<PAGE>
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 June 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 IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
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 August 13, 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.
<PAGE>
ZIFF DAVIS INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PAGE(S)
-------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 1998 (Unaudited) and Decem-
ber 31, 1997.......................................................... 1
Consolidated Statements of Operations (Unaudited) for the Three Months
and Six Months Ended June 30, 1998 and 1997........................... 2
Consolidated Statements of Cash Flows (Unaudited) for the Six Months
Ended June 30, 1998 and 1997.......................................... 3
Consolidated Statement of Changes in Stockholders' Equity (Unaudited)
for the Six Months Ended June 30, 1998................................ 4
Notes to Consolidated Financial Statements (Unaudited)................. 5-7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................... 8-13
Item 3. Quantitative and Qualitative Disclosures about Market Risk....... 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................ 14
Item 2. Changes in Securities and Use of Proceeds........................ 14
Item 3. Defaults Upon Senior Securities.................................. 14
Item 4. Submission of Matters to a Vote of Security Holders.............. 14
Item 5. Other Information................................................ 14
Item 6. Exhibits and Reports on Form 8-K................................. 14
SIGNATURES............................................................... 15
</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>
DECEMBER 31,
JUNE 30, 1998 1997
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 43,036 $ 30,301
Accounts receivable, net........................... 205,281 221,310
Inventories........................................ 18,494 17,853
Prepaid expenses and other current assets.......... 41,682 37,900
Due from affiliates................................ 36,413 131,290
Deferred taxes..................................... 8,794 8,794
---------- ----------
Total current assets............................. 353,700 447,448
Property and equipment, net.......................... 61,777 53,536
Intangible assets, net............................... 2,968,255 3,030,333
Other assets......................................... 40,498 15,329
---------- ----------
Total assets..................................... $3,424,230 $3,546,646
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................... $ 30,216 $ 55,468
Accrued expenses................................... 91,105 80,094
Unearned income, net............................... 188,006 154,682
Due to affiliates.................................. -- 398,332
Current portion of notes payable to affiliates..... 7,692 125,790
Other current liabilities.......................... 5,682 4,222
---------- ----------
Total current liabilities........................ 322,701 818,588
Notes payable to affiliates.......................... 73,654 2,408,240
Notes payable, net of unamortized discount........... 1,484,100 --
Deferred taxes....................................... 181,948 180,117
Other liabilities.................................... 14,496 13,571
---------- ----------
Total liabilities................................ 2,076,899 3,420,516
---------- ----------
Stockholders' equity:
Preferred stock (1)................................ -- --
Common stock (2)................................... 1,000 --
Additional paid-in capital......................... 1,550,239 248,330
Accumulated deficit................................ (201,110) (119,429)
Deferred compensation.............................. (870) (996)
Cumulative translation adjustment.................. (1,928) (1,775)
---------- ----------
Total stockholders' equity....................... 1,347,331 126,130
---------- ----------
Total liabilities and stockholders' equity....... $3,424,230 $3,546,646
========== ==========
</TABLE>
--------
(1) 1998: par value $.01 per share, 10,000,000 shares authorized, no shares
issued and outstanding; 1997: no authorized shares
(2) 1998: par value $.01 per share, 120,000,000 shares authorized,
100,000,000 shares issued and outstanding; 1997: par value $.01per
share, 2,000 shares authorized, 200 shares issued and outstanding.
See notes to Consolidated Financial Statements
1
<PAGE>
ZIFF-DAVIS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED--IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- ------------------
1998 1997 1998 1997
--------- --------- -------- --------
<S> <C> <C> <C> <C>
Revenue, net:
Publishing........................ $ 210,693 $ 219,195 $411,626 $428,759
Events............................ 65,782 82,135 92,903 97,456
--------- --------- -------- --------
276,475 301,330 504,529 526,215
--------- --------- -------- --------
Cost of production:
Publishing........................ 56,126 57,245 109,707 112,235
Events............................ 19,623 35,741 36,352 42,277
--------- --------- -------- --------
75,749 92,986 146,059 154,512
--------- --------- -------- --------
Selling, general and administrative
expenses........................... 140,063 143,243 284,302 283,225
Depreciation and amortization of
property and equipment............. 7,698 7,960 14,727 15,854
Amortization of intangible assets... 31,578 31,072 62,024 62,144
--------- --------- -------- --------
Income/(loss) from operations..... 21,387 26,069 (2,583) 10,480
Interest expense, net............... (36,153) (46,899) (82,092) (93,610)
Other non-operating income, net..... 2,734 3,115 4,356 5,270
--------- --------- -------- --------
Loss before income taxes............ (12,032) (17,715) (80,319) (77,860)
Provision/(benefit) for income
taxes.............................. 64,528 (328) 1,362 (656)
--------- --------- -------- --------
Net loss.......................... $ (76,560) $ (17,387) $(81,681) $(77,204)
========= ========= ======== ========
Proforma net loss per basic common
share............................ $ (0.77) $ (0.17) $ (0.82) $ (0.77)
========= ========= ======== ========
</TABLE>
See notes to Consolidated Financial Statements
2
<PAGE>
ZIFF-DAVIS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED -- IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss........................................... $ (81,681) $ (77,204)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization.................... 76,751 77,998
Amortization of debt issuance costs and dis-
count........................................... 479 --
Income from equity investments................... (2,613) (734)
Deferred tax provision (benefit)................. 1,362 (656)
Provision for bad debts, returns and cancella-
tions........................................... 8,991 6,873
Compensation earned on restricted stock.......... 126 540
Changes in operating assets and liabilities:
Accounts receivable.............................. 7,285 6,408
Inventories...................................... (20) 1,987
Accounts payable and accrued expenses............ (16,729) (25,429)
Unearned income.................................. 31,664 42,361
Due to/from affiliates........................... 19,984 12,269
Other, net....................................... (3,809) 1,420
----------- -----------
Net cash provided by operating activities............ 41,790 45,833
----------- -----------
Cash flows from investing activities:
Capital expenditures............................... (13,399) (12,940)
Investment in joint ventures....................... (1,193) (60)
Acquisitions, net of cash acquired................. (500) (2,998)
----------- -----------
Net cash used by investing activities................ (15,092) (15,998)
----------- -----------
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.............................. (15,000) --
Payments of debt due to affiliates................. (1,567,802) (9,581)
Purchase of treasury shares........................ (29,500) --
Sale of treasury shares............................ 29,500 --
Advance from majority shareholder.................. 20,377 --
----------- -----------
Net cash used by financing activities................ (13,963) (9,581)
----------- -----------
Increase in cash and cash equivalents.............. 12,735 20,254
Cash and cash equivalents, beginning of period..... 30,301 29,915
----------- -----------
Cash and cash equivalents, end of period............. $ 43,036 $ 50,169
=========== ===========
Supplemental cash flow information
Cash paid for income taxes....................... $ 642 $ --
Cash paid for interest........................... $ 72,704 $ 116,782
</TABLE>
- --------
(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 STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
ZIFF-DAVIS INC. ZD INC. ZD EVENTS ADDITIONAL RETAINED CUMULATIVE
------------------- TREASURY -------------- -------------- PAID- IN EARNINGS DEFERRED TRANSLATION
SHARES AMOUNT STOCK SHARES AMOUNT SHARES AMOUNT 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) (29,500)
Sale of treasury
shares to the
public.......... 2,000,000 29,500
Net loss........ (81,681)
Compensation
earned on
restricted
stock........... 126
Foreign currency
translation
adjustment...... (153)
----------- ------ -------- ----- ---- ----- ---- --------- --------- ----- -------
Balance at June
30, 1998
(unaudited)..... 100,000,000 $1,000 $ -- -- $-- -- $-- 1,550,239 $(201,110) $(870) $(1,928)
=========== ====== ======== ===== ==== ===== ==== ========= ========= ===== =======
<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........ (81,681)
Compensation
earned on
restricted
stock........... 126
Foreign currency
translation
adjustment...... (153)
-------------
Balance at June
30, 1998
(unaudited)..... $1,347,331
=============
</TABLE>
See notes to Consolidated 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
its affiliates, is 50.1% 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 June 30,
1998 and the results of their consolidated operations and cash flows for the
three and six months ended June 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 of common stock 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).
The amount of intercompany indebtedness converted to equity differs from
amounts previously disclosed due to finalization of intercompany obligations.
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, 1997 combined
financial statements.
5
<PAGE>
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 June 30, 1998, the public held 27.85 million or 27.85% of the Company's
stock.
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 and non-
deductible goodwill amortization.
4. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
The Company 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.
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 commence 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. Terms of the various agreements are as
follows:
<TABLE>
<CAPTION>
NOTIONAL AMOUNT RATE TERM
--------------- ----- -------
<S> <C> <C>
$100,000...................................................... 5.804% 3 years
$150,000...................................................... 5.855% 5 years
$100,000...................................................... 5.860% 5 years
$100,000...................................................... 5.860% 5 years
$100,000...................................................... 5.880% 7 years
</TABLE>
Management believes the risk of loss to the Company in the event of non-
performance by any party under these agreements is not significant.
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. 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 three month period include a $5,219
reduction in interest expense due to the new capital structure, a $900
increase in depreciation related to the assets acquired from Kingston, a $900
reduction of selling, general and administrative expenses to reflect income
from leasing such fixed assets back to Kingston, as well as the tax effect of
these adjustments recorded at the combined federal and state statutory rate of
41%. The pro forma adjustment for the six month
6
<PAGE>
period include $20,876 reduction of interest expense, $1,800 increase in
depreciation expense and a $1,800 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%.
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, 1998 ENDED JUNE 30, 1998
------------------- -------------------
<S> <C> <C>
Revenue, net: $ 276,475 $504,529
Depreciation and amortization......... 40,176 78,551
Income/(loss) from operations......... 21,387 (2,583)
Interest expense, net................. (30,934) (61,216)
Loss before income taxes.............. (6,813) (59,443)
Income tax provision.................. 66,668 9,921
Net loss.............................. (73,481) (69,364)
=========== ===========
Net loss per basic common share....... $ (0.73) $ (0.69)
=========== ===========
Weighted average common shares out-
standing............................. 100,000,000 100,000,000
</TABLE>
7
<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
fluctuation 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. was 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 shares of common stock 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 in exchange for 580,645 common shares of
the Company. 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 and funding transactions 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 June 30, 1998 the public held 27.85 million or 27.85% of the Company's
common stock.
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 all entities involved were
under common control.
8
<PAGE>
RESULTS OF OPERATIONS
Comparison of the three months ended June 30, 1998 and 1997 (unaudited)
Revenue
Revenue for the second quarter of 1998 was $276.5 million compared to $301.3
million for the second quarter of 1997, a decrease of $24.8 million or 8.2%.
The comparison of 1998 and 1997 second quarter results was unfavorably
affected by the accounting treatment for certain publications owned directly
in 1997, but owned through a joint venture (described below) in 1998 as well
as the shift of two events produced in the second quarter of 1997 to the first
quarter of 1998. Excluding these factors, revenue for the second quarter of
1998 grew by $.7 million compared to the same period in 1997.
Publishing--Excluding the impact of transferring certain publications to a
joint venture, publishing segment revenue improved $2.7 million or 1.3%. The
increase was due to growth in advertising in the Internet business (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.
A portion of the growth in consumer publication revenue was due to the
Company's May 1, 1998, acquisition of 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.
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 $11.2 million of revenue in the second
quarter of 1997 but are no longer consolidated in the Company's results for
1998.
Events--Revenue from the events segment decreased $16.3 million or 19.9%,
primarily due to the shift in timing of two events, Seybold and JavaOne, from
the second quarter last year to the first quarter of 1998. Revenue for the
three key events held in the quarter, COMDEX/Spring, N+I Las Vegas and Support
Services East, were collectively up 4.2% with N+I Las Vegas up 22%. In its
first year of a relocation to Chicago, COMDEX/Spring experienced a decline in
revenue due to lower square feet of exhibition space sold. This event has
permanently relocated to Chicago and has entered into a ten-year lease for a
venue.
Cost of production
Cost of production decreased $17.2 million or 18.5% from the 1997 period.
The events segment accounted for $16.1 million of this decrease primarily
related to the shift in timing of events discussed above. Publishing cost of
production declined $1.1 million primarily related to a decline in advertising
pages produced.
Selling, general and administrative
Selling, general and administrative expenses were $140.1 million for the
1998 second quarter compared to $143.2 million in the 1997 quarter, a decrease
of $3.1 million or 2.2%. The decline is largely the result of efficiencies
realized in combining the publishing and events businesses through the
Reorganization and in particular, the consolidation of the two former events
entities into one business unit.
Expenses for the 1998 period included $4.0 million for spending on recently
launched publications.
Depreciation and amortization
Total depreciation and amortization expense was $7.7 million for the 1998
period compared to $8.0 million in the 1997 quarter, a decrease of $.3 million
or 3.8%. The decline was the result of certain assets being fully depreciated
or amortized in 1997.
9
<PAGE>
Interest expense, net
Net interest expense declined to $36.2 million for the 1998 period from
$46.9 million in 1997. The reduction was attributed to a lower level of debt
outstanding due to principal repayments and, as a result of the
Reorganization, the capitalization of $908.7 million of intercompany
indebtedness. 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 $2.7 million for the 1998
quarter decreased $.4 million from the $3.1 million earned in 1997. The
decline was due to a revised royalty and fee arrangement for the events
business in Japan in 1998 which is 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 equity share of earnings from Mac Publishing, LLC.
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
rates 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 provision was $64.5 million for the second quarter of 1998
compared to an income tax benefit of $.3 million recorded in the second
quarter of 1997. The increase was due primarily to a higher projected annual
effective tax rate for 1998 as compared to 1997.
The significant provision relative to the reported pre-tax loss for the
three months ended June 30, 1998 was primarily the result of the reversal of
the tax benefit recorded in the three months ended March 31, 1998. The
reversal resulted from a change in the Company's estimated annual effective
tax rate and was accounted for in accordance with the provisions of Statement
of Financial Accounting Standards No. 109. This statement requires that the
revised estimated annual tax rate be applied to the year-to-date pre-tax loss
with the difference between the current year-to-date provision and the
previously reported year-to-date period recognized in the current quarterly
period.
Net loss
As a result of the changes described above, the net loss for the second
quarter of 1998 was $76.6 million compared to a net loss of $17.4 million for
the second 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 second quarter of 1998 was $63.4 million compared to $68.2
million for the period in 1997. Excluding the impact from the timing of
events, results were unfavorable to last year by $.7 million as the lower
level of advertising in the higher margin business publications more than
offset the growth in advertising from the Internet business and consumer
publications. In addition, during the second quarter of 1998 the Company
incurred $2.6 million of losses from launching new publications.
10
<PAGE>
Comparison of the six months ended June 30, 1998 and 1997 (unaudited)
Revenue
Revenue for the six months ended June 30, 1998 was $504.5 million compared
to $526.2 million for the first quarter of 1997, a decrease of $21.7 million
or 4.1%. The comparison of 1998 and 1997 six month results was unfavorably
affected by the accounting treatment for certain publications owned directly
in 1997, but owned through a joint venture in 1998. Excluding these factors,
revenue for the six months ended June 30, 1998 grew by $2.4 million, or 0.5%
compared to the same period in 1997.
Publishing--Excluding the impact of transferring certain publications to a
joint venture, publishing segment revenue improved $7.0 million or 1.7%.
Consistent with the results reported for the three month period, the increase
was due to growth in advertising in the Internet business (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.
A portion of the consumer advertising revenue growth was due to the
Company's May 1, 1998, acquisition of 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.
Revenues for the Macuser and MacWeek magazines contributed to Mac Publishing
LLC were $24.2 million for the first six months ended June 30, 1997 but, are
no longer consolidated into the Company's results for 1998.
Events--Revenue from the events segment decreased $4.6 million or 4.7%,
primarily the result of lower square feet of exhibition space being sold for
the COMDEX/Spring event as compared to the prior year.
Cost of production
Cost of production decreased $8.4 million or 5.5% from the 1997 period. The
events segment accounted for $5.9 million of this decrease, primarily related
to lower usage of exhibition space for the period. Publishing cost of
production declined $2.5 million due to lower advertising pages produced.
Selling, general and administrative
Selling, general and administrative expenses were $284.3 million for the six
months ended June 30, 1998 compared to $283.2 million in the 1997 quarter, an
increase of $1.1 million or 0.3%. Included in the 1998 period were $3.2
million of one-time costs for office relocations along with $6.0 million of
costs related to launches of new publications. Excluding these items,
recurring expenses decreased 2.9%, largely 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 $76.8 million for the 1998
period compared to $78.0 million in the 1997 period, a decrease of $1.2
million or 1.5%. The decline was the result of certain assets being fully
depreciated or amortized in 1997.
Interest expense, net
Net interest expense declined to $82.1 million for the 1998 period from
$93.6 million in 1997. The reduction was attributed to a lower level of debt
outstanding due to principal repayments and the recapitalization of $908,673
of intercompany indebtedness. The weighted average cost of debt did not change
significantly between the periods.
11
<PAGE>
Other non-operating income, net
Income of $4.4 million for the 1998 period decreased $.9 million from the
$5.3 million earned in 1997. The decline was due to the revised royalty and
fee arrangement for the events business in Japan partly offset by the
Company's share of earnings from Mac Publishing, LLC.
Income taxes
The combined income tax provision was $1.4 million for the six months ended
June 30, 1998 compared to an income tax benefit of $.7 million recorded in the
six months ended June 30, 1997. The increase was due primarily to a higher
projected annual effective tax rate for 1998 as compared to 1997.
Net loss
As a result of the changes described above, the net loss for the six months
ended June 30, 1998 was $81.7 million compared to a net loss of $77.2 million
for the six months ended June 30, 1997.
EBITDA
EBITDA for the six months ended June 30, 1998 was $78.5 million compared to
$93.8 million for the period in 1997. Results were unfavorable to last year
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. In addition, during the six months ended June 30, 1998 the Company
recorded $3.2 million of one-time costs for office relocations and incurred
$4.0 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 $43.0 million at June 30, 1998, an increase
of $12.7 million from $30.3 million at December 31, 1997. The increase was due
to the factors described below:
Cash provided by operations was $41.8 million for the six months ended June
30, 1998 compared to $45.8 million for the 1997 six months. The decline was
attributed to the Company's lower earnings for the 1998 period.
Cash used in investing activities for the 1998 period totaled $15.1 million
compared to $16.0 million for the 1997 period. For both periods, the majority
of these expenditures were for computer equipment and leasehold improvements.
Acquisitions for the 1997 period reflect the purchase of a 70% interest in
GameSpot, Inc. 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 New York offices
to be occupied during 1999.
Cash used in financing activities totaled $14.0 million for the 1998 period,
representing proceeds from the Reorganization and initial public offering of
$1,863.3 million, net of transaction costs, and funding from the parent
company of $20.4 million being offset by the repayment of debt and amounts due
to affiliates of $1,897.6 million. Cash used in financing activities in the
same period in 1997 amounted to $9.6 million representing 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
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.
12
<PAGE>
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 commence 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. Management believes the
risk of loss to the Company in the event of nonperformance by any party under
the agreements is not significant.
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
$25.4 million had been spent through June 30, 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
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 the Company's Registration Statement on Form S-
1 (File No. 333-46493).
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
13
<PAGE>
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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 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 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.
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.
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
14
<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: August 14, 1998 /s/ Timothy C. O'Brien
By___________________________________
Timothy C. O'Brien, Chief
Financial Officer, Director
(On behalf of Registrant and as
Principal Financial Officer)
Date: August 14, 1998 /s/ Mark D. Moyer
By___________________________________
Mark D. Moyer, Vice President and
Controller
(On behalf of Registrant and as
Principal Accounting Officer)
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF ZIFF-DAVIS INC.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> APR-01-1998 JAN-01-1998
<PERIOD-END> JUN-30-1998 JUN-30-1998
<CASH> 43,036 43,036
<SECURITIES> 0 0
<RECEIVABLES> 300,526 300,526
<ALLOWANCES> 95,245 95,245
<INVENTORY> 18,494 18,494
<CURRENT-ASSETS> 353,700 353,700
<PP&E> 61,777 61,777
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 3,424,230 3,424,230
<CURRENT-LIABILITIES> 322,701 322,701
<BONDS> 1,557,754 1,557,754
0 0
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<COMMON> 1,000 1,000
<OTHER-SE> 1,346,331 1,346,331
<TOTAL-LIABILITY-AND-EQUITY> 3,424,230 3,424,230
<SALES> 276,475 504,529
<TOTAL-REVENUES> 276,475 504,529
<CGS> 75,749 146,059
<TOTAL-COSTS> 255,088 507,112
<OTHER-EXPENSES> (2734) (4356)
<LOSS-PROVISION> 5773 8991
<INTEREST-EXPENSE> 36,153 82,092
<INCOME-PRETAX> (12,032) (80,319)
<INCOME-TAX> 64,528 1362
<INCOME-CONTINUING> (76,560) (81,681)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (76,560) (81,681)
<EPS-PRIMARY> (.77) (.82)
<EPS-DILUTED> (.77) (.82)
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