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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 March 31, 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 (I.R.S. EMPLOYER
OF 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 June 11, 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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ZIFF DAVIS INC.
INDEX TO FORM 10-Q
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PAGE(S)
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Combined Balance Sheets as of March 31, 1998 (Unaudited) and December
31, 1997............................................................. 1
Combined Statements of Operations (Unaudited) Three Months Ended March
31, 1998 and 1997.................................................... 2
Combined Statements of Cash Flows (Unaudited) Three Months Ended March
31, 1998 and 1997.................................................... 3
Combined Statements of Changes in Stockholder's Equity (Unaudited)
Three Months Ended
March 31, 1998....................................................... 4
Notes to Combined Financial Statements (Unaudited).................... 5-6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................ 7-10
Item 3. Quantitative and Qualitative Disclosures about Market Risk.... 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................. 11
Item 2. Changes in Securities......................................... 11
Item 3. Defaults Upon Service Securities.............................. 11
Item 4. Submission of Matters to a Vote of Security Holders........... 11
Item 5. Other Information............................................. 11
Item 6. Exhibits and Reports on Form 8-K.............................. 11
SIGNATURES............................................................ 12
</TABLE>
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PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ZD INC. AND ZD COMDEX AND FORUMS INC.
COMBINED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
ASSETS 1998 1997
------ ----------- ------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents........................... $ 36,271 $ 30,301
Accounts receivable, net............................ 204,582 221,310
Inventories......................................... 19,229 17,853
Prepaid expenses and other current assets........... 38,370 37,900
Due from affiliates................................. 138,885 131,290
Deferred taxes...................................... 72,602 8,794
---------- ----------
Total current assets.............................. 509,939 447,448
Property and equipment, net........................... 51,500 53,536
Intangible assets, net................................ 3,001,347 3,030,333
Other assets.......................................... 16,707 15,329
---------- ----------
Total assets...................................... $3,579,493 $3,546,646
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Accounts payable...................................... $ 48,177 $ 55,468
Accrued expenses...................................... 70,550 80,094
Unearned income, net.................................. 194,478 154,682
Due to affiliates..................................... 444,418 398,332
Current portion of notes payable to affiliates........ 126,563 125,790
Other current liabilities............................. 15,705 4,222
---------- ----------
Total current liabilities......................... 899,891 818,588
Notes payable to affiliates........................... 2,365,788 2,408,240
Deferred taxes........................................ 180,117 180,117
Other liabilities..................................... 11,988 13,571
---------- ----------
Total liabilities................................. 3,457,784 3,420,516
---------- ----------
Stockholder's equity:
Common stock, par value $.01; 1,000 shares
authorized; 200 shares issued and outstanding...... -- --
Additional paid-in capital.......................... 248,608 248,330
Accumulated deficit................................. (124,550) (119,429)
Deferred compensation............................... (933) (996)
Cumulative translation adjustment................... (1,416) (1,775)
---------- ----------
Total stockholder's equity........................ 121,709 126,130
---------- ----------
Total liabilities and stockholder's equity........ $3,579,493 $3,546,646
========== ==========
</TABLE>
See notes to Combined Financial Statements
1
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ZD INC. AND ZD COMDEX AND FORUMS INC.
COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED--IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1998 1997
--------- ---------
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Revenue, net:
Publishing............................................ $ 200,933 $ 209,564
Events................................................ 27,121 15,321
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228,054 224,885
--------- ---------
Cost of production:
Publishing............................................ 53,581 54,990
Events................................................ 16,729 6,536
--------- ---------
70,310 61,526
--------- ---------
Selling, general and administrative expenses............ 144,239 139,980
Depreciation and amortization of property and equip-
ment................................................... 7,029 7,894
Amortization of intangible assets....................... 30,446 31,072
--------- ---------
Loss from operations.................................. (23,970) (15,587)
Related party interest expense, net..................... (45,939) (46,713)
Other non-operating income, net......................... 1,622 2,155
--------- ---------
Loss before income taxes................................ (68,287) (60,145)
Income tax benefit...................................... (63,166) (328)
--------- ---------
Net loss.............................................. $ (5,121) $ (59,817)
========= =========
</TABLE>
See notes to Combined Financial Statements
2
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ZD INC. AND ZD COMDEX AND FORUMS INC.
COMBINED STATEMENTS OF CASH FLOWS
(UNAUDITED--IN THOUSANDS)
<TABLE>
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THREE MONTHS ENDED
MARCH 31,
--------------------
1998 1997
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Cash flows from operating activities:
Net loss............................................... $ (5,121) $ (59,817)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization........................ 37,475 38,966
Income from equity investments....................... (1,385) (1,055)
Deferred tax benefit................................. (63,166) (328)
Provision for bad debts, returns and cancellations... 3,218 3,255
Compensation earned on restricted stock.............. 63 270
Changes in operating assets and liabilities:
Accounts receivable.................................. 13,510 7,800
Inventories.......................................... (1,376) (337)
Accounts payable and accrued expenses................ (16,835) (23,523)
Unearned income...................................... 39,796 58,552
Due to/from affiliates and management................ 18,114 (11,501)
Other, net........................................... 8,933 4,936
--------- ---------
Net cash provided by operating activities................ 33,226 17,218
--------- ---------
Cash flows from investing activities:
Capital expenditures................................... (5,115) (5,263)
Investment in joint ventures........................... (1,117) --
Acquisitions, net of cash acquired..................... -- (2,998)
--------- ---------
Net cash used by investing activities.................... (6,232) (8,261)
--------- ---------
Cash flows from financing activities:
Advances from parent company........................... 20,377 --
Principal payments on notes payable to affiliates...... (41,679)
Contributed capital.................................... 278 --
--------- ---------
Net cash provided by financing activities................ (21,024) --
--------- ---------
Increase in cash and cash equivalents ................... 5,970 8,957
Cash and cash equivalents, beginning of period........... 30,301 29,915
--------- ---------
Cash and cash equivalents, end of period................. $ 36,271 $ 38,872
========= =========
Supplemental cash flow information:
Cash paid for income taxes............................. $ 642 $ --
Cash paid to related parties for interest.............. $ 42,679 $ 37,804
</TABLE>
See notes to Combined Financial Statements
3
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ZD INC. AND ZD COMDEX AND FORUMS INC.
COMBINED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
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<CAPTION>
ZD COMDEX AND
ZD INC. FORUMS INC. ADDITIONAL RETAINED CUMULATIVE TOTAL
------------- ------------- PAID-IN EARNINGS DEFERRED TRANSLATION STOCKHOLDER'S
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) COMPENSATION ADJUSTMENT EQUITY
------ ------ ------ ------ ---------- --------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1997................... 100 $ -- 100 $ -- $248,330 $(119,429) $(996) $(1,775) $126,130
Capital contribution
from Softbank and
affiliates............. 278 278
Net loss................ (5,121) (5,121)
Compensation earned on
restricted stock....... 63 63
Foreign currency
translation
adjustment............. 359 359
--- ----- --- ----- -------- --------- ----- ------- --------
Balance at March 31,
1998 (unaudited)....... 100 $ -- 100 $ -- $248,608 $(124,550) $(933) $(1,416) $121,709
=== ===== === ===== ======== ========= ===== ======= ========
</TABLE>
See notes to Combined Financial Statements
4
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ZD INC. AND ZD COMDEX AND FORUMS INC.
NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS)
1. BASIS OF PRESENTATION
Ziff Davis Inc. had no operations prior to the reorganization and completion
of its initial public offering on May 4, 1998, discussed in Note 2 below.
Accordingly, the financial information presented is the combined financial
statements including the accounts of ZD Inc. (formerly Ziff-Davis Inc.) and ZD
COMDEX and Forums Inc. ("ZDCF") and their subsidiaries (the "Companies").
Prior to the reorganization ZD Inc. and ZDCF were wholly-owned indirect
subsidiaries of SOFTBANK Corp. ("Softbank"), a Japanese corporation which,
directly or through affiliates, is approximately 50.1% owned by MAC Inc.
("MAC"), also a Japanese corporation. The financial statements do not reflect
the reorganization and initial public offering as such transactions occurred
after the balance sheet date.
The accompanying unaudited combined 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 combined financial position of the Companies at March 31, 1998 and
the results of their combined operations and cash flows for the three months
ended March 31, 1998 and 1997 have been included. Operating results for the
three months ended March 31, 1998 are not necessarily indicative of the
results that may be expected for the year ended December 31, 1998.
Prior to the reorganization and the initial public offering, the Companies
were capitalized with only a minimal number of common shares; consequently,
historical earnings per share has not been presented since management believes
such information is not relevant.
For further information, refer to the Companies' combined financial
statements and notes thereto for the year ended December 31, 1997, included in
Ziff-Davis Inc.'s Registration Statement on Form S-1. (File no. 333-46493
dated April 28, 1998)
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 ZDCF were contributed to Ziff-Davis Inc. in exchange for
73,619,355 common shares. Concurrently with the reorganization, Ziff-Davis
Inc. completed an initial public offering of 25,800,000 shares at an initial
public offering price of $15.50 per share, issued $250,000 of 8 1/2%
Subordinated Notes due 2008, entered into a $1,350,000 credit facility with a
group of banks under which $1,250,000 was borrowed and converted $884,882 of
intercompany indebtedness into equity. In addition, the Ziff-Davis Inc.
received approximately $9,100 of fixed assets from Kingston Technology Company
("Kingston") in exchange for 580,645 shares of Ziff-Davis Inc.'s common stock.
These assets will be 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 Ziff-Davis Inc.'s Registration Statement on Form S-1. (File no. 333-
46493 dated April 28, 1998)
Net proceeds from the initial public offering and funding transactions in
the Reorganization of $1,898,985 were used to complete the purchase of certain
assets from MAC for $370,000 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 are under
common control. Refer to Note 1 in the Companies' December 31, 1997 combined
financial statements.
5
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ZD INC. AND ZD COMDEX AND FORUMS INC.
NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS)
3. INCOME TAXES
Income taxes are provided at the projected annual effective tax rate. Ziff-
Davis Inc.'s anticipated effective tax rate is greater than the statutory rate
due to certain items which are not deductible for income tax purposes,
primarily losses generated by the MAC assets prior to their purchase by Ziff-
Davis Inc. and non-deductible goodwill amortization. The tax benefit recorded
for the three months ended March 31, 1998 has been reflected as a current
deferred tax asset as it is anticipated such benefit will reverse in future
quarters when Ziff-Davis Inc. generates taxable income.
4. COMMITMENTS AND CONTINGENCIES
OVER-ALLOTMENT OPTION
In conjunction with the initial public offering, Ziff-Davis Inc.'s U.S.
underwriters were granted an option to purchase additional shares of common
stock at the initial public offering price. On May 28, 1998, the underwriters
purchased 2,000,000 shares pursuant to the option, which shares Ziff-Davis
Inc. purchased from SBH for issuance to the underwriters in settlement of the
option.
GUARANTEE OF SOFTBANK'S U.S. DEBT
Prior to the Reorganization, the Companies, along with certain other
Softbank affiliates, were guarantors under a Softbank credit facility.
Concurrently with the Reorganization, the Companies were removed as
guarantors.
LEGAL PROCEEDINGS
Ziff-Davis Inc. is subject to various claims and legal proceedings arising
in the normal course of business. Management believes that the ultimate
liability, if any, in the aggregate will not be material to the combined
balance sheet, future operations or cash flow.
5. 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 include a $15,657 reduction in interest
expense due to the new capital structure, a $500 increase in depreciation
related to the assets acquired from Kingston, a $500 reduction of selling,
general and administrative expenses to reflect income from leasing such fixed
assets back to Kingston and the tax effect of these adjustments.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31, 1998
--------------
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Revenue, net................................................. $ 228,054
Depreciation and amortization................................ 37,975
Loss from operations......................................... (23,970)
Interest expense, net........................................ (30,282)
Loss before income taxes..................................... (52,630)
Income tax benefit........................................... (47,820)
Net loss..................................................... (4,810)
Basic loss per share......................................... $ (0.05)
Weighted average common shares outstanding................... 100,000,000
</TABLE>
Basic loss per share is presented as if the common stock issued in
conjunction with the initial public offering was outstanding beginning January
1, 1998 because management believes that such information is meaningful to
investors.
6
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ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Ziff-Davis Inc. (the "Company") operates in two business segments: (i)
publishing and (ii) events. The Company believes it is the world's preeminent
media and marketing company focused on computing and Internet-related
technology. Its principal publishing platforms are print publishing, online
content, market research and education. 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 events segment revenue has been earned in the second and fourth
quarters. In addition, the Company's publishing segment has generated higher
revenue in the second and fourth quarters.
REORGANIZATION AND INITIAL PUBLIC OFFERING
On May 4, 1998, SOFTBANK Corp. ("Softbank"), a Japanese corporation
completed a reorganization whereby the common stock of ZD Inc. and ZD COMDEX
and Forums Inc. ("ZDCF") were contributed to the Company by SOFTBANK Holdings,
Inc. ("SBH"), a wholly-owned subsidiary of Softbank, in exchange for
73,619,355 common shares. Concurrently with the reorganization, the Company
completed an initial public offering of 25,800,000 shares at an initial public
offering price of $15.50 per share, issued $250 million of 8 1/2% Subordinated
Notes due 2008, entered into a $1.35 billion credit facility with a group of
banks under which $1.25 billion was borrowed and converted $884.9 million of
intercompany indebtedness into equity. In addition, the Company received
approximately $9.1 million of fixed assets from SOFTBANK Kingston Inc.
("Kingston") in exchange for 580,645 shares of the Company. 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 dated
April 28, 1998)
Net proceeds of approximately $1.9 billion from the initial public offering
and funding transactions in the Reorganization were used to complete the
purchase of certain assets from MAC Inc. ("MAC") for $370.0 million (the "MAC
Assets") and repay intercompany indebtedness. MAC is a Japanese corporation
which owns 50.1% of Softbank.
On May 14, 1998, Kingston 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. The
public now holds 27.85 million or 27.85% of the Company's shares.
PRESENTATION OF FINANCIAL INFORMATION
The Company had no operations prior to the reorganization and initial public
offering. Accordingly, the financial information presented is the combined
financial statements of ZD Inc. and ZDCF.
The acquisition of the MAC Assets described above has been accounted for in
a manner similar to a pooling of interests as all entities involved are under
common control. Refer to Note 1 in the December 31, 1997 Combined Financial
Statements included in the Company's Registration Statement on Form S-1 (File
no. 333-46493 dated April 28, 1998).
7
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As a result of the reorganization and the initial public offering, the
Company significantly increased the number of common shares outstanding.
Consequently, management believes that presenting historical earnings per
share is not relevant.
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED)
Revenue
Revenue for the first quarter of 1998 was $228.1 million compared to $224.9
million for the first quarter of 1997, an increase of $3.2 million or 1.4%.
Excluding the impact of transferring certain publications to a joint
venture, publishing segment revenue improved $4.1 million or 2.1%. The
increase was due to growth in advertising in the 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 including slowing demand for computer
products, fewer new product launches, pricing pressures, vendor market share
shifts and excess PC inventories in distribution channels. 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 $12.8 million of revenue in the first quarter of 1997
but are no longer consolidated in the Company's results for 1998.
Revenue from the events segment rose $11.8 million or 77%, primarily as a
result of earlier production of two events, Seybold and JavaOne, as compared
to the prior year. Excluding timing effects, events segment revenue increased
$2.0 million or 7.8% principally from growth in these two events.
Selling, general and administrative
Selling, general and administrative expenses were $144.2 million for the
1998 quarter compared to $140.0 million in the 1997 quarter, an increase of
$4.2 million or 3.0%. Included in the 1998 quarter were $3.2 million of one-
time costs for office relocations. Excluding such one-time costs, recurring
expenses increased less than 1.0%.
Depreciation and amortization
Total depreciation and amortization expense was $37.5 million for the 1998
period compared to $39.0 million in the 1997 quarter, a decrease of $1.5
million or 3.8%. The decline was the result of certain assets being fully
depreciated or amortized in 1997.
Interest expense, net
Net interest expense declined to $45.9 million from $46.7 million. The
reduction was attributed to a lower level of debt outstanding due to principal
repayments.
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 $1.6 million for the 1998
quarter decreased $0.5 million compared to the $2.1 million earned in 1997.
The decline was due to a revised royalty and fee arrangement for the events
business in Japan in 1998 based on the profits of the events rather than a
fixed monthly management fee as in 1997. The decline was partly offset by the
Company's share of earnings from Mac Publishing LLC.
8
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Income taxes
The Company's taxable income for 1998 will be significantly greater than the
pre-tax income reported in its financial statements. The difference results
from certain items which are non-deductible for income taxes, primarily losses
generated by 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 be significantly in excess of the
statutory rates. In accordance with generally accepted accounting principles,
the Company records income taxes on a quarterly basis at the estimated annual
effective tax rate. As a result, the Company will record a tax benefit in
quarters where there are pre-tax losses and a provision in quarters where
there is pre-tax income.
The combined income tax benefit was $63.2 million for the first quarter of
1998 compared to a benefit of $0.3 million recorded in the first quarter of
1997. The increase was due primarily to a higher projected annual effective
tax rate for 1998 as compared 1997. The tax benefit recorded for the three
months ended March 31, 1998 has been reflected as a current deferred tax asset
as it is anticipated such benefit will reverse in future quarters when the
Company generates taxable income.
Net loss
As a result of the changes described above, the net loss for the first
quarter of 1998 was $5.1 million compared to a net loss of $59.8 million for
the first 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 first quarter of 1998 was $15.1 million compared to $25.5
million for the first quarter in 1997. Excluding the impact from the timing of
events, results were unfavorable compared to last year primarily due to the
lower level of advertising in the higher margin business publications. In
addition, during the first quarter of 1998 the Company recorded $3.2 million
of one-time costs for office relocations and incurred $1.4 million of losses
from launching 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 $36.3 million at March 31, 1998, an increase
of $6.0 million from the $30.3 million at December 31, 1997. The increase was
due to the factors described below:
Cash provided by operations was $33.2 million for the three months ended
March 31, 1998 compared to $17.2 million for the 1997 first quarter. The
improvement primarily results from parent company advances to fund interest
payments partly offset by the Company's lower earnings in the 1998 quarter.
Cash used in investing activities for the 1998 period totaled $6.2 million
compared to $8.3 million for the 1997 period. For both periods, the majority
of these expenditures were for computer equipment and leasehold improvements.
The Company projects it will spend approximately $35 million, net of tenant
improvement credits, during the year in connection with the building and
furnishing of new office space for the Company's corporate offices to be
occupied during 1999.
9
<PAGE>
Cash used in financing activities totaled $21.0 million for the 1998 period,
primarily the net effect of repayment of principal on intercompany
indebtedness and short term advances from the parent company to partially fund
such repayment. There was no financing activity in the 1997 comparable period.
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,
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.
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 this 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 $57 million, of which
$10.1 million had been spent through March 31, 1998. The Company has not yet
determined whether it will exercise its option to purchase MAC's interest in
ZDTV. 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.
FORWARD-LOOKING STATEMENTS
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" contains 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 contained the Company's Registration Statement on Form S-1 (File
No. 333-46493 dated April 28, 1998)
10
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company has been 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 are 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 investment in SIM was solely by SBH, which
intends a vigorous defense on behalf of itself and the Company.
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
None
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
11
<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.
Date: June 12, 1998
/s/ Timothy C. O'Brien
__________________________________________
TIMOTHY C. O'BRIEN,CHIEF FINANCIAL
OFFICER, DIRECTOR
(On behalf of Registrant and as Principal
Financial Officer)
Date: June 12, 1998
/s/ Mark D. Moyer
__________________________________________
MARK D. MOYER,VICE PRESIDENT AND
CONTROLLER
(On behalf of Registrant and as Principal
Accounting Officer)
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMBINED FINANCIAL STATEMENTS OF ZD INC. AND ZD COMDEX AND
FORUMS FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENT.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 36,271
<SECURITIES> 0
<RECEIVABLES> 204,582
<ALLOWANCES> 0
<INVENTORY> 19,229
<CURRENT-ASSETS> 509,939
<PP&E> 51,500
<DEPRECIATION> 0
<TOTAL-ASSETS> 3,579,493
<CURRENT-LIABILITIES> 889,891
<BONDS> 2,365,788
0
0
<COMMON> 0
<OTHER-SE> 121,709
<TOTAL-LIABILITY-AND-EQUITY> 3,579,493
<SALES> 228,054
<TOTAL-REVENUES> 228,054
<CGS> 70,310
<TOTAL-COSTS> 214,549
<OTHER-EXPENSES> 37,475
<LOSS-PROVISION> 3,218
<INTEREST-EXPENSE> 45,939
<INCOME-PRETAX> (68,287)
<INCOME-TAX> (63,166)
<INCOME-CONTINUING> (5,121)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,121)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
