantor owed to agents and lenders under the
Credit Facility;
(2) all obligations of a guarantor with respect to hedging obligations;
(3) all obligations of a guarantor to reimburse any bank or other Person
in respect of amounts paid under letters of credit, acceptances or other
similar instruments;
(4) all other Indebtedness of a guarantor which does not provide that it
is to rank equally in right of payment to or subordinate to the guarantee
of such guarantor, as the case may be; and
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(5) all deferrals, renewals, extensions and refundings of, and
amendments, modifications and supplements to, any of the Guarantor Senior
Indebtedness described above.
Notwithstanding anything to the contrary in the foregoing, Guarantor Senior
Indebtedness will not include
(1) Indebtedness of a guarantor to any of its subsidiaries (except to
the extent pledged under the Credit Facility);
(2) Indebtedness represented by the guarantees;
(3) any Indebtedness that by the express terms of the agreement or
instrument creating, evidencing or governing the same is junior or
subordinate in right of payment to any item of Guarantor Senior
Indebtedness;
(4) any trade payable arising from the purchase of goods or materials or
for services obtained in the ordinary course of business;
(5) Indebtedness incurred in violation of the "--Limitation on
Incurrence of Additional Indebtedness" covenant (but, as to any such
obligation, no such violation shall be deemed to exist for purposes of this
clause (5) if the holder(s) of such obligation or their representative and
the trustee shall have received an Officers' Certificate of Ziff Davis
Media to the effect that the incurrence of such Indebtedness does not (or,
in the case of revolving credit indebtedness, that the incurrence of the
entire committed amount thereof at the date on which the initial borrowing
thereunder is made would not violate such provisions of the indenture);
(6) Indebtedness represented by Disqualified Capital Stock; and
(7) any Indebtedness to or guaranteed on behalf of any stockholders,
director, officer or employee of a Guarantor or any Subsidiary of such
Guarantor.
"Indebtedness" means, with respect to any Person, any indebtedness of that
Person in respect of borrowed money or evidenced by bonds, notes, debentures or
similar instruments or letters of credit (or reimbursement agreements in
respect thereof) or bankers' acceptances or representing Capitalized Lease
Obligations or the balance deferred and unpaid of the purchase price of any
property or representing any hedging obligations (except any such balance that
constitutes an accrued expense, trade payable or customer contract advance) if
and to the extent any of the foregoing Indebtedness would appear as a liability
upon a balance sheet of that Person prepared in accordance with GAAP, as well
as all Indebtedness of others secured by a Lien on any asset of that Person
(whether or not that Indebtedness is assumed by that Person (provided, however,
that if such obligation or obligations shall not have been assumed, the amount
of such Indebtedness shall be deemed to be the lesser of the principal amount
of the obligation or the fair market value of the pledged property or assets))
and, to the extent not otherwise included, the guarantee by that Person of any
Indebtedness of any other Person.
The amount of Indebtedness of any Person at any date will be the outstanding
balance at such date of all unconditional obligations as described above and,
with respect to contingent obligations, the maximum liability upon the
occurrence of the contingency giving rise to the obligation; provided that (1)
the amount outstanding at any time of any Indebtedness issued with original
issue discount is the principal amount of such Indebtedness less the remaining
unamortized portion of the original issue discount of such Indebtedness at such
time as determined in conformity with GAAP; and (2) Indebtedness will not
include (a) any liability for federal, state, local or other taxes, and (b) any
accounts payable, trade payables and other accrued liabilities arising from the
purchase of goods or materials or for services obtained in the ordinary course
of business. Furthermore, guarantees of (or obligations with respect to letters
of credit supporting) Indebtedness otherwise included in the determination of
such amount shall not also be included.
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"Independent Financial Advisor" means an investment banking firm of national
reputation in the United States (1) which does not, and whose directors,
officers and employees or Affiliates do not, have a direct or indirect
financial interest in Ziff Davis Media, and (2) which, in the judgment of the
board of directors of Ziff Davis Media, is otherwise independent and qualified
to perform the task for which it is to be engaged.
"InternetCo" means Ziff Davis Internet Inc., a Delaware corporation.
"Investments" means, with respect of any Person, directly or indirectly, any
advance, account receivable (other than an account receivable arising in the
ordinary course of business of such Person or acquired as part of the assets
acquired by Ziff Davis Media or a Subsidiary of Ziff Davis Media otherwise in
accordance with the indenture), loan (including, without limitation, a
guarantee) or capital contribution to (by means of transfers of property to
others, payments for property or services for the account or use of others or
otherwise), the purchase of any Capital Stock, bonds, notes, debentures,
partnership or joint venture interests or other securities or other evidence of
beneficial ownership of, any Person or the making of any investment in any
Person. Investments exclude (1) extensions of trade credit on commercially
reasonable terms in accordance with normal trade practices of such Person; and
(2) the repurchase of securities of any Person by such Person.
The amount of any Investment will be the original cost of such Investment
plus the cost of all additional Investments by Ziff Davis Media or any of our
Restricted Subsidiaries, without any adjustments for increases or decreases in
value, or write-ups, write-downs or write-offs with respect to such Investment,
reduced by the (i) amount returned in cash with respect to such Investment
whether through interest payments, principal payments, dividends or other
distributions and (ii) proceeds received by Ziff Davis Media or any of our
Restricted Subsidiaries from the disposition, retirement or redemption of all
or any portion of such Investment; provided that the aggregate of all such
reductions may not exceed the amount of such initial Investment plus the cost
of all additional Investments. If Ziff Davis Media or any of our Restricted
Subsidiaries sells or otherwise disposes of any Common Stock of any direct or
indirect Restricted Subsidiary of Ziff Davis Media such that, after giving
effect to any such sale or disposition, Ziff Davis Media no longer owns,
directly or indirectly, greater than 50% of the outstanding Common Stock of
such Restricted Subsidiary, Ziff Davis Media will be deemed to have made an
Investment on the date of any such sale or disposition equal to the fair market
value of the Common Stock of such Restricted Subsidiary not sold or disposed
of.
"Investors' Rights Agreement" means the Investors' Rights Agreement dated
April 5, 2000 among Parent and certain stockholders of Parent.
"Issue Date" means the date of original issuance of the Exchange Notes.
"LaunchCo" means Ziff Davis Development Inc., a Delaware corporation.
"Lien" means, with respect to any property or assets of any Person, any
mortgage or deed of trust, pledge, hypothecation, collateral assignment,
deposit arrangement, security interest, lien, charge, easement, encumbrance,
preference, priority, or other security agreement or preferential arrangement
of any kind or nature whatsoever on or with respect to such property or assets
(including without limitation, any Capitalized Lease Obligation, conditional
sales, or other title retention agreement having substantially the same
economic effect as any of the foregoing).
"Macworld" means Mac Publishing LLC, a limited liability company.
"Make-Well Agreement" means the Make-Well Agreement, dated as of April 5,
2000, among Ziff-Davis Media Inc., Parent, Willis Stein & Partners II, L.P.,
Willis Stein & Partners Dutch, L.P. and each Person listed as a Maintaining
Party therein.
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"Management Redemption Debt" shall mean any Indebtedness issued by Parent or
any of its Subsidiaries in favor of any officers, directors or employees of
Ziff Davis Media or any of our Subsidiaries in connection with the purchase or
redemption of equity interests of Parent or any of our Subsidiaries from such
Person.
"Net Income" means, with respect to any Person, the net income (loss) of
that Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however:
(1) any gain (or loss), together with any related provisions for taxes
on that gain (or loss), realized in connection with:
(a) any Asset Sale, including, without limitation, dispositions
pursuant to sale and leaseback transactions; or
(b) the extinguishment of any Indebtedness of that Person or any of
our Restricted Subsidiaries; and
(2) any extraordinary or nonrecurring gain (or loss), together with any
related provision for taxes or that extraordinary or nonrecurring gain (or
loss).
"Net Proceeds" means
(1) in the case of any sale of Capital Stock by or equity contribution
to any Person, the aggregate net cash proceeds received by such Person,
after payment of expenses, commissions and the like incurred in connection
therewith;
(2) in the case of any exchange, exercise, conversion or surrender of
outstanding securities of any kind for or into shares of Capital Stock of
Ziff Davis Media which is not Disqualified Capital Stock, the net book
value of such outstanding securities on the date of such exchange,
exercise, conversion or surrender (plus any additional amount required to
be paid by the holder to such Person upon such exchange, exercise,
conversion or surrender, less any and all payments made to the holders,
e.g., on account of fractional shares and less all expenses incurred by
such Person in connection therewith); and
(3) in the case of any issuance of any Indebtedness by Ziff Davis Media
or any Restricted Subsidiary, the aggregate net cash proceeds received by
such Person after the payment of expenses, commissions, underwriting
discounts and the like incurred in connection therewith.
"Obligations" means, with respect to any Indebtedness, any principal,
interest, premiums, penalties, fees, indemnifications, reimbursement
obligations, damages and other liabilities payable to the holder of such
Indebtedness under the documentation governing such Indebtedness.
"Officers' Certificate" means, with respect to any Person, a certificate
signed by two Officers of such Person; provided, however, that every Officers'
Certificate with respect to compliance with a covenant or condition provided
for in the indenture shall include (i) a statement that the Officers making or
giving such Officers' Certificate have read such condition and any definitions
or other provisions contained in the indenture relating thereto and (ii) a
statement at to whether, in the opinion of the signers, such conditions has
been complied with.
"Parent" means Ziff Davis Holdings Inc., a Delaware corporation.
"Permitted Business" means any Person engaged directly or indirectly in the
publishing business (in print or on the Internet), the acquisition, development
and management of new magazine publishing initiatives and events and Internet
initiatives related to the business of InternetCo, testing business, technology
events business or any business reasonably related, incidental or ancillary
thereto.
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"Permitted Holders" means (a) WSP, (b) equity funds managed by WSP, (c) any
WSP co-investor (other than DLJMB) that signs the Investors' Rights Agreement
and (d) any Affiliate (other than DLJMB and other than any of the other
portfolio companies owned by WSP) of any Person named in clauses (a), (b) and
(c).
"Permitted Indebtedness" means:
(1) the incurrence by Ziff Davis Media and our Subsidiaries of
Indebtedness under the Credit Facility; provided that the aggregate
principal amount of all Indebtedness (with letters of credit being deemed
to have a principal amount equal to the maximum potential liability of Ziff
Davis Media and those Restricted Subsidiaries thereunder) outstanding under
the Credit Facility in reliance on this clause (i) does not exceed an
amount equal to $380.0 million less any mandatory prepayment made
thereunder (to the extent, in the case of payments of revolving credit
borrowings, that the corresponding commitments have been permanently
reduced);
(2) the incurrence by Ziff Davis Media and our Restricted Subsidiaries
and Unrestricted Subsidiary Guarantors of Existing Indebtedness reduced by
the amount of scheduled amortization payments or mandatory prepayments when
actually paid or permanent reductions thereof;
(3) the incurrence by Ziff Davis Media and the guarantors of
Indebtedness represented by the exchange notes and the guarantees;
(4) the incurrence by Ziff Davis Media or any of our Restricted
Subsidiaries and Unrestricted Subsidiary Guarantors of Indebtedness
represented by Capital Expenditure Indebtedness, Capitalized Lease
Obligations or other obligations, in each case, the proceeds of which are
used solely for the purpose of financing all or any part of the purchase
price or cost of construction or improvement of property, plant or
equipment (including acquisitions of Capital Stock of a Person that becomes
a Restricted Subsidiary to the extent of the fair market value of the
property, plant or equipment so acquired) used in the business of Ziff
Davis Media or that Restricted Subsidiary or Unrestricted Subsidiary
Guarantor, as the case may be (which may but need not be incurred under the
Credit Facility), in an aggregate principal amount (or accreted value, as
applicable) not to exceed $10.0 million outstanding after giving effect to
that incurrence;
(5) Indebtedness arising from agreements of Ziff Davis Media or any
Restricted Subsidiary or any Unrestricted Subsidiary Guarantor providing
for indemnification, adjustment of purchase price, earn out or other
similar obligations, in each case, incurred or assumed in connection with
the acquisition or disposition of any business, assets or a Subsidiary,
other than guarantees of Indebtedness incurred by any Person acquiring all
or any portion of such business, assets or Restricted Subsidiary for the
purpose of financing that acquisition; provided that the maximum assumable
liability in respect of that Indebtedness shall at no time exceed the gross
proceeds actually received by Ziff Davis Media and/or that Restricted
Subsidiary or Unrestricted Subsidiary Guarantor in connection with that
disposition;
(6) the incurrence by Ziff Davis Media or any of our Restricted
Subsidiaries or Unrestricted Subsidiary Guarantors of permitted Refinancing
Indebtedness in exchange for, or the net proceeds of which are used to
refund, refinance, defease or replace, Indebtedness (other than
intercompany Indebtedness) that is permitted by the indenture to be
incurred;
(7) the incurrence by Ziff Davis Media or any of its Restricted
Subsidiaries or Unrestricted Subsidiary Guarantors of intercompany
Indebtedness between or among Ziff Davis Media and/or any of our Restricted
Subsidiaries or Unrestricted Subsidiary Guarantors or Mac World; provided
that:
(a) if Ziff Davis Media is the obligor on that Indebtedness, that
Indebtedness is expressly subordinated to the prior payment in full in
cash of all obligations with respect to the exchange notes; and
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(b) (i) any subsequent issuance or transfer of Equity Interests that
results in any such Indebtedness being held by a Person other than Ziff
Davis Media or a Restricted Subsidiary or Unrestricted Subsidiary
Guarantor thereof and (ii) any sale or other transfer of any such
Indebtedness to a Person that is neither Ziff Davis Media nor a
Restricted Subsidiary nor an Unrestricted Subsidiary Guarantor thereof
shall be deemed, in each case, to constitute an incurrence of that
Indebtedness by Ziff Davis Media or that Restricted Subsidiary or
Unrestricted Subsidiary Guarantor, as the case may be, that was not
permitted by this clause (7);
(8) the incurrence by Ziff Davis Media or any of our Restricted
Subsidiaries or Unrestricted Subsidiary Guarantors of hedging obligations
that are incurred for the purpose of fixing or hedging:
(a) interest rate risk with respect to any Indebtedness that is
permitted by the terms of the indenture to be outstanding;
(b) exchange rate risk with respect to agreements or Indebtedness of
that Person payable in a currency other than U.S. dollars; and
(c) risk with respect to fluctuations in the cost of raw materials
used in the ordinary course of business, including paper;
provided that those agreements do not increase the Indebtedness of the
obligor outstanding at any time other than as a result of fluctuations in
foreign currency exchange rates, interest rates or the cost of raw
materials or by reason of fees, indemnities and compensation payable
thereunder;
(9) the guarantee by Ziff Davis Media or any of our Restricted
Subsidiaries or Unrestricted Subsidiary Guarantors of Indebtedness of Ziff
Davis Media or a Restricted Subsidiary or Unrestricted Subsidiary Guarantor
of Ziff Davis Media that was permitted to be incurred by another provision
of this definition;
(10) obligations in respect of performance, surety, appeal and other
similar bonds and completion guarantees (including related letters of
credit) provided by Ziff Davis Media or any Restricted Subsidiary or
Unrestricted Subsidiary Guarantor in the ordinary course of business;
(11) Indebtedness of Ziff Davis Media or any Restricted Subsidiary or
Unrestricted Subsidiary Guarantor arising from the honoring by a bank or
other financial institution of a check, draft or similar instrument
inadvertently (except in the case of daylight overdrafts) drawn against
insufficient funds in the ordinary course of business; provided that such
Indebtedness is satisfied within five business days of incurrence;
(12) guarantees that constitute Permitted Investments;
(13) Indebtedness incurred by Ziff Davis Media or any of our Restricted
Subsidiaries or any Unrestricted Subsidiary Guarantors constituting
reimbursement obligations with respect to letters of credit issued in the
ordinary course of business, including, without limitation, letters of
credit to procure raw materials, or in respect of reimbursement-type
obligations regarding workers' compensation claims or self-insurance or
other Indebtedness with respect to reimbursement-type obligations; and
(14) the incurrence by Ziff Davis Media or any of our Restricted
Subsidiaries or any Unrestricted Subsidiary Guarantors of additional
Indebtedness (which amount may, but need not, be incurred in whole or in
part under the Credit Facility) in an aggregate principal amount (or
accreted value, as applicable) outstanding after giving effect to that
incurrence not to exceed $30 million; provided that in no event shall
LaunchCo be permitted to incur additional Indebtedness under this clause
(14) in an aggregate principal amount exceeding $10.0 million and provided
further that in no event shall InternetCo be permitted to incur additional
Indebtedness under this clause (14) in an aggregate principal amount
exceeding $10.0 million.
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For purposes of determining compliance with this definition:
. in the event that an item of Indebtedness meets the criteria of more
than one of the categories of Permitted Indebtedness described in
clauses (1) through (14) above or is entitled to be incurred pursuant
to the "--Limitation on Incurrence of Additional Indebtedness"
covenant, Ziff Davis Media shall, in its sole discretion, classify
that item of Indebtedness in any manner that complies with this
definition and that item of Indebtedness will be treated as having
been incurred pursuant to only one of those clauses or pursuant to
the first paragraph hereof; and
. accrual or capitalization of interest or dividends and accretion or
amortization of original issue discount will not be deemed to be an
incurrence of Indebtedness for purposes of this covenant.
In addition, Ziff Davis Media may, at any time, change the classification of
an item of Indebtedness (or any portion thereof) to any other clause above;
provided that Ziff Davis Media or any Restricted Subsidiary or Unrestricted
Subsidiary Guarantor would be permitted to incur such item of Indebtedness (or
portion thereof) pursuant to such other clause above at such time of
reclassification.
"Permitted Investments" means
(1) any Investment in Ziff Davis Media or in a Restricted Subsidiary of
Ziff Davis Media;
(2) any Investment in cash or Cash Equivalents;
(3) any Investment by Ziff Davis Media or any Restricted Subsidiary of
Ziff Davis Media in a Person if, as a result of that Investment,
(a) that Person becomes a Restricted Subsidiary of Ziff Davis Media;
or
(b) that Person is merged, consolidated or amalgamated with or into,
or transfers or conveys substantially all of its assets to or is
liquidated into, Ziff Davis Media or a Restricted Subsidiary of Ziff
Davis Media;
(4) any Investment acquired solely in exchange for Equity Interests
(other than Disqualified Capital Stock) of Ziff Davis Media;
(5) loans and advances to or guarantees of third-party loans to
officers, directors and employees for bonafide business purposes in an
aggregate principal amount not to exceed $2.0 million in each year and $5.0
million in the aggregate in the ordinary course of business;
(6) hedging obligations permitted to be incurred under the "--Limitation
on Incurrence of Additional Indebtedness" covenant;
(7) any Person to the extent such Investment represents the noncash
portion of the consideration received for an Asset Sale as permitted
pursuant to the "--Limitation on Asset Sales" covenant;
(8) currency agreements and interest rate agreements entered into in the
ordinary course of Ziff Davis Media's business and otherwise in compliance
with the indenture;
(9) Investments by Ziff Davis Media to the Unrestricted Subsidiary
Guarantors in an amount not to exceed $50.0 million from the Designated
Cash Account; provided, however, that if the amount of the Designated Cash
Account is less than $50.0 million (the "Reduced Amount"), then the amount
of remaining Investments permitted under this clause (9) will be reduced to
the Reduced Amount;
(10) leases, utility and other similar deposits made in the ordinary
course of business or other pledges and deposits specifically permitted
under the definition of Permitted Liens;
(11) Investments existing on the date of the indenture;
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(12) so long as no Default or Event of Default then exists or would
result therefrom, Investments in Restricted Subsidiaries, Unrestricted
Subsidiaries and Macworld with additional equity contributions to Ziff
Davis Media expressly made for such purposes (other than the equity
contribution pursuant to clause (9) above);
(13) Investments in securities of trade creditors or customers received
pursuant to any plan of reorganization or similar arrangement upon the
bankruptcy or insolvency of such trade creditors or customers or in good
faith settlement of delinquent obligations of such trade creditors or
customers;
(14) Investments consisting of licenses or leases of intellectual
property in the ordinary course of business;
(15) guarantees by Ziff Davis Media or any of our Restricted
Subsidiaries of Indebtedness otherwise permitted to be incurred by
Restricted Subsidiaries under the indenture;
(16) guarantees by Ziff Davis Media or any of our restricted
Subsidiaries of Indebtedness of the Unrestricted Subsidiary Guarantors
permitted to be incurred pursuant to clause (14) of the definition of
Permitted Indebtedness; provided that any such guarantee shall constitute a
Permitted Investment under this clause (16) only if the proceeds of such
Indebtedness are not used by such Unrestricted Subsidiary Guarantor to make
an Investment other than in Ziff Davis Media or a Restricted Subsidiary;
(17) Investments consisting of endorsements for collection or deposit in
the ordinary course of business;
(18) non-cash loans to officers, directors and employees, in exchange
for notes, to purchase Equity Interests; and
(19) other Investments in any Person having an aggregate fair market
value (measured on the date each such Investment was made and without
giving effect to subsequent changes in value), when taken together with all
other Investments made pursuant to this clause (19) that are at the time
outstanding, not to exceed $10.0 million.
"Permitted Liens" means
(1) Liens on property of, or any shares of Capital Stock of, a Person
existing at the time that Person is merged into or consolidated with Ziff
Davis Media or any Restricted Subsidiary of Ziff Davis Media; provided that
those Liens were not incurred in contemplation of that merger or
consolidation and do not secure any property or assets of Ziff Davis Media
or any Restricted Subsidiary of Ziff Davis Media other than the property or
assets subject to the Liens prior to that merger or consolidation;
(2) Liens existing on the date of the indenture;
(3) Liens securing Indebtedness consisting of Capital Expenditure
Indebtedness, mortgage financings, industrial revenue bonds or other
monetary obligations, in each case incurred solely for the purpose of
financing or refinancing all or any part of the purchase price or cost of
construction or installation of assets used in the business of Ziff Davis
Media or our Subsidiaries, or repairs, additions or improvements to those
assets; provided that
(a) those Liens secure Indebtedness in an amount not in excess of
the original purchase price or the original cost of any such assets or
repair, addition or improvement thereto (plus an amount equal to the
reasonable fees and expenses in connection with the incurrence of that
Indebtedness);
(b) those Liens do not extend to any other assets of Ziff Davis
Media or our Subsidiaries (and, in the case of repair, addition or
improvements to any such assets, that Lien extends only to the assets
(and improvements thereto or thereon) repaired, added to or improved);
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(c) the incurrence of that Indebtedness is permitted by the "--
Limitation on Incurrence of Additional Indebtedness" covenant; and
(d) those Liens attach within 365 days of that purchase,
construction, installation, repair, addition or improvement;
(4) Liens securing Capitalized Lease Obligations permitted pursuant to
the definition of Permitted Indebtedness;
(5) Liens to secure any refinancings, renewals, extensions,
modifications or replacements (collectively, "refinancing") (or successive
refinancings), in whole or in part, of any Indebtedness secured by Liens
referred to in clauses (1) through (4) above and (28) below so long as that
Lien does not extend to any other property (other than improvements
thereto);
(6) Liens securing letters of credit entered into in the ordinary course
of business and consistent with past business practice;
(7) Liens on and pledges of the capital stock of any Unrestricted
Subsidiary;
(8) Liens securing (a) Indebtedness (including all Obligations) under
the Credit Facility (including guarantees thereof) or (b) hedging
obligations payable to a lender under the Credit Facility or an Affiliate
thereof or to a Person that was lender or Affiliate thereof at the time the
contract was entered into to the extent such hedging obligations are
secured by Liens on assets also securing Indebtedness (including all
Obligations) under the Credit Facility;
(9) Liens for taxes or claims either (a) not delinquent or not more than
30 days overdue or (b) contested in good faith by appropriate proceedings
and as to which Ziff Davis Media or any of our Unrestricted Subsidiaries
shall have set aside on its books such reserves as may be required by GAAP;
(10) Liens of landlords and Liens of carriers, warehousemen, mechanics
and materialmen and other similar Liens and other Liens imposed by law
incurred in the ordinary course of business;
(11) Liens incurred or deposits made in the ordinary course of business
in connection with workers' compensation, unemployment insurance and other
types of social security, or to secure the performance of tenders, public
or statutory obligations, regulatory, contractual or warranty requirements,
customs, surety and appeal bonds, bids, leases, government contracts, trade
contracts, performance and return-of-money bonds and other similar
obligations (exclusive of obligations for the payment of borrowed money);
(12) any attachment or judgment Lien not constituting an Event of
Default under clause (5) under the definition of Events of Default;
(13) real property encumbrances, easements, rights-of-way, restrictions,
minor defects, encroachments or irregularities in title, Liens incidental
to the conduct of the business of such Person or to the ownership of its
properties and other similar charges or encumbrances not interfering in any
material respect with the ordinary conduct of business of Ziff Davis Media
or any of our Restricted Subsidiaries;
(14) Liens arising out of consignment or similar arrangements for the
sale of goods in the ordinary course of business;
(15) licenses, sublicenses, leases or subleases granted to others that
do not materially interfere with the ordinary course of business of Ziff
Davis Media and our Restricted Subsidiaries;
(16) Liens arising from filing Uniform Commercial Code financing
statements regarding leases;
(17) customary rights of setoff, revocation, refund or chargeback under
deposit agreements or repurchase agreements or under the UCC of banks or
other financial institutions where Ziff Davis
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Media or any of our Subsidiaries maintains deposits in the ordinary course
of business permitted by the indenture;
(18) Liens on insurance policies and proceeds thereof to secure premiums
thereunder;
(19) Liens relating solely to assets to be sold in any Asset Sale
permitted by the indenture and arising pursuant to the sale agreements
governing such Asset Sale;
(20) Liens in favor of the noteholders;
(21) Liens in favor of any of the issuers granted by Ziff Davis Media or
any Subsidiary of Ziff Davis Media;
(22) Liens granted to secure Indebtedness permitted to be incurred
pursuant to clause (14) of the definition of Permitted Indebtedness;
(23) Liens securing conditional sale, rental or purchase money
obligations permitted to be incurred pursuant to the "--Limitation on
Incurrence of Additional Indebtedness" covenant, but only on the property
that is the subject of such obligation;
(24) Liens granted to secure Acquired Indebtedness permitted to be
incurred pursuant to the "--Limitation on Incurrence of Additional
Indebtedness" covenant that, by its terms, limits the recourse of the
lender or lenders thereunder against Ziff Davis Media, our Restricted
Subsidiaries and the Unrestricted Subsidiary Guarantors for the payment of
such Indebtedness directly to the property or assets that were the subject
of the transaction pursuant to which such Indebtedness was created;
(25) Liens encumbering initial deposits and margin deposits, and similar
Liens attaching to commodity trading accounts or other brokerage accounts
incurred in the ordinary course of business;
(26) any interest, right or title of a lessor, licensor or sublessor
arising by operation of law or by any contract, provided that any such
interest arising by contract shall (i) be customary and in the ordinary
course of business, (ii) be limited in scope to the property subject to
such contract and (iii) secure only the obligations arising under such
contract;
(27) Liens solely on any cash earnest money deposits made by Ziff Davis
Media or any of its Subsidiaries in connection with any letter of intent or
purchase agreement entered into by it in compliance with the "--Limitation
on Incurrence of Additional Indebtedness" covenant;
(28) Liens to secure Indebtedness of foreign Subsidiaries permitted to
be incurred under the "--Limitation on Incurrence of Additional
Indebtedness" covenant; and
(29) Liens incurred in the ordinary course of business of Ziff Davis
Media and our Subsidiaries with respect to obligations that do not exceed
$3.0 million at any one time outstanding.
"Person" means any individual, corporation, partnership, limited liability
company, joint venture, association, joint-stock company, trust, unincorporated
organization or government (including any agency or political subdivision
thereof).
"Preferred Stock" means any Capital Stock of a Person, however designated,
which entitles the holder thereof to a preference with respect to dividends,
distributions or liquidation proceeds of such Person over the holders of other
Capital Stock issued by such Person.
"Qualified Proceeds" means any of the following or any combination of the
following:
(1) cash;
(2) Cash Equivalents;
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(3) any liabilities (as shown on Ziff Davis Media's or any of our
Restricted Subsidiary's most recent balance sheet) of Ziff Davis Media or
any Restricted Subsidiary (other than contingent liabilities, liabilities
that are subordinated to or rank equally with the exchange notes or any
guarantee thereof and liabilities that are incurred in connection with or
in contemplation of the related Asset Sale) that are assumed by the
transferee of any such assets pursuant to a customary novation agreement
that fully and unconditionally releases Ziff Davis Media or such Restricted
Subsidiary from further liability;
(4) assets (other than Investments) that are used or useful in a
Permitted Business; and
(5) the Capital Stock of any Person engaged in a Permitted Business if,
in connection with the receipt by Ziff Davis Media or any Restricted
Subsidiary of Ziff Davis Media of that Capital Stock,
(a) that Person becomes a Restricted Subsidiary of Ziff Davis Media
or any Restricted Subsidiary of Ziff Davis Media; or
(b) that Person is merged, consolidated or amalgamated with or into,
or transfers or conveys substantially all of its assets to, or is
liquidated into, Ziff Davis Media or any Restricted Subsidiary.
"Refinance" means, in respect of any security or Indebtedness, to refinance,
extend, renew, refund, repay, prepay, redeem, defease or retire, or to issue a
security or Indebtedness in exchange or replacement for, such security or
Indebtedness in whole or in part. "Refinanced" and "Refinancing" shall have
correlative meanings.
"Refinancing Indebtedness" means Indebtedness that refunds, refinances or
extends any Indebtedness of Ziff Davis Media outstanding at the Issue Date or
other Indebtedness permitted to be incurred by Ziff Davis Media or our
Restricted Subsidiaries or Unrestricted Subsidiary Guarantors (to the extent
applicable) pursuant to the terms of the indenture, but only to the extent that
(1) the Refinancing Indebtedness is subordinated to the exchange notes
to at least the same extent as the Indebtedness being refunded, refinanced
or extended, if at all;
(2) the Refinancing Indebtedness is scheduled to mature either (a) no
earlier than the Indebtedness being refunded, refinanced or extended, or
(b) after the maturity date of the exchange notes;
(3) the portion, if any, of the Refinancing Indebtedness that is
scheduled to mature on or prior to the maturity date of the exchange notes
has a Weighted Average Life to Maturity at the time such Refinancing
Indebtedness is incurred that is equal to or greater than the Weighted
Average Life to Maturity of the portion of the Indebtedness being refunded,
refinanced or extended that is scheduled to mature on or prior to the
maturity date of the exchange notes;
(4) such Refinancing Indebtedness is in an aggregate principal amount
that is equal to or less than the sum of (a) the aggregate principal amount
then outstanding under the Indebtedness being refunded, refinanced or
extended, (b) the amount of accrued and unpaid interest, if any, and
premiums owed, if any, not in excess of preexisting prepayment provisions
on such Indebtedness being refunded, refinanced or extended, and (c) the
amount of customary fees, expenses and costs related to the incurrence of
such Refinancing Indebtedness; and
(5) if such Indebtedness being refinanced is Indebtedness of Ziff Davis
Media, then such Refinancing Indebtedness shall be Indebtedness of Ziff
Davis Media solely.
"Representative" means the indenture trustee or other trustee, agent or
representative in respect of any Designated Senior Indebtedness; provided that
if, and for so long as, any Designated Senior Indebtedness lacks such a
representative, then the Representative for such Designated Senior
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Indebtedness shall at all times constitute the holders of a majority in
outstanding principal amount of such Designated Senior Indebtedness in respect
of any Designated Senior Indebtedness.
"Restricted Subsidiary" of a Person means any subsidiary of such Person that
is not an Unrestricted Subsidiary.
"Sale and Lease-Back Transaction" means any arrangement with any Person
providing for the leasing by means of a capital lease and not an operating
lease by Ziff Davis Media or any Restricted Subsidiary of Ziff Davis Media of
any real or tangible personal property, which property has been or is to be
sold or transferred by Ziff Davis Media or such Restricted Subsidiary to such
Person in contemplation of such leasing.
"Senior Indebtedness" means the Obligations (including, without limitation,
Accrued Bankruptcy Interest) due pursuant to the terms of all agreements,
documents and instruments providing for, creating, securing or evidencing or
otherwise entered into in connection with
(1) all Indebtedness of Ziff Davis Media owed to agents and lenders
under the Credit Facility;
(2) all obligations of Ziff Davis Media with respect to hedging
obligations;
(3) all obligations of Ziff Davis Media to reimburse any bank or other
Person in respect of amounts paid under letters of credit, acceptances or
other similar instruments;
(4) all other Indebtedness of Ziff Davis Media which does not provide
that it is to rank equally in right of payment to or subordinate to the
exchange notes; and
(5) all deferrals, renewals, extensions and refundings of, and
amendments, modifications and supplements to, any of the Senior
Indebtedness described above.
Notwithstanding anything to the contrary in the foregoing, Senior
Indebtedness will not include
(1) Indebtedness of Ziff Davis Media to any of our Subsidiaries (except
to the extent pledged under the Credit Facility);
(2) Indebtedness represented by the exchange notes;
(3) any Indebtedness which by the express terms of the agreement or
instrument creating, evidencing or governing the same is junior or
subordinate in right of payment to any item of Senior Indebtedness;
(4) any trade payable arising from the purchase of goods or materials or
for services obtained in the ordinary course of business;
(5) Indebtedness incurred in violation of the "--Limitation on
Incurrence of Additional Indebtedness" covenant (but, as to any such
obligation, no such violation shall be deemed to exist for purposes of this
clause (5) if the holder(s) of such obligation or their representative and
the trustee shall have received an Officers' Certificate of Ziff Davis
Media to the effect that the incurrence of such Indebtedness does not (or,
in the case of revolving credit indebtedness, that the incurrence of the
entire committed amount thereof at the date on which the initial borrowing
thereunder is made would not) violate such provisions of the indenture);
(6) Indebtedness represented by Disqualified Capital Stock; and
(7) any Indebtedness to or guaranteed on behalf of any stockholders,
director, officer or employee of Ziff Davis Media or any Subsidiary of Ziff
Davis Media.
"Significant Restricted Subsidiary" or "Significant Unrestricted Subsidiary
Guarantor" means any Subsidiary of Ziff Davis Media that would be a
"significant subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X,
promulgated pursuant to the Securities Act, as such Regulation is in effect on
the date hereof.
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"Subordinated Seller Debt" means any Indebtedness issued by Ziff Davis Media
or any of our Subsidiaries in connection with an acquisition permitted under
the indenture, which Indebtedness constitutes all or a portion of the purchase
price for such acquisition, issued on terms and conditions that provide, among
other things, that such Indebtedness shall (a) be unsecured, (b) not pay cash
interest or principal at any time prior to the maturity date of the exchange
notes, (c) contain no creditor-like rights or remedies and (d) have a final
maturity of no earlier than 90 days after the maturity date of the exchange
notes.
"Subsidiary" of any specified Person means any corporation, partnership,
limited liability company, joint venture, association or other business entity,
whether now existing or hereafter organized or acquired, (1) in the case of a
corporation, of which more than 50% of the total voting power of the Capital
Stock entitled (without regard to the occurrence of any contingency) to vote in
the election of directors, officers or trustees thereof is held by such first-
named Person or any of our subsidiaries; or (2) in the case of a partnership,
limited liability company, joint venture, association or other business entity,
with respect to which such first-named Person or any of our subsidiaries has
the power to direct or cause the direction of the management and policies of
such entity by contract or otherwise or if in accordance with GAAP such entity
is consolidated with the first-named Person for financial statement purposes.
Notwithstanding the foregoing, Macworld shall not be considered a Subsidiary of
Ziff Davis Media or any of our subsidiaries.
"Unrestricted Subsidiary" means each of LaunchCo and InternetCo and any
Subsidiary that is designated by the board of directors as an Unrestricted
Subsidiary pursuant to board resolution and any Subsidiary of an Unrestricted
Subsidiary, but only to the extent that such other Subsidiary is not party to
any agreement, contract, arrangement or understanding with Ziff Davis Media or
any Restricted Subsidiary of ZD Publishing Holding, unless the terms of any
such agreement, contract, arrangement or understanding are not materially less
favorable to Ziff Davis Media or that Restricted Subsidiary than those that
might be obtained at the time from Persons who are not Affiliates of Ziff Davis
Media; and neither Ziff Davis Media nor any Restricted Subsidiary shall at any
time
(a) provide a guarantee of, or similar credit support to, any
Indebtedness of such subsidiary (including any undertaking, agreement or
instrument evidencing such Indebtedness),
(b) be directly or indirectly liable for any Indebtedness of such
subsidiary,
(c) be directly or indirectly liable for any other Indebtedness that
provides that the holder thereof may (upon notice, lapse of time or both)
declare a default thereon (or cause the payment thereof to be accelerated
or payable prior to its final scheduled maturity) upon the occurrence of a
default with respect to any other Indebtedness that is Indebtedness of such
subsidiary (including any corresponding right to take enforcement action
against such subsidiary),
except in the case of clause (a) or (b) above to the extent
(a) that Ziff Davis Media or such Restricted Subsidiary could otherwise
provide such a guarantee or incur such Indebtedness (other than as
Permitted Indebtedness) pursuant to the "--Limitation on Incurrence of
Additional Indebtedness" covenant and
(b) the provisions of such guarantee and the incurrence of such
Indebtedness otherwise would be permitted under the "--Limitation on
Restricted Payments" covenant.
Any such designation by the board of directors shall be evidenced to the
trustee by filing with the trustee a certified copy of the board resolution
giving effect to that designation and an Officers' Certificate certifying that
designation complied with the foregoing conditions and was permitted by the
covenant described in "--Limitation on Restricted Payments."
The board of directors of Ziff Davis Media may at any time designate any
Unrestricted Subsidiary to be a Restricted Subsidiary; provided that the
designation shall be deemed to be an incurrence of
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Indebtedness by a Restricted Subsidiary of Ziff Davis Media of any outstanding
Indebtedness of that Unrestricted Subsidiary and that designation shall only be
permitted if
(1) that Indebtedness is permitted under the "--Limitation on Incurrence
of Additional Indebtedness" covenant; and
(2) no Default or Event of Default would be in existence following that
designation.
"Unrestricted Subsidiary Guarantor" means LaunchCo and InternetCo.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing
(1) the then outstanding aggregate principal amount of such Indebtedness
into
(2) the sum of the total of the products obtained by multiplying
(a) the amount of each then remaining installment, sinking fund,
serial maturity or other required payment of principal, including
payment at final maturity, in respect thereof, by
(b) the number of years (calculated to the nearest one-twelfth)
which will elapse between such date and the making of such payment.
"Wholly Owned Restricted Subsidiary" of any Person means a Restricted
Subsidiary of that Person all the outstanding Equity Interests or other
ownership interests of which (other than directors' qualifying shares) shall at
the time be owned by that Person or by one or more Wholly Owned Restricted
Subsidiaries of that Person or by that Person and one or more Wholly Owned
Restricted Subsidiaries of that Person.
"Wholly Owned Subsidiary" means any subsidiary, all of the outstanding
voting securities (other than directors' qualifying shares) of which are owned,
directly or indirectly, by Ziff Davis Media.
"WSP" means Willis Stein & Partners II, L.P., Willis Stein & Partners III,
L.P., Willis Stein & Partners Dutch, L.P. and Willis Stein & Partners Dutch
III, L.P.
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EXCHANGE OFFER
Terms of the Exchange Offer; Period for Tendering Old Notes
Upon the terms and subject to the conditions in this prospectus and in the
letter of transmittal, we will accept any and all notes validly tendered and
not withdrawn prior to 5:00 p.m., New York City time, on the expiration date.
We will issue $1,000 principal amount of exchange notes in exchange for each
$1,000 principal amount of outstanding notes accepted in the exchange offer.
Holders may tender some or all of their notes pursuant to the exchange offer.
However, notes may be tendered only in integral multiples of $1,000.
The form and terms of the exchange notes are the same as the form and terms
of the notes except that:
(1) the exchange notes have been registered under the Securities Act of
1933 and hence will not bear legends restricting their transfer thereof;
and
(2) the holders of the exchange notes will not be entitled to rights
under the registration rights agreement. These rights include the
provisions for an increase in the interest rate on the notes in some
circumstances relating to the timing of the exchange offer. All of these
rights will terminate when the exchange offer is terminated. The exchange
notes will evidence the same debt as the notes. Holders of exchange notes
will be entitled to the benefits of the indenture.
As of the date of this prospectus, $250.0 million aggregate principal amount
of notes was outstanding. We have fixed the close of business on [ ], 2000
as the record date for the exchange offer for purposes of determining the
persons to whom this prospectus and the letter of transmittal will be mailed
initially.
We intend to conduct the exchange offer in accordance with the applicable
requirements of the Securities Exchange Act of 1934 and the rules and
regulations of the Securities and Exchange Commission under the Securities
Exchange Act of 1934.
We shall be deemed to have accepted validly tendered notes when, as and if
we have given oral or written notice to the exchange agent. The exchange agent
will act as agent for the tendering holders for the purpose of receiving the
exchange notes from the issuers.
If any tendered notes are not accepted for exchange because of an invalid
tender, the occurrence of other events in this prospectus or otherwise, we will
return the certificates for any unaccepted notes, at our expense, to the
tendering holder as promptly as practicable after the expiration date.
Holders who tender notes in the exchange offer will not be required to pay
brokerage commissions or fees or, subject to the instructions in the letter of
transmittal, transfer taxes with respect to the exchange of notes. We will pay
all charges and expenses, other than transfer taxes in some circumstances, in
connection with the exchange offer as described under the subheading "--Fees
and Expenses."
Expiration Date; Extensions; Amendments
The term "expiration date" shall mean 5:00 p.m., New York City time, on
[ ], 2001, unless we extend the exchange offer. In that case, the term
"expiration date" shall mean the latest date and time to which the exchange
offer is extended. Notwithstanding the foregoing, we will not extend the
expiration date beyond [ ], 2001.
In order to extend the exchange offer, prior to 9:00 a.m., New York City
time, on the next business day after the previously scheduled expiration date,
we will:
(1) notify the exchange agent of any extension by oral or written notice
and
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(2) mail to the registered holders an announcement of any extension.
We reserve the right, in our sole discretion,
(1) if any of the conditions below under the heading "Conditions" shall
not have been satisfied,
(A) to delay accepting any notes,
(B) to extend the exchange offer, or
(C) to terminate the exchange offer, or
(2) to amend the terms of the exchange offer in any manner.
Any delay in acceptance, extension, termination or amendment will be followed
as promptly as practicable by oral or written notice of delay to the
registered holders. We will give oral or written notice of any delay,
extension or termination to the exchange agent.
Interest on the Exchange Notes
The exchange notes will bear interest from their date of issuance. Holders
of notes that are accepted for exchange will receive, in cash, accrued
interest on the exchange notes to, but not including, the date of issuance of
the exchange notes. We will make the first interest payment on the exchange
notes on January 15, 2001. Interest on the notes accepted for exchange will
cease to accrue upon issuance of the exchange notes.
Interest on the exchange notes is payable semi-annually on each January 15
and July 15, commencing on January 15, 2001.
Procedures for Tendering Old Notes
Only a holder of notes may tender notes in the exchange offer. To tender in
the exchange offer, a holder must:
. complete, sign and date the letter of transmittal, or a facsimile of the
letter of transmittal;
. have the signatures guaranteed if required by the letter of transmittal;
and
. mail or otherwise deliver the letter of transmittal or such facsimile,
together with the notes and any other required documents, to the exchange
agent prior to 5:00 p.m., New York City time, on the expiration date.
To tender notes effectively, the holder must complete the letter of
transmittal and other required documents and the exchange agent must receive
all the documents prior to 5:00 p.m., New York City time, on the expiration
date. Delivery of the notes may be made by book-entry transfer in accordance
with the procedures described below. The exchange agent must receive
confirmation of book-entry transfer prior to the expiration date.
The tender by a holder and the acceptance of the tender by us will
constitute agreement between the holder and us under the terms and subject to
the conditions in this prospectus and in the letter of transmittal.
The method of delivery of notes and the letter of transmittal and all other
required documents to the exchange agent is at the election and sole risk of
the holder. As an alternative to delivery by mail, holders may wish to
consider overnight or hand delivery service. In all cases, sufficient time
should be allowed to assure delivery to the exchange agent before the
expiration date. No letter of transmittal or notes should be sent to us.
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Holders may request their respective brokers, dealers, commercial banks, trust
companies or nominees to effect the above transactions for such holders.
Any beneficial owner whose notes are registered in the name of a broker,
dealer, commercial bank, trust company or other nominee and who wishes to
tender should promptly instruct the registered holder to tender on the
beneficial owner's behalf. See "Instruction to Registered Holder and/or Book-
Entry Transfer Facility Participant from Owner" included with the letter of
transmittal.
An institution that is a member firm of the Medallion system must guarantee
signatures on a letter of transmittal or a notice of withdrawal unless the
notes are tendered:
(1) by a registered holder who has not completed the box entitled
"Special Registration Instructions" or "Special Delivery Instructions" on
the letter of transmittal; or
(2) for the account of member firm of the Medallion system.
If the letter of transmittal is signed by a person other than the registered
holder of any notes listed in that letter of transmittal, the notes must be
endorsed or accompanied by a properly completed bond power, signed by the
registered holder as the registered holder's name appears on the notes. An
institution that is a member firm of the Medallion System must guarantee the
signature.
Trustees, executors, administrators, guardians, attorneys-in-fact, offices
of corporations or others acting in a fiduciary or representative capacity
should indicate their capacities when signing the letter of transmittal or any
notes or bond powers. Evidence satisfactory to us of their authority to so act
must be submitted with the letter of transmittal.
We understand that the exchange agent will make a request promptly after the
date of this prospectus to establish accounts with respect to the notes at the
book-entry transfer facility, The Depository Trust Company, for the purpose of
facilitating the exchange offer. Subject to the establishment of the accounts,
any financial institution that is a participant in The Depository Trust
Company's system may make book-entry delivery of notes. To do so, the financial
institution should cause the book-entry transfer facility to transfer the notes
into the exchange agent's account with respect to the notes following the book-
entry transfer facility's procedures for transfer. Delivery of the notes may be
effected through book-entry transfer into the exchange agent's account at the
book-entry transfer facility. However, the holder must transmit and the
exchange agent must receive or confirm an appropriate letter of transmittal
properly completed and duly executed with any required signature guarantee and
all other required documents on or prior to the expiration date, or, if the
guaranteed delivery procedures described below are complied with, within the
time period provided under such procedures. Delivery of documents to the book-
entry transfer facility does not constitute delivery to the exchange agent.
The Depositary and The Depository Trust Company have confirmed that the
exchange offer is eligible for The Depository Trust Company Automated Tender
Offer Program. Accordingly, The Depository Trust Company participants may
electronically transmit their acceptance of the exchange offer by causing The
Depository Trust Company to transfer notes to the depositary in accordance with
The Depository Trust Company's Automated Tender Offer Program procedures for
transfer. The Depository Trust Company will then send an "agent's message" to
the Depositary.
The term "agent's message" means a message transmitted by The Depository
Trust Company, received by the Depositary and forming part of the confirmation
of a book-entry transfer, which states that:
(1) The Depository Trust Company has received an express acknowledgment
from the participant in The Depository Trust Company tendering notes
subject of the book-entry confirmation;
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(2) the participant has received and agrees to be bound by the terms of
the letter of transmittal; and
(3) we may enforce such agreement against such participant.
In the case of an agent's message relating to guaranteed delivery, the term
means a message transmitted by The Depository Trust Company and received by the
Depositary, which states that The Depository Trust Company has received an
express acknowledgment from the participant in The Depository Trust Company
tendering notes that such participant has received and agrees to be bound by
the notice of guaranteed delivery.
Notwithstanding the foregoing, in order to validly tender in the exchange
offer with respect to securities transferred through the Automated Tender Offer
Program, a The Depository Trust Company participant using Automated Tender
Offer Program must also properly complete and duly execute the applicable
letter of transmittal and deliver it to the Depositary.
By the authority granted by The Depository Trust Company, any The Depository
Trust Company participant which has notes credited to The Depository Trust
Company account at any time (and held of record by The Depository Trust
Company's nominee) may directly provide a tender as though it were the
registered holder by completing, executing and delivering the applicable letter
of transmittal to the Depositary. Delivery of documents to The Depository Trust
Company does not constitute delivery to the Depositary.
All questions as to the
. validity,
. form,
. eligibility (including time of receipt),
. acceptance of tendered notes and
. withdrawal of tendered notes
will be determined by us in our sole discretion. Our determination will be
final and binding. We reserve the absolute right to reject any and all notes
not properly tendered. We reserve the absolute right to reject any notes which
would be unlawful if accepted, in the opinion of our counsel. We also reserve
the right in our sole discretion to waive any defects, irregularities or
conditions of tender as to particular notes. Our interpretation of the terms
and conditions of the exchange offer, including the instructions in the letter
of transmittal, will be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of notes must be cured
within such time as we shall determine. We intend to notify holders of defects
or irregularities with respect to tenders of notes. However, neither we, the
exchange agent nor any other person shall incur any liability for failure to
give such notification. Tenders of notes will not be deemed to have been made
until such defects or irregularities have been cured or waived. Any notes
received by the exchange agent that are not properly tendered and as to which
the defects or irregularities have not been cured or waived will be returned by
the exchange agent to the tendering holders, unless otherwise provided in the
letter of transmittal, as soon as practicable following the expiration date.
Guaranteed Delivery Procedures
Holders who wish to tender their notes and:
(1) whose notes are not immediately available;
(2) who cannot deliver their notes, the letter of transmittal or any
other required documents to the exchange agent; or
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(3) who cannot complete the procedures for book-entry transfer, prior to
the expiration date may effect a tender if:
(1) they tender through an institution that is a member firm of the
Medallion system;
(2) prior to the expiration date, the exchange agent receives from an
institution that is a member firm of the Medallion system a properly
completed and duly executed notice of guaranteed delivery (by facsimile
transmission, mail or hand delivery) setting forth the name and address
of the holder, the certificate number(s) of such notes and the principal
amount of notes tendered, stating that the tender is being made and
guaranteeing that, within five New York Stock Exchange trading days
after the expiration date, the letter of transmittal (or facsimile
thereof) together with the certificate(s) representing the notes (or a
confirmation of book-entry transfer of such notes into the exchange
agent's account at the book-entry transfer facility), and any other
documents required by the letter of transmittal will be deposited by the
firm with the exchange agent; and
(3) the exchange agent receives
(A) such properly completed and executed letter of transmittal
(of facsimile thereof),
(B) the certificate(s) representing all tendered notes in proper
form for transfer (or a confirmation of book-entry transfer of such
notes into the exchange agent's account at the book-entry transfer
facility), and
(C) all other documents required by the letter of transmittal
upon five New York Stock Exchange trading days after the expiration
date.
Upon request to the exchange agent, we will send a notice of guaranteed
delivery to holders who wish to tender their notes according to the guaranteed
delivery procedures described above.
Withdrawal of Tenders
Except as otherwise provided in this prospectus, holders may withdraw
tenders of notes at any time prior to 5:00 p.m., New York City time, on the
expiration date. To withdraw a tender of notes in the exchange offer, the
exchange agent must receive a telegram, telex, letter or facsimile
transmission notice of withdrawal at its address in this prospectus prior to
5:00 p.m., New York City time, on the expiration date. Any such notice of
withdrawal must:
(1) specify the name of the person having deposited the notes to be
withdrawn;
(2) identify the notes to be withdrawn (including the certificate
number(s) and principal amount of such notes, or, in the case of notes
transferred by book-entry transfer, the name and number of the account at
the book-entry transfer facility to be credited);
(3) be signed by the holder in the same manner as the original signature
on the letter of transmittal by which such notes were tendered (including
any required signature guarantees) or be accompanied by documents of
transfer sufficient to have the trustee with respect to the notes register
the transfer of notes into the name of the person withdrawing the tender;
and
(4) specify the name in which any notes are to be registered, if
different from that of the person who deposited the notes.
We will determine all questions as to the validity, form and eligibility,
including time of receipt, of such notices. Our determination shall be final
and binding on all parties. We will not deem notes so withdrawn to have been
validly tendered for purposes of the exchange offer. We will not issue
exchange notes for withdrawn notes unless you validly retender the withdrawn
notes. We will return any notes which have been tendered but which are not
accepted for exchange to the holder of the notes at our
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cost as soon as practicable after withdrawal, rejection of tender or
termination of the exchange offer. You may retender properly withdrawn notes by
following one of the procedures described above under the heading "Procedures
for Tendering Old Notes" at any time prior to the expiration date.
Conditions
Notwithstanding any other term of the exchange offer, we shall not be
required to accept for exchange, or exchange notes for, any notes, and may
terminate or amend the exchange offer as provided in this prospectus before the
acceptance of the notes, if:
(1) any action or proceeding is instituted or threatened in any court or
by or before any governmental agency with respect to the exchange offer
which, in our sole judgment, might materially impair our ability to proceed
with the exchange offer or any development has occurred in any existing
action or proceeding which may be harmful to us or any of our subsidiaries;
or
(2) any law, statute, rule, regulation or interpretation by the staff of
the Securities and Exchange Commission is proposed, adopted or enacted,
which, in our sole judgment, might impair our ability to proceed with the
exchange offer or impair the contemplated benefits of the exchange offer to
us; or
(3) any governmental approval has not been obtained, which we believe,
in our sole discretion, is necessary for the consummation of the exchange
offer as outlined in this prospectus.
If we determine in our sole discretion that any of the conditions are not
satisfied, we may:
(1) refuse to accept any notes and return all tendered notes to the
tendering holders;
(2) extend the exchange offer and retain all notes tendered prior to the
expiration of the exchange offer, subject, however, to the rights of
holders to withdraw their notes; or
(3) waive such unsatisfied conditions of the exchange offer and accept
all properly tendered notes which have not been withdrawn.
Exchange Agent
Bankers Trust Company has been appointed as the exchange agent for the
exchange offer. You should direct all
. executed letters of transmittal,
. questions,
. requests for assistance,
. requests for additional copies of this prospectus or of the letter of
transmittal and
. requests for Notices of Guaranteed Delivery
to the exchange agent addressed as follows:
By Overnight Courier
By Hand after 4:30 p.m.
on the
Expiration Date
By Registered or
Certified Mail:
Bankers Trust Company
4 Albany Street
New York, NY 1006
Attn: Corporate Trust
and Agency Services
By Facsimile: Confirm by phone:
(212) 250-0933 (212) 250-6573
Delivery other than those above will not constitute a valid delivery.
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Fees and Expenses
We will bear the expenses of soliciting tenders. We are mailing the
principal solicitation. However, our officers and regular employees and those
of our affiliates may make additional solicitation by telegraph, telecopy,
telephone or in person.
We have not retained any dealer-manager in connection with the exchange
offer. We will not make any payments to brokers, dealers, or others soliciting
acceptances of the exchange offer. However, we will pay the exchange agent
reasonable and customary fees for its services. We will reimburse the exchange
agent for its reasonable out-of-pocket expenses.
We will pay the cash expenses incurred in connection with the exchange
offer. These expenses include fees and expenses of the exchange agent and
trustee, accounting and legal fees and printing costs, among others.
Accounting Treatment
The exchange notes will be recorded at the same carrying value as the notes.
The carrying value is face value, as reflected in our accounting records on the
date of exchange. Accordingly, we will recognize no gain or loss for accounting
purposes. The expenses of the exchange offer will be expensed over the term of
the exchange notes.
Transfer Taxes
Holders who tender their old notes for exchange will not be obligated to pay
any transfer taxes in connection with the exchange. However, holders who
instruct us to register exchange notes in the name of, or request that old
notes not tendered or not accepted in the exchange offer be returned to, a
person other than the registered tendering holder will be responsible for the
payment of any applicable transfer tax on that transfer.
Consequences of Failure to Exchange; Resales of Exchange Notes
The notes that are not exchanged for exchange notes under the exchange offer
will remain restricted securities. Accordingly, those notes may be resold only:
(1) to us (upon redemption of the notes or otherwise);
(2) so long as the notes are eligible for resale pursuant to Rule 144A,
to a person inside the United States who is a qualified institutional buyer
according to Rule 144A under the Securities Act of 1933 or pursuant to
another exemption from the registration requirements of the Securities Act
of 1933, based upon an opinion of counsel reasonably acceptable to us;
(3) outside the United States to a foreign person in a transaction
meeting the requirements of Rule 904 under the Securities Act of 1933; or
(4) under an effective registration statement under the Securities Act
of 1933
in each case in accordance with any applicable securities laws of any state of
the United States.
Resales of the Exchange Notes
Based on interpretations by the staff of the Securities and Exchange
Commission in no-action letters issued to third parties, we believe that a
holder or other person who receives exchange notes will be allowed to resell
the exchange notes to the public without further registration under the
Securities Act of 1933 and without delivering a prospectus that satisfies the
requirements of Section 10 of the Securities Act of 1933. The holder (other
than a person that is our "affiliate" within the meaning of Rule
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405 under the Securities Act of 1933) who receives exchange notes in exchange
for notes in the ordinary course of business and who is not participating, need
not intend to participate or have an arrangement or understanding with any
person to participate in the distribution of the exchange notes. However, if
any holder acquires exchange notes in the exchange offer for the purpose of
distributing or participating in a distribution of the exchange notes, the
holder cannot rely on the position of the staff of the Securities and Exchange
Commission enunciated in the no-action letters or any similar interpretive
letters. A holder who acquires exchange notes in order to distribute them must
comply with the registration and prospectus delivery requirements of the
Securities Act of 1933 in connection with any resale transaction, unless an
exemption from registration is otherwise available. Further, each broker-dealer
that receives exchange notes for its own account in exchange for notes as a
result of market-making activities or other trading activities must acknowledge
that it will deliver a prospectus in connection with any resale of such
exchange notes.
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following discussion, including the opinion of counsel described below,
is based upon current provisions of the Internal Revenue Code of 1986, as
amended, applicable Treasury regulations, judicial authority and administrative
rulings and practice. The Internal Revenue Service may take a contrary view,
and no ruling from the Service has been or will be sought. Legislative,
judicial or administrative changes or interpretations may be forthcoming that
could alter or modify the following statements and conditions. Any changes or
interpretations may or may not be retroactive and could affect the tax
consequences to holders. Some holders (including insurance companies, tax-
exempt organizations, financial institutions, broker-dealers, foreign
corporations and persons who are not citizens or residents of the United
States) may be subject to special rules not discussed below. We recommend that
each holder consult his own tax advisor as to the particular tax consequences
of exchanging such holder's old notes for exchange notes, including the
applicability and effect of any state, local or foreign tax laws.
Kirkland & Ellis, counsel to Ziff Davis Media Inc. and its subsidiaries, has
advised us that in its opinion, the exchange of the old notes for exchange
notes pursuant to the exchange offer will not be treated as an "exchange" for
federal income tax purposes because the exchange notes will not be considered
to differ materially in kind or extent from the old notes. Rather, the exchange
notes received by a holder will be treated as a continuation of the old notes
in the hands of such holder. As a result, there will be no federal income tax
consequences to holders exchanging old notes for exchange notes pursuant to the
exchange offer.
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PLAN OF DISTRIBUTION
Each broker-dealer that receives exchange notes for its own account under
the exchange offer must acknowledge that it will deliver a prospectus in
connection with any resale of exchange notes.
This prospectus, as it may be amended or supplemented from time to time, may
be used by a broker-dealer in connection with resales of exchange notes
received in exchange for old notes if the old senior subordinated notes were
acquired as a result of market-making activities or other trading activities.
We and our guarantor subsidiaries have agreed to make this prospectus, as
amended or supplemented, available to any broker-dealer to use in connection
with any such resale for a period of at least 90 days after the expiration
date. In addition, until [ ], 2001, all dealers effecting transactions in
the exchange notes may be required to deliver a prospectus.
Neither we nor our guarantor subsidiaries will receive any proceeds from any
sale of exchange notes by broker-dealers. Exchange notes received by broker-
dealers for their own accounts under the exchange offer may be sold from time
to time in one or more transactions
. in the over-the-counter market,
. in negotiated transactions,
. through the writing of options on the exchange notes or a combination of
such methods of resale,
. at market prices prevailing at the time of resale,
. at prices related to such prevailing market prices or
. at negotiated prices.
Any resale may be made directly to purchasers or to or through brokers or
dealers. Brokers or dealers may receive compensation in the form of commissions
or concessions from any broker-dealer or the purchasers of any such exchange
notes. An "underwriter" within the meaning of the Securities Act of 1933
includes:
(1) any broker-dealer that resells exchange notes that were received by
it for its own account pursuant to the exchange offer; or
(2) any broker or dealer that participates in a distribution of such
exchange notes.
Any profit on any resale of exchange notes and any commissions or concessions
received by any persons may be deemed to be underwriting compensation under the
Securities Act of 1933. The letter of transmittal states that, by acknowledging
that it will deliver and by delivering a prospectus, a broker-dealer will not
be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act of 1933.
Based on interpretations by the staff of the Securities and Exchange
Commission in no-action letters issued to third parties, we believe that a
holder or other person who receives exchange notes will be allowed to resell
the exchange notes to the public without further registration under the
Securities Act of 1933 and without delivering to the purchasers of the exchange
notes a prospectus that satisfies the requirements of Section 10 of the
Securities Act of 1933. The holder (other than a person that is an "affiliate"
of Ziff Davis Media Inc. within the meaning of Rule 405 under the Securities
Act of 1933) who receives exchange notes in exchange for old notes in the
ordinary course of business and who is not participating, need not intend to
participate or have an arrangement or understanding with person to participate
in the distribution of the exchange notes.
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However, if any holder acquires exchange notes in the exchange offer for the
purpose of distributing or participating in a distribution of the exchange
notes, the holder cannot rely on the position of the staff of the Securities
and Exchange Commission enunciated in such no-action letters or any similar
interpretive letters. The holder must comply with the registration and
prospectus delivery requirements of the Securities Act of 1933 in connection
with any resale transaction. A secondary resale transaction should be covered
by an effective registration statement containing the selling security holder
information required by Item 507 or 508, as applicable, of Regulation S-K under
the Securities Act of 1933, unless an exemption from registration is otherwise
available.
Further, each broker-dealer that receives exchange notes for its own account
in exchange for old notes, where the old notes were acquired by such
participating broker-dealer as a result of market-making activities or other
trading activities, must acknowledge that it will deliver a prospectus in
connection with any resale of any exchange notes. We and each of our guarantor
subsidiaries have agreed, for a period of not less than 90 days from the
consummation of the exchange offer, to make this prospectus available to any
broker-dealer for use in connection with any such resale.
For a period of not less than 90 days after the expiration date we will
promptly send additional copies of this prospectus and any amendment or
supplement to this prospectus to any broker-dealer that requests those
documents in the letter of transmittal. We and each of our guarantor
subsidiaries have jointly and severally agreed to pay all expenses incident to
the exchange offer, including the expenses of one counsel for the holders of
the old notes, other than commissions or concessions of any brokers or dealers.
We will indemnify the holders of the old notes against liabilities under the
Securities Act of 1933, including any broker-dealers.
117
<PAGE>
LEGAL MATTERS
Kirkland & Ellis, New York, New York will issue an opinion with respect to
the issuance of the exchange notes offered hereby, including:
(1) our existence and good standing under our jurisdiction of
incorporation;
(2) our authorization of the sale and issuance of the exchange notes;
and
(3) the enforceability of the exchange notes.
EXPERTS
The carve-out financial statements of Ziff Davis Publishing, (a division of
Ziff Davis Inc.) as of December 31, 1998 and 1999 and for each of the three
years in the period ended December 31, 1999 and the financial statements of
Ziff Davis Media Inc. as of March 31, 2000 and for the period from November 24,
1999 (inception) to March 31, 2000 included in this prospectus have been so
included in reliance on the reports of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
AVAILABLE INFORMATION
We are not currently subject to the periodic reporting and other
informational requirements of the Securities Exchange Act of 1934. However, we
have agreed that, whether or not we are required to do so by the rules and
regulations of the Securities and Exchange Commission, for so long as any of
the notes remain outstanding, we will furnish to the holders of the notes and
file with the Securities and Exchange Commission (unless the Securities and
Exchange Commission will not accept such a filing) (1) all quarterly and annual
financial information that would be required to be contained in such a filing
with the Securities and Exchange Commission on Forms 10-Q and 10-K if we were
required to file such forms, including a "Management's Discussion and Analysis
of Results of Operations and Financial Condition" and, with respect to the
annual information only, a report thereon by our certified independent public
accountants and (2) all reports that would be required to be filed with the
Securities and Exchange Commission on Form 8-K if we were required to file such
reports. In addition, for so long as any of the notes remain outstanding, we
have agreed to make available to any prospective purchaser of the notes or
beneficial owner of the notes in connection with any sale thereof, the
information required by Rule 144A(d)(4) under the Securities Act of 1933.
118
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Ziff Davis Media Inc.
Report of independent accountants....................................... F-2
Balance sheets at March 31, 2000........................................ F-3
Statement of cash flows from November 24, 1999 (date of inception)
through March 31, 2000................................................. F-4
Notes to financial statements........................................... F-5
Unaudited consolidated balance sheets at September 30, 2000 ............ F-7
Unaudited consolidated income statements for the six months ended
September 30, 2000
and 1999............................................................... F-8
Unaudited consolidated statements of cash flows for the six months ended
September 30, 2000 and 1999............................................ F-9
Unaudited consolidated statements of changes in stockholder's equity.... F-10
Notes to unaudited consolidated financial statements.................... F-11
Ziff-Davis Publishing (a division of Ziff-Davis Inc.)
Report of independent accountants....................................... F-26
Carve-out balance sheets at December 31, 1998 and 1999 and March 31,
2000 (unaudited)....................................................... F-27
Carve-out statements of operations for the years ended December 31,
1997, 1998 and 1999 and the three months ended March 31, 1999 and 2000
(unaudited)............................................................ F-28
Carve-out statements of cash flows for the years ended December 31,
1997, 1998 and 1999 and the three months ended March 31, 1999 and 2000
(unaudited)............................................................ F-29
Carve-out statements of changes in division equity for the years ended
December 31, 1997, 1998 and 1999 and the three months ended March 31,
2000 (unaudited)....................................................... F-30
Notes to carve-out financial statements................................. F-31
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholder of
Ziff Davis Media Inc.
In our opinion, the accompanying balance sheets and related statement of cash
flows present fairly, in all material respects, the financial position of Ziff
Davis Media, Inc. (the "Company") at March 31, 2000 and its cash flows for the
period from November 24, 1999 (inception) to March 31, 2000 in conformity with
accounting principles generally accepted in the United States of America. 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 audit. We conducted our audit of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
New York, NY
June 5, 2000
F-2
<PAGE>
ZIFF DAVIS MEDIA INC.
BALANCE SHEETS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
March 31,
2000
---------
<S> <C>
ASSETS
Cash and cash equivalents............................................ $1,690
Debt issuance costs.................................................. 3,655
------
Total assets...................................................... $5,345
======
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accrued expenses.................................................... $3,345
------
Total liabilities................................................. 3,345
------
Commitments and contingencies (Note 3)
Stockholder's equity:
Common stock, $0.01 par value, 1,000 shares authorized, no shares
and 6 shares issued
and outstanding, respectively...................................... --
Additional paid-in capital.......................................... 2,000
------
Total stockholder's equity........................................ 2,000
------
Total liabilities and stockholder's equity........................ $5,345
======
</TABLE>
The accompanying notes are an integral part of these financial statements
F-3
<PAGE>
ZIFF DAVIS MEDIA INC.
STATEMENT OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
For the period
November 24, 1999
(date of
inception)
to March 31, 2000
-----------------
<S> <C>
Cash flows from financing activities
Debt issuance costs.......................................... $ (310)
Proceeds from issuance of equity securities.................. 2,000
-------
Net cash provided by financing activities..................... 1,690
-------
Net increase in cash and cash equivalents..................... 1,690
-------
Cash and cash equivalents at beginning of period.............. --
-------
Cash and cash equivalents at end of period.................... $ 1,690
=======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
ZIFF DAVIS MEDIA INC.
NOTES TO FINANCIAL STATEMENTS
(dollars in thousands, except share and per share amounts)
1. Organization and Basis of Presentation
Ziff Davis Media Inc. (the "Company") was incorporated in the state of
Delaware on November 24, 1999. The Company was formerly known as WS-ZD
Acquisition Inc. and was formed to acquire certain publishing assets from Ziff-
Davis Inc., an unrelated company.
On January 4, 2000, the Company sold 6 shares of common stock to Willis
Stein & Partners for $2,000. Proceeds from the shares were used to pay debt
issuance costs. The Company had no operations prior to raising additional
capital and completing the planned acquisition described below. As such these
financial statements do not include a statement of operations.
2. Acquisition, and Equity and Debt Issuance
On April 5, 2000, the Company acquired certain publishing assets from Ziff-
Davis Inc. In conjunction with the acquisition the Company issued 994
additional shares of common stock for $333,000, entered into the $405,000
senior credit facilities ("Senior Credit Facilities") and issued $175,000
senior subordinated notes. See note 4, "Unaudited Pro Forma Financial
Information."
The Senior Credit Facilities are comprised of $100.0 million tranche A term
loan facility, a $255,000 tranche B term loan facility and a $50,000 revolving
credit facility. Borrowings under each facility are based on either Eurodollar
rates or a defined base rate, plus a margin. Borrowings under tranche A and B
term loans are due September 30, 2006 and March 31, 2007, respectively, with
quarterly payments beginning March 31, 2001. Borrowings under the senior
revolving credit facility are due September 30, 2006. The $175,000 senior
subordinated notes bear interest at the higher of a fixed rate or LIBOR plus a
margin and provides for rate increases through the first year. See note 4,
"Unaudited Pro Forma Financial Information."
These debt agreements provide for certain restrictive covenants that limit
the Company's ability to make certain investments and payments and require the
company to meet certain operating performance measures. See note 4, "Unaudited
Pro Forma Financial Information."
3. Subsequent Events (unaudited)
Senior Subordinated Note Offering
In July 2000, the Company completed an offering of $250,000 12% senior
subordinated notes due 2010 (the "Notes"). Proceeds from the notes were used to
(1) repay the $175,000 senior subordinated notes in full, (2) partially repay
approximately $59,700 of the senior credit facilities, (3) pay approximately
$6,900 of accrued interest related to senior and subordinated debt and (4) pay
approximately $8,400 of transaction related fees. See note 4, "Unaudited Pro
Forma Financial Information."
Sale of International Operations
In August 2000, the Company and its European subsidiaries completed the sale
of its wholly-owned International operations (excluding international licensing
and international joint ventures) for a purchase price of approximately
$42,000. See note 4, "Unaudited Pro Forma Financial Information."
F-5
<PAGE>
ZIFF DAVIS MEDIA INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except share and per share amounts)
The purchase price for these assets consists of:
(1) $31,000 in cash subject to post closing adjustments, plus
(2) approximately $3,200 related to purchase of inventory, prepaid
expenses and fixed assets, excluding leasehold improvements, offset by
approximately $3,500 of net subscription liabilities assumed; and
(3) an additional $15,000 to be paid over a period of five years in five
annual payments of $3,000 which we have recorded at a net present value of
$11,300.
The Company will retain most of the accounts receivable, other than accounts
receivable in respect of advertising and subscriptions for issues of the
publications to be published after the closing. The buyer has agreed to collect
these accounts on behalf of the Company.
Executive Promissory Notes
In the second calendar quarter of 2000, the Company's parent loaned certain
executive officers of the Company an aggregate of approximately $5,600, the
proceeds of which were used to purchase shares of the Parent's capital stock.
The loans are secured by the purchased shares and accrue interest at 7.0%. The
executive officers' personal liability under a portion of the loan obligations
is limited to 60% of the net amount outstanding. The loans mature at various
times, are prepayable, and at May 31, 2000 approximately $5,400 of principal
was outstanding.
Debt Prepayment
In November 2000, the Company prepaid $35,000 of debt under its Senior
Credit Facilities.
4. Unaudited Pro Forma Financial Information
The following summary pro forma financial information has been prepared as
if the acquisition, debt agreements and decision to sell international
operations described above had been consummated on April 1, 1999. The pro forma
adjustments include the recognition of interest expense related to the debt
agreements (including the July 2000, senior subordinated notes offering), the
removal of stock-based compensation and amortization of intangible assets
related to the capital structure of Ziff-Davis Inc., inclusion of amortization
expense based on the current estimate of new intangible assets in the
acquisition and the current estimate of useful lives, additional revenue
related to contractual arrangements entered into with Ziff-Davis Inc. as part
of the transaction, the exclusion of the results of the international
operations and the income tax effect of the entries. Amounts assigned to
tangible net assets and intangible assets could change. In addition, the lives
assigned to intangible assets will be revised upon finalization of the purchase
price allocation. The pro forma data is not necessarily indicative of actual
results had the transaction occurred on January 1, 1999. Further, pro forma
results are not meant to represent future financial results.
<TABLE>
<CAPTION>
Year ended
March 31, 2000
----------------------
(dollars in thousands)
<S> <C>
Revenue, net.......................................... $464,315
Income from operations................................ 37,437
Interest expense...................................... 61,402
Loss before taxes..................................... (21,751)
Provision for income taxes............................ 544
Net loss.............................................. $(22,295)
</TABLE>
F-6
<PAGE>
ZIFF DAVIS MEDIA INC.
UNAUDITED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
September 30,
2000
-------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents....................................................................................... $ 91,235
Accounts receivable, net........................................................................................ 67,955
Inventories..................................................................................................... 4,649
Deferred taxes.................................................................................................. --
Prepaid expenses and other current assets....................................................................... 11,807
Due from affiliate.............................................................................................. 256
--------
Total current assets.......................................................................................... 175,902
Restricted cash................................................................................................... 26,750
Property and equipment, net....................................................................................... 60,209
Deferred taxes.................................................................................................... --
Equity investments................................................................................................ 5,935
Intangible assets, net............................................................................................ 673,699
Other assets...................................................................................................... 29,691
--------
Total assets.................................................................................................. $972,186
========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable................................................................................................ $ 5,437
Accrued expenses and other current liabilities.................................................................. 47,626
Current portion of long-term debt............................................................................... 7,829
Unexpired subscriptions, net.................................................................................... 46,251
Due to management............................................................................................... --
--------
Total current liabilities..................................................................................... 107,143
--------
Deferred taxes.................................................................................................. --
Long-term debt.................................................................................................. 537,461
Other non-current liabilities................................................................................... 6,189
--------
Total liabilities............................................................................................. 650,793
--------
Commitments and contingencies (Note 6)
Stockholder's equity:
Common stock, June 30: $0.01 par value, 1000 shares authorized, issued and outstanding; December 31- not
applicable..................................................................................................... --
Additional paid-in capital...................................................................................... 335,000
Retained earnings (deficit)..................................................................................... (13,067)
--------
Total stockholder's equity.................................................................................... 321,393
--------------------------------------------------
--------
Total liabilities and stockholder's equity.................................................................... $972,186
</TABLE>
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
F-7
<PAGE>
ZIFF DAVIS MEDIA INC.
UNAUDITED CONSOLIDATED INCOME STATEMENTS
(in thousands)
<TABLE>
<CAPTION>
Six months ended
September 30,
----------------------
1999 2000
------------- --------
(Predecessor)
<S> <C> <C>
Revenue, net........................................................................................... $254,780 $227,390
Cost of operations:
Cost of production................................................................................... 75,459 64,581
Selling, general and administrative expenses (excludes stock-based compensation expense detailed
below) ............................................................................................. 138,004 121,174
Stock-based compensation expense..................................................................... 920 --
Depreciation and amortization of property and equipment.............................................. 6,726 6,400
Amortization of intangible assets.................................................................... 35,526 22,299
-------- --------
(Loss) income from operations.......................................................................... (1,855) 12,936
Equity in income from joint ventures................................................................... 1,244 1,216
Interest expense, net.................................................................................. -- 27,426
-------- --------
(Loss) income before income taxes.................................................................. (611) (13,274)
Income tax (benefit) provision......................................................................... (151) 333
-------- --------
Net loss........................................................................................... $ (460) $(13,607)
--------------------------------------------------
======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
F-8
<PAGE>
ZIFF DAVIS MEDIA INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Six months ended
September 30,
-----------------------
1999 2000
------------- ---------
(Predecessor)
<S> <C> <C>
Cash flows from operating activities:
Net loss............................................. $ (460) $ (13,607)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization...................... 42,252 28,699
Equity income from joint ventures.................. (1,244) (1,216)
Deferred tax provision............................. 95 --
Provision for doubtful accounts.................... 4,341 2,804
Non-cash rent expense.............................. 868 --
Stock-based compensation expense................... 920 --
Changes in operating assets and liabilities:
Accounts receivable............................... (2,159) 5,824
Inventories....................................... (258) 5,737
Accounts payable and accrued expenses............. 7,289 10,615
Unexpired subscriptions, net...................... (1,640) (1,971)
Due from affiliates............................... -- (256)
Prepaid expenses and other, net................... (13,572) (1,971)
-------- ---------
Net cash provided by operating activities............ 36,432 34,658
-------- ---------
Cash flows from investing activities:
Capital expenditures............................... (2,575) (7,016)
Distribution from joint ventures................... -- 2,628
Net proceeds from sale of international
operations........................................ -- 26,750
Acquisitions and investments, net of cash
acquired.......................................... (7,694) (270)
Acquisition of ZDP, net of cash acquired........... -- (798,328)
-------- ---------
Net cash used by investing activities................ (10,269) (776,236)
-------- ---------
Cash flows from financing activities:
Proceeds from issuance of equity securities........ -- 333,000
Proceeds from borrowings under senior credit
facilities........................................ -- 355,000
Repayment of borrowings under senior credit
facility.......................................... -- (59,710)
Proceeds from issuance of 12% senior subordinated
notes due 2010.................................... -- 250,000
Proceeds from issuance of senior subordinated
notes............................................. -- 175,000
Repayment of senior subordinated notes............. -- (175,000)
Debt issuance cost................................. -- (20,727)
Capital returned to ZDI, net....................... (24,079) --
-------- ---------
Net cash provided (used) by financing activities..... (24,079) 857,563
-------- ---------
Net increase in cash and cash equivalents............ 2,084 115,985
Cash and cash equivalents at beginning of period..... 5,156 2,000
-------- ---------
Cash and cash equivalents at end of period(/1/)...... $ 7,240 $ 117,985
======== =========
</TABLE>
--------
(1) Includes $26,750 of restricted cash at September 30, 2000.
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
F-9
<PAGE>
ZIFF DAVIS MEDIA INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
(in thousands, except share information)
<TABLE>
<CAPTION>
Common Stock Additional Total
--------------------- Paid-in Retained Stockholder's
Shares Amount Capital Earnings Equity
--------- --------- ---------- -------- -------------
<S> <C> <C> <C> <C> <C>
Balance at April 1,
2000................... 6 $ -- $ 2,000 $ -- $ 2,000
Sale of common stock to
Parent................. 994 -- 333,000 333,000
Net income.............. (13,607) (13,607)
--------- --------- -------- -------- --------
Balance at September 30,
2000................... 1,000 $ -- $335,000 $(13,607) $321,393
========= ========= ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
F-10
<PAGE>
ZIFF DAVIS MEDIA INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
1. Organization and Basis of Presentation
Formation of Ziff Davis Media Inc.
Ziff Davis Media Inc. (the "Company") publishes and licenses magazines,
provides editorial content about the technology industry and the Internet, and
to a lesser extent provides custom testing services and software and produces
conferences, seminars and webcasts. The Company was incorporated in the state
of Delaware on November 24, 1999 and was formed to acquire certain publishing
assets ("Ziff-Davis Publishing", "ZDP", or "Predecessor") from Ziff-Davis Inc.
("ZDI"), an unrelated company. The Company's major operating subsidiaries are
Ziff Davis Publishing Inc., Ziff Davis Development Inc. ("LaunchCo"), and Ziff
Davis Internet Inc. ("InternetCo").
The Company had no operations prior to April 5, 2000 when it completed the
acquisition of ZDP for $780,000 plus expenses (the "Acquisition"). The
Acquisition was accounted for under the purchase method of accounting. The
Company funded the Acquisition by: (i) issuing 1,000 shares of common stock to
its parent company, Ziff Davis Holdings Inc., for $335,000, (ii) entering into
a $405,000 senior credit facility of which $355,000 was borrowed at closing and
(iii) issuing $175,000 of senior subordinated notes (the "Bridge Loan") (See
Note 4). Fees and expenses, including debt issuance, cost associated with the
Acquisition, totaling approximately $30,000, were paid with the equity and debt
proceeds. The Company's year-end is March 31 while ZDP's year end was December
31.
Basis of Presentation and Principles of Consolidation
The financial statements of the Company as of September 30, 2000 and for the
six month period then ended are prepared on a consolidated basis and include
the accounts of the Company and its subsidiaries. The combined financial
statements of the Predecessor as of December 31, 1999, for the six month period
ended September 30, 1999 are prepared on a carve-out basis, as ZDP was not a
separate legal entity of ZDI. All significant intercompany accounts and
transactions have been eliminated in consolidation. Investments in companies in
which ownership interests are greater than 20 percent and in which the Company
has the ability to exercise significant influence, but not control, over the
operating and financial policies of such companies are accounted for under the
equity method. The Company operates in one business segment, publishing.
The Company and ZDP's operations consist of the following domestic and
international publications:
Domestic
<TABLE>
------------------------------------------------------------------------
<S> <C>
PC Magazine Electronic Gaming Monthly
eWeek Sm@rt Partner
Interactive Week Computer Gaming World
Yahoo! Internet Life Expert Gamer
Ziff Davis SMART BUSINESS for the New
Economy Expedia Travels*
Family PC The Net Economy*
Official U.S. Playstation Magazine
International**
------------------------------------------------------------------------
Yahoo! Internet Life (France) PC Direct (UK)
PC Direct (France) PC Gaming World (UK)
PC Expert (France) PC Direkt (Germany)
IT Week (UK) PC Professionell (Germany)
PC Magazine (UK) Internet Professionell (Germany)
</TABLE>
--------
*Launched in 2000 through LaunchCo
**These wholly-owned International titles were sold in August 2000 (see "Sale
of International Operations" below)
F-11
<PAGE>
ZIFF DAVIS MEDIA INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except per share amounts)
In addition, the Company licenses its content and brands to more than 50
licensees in over 30 foreign markets. The Company publishes MacWorld through a
50% owned joint venture with International Data Group and also publishes four
magazines in China through a 65% owned joint venture with ZDI. The Company
develops benchmark software and provides custom testing programs through its
subsidiary eTESTING LABS Inc, in addition to producing conferences, seminars
and webcasts within certain of our domestic publications. The Company is also
developing Internet-related ventures leveraged off its expertise in technology
and the Internet through InternetCo. and developing new publications and
businesses through LaunchCo.
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary to present fairly the
financial position and results of operations of the Company and ZDP have been
included. Operating results for the periods presented are not necessarily
indicative of the results that may be expected for future periods. These
financial statements should be read in conjunction with the annual financial
statements and other information included elsewhere in this prospectus.
The carve-out financial statements of ZDP and related notes reflect the
carve-out historical results of operations, financial position and cash flows
of ZDP. These financial statements are not necessarily indicative of results
that would have occurred if ZDP had been a separate stand-alone entity during
the periods presented or future results of ZDP. Refer to the carve-out
financial statements of ZDP included elsewhere in this prospectus for a more
complete discussion of the basis of presentation and policies used to prepare
ZDP's historical financial statements.
Acquisition of ZDP
The acquisition of ZDP was accounted for using the purchase method of
accounting. The assets and liabilities of ZDP acquired by the Company on April
5, 2000, have been recorded at estimated fair value as of the Acquisition date
with the excess of purchase price over net assets acquired being allocated to
intangible assets, including goodwill. (See Note 2--"Intangible assets, net")
F-12
<PAGE>
ZIFF DAVIS MEDIA INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except per share amounts)
The following table summarizes the preliminary allocation of the aggregate
consideration paid to the fair value of the assets acquired and liabilities
assumed by the Company in connection with the Acquisition:
<TABLE>
<S> <C> <C>
Accounts receivable, net.................................. $75,583
Inventories............................................... 10,386
Prepaid expenses and other current assets................. 6,143
-------
Total current assets.................................... $ 92,112
Equity investments........................................ 7,072
Property and equipment.................................... 59,593
Assets held for sale...................................... 36,750
Subscriber lists.......................................... 11,700
Advertiser lists.......................................... 350,700
Tradenames................................................ 214,100
Goodwill ................................................. 122,326
--------
894,353
Accounts payable and accrued expenses..................... (37,284)
Unearned income, net...................................... (52,079)
Due to Affiliates......................................... (2,221)
Other liabilities......................................... (4,441)
-------
Total liabilities....................................... (96,025)
--------
Net consideration paid.................................. $798,328
========
</TABLE>
Intangible assets are being amortized over periods ranging from 2.5 to 20
years. Management is in the process of finalizing the purchase price allocation
and plans associated with the Acquisition including: (i) completion of third
party valuations and (ii) assessing and formulating plans to establish a stand-
alone infrastructure and restructure the operations of ZDP. These plans include
the consolidation and rationalization of certain operations and incremental
non-recurring costs associated with the Acquisition. The objective of these
plans is to (i) develop and establish the infrastructure of the Company, as ZDP
was not a separate legal entity and did not have stand-alone operations, (ii)
reduce overhead expenses and (iii) dispose of businesses which do not meet
long-term strategic objectives. These plans have not been finalized and
additional costs may result as the Company refines and implements these plans.
Such costs will be recorded as an adjustment to goodwill. The Company's
preliminary estimate of the total cash expenditures associated with these plans
is approximately $6,900, which primarily consists of severance and termination
benefit costs, contract termination costs and facilities rationalization
expenses, with approximately $3,600 having been spent through September 30,
2000. The Company expects to finalize these plans during the second half of
fiscal 2001 and substantially complete cash expenditures related to these plans
during the first half of fiscal 2002. The final costs and allocation of
purchase price are not expected to differ materially from the current
estimates.
Summary pro forma financial information for the period ended September 30,
2000 does not differ materially from actual results, as the Acquisition was
completed near the beginning of the Company's fiscal year and therefore, is not
presented. The following summary pro forma financial information for the six
months ended September 30, 1999 has been prepared as if the Acquisition, debt
agreements and decision to sell international operations described below had
been consummated on April 1, 1999. The pro forma adjustments reflect the
removal of stock based compensation and amortization of intangible
F-13
<PAGE>
ZIFF DAVIS MEDIA INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except per share amounts)
assets related to the capital structure of ZDI, the exclusion of the results of
the international operations, the recognition of interest expense related to
the debt agreements, inclusion of amortization expense of the new intangible
assets created in the Acquisition, additional revenue related to contractual
arrangements entered into with ZDI as part of the transaction, and the income
tax effect of the pro forma adjustments. Summary pro forma financial
information is not necessarily indicative of actual results had the Acquisition
occurred on April 1, 1999 or results that may be expected for future periods.
<TABLE>
<CAPTION>
Six months ended
September 30, 1999
----------------------
(dollars in thousands)
<S> <C>
Revenue, net.......................................... $220,725
Income from operations................................ 19,098
Interest expense...................................... 29,790
Loss before taxes..................................... (9,448)
Provision for income taxes............................ 236
Net loss.............................................. $ (9,684)
</TABLE>
Sale of International Operations
In connection with the Acquisition, the Company determined that all of its
wholly-owned international operations (excluding international licensing
operations and international joint ventures) did not meet its long-term
strategic objectives and initiated a plan to sell these operations. The net
assets related to these operations were recorded as assets held for sale at the
estimated net proceeds from the sale, as adjusted for estimated cash flows from
these operations and an allocation of interest expense for the estimated
holding period.
In August 2000, the Company and its European subsidiaries completed the sale
of its wholly-owned International operations (excluding international licensing
and international joint ventures) for a purchase price of approximately
$42,000.
The purchase price for these assets consists of:
(1) $31,000 in cash subject to post closing adjustments, plus
(2) approximately $3,200 related to purchase of inventory, prepaid
expenses and fixed assets, excluding leasehold improvements, offset by
approximately $3,500 of net subscription liabilities assumed; and
(3) an additional $15,000 to be paid over a period of five years in five
annual payments of $3,000 which we have recorded at a net present value of
$11,300.
The net assets related to these operations have been recorded in the balance
sheet as other assets and as of September 30, 2000 are reflected at the
remaining estimated net proceeds from the sale, as adjusted for estimated cash
flows from these operations and liquidation expenses. Activity from the
Acquisition to September 30, 2000 in the net assets held for sale as follows:
<TABLE>
<S> <C>
Asset held for sale at Acquisition date............................. $36,750
Initial proceeds from sale of operations............................ (30,948)
Cash outlays ....................................................... 4,198
-------
Asset held for sale, net at September 30, 2000...................... $10,000
=======
</TABLE>
F-14
<PAGE>
ZIFF DAVIS MEDIA INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except per share amounts)
The amount the Company will ultimately realize upon completion of the sale and
liquidation may differ from the amounts assumed in arriving at the estimated
net realizable value of the assets. Such a difference would be recorded as an
adjustment to goodwill.
2. Summary of Significant Accounting Policies
Cash and cash equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
Restricted cash is classified as a non-current asset and represents cash
which is restricted as to withdrawal or which cannot be used to fund current
operations. At September 30, 2000, $26,750 of net proceeds from the sale of the
international operations was classified as restricted cash. Under the terms of
the Company's senior credit facility, this restricted cash must be used for
certain permitted capital expenditures and acquisitions within 360 days from
the sale date or it must be used to prepay principal due under our senior
credit facility.
Concentration of credit risk
The Company invests its temporary cash investments with high credit quality
financial institutions. At times, such investments may be in excess of
federally insured limits, or, with respect to international accounts, there may
be no insurance. The Company has not experienced losses in such accounts.
The Company's advertisers primarily include customers who represent a
variety of technology companies in the United States and other countries. The
Company extends credit to its customers and historically has not experienced
significant losses relating to receivables from individual customers or groups
of customers.
Property and equipment, net
Property and equipment have been recorded at cost or their estimated fair
value at the date of acquisition. Depreciation is computed using the straight-
line method over the estimated useful lives of the acquired assets, ranging
from 3 to 20 years. Leasehold improvements are amortized using the straight-
line method over the service life of the improvement or the life of the related
lease, whichever is shorter. Maintenance and repair costs are charged to
expense as incurred.
Inventories
Inventories, which consist of paper, are stated at the lower of cost or
market. Cost is determined on a first-in, first-out basis.
Intangible assets, net
The Company is in the process of finalizing the purchase price allocation
related to the Acquisition (See Note 1). Amortization of intangible assets is
computed on a straight-line basis over the assets estimated useful lives of 2.5
to 20 years. The final allocation of purchase price, which is expected to be
completed by the fourth quarter of fiscal 2001, may result in a different
purchase price allocation as well as different amortization levels then
currently recorded.
F-15
<PAGE>
ZIFF DAVIS MEDIA INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except per share amounts)
Impairment of Long-Lived Assets
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable.
Impairment losses for assets to be held and used are recognized in operating
results in the event that the undiscounted expected future cash flows to be
generated by the related asset are less than the carrying value of the asset.
If undiscounted expected future cash flows are not sufficient to support the
recorded value of the assets, an impairment loss is recognized to reduce the
carrying value of the intangible assets to estimated recoverable value.
Impairment losses for assets held for sale are recognized in operating results
when the fair value of the related assets are less than the carrying value of
the asset. Fair value is determined using quoted market prices in an active
market (if available). If quoted market prices are not available, management
estimates the fair market value using the best information available including
prices for similar assets and the results of established valuation techniques.
Debt issuance costs
The cost to issue debt is recorded in other assets and amortized to interest
expense over the term of the related debt using the effective-interest rate
method. At September 30, 2000, other assets included $19.7 million in net debt
issuance costs.
Revenue, net
Advertising revenue for the Company's publications, less agency commissions,
is recognized as income in the month that the related publications are sent to
subscribers or become available for sale at newsstands. Circulation revenue
consists of both subscription and single copy newsstand sales. Subscription
revenue, less estimated cancellations, is deferred and recognized as income in
the month that the related publications are sent to subscribers. Newsstand
sales, less estimated returns, are recognized in the month that the related
publications become available for sale at newsstands.
Operating costs and expenses
Cost of production includes the direct cost of producing magazines,
primarily paper, manufacturing, distribution and fulfillment.
Selling, general and administrative costs include editorial, product
development, advertising and subscriber acquisition costs and other general and
administrative costs. Editorial and product development costs, including pre-
publication expenses, are expensed as incurred. Product development costs
include the cost of artwork, graphics, prepress, plates and photography for new
products and are expensed as incurred.
Advertising costs are expensed the first time the advertising takes place,
except for the cost of certain direct-response advertising programs. Direct-
response advertising consists primarily of publication subscription renewal
mailings, magazine advertisements which include order coupons for the Company's
publications and other subscription promotions. The capitalized cost of the
advertising is amortized over the 12-month period following the advertising
campaign. At September 30, 2000, $1,880 of advertising expenditures were
reported as Other current assets.
F-16
<PAGE>
ZIFF DAVIS MEDIA INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except per share amounts)
Income taxes
Income taxes are based upon income for financial reporting purposes.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
Interest rate swaps
The Company periodically uses interest rate swaps to manage its exposure to
interest rate fluctuations on its floating rate debt and is required, under the
senior credit facility, to hedge no less than 50% of its total funded debt.
These interest rate swaps are entered into for hedging purposes and, as such,
must be designated and effective as a hedge against the risk of increased
interest rates. Under the terms of the agreements, the Company pays a fixed
interest rate on a notional amount and receives a variable interest rate on the
same notional amount. The difference between amounts paid and received is
recorded as additional interest expense. Interest rate swaps designated but no
longer effective as a hedge would be reported at market value and the related
gains and losses would be recognized in earnings. Gains or losses on
termination of interest rate swaps would be recognized in earnings in the
period of termination.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expense during the reporting period.
Actual results could subsequently differ from those estimates. The significant
estimates that affect the financial statements include, but are not limited to,
doubtful accounts, newsstand returns, deferred advertising costs and
recoverability of long term assets such as intangible assets.
New Accounting Principles
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", which requires
entities to recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
SFAS No. 133, as amended by SFAS Nos. 137 and 138, is effective for all fiscal
years beginning after June 15, 2000. The Company is currently reviewing the
impact, if any, SFAS No. 133 (as amended) will have on the Company's financial
position or results of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements".
This bulletin summarizes the SEC's views in applying generally accepted
accounting principles to revenue recognition in financial statements and is
required to be adopted in our fourth fiscal quarter of 2001. The Company has
determined that adoption of this bulletin will not have a material impact on
its financial statements.
Reclassifications
Certain amounts have been reclassified, where appropriate, to conform to the
current financial statement presentation.
F-17
<PAGE>
ZIFF DAVIS MEDIA INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except per share amounts)
3. Contracts with ZDI
In connection with the Acquisition, the Company entered into certain
agreements with ZDI pertaining to ZDNet, ZDI's Internet division, and Computer
Shopper, a ZDI magazine.
ZDNet Agreement
Prior to the Acquisition, ZDP charged ZDNet an annual fee for the use of the
editorial content of its publications. The annual fee, which was recorded as
revenue, was equal to 5% of the first $100,000 of ZDNet's revenue for the year,
4% of the next $50,000 of ZDNet's revenue for that year and 3% of any
incremental revenue over $150,000 for that year. In October 1999, ZDI's Board
of Directors approved a prospective change in methodology of determining future
royalty charges whereby the charge began to be based on revenue, net of bad
debt expense.
As a result of the Acquisition, this royalty agreement was contractually
formalized into a three-year exclusive license agreement with ZDNet with an
additional two years on a non-exclusive basis. After the third year, the
contract begins a two-year transition period in which fees are reduced and
ZDNet's exclusive right to the Company's content is eliminated. The ZDNet
Agreement applies only to those publications existing at the date of the
Acquisition. This agreement does not cover any new publications acquired or
developed by the Company (such as Expedia Travels or The Net Economy), to which
the Company retains all the rights in every medium and it specifically allows
the Company, in certain circumstances, to transact e-commerce independently of
ZDNet. Under this agreement, ZDNet pays royalties subject to the following
minimum and maximum payments:
<TABLE>
<CAPTION>
Minimum Maximum
------- -------
<S> <C> <C>
Year 1..................................................... $7,000 $14,000
Year 2..................................................... 9,000 18,000
Year 3..................................................... 11,000 22,000
</TABLE>
On August 22, 2000, the Company gave notice pursuant to the terms of the
ZDNet Agreement that it would terminate effective March 1, 2001 due to various
breaches by ZDNet. Upon termination of the agreement on March 1, 2001, we will
not be entitled to receive the minimum annual royalty payments under the
agreement.
Computer Shopper Services Agreement
Under this agreement, the Company provides distribution, circulation and
production services to ZDI for its Computer Shopper magazine, and ZDI pays the
Company its costs in relation to the performance of these services, plus an
additional $5,000 annually in fees. ZDI may terminate this agreement at any
time with 90 days prior notice.
4. Debt
In connection with the Acquisition, the Company entered into a senior credit
agreement with a syndicate of banks, comprised of (i) a $ 355,000 term loan
facility and (ii) a $50,000 revolving credit facility (collectively, the
"Senior Credit Facility"). The Company also entered into the $175,000 Bridge
Loan which bore interest at 12.5% per annum.
F-18
<PAGE>
ZIFF DAVIS MEDIA INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except per share amounts)
On July 18, 2000, the Company issued $250,000 of 12% Senior Subordinated
Notes (the "Notes"). Interest is paid semi-annually and the Notes mature on
July 15, 2010. The Notes are unsecured and subordinated to all existing and
future indebtedness. All existing and future domestic subsidiaries will
guarantee the notes. The proceeds of this offering were used to repay the
Bridge Loan and $59,710 of the Senior Credit Facility, respectively. In
addition, proceeds were used to pay approximately $8,500 of expenses associated
with the offering and approximately $6,790 of accrued interest related to the
principal repayments.
As of September 30, 2000, total indebtedness was $545,290 and consisted of
$295,290 of outstanding principal under the Senior Credit Facility and $250,000
in Notes. At September 30, 2000, $50,000 was available under the revolving
portion of the Senior Credit Facility.
Amounts outstanding under the Senior Credit Facility bear interest, at the
Company's option, at a rate per annum equal to either the base rate or the
eurodollar rate, in each case plus an additional margin. The additional margin
adjusts according to a performance pricing grid based on the Company's ratio of
total debt to EBITDA (as defined). As of September 30, 2000, borrowings under
the Senior Credit Facility bore interest at rates ranging from 9.63% to 10.26%.
The Senior Credit Facility is secured by a first priority security interest
in substantially all of the Company's existing and future tangible and
intangible assets. The Senior Credit Facility requires the Company to meet
certain financial tests, including maximum total leverage ratio, maximum senior
leverage ratio, minimum interest coverage ratio, minimum fixed charge coverage
ratio and maximum capital expenditure tests. The Senior Credit Facility
contains certain restrictive covenants, including restrictions on (i)
indebtedness, liens and guarantees; (ii) mergers, consolidations and certain
types of acquisitions and asset sales; and (iii) dividends and stock
repurchases. In addition, the Senior Credit Facility requires the Company to
enter into financial instruments, such as interest rate swaps, so that at least
50% of total debt is effectively at a fixed interest rate. On September 27,
2000, the Company entered into an interest rate swap agreement for a notional
amount of $25,000. Under this agreement, the Company pays a fixed rate of
interest for a three year period in exchange for receiving a floating rate of
interest based on three-month LIBOR.
Borrowings under the revolving credit facility are due September 30, 2006,
and may be borrowed, repaid and reborrowed prior to maturity. Borrowings under
the term loan facility are payable in varying quarterly installments beginning
March 31, 2001 through March 31, 2007. The maturity of all the loans can be
accelerated upon the event of default.
The scheduled annual maturities of the Senior Credit Facility and Notes at
September 30, 2000 are as follows:
<TABLE>
<CAPTION>
Fiscal Year Ending
------------------
<S> <C>
2001.............................................................. $ 2,610
2002.............................................................. 10,439
2003.............................................................. 12,519
2004.............................................................. 14,598
2005.............................................................. 18,757
Thereafter........................................................ 486,367
--------
Total........................................................... $545,290
========
</TABLE>
F-19
<PAGE>
ZIFF DAVIS MEDIA INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except per share amounts)
5. Executive Promissory Notes
In the second calendar quarter of 2000, the Company's parent loaned certain
executive officers of the Company an aggregate of $5,600, the proceeds of which
were used to purchase shares of the Parent's capital stock. The loans mature at
various times, are prepayable, and at September 30, 2000 approximately $5,100
of principal was outstanding.
6. Contingencies
The Company is subject to various claims and legal proceedings arising in
the normal course of business.
The Company has been named in several federal class action price fixing
cases, along with other major magazine publishing companies. The cases have
been consolidated and the consolidated case is pending in the United States
District Court for the Southern District of New York. The consolidated
complaint alleges that the magazine publishing companies unlawfully conspired
to limit the discounting of magazine subscriptions. The plaintiffs have filed a
motion for partial summary judgement and the Company will vigorously defend the
motion.
The Company believes that there are substantial defenses to the litigation
in which it is involved and that such litigation will not materially affect its
financial position, future operating results or cash flows, although no
assurance can be given with respect to the ultimate outcome of any such
litigation.
7. Earnings Per Share
Earnings per share have been omitted on the basis that there are no public
shareholders.
8. Comprehensive Income
Comprehensive income, net of taxes, is comprised of:
<TABLE>
<CAPTION>
Three months ended Six months ended
September 30, September 30,
------------------- -----------------
1999 2000 1999 2000
--------- --------- -----------------
<S> <C> <C> <C> <C>
Net loss............................ $ (5,193) $ (16,388) $ (460) $ (13,607)
Currency translation adjustment..... 183 -- 652 --
-------- --------- ------ ---------
Comprehensive income (loss)......... $ (5,010) $ (16,388) $ 192 $ (13,607)
======== ========= ====== =========
</TABLE>
9. Supplemental Financial Information
Guarantor financial statements
The Company is a holding company and its only assets are the ownership of
the capital stock of its subsidiaries and cash balances. All of the Company's
wholly-owned subsidiaries have guaranteed the Company's debt on a full
unconditional, joint and several basis. The Company's equity investees are not
guarantors of the debt and are recorded in the balance sheet of September 30,
2000 at $5,935.
F-20
<PAGE>
ZIFF DAVIS MEDIA INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except per share amounts)
The tables below present unaudited combining financial statements detailing
the Company, the guarantor subsidiaries, the non guarantor investees and
related elimination entries.
<TABLE>
<CAPTION>
At September 30, 2000
------------------------------------------------------
Ziff Davis Non
Media Inc. Guarantors Guarantors Eliminations Total
---------- ---------- ---------- ------------ --------
<S> <C> <C> <C> <C> <C>
Assets:
Cash and cash
equivalents $ 50,142 $ 41,093 -- -- $ 91,235
Accounts receivable,
net.................... -- 67,955 -- -- 67,955
Inventories............. -- 4,649 -- -- 4,649
Prepaid expenses and
other current assets -- 11,807 -- -- 11,807
Due from affiliates..... 30,157 (25,212) (4,689) -- 256
-------- -------- ------ --------- --------
Total current
assets.............. 80,299 100,292 (4,689) -- 175,902
Restricted cash......... -- 26,750 -- -- 26,750
Property and equipment,
net.................... -- 60,209 -- -- 60,209
Equity investments and
investments in
subsidiaries........... 781,305 -- 5,935 (781,305) 5,935
Intangible assets, net.. -- 673,699 -- -- 673,699
Other assets............ -- 29,691 -- -- 29,691
-------- -------- ------ --------- --------
Total assets......... $861,604 $890,641 $1,246 $(781,305) $972,186
======== ======== ====== ========= ========
Liabilities and
stockholder's equity:
Accounts payable........ $ -- $ 5,437 $ -- $ -- $ 5,437
Accrued expenses and
other current
liabilities............ 12,158 35,468 -- -- 47,626
Current portion of long-
term debt.............. 7,829 -- -- -- 7,829
Unexpired subscriptions,
net.................... -- 46,251 -- -- 46,251
-------- -------- ------ --------- --------
Total current
liabilities......... 19,987 87,156 -- -- 107,143
Long-term debt.......... 537,461 -- -- -- 537,461
Other non-current
liabilities............ -- 6,189 -- -- 6,189
Total liabilities.... 557,448 93,345 -- -- 650,793
Common stock............ -- -- -- -- --
Additional paid in
capital................ 335,000 781,305 -- (781,305) 335,000
Retained earnings
(deficit).............. (30,844) 15,991 1,246 -- (13,607)
-------- -------- ------ --------- --------
Total stockholder's
equity.............. 304,156 797,296 1,246 (781,305) 321,393
-------- -------- ------ --------- --------
Total liabilities &
stockholder's equity $861,604 $890,641 $1,246 $(781,305) $972,186
======== ======== ====== ========= ========
</TABLE>
<TABLE>
<CAPTION>
For the three months ended September 30, 2000
------------------------------------------------------
Ziff Davis Non
Media Inc. Guarantors Guarantors Eliminations Total
---------- ---------- ---------- ------------ --------
<S> <C> <C> <C> <C> <C>
Revenue, net............ $ -- $100,586 $-- $-- $100,586
Cost of production...... -- 29,133 -- -- 29,133
Selling, general and
administrative expenses -- 58,439 -- -- 58,439
Depreciation and
amortization........... 390 16,416 -- -- 16,806
-------- -------- ---- ---- --------
Loss from
operations.......... (390) (3,402) -- -- (3,792)
Equity in income from
joint ventures......... -- -- 592 -- 592
Interest expense, net... 17,268 (2,481) -- -- 14,787
-------- -------- ---- ---- --------
(Loss) income before
income taxes.. (17,658) (921) 592 -- (17,987)
Income tax provision
(benefit).............. 5,850 (7,163) (286) -- (1,599)
-------- -------- ---- ---- --------
Net (loss) income.... $(23,508) $ 6,242 $878 $-- $(16,388)
======== ======== ==== ==== ========
</TABLE>
F-21
<PAGE>
ZIFF DAVIS MEDIA INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
For the six months ended September 30, 2000
-------------------------------------------------------
Ziff
Davis
Media Non
Inc. Guarantors Guarantors Eliminations Total
--------- ---------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Revenue, net............ $ -- $227,390 $ -- $ -- $ 227,390
Cost of production...... -- 64,581 -- -- 64,581
Selling, general and ad-
ministrative expenses -- 121,174 -- -- 121,174
Depreciation and amorti-
zation................. 780 27,919 -- -- 28,699
--------- -------- ------ ----- ---------
Loss (income) from op-
erations............. (780) 13,716 -- -- 12,936
Equity in income from
joint ventures......... -- -- 1,216 -- 1,216
Interest expense, net... 29,312 (1,886) -- -- 27,426
--------- -------- ------ ----- ---------
(Loss) income before
income taxes......... (30,092) 15,602 1,216 -- (13,274)
Income tax provision
(benefit).............. 752 (389) (30) -- 333
--------- -------- ------ ----- ---------
Net (loss) income..... $ (30,844) $ 15,991 $1,246 $ -- $ (13,607)
========= ======== ====== ===== =========
</TABLE>
Restricted/Unrestricted Financial Statements
The Company is the borrower and its subsidiaries are all guarantors under
the Company's debt agreements. In determining compliance with certain covenants
specified in the Senior Credit Facility, the Company is required to exclude the
results of operations of LaunchCo and InternetCo ("Unrestricted Subsidiaries")
and separately report the combining financial statements of the restricted and
unrestricted entities. The results of operations of the Unrestricted
Subsidiaries are also excluded for certain purposes under the indenture
governing the Notes. Reflected below are unaudited combining balance sheets and
statements of operations for the Company detailing the restricted and
Unrestricted Subsidiaries.
F-22
<PAGE>
ZIFF DAVIS MEDIA INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
At September 30, 2000
-------------------------------------------
Ziff Davis Media Inc.
and Restricted Unrestricted
Subsidiaries Subsidiaries Total
--------------------- ------------ --------
<S> <C> <C> <C>
Assets:
Current assets:
Cash and cash equivalents....... $ 91,228 $ 7 $ 91,235
Accounts receivable, net........ 67,401 554 67,955
Inventories..................... 4,649 -- 4,649
Prepaid expenses and other
current assets................. 10,680 1,127 11,807
Due from (to) affiliates........ 12,466 (12,210) 256
-------- -------- --------
Total current assets.......... 186,424 (10,522) 175,902
Restricted cash................... 26,750 -- 26,750
Property and equipment, net....... 58,726 1,483 60,209
Equity investments(1)............. 5,935 -- 5,935
Intangible assets, net............ 673,681 18 673,699
Other assets, net................. 29,691 -- 29,691
-------- -------- --------
Total assets.................. $981,207 $ (9,021) $972,186
======== ======== ========
Liabilities and Stockholder's
Equity:
Current liabilities:
Accounts payable................ $ 5,437 $ -- $ 5,437
Accrued expenses and other
current liabilities............ 46,346 1,280 47,626
Current portion of long term
debt........................... 7,829 -- 7,829
Unexpired subscriptions, net.... 45,911 340 46,251
-------- -------- --------
Total current liabilities..... 105,523 1,620 107,143
Long term debt.................... 537,461 -- 537,461
Other non-current liabilities..... 6,189 -- 6,189
-------- -------- --------
Total liabilities............. 649,173 1,620 650,793
-------- -------- --------
Stockholder's equity
Common stock.................... -- -- --
Additional paid-in capital...... 335,000 -- 335,000
Accumulated deficit............. (2,966) (10,641) (13,607)
-------- -------- --------
Total stockholder's equity.... 332,034 (10,641) 321,393
-------- -------- --------
Total liabilities and
stockholder's equity......... $981,207 $ (9,021) $972,186
======== ======== ========
</TABLE>
--------
(1) These entities are not guarantors under the Company's senior credit
facility.
F-23
<PAGE>
ZIFF DAVIS MEDIA INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
For the three months ended
September 30, 2000
-------------------------------------------
Ziff Davis Media Inc.
and Restricted Unrestricted
Subsidiaries Subsidiaries Total
--------------------- ------------ --------
<S> <C> <C> <C>
Revenue, net..................... $100,205 $ 381 $100,586
Cost of production............... 29,063 70 29,133
Selling, general and
administrative expenses......... 50,344 8,095 58,439
Depreciation and amortization of
property and equipment.......... 3,206 -- 3,206
Amortization of intangible
assets.......................... 13,596 4 13,600
-------- ------- --------
Income (loss) from operations.. 3,996 (7,788) (3,792)
Equity in income from joint
ventures........................ 592 -- 592
Interest expense, net............ 14,787 -- 14,787
-------- ------- --------
Loss before income taxes....... (10,199) (7,788) (17,987)
Income tax provision (benefit)... (2,923) 1,324 (1,599)
-------- ------- --------
Net loss....................... $ (7,276) $(9,112) $(16,388)
======== ======= ========
</TABLE>
<TABLE>
<CAPTION>
For the six months ended
September 30, 2000
-------------------------------------------
Ziff Davis Media Inc.
and Restricted Unrestricted
Subsidiaries Subsidiaries Total
--------------------- ------------ --------
<S> <C> <C> <C>
Revenue, net..................... $227,009 $ 381 $227,390
Cost of production............... 64,494 87 64,581
Selling, general and
administrative expenses......... 110,503 10,671 121,174
Depreciation and amortization of
property and equipment.......... 6,396 4 6,400
Amortization of intangible
assets.......................... 22,299 -- 22,299
-------- -------- --------
Income (loss) from operations.. 23,317 (10,381) 12,936
Equity in income from joint
ventures........................ 1,216 -- 1,216
Interest expense, net............ 27,426 -- 27,426
-------- -------- --------
Loss before income taxes....... (2,893) (10,381) (13,274)
Income tax provision............. 73 260 333
-------- -------- --------
Net loss....................... $ (2,966) $(10,641) $(13,607)
======== ======== ========
</TABLE>
10. Subsequent Events
On October 16, 2000, the Company filed a registration statement with the
Securities and Exchange Commission, in relation to an exchange offer for the
Notes. This registration statement is not yet effective.
On November 10, 2000, the Company prepaid $35,000 of principal owed under
its Senior Credit Facility, reducing total debt outstanding to $510,290 and
senior debt outstanding to $260,290.
F-24
<PAGE>
[This page was intentionally left blank]
F-25
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Ziff-Davis Inc.
In our opinion, the accompanying carve-out balance sheets and the related
carve-out statements of operations, cash flows and changes in division equity
present fairly, in all material respects, the financial position of Ziff Davis
Publishing as defined in Note 1 to the financial statements (the "Company"), at
December 31, 1999 and 1998, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1999 in
conformity with accounting principles generally accepted in the United States.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
upon our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
New York, NY
February 25, 2000 (except as to Note 18,
which is as of October 13, 2000)
F-26
<PAGE>
Ziff-Davis Publishing (a division of Ziff-Davis Inc.)
CARVE-OUT BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
December 31, March 31,
---------------------- ---------------
1998 1999 2000
---------- ---------- -----------
(unaudited)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............ $ 6,309 $ 2,487 $ 4,632
Accounts receivable, net............. 103,970 97,902 89,339
Inventories.......................... 12,036 10,881 11,287
Deferred taxes....................... 3,768 4,911 4,911
Prepaid postage and other current
assets.............................. 16,277 16,465 16,721
---------- ---------- ---------
Total current assets.................. 142,360 132,646 126,890
Property and equipment, net........... 45,162 65,529 63,908
Deferred taxes........................ -- 41,814 39,719
Equity investments.................... 8,466 7,140 7,406
Intangible assets, net................ 1,531,895 684,119 675,466
---------- ---------- ---------
Total assets.......................... $1,727,883 $ 931,248 $ 913,389
========== ========== =========
LIABILITIES AND DIVISION EQUITY
Current liabilities:
Accounts payable..................... $ 15,630 $ 5,839 $ 12,678
Accrued expenses..................... 39,197 44,941 30,664
Unexpired subscriptions, net......... 51,325 50,670 53,196
Due to management.................... 4,500 2,966 2,150
Other current liabilities............ 2,193 107 73
---------- ---------- ---------
Total current liabilities............. 112,845 104,523 98,761
Deferred taxes........................ 143,022 -- --
Due to management..................... 5,400 -- --
---------- ---------- ---------
Total liabilities..................... 261,267 104,523 98,761
---------- ---------- ---------
Commitments and contingencies (Notes
15 and 17)
Division equity:
Division capital..................... 1,503,362 1,447,245 1,433,702
Accumulated deficit.................. (33,634) (616,668) (615,226)
Deferred compensation................ (3,417) (2,359) (1,913)
Accumulated other comprehensive
income.............................. 305 (1,493) (1,935)
---------- ---------- ---------
Total division equity................. 1,466,616 826,725 814,628
---------- ---------- ---------
Total liabilities and division
equity............................... $1,727,883 $ 931,248 $ 913,389
========== ========== =========
</TABLE>
The accompanying notes are an integral part of these carve-out financial
statements.
F-27
<PAGE>
Ziff-Davis Publishing (a division of Ziff-Davis Inc.)
CARVE-OUT STATEMENTS OF OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
Three months
Year ended December 31, ended March 31,
---------------------------- ------------------ ---
1997 1998 1999 1999 2000
-------- -------- --------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Revenue, net:
Third party.............. $565,094 $531,414 $ 525,197 $124,236 $125,820
Related party............ 10,112 9,563 10,512 2,582 3,121
-------- -------- --------- -------- --------
575,206 540,977 535,709 126,818 128,941
-------- -------- --------- -------- --------
Cost of production........ 165,794 167,284 158,040 39,478 38,733
Selling, general and
administrative
expenses -- third party
(excludes stock-based
compensation expense of
$0, $0, $866, and $446,
respectively)............ 231,281 226,808 222,716 51,369 63,609
Selling, general and
administrative
expenses -- related
party.................... 62,885 57,290 55,020 12,509 10,816
Stock-based compensation
expense.................. -- -- 866 459 446
Year 2000 remediation
costs.................... -- -- 3,027 -- --
Depreciation and
amortization of property
and equipment............ 13,335 15,068 13,461 3,370 3,413
Amortization of intangible
assets................... 68,221 67,195 69,016 16,767 8,653
Write-down of intangible
assets................... -- -- 778,760 -- --
Restructuring charge...... -- 39,995 -- -- --
-------- -------- --------- -------- --------
Income (loss) from
operations............ 33,690 (32,663) (765,197) 2,866 3,271
Equity in income (loss)
from joint ventures...... 335 2,154 1,874 (74) 266
-------- -------- --------- -------- --------
Income (loss) before
income taxes.......... 34,025 (30,509) (763,323) 2,792 3,537
Income tax provision
(benefit)................ 30,596 (6,858) (180,289) 689 2,095
-------- -------- --------- -------- --------
Net income (loss)...... $ 3,429 $(23,651) $(583,034) $ 2,103 $ 1,442
======== ======== ========= ======== ========
</TABLE>
The accompanying notes are an integral part of these carve-out financial
statements.
F-28
<PAGE>
Ziff-Davis Publishing (a division of Ziff-Davis Inc.)
CARVE-OUT STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Three months
Year ended December 31, ended March 31,
---------------------------- -----------------
1997 1998 1999 1999 2000
------- -------- --------- ------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss)............ $ 3,429 $(23,651) $(583,034) $ 2,103 $ 1,442
Adjustments to reconcile net
income (loss) to net cash
provided by operating
activities:
Depreciation and
amortization............... 81,556 82,263 82,477 20,137 12,066
Income (loss) from equity
investments................ (335) (2,154) (1,874) 74 (266)
Provision for doubtful
accounts................... 8,635 10,495 8,977 1,502 1,665
Deferred tax provision
(benefit).................. 8,835 (11,309) (185,978) 689 2,095
Non-cash rent expense
(credits).................. (1,815) (1,794) 1,774 (670) 404
Stock-based compensation
expense.................... -- -- 866 459 446
Restructuring charge........ -- 39,995 -- -- --
Write-down of intangible
assets..................... -- -- 778,760 -- --
Changes in operating assets
and liabilities:
Accounts receivable........ (15,131) (9,719) (2,909) 3,093 6,898
Inventories................ (1,224) 1,582 1,155 606 (406)
Accounts payable and
accrued expenses.......... 1,515 (9,471) (4,047) (11,645) (7,438)
Unexpired subscriptions,
net....................... (9,340) (5,017) (655) 1,029 2,526
Other, net................. (985) 9,564 (4,083) 13,374 (1,136)
------- -------- --------- ------- --------
Net cash provided by
operating activities........ 75,140 80,784 91,429 30,751 18,296
------- -------- --------- ------- --------
Cash flows from investing
activities:
Capital expenditures:
Information system
implementation............ (1,286) (2,595) (5,501) (1,330) (1,792)
Other capital
expenditures.............. (6,730) (14,964) (5,339) (1,290) --
Distribution from joint
ventures................... -- -- 4,000 -- --
Acquisitions, net of cash
acquired................... (9,951) (600) (9,498) (1,541) (816)
------- -------- --------- ------- --------
Net cash used by investing
activities.................. (17,967) (18,159) (16,338) (4,161) (2,608)
------- -------- --------- ------- --------
Cash flows from financing
activities:
Capital returned to ZDI,
net......................... (55,440) (60,581) (78,913) (27,743) (13,543)
------- -------- --------- ------- --------
Net cash used by financing
activities.................. (55,440) (60,581) (78,913) (27,743) (13,543)
------- -------- --------- ------- --------
Net increase (decrease) in
cash and cash equivalents... 1,733 2,044 (3,822) (1,153) 2,145
Cash and cash equivalents at
beginning of period......... 2,532 4,265 6,309 6,309 2,487
------- -------- --------- ------- --------
Cash and cash equivalents at
end of period............... $ 4,265 $ 6,309 $ 2,487 $ 5,156 $ 4,632
======= ======== ========= ======= ========
</TABLE>
The accompanying notes are an integral part of these carve-out financial
statements.
F-29
<PAGE>
Ziff-Davis Publishing (a division of Ziff-Davis Inc.)
CARVE-OUT STATEMENTS OF CHANGES IN DIVISION EQUITY
(in thousands)
<TABLE>
<CAPTION>
Accumulated
Other Total
Division Accumulated Deferred Comprehensive Division Comprehensive
Capital Deficit Compensation Income Equity Income (Loss)
---------- ----------- ------------ ------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1997................... $1,631,261 $ (13,412) $ -- $ (90) $1,617,759
Net income.............. 3,429 3,429 $ 3,429
Other comprehensive
income:
Foreign currency
translation
adjustment............ 100 100 100
---------
Comprehensive income.... $ 3,529
=========
Basis difference in
assets acquired from
related party.......... (20,432) (20,432)
Contribution of office
space constructed by
ZDI.................... 782 782
Return of capital....... (55,440) (55,440)
---------- --------- ------- ------- ----------
Balance at December 31,
1997................... $1,556,171 $ (9,983) $ -- $ 10 $1,546,198
Net loss................ (23,651) (23,651) $ (23,651)
Issuance of stock
options................ 3,417 (3,417) --
Other comprehensive
income:
Foreign currency
translation
adjustment............ 295 295 295
---------
Comprehensive loss...... $ (23,356)
=========
Basis difference in
assets acquired from
related party.......... (18,224) (18,224)
Contribution of office
space constructed by
ZDI.................... 22,579 22,579
Return of capital....... (60,581) (60,581)
---------- --------- ------- ------- ----------
Balance at December 31,
1998................... $1,503,362 $ (33,634) $(3,417) $ 305 $1,466,616
Net loss................ (583,034) (583,034) $(583,034)
Stock-based
compensation........... 866 866
Forfeiture of
compensatory stock
options................ (192) 192 --
Other comprehensive
income:
Foreign currency
translation
adjustment............ (1,798) (1,798) (1,798)
---------
Comprehensive loss...... $(584,832)
=========
Contribution of office
space constructed by
ZDI.................... 22,988 22,988
Return of capital....... (78,913) (78,913)
---------- --------- ------- ------- ----------
Balance at December 31,
1999................... $1,447,245 $(616,668) $(2,359) $(1,493) $ 826,725
Net income.............. 1,442 1,442 $ 1,442
Stock-based
compensation........... 446 446
Other comprehensive
income:
Foreign currency
translation
adjustment............ (442) (442) (442)
---------
Comprehensive income.... $ 1,000
=========
Return of capital....... (13,543) (13,543)
---------- --------- ------- ------- ----------
Balance at March 31,
2000 (unaudited)....... $1,433,702 $(615,226) $(1,913) $(1,935) $ 814,628
========== ========= ======= ======= ==========
</TABLE>
The accompanying notes are an integral part of these carve-out financial
statements.
F-30
<PAGE>
Ziff-Davis Publishing (a division of Ziff-Davis Inc.)
NOTES TO CARVE-OUT FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
1. Organization and Basis of Presentation
Formation of Ziff-Davis Inc.
Ziff-Davis Inc. "ZDI" was formed through an initial public offering and
reorganization that were completed on May 4, 1998. Prior to that date, the
predecessors of Ziff-Davis Inc. (currently named ZD Inc. and ZD Events Inc.)
were wholly owned indirect subsidiaries of SOFTBANK Corp. (together with its
non-Ziff-Davis Inc. affiliates, "Softbank"). Ziff-Davis Publishing ("ZDP") is
the division of ZDI focused on magazine publishing. ZDI manages certain
operational and administrative activities, including those provided to ZDP, on
a centralized basis. (See Note 3 for a description of services provided on a
centralized basis.)
Relationship with Softbank and MAC Inc.
Softbank is the indirect majority shareholder of Ziff-Davis Inc. At the time
of the acquisition of the MAC Assets (defined below) Softbank was majority
owned directly and indirectly by its president, Mr. Masayoshi Son. MAC Inc.
("Mac") was also a Japanese corporation and was wholly owned by Mr. Son.
Formation of Ziff-Davis Publishing
ZDP publishes and licenses magazines and provides editorial content about
the technology industry and the Internet. ZDP primarily consists of the
following publications:
<TABLE>
<S> <C> <C>
PC Magazine Official Playstation Magazine PC Expert (France)
PC/Computing* Computer Gaming World PC Direct (France)
PC Week** Family PC PC Magazine (UK)
Interactive Week Yahoo! Internet Life PC Direct (UK)
Sm@rt Reseller*** PC Professionell (Germany) PC Gaming World (UK)
Electronic Gaming Monthly PC Direkt (Germany) IT Week (UK)
Expert Gamer Internet Professionell (Germany)
</TABLE>
--------
* Retitled Ziff-Davis SMART BUSINESS for the New Economy beginning with the
May 2000 issue.
** Retitled eWeek beginning with the May 8, 2000 issue.
*** Retitled Sm@rt Partner beginning with the June 5, 2000 issue.
In addition, ZDP holds investments in three joint ventures (see Note 7).
Pending sale of ZDP
On December 6, 1999, ZDI entered an agreement to sell ZDP to Willis Stein &
Partners ("Willis Stein") for $780,000, subject to adjustment in certain
situations. Willis Stein will purchase the U.S. based assets of ZDI and stock
of the legal entities holding the publication assets in France, Germany and the
United Kingdom. The transaction is expected to be completed during the first
quarter of 2000 and is contingent on Willis Stein obtaining financing. In order
to facilitate the transaction, ZDI has put in place a program of incentives,
including stay bonuses and accelerated vesting of stock options for the
employees of ZDP. The cost of these programs will be recorded by ZDI as the
incentives are earned. To date, no amounts have been earned under these
programs.
The accompanying carve-out financial statements and related notes reflect
the carve-out historical results of operations, financial position and cash
flows of ZDP. These financial statements are not necessarily indicative of
results that would have occurred if ZDP had been a separate stand-alone entity
during the periods presented or of future results of ZDP.
F-31
<PAGE>
Ziff-Davis Publishing (a division of Ziff-Davis Inc.)
NOTES TO CARVE-OUT FINANCIAL STATEMENTS--(continued)
(dollars in thousands, except per share amounts)
Acquisition of ZDP
In February 1996, Softbank acquired the stock of Ziff-Davis Holdings Corp.
("Holdings") for an aggregate purchase price of approximately $1,800,000 plus
transaction costs. Concurrent with the acquisition, in a separate agreement,
Mac, directly or through wholly owned affiliates, acquired certain of the
assets and assumed certain of the liabilities of ZDI (the "MAC Assets"),
primarily its international and domestic start-up operations, for an aggregate
purchase price of approximately $302,000.
The businesses which comprise ZDP were acquired through these transactions
which have been accounted for as of February 29, 1996 using the purchase method
of accounting. The excess of the purchase price over the fair value of the
tangible assets acquired and liabilities assumed related to ZDP was $1,678,461.
Purchase of MAC Assets
In 1997, ZDI agreed to purchase certain of the MAC Assets for $370,000. The
acquisition was effected in two tranches, the first of which closed on October
31, 1997 and the second, which closed on May 4, 1998.
Certain of the MAC Assets, primarily the international publications and
domestic start-up publications have been allocated to ZDP. The acquisitions
from MAC described above have been accounted for in a manner similar to a
pooling of interests as all entities involved were under common control at the
time of the acquisitions. Accordingly, the accompanying combined financial
statements include the results of the MAC Assets allocated to ZDP from February
29, 1996.
2. Summary of Significant Accounting Policies
Principles of combination
The carve-out financial statements include the accounts attributed to ZDP.
All significant intercompany accounts and transactions have been eliminated in
combination. ZDP operates in one business segment, publishing, and in two
geographic areas (See Note 16).
Investments in companies in which ownership interests range from 20 to 50
percent and in which ZDP has the ability to exercise significant influence over
the operating and financial policies of such companies are accounted for under
the equity method.
The accompanying unaudited carve-out financial statements for the three
months ended March 31, 2000 have been prepared in accordance with generally
accepted accounting principles for interim financial information. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary to present fairly the carve-out financial
results of ZDP's carve-out operations and cash flows for the three months ended
March 31, 2000 have been included. Operating results for the periods presented
are not necessarily indicative of the results that may be expected for the year
ended March 31, 2001.
Cash and cash equivalents
ZDP considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents.
F-32
<PAGE>
Ziff-Davis Publishing (a division of Ziff-Davis Inc.)
NOTES TO CARVE-OUT FINANCIAL STATEMENTS--(continued)
(dollars in thousands, except per share amounts)
Concentration of credit risk
ZDP places its temporary cash investments with high credit quality financial
institutions. At times, such investments may be in excess of federally insured
limits or, with respect to international operations, there may be no insurance.
ZDP has not experienced losses in such accounts.
ZDP's advertisers primarily include customers who represent a variety of
technology companies in the United States and other countries. ZDP extends
credit to its customers and historically has not experienced significant losses
relating to receivables from individual customers or groups of customers. No
single customer accounted for more than 5% of ZDP's 1999, 1998 or 1997 net
revenue, however, the twenty largest customers as a group accounted for
approximately 29% of ZDP's 1999 revenue.
Property and equipment
Property and equipment have been recorded at cost or their estimated fair
value at the date of acquisition. Depreciation is computed using the straight-
line method over the estimated useful lives of the acquired assets, ranging
from 3 to 20 years. Leasehold improvements are amortized using the straight-
line method over the service life of the improvement or the life of the related
lease, whichever is shorter. Maintenance and repair costs are charged to
expense as incurred.
ZDI funded and built out the lease of its New York offices; however, the
assets were allocated to ZDP. The transfer of assets from ZDI to ZDP has been
reflected as a capital contribution in the Carve-out Statements of Changes in
Division Equity and the Carve-out Statements of Cash Flows.
Inventories
Inventories, which consist of paper, are stated at the lower of cost or
market. Cost is determined on a first-in, first-out basis.
Intangible assets
Intangible assets consist principally of advertising lists, trademarks and
trade names and goodwill. Amortization of these assets is computed on a
straight-line basis over their estimated useful lives. Identifiable intangible
assets are amortized over a period of 3 to 34 years and goodwill, which
represents the excess of the purchase price over the estimated fair values of
net assets acquired, is amortized over 5 to 40 years. Long-lived assets are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable. Impairment losses for assets
to be held and used are recognized in operating results in the event that the
undiscounted expected future cash flows to be generated by the related asset
are less than the carrying value of the asset. If undiscounted expected future
cash flows are not sufficient to support the recorded value of the assets, an
impairment loss is recognized to reduce the carrying value of the intangible
assets to estimated recoverable value. Impairment losses for assets held for
sale are recognized in operating results when the fair value of the related
assets are less than the carrying value of the asset. Fair value is determined
using quoted market prices in an active market (if available). If quoted market
prices are not available, management estimates the fair market value using the
best information available including prices for similar assets and the results
of established valuation techniques.
On December 6, 1999, ZDP wrote-down the value of intangible assets to
reflect the agreement between ZDI and Willis Stein to sell ZDP for $780,000.
Revenue recognition
Advertising revenue for ZDP's publications, less agency commissions, is
recognized as income in the month that the related publications are sent to
subscribers or become available for sale at newsstands.
F-33
<PAGE>
Ziff-Davis Publishing (a division of Ziff-Davis Inc.)
NOTES TO CARVE-OUT FINANCIAL STATEMENTS--(continued)
(dollars in thousands, except per share amounts)
Circulation revenue consists of both subscription and single copy newsstand
sales. Subscription revenue, less estimated cancellations, is deferred and
recognized as income in the month that the related publications are sent to
subscribers. Newsstand sales, less estimated returns, are recognized in the
month that the related publications become available for sale at newsstands.
Operating costs and expenses
Cost of production includes the direct cost of producing magazines,
primarily paper, manufacturing, distribution and fulfillment.
Selling, general and administrative costs include subscriber acquisition
costs, which are expensed as incurred. Editorial and product development costs
are expensed as incurred. Product development costs include the cost of
artwork, graphics, prepress, plates and photography for new products and are
expensed as incurred.
Equity in income from joint ventures
Equity in income from joint ventures includes ZDP's equity share of income
or loss from ZDP's investments in joint ventures.
Foreign currency
The effect of translating foreign currency financial statements into U.S.
dollars is included in the cumulative translation adjustments account in
division equity. Gains and losses on foreign currency transactions, which are
not significant, have been included in selling, general and administrative
expenses. ZDP has not historically entered into forward currency contracts.
Income taxes
ZDP uses the asset and liability approach for financial accounting and
reporting of income taxes.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results could subsequently differ from those estimates. The significant
estimates that affect the financial statements include, but are not limited
to, doubtful accounts and recoverability of long term assets such as
intangible assets.
Fair value of financial instruments
All current assets and liabilities are carried at cost, which approximates
fair value because of the short-term maturity of those instruments. ZDP has no
other financial instruments.
Stock-based compensation
ZDP has elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees ("APB"), to account for stock
options. Effective January 1, 1996, ZDP adopted the disclosure-only provisions
of Statement of Financial Accounting Standard ("SFAS") No. 123, Accounting for
Stock-Based Compensation.
F-34
<PAGE>
Ziff-Davis Publishing (a division of Ziff-Davis Inc.)
NOTES TO CARVE-OUT FINANCIAL STATEMENTS--(continued)
(dollars in thousands, except per share amounts)
Comprehensive income
ZDP implemented SFAS No. 130, Reporting Comprehensive Income, effective
January 1, 1998. This standard requires ZDP to report the total changes in
division equity that do not result directly from transactions with stockholders
or do not affect retained earnings. The only such change is the change in
cumulative translation adjustment as detailed in the Statements of Changes in
Division Equity.
New accounting pronouncement
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
establishes accounting and reporting standards for derivative instruments and
for hedging activities and is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. Historically, ZDP has not entered such
transactions and does not expect that the adoption of SFAS No. 133 will have a
material impact on ZDP's results of operations. ZDP will adopt SFAS No. 133
beginning with its 2000 financial statements.
3. Certain Cash Management and Allocation Policies
As described in Note 1, ZDP receives certain operational and administrative
services that are performed on a centralized basis by ZDI. ZDP's financial
statements reflect the application of the cash management and expense
allocation policies summarized below.
Treasury activities
ZDI manages most treasury activities on a centralized basis. These
activities include the investment of surplus cash, the issuance, repayment and
repurchase of short-term and long-term debt, and the issuance and repurchase of
common stock and preferred stock. ZDP generally remits its cash receipts (other
than receipts of foreign operations or operations that are not wholly owned) to
ZDI, and ZDI generally funds ZDP's cash disbursements (other than disbursements
of foreign operations or operations that are not wholly owned), on a daily
basis.
In the financial statements of ZDP, (1) no external debt and equity
transactions (and the proceeds thereof) were attributed to ZDP, (2) whenever
ZDP held cash (other than cash of ZDP's foreign operations or cash of ZDP's
operations that are not wholly owned), that cash was transferred to ZDI and
accounted for as a return of capital (i.e., as a reduction in ZDP's division
equity) and (3) whenever ZDP had a cash need (other than cash needs of ZDP's
foreign operations or cash needs of ZDP's operations that are not wholly
owned), that cash need was funded by ZDI and accounted for as a capital
contribution (i.e., as an increase in ZDP's division equity). No interest
expense or income to or from ZDI has been reflected in the financial statements
of ZDP.
General and administrative service expenses
ZDI allocates the cost of certain corporate general and administrative
services, including certain legal, accounting (tax and financial), information
systems, telecommunications, purchasing, marketing, intellectual property,
public relations and travel expenses (collectively, "Central Services") to ZDP
based on utilization. Where determination based on utilization alone is
impracticable, ZDI uses other methods and criteria that management believes to
provide a reasonable estimate of the cost attributable to ZDP.
F-35
<PAGE>
Ziff-Davis Publishing (a division of Ziff-Davis Inc.)
NOTES TO CARVE-OUT FINANCIAL STATEMENTS--(continued)
(dollars in thousands, except per share amounts)
Royalty charges
ZDP charges ZDNet, (ZDI's Internet division), an annual fee for the use of
various brands and editorial content. The current annual fee, which is
reflected in ZDP's financial statements as royalty revenue, is equal to 5% of
the first $100,000 of ZDNet's revenue for the year, 4% of the next $50,000 of
ZDNet's revenue for that year and 3% of any incremental revenue over $150,000
for that year. In October 1999, ZDI's Board of Directors approved a prospective
change in methodology of determining future royalty charges whereby the charge
began to be based on revenue, net of bad debt expense.
On completion of the sale of ZDP described in Note 1, this royalty agreement
will be contractually formalized for a five-year period. ZDNet will have
exclusive rights to use ZDP content online for a period of three years. Minimum
and maximum payments under the agreement will be established as follows:
<TABLE>
<CAPTION>
Minimum Maximum
------- -------
<S> <C> <C>
Year 1.................................................... $ 7,000 $14,000
Year 2.................................................... 9,000 18,000
Year 3.................................................... 11,000 22,000
</TABLE>
After the third year, the contract begins a two-year transition period in
which fees are reduced and ZDNet's exclusive right to ZDP's content is
eliminated. See Note 19
4. Restructuring in 1998
Margin pressure on computer equipment manufacturers, industry and product
delays, lower product demand in and from Asia and a focus on the Year 2000
transition contributed to a reduced demand for advertising in ZDP's magazines.
As a result of this reduced demand, in October 1998 ZDP announced a
restructuring program with the intent of significantly reducing its cost base.
ZDP incurred a pre-tax charge of $39,995 for this restructuring program. The
charge included asset impairment costs ($34,215), employee termination costs
($3,943) and costs to exit activities ($1,837) principally resulting from the
closing of three publications (Windows Pro, Internet Business and Equip) and
the reduction of ZDP's work force by 184 employees. The following sets forth
additional detail concerning the principal components of the charge:
. Asset impairment costs were a non-cash write-off of intangible assets,
primarily subscriber lists, advertising lists and tradenames associated
with the discontinued publications.
. Employee termination costs related to severed personnel at the closed
publications as well as a rationalization and resulting workforce
reduction of the remainder of ZDP's operations. Employee termination
costs included payments for severance as well as the costs of
outplacement services and the provision of continued benefits to
personnel.
. Costs to exit activities reflect the costs associated with the final
closure of the discontinued publications, including the costs to reduce
office space under lease as a result of the reduced level of employees.
Included in accrued expenses were $3,943 and $-0- at December 31, 1998 and
1999, respectively, relating to this restructuring.
F-36
<PAGE>
Ziff-Davis Publishing (a division of Ziff-Davis Inc.)
NOTES TO CARVE-OUT FINANCIAL STATEMENTS--(continued)
(dollars in thousands, except per share amounts)
5. Accounts Receivable, Net
Accounts receivable, net consist of the following:
<TABLE>
<CAPTION>
December 31,
------------------
1998 1999
-------- --------
<S> <C> <C>
Accounts receivable....................................... $164,988 $187,102
Allowance for doubtful accounts, returns and
cancellations............................................ (61,018) (89,200)
-------- --------
$103,970 $ 97,902
======== ========
</TABLE>
6. Property and Equipment, Net
Property and equipment, net, consist of the following:
<TABLE>
<CAPTION>
December 31,
------------------
1998 1999
-------- --------
<S> <C> <C>
Computers and equipment..................................... $ 38,255 $ 46,730
Leasehold improvements...................................... 32,349 55,287
Furniture and fixtures...................................... 13,292 16,708
-------- --------
83,896 118,725
Accumulated depreciation and amortization................... (38,734) (53,196)
-------- --------
$ 45,162 $ 65,529
======== ========
</TABLE>
7. Investments
ZDP has investments in the following companies:
<TABLE>
<CAPTION>
Carrying
value at
December 31,
Ownership -------------
Equity investments Percentage 1998 1999
------------------ ---------- ------ ------
<S> <C> <C> <C>
Mac Publishing LLC..................................... 50% $8,271 $6,449
ZD Richina Media LLC*.................................. 65% 183 378
ZD APN Partners*....................................... 51% 12 313
</TABLE>
--------
* These greater than 50% owned joint ventures are not consolidated as ZDP does
not exercise control over the entities.
8. Intangible Assets, Net
Intangible assets, net, consist of the following:
<TABLE>
<CAPTION>
Range of December 31,
Lives ---------------------
(years) 1998 1999
-------- ---------- ---------
<S> <C> <C> <C>
Advertiser lists................................ 3-34 $ 594,075 $ 557,318
Trademarks and trade names...................... 30 222,920 209,221
Subscriber lists................................ 3-10 31,100 30,110
License agreements.............................. 6-14 11,212 10,804
Goodwill........................................ 5-40 856,445 --
---------- ---------
1,715,752 807,453
Accumulated amortization........................ (183,857) (123,334)
---------- ---------
$1,531,895 $ 684,119
========== =========
</TABLE>
F-37
<PAGE>
Ziff-Davis Publishing (a division of Ziff-Davis Inc.)
NOTES TO CARVE-OUT FINANCIAL STATEMENTS--(continued)
(dollars in thousands, except per share amounts)
Intangible assets primarily relate to the acquisition of ZDP. As discussed
in Note 1, the acquisition was accounted for under the purchase method of
accounting. As such the purchase price was allocated to tangible and
identifiable intangible assets with the remaining amount allocated to goodwill.
Advertiser and subscriber lists were recorded at their estimated fair value
as determined by an "income" approach. Trademarks/trade names were recorded at
their estimated fair value using a "relief from royalty" approach.
All intangible assets are being amortized using the straight-line method
over their estimated useful lives, up to 40 years. In determining the estimated
useful lives, ZDP considered its competitive position in the markets in which
it operates, the historical attrition rates of advertisers, exhibitors and
subscribers, legal and contractual obligations, and other factors.
On December 6, 1999, ZDI entered an agreement to sell ZDP for $780,000 (See
Note 1). As a result, a write-down of $778,760 was recognized in 1999 to
reflect the fair value of ZDP's net assets on a held for sale basis. Prior to
the decision to sell ZDP, ZDP's undiscounted cash flows were sufficient to
recover all of its intangible assets on a held for use basis. On December 6,
1999, ZDI entered an agreement to sell ZDP's assets for $780,000 (See Note 1).
Shortly before entering into the agreement, ZDI's board of directors authorized
management to enter into negotiations with Willis Stein & Partners to sell ZDP.
Prior to the ZDI board authorization, the evaluation of whether ZDP's
intangible assets were impaired was performed using an undiscounted cash flow
model in accordance with SFAS 121. Once management had the authority to
negotiate and approve the sale, an impairment review was performed using a fair
value model. The fair value of ZDP's assets that were sold was deemed to be the
purchase price for such assets due to the relatively short period of time
between management obtaining approval from the ZDI board and entering into a
transaction with Willis Stein & Partners. The components of this writedown are
detailed below:
<TABLE>
<CAPTION>
Writedown
Amount
---------
<S> <C>
Subscriber lists..................................................... $ 36,757
Advertiser lists..................................................... 13,699
Trademarks/Tradenames................................................ 990
License Agreements................................................... 408
Goodwill............................................................. 856,445
--------
908,299
Accumulated amortization............................................. (129,539)
--------
$778,760
========
</TABLE>
Recoverability of goodwill and intangible assets is assessed at a minimum on
an annual basis. Impairments would be recognized in operating results if a
permanent diminution in value were to occur based upon an undiscounted cash
flow analysis.
F-38
<PAGE>
Ziff-Davis Publishing (a division of Ziff-Davis Inc.)
NOTES TO CARVE-OUT FINANCIAL STATEMENTS--(continued)
(dollars in thousands, except per share amounts)
9. Accrued Expenses
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
December 31,
---------------
1998 1999
------- -------
<S> <C> <C>
Payroll and related employee benefits.......................... $20,380 $24,622
Restructuring reserve.......................................... 3,943 --
Other taxes payable............................................ 1,255 1,270
Other accrued expenses......................................... 13,619 19,049
------- -------
$39,197 $44,941
======= =======
</TABLE>
10. Income Taxes
ZDP is included in the consolidated federal income tax return filed by
Softbank (for 1997 and 1998) and by ZDI (for May 4 through December 31, 1998
and 1999). However, the tax expense reflected on the Carve-out Statements of
Operations and the tax assets and liabilities reflected on the Carve-out
Balance Sheets have been prepared as though ZDP filed stand-alone income tax
returns. Current taxes payable are recorded as increases to Division Capital.
Income (loss) before income taxes is attributable to the following
jurisdictions:
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------
1997 1998 1999
------- -------- ---------
<S> <C> <C> <C>
United States...................................... $27,991 $(31,096) $(764,916)
Foreign............................................ 6,034 587 1,593
------- -------- ---------
Total........................................... $34,025 $(30,509) $(763,323)
======= ======== =========
</TABLE>
Components of the income tax provision (benefit) are as follows:
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------
1997 1998 1999
------- ------- ---------
<S> <C> <C> <C>
U.S. federal income taxes:
Current........................................... $17,578 $ 3,253 $ 4,199
Deferred.......................................... 7,136 (9,135) (150,224)
State and local income taxes:
Current........................................... 4,183 775 999
Deferred.......................................... 1,699 (2,174) (35,754)
Foreign income taxes:
Current........................................... -- 423 491
Deferred.......................................... -- -- --
------- ------- ---------
Total income tax provision (benefit)............ $30,596 $(6,858) $(180,289)
======= ======= =========
</TABLE>
F-39
<PAGE>
Ziff-Davis Publishing (a division of Ziff-Davis Inc.)
NOTES TO CARVE-OUT FINANCIAL STATEMENTS--(continued)
(dollars in thousands, except per share amounts)
A reconciliation of the U.S. federal statutory tax rate to ZDP's effective
tax rate on loss before income taxes is as follows:
<TABLE>
<CAPTION>
Year ended
December 31,
------------------
1997 1998 1999
---- ----- -----
<S> <C> <C> <C>
Federal tax at 35%.......................................... 35.0% 35.0% 35.0%
State and local taxes (net of federal tax benefit).......... 5.0 5.0 5.0
Non-recognition of combined losses of MAC Assets............ 46.3 (3.7) --
Amortization of nondeductible goodwill...................... 9.8 (11.0) (16.3)
Foreign operations.......................................... (7.3) .2 0.1
Other nondeductible expenses................................ 1.1 (3.2) (0.2)
---- ----- -----
Effective tax rate.......................................... 89.9% 22.3% 23.6%
==== ===== =====
</TABLE>
Following is a summary of the components of the deferred tax accounts at
December 31, 1998 and 1999:
<TABLE>
<CAPTION>
December 31,
-------------------
1998 1999
--------- --------
<S> <C> <C>
Current deferred tax assets:
Allowance for bad debts................................... $ 1,800 $ 1,457
Employee compensation, bonus, and vacation................ 1,041 1,932
Other..................................................... 927 1,522
--------- --------
Current deferred tax assets............................. $ 3,768 $ 4,911
--------- --------
Noncurrent deferred tax assets and liabilities:
Basis difference in intangible assets..................... $(144,608) $ 40,759
Net operating loss carryforwards.......................... 42,917 41,722
Other..................................................... 1,586 1,055
--------- --------
Gross noncurrent deferred tax assets (liabilities)...... (100,105) 83,536
Valuation allowance........................................ (42,917) (41,722)
--------- --------
Net noncurrent deferred tax assets (liabilities).......... $(143,022) $ 41,814
--------- --------
Total net deferred tax assets (liabilities)................ $(139,254) $ 46,725
========= ========
</TABLE>
As of December 31, 1998 and 1999, ZDP had total deferred tax assets of
$50,276 and $89,050, respectively, and total deferred tax liabilities of
$146,613 and $603, respectively.
As of December 31, 1999, ZDP has foreign net operating loss carryforwards of
approximately $91,011, which will begin to expire in 2000. The December 31,
1998 and 1999 net deferred tax asset is reduced by a valuation allowance of
$42,917 and $41,722, respectively, relating to tax benefits of foreign net
operating loss carryforwards which are not expected to be recognized.
ZDP's foreign operations have no undistributed earnings for remittance to
the U.S. and therefore no U.S. or foreign tax provision on remittances has been
recorded.
The pending sale of ZDP to Willis Stein (See Note 1) will not result in a
transfer of the aggregate deferred tax assets and liabilities as the sale is
structured principally as a sale of assets.
F-40
<PAGE>
Ziff-Davis Publishing (a division of Ziff-Davis Inc.)
NOTES TO CARVE-OUT FINANCIAL STATEMENTS--(continued)
(dollars in thousands, except per share amounts)
11. Due to Management
As a result of contingent purchase price adjustments related to its
acquisition of Interactive Enterprises, LLC, ZDP was obligated to pay the
prior minority owners $10,850, which was recorded as an increase to intangible
assets. Payments of the purchase price, reflected as "Acquisitions, net of
cash acquired" in the Carve-out Statements of Cash Flows were $850, $100 and
$8,698, for the years ended December 31, 1997, 1998 and 1999, respectively.
In addition, ZDP has accrued liabilities totaling $1,800 at year end 1999
related to an equity participation plan for the senior manager of Sm@rt
Reseller, in recognition of an increase in value as defined by an agreed upon
formula. Such amount has been recorded as a charge to selling, general and
administrative expenses.
The balance included in current and long term Due to Management relates to
the above agreements.
12. Related Party Transactions
As described in Note 3, ZDI manages certain costs and services on a
centralized basis and allocates a portion of such costs to ZDP. Included in
selling, general and administrative expenses--related party for the years
ended December 31, 1997, 1998 and 1999 were $61,067, $56,591 and $54,510,
respectively related to such charges.
In addition, ZDI provides certain corporate services, including finance,
treasury and tax. Fees for these services are included in the income statement
as selling, general and administrative expenses.
ZDP transacts business with a group of companies affiliated through common
ownership with Softbank, and has various transactions and relationships with
members of the group. Due to these relationships, it is possible that the
terms of those transactions are not the same as those that would result from
transactions among unrelated parties.
The amounts receivable from affiliated companies are included in the
accounts receivable, net in the accompanying balance sheets There were no
amounts payable to affiliated companies at December 31, 1998 and 1999. Details
of amounts receivable from affiliated companies are:
<TABLE>
<CAPTION>
December
31,
---------
1998 1999
---- ----
<S> <C> <C>
Accounts Receivable, net:
Kingston Technologies........................................... $188 $128
Softbank........................................................ 138 56
ZDTV............................................................ 10 14
ZDNet........................................................... -- 1
E-Trade......................................................... 15 --
---- ----
$351 $199
==== ====
</TABLE>
F-41
<PAGE>
Ziff-Davis Publishing (a division of Ziff-Davis Inc.)
NOTES TO CARVE-OUT FINANCIAL STATEMENTS--(continued)
(dollars in thousands, except per share amounts)
Related party transactions included in the accompanying combined statements
of operations include the following:
<TABLE>
<CAPTION>
Year ending December 31,
-------------------------
1997 1998 1999
-------- ----------------
<S> <C> <C> <C>
Revenue, net:
Kingston Technologies............................ $ 2,314 $ 2,309 $ 1,900
ZD Events........................................ 1,965 2,336 929
E-Trade.......................................... 253 18 786
Softbank......................................... 3,048 1,144 492
ZDNet advertising................................ 768 396 480
ZDNet royalty.................................... 1,611 2,807 5,123
ZDTV............................................. 93 517 425
Yahoo! Inc. ..................................... -- -- 210
Insweb Corp...................................... -- -- 137
ZD Education..................................... -- 19 30
Computer Shopper................................. -- 15 --
Broadcast.com.................................... -- 2 --
Geocities........................................ 60 -- --
-------- ------- --------
$10,112 $ 9,563 $ 10,512
======== ======= ========
<CAPTION>
Year ending December 31,
-------------------------
1997 1998 1999
-------- ----------------
<S> <C> <C> <C>
Expenses:
Yahoo! Inc....................................... $ 1,631 $ 169 $ 333
ZD Market Intelligence........................... -- -- 50
Softbank Marketing Solutions..................... -- -- 31
Softbank Content Services........................ -- 19 30
Kingston Technologies............................ -- -- 24
ZDTV............................................. -- -- 18
ZD Events........................................ -- -- 12
ZDNet............................................ -- -- 12
Softbank......................................... 1,818 699 --
-------- ------- --------
$3,449 $ 887 $ 510
======== ======= ========
</TABLE>
Affiliated arrangements
ZDP had an arrangement with SOFTBANK Services, an affiliated company,
whereby ZDP is charged for administrative services provided plus a management
fee. ZDP incurred services fees in relation to this agreement of approximately
$30 and $19 for the years ended December 31, 1997 and 1998, respectively.
During 1998, SOFTBANK Services was sold to an unrelated third party and the
arrangement was terminated.
ZDP entered into certain licensing agreements with Softbank for the
publishing and distribution of Japanese language editions of certain
publications. The fees earned by ZDP for the years ended December 31, 1997,
1998 and 1999 were approximately $1,314, $699 and $479, respectively.
ZDP sells advertising to other divisions of Ziff-Davis Inc. at discounts to
market rates. Had ZDP charged market rates for such advertising, ZDP's revenue
would have increased by $3,288, $3,599 and $3,389 for the years ended December
31, 1997, 1998 and 1999, respectively.
F-42
<PAGE>
Ziff-Davis Publishing (a division of Ziff-Davis Inc.)
NOTES TO CARVE-OUT FINANCIAL STATEMENTS--(continued)
(dollars in thousands, except per share amounts)
13. Stock Compensation Plans
These Carve-out Financial Statements and the disclosures described below
reflect the various compensation plans implemented by Softbank and ZDI only to
the extent such plans affect the employees of ZDP. Upon completion of the sale
of ZDP to Willis Stein (See Note 1), any obligations related to these plans
will remain with ZDI.
SOFTBANK Executive Stock Option Plans
The Softbank Executive Stock Option Plans provide for the granting of
nonqualified stock options (the "Softbank Options") to purchase the common
stock of SOFTBANK Corp. to officers, directors and key employees of ZDI,
including certain employees of ZDP. SOFTBANK Corp. is a publicly traded company
in Japan. Under the plans, options have been granted at exercise prices equal
to the closing market price in Japan's public equities market (market price
denominated in Japanese yen) on the date of grant. Substantially all options
granted become exercisable in various installments over the first six
anniversaries of the date of grant and expire ten years after the date of
grant. On January 19, 1998, the exercise price of all of the shares outstanding
under option agreements was reset to (Yen)4,000, the closing market price on
Japan's Tokyo Stock Exchange First Section at that date. In conjunction with
the repricing, those options previously exercisable on December 31, 1997 could
only be exercised after July 19, 1998. The repricing of the stock options did
not result in compensation expense to ZDP.
1998 Incentive Compensation Plan and the 1998 Non-Employee Director's Stock
Option Plan
ZDI has two classes of common stock; Ziff-Davis Inc.--ZD Common Stock ("ZD
Stock") and Ziff-Davis Inc.--ZDNet Stock ("ZDNet Stock").
In 1998, ZDI adopted the 1998 Incentive Compensation Plan (the "Incentive
Plan") and the 1998 Non-Employee Directors' Stock Option Plan (the "Non-
Employee Directors Plan"). The Incentive Plan provides for the grant of
options, stock appreciation rights, stock awards and other interests in ZDI
common stock to key employees of ZDI and its affiliates and consultants. The
Non-Employee Directors' Plan provides for the grant of stock options to non-
employee directors. ZDI has reserved 8,500,000 shares of common stock for
issuance under the Non-Employee Directors' Plan. During 1998, ZDI granted
options to ZDP employees to purchase 1,890,550 shares with exercise prices
ranging from $6.00 to $16.00 per share representing the fair value of such
options on the date of grant. Such options vest ratably over five years.
On September 23, 1998, the ZDI Board of Directors approved the reduction of
the exercise price of all options outstanding under the Incentive Plan from
$16.00 to $6.00, the closing market price of ZDI common stock on that date. In
addition, the vesting period of the options was extended by three months. The
repricing did not result in compensation expense to ZDP.
On December 21, 1998, the ZDI Board of Directors approved an amendment to
the Incentive Plan to permit grants of options and other stock-based awards
with respect to any series of common stock of ZDI and to increase the number of
shares available for issuance from 8,500,000 shares to 17,827,500 shares.
In addition, on December 21, 1998, the ZDI Board of Directors approved the
grant of options to acquire an aggregate of approximately 906,413 shares of
ZDNet Stock to certain employees of ZDP at a price of $4.29 per share. As a
result of the grant, ZDP has recorded deferred compensation expense of
F-43
<PAGE>
Ziff-Davis Publishing (a division of Ziff-Davis Inc.)
NOTES TO CARVE-OUT FINANCIAL STATEMENTS--(continued)
(dollars in thousands, except per share amounts)
$1,668 for the difference between the exercise price and the deemed fair value
of the underlying shares. This amount has been recorded as a component of
division equity offset by an addition to paid-in capital. ZDP expects to
recognize non-cash compensation for accounting purposes of $417 ratably over
the vesting period of the options. These options are currently scheduled to
vest evenly over a four year period.
On January 29, 1999, ZDI granted options to a number of employees in
connection with the cancellation of corresponding options to purchase stock of
SOFTBANK Corp. In connection with these grants, an affiliate of SOFTBANK Corp.
has agreed with ZDI that, if and when any of these options are exercised, (1)
that affiliate will cause the shares of ZDI common stock issuable upon such
exercise to be supplied to ZDI and (2) ZDI will deliver to that affiliate or
its designee the exercise price paid upon such exercise. Thus, the exercise of
these options will not increase the number of shares of ZDI common stock
outstanding or ZDI's stockholders' equity. However, ZDP expects to recognize
compensation expense for accounting purposes of approximately $1,749 over three
years as a result of these grants. As such, this amount has been recorded in
the Carve-out Financial Statements as Division Capital offset by a reduction to
division equity as deferred compensation.
Option grants
Information relating to the Softbank options related to ZDP employees during
1997, 1998 and 1999 is as follows:
<TABLE>
<CAPTION>
Weighted Average
Number of Option Price Per
Shares Share(1)
--------- ----------------
<S> <C> <C>
Shares outstanding under options at December 31,
1996.............................................. 180,707 $87.15
Granted............................................ 122,750 64.01
Exercised.......................................... --
Forfeited.......................................... --
-------
Shares outstanding under options at December 31,
1997.............................................. 303,457 77.68
Granted............................................ --
Exercised.......................................... (32,131) 31.03
Forfeited.......................................... --
Converted to Ziff-Davis Inc. options............... (49,629) 31.03
-------
Shares outstanding under options at December 31,
1998.............................................. 221,697 31.03
Granted............................................ --
Exercised.......................................... (85,735) 31.03
Forfeited/cancelled................................ (11,096) 31.03
-------
Shares outstanding under options at December 31,
1999:............................................. 124,866 31.03
=======
Shares exercisable as of:
At December 31, 1997 (price $87.15)............... 28,461
At December 31, 1998 (price $31.03)............... 42,441
At December 31, 1999 (price $31.03)............... 34,124
</TABLE>
--------
(1) The exercise price of the stock options is set in Japanese yen. The
exercise prices as shown above have been converted to U.S. dollars based
upon the exchange rate as of the date of grant for the respective options.
The above activity reflects the repricing of all options outstanding as of
January 19, 1998 to (Yen)4,000.
(2) Adjusted for a 1.4:1 stock split during 1996 and a 1.3:1 stock split during
1997.
F-44
<PAGE>
Ziff-Davis Publishing (a division of Ziff-Davis Inc.)
NOTES TO CARVE-OUT FINANCIAL STATEMENTS--(continued)
(dollars in thousands, except per share amounts)
Information relating to the Ziff-Davis Inc.--ZD stock options related to ZDP
employees during 1998 and 1999 is as follows:
<TABLE>
<CAPTION>
Weighted Average
Number of Option Price Per
Shares Share(3)
--------- ----------------
<S> <C> <C>
Shares outstanding under options at December 31,
1997............................................. -- $ --
Granted........................................... 1,890,550 6.14
Exercised......................................... -- --
Forfeited......................................... (135,340) 6.00
---------
Shares outstanding under options at December 31,
1998............................................. 1,755,210 6.15
Granted........................................... 2,237,115 15.44
Exercised......................................... (106,710) 6.00
Forfeited......................................... (268,099) 9.70
---------
Shares outstanding under options at December 31,
1999............................................. 3,617,516 $11.63
=========
</TABLE>
--------
(3) The 1998 activity reflects the September 23, 1998 repricing of 1,572,850 ZD
stock options issued in May 1998.
Information relating to the Ziff-Davis Inc.--ZDNet stock options related to
ZDP employees during 1998 and 1999 is as follows:
<TABLE>
<CAPTION>
Weighted
Average Option
Number of Price Per
Shares Share
--------- --------------
<S> <C> <C>
Shares outstanding under options at December 31,
1997............................................... -- $ --
Granted............................................. 906,413 4.29
Exercised........................................... -- --
Forfeited........................................... -- --
---------
Shares outstanding under options at December 31,
1998............................................... 906,413 4.29
Granted............................................. 1,310,100 29.74
Exercised........................................... (11,000) 4.29
Forfeited........................................... (197,150) 15.38
---------
Shares outstanding under options at December 31,
1999............................................... 2,008,363 $19.80
=========
<CAPTION>
1998 1999
--------- --------------
<S> <C> <C>
Shares exercisable at December 31,..................
ZDNet.............................................. -- 189,266
ZD................................................. -- 374,703
</TABLE>
As permitted by SFAS No. 123, ZDP has chosen to continue to account for
stock options in accordance with the provisions of APB 25 and, accordingly, no
compensation expense related to stock option grants was recorded in 1997, 1998
or 1999. Pro forma information regarding net income is required by SFAS No. 123
and has been determined as if ZDP had accounted for stock options under the
fair value method. The fair value of the option grants was estimated at the
date of grant using the Black-Scholes option-pricing model with the following
assumptions for 1997, 1998 and 1999:
F-45
<PAGE>
Ziff-Davis Publishing (a division of Ziff-Davis Inc.)
NOTES TO CARVE-OUT FINANCIAL STATEMENTS--(continued)
(dollars in thousands, except per share amounts)
Softbank options
<TABLE>
<CAPTION>
1997 1998 1999
------- ---- ----
<S> <C> <C> <C>
Risk-free interest rate................................... 6.35% n/a n/a
Dividend yield............................................ 0.22% n/a n/a
Volatility factor......................................... 51.35% n/a n/a
Expected life............................................. 6 years n/a n/a
</TABLE>
Ziff-Davis Inc.--ZD Stock options
<TABLE>
<CAPTION>
1997 1998 1999
---- ------- -------
<S> <C> <C> <C>
Risk-free interest rate............................... n/a 5.03% 5.31%
Dividend yield........................................ n/a 0.00% 0.00%
Volatility factor..................................... n/a 54.70% 59.27%
Expected life......................................... n/a 6 years 6 years
</TABLE>
Ziff-Davis Inc.--ZDNet Stock options
<TABLE>
<CAPTION>
1997 1998 1999
---- ------- -------
<S> <C> <C> <C>
Risk-free interest rate................................. n/a 4.67% 5.25%
Dividend yield.......................................... n/a 0.00% 0.00%
Volatility factor....................................... n/a 54.70% 84.15%
Expected life........................................... n/a 6 years 6 years
</TABLE>
The weighted average fair value of options granted in 1997, 1998 and 1999 is
as follows:
<TABLE>
<CAPTION>
1997 1998 1999
------ ---- -----
<S> <C> <C> <C>
Softbank options........................................... $34.05 n/a n/a
Ziff-Davis Inc.--ZD Stock options.......................... n/a 5.21 9.86
Ziff-Davis Inc.--ZDNet options............................. n/a 4.25 22.19
</TABLE>
For purposes of the pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. Had
compensation cost for the stock option plans been determined based upon fair
value at the grant date for awards during 1997, 1998 and 1999, consistent with
the provision of SFAS No. 123, ZDP's earnings would have decreased by
approximately $1,120, $1,529 and $10,699, respectively.
Employee Stock Purchase Plan
In 1998, ZDI adopted the Employee Stock Purchase Plan (the "Stock Purchase
Plan") whereby eligible employees may purchase ZDI's common stock with after-
tax payroll deductions of 1% to 10% of their base pay. The price at which
shares of common stock will be purchased is the lesser of 85% of the fair
market value of a share of common stock on (1) the first business day of a
purchase period or (2) the last business day of a purchase period. ZDI has
reserved 1,500,000 shares of common stock for issuance under the Stock Purchase
Plan.
On December 21, 1998, the ZDI Board of Directors approved an amendment to
the Employee Stock Purchase Plan, subject to stockholder approval, to permit
grants of options with respect to any series of common stock of ZDI and
increase the number of shares available for sale to participate from
1,500,000 shares to 2,500,000 shares.
F-46
<PAGE>
Ziff-Davis Publishing (a division of Ziff-Davis Inc.)
NOTES TO CARVE-OUT FINANCIAL STATEMENTS--(continued)
(dollars in thousands, except per share amounts)
14. Employee Benefit Plans
Retirement plans
ZDI and its subsidiaries maintain various defined contribution retirement
plans. Substantially all of ZDP's employees are eligible to participate in one
of the plans under which annual contributions may be made by ZDP for the
benefit of all eligible employees. Employees may also make contributions to the
plan in which they participate which, subject to certain limitations, may be
matched by ZDP up to certain specified percentages. Employees are generally
eligible to participate in a plan upon joining ZDP and receive matching
contributions immediately upon commencement of employment. In addition, the
employees become eligible to receive a discretionary contribution after one
year of employment. ZDP made contributions of $4,298, $3,674 and $3,990 for the
years ended December 31, 1997, 1998 and 1999.
15. Operating Lease Commitments
ZDP utilizes equipment and space under lease to ZDI. ZDP's allocation of the
future minimum rental commitments under noncancelable operating leases, net of
sublease income, are as follows:
<TABLE>
<S> <C>
2000................................................................ $ 18,457
2001................................................................ 17,645
2002................................................................ 17,259
2003................................................................ 16,970
2004................................................................ 17,476
Thereafter......................................................... 200,348
--------
Total............................................................ $288,155
========
</TABLE>
Rent expense amounted to approximately $10,361, $9,210 and $12,016 for the
years ended December 31, 1997, 1998 and 1999, respectively.
16. Geographic Segment Information
ZDP operates in one business segment in two geographic areas. Revenue by
geographic area for the respective years ended December 31 is as follows:
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Revenue:
U.S.............................................. $496,181 $461,085 $456,371
Foreign.......................................... 79,025 79,892 79,338
-------- -------- --------
Total.......................................... $575,206 $540,977 $535,709
======== ======== ========
</TABLE>
Foreign revenue is based on the country in which the sales originate.
Revenue from one single foreign country was not material to the consolidated
revenues of ZDP.
F-47
<PAGE>
Ziff-Davis Publishing (a division of Ziff-Davis Inc.)
NOTES TO CARVE-OUT FINANCIAL STATEMENTS--(continued)
(dollars in thousands, except per share amounts)
The following is long-lived asset information by geographic area as of
December 31, 1997, 1998 and 1999:
<TABLE>
<CAPTION>
1997 1998 1999
---------- ---------- --------
<S> <C> <C> <C>
Long-lived assets:
U.S.......................................... $1,644,358 $1,581,430 $753,453
Foreign...................................... 3,261 4,093 3,335
---------- ---------- --------
Total...................................... $1,647,619 $1,585,523 $756,788
========== ========== ========
</TABLE>
No single customer accounted for more than 10% of total revenue for each of
the years ended December 31, 1997, 1998 and 1999.
17. Contingencies
ZDP and ZDI are subject to various claims and legal proceedings arising in
the normal course of business.
The litigations and other legal proceedings described below are disclosed
solely because ZDP is a non-incorporated division of ZDI. Upon the sale of ZDP
to Willis Stein (see Note 1), ZDP will retain no contingent liability related
to these litigations.
Class action and derivative litigations
Following a decline in the price per share of Ziff-Davis Inc.'s common stock
in October 1998, eight securities class action suits were filed against Ziff-
Davis Inc. and certain of its directors and officers in the United States
District Court for the Southern District of New York.
The complaints alleged that defendants violated Sections 11, 12(a) (2) and
15 of the Securities Act of 1933 in connection with the registration statement
filed by Ziff-Davis Inc. with the Securities and Exchange Commission relating
to the initial public offering of Ziff-Davis Inc.'s stock completed on May 4,
1998 (the "IPO"). More particularly, the complaints alleged that the
registration statement contained false and misleading statements and failed to
disclose facts that could have indicated an impending decline in Ziff-Davis
Inc.'s revenue. The complaints sought on behalf of a class of purchasers of
Ziff-Davis Inc.'s common stock from the date of the IPO through October 8, 1998
unspecified damages, interest, fees and costs, recission, and injunctive relief
such as the imposition of a constructive trust upon the proceeds of the IPO.
On January 28, 1999, the court entered an order consolidating the actions,
appointing lead plaintiff's counsel and requiring the filing of a consolidated
amended complaint. The consolidated amended complaint was filed on June 15,
1999 and only alleges claims under Section 11 of the Securities Act of 1933. On
May 20, 1999, Ziff-Davis Inc. moved to dismiss the consolidated amended
complaint. In July 1999, plaintiff filed their response to the motion. Ziff-
Davis Inc. filed a reply on August 11, 1999. The motion has not been decided.
In addition, two derivative suits have been filed by stockholders against
Ziff-Davis Inc. and all of its directors in the Court of Chancery of the State
of Delaware for New Castle County. The complaints allege that the directors
breached their fiduciary duties to Ziff-Davis Inc. by repricing the stock
options awarded to certain directors and demand the nullification of the
repricing and an injunction against
F-48
<PAGE>
Ziff-Davis Publishing (a division of Ziff-Davis Inc.)
NOTES TO CARVE-OUT FINANCIAL STATEMENTS--(continued)
(dollars in thousands, except per share amounts)
exercise by the directors of any repriced option. Plaintiffs filed an amended
complaint on February 17, 1999 (which is substantially similar to the original
complaints, except that the amended complaint also addresses the granting of
"new options" at an allegedly "reduced exercise price") and the actions have
been consolidated. Answers to the amended complaint on behalf of both Ziff-
Davis Inc. and its directors were filed on April 12, 1999. Discovery is
proceeding.
Other legal proceedings
Ziff-Davis Inc. was named as a defendant in an action, filed on April 17,
1998 in the Supreme Court of the State of New York, by minority stockholders of
SOFTBANK Interactive Marketing Inc. ("SIM"), formerly an indirect subsidiary of
SOFTBANK Corp. The complaint alleged, among other things, that Softbank, SIM's
majority stockholder, acting with Ziff-Davis Inc. and two of its senior
officers and directors who were directors of SIM (and who were also named as
defendants), had conflicts of interest between SIM and other Softbank
investments (including investments in Ziff-Davis Inc.) and failed to act in the
best interests of SIM and the minority stockholders by taking actions which
benefited Ziff-Davis Inc. The complaint stated claims based on common law
fraud, breach of fiduciary duty and aiding and abetting theories and seeks in
excess of $200,000 in damages. Upon motion of Ziff-Davis Inc. and the other
defendants, all of the claims against them other than a breach of contract
claim, which is solely against SBH, were dismissed on February 26, 1999. On
April 1, 1999, plaintiffs filed a notice of appeal of the dismissal. On
September 2, 1999, the remaining claim, which was solely against SBH, was
dismissed. On October 6, 1999, plaintiffs filed a notice of appeal of this
dismissal.
Ziff-Davis Inc. and ZDTV, LLC ("ZDTV"), a majority owned affiliate of Ziff-
Davis Inc., were named as defendants in an action filed on November 10, 1999 in
the U.S. District Court, Southern District of New York, by plaintiff. In
October 1998, ZDTV, through a subsidiary, purchased certain assets from
corporations owned by plaintiff and two other individuals. In addition to a
cash payment at the closing of the acquisition, ZDTV agreed to pay additional
purchase price, contingent on the future operating profits of the SkyTV
division. Ziff-Davis Inc. guaranteed the obligations of ZDTV. The complaint
alleges, among other things, that ZDTV and Ziff-Davis Inc. breached their
covenants of good faith and fair dealing by failing to act in the best
interests of the SkyTV division, to support and procure business for the SkyTV
division, and to provide public relations, marketing assistance and corporate
sales team support, thereby lessening plaintiff's opportunity to earn
additional purchase price. The complaint seeks an amount to be determined at
trial, but not less than $60,000 in damages.
Although the outcome of these cases cannot be predicted, Ziff-Davis Inc.
believes that there are substantial defenses to the claims. Ziff-Davis Inc.
currently cannot estimate its ultimate liability, if any, with respect to such
pending litigations. Accordingly, no provision for such matters has been
included in the financial statements.
18. Supplemental Financial Information
As described in Note 19, the businesses that comprise ZDP have been sold to
Willis Stein and co-investors ("Willis Stein"). Willis Stein completed the
transaction through a holding company ("NewCo") which partially financed the
transaction by entering into a senior credit facility with a syndicate of banks
and issuing subordinated notes.
Under NewCo's debt agreements, the international operations are 60%
guarantors and the joint ventures are not guarantors. The following table
details the guarantor/non-guarantor financial information as if the debt
agreements were in place at ZDP as of December 31, 1999.
F-49
<PAGE>
Ziff-Davis Publishing (a division of Ziff-Davis Inc.)
NOTES TO CARVE-OUT FINANCIAL STATEMENTS--(continued)
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
At December 31, 1999
----------------------------------------
Partial Non-
Guarantor Guarantor Guarantor Combined
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Current assets
Cash and cash equivalents........... $ 301 $ 2,186 $ -- $ 2,487
Accounts receivable, net............ 82,306 15,596 -- 97,902
Inventories......................... 10,460 421 -- 10,881
Deferred taxes...................... 4,911 -- -- 4,911
Prepaid postage and other current
assets............................. 13,286 3,179 -- 16,465
--------- ------- ----- ---------
Total current assets................ 111,265 21,381 -- 132,646
Property and equipment, net......... 62,195 3,334 -- 65,529
Deferred taxes...................... 41,814 -- -- 41,814
Equity Investments.................. -- -- 7,140 7,140
Intangible assets, net.............. 646,899 37,220 -- 684,119
--------- ------- ----- ---------
Total assets........................ 862,173 61,935 7,140 931,248
========= ======= ===== =========
Current liabilities
Accounts payable.................... 2,520 3,319 -- 5,839
Accrued expenses.................... 35,134 9,807 -- 44,941
Unexpired subscriptions, net........ 45,715 4,955 -- 50,670
Due to management................... 2,966 -- -- 2,966
Other current liabilities........... -- 107 -- 107
--------- ------- ----- ---------
Total current liabilities........... 86,335 18,188 -- 104,523
Due to (from) affiliates............. (7,140) -- 7,140 --
--------- ------- ----- ---------
Total liabilities................... 79,195 18,188 7,140 104,523
--------- ------- ----- ---------
Division capital..................... 1,382,717 64,528 -- 1,447,245
Accumulated deficit.................. (597,645) (19,023) -- (616,668)
Deferred compensation................ (2,359) -- -- (2,359)
Accumulated other comprehensive
income.............................. 264 (1,757) -- (1,493)
--------- ------- ----- ---------
Total division equity............... 782,978 43,747 -- 826,725
--------- ------- ----- ---------
Total liabilities and division
equity............................. 862,173 61,935 7,140 931,248
========= ======= ===== =========
</TABLE>
<TABLE>
<CAPTION>
For the year ended December 31, 1999
----------------------------------------
Partial Non-
Guarantor Guarantor Guarantor Combined
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenue, net......................... $ 456,578 $79,131 $ -- $ 535,709
--
Cost of production................... 130,109 27,931 158,040
Selling, general and administrative
expenses............................ 225,764 54,999 280,763
Depreciation and amortization........ 79,376 3,101 -- 82,477
Stock-based compensation expenses.... 866 866
Write-down of intangible assets...... 775,938 2,822 778,760
--------- ------- ------ ---------
Loss from operations................ (755,475) (9,722) -- (765,197)
Equity in income from joint
ventures............................ -- -- 1,874 1,874
--------- ------- ------ ---------
Income (loss) before income taxes... (755,475) (9,722) 1,874 (763,323)
Income tax benefit................... (180,289) -- (180,289)
--------- ------- ------ ---------
Net income (loss)................... $(575,186) $(9,722) $1,874 $(583,034)
========= ======= ====== =========
</TABLE>
F-50
<PAGE>
Ziff-Davis Publishing (a division of Ziff-Davis Inc.)
NOTES TO CARVE-OUT FINANCIAL STATEMENTS--(continued)
(dollars in thousands, except per share amounts)
19. Subsequent Events (unaudited)
Sale of ZDP
On April 5, 2000 Ziff Davis Inc. completed its sale of ZDP to Willis Stein
and its co-investors. ZDP was subsequently renamed Ziff Davis Media Inc. Willis
Stein and its co-investors financed the transaction through a holding company
which issued common stock for $335,000, entered into the $405,000 senior credit
facilities ("Senior Credit Facilities") and issued $175,000 senior subordinated
notes.
Litigation
The litigation involving Ziff Davis Inc. and ZDTV, LLC described in Note 17
was dismissed without prejudice in May 2000.
ZDNet Royalty Agreement
On August 22, 2000, the Company gave notice pursuant to the terms of the
ZDNet Agreement (described in Note 3) that it would terminate effective March
1, 2001 due to various breaches by ZDNet. Upon termination of the agreement on
March 1, 2001, the Company will not be entitled to receive the minimum annual
royalty payments under the agreements.
F-51
<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
We have not authorized any dealer, salesperson or other person to give any
information or represent anything to you other than the information contained
in this prospectus. You must not rely on unauthorized information or
representations.
This prospectus does not offer to sell or ask for offers to buy any of the
securities in any jurisdiction where it is unlawful, where the person making
the offer is not qualified to do so, or to any person who can not legally be
offered the securities.
The information in this prospectus is current only as of the date on its
cover, and may change after that date. For any time after the cover date of
this prospectus, we do not represent that our affairs are the same as described
or that the information in this prospectus is correct, nor do we imply those
things by delivering this prospectus or selling securities to you.
Until , 2001, all dealers that buy, sell or trade the exchange
notes may be required to deliver a prospectus, regardless of whether they are
participating in the offering. 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.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
-------------
PROSPECTUS
-------------
$250,000,000
[LOGO OF ZIFF DAVIS MEDIA]
12% Series B Senior Subordinated
Notes due 2010
, 2001
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
Ziff Davis Media Inc. is a corporation organized under the laws of the State
of Delaware.
(a) Article Nine of Ziff Davis Media Inc.'s Certificate of Incorporation
provides that:
To the fullest extent permitted by the General Corporation Law of the
State of Delaware as the same exists or may hereafter be amended, a
director of this corporation shall not be liable to the corporation or its
stockholders for monetary damages for a breach of fiduciary duty as a
director. Any appeal or modification of this ARTICLE NINE shall not
adversely affect any right or protection of a director of the corporation
existing at the time of such repeal or modification.
(b) Article V of the By-Laws of Ziff Davis Media Inc. provides that:
Section 1. Nature of Indemnity. Each person who was or is made a party
or is threatened to be made a party to or is involved in any action, suit
or proceeding, whether civil, criminal, administrative or investigative
(hereinafter a "proceeding"), by reason of the fact that he, or a person of
whom he is the legal representative, is or was a director or officer, of
the corporation or is or was serving at the request of the corporation as a
director, or officer, of the corporation or is or was serving at the
request of the corporation as a director, officer, employee, fiduciary, or
agent of another corporation or of a partnership, joint venture, trust, or
other enterprise, shall be indemnified and held harmless by the corporation
to the fullest extent which it is empowered to do so unless prohibited from
doing so by the General Corporation Law of the State of Delaware, as the
same exists or may hereafter be amended) but, in the case of any such
amendment, only to the extent that such amendment permits the corporation
to provide broader indemnification rights than said law permitted the
corporation to provide prior to such amendment) against all expense,
liability and loss (including the attorney's fees actually and reasonably
incurred by such person in connection with such proceeding) and such
indemnification shall inure to the benefit of his heirs, executors and
administrators; provided, however, that, except as provided in Section 2
hereof, the corporation shall indemnify any such person seeking
indemnification in connection with a proceeding initiated by such person
only if such proceeding was authorized by the board of directors of the
corporation. The right to indemnification conferred in this Article V shall
be a contract right and, subject 2 and 5 hereof, shall include the right to
be paid by the corporation the expenses incurred in defending any such
proceeding in advance of its final disposition. The corporation may, by
action of its board of directors, provide indemnification to employees and
agents of the corporation with the same scope and effect as the foregoing
indemnification of directors and officers.
Section 2. Procedure for indemnification of Directors and Officers. Any
indemnification of a director or officer of the corporation under section 1
of this Article V or advance of expenses under section 5 of this Article V
shall be made promptly, and in any event within thirty (30) days, upon the
written request of the director or officer. If a determination by the
corporation that the director or officer is entitled to indemnification
pursuant to this Article V is required, and the corporation fails to
respond within sixty (60) days to a written request for indemnity, the
corporation shall be deemed to have approved the request.
Section 3. Article Not Exclusive. The rights to indemnification and the
payment of expenses incurred in defending a proceeding in advance of its
final disposition conferred in this Article V shall not be exclusive of any
other right which any person may have or hereafter acquire under any
statute, provision of the certificate of incorporation, by-law, agreement,
vote of stockholders or disinterested directors or otherwise.
II-1
<PAGE>
Section 4. Insurance. The corporation may purchase and maintain
insurance on its own behalf and on behalf of any person who is or was a
director, officer, employee, fiduciary, or agent of the corporation or was
serving at the request of the corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise against any liability asserted against him or her and incurred
by him or her in any such capacity, whether or not the corporation would
have the power to indemnify such person against such liability under this
Article V.
Section 5. Expenses. Expenses incurred by any person described in
Section 1 of this Article V in defending a proceeding shall be paid by the
corporation in advance of such proceeding's final disposition unless
otherwise determined by the board of directors in the specific case upon
receipt of an undertaking by or on behalf of the director or officer to
repay such amount if it shall ultimately be determined that he or she is
not entitled to be indemnified by the corporation. Such expenses incurred
by other employees and agents may be so paid upon such terms and
conditions, if any, as the board of directors deems appropriate.
Section 6. Employees and Agents. Persons who are not covered by the
foregoing provisions of this Article V and who are or were employees or
agents of the corporation, or who are or were serving at the request of the
corporation as employees or agents of another corporation, partnership,
joint venture, trust or other enterprise, may be indemnified to the extent
authorized at any time or from time to time by the board of directors.
Section 7. Contract Rights. The provisions of this Article V shall be
deemed to be a contract right between the corporation and each director or
officer who serves in any such capacity at any time while this Article V
and the relevant provisions of the General Corporation Law of the State of
Delaware or other applicable law are in effect, any repeal or modification
of this Article V or any such law shall not affect any rights or
obligations then existing with respect to any state of facts or proceeding
then existing.
Section 8. Merger or Consolidation. For purposes of this Article V,
references to "the corporation" shall include, in addition to the resulting
corporation, any constituent corporation (including any constituent of a
constituent) absorbed in a consolidation or merger which, if its separate
existence had continued, would have had power and authority to indemnify
its directors, officers, and employees or agents, so that any person who is
or was a director, officer, employee or agent of such constituent
corporation, or is or was serving at the request of such constituent
corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, shall
stand in the same position under this Article V with respect to the
resulting or surviving corporation as he or she would have with respect to
such constituent corporation if its separate existence had continued.
Item 21. Exhibits and Financial Statement Schedules.
(a) Exhibits.
See Exhibit Index.
(b) Financial Statement Schedules.
All schedules have been omitted because they are not applicable or
because the required information is shown in the financial statements or
notes thereto.
Item 22. Undertakings.
The undersigned registrant hereby undertakes:
(a) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement;
II-2
<PAGE>
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which individually or in the
aggregate, represent a fundamental change in the information in the
registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
(b) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at the time shall be deemed to
be the initial bona fide offering thereof;
(c) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Securities Act") may be permitted to directors, officers and
controlling persons of the registrant pursuant to the provisions described
under Item 20 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 Securities 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, 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 Securities Act and will be governed
by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(d) The undersigned registrant hereby undertakes to respond to requests
for information that is incorporated by reference into the prospectus
pursuant to Item 4, 10(b), 11 or 13 of this form, within one business day
of receipt of such request, and to send the incorporated documents by first
class mail or other equally prompt means. This includes information
contained in documents filed subsequent to the effective date of the
registration statement through the date of responding to the request.
(e) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to the Registration Statement on Form S-4
to be signed on its behalf by the undersigned, thereunto duly authorized, in
the City of New York, State of New York on December 27, 2000.
Ziff Davis Media Inc.
/s/ Robert L. Madore
By: _________________________________
Name: Robert L. Madore
Title: Senior Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement on Form S-4 has been signed by the
following persons in the capacities indicated on December 27, 2000.
<TABLE>
<CAPTION>
Signature Capacity
--------- --------
<S> <C>
* Chief Executive Officer, Chairman,
___________________________________________ President and Director
(James D. Dunning, Jr.) (Principal Executive Officer)
/s/ Robert L. Madore Senior Vice President and Chief Financial
___________________________________________ Officer (Principal Financial and
(Robert L. Madore) Accounting Officer)
*
___________________________________________ Director
(Daniel H. Blumenthal)
* Director
___________________________________________
(Avy H. Stein)
*
___________________________________________ Director
(David Wittels)
</TABLE>
* by Robert L. Madore,
attorney-in-fact
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to the Registration Statement on Form S-4
to be signed on its behalf by the undersigned, thereunto duly authorized, in
the City of New York, State of New York on December 27, 2000.
Ziff Davis Publishing Holdings Inc.
/s/ Robert L. Madore
By: _________________________________
Name: Robert L. Madore
Title: Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement on Form S-4 has been signed by the
following persons in the capacities indicated on December 27, 2000.
<TABLE>
<CAPTION>
Signature Capacity
--------- --------
<S> <C>
* Chief Executive Officer,
___________________________________________ Chairman, President and Director
(James D. Dunning Jr.) (Principal Executive Officer)
/s/ Robert L. Madore Chief Financial Officer
___________________________________________ (Principal Financial and Accounting
(Robert L. Madore) Officer)
* Director
___________________________________________
(Thomas McGrade)
* Director
___________________________________________
(Alan J. Perlman)
* Director
___________________________________________
(Avy H. Stein)
* Director
___________________________________________
(Daniel H. Blumenthal)
* Director
___________________________________________
(Milton J. "Chip" Block)
* Director
___________________________________________
(David Wittels)
</TABLE>
* by Robert L. Madore,
attorney-in-fact
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to the Registration Statement on Form S-4
to be signed on its behalf by the undersigned, thereunto duly authorized, in
the City of New York, State of New York on December 27, 2000.
Ziff Davis Internet Inc.
/s/ Robert L. Madore
By: _________________________________
Name:Robert L. Madore
Title:Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement on Form S-4 has been signed by the
following persons in the capacities indicated on December 27, 2000.
<TABLE>
<CAPTION>
Signature Capacity
--------- --------
<S> <C>
* Chief Executive Officer,
___________________________________________ Chairman, President and Director
(James D. Dunning, Jr.) (Principal Executive Officer)
/s/ Robert L. Madore Chief Financial Officer
___________________________________________ (Principal Financial and Accounting
(Robert L. Madore) Officer)
* Director
___________________________________________
(Thomas McGrade)
* Director
___________________________________________
(Alan J. Perlman)
* Director
___________________________________________
(Avy H. Stein)
* Director
___________________________________________
(Daniel H. Blumenthal)
* Director
___________________________________________
(Milton J. "Chip" Block)
</TABLE>
* by Robert L. Madore
attorney-in-fact
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to the Registration Statement on Form S-4
to be signed on its behalf by the undersigned, thereunto duly authorized, in
the City of New York, State of New York on December 27, 2000.
Ziff Davis Development Inc.
/s/ Robert L. Madore
By: _________________________________
Name:Robert L. Madore
Title:Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement on Form S-4 has been signed by the
following persons in the capacities indicated on December 27, 2000.
<TABLE>
<CAPTION>
Signature Capacity
--------- --------
<S> <C>
* Chief Executive Officer,
___________________________________________ Chairman, President and Director
(James D. Dunning, Jr.) (Principal Executive Officer)
/s/ Robert L. Madore Chief Financial Officer
___________________________________________ (Principal Financial and Accounting
(Robert L. Madore) Officer)
* Director
___________________________________________
(Thomas McGrade)
* Director
___________________________________________
(Alan J. Perlman)
* Director
___________________________________________
(Avy H. Stein)
* Director
___________________________________________
(Daniel H. Blumenthal)
* Director
___________________________________________
(Milton J. "Chip" Block)
</TABLE>
* by Robert L. Madore,
attorney-in-fact
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to the Registration Statement on Form S-4
to be signed on its behalf by the undersigned, thereunto duly authorized, in
the City of New York, State of New York on December 27, 2000.
Ziff Davis Publishing Inc.
/s/ Robert L. Madore
By: _________________________________
Name: Robert L. Madore
Title: Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement on Form S-4 has been signed by the
following persons in the capacities indicated on December 27, 2000.
<TABLE>
<CAPTION>
Signature Capacity
--------- --------
<S> <C>
* Chief Executive Officer,
___________________________________________ Chairman, President and Director
(James D. Dunning, Jr.) (Principal Executive Officer)
/s/ Robert L. Madore Chief Financial Officer
___________________________________________ (Principal Financial and Accounting
(Robert L. Madore) Officer)
* Director
___________________________________________
(Thomas McGrade)
* Director
___________________________________________
(Alan J. Perlman)
* Director
___________________________________________
(Avy H. Stein)
* Director
___________________________________________
(Daniel H. Blumenthal)
* Director
___________________________________________
(Milton J. "Chip" Block)
</TABLE>
* by Robert L. Madore
attorney-in-fact
II-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to the Registration Statement on Form S-4
to be signed on its behalf by the undersigned, thereunto duly authorized, in
the City of New York, State of New York on December 27, 2000.
eTESTING LABS, INC.
/s/ Robert L. Madore
By: _________________________________
Name:Robert L. Madore
Title:Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement on Form S-4 has been signed by the
following persons in the capacities indicated on December 27, 2000.
<TABLE>
<CAPTION>
Signature Capacity
--------- --------
<S> <C>
* Chief Executive Officer,
___________________________________________ Chairman, President and Director
(James D. Dunning, Jr.) (Principal Executive Officer)
/s/ Robert L. Madore Chief Financial Officer
___________________________________________ (Principal Financial and Accounting
(Robert L. Madore) Officer)
* Director
___________________________________________
(Avy H. Stein)
* Director
___________________________________________
(Daniel H. Blumenthal)
* Director
___________________________________________
(David Wittels)
</TABLE>
*by Robert L. Madore
attorney-in-fact
II-9
<PAGE>
Exhibit Index
<TABLE>
<C> <S>
1.1 Purchase Agreement by and among Ziff Davis Media Inc., Deutsche Bank
Securities Inc. and CIBC World Markets Corp. dated July 18th, 2000.*
2.1 Purchase Agreement dated December 6, 1999 among WS-ZP Acquisition, Inc.,
ZD Inc. and ZD Holdings (Europe) Ltd.**
2.2 Sale and Purchase Agreement relating to Certain Print-Based Publishing
Assets in the UK, Germany and France, dated June 30, 2000 with VNU N.V.,
View Group B.V., VNU Business Publications Limited, VNU Holding
Deutschland GMBH, VNU Business Publications France SA.
3.1 Articles of Incorporation for Ziff Davis Media.*
3.2 Articles of Incorporation for Ziff Davis Publishing Holdings Inc.*
3.3 Articles of Incorporation for Ziff Davis Internet Inc.*
3.4 Articles of Incorporation for Ziff Davis Development Inc.*
3.5 Articles of Incorporation for Ziff Davis Publishing Inc.*
3.6 Articles of Incorporation for eTESTING LABS, Inc.*
3.7 By-laws for Ziff Davis Media.*
3.8 By-laws for Ziff Davis Publishing Holdings Inc.*
3.9 By-laws for Ziff Davis Internet Inc.*
3.10 By-laws for Ziff Davis Development Inc.*
3.11 By-laws for Ziff Davis Publishing Inc.*
3.12 By-laws for eTESTING LABS, Inc.*
4.1 Indenture between Ziff Davis Media Inc., Ziff Davis Publishing Holdings
Inc., Ziff Davis Internet Inc., Ziff Davis Development Inc., Ziff Davis
Publishing Inc. eTesting Labs, Inc. and Bankers Trust Company dated July
21, 2000.*
4.2 Registration Rights Agreement by and among Ziff Davis Media Inc., Ziff
Davis Publishing Holdings Inc., Ziff Davis Internet Inc., Ziff Davis
Development Inc., Ziff Davis Publishing Inc., eTesting Labs, Inc.,
Deutsche Bank Securities Inc. and CIBC World Markets Corp. dated July 21,
2000.*
5.1 Opinion of Kirkland & Ellis.***
8.1 Opinion of Kirkland & Ellis regarding federal tax consequences.*
10.1 Credit Agreement between Ziff Davis Media Inc., CIBC World Markets Corp.,
Bankers Trust Company, Fleet National Bank, Canadian Imperial Bank of
Commerce and other credit parties dated April 5, 2000, as amended.*
10.2 License Agreement, dated April 5, 2000 with ZD Inc.*
10.3 License Agreement, dated April 5, 2000 with ZD Inc. (ZD logo).*
10.4 License Agreement, dated April 5, 2000 with ZD Inc. (Interactive).*
</TABLE>
<PAGE>
<TABLE>
<C> <S>
10.5 Limited Liability Company Agreement, dated July 31, 1997, with Ziff-Davis
Inc., Macworld Communications, Inc. and International Data Group, Inc.,
as amended.*
10.6 Executive Agreements by and between Ziff Davis Holdings, Inc. and Mr.
Dunning, dated as of April 5, 2000.*
10.7 Executive Agreement by and between Ziff Davis Holdings, Inc. and Mr.
Thomas McGrade, dated April 5, 2000.*
10.8 Executive Agreement by and between Ziff Davis Holdings, Inc. and Mr.
Perlman, dated
April 5, 2000.*
10.9 Executive Agreement by and between Ziff Davis Holdings, Inc. and Mr.
Madore, dated
May 19, 2000.*
12.1 Statement re computation of ratio of earnings to fixed charges.***
21.1 Subsidiaries of the registrant.*
23.1 Consent of PricewaterhouseCoopers LLP***
23.2 Consent of Kirkland & Ellis (included in Exhibit 5.1).
25.1 Statement re Eligibility of Trustee.*
27.1 Financial Data Schedule.***
99.1 Form of Letter of Transmittal.*
99.2 Form of Notice of Guaranteed Delivery.*
99.3 Form of Tender Instructions.*
</TABLE>
--------
*previously filed.
**filed herewith.
***refiled herewith.
2
