<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q
(MARK ONE)
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1998
----------------
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
COMMISSION FILE NUMBER 1-9676
ZIFF-DAVIS INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3987754
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
ONE PARK AVENUE, NEW YORK, NY 10016
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
Registrant's telephone number, including area code (212) 503-3500
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES [X] NO [_]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
As of November 16, 1998, there were 100,000,000 shares of the registrant's
voting common shares, par value $0.01 per share, issued and outstanding of
which 27,850,000 shares are held by the public.
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<PAGE>
ZIFF DAVIS INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PAGE(S)
-------
<C> <S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1998
(Unaudited) and December 31, 1997.......................... 1
Consolidated Statements of Operations (Unaudited) for the
Three Months and Nine Months Ended September 30, 1998 and
1997....................................................... 2
Consolidated Statements of Cash Flows (Unaudited) for the
Nine Months Ended September 30, 1998 and 1997.............. 3
Consolidated Statement of Changes in Stockholders' Equity
(Unaudited) for the Nine Months Ended September 30, 1998... 4
Notes to Consolidated Financial Statements (Unaudited)...... 5-8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 9-15
Item 3. Quantitative and Qualitative Disclosures About Market Risk.. 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 16
Item 2. Changes in Securities and Use of Proceeds................... 16
Item 3. Defaults Upon Senior Securities............................. 17
Item 4. Submission of Matters to a Vote of Security Holders......... 17
Item 5. Other Information........................................... 17
Item 6. Exhibits and Reports on Form 8-K............................ 17
SIGNATURES........................................................... 18
</TABLE>
<PAGE>
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ZIFF-DAVIS INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 DECEMBER 31, 1997
------------------ -----------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............... $ 27,153 $ 30,301
Accounts receivable, net................ 195,330 221,310
Inventories............................. 19,065 17,853
Prepaid expenses and other current as-
sets................................... 45,406 37,900
Due from affiliates..................... 46,472 131,290
Deferred taxes.......................... 8,794 8,794
---------- ----------
Total current assets.................. 342,220 447,448
Property and equipment, net............... 68,149 53,536
Intangible assets, net.................... 2,947,913 3,030,333
Other assets.............................. 54,419 15,329
---------- ----------
Total assets.......................... $3,412,701 $3,546,646
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................ $ 44,243 $ 55,468
Accrued expenses........................ 104,670 80,094
Unearned income, net.................... 220,872 154,682
Due to affiliates....................... -- 398,332
Current portion of notes payable to af-
filiates............................... 7,692 125,790
Other current liabilities............... 6,323 4,222
---------- ----------
Total current liabilities............. 383,800 818,588
Notes payable to affiliates............... 71,924 2,408,240
Notes payable, net of unamortized dis-
count.................................... 1,454,123 --
Deferred taxes............................ 146,997 180,117
Other liabilities......................... 11,809 13,571
---------- ----------
Total liabilities..................... 2,068,653 3,420,516
---------- ----------
Stockholders' equity:
Preferred stock (1)..................... -- --
Common stock (2)........................ 1,000 --
Additional paid-in capital.............. 1,550,239 248,330
Accumulated deficit..................... (205,608) (119,429)
Deferred compensation................... (807) (996)
Cumulative translation adjustment....... (776) (1,775)
---------- ----------
Total stockholders' equity............ 1,344,048 126,130
---------- ----------
Total liabilities and stockholders'
equity............................... $3,412,701 $3,546,646
========== ==========
</TABLE>
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(1) September 30, 1998: par value $.01 per share, 10,000,000 shares
authorized, no shares issued and outstanding; December 31, 1997: no
authorized shares
(2) September 30, 1998: par value $.01 per share, 120,000,000 shares
authorized, 100,000,000 shares issued and outstanding; December 31, 1997:
par value $.01 per share, 2,000 shares authorized, 200 shares issued and
outstanding
See notes to Consolidated Financial Statements
1
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ZIFF-DAVIS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED--IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenue, net:
Publishing...................... $ 196,231 $ 199,745 $ 607,857 $ 628,504
Events.......................... 29,787 24,227 122,690 121,683
--------- --------- --------- ---------
226,018 223,972 730,547 750,187
--------- --------- --------- ---------
Cost of production:
Publishing...................... 52,821 53,029 162,528 165,264
Events.......................... 10,650 9,687 47,002 51,964
--------- --------- --------- ---------
63,471 62,716 209,530 217,228
--------- --------- --------- ---------
Selling, general and administra-
tive expenses.................... 139,516 143,131 423,818 426,356
Depreciation and amortization of
property and equipment........... 7,870 8,585 22,597 24,439
Amortization of intangible as-
sets............................. 29,973 31,114 91,997 93,258
--------- --------- --------- ---------
Loss from operations............ (14,812) (21,574) (17,395) (11,094)
Interest expense, net............. (29,093) (47,723) (111,185) (141,333)
Other non-operating income, net... 4,456 2,361 8,812 7,633
--------- --------- --------- ---------
Loss before income taxes.......... (39,449) (66,936) (119,768) (144,794)
Income tax benefit................ (34,951) (328) (33,589) (984)
--------- --------- --------- ---------
Net loss........................ $ (4,498) $ (66,608) $ (86,179) $(143,810)
========= ========= ========= =========
Pro forma net loss per basic
common share:.................. $ (0.04) $ (0.67) $ (0.86) $ (1.44)
========= ========= ========= =========
</TABLE>
See notes to Consolidated Financial Statements
2
<PAGE>
ZIFF-DAVIS INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED--IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
1998 1997
----------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss............................................. $ (86,179) $(148,810)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Depreciation and amortization.................... 114,594 117,697
Amortization of debt issuance costs and dis-
count............................................. 1,313 --
Income from equity investments................... (4,688) (252)
Deferred tax benefit............................. (33,589) (984)
Changes in operating assets and liabilities:
Accounts receivable................................ 28,622 23,395
Inventories........................................ (591) (1,631)
Accounts payable and accrued expenses.............. 6,703 (28,883)
Unearned income.................................... 62,770 80,118
Due to/from affiliates............................. 10,707 (50,666)
Other, net......................................... (16,871) (10,634)
----------- ---------
Net cash provided/(used) by operating activities....... 82,791 (20,650)
----------- ---------
Cash flows from investing activities:
Capital expenditures................................. (27,399) (18,636)
Investment in joint ventures......................... (1,193) (60)
Other investments.................................... (5,000) --
Acquisitions, net of cash acquired................... (6,999) (2,998)
----------- ---------
Net cash used by investing activities.................. (40,591) (21,694)
----------- ---------
Cash flows from financing activities:
Proceeds from equity offering (1).................... 380,337 --
Proceeds from issuance of notes payable (1).......... 242,723 --
Proceeds from issuance of bank debt (1).............. 1,240,200 --
Payments of amounts due to affiliates................ (314,798) --
Payments of bank debt................................ (45,000) --
Payments of debt due to affiliates................... (1,569,532) (19,162)
Purchase of treasury shares.......................... (29,500) --
Sale of treasury shares.............................. 29,500 --
Advance from majority shareholder.................... 20,377 --
Contributed capital.................................. 345 69,366
----------- ---------
Net cash (used)/provided by financing activities....... (45,348) 50,204
----------- ---------
(Decrease)/increase in cash and cash equivalents..... (3,148) 7,860
Cash and cash equivalents, beginning of period....... 30,301 29,915
----------- ---------
Cash and cash equivalents, end of period............... $ 27,153 $ 37,775
=========== =========
Supplemental cash flow information;
Cash paid for income taxes......................... $ 642 $ --
Cash paid for interest............................. $ 94,360 $ 162,758
</TABLE>
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(1) Net of transaction costs of $19,563, $9,800 and $7,277, respectively
See Notes to Consolidated Financial Statements
3
<PAGE>
ZIFF-DAVIS INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
ZIFF-DAVIS INC. TREASURY ZD INC. ZD EVENTS
------------------- -------- ------------- -------------
ADDITIONAL RETAINED CUMULATIVE
PAID- EARNINGS DEFERRED TRANSLATION
SHARES AMOUNT STOCK SHARES AMOUNT SHARES AMOUNT IN CAPITAL (DEFICIT) COMPENSATION ADJUSTMENT
----------- ------ -------- ------ ------ ------ ------ ---------- --------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31,
1997............ -- $ -- $ -- $100 $ -- $100 $-- $ 248,330 $(119,429) $(996) $(1,775)
Capital
Contribution.... 9,007
Capitalization
of amounts due
to affiliates... 908,673
Contribution of
subsidiaries
from SBH to
Ziff-Davis
Inc............. 73,619,355 736 (100) (100)
Initial public
offering........ 25,800,000 258 375,235
Acquisition of
fixed assets
from an
affiliate....... 580,645 6 8,994
Purchase of
treasury shares
from SBH........ (2,000,000) (20) (29,480)
Sale of treasury
shares to the
public.......... 2,000,000 20 29,480
Net loss........ (86,179)
Compensation
earned on
restricted
stock........... 189
Foreign currency
translation
adjustment...... 999
----------- ------ ------- ---- ----- ---- ---- ---------- --------- ----- -------
Balance at
September 30,
1998
(unaudited)..... 100,000,000 $1,000 $ -- -- $ -- -- $-- $1,550,239 $(205,608) $(807) $ (776)
=========== ====== ======= ==== ===== ==== ==== ========== ========= ===== =======
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
-------------
<S> <C>
Balance at
December 31,
1997............ $ 126,130
Capital
Contribution.... 9,007
Capitalization
of amounts due
to affiliates... 908,673
Contribution of
subsidiaries
from SBH to
Ziff-Davis
Inc............. 736
Initial public
offering........ 375,493
Acquisition of
fixed assets
from an
affiliate....... 9,000
Purchase of
treasury shares
from SBH........ (29,500)
Sale of treasury
shares to the
public.......... 29,500
Net loss........ (86,179)
Compensation
earned on
restricted
stock........... 189
Foreign currency
translation
adjustment...... 999
-------------
Balance at
September 30,
1998
(unaudited)..... $1,344,048
=============
</TABLE>
See notes to Combined Financial Statements
4
<PAGE>
ZIFF-DAVIS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS)
1. BASIS OF PRESENTATION
Ziff-Davis Inc. (the "Company" or "Ziff-Davis") had no operations prior to
the reorganization and completion of its initial public offering on May 4,
1998, discussed in Note 2 below. The financial information presented is the
consolidated financial statements of Ziff-Davis Inc. including the accounts of
ZD Inc. (formerly Ziff-Davis Inc.) and ZD Events Inc. (formerly ZD COMDEX and
Forums Inc.), and their subsidiaries (collectively, the "Companies") accounted
for in a manner similar to a "pooling of interests" transaction. Prior to the
reorganization, the Companies were wholly-owned indirect subsidiaries of
SOFTBANK Corp. ("Softbank"), a Japanese corporation which, directly or through
affiliates, is approximately 50.0% owned by MAC Inc. ("MAC"), also a Japanese
corporation.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. 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 consolidated financial position of the Company at September
30, 1998 and the results of their consolidated operations and cash flows for
the three and nine months ended September 30, 1998 and 1997 have been
included. Operating results for the periods presented are not necessarily
indicative of the results that may be expected for the year ended December 31,
1998.
Prior to the reorganization and initial public offering, the Companies were
capitalized with only a minimal number of shares; consequently, net loss per
share results are presented on a pro forma basis assuming 100 million weighted
average common shares were outstanding for all periods presented.
For further information, refer to the Companies' combined financial
statements and notes thereto for the year ended December 31, 1997, included in
Ziff-Davis' Registration Statement on Form S-1 (File No. 333-46493).
2. THE REORGANIZATION AND INITIAL PUBLIC OFFERING
On May 4, 1998, Softbank, through its wholly-owned subsidiary SOFTBANK
Holdings Inc. ("SBH"), completed a reorganization whereby the common stock of
ZD Inc. and ZD Events Inc. were contributed to the Company in exchange for
73,619,355 shares of the Company's common stock. Concurrently with the
reorganization, Ziff- Davis (i) completed an initial public offering of
25,800,000 shares at an initial public offering price of $15.50 per share,
(ii) issued $250,000 of 8 1/2% Subordinated Notes due 2008, (iii) entered into
a $1,350,000 credit facility with a group of banks under which $1,250,000 was
borrowed and (iv) converted $908,673 of intercompany indebtedness to equity.
In addition, the Company received approximately $9.1 million of fixed assets
from Kingston Technology Company ("Kingston") in exchange for 580,645 shares
of the Company's common stock. These assets have been subsequently leased back
to Kingston. Total shares of common stock issued to Softbank and its
affiliates were 74,200,000. The transactions described above are hereafter
referred to as the "Reorganization". For a more complete description of the
Reorganization refer to the Company's Registration Statement on Form S-1 (File
No. 333-46493).
Proceeds, net of transaction costs, from the initial public offering and
funding transactions in the Reorganization of $1,863,260 were used to complete
the purchase of certain assets from MAC for $370,000 (the "MAC Assets"), and
repay intercompany indebtedness.
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. Refer to Note 1 in the Companies' December 31,
5
<PAGE>
ZIFF-DAVIS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS)
1997 combined financial statements, included in Ziff Davis' Registration
Statement on Form S-1 (File No. 333-46443).
On May 14, 1998 an affiliate of Softbank sold 50,000 shares of the Company's
common stock to an unrelated third party. On May 28, 1998, the Company's U.S.
underwriters exercised their option to purchase 2.0 million additional shares
of common stock to cover over-allotments. The Company purchased the additional
shares from SBH resulting in no change to the total number of shares
outstanding.
At September 30, 1998, the public held 27.85 million or 27.85% of the
Company's shares.
3. INCOME TAXES
Income taxes are provided based on the Company's projected annual effective
tax rate which differs from the U.S. federal statutory rate of 35% due to
certain items which are not deductible for income tax purposes, primarily
losses of the MAC Assets prior to their purchase by the Company, non-
deductible goodwill amortization and the effect of state and local income
taxes.
4. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
The Company is subject to various claims and legal proceedings arising in
the normal course of business. See Note 7.
Interest Rate Swaps
On June 10, 1998, the Company entered into interest rate swap agreements,
with an aggregate notional amount of $550,000. Under these swap agreements,
which began on August 10, 1998, the Company will receive a floating rate of
interest based on three-month LIBOR, which resets quarterly, and the Company
will pay a fixed rate of interest, each quarter, for the terms of the
respective agreements. The terms of these agreements range from 3 to 7 years
and the weighted average fixed rate the Company will pay is 5.85%. The Company
has entered into these agreements solely to hedge its interest rate risk under
its floating rate bank debt.
For the three month and nine month periods ended September 30, 1998, these
interest rate swaps did not have a material impact on the financial
statements.
5. COMPREHENSIVE INCOME
The Company implemented Statement of Financial Accounting Standards No. 130
"Reporting Comprehensive Income", effective January 1, 1998. This standard
requires the Company to report the total changes in stockholders' equity that
do not result directly from transactions with stockholders, including those
which do not affect retained earnings. These changes are not material to the
Company's consolidated financial statements.
6
<PAGE>
ZIFF-DAVIS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS)
6. PRO FORMA FINANCIAL INFORMATION
The following summary pro forma information has been prepared as if the
Reorganization, described in Note 2 above, had been consummated on January 1,
1998. The pro forma adjustments for the nine month period include a $5,219
reduction of interest expense, a $900 increase in depreciation expense and a
$900 reduction of selling, general and administrative expenses, as well as the
tax effect of these items recorded at the combined federal and state statutory
rate of 41%. The pro forma adjustments do not impact the three month period
ended September 30, 1998.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1998
------------------
<S> <C>
Revenue, net:............................................. $ 730,547
Depreciation and amortization............................. 115,494
Loss from operations...................................... (17,395)
Interest expense, net..................................... 105,966
Loss before income taxes.................................. (114,549)
Income tax benefit........................................ 31,449
Net loss.................................................. (83,100)
Net loss per basic common share........................... (0.83)
Weighted average common shares outstanding................ 100,000,000
EBITDA.................................................... 106,911
</TABLE>
7. SUBSEQUENT EVENTS
Restructuring
On October 8, 1998, the Company announced that anticipated results for the
fourth quarter would be below expectations and that, as a result, a Company-
wide restructuring would be implemented in which three publications would be
discontinued and its work force reduced by approximately 10%. Those three
publications have been discontinued and the work force reduction has also
largely been completed. The cost of this restructuring, estimated at $50 to
$60 million will be recognized in the fourth quarter of 1998.
Securities Class Action Litigation
Following a decline in the price per share of the Company's common stock
after the October 8, 1998 announcement, seven securities class action suits
have been filed against the Company and certain of its directors and officers
in the United States District Court for the Southern District of New York.
The complaints allege that defendants violated Sections 11, 12(a) (2) and 15
of the Securities Act of 1933 in connection with the registration statement
filed by the Company with the Securities and Exchange Commission relating to
the initial public offering of the Company's common stock on April 29, 1998
(the "IPO"). More particularly, the complaints allege that the registration
statement contained false and misleading statements and failed to disclose
facts that could have indicated an impending decline in the Company's revenue.
The complaints seek on behalf of a class of purchasers of the Company'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.
The complaints are as follows: Napoli v. Ziff-Davis Inc., et al., No. 98
Civ. 7158 (filed Oct. 9, 1998); Steinberg, et ano. v. Ziff-Davis Inc., et al.,
No. 98 Civ. 7205 (filed Oct. 13, 1998); Flinker v. Ziff-Davis Inc., et
7
<PAGE>
ZIFF-DAVIS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS)
al., No. 98 Civ. 7231 (filed Oct. 14, 1998); Koenig v. Ziff-Davis Inc., et
al., No. 98 Civ. 7260 (filed Oct. 15, 1998); Schindler v. Ziff-Davis Inc., et
al., No. 98 Civ. 7418 (filed Oct. 19. 1998); Miller v. Ziff-Davis Inc., et
al., No. 98 Civ. 7541 (filed Oct. 23, 1998); and Felgoise v. Ziff Davis Inc.,
et al., No. 98 Civ 8045 (filed Nov. 9, 1998). All of the complaints have been
assigned to Judge Shirley Wohl Kram. Service upon defendants has not yet been
effected.
Although the outcome of these cases cannot be predicted, the Company
believes that there are substantial defenses to the claims and intends to
defend vigorously.
ACQUISITION
On October 28, 1998, the Company acquired the assets of Sky TV Inc. and
certain affiliates. Sky TV is a media company that produces video contest for
distribution principally through airline in-flight, cable and broadcast
television. Sky TV's principal offices are located in Dallas and San
Francisco.
8
<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Ziff-Davis Inc. (the "Company") is a leading integrated media and marketing
company focused on computing and Internet-related technology. The Company
operates in two business segments: publishing and events. Within the
publishing segment its principal platforms include print publishing, online
content, market research and education. The events segment produces industry-
related trade shows and conferences. The Company's principal sources of
revenue are the sale of advertising and exhibit space. No single customer
accounts for more than 3% of the Company's annual revenue.
The Company's revenue and profitability are influenced by a number of
external factors, including the volume of new technology product
introductions, the amount and allocation of marketing expenditures by the
Company's clients, the extent to which sellers elect to advertise using print
and online media or participate in industry events, and competition among
computer technology marketers. Accordingly, the Company may experience
fluctuations in revenue from period to period.
Historically, the Company's business has been seasonal as a significant
portion of the Company's revenue has been earned in the second and fourth
quarters, in 1997 accounting for 26% and 35%, respectively, of the Company's
consolidated revenue.
REORGANIZATION AND INITIAL PUBLIC OFFERING
As described in Note 2 to the consolidated financial statements, on May 4,
1998, Softbank completed a reorganization whereby the common stock of ZD Inc.
and ZD Events Inc. were contributed to the Company by SBH in exchange for
73,619,355 shares of the Company's common stock. Concurrently, the Company (i)
completed an initial public offering of 25.8 million common shares at $15.50
per share, (ii) issued $250 million of 8 1/2% Subordinated Notes due 2008,
(iii) entered into a $1.35 billion credit facility with a group of banks under
which $1.25 billion was borrowed and (iv) converted $908.7 million of
intercompany indebtedness to equity. In addition, the Company received $9.1
million of fixed assets from Kingston, an affiliated company, in exchange for
580,645 common shares of the Company. These transactions are collectively
referred to as the Reorganization. Total shares of common stock issued to
Softbank and its affiliates were 74,200,000.
Net proceeds from the Reorganization of approximately $1.9 billion from the
initial public offering, subordinated note and credit facility were used to
complete the purchase of the MAC Assets for $370.0 million and repay
intercompany indebtedness.
On May 14, 1998, an affiliate of Softbank sold 50,000 shares of the
Company's common stock to an unrelated third party. On May 28, 1998, the
Company's U.S. underwriters exercised their option to purchase 2.0 million
additional shares of common stock to cover over allotments. The Company
purchased the additional shares from SBH resulting in no change to the total
number of shares outstanding.
At September 30, 1998, the public held 27.85 million shares or 27.85% of the
Company's common stock.
REDUCED DEMAND FOR ADVERTISING; RESTRUCTURING
Margin pressure on computer equipment manufacturers, industry and product
delays, lower demand in Asia and a focus on the Year 2000 transition are
contributing to a reduced demand for advertising in the Company's business
magazines (principally PC Magazine, PC Computing, Computer Shopper and PC
Week). The Company believes these factors will continue, and as announced on
October 8, 1998, expects that EBITDA for the fourth quarter of 1998 will be
significantly lower than EBITDA for the fourth quarter of 1997.
As a result of this reduced demand, the Company also announced on October 8,
1998 a company-wide restructuring in which it will discontinue three
publications (Internet Business, Equip and Windows Pro),
9
<PAGE>
streamline operating support services, consolidate certain facilities and
reduce its workforce by approximately 10%. The Company expects to take a one-
time pre-tax charge of $50 to $60 million in the fourth quarter as part of
this restructuring.
See "--Liquidity and Capital Resources--Credit Facility" below.
PRESENTATION OF FINANCIAL INFORMATION
The Company had no operations prior to the Reorganization and initial public
offering. The financial information presented is the consolidated financial
statements of Ziff-Davis Inc. and includes the combined results of ZD Inc. and
ZD Events Inc. prior to the Reorganization prepared in a manner similar to a
pooling of interests transaction.
The acquisition of the MAC Assets described above has been accounted for in
a manner similar to a "pooling of interests" as if all entities involved were
under common control.
RESULTS OF OPERATIONS
Comparison of the three months ended September 30, 1998 and 1997 (unaudited)
Revenue--Revenue for the third quarter of 1998 was $226.0 million compared
to $224.0 million for the third quarter of 1997, an increase of $2.0 million
or 0.9%. The comparability of 1998 and 1997 third quarter results was affected
by the accounting treatment for certain publications transferred to or from
joint ventures, as well as the shift in timing of an event, which are
described below. Excluding these factors, revenue for the third quarter of
1998 decreased by $4.4 million or 2.0% compared to the same period in 1997.
Publishing--The decline in the publishing segment's revenue primarily
relates to transferring certain publications to or from joint ventures.
Excluding such transfers, publishing segment revenue increased $0.6 million.
Growth in advertising in the Company's Internet business (ZDNet), consumer
publications and new publications launched in 1998 was partly offset by lower
advertising in business publications. Advertising revenue was lower in the
business publications principally due to factors affecting the computer
technology industry during the period (as described in "Reduced Demand for
Advertising; Restructuring" above).
On May 1, 1998, the Company acquired its joint venture partner's 50%
interest in Family PC magazine. The Company now owns 100% of the magazine and
its results are included in the consolidated results from the acquisition
date. This publication contributed $3.9 million of revenue in the 1998 quarter
but was not consolidated in the 1997 quarter.
In October 1997, the Company transferred its Macuser and MacWeek magazines
to form a 50/50 joint venture (Mac Publishing, LLC) with another publishing
company. These publications contributed $8.0 million of revenue in the third
quarter of 1997 but are no longer consolidated in the Company's results for
1998.
Events--Revenue from the events segment increased $5.5 million or 22.9%,
representing the net impact of the production of Seybold San
Francisco/Publishing 98 in the third quarter of 1998 as compared to the fourth
quarter of 1997, offset by declines in revenue at smaller events.
Cost of production
Cost of production increased $.8 million or 1.2% from the 1997 period.
Publishing cost of production declined $0.2 million primarily related to a
decline in advertising pages produced. The events segment increased by $1.0
million primarily related to the production of Seybold San
Francisco/Publishing 98.
Selling, general and administrative
Selling, general and administrative expenses were $139.5 million for the
1998 third quarter compared to $143.1 the million in the third quarter of
1997, a decrease of $3.6 million or 2.5%. The decline is primarily related to
headcount reductions from the integration of operations related to the
Reorganization.
10
<PAGE>
Expenses for the 1998 period included $3.9 million for spending on recently
launched publications.
Depreciation and amortization
Total depreciation and amortization expense was $37.8 million for the 1998
period compared to $39.7 million in the 1997 quarter, a decrease of $1.9
million or 4.7%. The decline was the result of certain assets being fully
depreciated or amortized in 1997.
Interest expense, net
Net interest expense declined to $29.1 million for the 1998 period from
$47.7 million in 1997. The reduction was attributed to a lower level of debt
outstanding due to principal repayments and the capitalization of $908.7
million of intercompany indebtedness as part of the Reorganization. The
weighted average cost of debt did not change significantly between the
periods.
Other non-operating income, net
Other non-operating income primarily reflects the Company's equity share of
earnings and losses from joint ventures and fees earned from management of
events not produced by the Company. Income of $4.5 million for the 1998
quarter increased $2.1 million from the $2.4 million earned in the 1997
period, reflecting the Company's equity share of earnings from Mac Publishing,
LLC., which was formed in August 1997. The increase was partly offset by a
revised royalty and fee arrangement for the events business managed by the
Company in Japan in 1998 which is based on the profits of the events rather
than a fixed monthly management fee as in 1997.
Income taxes
The Company's taxable income for 1998 will be significantly greater than the
pre-tax results reported in its financial statements. The difference results
from certain items which are non-deductible for income taxes, primarily losses
generated from the MAC Assets prior to their purchase by the Company and non-
deductible goodwill amortization expense. Consequently, the Company's
effective tax rate for the year will differ from the U.S. federal statutory
rate of 35%. In accordance with generally accepted accounting principles, the
Company records income taxes on a quarterly basis based on its projected
annual effective tax rate.
The income tax benefit was $35.0 million and $.3 million for the third
quarters of 1998 and 1997, respectively. The increase was due primarily to the
losses with respect to the MAC Assets, which were not deductible until the MAC
assets were purchased by the Company on May 4, 1998. The income tax benefit
for the period results from applying the Company's estimated annual effective
tax rate to the pretax loss for the nine months ended September 30, 1998.
Net loss
As a result of the changes described above, the net loss for the third
quarter of 1998 was $4.5 million compared to a net loss of $66.6 million for
the third quarter of 1997.
EBITDA
EBITDA is defined as income before provision for income taxes, interest
expense, depreciation and amortization. EBITDA is not intended to represent
cash flows from operations and should not be considered an alternative to net
income as an indicator of the Company's operating performance or to cash flows
as a measure of liquidity. The Company believes EBITDA is a standard measure
commonly reported and widely used by analysts, investors and other interested
parties in the publishing and media industries.
EBITDA for the third quarter of 1998 was $27.5 million compared to $20.5
million for the third quarter of 1997. Excluding the impact from the timing of
Seybold San Francisco/Publishing 98, results improved by $1.1
11
<PAGE>
million over the same quarter last year as growth in advertising sales from
the Internet business and consumer publications as well as the Company's cost
reduction efforts more than offset the decline in advertising sales in the
business publications. In addition, results for the third quarter of 1998
include $2.4 million of losses from new publications.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 (UNAUDITED)
Revenue
Revenue for the nine months ended September 30, 1998 was $730.5 million
compared to $750.2 million for the nine months ended September 30, 1997, a
decrease of $19.7 million or 2.6%. The comparability of 1998 and 1997 nine
month results was affected by the accounting treatment for certain
publications transferred to or from joint ventures as well as the shift in
timing of an event. Excluding these factors, revenue for the nine months ended
September 30, 1998 decreased by $2.4 million, or 0.3% compared to the same
period in 1997.
Publishing--The decline in the publishing segment's revenue resulted from
transferring certain publications to or from joint ventures. Excluding such
transfers, publishing segment revenue improved $6.5 million or 1.0%.
Consistent with the results reported for the three month period, the increase
was due to growth in advertising in the Company's Internet business
(principally ZDNet) and consumer publications partly offset by lower
advertising in business publications. Advertising revenue was lower in the
business publications principally due to factors affecting the computer
technology industry during the period (as described in "Reduced Demand for
Advertising; Restructuring" above)
Revenues for the Macuser and MacWeek magazines contributed to Mac Publishing
LLC were $31.9 million for the nine months ended September 30, 1997 but, were
not consolidated into the Company's results for the same period in 1998. On
May 1, 1998, the Company acquired its joint venture partner's 50% interest in
Family PC magazine. The Company now owns 100% of the magazine and its results
are included in the consolidated results from the acquisition date. Revenue
from Family PC included in the 1998 nine months results is $4.8 million.
Events--Revenue from the events segment increased $1.0 million or 0.8%,
primarily resulting from the shift in timing of Seybold San
Francisco/Publishing 98 offset by revenue declines for smaller events.
Cost of production
Cost of production decreased $7.7 million or 3.5% from the 1997 period.
Publishing cost of production declined $2.8 million due to lower advertising
pages produced. The events segment accounted for $4.9 million of this
decrease, primarily attributable to the lower usage of exhibition space for
the period, partially offset by the shift in timing of Seybold San
Francisco/Publishing 98.
Selling, general and administrative
Selling, general and administrative expenses were $423.8 million for the
nine months ended September 30, 1998 compared to $426.4 million for the nine
months ended September 30, 1997, a decrease of $2.6 million or 0.6%. Included
in the 1998 period were $3.2 million of one-time costs for office relocations
and $9.9 million of costs related to launches of new publications. Excluding
the one-time costs, recurring expenses decreased 1.4%, principally related to
efficiencies realized in combining the publishing and events business through
the Reorganization and in particular, the consolidation of the two former
events entities into one business unit.
Depreciation and amortization
Total depreciation and amortization expense was $114.6 million for the 1998
period compared to $117.7 million in the 1997 period, a decrease of $3.1
million or 2.6%. The decline was the result of certain assets being fully
depreciated or amortized in 1997.
12
<PAGE>
Interest expense, net
Net interest expense declined to $111.2 million for the 1998 period from
$141.3 million in 1997. The reduction was attributed to a lower level of debt
outstanding due to principal repayments and the capitalization of $908.7
million of intercompany indebtedness as part of the Reorganization. The
weighted average cost of debt did not change significantly between the
periods.
Other non-operating income, net
Income of $8.8 million for the 1998 period increased $1.2 million from the
$7.6 million earned in the 1997 period. The increase was due to the Company's
share of earnings from Mac Publishing, LLC, partly offset by the revised
royalty and fee arrangement for the events business managed by the Company in
Japan.
Income taxes
The combined income tax benefit was $33.6 million and 1.0 million for the
nine months ended September 30, 1998 and 1997, respectively. The increase was
due primarily to the losses with respect to the MAC Assets, which were not
deductible until the MAC Assets were purchased by the Company on May 4, 1998.
The income tax benefit for the period results from applying the Company's
estimated annual effective tax rate to the pretax loss for the nine months
ended September 30, 1998.
Net loss
As a result of the changes described above, the net loss for the nine months
ended September 30, 1998 was $86.2 million compared to a net loss of $143.8
million for the nine months ended September 30, 1997.
EBITDA
EBITDA for the nine months ended September 30, 1998 was $106.0 million
compared to $114.2 million for the period in 1997. Results were unfavorable as
compared to 1997 primarily due to the lower level of advertising in the higher
margin business publications as well as a decline in the earnings from the
COMDEX/Spring event, partly offset by the shift in timing of Seybold San
Francisco/Publishing 98. In addition, during the nine months ended September
30, 1998 the Company recorded $3.2 million of one-time costs for office
relocations and incurred $6.4 million of losses from new publications.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company's financing requirements have been funded through
intercompany loans and advances. As previously discussed, the Company's
capital structure has been significantly changed through the Reorganization.
Cash and cash equivalents were $27.2 million at September 30, 1998, a
decrease of $3.1 million from $30.3 million at December 31, 1997. The decrease
was due to the factors described below.
Cash provided by operations was $82.8 million for the nine months ended
September 30, 1998 compared to a use of $20.7 million for the same period in
1997. The increase was attributed to the Company's lower losses and a decrease
in funding to affiliates for the 1998 period.
Cash used in investing activities for the nine months ended September 30,
1998 totalled $40.6 million compared to $21.7 million for the 1997 comparable
period. For both periods, the majority of these expenditures were for computer
equipment and leasehold improvements. Other investments represent the
Company's investment in Deja News. Acquisitions in the 1998 period relate to
the Company's acquisition of a tradeshow in Canada, an additional 50% interest
of Family PC magazine and a European marketing database company. Acquisitions
for the 1997 period reflect the purchase of a 70% interest in GameSpot, Inc.
The Company projects
13
<PAGE>
it will spend approximately $35 million, net of tenant improvement credits,
during 1998 in connection with the building and furnishing of new office space
for the Company's New York offices to be occupied during 1999.
Cash used in financing activities totaled $45.3 million for the nine months
ended September 30, 1998, representing proceeds from the Reorganization and
the initial public offering of $1,863.3 million, net of transaction costs, and
funding from the parent company of $20.4 million, offset by the repayment of
debt and amounts due to affiliates of $1,614.5 million. Cash provided by
financing activities in the same period in 1997 amounted to $50.2 million
representing capital contributions partly offset by repayments of intercompany
debt.
The Company believes, based on its current level of operations and
anticipated growth, that the Company's ability to generate cash, together with
cash on hand and available lines of credit, will be sufficient to make
required payments of principal and interest on the Company's indebtedness and
to fund anticipated capital expenditures and future working capital
requirements over the next 12 months. However, actual capital expenditures may
change, particularly as a result of any acquisitions the Company may pursue.
CREDIT FACILITY
For the reason described under "Reduced Demand for Advertising;
Restructuring" above, the Company expects its debt to EBITDA ratios at
December 31, 1998 to be above the levels required by its credit facility at
such date. Based on preliminary discussions with the lead banks for the credit
facility, the Company expects the banks, in return for a negotiated fee and
increase in interest rates under the credit facility, to be cooperative in
modifying, prior to the end of year, the debt covenants as required. The
Company is currently in compliance with it covenants under the credit
facility.
INTEREST RATE SWAPS
On June 10, 1998, the Company entered into interest rate swap agreements,
with an aggregate notional amount of $550 million. Under these swap
agreements, which commenced on August 10, 1998, the Company will receive a
floating rate of interest based on three-month LIBOR, which resets quarterly,
and the Company will pay a fixed rate of interest each quarter for the terms
of the respective agreements. The weighted average fixed rate the Company will
pay under these agreements is 5.85%. The Company has entered into these
agreements solely to hedge its interest rate risk under its floating rate bank
debt.
ZDTV
The Company has entered into a license and services agreement with MAC to
develop ZDTV. ZDTV is indirectly owned by MAC, but as part of the license and
services agreement, MAC has granted the Company an option exercisable through
December 31, 1998 to purchase all of MAC's interest in ZDTV for an amount
equal to MAC's investment plus 10% per annum for the period of its investment.
Pursuant to the license and services agreement, the Company has agreed to fund
ZDTV's operations on behalf of MAC through unsecured advances, which for
approved levels of expenditures are to be reimbursed by MAC. Such advances
bear interest at the 30-day LIBOR rate plus 0.50%. ZDTV's cash requirements
for 1998 are currently expected to be approximately $55.2 million, of which
$40.3 million had been spent through September 30, 1998. The Company has not
yet determined whether it will exercise its option to purchase MAC's interest
in ZDTV. If the option is exercised, the Company estimates that the option
price would be approximately $85 to $95 million, of which approximately $55
million to $65 million would be satisfied by cancellation of the unsecured
advances and the remainder would be paid in cash. Any such purchase will
depend upon securing sufficient cable carriage, which may include entering
into a joint venture or other co-ownership arrangement. Other than advances to
ZDTV which are reported on the Company's balance sheet, the results of
operations of ZDTV are not included in the Company's results.
14
<PAGE>
YEAR 2000
During 1997, the Company began a review of its computer systems and related
software to identify systems and software which might malfunction due to a
misidentification of the Year 2000. The Company is using both internal and
external resources to identify, correct or reprogram, and test systems for
Year 2000 readiness. Some of the Company's computer systems and databases,
including its subscription fulfillment and payroll systems, are managed by
third parties under contractual arrangements. The Company has requested those
third parties to advise the Company as to whether they anticipate difficulties
in addressing Year 2000 problems and, if so, the nature of such difficulties.
Management of the Company has not finally determined the cost associated with
its Year 2000 readiness efforts and the related potential impact on the
Company's results of operations. Amounts expended to date have not been
material. There can be no assurances that the Company's systems or systems of
other companies on which the Company relies will be converted in time or that
any such failure to convert by the Company or another company will not have an
adverse effect on the Company's financial condition or position. After
evaluating its internal compliance efforts as well as the compliance of third
parties as described above by the end of calendar year 1998, the Company will
develop during 1999 contingency plans to address situations in which various
systems of the Company, or of third parties with which the Company does
business, are not Year 2000 compliant. Any Year 2000 compliance problem could
have a material adverse effect on the Company's business, results of
operations and financial condition. Management believes a likely "worst case
scenario" is that some customers and vendors will be unable to complete
transactions on a timely basis which may have an adverse impact on the timing
of the Company's cash flows and potentially the Company's ability to deliver
products or services.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Form 10-Q and in "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
contain forward-looking statements which are subject to various risks and
uncertainties. Actual results could differ materially from those discussed
herein. Important factors that could cause or contribute to such differences
include those discussed under the caption "Risk Factors" in the Prospectus
dated April 28, 1998 contained in the Company's Registration Statement on Form
S-1 (File No. 333-46493).
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable
15
<PAGE>
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Softbank Interactive Marketing
The Company 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 shareholders of
SOFTBANK Interactive Marketing Inc. ("SIM"), formerly an indirect subsidiary
of Softbank. The complaint alleges, among other things, that SBH, SIM's
majority shareholder, acting with the Company 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 the Company) and failed to act in the
best interests of SIM and the minority shareholders by taking actions which
benefited the Company. The complaint states claims based on common law fraud,
breach of fiduciary duty and aiding and abetting theories and seeks in excess
of $200 million in damages. The Company and the other defendants have moved to
dismiss all of the claims against them other than a breach of contract claim
which is solely against SBH.
Although the outcome of this case cannot be predicted, the Company believes
that there are substantial defenses to the claims and intends to defend
vigorously.
Securities Class Action Litigation
On October 8, 1998, the Company announced that anticipated results for the
fourth quarter would be below expectations and that, as a result, a Company-
wide restructuring would be implemented. Following a decline in the price per
share of the Company's common stock after the announcement, seven securities
class action suits have been filed against the Company and certain of its
directors and officers in the United States District Court for the Southern
District of New York.
The complaints allege that defendants violated Sections 11, 12(a) (2) and 15
of the Securities Act of 1933 in connection with the registration statement
filed by the Company with the Securities and Exchange Commission relating to
the initial public offering of the Company's common stock on April 29, 1998
(the "IPO"). More particularly, the complaints allege that the registration
statement contained false and misleading statements and failed to disclose
facts that could have indicated an impending decline in the Company's revenue.
The complaints seek on behalf of a class of purchasers of the Company'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.
The complaints are as follow: Napoli v. Ziff-Davis Inc., et al., No. 98 Civ.
7158 (filed Oct. 9, 1998); Steinberg, et ano. v. Ziff-Davis Inc., et al., No.
98 Civ. 7205 (filed Oct. 13, 1998); Flinker v. Ziff-Davis Inc., et al., No. 98
Civ. 7231 (filed Oct. 14, 1998); Koenig v. Ziff-Davis Inc., et al., No. 98
Civ. 7260 (filed Oct. 15, 1998); Schindler v. Ziff-Davis Inc., et al., No. 98
Civ. 7418 (filed Oct. 19, 1998) Miller v. Ziff Davis Inc., etal., No. 98 Civ.
7541 (filed Oct. 23, 1998); and Felgoise v. Ziff-Davis Inc., et al., No. 98
Civ. 8045 (filed Nov. 9, 1998). All of the complaints have been assigned to
Judge Shirley Wohl Kram. Service upon defendants has not yet been effected.
Although the outcome of these cases cannot be predicted, the Company
believes that there are substantial defenses to the claims and intends to
defend vigorously.
There are no other legal proceedings to which the Company is a party, other
than ordinary routine litigation incidental to the business of the Company
which is not otherwise material to the business or financial condition of the
Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
16
<PAGE>
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
i) Exhibit 27--Financial Data Schedule (EDGAR filing only)
b) Reports on Form 8-K
None
17
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
Ziff-Davis Inc.
/s/ Timothy C. O'Brien
Date: November 16, 1998 By __________________________________
TIMOTHY C. O'BRIEN
CHIEF FINANCIAL OFFICER, DIRECTOR
(On behalf of Registrant and as
Principal Financial Officer)
/s/ Mark D. Moyer
Date: November 16, 1998 By __________________________________
MARK D. MOYER
VICE PRESIDENT AND CONTROLLER
(On behalf of Registrant and as
Principal Accounting Officer)
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
CONSOLIDATED FINANCIAL STATEMENTS OF ZIFF-DAVIS, INC. AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> JUN-01-1998 JAN-01-1998
<PERIOD-END> SEP-30-1998 SEP-30-1998
<CASH> 27,153 27,153
<SECURITIES> 0 0
<RECEIVABLES> 303,686 303,686
<ALLOWANCES> 108,356 108,356
<INVENTORY> 19,065 19,065
<CURRENT-ASSETS> 342,221 342,221
<PP&E> 54,418 54,418
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 3,412,701 3,412,701
<CURRENT-LIABILITIES> 383,800 383,800
<BONDS> 1,526,047 1,526,047
0 0
0 0
<COMMON> 1,000 1,000
<OTHER-SE> 1,343,048 1,343,048
<TOTAL-LIABILITY-AND-EQUITY> 3,412,701 3,412,701
<SALES> 226,018 730,547
<TOTAL-REVENUES> 226,018 730,547
<CGS> 63,471 209,530
<TOTAL-COSTS> 240,083 747,942
<OTHER-EXPENSES> (4,456) (8,812)
<LOSS-PROVISION> 4,120 13,111
<INTEREST-EXPENSE> 29,093 111,185
<INCOME-PRETAX> (39,449) (119,768)
<INCOME-TAX> (34,951) (33,589)
<INCOME-CONTINUING> (4,498) (86,179)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (4,998) (86,179)
<EPS-PRIMARY> (.04) (.86)
<EPS-DILUTED> (.04) (.86)
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