<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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, 1999
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 001-14055
ZIFF-DAVIS INC.
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C>
DELAWARE 13-3987754
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
28 East 28th Street, 10016
New York, New York (Zip Code)
(Address of principal executive offices)
</TABLE>
Registrants 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, 1999, there were 103,285,334 shares outstanding of the
registrant's Ziff-Davis Inc.--ZD Common Stock, par value $0.01 per share, and
13,692,147 shares outstanding of the registrant's Ziff-Davis Inc.--ZDNet
Common Stock, par value $0.01 per share.
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- -------------------------------------------------------------------------------
<PAGE>
ZIFF-DAVIS INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Ziff-Davis Inc.
Consolidated Balance Sheets as of June 30, 1999 (Unaudited) and
December 31, 1998..................................................... 1
Consolidated Statements of Operations (Unaudited) for the three and six
months ended June 30, 1999 and 1998................................... 2
Consolidated Statements of Comprehensive Loss (Unaudited) for the three
and six months ended June 30, 1999 and 1998........................... 3
Consolidated Statements of Cash Flows (Unaudited) for the six months
ended June 30, 1999 and 1998.......................................... 4
Consolidated Statement of Changes in Stockholders' Equity (Unaudited)
for the six months ended June 30, 1999................................ 5
Notes to unaudited consolidated financial statements................... 6
ZD
Combined Balance Sheets as of June 30, 1999 (Unaudited) and December
31, 1998.............................................................. 14
Combined Statements of Operations (Unaudited) for the three and six
months ended June 30, 1999 and 1998................................... 15
Combined Statements of Comprehensive Income (Loss) (Unaudited) for the
three and six months ended June 30, 1999 and 1998..................... 16
Combined Statements of Cash Flows (Unaudited) for the six months ended
June 30, 1999 and 1998................................................ 17
Combined Statement of Changes in Division Equity (Unaudited) for the
six months ended June 30, 1999........................................ 18
Notes to unaudited combined financial statements....................... 19
ZDNet
Combined Balance Sheets as of June 30, 1999 (Unaudited) and December
31, 1998.............................................................. 26
Combined Statements of Operations (Unaudited) for the three and six
months ended June 30, 1999 and 1998................................... 27
Combined Statements of Comprehensive Loss (Unaudited) for the three and
six months ended June 30, 1999 and 1998............................... 28
Combined Statements of Cash Flows (Unaudited) for the six months ended
June 30, 1999 and 1998................................................ 29
Combined Statement of Changes in Division Equity (Unaudited) for the
six months ended June 30, 1999........................................ 30
Notes to unaudited combined financial statements....................... 31
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Ziff-Davis Inc........................................................... 37
ZD....................................................................... 46
ZDNet.................................................................... 54
Item 3. Quantitative and Qualitative Disclosures about Market Risk......... 60
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................. 61
Item 2. Changes in Securities and Use of Proceeds.......................... 62
Item 3. Defaults Upon Senior Securities.................................... 62
Item 4. Submission of Matters to a Vote of Security Holders................ 62
Item 5. Other Information.................................................. 62
Item 6. Exhibits and Reports on Form 8-K................................... 62
SIGNATURES................................................................. 63
</TABLE>
<PAGE>
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ZIFF-DAVIS INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ 32,529 $ 32,566
Accounts receivable, net............................ 234,895 227,325
Inventories......................................... 11,956 15,551
Prepaid expenses and other current assets........... 45,509 34,543
Due from affiliates................................. 2,750 53,984
Deferred taxes...................................... 22,262 22,262
---------- ----------
Total current assets............................... 349,901 386,231
Securities available for sale......................... 10,709 --
Property and equipment, net........................... 109,755 91,189
Intangible assets, net................................ 2,928,760 2,907,043
Other assets.......................................... 60,847 49,340
---------- ----------
Total assets....................................... $3,459,972 $3,433,803
========== ==========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Accounts payable.................................... $ 41,106 $ 74,397
Accrued expenses.................................... 117,141 97,319
Unearned income, net................................ 214,633 152,081
Due to affiliates and management.................... -- 4,618
Current portion of notes payable to affiliates...... 6,923 7,692
Other current liabilities........................... 24,798 14,591
---------- ----------
Total current liabilities.......................... 404,601 350,698
Notes payable to affiliates........................... 67,500 70,192
Notes payable, net of unamortized discount............ 1,209,192 1,469,130
Deferred taxes........................................ 143,287 165,082
Due to management..................................... 4,437 5,400
Other liabilities..................................... 13,043 19,690
---------- ----------
Total liabilities.................................. 1,842,060 2,080,192
---------- ----------
Commitments and contingencies (see Note 9)
Minority Interest..................................... 36,746 1,013
---------- ----------
Stockholders' equity:
Preferred stock(1).................................. -- --
Common stock--Ziff-Davis Inc--ZD common stock(2).... 1,032 1,000
Common stock--Ziff-Davis Inc--ZDNet common
stock(3)........................................... 121 --
Additional paid-in capital.......................... 1,840,758 1,571,681
Accumulated deficit................................. (238,155) (197,238)
Deferred compensation............................... (19,078) (22,024)
Unrealized gain on securities available for sale.... 2,637 --
Cumulative translation adjustment................... (6,149) (821)
---------- ----------
Total stockholders' equity......................... 1,581,166 1,352,598
---------- ----------
Total liabilities and stockholders' equity......... $3,459,972 $3,433,803
========== ==========
</TABLE>
- --------
(1) June 30, 1999 and December 31, 1998: par value $0.01 per share, 10,000,000
shares authorized, no shares issued and outstanding.
(2) June 30, 1999: par value $.01 per share, 210,000,000 shares authorized,
103,206,374 shares issued and outstanding; December 31, 1998: par value
$0.01 per share 120,000,000 shares authorized, 100,000,000 shares issued
and outstanding.
(3) June 30, 1999: par value $.01 per share, 72,100,000 shares authorized,
12,103,000 shares issued and outstanding; December 31, 1998: no shares
authorized, issued or outstanding.
The accompanying notes are an integral part of these financial statements.
1
<PAGE>
ZIFF-DAVIS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited--dollars in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------------ ------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue, net:
Publishing.............. $ 178,369 $ 198,419 $ 353,358 $ 389,664
Events.................. 75,591 65,782 94,065 92,903
Internet................ 22,939 12,274 41,500 21,962
Television.............. 3,615 -- 5,701 --
----------- ----------- ----------- -----------
280,514 276,475 494,624 504,529
Cost of production........ 76,209 75,749 136,064 146,059
Selling, general and ad-
ministrative expenses.... 156,333 140,270 298,078 284,446
Stock-based compensation.. 1,917 63 3,389 126
Depreciation and amortiza-
tion of property and
equipment................ 8,432 7,698 16,975 14,727
Amortization of intangible
assets................... 34,277 31,578 66,148 62,024
----------- ----------- ----------- -----------
Income (loss) from opera-
tions.................... 3,346 21,117 (26,030) (2,853)
Interest expense, net..... (28,598) (36,153) (60,970) (82,092)
Other non-operating in-
come, net................ 10,227 2,859 11,491 4,356
Minority interest in
losses of subsidiaries... 6,722 145 10,195 270
----------- ----------- ----------- -----------
Loss before income taxes.. (8,303) (12,032) (65,314) (80,319)
Income tax benefit (provi-
sion).................... 5,161 (64,528) 24,397 (1,362)
----------- ----------- ----------- -----------
Net loss................ $ (3,142) $ (76,560) $ (40,917) $ (81,681)
=========== =========== =========== ===========
ZD NET
Pro forma net income
(loss) per basic and di-
luted common share....... $ .01 $ (.04) $ .01 $ (.12)
Pro forma weighted average
basic common shares out-
standing................. 72,060,967 71,500,000 71,782,033 71,500,000
Pro forma weighted average
diluted common shares
outstanding.............. 80,913,659 71,500,000 80,492,169 71,500,000
ZD GROUP
Pro forma net loss per
basic common share....... $ (0.03) $ (0.77) $ (0.40) $ (0.82)
Pro forma weighted average
basic common shares
outstanding.............. 103,130,069 100,000,000 102,078,285 100,000,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
ZIFF-DAVIS INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited--dollars in thousands)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------- ------------------
1999 1998 1999 1998
--------- --------- -------- --------
<S> <C> <C> <C> <C>
Net loss.............................. $ (3,142) $ (76,560) $(40,917) $(81,681)
Other comprehensive income, net of
tax:
Foreign currency translation
adjustments......................... (3,501) (512) (5,328) (153)
Unrealized (loss) gain on securities
available for sale.................. (449) -- 2,637 --
-------- --------- -------- --------
Comprehensive loss.................... $ (7,092) $ (77,072) $(43,608) $(81,834)
======== ========= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
ZIFF-DAVIS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited--dollars in thousands)
<TABLE>
<CAPTION>
Six months ended
June 30,
---------------------
1999 1998
--------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss.............................................. $ (40,917) $ (81,681)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization....................... 83,123 76,751
Amortization of debt issuance costs and discount.... 1,416 479
Stock-based compensation............................ 3,389 126
Income from equity investments...................... (1,806) (2,613)
Deferred tax (benefit) provision.................... (24,397) 1,362
Minority interest................................... (10,195) (270)
Changes in operating assets and liabilities:
Accounts receivable............................... (5,323) 16,276
Inventories....................................... 3,595 (20)
Accounts payable and accrued expenses............. (585) (16,729)
Unearned income................................... 56,291 31,664
Due to/from affiliates and management............. (2,817) 19,984
Other, net........................................ (29,324) (3,539)
--------- ----------
Net cash provided by operating activities............... 32,450 41,790
--------- ----------
Cash flows from investing activities:
Capital expenditures.................................. (48,929) (13,399)
Proceeds from sale of business........................ 9,755 --
Investments and other................................. (5,175) (1,193)
Distributions from joint ventures..................... 4,000 --
Acquisitions, net of cash acquired.................... (32,800) (500)
--------- ----------
Net cash used by investing activities................... (73,149) (15,092)
--------- ----------
Cash flows from financing activities:
Proceeds from sale of Ziff-Davis Inc.--ZD common
stock(1)............................................. 51,420 380,337
Proceeds from issuance of notes payable(1)............ -- 242,723
Proceeds from issuance of bank debt(1)................ -- 1,240,200
Proceeds from sale of Ziff-Davis Inc.--ZDNet common
stock(2)............................................. 198,603 --
Proceeds from sale of interest in ZDTV................ 54,000 --
Principal payments on notes payable to affiliates..... (3,461) (314,798)
Repayments of credit facility......................... (295,400) (15,000)
Borrowings under credit facility...................... 35,500 --
Payments of debt due to affiliate..................... -- (1,567,802)
Purchase of treasury shares........................... -- (29,500)
Sale of treasury shares............................... -- 29,500
Advance from majority shareholder..................... -- 20,377
--------- ----------
Net cash provided (used) by financing activities........ 40,662 (13,963)
--------- ----------
Net increase (decrease) in cash and cash equivalents.... (37) 12,735
Cash and cash equivalents at beginning of period........ 32,566 30,301
--------- ----------
Cash and cash equivalents at end of period.............. $ 32,529 $ 43,036
========= ==========
Supplemental cash flow information:
Cash paid for income taxes............................ $ -- $ 642
Cash paid for interest................................ $ 55,612 $ 72,704
</TABLE>
- --------
(1) Net of transaction costs of $19,563; $9,800; and $7,277, respectively,
for the six months ended June 30, 1998
(2) Net of transaction costs of $19,897
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
ZIFF-DAVIS INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(dollars in thousands)
<TABLE>
<CAPTION>
Common Stock
------------------------------------
Unrealized
Gain on
Additional Securities Cumulative Total
ZD Stock ZDNet Stock Paid-in Accumulated Deferred Available Translation Stockholders'
Shares Amount Shares Amount Capital Deficit Compensation For Sale Adjustment Equity
----------- ------ ---------- ------ ---------- ----------- ------------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31,
1998............ 100,000,000 $1,000 -- $-- $1,571,681 $(197,238) $(22,024) $ -- $ (821) $1,352,598
Issuance of
common stock.... 3,030,303 30 49,970 50,000
Sale of minority
interest in
subsidiary...... 7,176 7,176
Compensation
earned on stock
options......... 3,389 3,389
Issuance of ZDZ
shares, net of
offering costs.. 11,500,000 115 198,488 198,603
Shares and
options issued
to acquire
minority
interest in
GameSpot........ 600,000 6 12,025 (443) 11,588
Sale of shares
under employee
stock purchase
plan............ 75,628 1 782 783
Stock options
exercised....... 100,443 1 3,000 636 637
Unrealized gain
on securities
available for
sale, net....... 2,637 2,637
Net loss........ (40,917) (40,917)
Foreign currency
translation
adjustment...... (5,328) (5,328)
----------- ------ ---------- ---- ---------- --------- -------- ------ ------- ----------
Balance at June
30, 1999
(unaudited)..... 103,206,374 $1,032 12,103,000 $121 $1,840,758 $(238,155) $(19,078) $2,637 $(6,149) $1,581,166
=========== ====== ========== ==== ========== ========= ======== ====== ======= ==========
</TABLE>
The accompanying notes are an integral part of these financial statements
5
<PAGE>
ZIFF-DAVIS INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(numbers rounded to the nearest thousand, except share and per share amounts)
1. THE COMPANY AND BASIS OF PRESENTATION
Basis of presentation
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 Ziff-Davis Inc. at June
30, 1999 and the results of its consolidated operations for the three and six
months ended June 30, 1999 and 1998 and cash flows for the six months ended
June 30, 1999 and 1998 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, 1999. It is suggested that the statements be
read in conjunction with Ziff-Davis Inc.'s consolidated financial statements
and notes thereto included in Ziff-Davis Inc.'s December 31, 1998 Annual
Report and Form 10-K.
Formation of Ziff-Davis Inc.
Ziff-Davis Inc. was formed through an initial public offering and a
reorganization that were completed on May 4, 1998 (see Note 2). Prior to that
date, the predecessors of Ziff-Davis Inc. were wholly owned indirect
subsidiaries of SOFTBANK Corp. (together with its non-Ziff-Davis Inc.
affiliates, "Softbank") or assets owned by MAC Inc., an affiliate of SOFTBANK
Corp. ("MAC Assets"). As such, financial statements for periods prior to May
4, 1998 have been prepared on a combined basis while the financial statements
for the periods after May 4, 1998 have been prepared on a consolidated basis.
The results of the MAC Assets which were acquired in two tranches on October
31, 1997 and May 4, 1998, have been included in Ziff-Davis Inc.'s financial
statements from the time of their acquisition by MAC Inc. ("MAC") on February
29, 1996. These results have been included in a manner similar to a pooling of
interests, as the MAC Assets and predecessor companies of Ziff-Davis Inc. were
under common control at the time the MAC Assets were acquired by Ziff-Davis
Inc.
Ziff-Davis Inc. operates in four business segments: (1) publishing, (2)
events, (3) Internet and (4) television.
Publishing
The publishing segment is engaged in publishing magazines, journals,
newsletters, electronic information products, training manuals and market
research about computer technology and the Internet. The publishing segment's
principal operations are in the U.S. and Europe, although it also licenses or
syndicates its editorial content to over 50 publications distributed
worldwide.
Events
The events segment is engaged in the organization, production and management
of trade shows, conferences and seminars for the computer technology and
Internet industries. The events segment's principal operations are in the U.S.
and to a lesser extent in Europe and Asia.
Internet
The Internet segment is engaged in providing computer technology and
internet related news and information to Internet users worldwide. The
Internet segment's principal operations are in the U.S. and to a lesser extent
in Europe.
6
<PAGE>
ZIFF-DAVIS INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
Television
The television segment, which was acquired in February 1999 (see Note 4), is
engaged in the production and distribution of television broadcasting for and
about the computer technology and the Internet industries. The television
segment's principal operations are in the U.S. although it licenses or
syndicates programming worldwide.
Sale of Common Stock
On March 4, 1999, Vulcan Ventures Inc., the investment vehicle of Paul G.
Allen, purchased 3,030,303 shares of Ziff-Davis Inc. common stock for
$50,000,000 in cash.
On April 6, 1999, the Company completed a public offering of 11,500,000
shares of a new class of common stock called Ziff-Davis Inc.--ZDNet Stock (see
Note 3).
Reclassifications
Certain amounts have been reclassified, where appropriate, to conform to the
current financial statement presentation.
2. Reorganization and Initial Public Offering
On May 4, 1998, SOFTBANK Corp., through its wholly owned subsidiary SOFTBANK
Holdings Inc. ("SBH"), completed a reorganization whereby the common stock of
the predecessor companies to Ziff-Davis Inc. was contributed to Ziff-Davis
Inc. in exchange for 73,619,355 shares of Ziff-Davis Inc.'s common stock.
Concurrent with the reorganization, Ziff-Davis Inc. (1) completed an initial
public offering of 25,800,000 common shares at an initial public offering
price of $15.50 per share, (2) issued $250,000,000 of 8 1/2% subordinated
notes due 2008, (3) entered into a $1,350,000,000 credit facility with a group
of banks under which $1,250,000,000 was borrowed and (4) converted
$908,673,000 of intercompany indebtedness to equity. In addition, Ziff-Davis
Inc. received approximately $9,107,000 of fixed assets from Kingston
Technology Company ("Kingston"), a related party, in exchange for 580,645
shares of Ziff-Davis Inc.'s common stock and $107,000 in cash. These assets
were subsequently leased back to Kingston. Total shares of common stock issued
to Softbank were 74,200,000. The transactions described above are hereafter
referred to as the "Reorganization".
Proceeds, net of transaction costs, from the initial public offering and
funding transactions in the Reorganization of $1,863,260,000 were used to
complete the purchase of the MAC Assets for $370,000,000 and repay
intercompany indebtedness.
3. ZDNet Stock
The stockholders of Ziff-Davis Inc. voted, at a Special Meeting held on
March 30, 1999, to authorize the issuance of a new series of common stock,
designated as Ziff-Davis Inc.--ZDNet Common Stock ("ZDNet Stock"), which is
intended to reflect the performance of Ziff-Davis Inc.'s Internet business
division ("ZDNet"). When the ZDNet Stock was issued on April 6, 1999, Ziff-
Davis Inc.'s existing common stock was re-classified as Ziff-Davis Inc.--ZD
Common Stock ("ZD Stock"), which is intended to reflect the performance of
Ziff-Davis Inc.'s other businesses and a retained interest in ZDNet. The
businesses represented by ZD Stock are referred to as "ZD".
The ZDNet Stock offering was completed on April 6, 1999. Ziff-Davis Inc.
issued 11,500,000 shares of ZDNet Stock, at $19.00 per share, including
1,500,000 shares issued in conjunction with the underwriters' exercise of
their option to purchase additional shares to cover over-allotments. Net
proceeds of approximately $198.6 million were received on April 6, 1999 and
were used to repay indebtedness under the revolving credit agreement.
7
<PAGE>
ZIFF-DAVIS INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
The following pro forma information has been prepared as if the ZDNet Stock
offering had been consummated on January 1, 1999. The pro forma adjustments
include a $4,215,000 reduction of interest expense and the tax effect of this
adjustment at a statutory rate of 41.0%. There is no pro forma impact for the
three month period ended June 30, 1999.
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1999
----------------------
(dollars in thousands)
<S> <C>
Revenue, net....................................... $494,624
Loss from operations............................... (26,030)
Interest expense, net.............................. (56,755)
Loss before taxes.................................. (61,099)
Income tax benefit................................. (22,669)
Net loss........................................... (38,430)
</TABLE>
Pro forma loss per share is not shown since subsequent to the ZDNet
offering, Ziff-Davis Inc. reports earnings for each class of stock in its
related financial statements (i.e. ZD or ZDNet). The pro forma data is not
necessarily indicative of actual results had the transaction occurred on
January 1, 1999. Further, pro forma results are not meant to represent future
financial results.
4. ZDTV
On February 4, 1999, Ziff-Davis Inc. purchased ZDTV, LLC ("ZDTV") from MAC
Holdings (America) Inc., a related party, for a purchase price of
approximately $81,400,000. Ziff-Davis Inc. paid approximately $32,800,000 of
the purchase price in cash (settled on February 5, 1999) and paid the
remainder by applying approximately $48,600,000 in advances owed to it by MAC
Holdings (America) Inc. Ziff-Davis Inc. also agreed to be responsible for the
funding of ZDTV during the period in 1999 prior to the purchase which will be
accounted for as additional purchase price. Such funding amounted to
approximately $4,200,000.
On February 5, 1999, Vulcan Programming Inc., an entity owned by Paul G.
Allen, purchased a one-third interest in ZDTV for $54,000,000 in cash. In
April 1999, an additional 4% of ZDTV was sold to ZDTV's president.
The following unaudited summary pro forma information assumes that the
acquisition of ZDTV and the sale of a one-third interest in ZDTV to Vulcan
Programming Inc. had been consummated on January 1, 1999. Adjustments for ZDTV
transactions include the operating results of ZDTV, amortization of the
purchase price of ZDTV, Vulcan Programming Inc.'s one-third interest in the
losses of ZDTV and the tax effects of these items. Pro forma loss per share is
not shown since subsequent to the ZDNet Stock offering, Ziff-Davis Inc.
reports earnings for each class of stock in its related financial statements
(i.e. ZD or ZDNet). The pro forma data is not necessarily indicative of actual
results had the transaction occurred on January 1, 1999. Further, pro forma
results are not meant to represent future financial results. There is no pro
forma impact for the three months ended June 30, 1999.
<TABLE>
<CAPTION>
Six Months Ended June 30, 1999
--------------------------------
Adjustments
Ziff- For
Davis ZDTV
Inc. Transactions Pro Forma
-------- ------------ ---------
(dollars in thousands)
<S> <C> <C> <C>
Revenue................................. $494,624 $ 316 $494,940
Loss from operations.................... (26,030) (2,546) (28,576)
Net loss................................ (40,917) (1,006) (41,923)
</TABLE>
8
<PAGE>
ZIFF-DAVIS INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
ZDTV 1999 Profits Interest Plan
On May 11, 1999, ZDTV's Board of Directors adopted and approved the ZDTV
1999 Profits Interest Plan. Under such plan, ZDTV's Board of Directors may
issue interests in ZDTV for incentive purposes to employees, directors and
consultants covered by the plan. At June 30, 1999, there were 6,544,800 units
issued under the plan.
5. Acquisition of Gamespot
On April 7, 1999, Ziff-Davis Inc. completed the acquisition of the remaining
30% interest in GameSpot Inc. in exchange for 600,000 newly issued shares of
ZDNet Stock valued at approximately $11,400,000. This acquisition was
accounted for under the purchase method of accounting.
6. Investments
On February 19, 1999 Ziff-Davis Inc. acquired warrants to purchase 2,005,400
shares of Series E preferred stock of BuyDirect.com Inc. ("Series E shares")
at an exercise price of $1.65. On March 25, 1999, Ziff-Davis Inc. exercised
its warrants and received 1,510,020 Series E shares in a cashless exercise by
exchanging 495,380 warrants in lieu of payment of the exercise price. On March
30, 1999, BuyDirect.com Inc. was acquired by Beyond.com Corporation and these
Series E shares were converted to 438,057 shares of Beyond.com Corporation and
at June 30, 1999 are reflected in the balance sheet as Securities Available
for Sale.
The warrants were granted in connection with an agreement by BuyDirect.com
Inc. to advertise on certain ZDNet sites. As a result, the fair value of the
warrants at February 19, 1999 was recorded as deferred revenue and will be
recognized as income over the life of the advertising agreement. The fair
value of the warrants was determined to be $6,240,000.
In June 1999, Ziff-Davis Inc. entered into an agreement to hedge a portion
of the unrealized gain associated with these shares. (See Note 9).
7. Income Taxes
Income taxes are provided based on Ziff-Davis Inc.'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 nondeductible goodwill amortization and the effect of state and
local taxes. The tax benefit recorded for the six months ended June 30, 1999
has been reflected as a reduction of the deferred tax liability as it is
anticipated that the benefit will be realizable in future periods.
8. Earnings per share
Ziff-Davis Inc. reports earnings per share for its two classes of common
stock, ZD and ZDNet.
The pro forma weighted average common shares outstanding and the pro forma
loss per share related to ZD stock has been prepared assuming the
reorganization and initial public offering of ZD Stock (see Note 2) occurred
on January 1, 1998. ZD's earnings include its retained interest in ZDNet's
results. Diluted earnings per share are not shown as the impact of stock
options would be anti-dilutive.
9
<PAGE>
ZIFF-DAVIS INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
The pro forma weighted average common shares outstanding and the pro forma
income (loss) per share related to ZDNet stock has been prepared assuming the
reorganization and initial public offering of ZDNet Stock (see Note 3) occured
on January 1, 1998. A reconciliation of the numerator and denominator of basic
and diluted net income (loss) per share is presented below.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
(in thousands, except share and per shares amounts)
<S> <C> <C> <C> <C>
Income (loss) available
to common shareholders
....................... $ 816 $ (2,894) $ 630 $ (8,904)
============ ============ ============ ============
Pro forma weighted
average basic common
shares outstanding..... 72,060,967 71,500,000 71,782,033 71,500,000
Dilutive potential
common shares.......... 8,852,692 -- 8,710,136 --
------------ ------------ ------------ ------------
Pro forma weighted
average basic common
shares outstanding..... 80,913,659 71,500,000 80,492,169 71,500,000
============ ============ ============ ============
Pro forma income (loss)
per basic common
share.................. $ .01 $ (.04) $ .01 $ (.12)
Pro forma income (loss)
per dilutive common
share.................. $ .01 $ (.04) $ .01 $ (.12)
</TABLE>
Certain options were not included in the computation of diluted net earnings
per share because the options exercise prices were greater than the average
market prices of the common shares. For the three months and six months period
ended June 30, 1999, options to purchase 1,823,580 shares of ZDNet stock at
prices ranging from $29.88 to $42.88 per share were outstanding and not
included in the calculations. There were no options outstanding during the
1998 periods.
9. Commitments and Contingencies
Ziff-Davis Inc. is subject to various claims and legal proceedings arising
in the normal course of business.
Class action and derivative litigations
Following a decline in the price per share of Ziff-Davis Inc.'s common stock
in October 1998, eight securities class action suits were filed against Ziff-
Davis Inc. and certain of its directors and officers in the United States
District Court for the Southern District of New York.
The complaints alleged that defendants violated Sections 11, 12(a) (2) and
15 of the Securities Act of 1933 in connection with the registration statement
filed by Ziff-Davis Inc. with the Securities and Exchange Commission relating
to the initial public offering of Ziff-Davis Inc.'s stock completed on May 4,
1998 (the "IPO"). More particularly, the complaints alleged that the
registration statement contained false and misleading statements and failed to
disclose facts that could have indicated an impending decline in Ziff-Davis
Inc.'s revenue. The complaints sought on behalf of a class of purchasers of
Ziff-Davis Inc.'s common stock from the date of the IPO through October 8,
1998 unspecified damages, interest, fees and costs, rescission, and injunctive
relief such as the imposition of a constructive trust upon the proceeds of the
IPO.
On January 28, 1999, the court entered an order consolidating the actions,
appointing lead plaintiff's counsel and requiring the filing of a consolidated
amended complaint. The consolidated amended complaint was filed on June 15,
1999 and only alleges claims under Section 11 of the Securities Act of 1933.
On May 20, 1999, Ziff-Davis Inc. moved to dismiss the consolidated amended
complaint. In July 1999, plaintiff filed their response to the motion. Ziff-
Davis Inc. filed a reply on August 11, 1999.
10
<PAGE>
ZIFF-DAVIS INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
In addition, two derivative suits have been filed by stockholders against
Ziff-Davis Inc. and all of its directors in the Court of Chancery of the State
of Delaware for New Castle County. The complaints allege that the directors
breached their fiduciary duties to Ziff-Davis Inc. by repricing the stock
options awarded to certain directors and demand the nullification of the
repricing and an injunction against exercise by the directors of any repriced
option. Plaintiffs filed an amended complaint on February 17, 1999 (which is
substantially similar to the original complaints, except that the amended
complaint also addresses the granting of "new options" at an allegedly
"reduced exercise price") and the actions have been consolidated. Answers to
the amended complaint on behalf of both Ziff-Davis Inc. and its directors were
filed on April 12, 1999. Discovery is proceeding.
Other legal proceedings
Ziff-Davis Inc. was named as a defendant in an action, filed on April 17,
1998 in the Supreme Court of the State of New York, by minority stockholders
of SOFTBANK Interactive Marketing Inc. ("SIM"), formerly an indirect
subsidiary of SOFTBANK Corp. The complaint alleged, among other things, that
SBH, SIM's majority stockholder, acting with Ziff-Davis Inc. and two of its
senior officers and directors who were directors of SIM (and who were also
named as defendants), had conflicts of interest between SIM and other Softbank
investments (including investments in Ziff-Davis Inc.) and failed to act in
the best interests of SIM and the minority stockholders by taking actions
which benefited Ziff-Davis Inc. The complaint stated claims based on common
law fraud, breach of fiduciary duty and aiding and abetting theories and seeks
in excess of $200,000,000 in damages. Upon motion of Ziff-Davis Inc. and the
other defendants, all of the claims against them other than a breach of
contract claim which is solely against SBH, were dismissed on February 26,
1999. On April 1, 1999, plaintiffs filed a notice of appeal of the dismissal.
Although the outcome of these cases cannot be predicted, Ziff-Davis Inc.
believes that there are substantial defenses to the claims. Ziff-Davis Inc.
currently cannot estimate its ultimate liability, if any, with respect to such
pending litigations. Accordingly, no provision for such matters has been
included in the financial statements.
Interest rate swap
On June 15, 1999, Ziff-Davis Inc. amended a swap agreement (with a notional
amount of $100 million) by reducing the fixed rate paid to the counterparty
and providing the counterparty with a one-time option to cancel the swap
agreement on February 5, 2000. Ziff-Davis Inc. entered into another swap
agreement (with a notional amount of $50 million) on June 15, 1999. Under this
swap agreement, Ziff-Davis Inc. will receive a fixed rate of interest and pay
a floating rate of interest based on 3 months LIBOR, which resets quarterly,
for the terms of the agreement.
Beyond.com hedge
In June 1999, Ziff-Davis Inc. entered into a short-sale to effect a hedge on
300,000 of its 438,057 shares of Beyond.com. These shares were sold on behalf
of Ziff-Davis Inc. by a third party at a weighted average price of $22.50 per
share. Upon delivery of the shares to the third party, Ziff-Davis Inc. will
receive the cash proceeds of the sale and recognize a gain. However, Ziff-
Davis Inc. is not required to deliver the shares in any specified time-frame.
11
<PAGE>
ZIFF-DAVIS INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
9. Segment Information
Ziff-Davis Inc. operates in four reportable business segments: (1)
publishing, (2) events, (3) Internet and (4) television. All material inter-
segment revenue has been eliminated. The following table presents information
about each of the reported segments:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------
1999 1998 1999 1998
---------- ------------ -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C>
Revenue:
Publishing..................... $ 178,369 $ 198,419 $353,358 $389,664
Events......................... 75,591 65,782 94,065 92,903
Internet....................... 22,939 12,274 41,500 21,962
Television..................... 3,615 -- 5,701 --
---------- ---------- -------- --------
Total........................ $ 280,514 $ 276,475 $494,624 $504,529
========== ========== ======== ========
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------
1999 1998 1999 1998
---------- ------------ -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C>
EBITDA:
Publishing..................... $ 36,495 $ 37,626 $ 62,710 $ 64,986
Events......................... 31,399 27,404 24,202 19,744
Internet....................... 4,610 (1,570) 6,556 (6,080)
Television..................... (9,155) -- (13,894) --
---------- ---------- -------- --------
Total........................ $ 63,349 $ 63,460 $ 79,574 $ 78,650
========== ========== ======== ========
<CAPTION>
June 30, December 31,
1999 1998
---------- ------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Total Assets:
Publishing..................... $1,986,480 $2,192,099
Events......................... 1,187,885 1,144,018
Internet....................... 144,694 97,686
Television..................... 140,913 --
---------- ----------
Total........................ $3,459,972 $3,433,803
========== ==========
A reconciliation of EBITDA to loss before income taxes is below:
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------
1999 1998 1999 1998
---------- ------------ -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C>
Total segment EBITDA............. $ 63,349 $ 63,460 $ 79,574 $ 78,650
Depreciation and amortization of
property and equipment.......... (8,432) (7,698) (16,975) (14,727)
Amortization of intangible
assets.......................... (34,277) (31,578) (66,148) (62,024)
Stock-based compensation......... (1,917) (63) (3,389) (126)
Minority interest in ZDTV's non-
EBITDA losses................... 1,572 -- 2,594 --
Interest expense, net............ (28,598) (36,153) (60,970) (82,092)
---------- ---------- -------- --------
Loss before income taxes......... $ (8,303) $ (12,032) $(65,314) $(80,319)
========== ========== ======== ========
</TABLE>
12
<PAGE>
ZIFF-DAVIS INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
10. Subsequent Events
Updates.com Inc.
On July 2, 1999, ZDNet acquired Updates.com Inc. for a purchase price of
approximately $18,500,000. Consideration was in the form of $5,000,000 in cash
and 582,526 shares of ZDNet Stock. This acquisition will be accounted for
under the purchase method of accounting.
Ziff-Davis Inc.
On July 14, 1999, Ziff-Davis Inc. announced that it had retained the
investment banking firm of Morgan Stanley Dean Witter ("Morgan Stanley") to
explore strategic alternatives to maximize shareholder value. The Ziff-Davis
Inc. Board of Directors has not embraced any particular strategic alternatives
and will investigate all possible alternatives, including strategic alliances,
mergers and the sale or joint venture of all or some of Ziff-Davis Inc.'s
businesses. No assurances can be given that any transaction will result from
the exploration process that Morgan Stanley has been retained to manage. On
May 24, 1999, Ziff Davis Inc. had retained Morgan Stanley to explore strategic
alternatives for its ZD Market Intelligence unit.
SoftSeek Inc.
On July 30, 1999, ZDNet acquired SoftSeek Inc., for a purchase price of
approximately $26,000,000. Consideration was in the form of $7,000,000 in cash
and 991,038 shares of ZDNet Stock valued at $19,000,000. This acquisition will
be accounted for under the purchase method of accounting.
Registration statement
On August 5, 1999, Ziff-Davis Inc. filed a registration statement on Form S-
3 (File No 333-84555), which became effective on August 11, 1999 with the
Securities and Exchange Commission to register 1,180,173 shares of ZDNet Stock
in connection with the acquisition of Updates.com Inc. and SoftSeek Inc.
13
<PAGE>
ZD
(a division of Ziff-Davis Inc.)
COMBINED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----------- ------------
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents............................ $ 32,318 $ 32,274
Accounts receivable, net............................. 214,984 208,593
Inventories.......................................... 11,956 15,551
Prepaid expenses and other current assets............ 44,600 34,278
Due from affiliates.................................. 2,750 53,984
Deferred taxes....................................... 22,262 21,483
---------- ----------
Total current assets............................... 328,870 366,163
Property and equipment, net.......................... 103,911 85,571
Retained interest in ZDNet........................... 123,514 89,547
Intangible assets, net............................... 2,857,724 2,844,317
Other assets......................................... 54,229 44,340
---------- ----------
Total assets....................................... $3,468,248 $3,429,938
========== ==========
<CAPTION>
LIABILITIES AND DIVISION EQUITY
<S> <C> <C>
Current liabilities:
Accounts payable..................................... $ 36,133 $ 71,844
Accrued expenses..................................... 114,481 93,824
Unearned income, net................................. 207,995 151,003
Due to ZDNet......................................... 27,037 --
Due to affiliates and management..................... -- 4,618
Current portion of notes payable to affiliates....... 6,923 7,692
Other current liabilities............................ 24,798 14,591
---------- ----------
Total current liabilities.......................... 417,367 343,572
Notes payable to affiliates............................ 67,500 70,192
Notes payable, net of unamortized discount............. 1,209,192 1,469,130
Deferred taxes......................................... 145,707 169,356
Due to management...................................... 4,437 5,400
Other liabilities...................................... 13,043 18,677
---------- ----------
Total liabilities.................................. 1,857,246 2,076,327
Commitments and contingencies (see Note 6).............
Minority interest...................................... 36,746 1,013
Division equity........................................ 1,574,256 1,352,598
---------- ----------
Total liabilities and division equity.............. $3,468,248 $3,429,938
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
14
<PAGE>
ZD
(a division of Ziff-Davis Inc.)
COMBINED STATEMENTS OF OPERATIONS
(Unaudited--dollars in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Three months ended
June 30, Six months ended June 30,
-------------------------- --------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue, net:
Publishing............ $ 178,369 $ 198,419 $ 353,358 $ 389,664
Events................ 75,591 65,782 94,065 92,903
Television............ 3,615 -- 5,701 --
------------ ------------ ------------ ------------
257,575 264,201 453,124 482,567
Cost of production...... 73,299 74,711 130,492 143,758
Selling, general and ad-
ministrative expenses.. 140,913 127,049 268,588 258,165
Stock-based compensa-
tion................... 637 63 1,273 126
Depreciation and amorti-
zation of property and
equipment.............. 7,792 7,301 15,803 13,981
Amortization of intangi-
ble assets............. 32,916 30,558 63,765 59,626
------------ ------------ ------------ ------------
Income (loss) from oper-
ations................. 2,018 24,519 (26,797) 6,911
Interest expense, net... (29,148) (36,153) (61,520) (82,092)
Income (loss) related to
retained interest in
ZDNet.................. 679 (2,895) 493 (8,904)
Other non-operating in-
come, net.............. 10,227 2,589 11,491 4,086
Minority interest in
losses of subsidiar-
ies.................... 6,722 -- 10,078 --
------------ ------------ ------------ ------------
Loss before income tax-
es..................... (9,502) (11,940) (66,255) (79,999)
Income tax benefit (pro-
vision)................ 6,224 (64,620) 25,202 (1,682)
------------ ------------ ------------ ------------
Net loss................ $ (3,278) $ (76,560) $ (41,053) $ (81,681)
============ ============ ============ ============
Pro forma net loss per
basic common share..... $ (0.03) $ (0.77) $ (0.40) $ (0.82)
Pro forma weighted aver-
age basic common shares
outstanding............ 103,130,069 100,000,000 102,078,285 100,000,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
15
<PAGE>
ZD
(a division of Ziff-Davis Inc.)
COMBINED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited--dollars in thousands)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------- ------------------
1999 1998 1999 1998
--------- --------- -------- --------
<S> <C> <C> <C> <C>
Net loss.............................. $ (3,278) $ (76,560) $(41,053) $(81,681)
Other comprehensive income, net of tax
Foreign currency translation
adjustments......................... (3,501) (512) (5,328) (153)
Appreciation in equity of retained
interest in ZDNet................... 31,533 -- 35,455 --
-------- --------- -------- --------
Comprehensive income (loss)........... $ 24,754 $ (77,072) $(10,926) $(81,834)
======== ========= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
16
<PAGE>
ZD
(a division of Ziff-Davis Inc.)
COMBINED STATEMENTS OF CASH FLOWS
(Unaudited--dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------
1999 1998
--------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss............................................... $ (41,053) $ (81,681)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization....................... 79,568 73,607
Amortization of debt discount....................... 1,416 479
(Income) loss from retained interest in ZDNet....... (493) 8,904
(Income) loss from equity investments............... (1,806) (2,613)
Deferred tax benefit (provision).................... (25,202) 1,682
Stock-based compensation............................ 1,273 126
Minority interest................................... (10,078) --
Changes in operating assets and liabilities:
Accounts receivable............................... (4,144) 16,489
Inventories....................................... 3,595 (20)
Accounts payable and accrued expenses............. (2,170) (19,445)
Unearned income................................... 56,971 30,745
Due to affiliates and management.................. (2,817) 19,984
Other, net........................................ (29,420) (3,528)
--------- -----------
Net cash provided by operating activities.............. 25,640 44,729
--------- -----------
Cash flows from investing activities:
Capital expenditures................................. (47,531) (11,449)
Proceeds from sale of businesses..................... 9,755 --
Distributions from joint ventures.................... 4,000 --
Investments and other................................ (3,557) (1,193)
Acquisitions, net of cash acquired................... (32,800) (500)
--------- -----------
Net cash used by investing activities.................. (70,133) (13,142)
--------- -----------
Cash flows from financing activities:
Proceeds from sale of Ziff-Davis Inc-ZD common
stock(1)............................................ 51,420 380,337
Proceeds from issuance of notes payable(1)........... -- 242,723
Proceeds from issuance of bank debt(1)............... -- 1,240,200
Proceeds from sale of Ziff-Davis Inc-ZDNet common
stock(2)............................................ 172,718 --
Proceeds from sale of interest in ZDTV............... 54,000 --
Repayments of credit facility........................ (295,400) --
Borrowings under credit facility..................... 35,500 --
Payments of notes payable to affiliates.............. -- (314,798)
Payments of bank debt................................ -- (15,000)
Payments of debt due to affiliate.................... (3,461) (1,567,802)
Purchase of treasury shares.......................... -- (29,500)
Return of capital from ZDNet......................... 2,723 --
Sale of treasury shares.............................. -- 29,500
Advance from affiliate............................... 27,037 20,377
Contributed capital.................................. -- (5,143)
--------- -----------
Net cash provided (used) by financing activities....... 44,537 (19,106)
--------- -----------
Net increase in cash and cash equivalents.............. 44 12,481
Cash and cash equivalents at beginning of period....... 32,274 30,273
--------- -----------
Cash and cash equivalents at end of period............. $ 32,318 $ 42,754
========= ===========
Supplemental cash flow information:
Cash paid for income taxes........................... $ -- $ 642
Cash paid for interest............................... $ 55,612 $ 72,704
</TABLE>
- --------
(1) 1998 amounts net of transaction costs of $19,563; $9,800; and $7,277,
respectively
(2) Net of transaction costs of $19,897
The accompanying notes are an integral part of these financial statements.
17
<PAGE>
ZD
(a division of Ziff-Davis Inc.)
COMBINED STATEMENTS OF CHANGES IN DIVISION EQUITY
(dollars in thousands)
<TABLE>
<CAPTION>
Cumulative Total
Division Accumulated Deferred Translation Division
Capital Deficit Compensation Adjustment Equity
---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Balance at December 31,
1998.................... $1,559,336 $(197,238) $(8,679) $ (821) $1,352,598
Issuance of common
stock................... 50,000 50,000
Sale of minority
interest in subsidiary.. 7,176 7,176
Compensation earned on
stock options........... 1,273 1,273
Issuance of ZDNet Stock,
net of offering cost... 172,718 172,718
Sale of stock under
employee stock purchase
plan................... 782 782
Stock options
exercised.............. 636 636
Appreciation in equity
of retained interest in
ZDNet.................. 35,455 35,455
Net loss................ (41,053) (41,053)
Foreign currency
translation adjustment.. (5,329) (5,329)
---------- --------- ------- ------- ----------
Balance at June 30, 1999
(unaudited)............. $1,826,103 $(238,291) $(7,406) $(6,150) $1,574,256
========== ========= ======= ======= ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
18
<PAGE>
ZD
(a division of Ziff-Davis Inc.)
NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS
(numbers rounded to the nearest thousands, except share and per share amounts)
1. Organization and Basis of Presentation
Basis of presentation
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 ZD at June 30, 1999 and the results
of its combined operations for the three and six months ended June 30, 1999
and 1998 and cash flows for the six months ended June 30, 1999 and 1998 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,
1999. It is suggested that the statements be read in conjunction with ZD's
combined financial statements and notes thereto for the year ended December
31, 1998, included in Ziff-Davis Inc.'s registration statement on Form S-1
dated March 30, 1999 (File No. 333-69447).
Formation of Ziff-Davis Inc.
Ziff-Davis Inc. was formed through an initial public offering and a
reorganization that were completed on May 4, 1998 (see Note 2). Prior to that
date, the predecessors of Ziff-Davis Inc. were wholly owned indirect
subsidiaries of SOFTBANK Corp. (together with its non-Ziff-Davis Inc.
affiliates, "Softbank") or assets owned by MAC Inc., an affiliate of SOFTBANK
Corp. ("MAC Assets").
The results of the MAC Assets which were acquired in two tranches on October
31, 1997 and May 4, 1998, have been included in Ziff-Davis Inc.'s financial
statements from the time of their acquisition by MAC Inc. ("MAC") on February
29, 1996. These results have been included in a manner similar to a pooling of
interests, as the MAC Assets and predecessor companies of Ziff-Davis Inc. were
under common control at the time the MAC Assets were acquired by Ziff-Davis
Inc.
ZD is the division of Ziff-Davis Inc. focused on the business of print
publishing, tradeshows and conferences, television, market research and
education. ZDNet is the Internet business division of Ziff-Davis Inc. As of
June 30, 1999, ZD held a retained interest in ZDNet of approximately 83.2%
(see Note 3).
ZD operates in three business segments: (1) publishing, (2) events and (3)
television.
Publishing
The publishing segment is engaged in publishing magazines, journals,
newsletters, electronic information products, training manuals and market
research about computer technology and the Internet. The publishing segment's
principal operations are in the U.S. and Europe, although it also licenses or
syndicates its editorial content to over 50 publications distributed
worldwide.
Events
The events segment is engaged in the organization, production and management
of trade shows, conferences and seminars for computer technology and the
Internet industries. The events segment's principal operations are in the U.S.
and to a lesser extent in Europe and Asia.
19
<PAGE>
ZD
(a division of Ziff-Davis Inc.)
NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS--(Continued)
Television
The television segment, which was acquired in February 1999 (see Note 4), is
engaged in the production and distribution of television broadcasting for and
about the computer technology and the Internet industries. The television
segment's principal operations are in the U.S although it licenses or
syndicates programming worldwide.
Sale of Common Stock
On March 4, 1999, Vulcan Ventures Inc., the investment vehicle of Paul G.
Allen, purchased 3,030,303 shares of Ziff-Davis Inc. common stock for
$50,000,000 in cash.
On April 6, 1999, ZD completed a public offering of 10,000,000 shares of a
new class of common stock called Ziff-Davis Inc.--ZDNet stock (see Note 3).
Earnings per share
Pro forma net loss per basic common share and the associated weighted
average common shares outstanding in the 1998 period presented on the combined
statement of operations assumes the ZD stock offering (see Note 2) was
completed on January 1, 1998.
Pro forma net loss per basic common share presented elsewhere in these
financial statements is calculated based on pro forma net loss for the
transaction being described divided by the weighted average common shares
outstanding indicated on the statement of operations.
Diluted earnings per share are not shown as the impact of stock options
would be anti-dilutive.
Reclassifications
Certain amounts have been reclassified, where appropriate, to conform to the
current financial statement presentation.
2. Reorganization, and Initial Public Offering
On May 4, 1998, SOFTBANK Corp., through its wholly owned subsidiary SOFTBANK
Holdings Inc. ("SBH"), completed a reorganization whereby the common stock of
the predecessor companies to Ziff-Davis Inc. was contributed to Ziff-Davis
Inc. in exchange for 73,619,355 shares of Ziff-Davis Inc.'s common stock.
Concurrent with the reorganization, Ziff-Davis Inc. (1) completed an initial
public offering of 25,800,000 common shares at an initial public offering
price of $15.50 per share, (2) issued $250,000,000 of 8 1/2% subordinated
notes due 2008, (3) entered into a $1,350,000,000 credit facility with a group
of banks under which $1,250,000,000 was borrowed and (4) converted
$908,673,000 of intercompany indebtedness to equity. In addition, Ziff-Davis
Inc. received approximately $9,107,000 of fixed assets from Kingston
Technology Company ("Kingston"), a related party, in exchange for 580,645
shares of Ziff-Davis Inc.'s common stock and $107,000 in cash. These assets
were subsequently leased back to Kingston. Total shares of common stock issued
to Softbank were 74,200,000. The transactions described above are hereafter
referred to as the "Reorganization".
Proceeds, net of transaction costs, from the initial public offering and
funding transactions in the Reorganization of $1,863,260,000 were used to
complete the purchase of the MAC Assets for $370,000,000 and repay
intercompany indebtedness.
20
<PAGE>
ZD
(a division of Ziff-Davis Inc.)
NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS--(Continued)
3. ZDNet Stock
The stockholders of Ziff-Davis Inc. voted, at a Special Meeting held on
March 30, 1999, to authorize the issuance of a new series of common stock,
designated as Ziff-Davis Inc.--ZDNet Common Stock ("ZDNet Stock"), which is
intended to reflect the performance of Ziff-Davis Inc.'s Internet business
division ("ZDNet"). When the ZDNet Stock was issued on April 6, 1999, Ziff-
Davis Inc.'s existing common stock was re-classified as Ziff-Davis Inc.--ZD
Common Stock ("ZD Stock"), which is intended to reflect the performance of
Ziff-Davis Inc.'s other businesses and a retained interest in ZDNet (i.e.,
Ziff-Davis Inc.'s interest in ZDNet excluding the interest intended to be
represented by outstanding shares of ZDNet Stock) (collectively, "ZD").
Prior to the ZDNet Stock offering, ZD held a 100% retained interest in
ZDNet. The ZDNet Stock offering was completed on April 6, 1999. Ziff-Davis
Inc. issued 11,500,000 shares at $19.00 per share, including 1,500,000 shares
issued in conjunction with the underwriters' exercise of their option to
purchase additional shares to cover over-allotments. Ziff-Davis Inc.
attributed to ZDNet 1,500,000 of the sold shares in a manner analogous to a
primary offering, and attributed to ZD 10,000,000 of the sold shares in
respect of its retained interest in ZDNet, in a manner analogous to a
secondary offering. ZD received net proceeds of approximately $172.7 million
and ZDNet received net proceeds of approximately $25.9 million. The ZDNet net
proceeds were loaned to ZD as an intercompany loan which will bear interest at
the rate at which funding is available to Ziff-Davis Inc. After giving effect
to the ZDNet Stock offering, there were 11,500,000 shares of ZDNet Stock
outstanding and another 60,000,000 notional shares of ZDNet Stock intended to
represent ZD's retained interest in ZDNet, which was approximately 83.9%
immediately following the offering.
Prior to the ZDNet Stock offering, Ziff-Davis Inc. provided all funding for
ZD and ZDNet. Ziff-Davis Inc. continued with these practices until the ZDNet
Stock was issued. Accordingly, no interest expense or income to or from ZDNet
has been reflected in the financial statements of ZD for any period prior to
the date on which the ZDNet Stock was issued.
The following pro forma information has been prepared as if the ZDNet Stock
offering had been consummated on January 1, 1999. The pro forma adjustments
include a $3,666,000 reduction of interest expense and the tax effect of this
adjustment a statutory tax rate of 41.0%. The pro forma data is not
necessarily indicative of actual results had the transaction occurred on
January 1, 1999. Further, pro forma results are not meant to represent future
financial results. There is no pro forma impact for the three month period
ended June 30, 1999.
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1999
---------------------
(dollars in thousands
except per share
amount)
<S> <C>
Revenue, net.............................................. $453,124
Loss from operations...................................... (26,797)
Interest expense, net..................................... (57,854)
Loss before taxes......................................... (62,589)
Income tax benefit........................................ (23,699)
Net loss.................................................. (38,890)
Pro forma loss per basic common share..................... (.38)
</TABLE>
4. ZDTV
On February 4, 1999, ZD purchased ZDTV, LLC ("ZDTV") from MAC Holdings
(America) Inc., a related party, for a purchase price of approximately
$81,400,000. ZD paid approximately $32,800,000 of the purchase
21
<PAGE>
ZD
(a division of Ziff-Davis Inc.)
NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS--(Continued)
price in cash (settled on February 5, 1999) and paid the remainder by applying
approximately $48,600,000 in advances owed to it by MAC Holdings (America)
Inc. ZD also agreed to be responsible for the funding of ZDTV during the
period in 1999 prior to the purchase which will be accounted for as additional
purchase price. Such funding amounted to approximately $4,200,000.
On February 5, 1999 Vulcan Programming Inc., an entity owned by Paul G.
Allen, purchased a one-third interest in ZDTV for $54,000,000 in cash. In
April 1999, an additional 4% of ZDTV was sold to ZDTV's president.
The following unaudited summary pro forma information assumes that the
acquisition of ZDTV and the sale of a one-third interest in ZDTV to Vulcan
Programming Inc. had been consummated on January 1, 1999. Adjustments for ZDTV
transactions include the operating results of ZDTV, amortization of the
purchase price of ZDTV, Vulcan Programming's one-third interest in the losses
of ZDTV and the tax effects of these items. The pro forma data is not
necessarily indicative of actual results had the transaction occurred on
January 1, 1999. Further, pro forma results are not meant to represent future
financial results. There is no pro forma impact for the three months ended
June 30, 1999.
<TABLE>
<CAPTION>
Six Months Ended June 30, 1999
--------------------------------
Adjustments
for ZDTV
ZD Transactions Pro Forma
-------- ------------ ---------
(dollars in thousands
except per share amounts)
<S> <C> <C> <C>
Revenue....................................... $453,124 $ 316 $453,440
Loss from operations.......................... (26,797) (2,546) (29,343)
Net loss...................................... (41,053) (1,006) (42,059)
Pro forma loss per basic common share......... $ (0.41)
</TABLE>
ZDTV 1999 Profits Interest Plan
On May 11, 1999, ZDTV's Board of Directors adopted and approved the ZDTV
1999 Profits Interest Plan. Under such plan, ZDTV's Board of Directors may
issue interests in ZDTV for incentive purposes to employees, directors and
consultants covered by the plan. At June 30, 1999, there were 6,544,800 units
issued under the plan.
5. Income Taxes
Income taxes are provided based on ZD'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 ZD and nondeductible goodwill amortization
and the effect of state and local taxes. The tax benefit recorded for the
three and six months ended June 30, 1999 has been reflected as a reduction of
the deferred tax liability as it is anticipated that the benefit will be
realizable in future periods.
6. Commitments and Contingencies
ZD and Ziff-Davis Inc. are subject to various claims and legal proceedings
arising in the normal course of business.
Class action and derivative litigations
Following a decline in the price per share of Ziff-Davis Inc.'s common stock
in October 1998, eight securities class action suits were filed against Ziff-
Davis Inc. and certain of its directors and officers in the United States
District Court for the Southern District of New York.
22
<PAGE>
ZD
(a division of Ziff-Davis Inc.)
NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS--(Continued)
The complaints alleged that defendants violated Sections 11, 12(a) (2) and
15 of the Securities Act of 1933 in connection with the registration statement
filed by Ziff-Davis Inc. with the Securities and Exchange Commission relating
to the initial public offering of Ziff-Davis Inc.'s stock completed on May 4,
1998 (the "IPO"). More particularly, the complaints alleged that the
registration statement contained false and misleading statements and failed to
disclose facts that could have indicated an impending decline in Ziff-Davis
Inc.'s revenue. The complaints sought on behalf of a class of purchasers of
Ziff-Davis Inc.'s common stock from the date of the IPO through October 8,
1998 unspecified damages, interest, fees and costs, rescission, and injunctive
relief such as the imposition of a constructive trust upon the proceeds of the
IPO.
On January 28, 1999, the court entered an order consolidating the actions,
appointing lead plaintiff's counsel and requiring the filing of a consolidated
amended complaint. The consolidated amended complaint was filed on June 15,
1999 and only alleges claims under Section 11 of the Securities Act of 1933.
On May 20, 1999, Ziff-Davis Inc. moved to dismiss the consolidated amended
complaint. In July 1999, plaintiff filed their response to the motion. Ziff-
Davis Inc. filed a reply on August 11, 1999.
In addition, two derivative suits have been filed by stockholders against
Ziff-Davis Inc. and all of its directors in the Court of Chancery of the State
of Delaware for New Castle County. The complaints allege that the directors
breached their fiduciary duties to Ziff-Davis Inc. by repricing the stock
options awarded to certain directors and demand the nullification of the
repricing and an injunction against exercise by the directors of any repriced
option. Plaintiffs filed an amended complaint on February 17, 1999 (which is
substantially similar to the original complaints, except that the amended
complaint also addresses the granting of "new options" at an allegedly
"reduced exercise price") and the actions have been consolidated. Answers to
the amended complaint on behalf of both Ziff-Davis Inc. and its directors were
filed on April 12, 1999. Discovery is proceeding.
Other legal proceedings
Ziff-Davis Inc. was named as a defendant in an action, filed on April 17,
1998 in the Supreme Court of the State of New York, by minority stockholders
of SOFTBANK Interactive Marketing Inc. ("SIM"), formerly an indirect
subsidiary of SOFTBANK Corp. The complaint alleged, among other things, that
SBH, SIM's majority stockholder, acting with Ziff-Davis Inc. and two of its
senior officers and directors who were directors of SIM (and who were also
named as defendants), had conflicts of interest between SIM and other Softbank
investments (including investments in Ziff-Davis Inc.) and failed to act in
the best interests of SIM and the minority stockholders by taking actions
which benefited Ziff-Davis Inc. The complaint stated claims based on common
law fraud, breach of fiduciary duty and aiding and abetting theories and seeks
in excess of $200,000,000 in damages. Upon motion of Ziff-Davis Inc. and the
other defendants, all of the claims against them other than a breach of
contract claim which is solely against SBH, were dismissed on February 26,
1999. On April 1, 1999, plaintiffs filed a notice of appeal of the dismissal.
Although the outcome of these cases cannot be predicted, Ziff-Davis Inc.
believes that there are substantial defenses to the claims. Ziff-Davis Inc.
currently cannot estimate its ultimate liability, if any, with respect to such
pending litigations. Accordingly, no provision for such matters has been
included in the financial statements.
Interest rate swap
On June 15, 1999, ZD amended a swap agreement (with a notional amount of
$100 million) by reducing the fixed rate paid to the counterparty and
providing the counterparty with a one-time option to cancel the swap agreement
on February 5, 2000. ZD entered into another swap agreement (with a notional
amount of $50 million) on June 15, 1999. Under this swap agreement, ZD will
receive a fixed rate of interest and pay a floating rate of interest based on
3 months LIBOR, which resets quarterly, for the term of the agreement.
23
<PAGE>
ZD
(a division of Ziff-Davis Inc.)
NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS--(Continued)
7. Segment Information
ZD operates in three reportable business segments: (1) publishing, (2)
events and (3) television. All material inter-segment revenue has been
eliminated. The following table presents information about each of the
reported segments:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------------ ------------------
1999 1998 1999 1998
---------- ------------ -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C>
Revenue:
Publishing....................... $ 178,369 $ 198,419 $353,358 $389,664
Events........................... 75,591 65,782 94,065 92,903
Television....................... 3,615 -- 5,701 --
---------- ---------- -------- --------
Total.......................... $ 257,575 $ 264,201 $453,124 $482,567
========== ========== ======== ========
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------------ ------------------
1999 1998 1999 1998
---------- ------------ -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C>
EBITDA:
Publishing....................... $ 40,331 $ 36,056 $ 68,492 $ 58,906
Events........................... 31,399 27,404 24,202 19,744
Television....................... (9,155) -- (13,894) --
---------- ---------- -------- --------
Total.......................... $ 62,575 $ 63,460 $ 78,800 $ 78,650
========== ========== ======== ========
<CAPTION>
June 30, December 31,
1999 1998
---------- ------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Total Assets:
Publishing....................... $2,139,450 $2,285,920
Events........................... 1,187,885 1,144,018
Television....................... 140,913 --
---------- ----------
Total.......................... $3,468,248 $3,429,938
========== ==========
A reconciliation of EBITDA to loss before income taxes is below:
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------------ ------------------
1999 1998 1999 1998
---------- ------------ -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C>
Total segment EBITDA............. $ 62,575 $ 63,460 $ 78,800 $ 78,650
Depreciation and amortization of
property and equipment.......... (7,792) (7,301) (15,803) (13,981)
Amortization of intangible
assets.......................... (32,916) (30,558) (63,765) (59,626)
Stock-based compensation......... (637) (63) (1,273) (126)
Retained interest in ZDNet's non-
EBITDA losses................... (3,156) (1,325) (5,288) (2,824)
Minority interest in ZDTV's non-
EBITDA losses................... 1,572 -- 2,594 --
Interest expense, net............ (29,148) (36,153) (61,520) (82,092)
---------- ---------- -------- --------
Loss before income taxes......... $ (9,502) $ (11,940) $(66,255) $(79,999)
========== ========== ======== ========
</TABLE>
24
<PAGE>
ZD
(a division of Ziff-Davis Inc.)
NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS--(Continued)
8. SUBSEQUENT EVENTS
Ziff-Davis Inc.
On July 14, 1999, Ziff-Davis Inc. announced that it had retained the
investment banking firm of Morgan Stanley Dean Witter ("Morgan Stanley") to
explore strategic alternatives to maximize shareholder value. The Ziff-Davis
Inc. Board of Directors has not embraced any particular strategic alternatives
and will investigate all possible alternatives, including strategic alliances,
mergers, and the sale or joint venture of all or some of Ziff-Davis Inc.'s
businesses (including the businesses which make up ZD). No assurances can be
given that any transaction will result from the exploration process that
Morgan Stanley has been retained to manage. On May 24, 1999, Ziff-Davis Inc.
had retained Morgan Stanley to explore strategic alternatives for its ZD
Market Intelligence unit.
25
<PAGE>
ZDNet
(a division of Ziff-Davis Inc.)
COMBINED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 211 $ 292
Accounts receivable, net................................. 19,911 18,732
Receivable from ZD....................................... 27,037 --
Deferred taxes........................................... -- 779
Other current assets..................................... 908 265
-------- -------
Total current assets................................... 48,067 20,068
Securities available for sale.............................. 10,709 --
Property and equipment, net................................ 5,844 5,618
Investment, at cost........................................ 6,618 5,000
Deferred taxes............................................. 2,420 4,274
Intangible assets, net..................................... 71,036 62,726
-------- -------
Total assets........................................... $144,694 $97,686
======== =======
LIABILITIES AND DIVISION EQUITY
Current liabilities:
Accounts payable......................................... $ 4,972 $ 2,553
Accrued expenses......................................... 2,660 3,495
Unearned income.......................................... 6,638 1,078
-------- -------
Total current liabilities.............................. 14,270 7,126
Non-current liabilities.................................... -- 1,013
-------- -------
Total liabilities...................................... 14,270 8,139
-------- -------
Commitments and contingencies (see Note 7)
Division equity............................................ 130,424 89,547
-------- -------
Total liabilities and division equity.................. $144,694 $97,686
======== =======
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
26
<PAGE>
ZDNet
(a division of Ziff-Davis Inc.)
COMBINED STATEMENTS OF OPERATIONS
(Unaudited--dollars in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue, net.................... $ 22,939 $ 12,274 $ 41,500 $ 21,962
Cost of operations:
Production and content........ 8,526 6,573 16,286 13,065
Selling, general and
administrative expenses...... 9,805 7,415 18,776 15,247
Stock-based compensation...... 1,278 -- 2,114 --
Depreciation and amortization
of property and equipment.... 639 397 1,172 746
Amortization of intangible
assets....................... 1,361 1,020 2,383 2,398
---------- ---------- ---------- ----------
Income (loss) from operations... 1,330 (3,131) 769 (9,494)
Interest income................. 550 -- 550 --
Minority interest............... -- 145 117 270
---------- ---------- ---------- ----------
Income (loss) before income
taxes.......................... 1,880 (2,986) 1,436 (9,224)
Income tax provision (benefit).. 1,064 (92) 806 (320)
---------- ---------- ---------- ----------
Net income (loss)............... $ 816 $ (2,894) $ 630 $ (8,904)
========== ========== ========== ==========
Pro forma net income (loss) per
basic and diluted common
share.......................... $ .01 $ (.04) $ .01 $ (.12)
Pro forma weighted average basic
common shares outstanding...... 72,060,967 71,500,000 71,782,033 71,500,000
Pro forma weighted average
diluted common shares
outstanding.................... 80,913,659 71,500,000 80,492,169 71,500,000
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
27
<PAGE>
ZDNet
(a division of Ziff-Davis Inc.)
COMBINED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited--dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------- ----------------
1999 1998 1999 1998
------------------- ----------------
<S> <C> <C> <C> <C>
Net income (loss)....................... $ 816 $(2,894) $ 630 $(8,904)
Other comprehensive income, net of tax:
Foreign currency translation adjust-
ments................................ 342 -- 743 14
Unrealized (loss) gain on securities
available for sale................... (449) -- 2,637 --
------- ---------- ------- --------
Comprehensive income (loss)............. $ 709 $(2,894) $ 4,010 $(8,890)
======= ========== ======= ========
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
28
<PAGE>
ZDNet
(a division of Ziff-Davis Inc.)
COMBINED STATEMENTS OF CASH FLOWS
(Unaudited--dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 31,
------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss).......................................... $ 630 $ (8,904)
Adjustments to reconcile net income (loss) to net cash
provided by (used) in operating activities:
Depreciation and amortization of property and equipment.. 1,172 746
Amortization of intangible assets........................ 2,383 2,398
Minority interest........................................ (117) (270)
Deferred tax provision (benefit)......................... 806 (320)
Stock-based compensation................................. 2,114 --
Changes in operating assets and liabilities:
Accounts receivable.................................... (1,179) (213)
Other current assets................................... (644) (1)
Accounts payable and accrued expenses.................. 1,585 2,716
Unearned income........................................ (680) 919
Other, net............................................. 740 (10)
-------- --------
Net cash provided by (used in) operating activities........ 6,810 (2,939)
-------- --------
Cash flows from investing activities:
Capital expenditures..................................... (1,398) (1,950)
Investments.............................................. (1,618) --
-------- --------
Net cash used in investing activities...................... (3,016) (1,950)
-------- --------
Cash flows from financing activities:
Capital (distributions) contributions to from ZD......... (2,723) 5,143
Advances to ZD........................................... (27,037) --
Proceeds from stock offering(1).......................... 25,885 --
-------- --------
Net cash (used) in provided by financing activities........ (3,875) 5,143
-------- --------
Net (decrease) increase in cash and cash equivalents....... (81) 254
Cash and cash equivalents at beginning of period........... 292 28
-------- --------
Cash and cash equivalents at end of period................. $ 211 $ 282
======== ========
</TABLE>
- --------
(1) Net of transaction costs of $2,615.
The accompanying notes are an integral part of the combined financial
statements.
29
<PAGE>
ZDNet
(a division of Ziff-Davis Inc.)
COMBINED STATEMENTS OF CHANGES IN DIVISION EQUITY
(dollars in thousands)
<TABLE>
<CAPTION>
Unrealized Gain Cumulative Total
Division Deferred Accumulated on Securities Translation Division
Capital Compensation Deficit Available for Sale Adjustment Equity
-------- ------------ ----------- ------------------ ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1998................... $148,975 $(13,345) $(46,047) $ -- $(36) $ 89,547
Return of capital to
parent................. (2,723) (2,723)
Stock-based
compensation........... 2,114 2,114
Unrealized gain on
securities available
for sale, net.......... 2,637 2,637
Issuance of ZDNet
Stock.................. 25,885 25,885
Acquisition of
GameSpot............... 12,031 (443) 11,588
Net income.............. 630 630
Foreign exchange
translation
adjustment............. 746 746
-------- -------- -------- ------ ---- --------
Balance at June 30, 1999
(unaudited)............ $184,168 $(11,674) $(45,417) $2,637 $710 $130,424
======== ======== ======== ====== ==== ========
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
30
<PAGE>
ZDNet
(a division of Ziff-Davis Inc.)
NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS
(numbers rounded to the nearest thousand, except share and per share amounts)
1. Organization and Basis of Presentation
Basis of presentation
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 ZDNet at June 31, 1999 and the
results of its combined operations for the three and six months ended June 30,
1999 and 1998 and cash flows for the three months ended June 30, 1999 and 1998
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, 1999. It is suggested that the statements be read in conjunction
with ZDNet's combined financial statements for the year ended December 31,
1999, included in Ziff-Davis Inc.'s registration statement dated March 30,
1999 Form S-1 (File No. 333-69447).
Formation of Ziff-Davis Inc.
Ziff-Davis Inc. was formed through an initial public offering and
reorganization that were completed on May 4, 1998 (see Note 2). Prior to that
date, the predecessors of Ziff-Davis Inc. were wholly owned indirect
subsidiaries of SOFTBANK Corp. (together with its non-Ziff-Davis Inc.
affiliates, "Softbank") or assets owned by MAC Inc., an affiliate of Softbank
("MAC Assets").
ZDNet is the Internet business division of Ziff-Davis Inc. ZD is the
division of Ziff-Davis Inc. focused on the business of print publishing, trade
shows and conferences, television, market research and education. At June 30,
1999, ZD held a retained interest in ZDNet of approximately 83.2% (see Note
3).
Acquisition of GameSpot, Inc.
In January 1997, SOFTBANK Holdings Inc. ("SBH"), an affiliate of Ziff-Davis
Inc., acquired 70% of GameSpot ("GameSpot", formerly SpotMedia Communications,
Inc.) for approximately $3,000,000. Funds for this acquisition were provided
by Ziff-Davis Inc., to SBH. As part of the initial public offering and
reorganization that was completed on May 4, 1998 (See Note 2), the 70%
interest in GameSpot was contributed to ZDNet. Because GameSpot and Ziff-Davis
Inc. were under common control at the time of the transaction, the GameSpot
acquisition has been accounted for in a manner similar to a pooling of
interests and GameSpot's results have been included in ZDNet's results since
the time of common ownership (January 1997).
On April 7, 1999, Ziff-Davis Inc. completed the acquisition of the remaining
30% interest in GameSpot in exchange for 600,000 newly issued shares of ZDNet
Stock valued at approximately $11,400,000. This acquisition has been accounted
for under the purchase method of accounting.
Reclassifications
Certain amounts have been reclassified, where appropriate, to conform to the
current financial statement presentation.
31
<PAGE>
ZDNet
(a division of Ziff-Davis Inc.)
NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS--(Continued)
2. Reorganization and initial public offering
On May 4, 1998, SOFTBANK Corp., through its wholly owned subsidiary, SBH,
completed a reorganization whereby the common stock of the predecessor
companies to Ziff-Davis Inc. was contributed to Ziff-Davis Inc. in exchange
for 73,619,355 shares of Ziff-Davis Inc.'s common stock. Concurrent with the
reorganization, Ziff-Davis Inc. (1) completed an initial public offering of
25,800,000 common shares at an initial public offering purchase price of
$15.50 per share, (2) issued $250,000,000 of 8 1/2% subordinated notes due
2008, (3) entered into a $1,350,000,000 credit facility with a group of banks
under which $1,250,000,000 was borrowed and (4) converted $908,673,000 of
intercompany indebtedness to equity. In addition, Ziff-Davis Inc. received
approximately $9,107,000 of fixed assets from Kingston Technology Company
("Kingston"), a related party, in exchange for 580,645 shares of Ziff-Davis
Inc.'s common stock and $107,000 in cash. These assets have been subsequently
leased back to Kingston. Total shares of common stock issued to Softbank were
74,200,000. The transactions described above are herein referred to as the
"Reorganization".
Proceeds, net of transaction costs, from the initial public offering and
funding transactions in the Reorganization of $1,863,260,000 were used to
complete the purchase of certain assets from MAC for $370,000,000, and repay
intercompany indebtedness. The ZDNet business was a portion of the MAC Assets
acquired at that time.
3. ZDNet Stock
The stockholders of Ziff-Davis Inc. voted, at a Special Meeting held on
March 30, 1999, to authorize the issuance of a new series of common stock,
designated as Ziff-Davis Inc.--ZDNet Common Stock ("ZDNet Stock"), which is
intended to reflect the performance of Ziff-Davis Inc.'s Internet business
division ("ZDNet"). When the ZDNet Stock was issued on April 6, 1999, Ziff-
Davis Inc.'s existing common stock was re-classified as Ziff-Davis Inc.--ZD
Common Stock ("ZD Stock"), which is intended to reflect the performance of
Ziff-Davis Inc.'s other businesses and a retained interest in ZDNet (i.e.,
Ziff-Davis Inc.'s retained interest in ZDNet excluding the interest intended
to be represented by outstanding shares of ZDNet Stock)(collectively, "ZD").
Prior to the ZDNet Stock offering, ZD held a 100% retained interest in
ZDNet. The ZDNet Stock offering was completed on April 6, 1999. Ziff-Davis
Inc. issued 11,500,000 shares at $19.00 per share including 1,500,000 shares
issued in conjunction with the underwriters' exercise of their option to
purchase additional shares to cover over-allotments. Ziff-Davis Inc.
attributed to ZDNet 1,500,000 of the sold shares in a manner analogous to a
primary offering and the related net proceeds of approximately $25.9 million.
The full amount of the net proceeds was loaned to ZD as an intercompany loan
which bears interest at the rate at which funding is available to Ziff-Davis
Inc. After giving effect to the ZDNet Stock offering, there were 11,500,000
shares of ZDNet Stock outstanding and another 60,000,000 notional shares of
ZDNet Stock intended to represent ZD's retained interest in ZDNet, which was
approximately 83.9% immediately following the offering.
Prior to the ZDNet Stock offering, Ziff-Davis Inc. provided all funding for
ZD and ZDNet. Ziff-Davis Inc. continued these practices until the ZDNet Stock
was issued. Accordingly, no interest expense or income to or from ZD has been
reflected in the financial statements of ZDNet for any period prior to the
date on which the ZDNet Stock was issued.
The following summary pro forma information has been prepared as if the
ZDNet Stock offering had been consummated on January 1, 1999. The pro forma
adjustments include the recognition of $550,000 of interest income from ZD and
the tax effect of this adjustment at a statutory tax rate of 41.0%. The pro
forma data is not necessarily indicative of actual results had the transaction
occurred on January 1, 1999. Further, pro forma results are not meant to
represent future financial results. There is no pro forma impact for the three
month period ended June 30, 1999.
32
<PAGE>
ZDNet
(a division of Ziff-Davis Inc.)
NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1999
----------------------
(dollars in thousands,
except share amounts)
<S> <C>
Revenue, net................................... $41,500
Loss from operations........................... 769
Interest income................................ 1,100
Income before taxes............................ 1,986
Income tax provision........................... 1,031
Net income..................................... 955
Pro forma net income per basic and diluted com-
mon share..................................... .01
</TABLE>
4. Investments
BuyDirect.com
On February 19, 1999 ZDNet acquired warrants to purchase 2,005,400 shares of
Series E preferred stock of BuyDirect.com Inc. ("Series E shares") at a
exercise price $1.65. On March 25, 1999, ZDNet exercised its warrants and
received 1,510,020 Series E shares in a cashless exercise by exchanging
495,380 warrants in lieu of payment of the exercise price. On March 30, 1999,
BuyDirect.com Inc. was acquired by Beyond.com Corporation and these Series E
shares were converted to 438,057 shares of Beyond.com Corporation and at June
30, 1999 are reflected in the balance sheet as Securities Available for Sale.
The warrants were granted in connection with an agreement by BuyDirect.com
Inc. to advertise on certain ZDNet sites. As a result, the fair value of the
warrants on February 19, 1999 was recorded as deferred revenue and will be
recognized as income over the life of the advertising agreement. The fair
value of the warrants was determined to be $6,240,000.
In June 1999, ZDNet entered into an agreement to hedge a portion of the
unrealized gain associated with these shares. (See Note 7)
Deja.com
On May 13, 1999, ZDNet made an additional investment in Deja.com Inc.
(formerly Deja News, Inc.) with the purchase of 386,939 shares of Series D
convertible non-voting preferred stock at a purchase price of $3.61 per share.
Combined with previous investments, at June 30, 1999, ZDNet owned 6.6% of
Deja.com Inc.
5. Income Taxes
Income taxes are provided based on ZDNet'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
nondeductible goodwill amortization and the effect of state and local taxes.
In addition, tax benefits attributable to losses in foreign jurisdictions and
certain U.S. losses are subject to the establishment of a valuation allowance
inasmuch as such loss carryforwards are not expected to be utilized in the
future. The tax benefit recorded for the six months ended June 30, 1999 has
been reflected as a non-current deferred tax assets as it is anticipated that
the benefit will reverse in future periods when ZDNet generates taxable
income.
6. Earnings per share
Pro forma earnings per share and the related weighted average common shares
outstanding presented in the statement of operations assume the ZDNet Stock
Offering (see Note 3) occurred on January 1, 1998.
33
<PAGE>
ZDNet
(a division of Ziff-Davis Inc.)
NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS--(Continued)
A reconciliation of the numerator and denominator of basic and diluted net
income (loss) per share are presented below:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
(in thousands, except share and per share amounts)
<S> <C> <C> <C> <C>
Income (loss) available
to common
shareholder........... $ 816 $ (2,894) $ 630 $ (8,904)
============ ============ ============ ============
Pro forma weighted
average basic common
shares outstanding.... 72,060,967 71,500,000 71,782,033 71,500,000
Dilutive potential
common shares......... 8,852,692 -- 8,710,136 --
------------ ------------ ------------ ------------
Pro forma weighted
average dilutive
common shares
outstanding........... 80,913,659 71,500,000 80,492,169 71,500,000
============ ============ ============ ============
Pro forma income (loss)
per basic common
share................. $ .01 $ (.04) $ .01 $ (.12)
Pro forma income (loss)
per dilutive common
share................. $ .01 $ (.04) $ .01 $ (.12)
</TABLE>
Certain options were not included in the computation of diluted net earnings
per share because the options exercise prices were greater than the average
market prices of the common shares. For the three months and six months period
ended June 30, 1999, options to purchase 1,823,580 shares of ZDNet stock at
prices ranging from $29.88 to $42.88 per share were outstanding and not
included in the calculations. There were no options outstanding during the
1998 periods.
7. Commitments and Contingencies
Class action and derivative litigations
ZDNet and Ziff-Davis Inc. are subject to various legal proceedings arising
in the normal course of business.
Following a decline in the price per share of Ziff-Davis Inc.'s common stock
in October 1998, eight securities class action suits were filed against Ziff-
Davis Inc. and certain of its directors and officers in the United States
District Court for the Southern District of New York.
The complaints alleged that defendants violated Sections 11, 12(a) (2) and
15 of the Securities Act of 1933 in connection with the registration statement
filed by Ziff-Davis Inc. with the Securities and Exchange Commission relating
to the initial public offering of Ziff-Davis Inc.'s stock completed on May 4,
1998 (the "IPO"). More particularly, the complaints alleged that the
registration statement contained false and misleading statements and failed to
disclose facts that could have indicated an impending decline in Ziff-Davis
Inc.'s revenue. The complaints sought on behalf of a class of purchasers of
Ziff-Davis Inc.'s common stock from the date of the IPO through October 8,
1998 unspecified damages, interest, fees and costs, rescission, and injunctive
relief such as the imposition of a constructive trust upon the proceeds of the
IPO.
On January 28, 1999, the court entered an order consolidating the actions,
appointing lead plaintiff's counsel and requiring the filing of a consolidated
amended complaint. The consolidated amended complaint was filed on June 15,
1999 and only alleges claims under Section 11 of the Securities Act of 1933.
On May 20, 1999, Ziff-Davis Inc. moved to dismiss the consolidated amended
complaint. In July 1999, plaintiff filed their response to the motion. Ziff-
Davis Inc. filed a reply on August 11, 1999.
In addition, two derivative suits have been filed by stockholders against
Ziff-Davis Inc. and all of its directors in the Court of Chancery of the State
of Delaware for New Castle County. The complaints allege that
34
<PAGE>
ZDNet
(a division of Ziff-Davis Inc.)
NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS--(Continued)
the directors breached their fiduciary duties to Ziff-Davis Inc. by repricing
the stock options awarded to certain directors and demand the nullification of
the repricing and an injunction against exercise by the directors of any
repriced option. Plaintiffs filed an amended complaint on February 17, 1999
(which is substantially similar to the original complaints, except that the
amended complaint also addresses the granting of "new options" at an allegedly
"reduced exercise price") and the actions have been consolidated. Answers to
the amended complaint on behalf of both Ziff-Davis Inc. and its directors were
filed on April 12, 1999. Discovery is proceeding.
Other legal proceedings
Ziff-Davis Inc. was named as a defendant in an action, filed on April 17,
1998 in the Supreme Court of the State of New York, by minority stockholders
of SOFTBANK Interactive Marketing Inc. ("SIM"), formerly an indirect
subsidiary of SOFTBANK Corp. The complaint alleged, among other things, that
SBH, SIM's majority stockholder, acting with Ziff-Davis Inc. and two of its
senior officers and directors who were directors of SIM (and who were also
named as defendants), had conflicts of interest between SIM and other Softbank
investments (including investments in Ziff-Davis Inc.) and failed to act in
the best interests of SIM and the minority stockholders by taking actions
which benefited Ziff-Davis Inc. The complaint stated claims based on common
law fraud, breach of fiduciary duty and aiding and abetting theories and seeks
in excess of $200,000,000 in damages. Upon motion of Ziff-Davis Inc. and the
other defendants, all of the claims against them other than a breach of
contract claim which is solely against SBH, were dismissed on February 26,
1999. On April 1, 1999, plaintiffs filed a notice of appeal of the dismissal.
Although the outcome of these cases cannot be predicted, Ziff-Davis Inc.
believes that there are substantial defenses to the claims. Ziff-Davis Inc.
currently cannot estimate its ultimate liability, if any, with respect to such
pending litigations. Accordingly, no provision for such matters has been
included in the financial statements.
Beyond.com Hedge
In June 1999, ZDNet entered into a short-sale to effect a hedge on 300,000
of its 438,057 shares of Beyond.com. These shares were sold on behalf of ZDNet
by a third party at a weighted average price of $22.50 per share. Upon
delivery of the shares to the third party, ZDNet will receive the cash
proceeds of the sale and recognize a gain. However, ZDNet is not required to
deliver the shares in any specified time-frame.
8. Subsequent Events
Updates.com Inc.
On July 2, 1999, ZDNet acquired Updates.com Inc. for a combination of cash
and stock which amounted to a purchase price of approximately $18,500,000.
ZDNet paid $5,000,000 in cash and issued 582,526 shares of ZDNet Stock in
consideration of the assets purchased. This acquisition will be accounted for
under the purchase method of accounting.
Ziff-Davis Inc.
On July 14, 1999, Ziff-Davis Inc. announced that it has retained the
investment banking firm of Morgan Stanley Dean Witter ("Morgan Stanley") to
explore strategic alternatives to maximize shareholder value. The Ziff-Davis
Inc. Board of Directors has not embraced any particular strategic alternative
and will investigate all possible alternatives, including strategic alliances,
mergers and the sale or joint venture of all or some of Ziff-Davis, Inc's
businesses (including ZDNet). No assurances can be given that any transaction
will result from the exploration process that Morgan Stanley Dean Witter has
been retained to manage. On May 24, 1999 Ziff-Davis Inc. had retained Morgan
Stanley to explore strategic alternatives for its ZD Market Intelligence unit.
35
<PAGE>
ZDNet
(a division of Ziff-Davis Inc.)
NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS--(Continued)
SoftSeek, Inc.
On July 30, 1999, ZDNet acquired SoftSeek Inc. for a purchase price of
approximately $26,000,000. Consideration was in the form of $7,000,000 in cash
and 991,038 shares of ZDNet stock valued at $19,000,000. This acquisition will
be accounted for under the purchase method of accounting.
Registration statement
On August 5, 1999, Ziff-Davis Inc. filed a registration statement on Form S-
3 (File No. 333-84555), which become effective on August 11, 1999, with the
Securities and Exchange Commission to register 1,180,173 shares of ZDNet stock
in connection with the acquisition of Updates.com Inc. and SoftSeek Inc.
36
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ZIFF-DAVIS INC.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Overview
Ziff-Davis Inc. was formed through an initial public offering and a
reorganization that were completed on May 4, 1998. Prior to that date, the
predecessors of Ziff-Davis Inc. were wholly owned indirect subsidiaries of
SOFTBANK Corp. (together with its non-Ziff-Davis Inc. affiliates, "Softbank")
or assets owned by MAC Inc., an affiliate of SOFTBANK Corp. ("MAC Assets"). As
such, financial statements for periods prior to May 4, 1998 have been prepared
on a combined basis while the financial statements for the periods after May
4, 1998 have been prepared on a consolidated basis.
Ziff-Davis Inc.'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 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, Ziff-Davis Inc. may experience fluctuations in revenue
from period to period.
Historically, Ziff-Davis Inc.'s business has been seasonal, earning a
significant portion of its revenue in the second and fourth quarters. In
addition, the shift in timing of a tradeshow or conference may result in
material differences in comparison to prior periods.
On July 14, 1999, Ziff-Davis Inc. announced that it had retained Morgan
Stanley Dean Witter ("Morgan Stanley") to explore strategic alternatives to
maximize shareholder value. The Ziff-Davis Inc. Board of Directors has not
embraced any particular strategic alternatives, and will investigate all
possible alternatives, including strategic alliances, mergers and the sale or
joint venture of all or some of Ziff-Davis, Inc.'s businesses. No assurances
can be given that any transaction will result from the exploration process
that Morgan Stanley has been retained to manage. On May 24, 1999, the Company
retained Morgan Stanley to explore strategic alternatives for its ZD Market
Intelligence unit.
ZDNet Stock
The stockholders of Ziff-Davis Inc. voted, at a Special Meeting held on
March 30, 1999, to authorize the issuance of a new series of common stock,
designated as Ziff-Davis Inc.--ZDNet Common Stock ("ZDNet Stock"), which is
intended to reflect the performance of Ziff-Davis Inc.'s Internet business
division, ZDNet. When the ZDNet Stock was issued on April 6, 1999, Ziff-Davis
Inc.'s existing common stock was re-classified as Ziff-Davis Inc.--ZD Common
Stock ("ZD Stock"), which is intended to reflect the performance of Ziff-Davis
Inc.'s other businesses and a retained interest in ZDNet. The businesses
represented by ZD Stock are referred to as "ZD".
The ZDNet Stock offering was completed on April 6, 1999. Ziff-Davis Inc.
issued 11.5 million shares of ZDNet Stock, including 1.5 million shares issued
in conjunction with the underwriters' exercise of their option to purchase
additional shares to cover over-allotments. Net proceeds of approximately
$198.6 million were received on April 6, 1999.
Acquisitions and Sale of Common Stock
ZDTV
On February 4, 1999, Ziff-Davis Inc. purchased ZDTV, LLC ("ZDTV") from MAC
Holdings (America) Inc., a related party, for a purchase price of
approximately $81.4 million. Ziff-Davis Inc. paid approximately
37
<PAGE>
$32.8 million of the purchase price in cash (settled on February 5, 1999) and
paid the remainder by applying approximately $48.6 million in advances owed to
it by MAC Holdings (America) Inc. Ziff-Davis Inc. also agreed to be
responsible for the funding of ZDTV during the period in 1999 prior to the
purchase which will be accounted for as additional purchase price. Such
funding amounted to approximately $4.2 million.
On February 5, 1999, Vulcan Programming Inc., an entity owned by Paul G.
Allen, purchased a one-third interest in ZDTV for $54 million in cash. In
April 1999, an additional 4% of ZDTV was sold to ZDTV's president.
As a result of the acquisition, Ziff-Davis Inc. recorded an increase in
intangible assets of $76.1 million which will be amortized over 10 years.
ZDTV's cash requirements are currently expected to be approximately $50
million for 1999. The $54 million invested in ZDTV by Vulcan Programming Inc.
will be used to fund ZDTV and thereafter cash requirements will be funded by
the members or by third parties.
Sale of Common Stock
On March 4, 1999, Vulcan Ventures Inc., the investment vehicle of Paul G.
Allen, purchased 3,030,303 shares of Ziff-Davis Inc. common stock for $50
million in cash.
GameSpot, Inc.
On April 7, 1999, Ziff-Davis Inc. closed on the acquisition of the remaining
30% interest in GameSpot Inc. in exchange for 600,000 newly issued shares of
ZDNet Stock valued at approximately $11.4 million. This acquisition was
accounted for under the purchase method of accounting.
Updates.com, Inc.
On July 2, 1999, Ziff-Davis Inc. acquired Updates.com Inc. for $5 million in
cash and 582,526 shares of ZDNet Stock valued at $13.5 million. This
acquisition will be accounted for under the purchase method of accounting.
Softseek Inc.
On July 30, 1999, Ziff-Davis Inc. acquired Softseek, Inc. for $7 million in
cash and 991,038 shares of ZDNet Stock valued at $19 million. This acquisition
will be accounted for under the purchase method of accounting.
In connection with the acquisitions described in the preceding three
paragraphs, amortization expense for 1999 will increase by approximately $5.5
million.
Presentation of Financial Information
Ziff-Davis Inc. is comprised of certain operations which were acquired at
various times and completed a reorganization in May 1998. See Notes 1 and 2 to
the Consolidated Financial Statements included in Ziff-Davis Inc.'s Annual
Report on Form 10-K (File No. 001-14055).
38
<PAGE>
Results of Operations
Comparison of the three months ended June 30, 1999 and 1998
Revenue
Revenue for the second quarter of 1999 was $280.5 million compared to $276.5
million for the second quarter of 1998, an increase of $4.0 million or 1.5%.
Revenue by segment is summarized in the following table:
<TABLE>
<CAPTION>
Three Months Ended
June 30,
-----------------------
1999 1998
----------- -----------
(dollars in thousands)
<S> <C> <C>
Revenue:
Publishing...................................... $ 178,369 $ 198,419
Events.......................................... 75,591 65,782
Internet........................................ 22,939 12,274
Television...................................... 3,615 --
----------- -----------
Total......................................... $ 280,514 $ 276,475
=========== ===========
</TABLE>
Revenue from the publishing segment decreased by $20.1 million or 10.1%,
from $198.4 million in the second quarter of 1998 to $178.4 million in the
second quarter of 1999. Excluding the effect of the three magazines that were
closed in October 1998 as part of a restructuring, publishing segment revenue
decreased by $11.6 million or 6.1%. Revenue from consumer publications
increased 48.6% but was more than offset by a revenue decline from business
publications. Margin pressure on computer equipment manufacturers, industry
and product delays, and a focus on Year 2000 transition contributed to reduced
demand for advertising in Ziff-Davis Inc.'s business magazines.
Revenue from the events segment increased by $9.8 million or 14.9% from
$65.8 million in the second quarter of 1998 to $75.6 million in the second
quarter of 1999. The primary reason for the increase was the shift of two
events from the first quarter of 1998 to the second quarter of 1999, partially
offset by the shifting of an event from the second quarter in 1998 to the
first quarter in 1999. Excluding the shifting of events, revenue increased by
$0.9 million or 1.2%, primarily as a result of the continued growth of JavaOne
and N+I Las Vegas, mostly offset by a decrease in revenue at COMDEX/Spring and
the discontinuation of certain smaller events.
Revenue from the Internet segment increased by $10.7 million or 86.9% from
$12.3 million in the second quarter of 1998 to $22.9 million in the second
quarter of 1999. Revenue from advertising accounted for 93.3% of total revenue
for 1999 compared to 82.7% for the same period in 1998. The increase in
revenue was attributed to increases in rates and volume. During the period
both the number of advertisers and the average monthly revenue per advertiser
increased as did the average sale price per page. Subscription-based fees and
services declined as expected and were $1.5 million for the three months ended
June 30, 1999 compared to $2.1 million for the same period in 1998.
Revenue from the television segment was $3.6 million for 1999. The
television segment was acquired on February 4, 1999 when Ziff-Davis Inc.
purchased ZDTV from MAC Holdings (America) Inc. for an aggregate purchase
price of $81.4 million. (See Note 4 in the Ziff-Davis Inc. Unaudited
Consolidated Financial Statements.)
Cost of production
The cost of production increased by $0.5 million or 0.7% from $75.7 million
in the second quarter of 1998 to $76.2 million in the second quarter of 1999.
The increase was driven by the acquisition of ZDTV and the shift in timing of
certain events. The increase was mostly offset by the decline in publishing
production cost related to a decline in advertising pages and the absence of
costs related to the closure of certain publications.
39
<PAGE>
Selling, general and administrative expenses
Selling, general and administrative expenses were $156.3 million for the
second quarter of 1999 compared to $140.0 million in the second quarter of
1998, an increase of $16.3 million or 11.7%. The increase was primarily
related to the acquisition of ZDTV, and the increase in personnel and
advertising costs required to support the growth of ZDNet and increased costs
related to the shift in timing of certain events, partially offset by the
reduced costs as a result of the fourth quarter 1998 restructuring.
Stock-based compensation
Stock based compensation is a non-cash charge which is recorded over the
vesting period of certain stock option and restricted stock grants. Stock-
based compensation increased by $1.8 million from $0.1 million in the second
quarter of 1998 to $1.9 million for the second quarter of 1999. The increase
was a result of the issuance of certain options of ZDNet Stock and the
conversion of certain SOFTBANK Corp. stock options to Ziff-Davis Inc. stock
options in December 1998, both of which resulted in compensation. In addition,
$0.4 million of stock compensation was incurred in 1999 relating to the
exchange of GameSpot stock options for ZDNet stock options as part of
completing the GameSpot acquisition.
Depreciation and amortization
Total depreciation and amortization expense was $8.4 million for the second
quarter of 1999 compared to $7.7 million for the second quarter of 1998, an
increase of $0.7 million or 9.5%. The primary reason for the increase was
depreciation and amortization of assets associated with the acquisitions of
ZDTV and GameSpot and Ziff-Davis Inc.'s new headquarters. These increases were
partially offset by the absence of amortization related to intangible assets
written off as part of the October 1998 restructuring.
Interest expense, net
Net interest expense declined by $7.6 million or 20.9% to $28.6 million for
the second quarter of 1999 from $36.1 million for the second quarter of 1998.
This was primarily due to a significant reduction in Ziff-Davis Inc.'s
outstanding debt through the reorganization and initial public offering
completed in May 1998 and the ZDNet Stock offering completed in April 1999.
Other non-operating income, net
Other non-operating income primarily reflects Ziff-Davis Inc.'s equity share
of earnings and losses from joint ventures, fees earned from management of
events not produced by Ziff-Davis and gains or losses realized on the
disposition of businesses. Income of $10.2 million for the quarter ended June
30, 1999 was $7.3 million higher than the income for the same period in 1998
of $2.9 million primarily due to one-time gains of $6.2 million from the sale
of several business units in the second quarter. The sale of these business
units is not expected to have a material impact on Ziff-Davis Inc.'s future
results from operations or cash flows.
Minority interest in losses of subsidiaries
Losses attributable to minority stockholders of Ziff-Davis Inc.'s
subsidiaries increased $6.6 million from $0.1 million for the second quarter
of 1998 to $6.7 million for the second quarter of 1999. This increase is
primarily due to the sale of a one-third interest in ZDTV in February 1999,
creating a minority interest in the losses of ZDTV.
Income taxes
The consolidated tax benefit for the second quarter of 1999 was $5.2 million
compared to a provision of $64.5 million in the second quarter of 1998. The
difference is due to a significantly lower projected annual effective tax rate
for 1999 as compared to 1998. The effective tax rate for the three months
ended June 30, 1999
40
<PAGE>
was 62% compared to 536% for the 1998 quarter. These rates reflect adjustments
to record year-to-date income tax benefits or expense at revised rates of 37%
and negative 1.7%, for the years 1999 and 1998, respectively. These rates are
based on estimates for annual earnings and taxes available at the time. The
difference in the current estimate of the 1999 effective rate and the actual
annual effective rate for 1998 is primarily due to a higher level of non-
deductible items in 1998 when compared to 1999.
Income taxes are provided based on Ziff-Davis Inc.'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 Ziff-Davis Inc.
and non-deductible goodwill amortization, and the effect of state and local
taxes. The deferred tax benefit for the three months ended June 30, 1999 has
been reflected as a reduction of the long-term deferred tax liability.
Net loss
As a result of the factors discussed above, the net loss decreased from
$76.6 million for the three months ended June 30, 1999 to $3.1 million for the
three months ended June 30, 1999.
EBITDA
EBITDA is defined as income before provision for income taxes, interest
expense, depreciation and other non-cash charges. These non-cash charges
include amortization of intangible assets and stock-based compensation
expense. EBITDA as reported for Ziff-Davis Inc. includes its 64.0% interest in
the EBITDA of ZDTV.
EBITDA for the second quarter of 1999 was $63.3 million compared to $63.4
million for the second quarter of 1998, a decrease of $0.1 million or 0.1%.
This change in EBITDA reflects the significant improvement at ZDNet, offset by
the inclusion of ZDTV losses and declines in the publishing segment.
Comparison of the six months ended June 30, 1999 and 1998
Revenue
Revenue for the six months ended June 30, 1999 was $494.6 million compared
to $504.5 million for the six months ended June 30, 1998, a decrease of $9.9
million or 2.0%. Revenue by segment is summarized in the following table:
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------------
1999 1998
----------- -----------
(dollars in thousands)
<S> <C> <C>
Revenue:
Publishing...................................... $ 353,358 $ 389,664
Events.......................................... 94,065 92,903
Internet........................................ 41,500 21,962
Television...................................... 5,701 --
----------- -----------
Total......................................... $ 494,624 $ 504,529
=========== ===========
</TABLE>
Revenue from the publishing segment decreased by $36.3 million or 9.3%, from
$389.7 million for the six months ended June 30, 1998 to $353.4 million for
the six months ended June 30, 1999. Excluding the effect of the three
magazines that were closed in October 1998 as part of a restructuring,
publishing segment revenue decreased by $18.3 million or 4.9%. Revenue from
consumer publications increased 55.8% but was more than offset by a decline
from business publications. Margin pressure on computer equipment
manufacturers, industry and product delays, and a focus on Year 2000
transition contributed to reduced demand for advertising in Ziff-Davis Inc.'s
business magazines.
Revenue for the six months from the events segment increased by $1.2 million
or 1.3% from $92.9 million in the six months ended June 30, 1998 to $94.1
million in the six months ended June 30, 1999. Revenue increases at N+I Las
Vegas and JavaOne were mostly offset by declines related to Comdex/Spring and
discontinued shows.
41
<PAGE>
Revenue from the Internet segment increased by $19.5 million or 89.0% from
$22.0 million to $41.5 million in the first half of 1999. Revenue from
advertising accounted for 92.2% of total revenue for 1999 compared to 80.9%
for the same period in 1998. The increase in revenue was attributed to
increases in rates and volume. During the period both the numbers of
advertisers and the average monthly revenue per advertiser increased as did
the average sale price per page. Subscription-based fees and services declined
as expected and were $3.2 million for the six months ended June 30, 1999
compared to $4.2 million for the same period in 1998.
Revenue from the television segment was $5.7 million for 1999. The
television segment was acquired on February 4, 1999 when Ziff-Davis Inc.
purchased ZDTV from MAC Holdings (America) Inc. for an aggregate purchase
price of $81.4 million. (See Note 4 in the Ziff-Davis Inc. Unaudited
Consolidated Financial Statements.)
Cost of production
The cost of production decreased by $10.0 million or 6.8% from $146.1
million for the six months ended June 30, 1998 to $136.1 for the six months
ended June 30, 1999. The decline was consistent with the decreases in revenue
attributed to the discontinuation of three magazines in October 1998 as well
as the decline in advertising pages in the business magazines. These cost
reductions were partially offset by production costs incurred from the
acquisition of ZDTV.
Selling, general and administrative expenses
Selling, general and administrative expenses were $298.1 million for the six
months ended June 30, 1999 compared to $284.4 million for the six months ended
June 30, 1998, an increase of $13.7 million or 4.8%. The increase was
primarily related to the acquisition of ZDTV and increased cost to support
ZDNet's growth, offset by cost savings realized from the October 1998
restructuring.
Stock-based compensation
Stock-based compensation increased by $3.3 million from $0.1 million for the
first half of 1998 to $3.4 million for first half of 1999. The increase was a
result of the issuance of certain options of ZDNet stock and the conversion of
certain SOFTBANK Corp. stock options to Ziff-Davis Inc. stock options in
December 1998, both of which resulted in compensation. In addition, $0.4
million of stock compensation was incurred in 1999 relating to the exchange of
GameSpot stock options for ZDNet stock options as part of completing the
GameSpot acquisition.
Depreciation and amortization
Total depreciation and amortization expense was $17.0 million for the six
months ended June 30, 1999 compared to $14.7 million for the six months ended
June 30, 1998, an increase of $2.3 million or 15.6%. The primary reason for
the increase was depreciation and amortization of assets acquired through
acquisitions of ZDTV, Sky TV and the minority interest in GameSpot as well as
assets associated with Ziff-Davis' new headquarters. These increases were
partially offset by the absence of amortization related to intangible assets
written off as part of the October 1998 restructuring.
Interest expense, net
Net interest expense declined by $21.1 million or 25.9% to $61.0 million for
the six months ended June 30, 1999 from $82.1 million for the six months ended
June 30, 1998. This was primarily due to a significant reduction in Ziff-Davis
Inc.'s outstanding debt through the reorganization and initial public offering
completed in May 1998 and the ZDNet Stock offering completed in April 1999.
Other non-operating income, net
Income of $11.5 million for the six months ended June 30, 1999 was $7.1
million higher than the income for the same period in 1998 of $4.4 million
primarily due to $7.1 million of one-time gains from the sale of
42
<PAGE>
several business units. The sale of these business units is not expected to
have a material impact on Ziff-Davis Inc.'s future statements of operations or
cash flows.
Minority interest in losses of subsidiaries
Losses attributable to minority stockholders of Ziff-Davis Inc.'s
subsidiaries increased $9.9 million from $0.3 million to $10.2 million. This
increase is primarily due to the sale of a one-third interest in ZDTV in
February 1999, creating a minority interest in the losses of ZDTV.
Income taxes
The consolidated tax benefit for the first half of 1999 was $24.4 million
compared to a provision of $1.4 million in the first half of 1998. The
difference is due to a significantly lower projected annual effective tax rate
for 1999 as compared to 1998. The effective tax rate for the six months ended
June 30, 1999 was 37% compared to a negative 1.7% for the 1998 period. These
rates are based on estimates for annual earnings and taxes available at the
time. The actual effective rate for 1998 was 25.4%. The difference in the
current estimate of the 1999 effective rate and the actual annual effective
rate for 1998 is primarily due to a higher level of non-deductible items in
1998 when compared to 1999.
Income taxes are provided based on Ziff-Davis Inc.'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 Ziff-Davis Inc.,
and non deductible goodwill amortization and the effect of state and local
taxes. The deferred tax benefit for the three months ended June 30, 1999 has
been reflected as a reduction of the long-term deferred tax liability.
Net loss
As a result of the factors discussed above, the net loss decreased from
$81.7 million for the six months ended June 30, 1998 to $40.9 million for the
six months ended June 30, 1999.
EBITDA
EBITDA for the six months ended June 30, 1999 was $79.6 million compared to
$78.7 million for the six months ended June 30, 1998, an increase of $.9
million or 1.1%. This increase reflects the significant improvement at ZDNet
and the events segment partially offset by the inclusion of ZDTV losses and a
slight decline in the publishing segment.
Liquidity and Capital Resources
At June 30, 1999, Ziff-Davis Inc.'s total outstanding debt was $1,284.4
million, excluding unamortized discount, and consisted of $74.4 million due to
Softbank, $1,180 million in notes and $30 million under the credit facility.
Cash and cash equivalents were $32.5 million at June 30, 1999 compared to
$32.6 million at December 31, 1998. The change during the six months of 1999
was due to the factors discussed below.
Cash provided by operations was $32.5 million for the six months ended June
30, 1999 compared to $41.8 million for the six months of 1998.
Cash used by investing activities was $73.1 million for the six months ended
June 30, 1999 compared to $15.1 million in the six months of 1998. The
increase reflects higher capital spending of $48.9 million primarily due to
one-time spending on relocation of the New York operations. The remainder of
the increase primarily relates to the cash paid for the acquisition of ZDTV
($32.8 million).
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<PAGE>
Cash provided by financing activities was $40.6 million for the six months
ended June 30, 1999 compared to cash used of $14.0 million for the six months
ended June 30, 1998. Financing activities in 1998 related to the ZD initial
public offering. Financing activities in 1999 include the ZDNet Stock offering
and the sale of ZD Stock to Vulcan as well as the partial use of these
proceeds to repay indebtedness.
In connection with Ziff-Davis Inc.'s intention to pursue strategic
alternatives, programs have been put in place in order to retain employees.
The cost of such programs, which include enhanced severance packages,
accelerated vesting of stock options and employer contribution to the 401(K)
plans, can not yet be estimated.
Ziff-Davis Inc. believes, based on its current level of operations and
anticipated growth, that its 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 its indebtedness and to fund anticipated
capital expenditures and working capital requirements. However, actual capital
expenditures may change, particularly as a result of any acquisitions Ziff-
Davis Inc. may pursue. The ability of Ziff-Davis Inc. to meet its debt service
obligations and reduce its total debt will depend on its future performance.
Interest rate swap
On June 15, 1999, Ziff-Davis Inc. amended a swap agreement (with a notional
amount of $100 million) by reducing the fixed rate paid to the counterparty
and providing the counterparty with a one-time option to cancel the swap
agreement on February 5, 2000. Ziff-Davis Inc. entered into another swap
agreement (with a notional amount of $50 million) on June 15, 1999. Under this
swap agreement, Ziff-Davis Inc. will received a fixed rate of interest and pay
a floating rate of interest based on 3 months LIBOR, which resets quarterly,
for the term of the agreement.
Restructuring
In October 1998, Ziff-Davis Inc. announced a restructuring program with the
intent of significantly reducing its cost base. As a result, a charge of $52.2
million was recorded in the fourth quarter of 1998. The charge included asset
impairment costs ($37.9 million), employee termination costs ($8.6 million)
and costs to exit activities ($5.7 million). All amounts related to the
restructuring have been paid and no accrual balance remains.
Year 2000 Readiness Disclosure
During 1997, Ziff-Davis Inc. began a review of its computer systems and
software to identify systems and software which might malfunction due to
misidentification of the Year 2000. Ziff-Davis Inc. is using both internal and
external resources to identify, test, correct and reprogram systems and
software for Year 2000 readiness.
At December 31, 1998, Ziff-Davis Inc. was in the research and validation
phase of its Year 2000 project for information technology, or IT, systems and
non-IT systems. This phase consists of research and validation of all
infrastructure, hardware and software, including platform, wide-area network
and local-area network components. Research for non-IT systems includes
identifying systems that include embedded technology, such as micro-
controllers, which are not yet Year 2000 compliant.
Ziff-Davis Inc. has identified critical systems and applications that will
either be validated for compliance through formal documentation, through
vendors or through testing. During the second quarter of 1999, Ziff-Davis Inc.
entered the testing phase of its infrastructure, hardware, software and
databases and plans to complete such phase by the fourth quarter of 1999.
Contingency plans will be developed for any systems or platforms that are
known to be non-compliant by the fourth quarter of 1999.
Some of Ziff-Davis Inc. computer systems and databases, including its
subscription fulfillment and payroll systems, are managed by third parties
under contractual arrangements. Ziff-Davis Inc. is not currently aware of
44
<PAGE>
any Year 2000 compliance problems related to those third parties. Ziff-Davis
Inc. has requested those third parties with which Ziff-Davis Inc. has material
relationships in the second quarter of 1999 to advise it as to whether such
third parties anticipate difficulties in addressing Year 2000 compliance
problems, and if so, the nature of such difficulties. Such inquiries are
substantially complete and no material matters have been identified.
In addition, Ziff-Davis Inc. is developing contingency plans in order to
compensate for any disruption or downtime that could result from a Year 2000
compliance problem. Ziff-Davis plans to replace IT and non-IT systems that it
determines are not Year 2000 compliant by the fourth quarter of 1999, in order
to minimize any risk of a Year 2000 compliance problem.
Ziff-Davis Inc. has incurred remediation costs associated with its Year 2000
readiness efforts. These remediation costs have been incurred in connection
with replacement of systems and hardware, modification of software and
consulting costs related to Year 2000 solution providers. The internal costs
to address Year 2000 issues, which have been included in the general and
administrative expenses of Ziff-Davis Inc., have not been tracked separately
and are therefore not determinable. However, management believes these
expenses have been substitutive rather than incremental to the recurring level
of general and administrative expenses. Total capitalized costs incurred in
the replacement of systems in connection with Ziff-Davis Inc.'s Year 2000
readiness efforts as of December 31, 1997 and 1998 were $1.7 million and $3.8
million, respectively. Ziff-Davis Inc. estimates that it will incur external
selling, general and administrative expenses of approximately $7 to $9 million
and capital costs of $5 to $6 million during 1999 related to its Year 2000
readiness efforts.
Ziff-Davis Inc. expects to complete testing and replacement of critical
systems in the fourth quarter of 1999. Ziff-Davis Inc.'s estimate of its most
reasonably likely "worst case scenario" would be the failure of its internal
applications and systems that process and store certain information and data.
Ziff-Davis Inc. would resolve the failure of such applications and systems one
by one, and management of Ziff-Davis Inc. does not believe that the impact on
its critical systems would be material. However, if Ziff-Davis Inc. or any of
its subscribers, advertisers, licensors, vendors or other third parties on
whom it relies experiences a Year 2000 compliance problem, this could have a
material adverse effect on Ziff-Davis Inc.'s profit and liquidity.
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 March 30, 1999 contained in the Ziff-Davis Inc.'s Registration Statement
on Form S-1 (File No. 333-69447) and in the registration statement on Form S-3
(File No. 333-84555) which became effective on August 11, 1999.
45
<PAGE>
ZD
(A Division of Ziff-Davis Inc.)
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Overview
Ziff-Davis Inc. was formed through an initial public offering and a
reorganization that were completed on May 4, 1998. Prior to that date, the
predecessors of Ziff-Davis Inc. were wholly owned indirect subsidiaries of
SOFTBANK Corp. (together with its non-Ziff-Davis Inc. affiliates, "Softbank")
or assets owned by MAC Inc., an affiliate of SOFTBANK Corp. ("MAC Assets").
ZD is the division of Ziff-Davis Inc. which focuses on the businesses of
print publishing, trade shows and conferences, market research, education and
television, and holds a retained interest in ZDNet, Ziff-Davis Inc.'s Internet
business.
ZD'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 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, ZD may experience fluctuations in revenue from period to period.
Historically, ZD's business has been seasonal, earning a significant portion
of its revenue in the second and fourth quarters. In addition, the shift in
timing of a tradeshow or conference may result in material differences in
comparison to prior periods.
On July 14, 1999, Ziff-Davis Inc. announced that it had retained Morgan
Stanley Dean Witter ("Morgan Stanley") to explore strategic alternatives to
maximize shareholder value. The Ziff-Davis Inc. Board of Directors has not
embraced any particular strategic alternative, and will investigate all
possible alternatives, including strategic alliances, mergers and the sale or
joint venture of all or some of Ziff-Davis Inc's businesses (including the
businesses that make up ZD). No assurance can be given that any transaction
will result from the exploration process that Morgan Stanley has been retained
to manage. On May 24, 1999, Ziff-Davis Inc. retained Morgan Stanley to explore
strategic alternatives for its ZD Market Intelligence unit.
ZDNet Stock
The stockholders of Ziff-Davis Inc. voted, at a Special Meeting held on
March 30, 1999, to authorize the issuance of a new series of common stock, to
be designated as Ziff-Davis Inc.--ZDNet Common Stock ("ZDNet Stock"), which is
intended to reflect the performance of Ziff-Davis Inc.'s Internet business
division, ZDNet. When the ZDNet Stock was issued on April 6, 1999, Ziff-Davis
Inc.'s existing common stock was reclassified as Ziff-Davis Inc.--ZD Common
Stock ("ZD Stock"), which is intended to reflect the performance of Ziff-Davis
Inc.'s other businesses and a retained interest in ZDNet. The businesses
represented by ZD Stock are referred to as "ZD".
Prior to the ZDNet Stock offering, ZD held a 100% retained interest in
ZDNet. The ZDNet Stock offering was completed on April 6, 1999. Ziff-Davis
Inc. issued 11,500,000 shares of ZDNet stock, including 1,500,000 shares
issued in conjunction with the underwriters' exercise of their option to
purchase additional shares to cover over-allotments. Ziff-Davis Inc.
attributed to ZDNet 1,500,000 of the sold shares in a manner analogous to a
primary offering and attributed to ZD 10,000,000 of the sold shares in respect
of its retained interest in ZDNet, in a manner analogous to a secondary
offering. ZD received net proceeds of approximately $172.7 million and ZDNet
received net proceeds of approximately $25.9 million. The ZDNet net proceeds
were loaned to ZD as an intercompany loan which will bear interest at the rate
at which funding is available to Ziff-Davis Inc. After giving effect to the
ZDNet Stock offering, there were 11,500,000 shares of ZDNet Stock outstanding
and another 60,000,000 notional shares of ZDNet Stock intended to represent
ZD's retained interest in ZDNet, which was approximately 83.9% immediately
following the offering.
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<PAGE>
Acquisitions and Sale of Common Stock
ZDTV
On February 4, 1999, ZD purchased ZDTV, LLC ("ZDTV") from MAC Holdings
(America) Inc., a related party, for a purchase price of approximately $81.4
million ZD paid approximately $32.8 million of the purchase price in cash
(settled on February 5, 1999) and paid the remainder by applying approximately
$48.6 million in advances owed to it by MAC Holdings (America) Inc. ZD also
agreed to be responsible for the funding of ZDTV during the period in 1999
prior to the purchase which will be accounted for as additional purchase
price. Such funding amounted to approximately $4.2 million.
On February 5, 1999, Vulcan Programming Inc., an entity owned by Paul G.
Allen, purchased a one-third interest in ZDTV for $54 million in cash. In
April 1999, an additonal 4% of ZDTV was sold to ZDTV's president.
As result of the acquisition, ZD recorded an increase in intangible assets
of $76.1 million which will be amortized over 10 years. ZDTV's cash
requirements are currently expected to be approximately $50 million for 1999.
The $54 million invested in ZDTV by Vulcan Programming Inc. will be used to
fund ZDTV and thereafter cash requirements will be funded by the members or by
third parties.
Sale of Common Stock
On March 4, 1999, Vulcan Ventures Inc., the investment vehicle of Paul G.
Allen, purchased 3,030,303 shares of ZD common stock for $50 million in cash.
Presentation of Financial Information
ZD is comprised of certain operations which were acquired at various times
and completed a reorganization in May 1998. See Notes 1 and 2 to ZD's Combined
Financial Statements included in Ziff-Davis Inc.'s registration statement on
Form S-1 dated March 30, 1999 (File No. 333-69447).
Results of Operations
Comparison of the three months ended June 30, 1999 and 1998 (unaudited)
Revenue
Revenue for the second quarter of 1999 was $257.6 million compared to $264.2
million for the second quarter of 1998, a decrease of $6.6 million or 2.5%.
Revenue by segment is summarized in the following table:
<TABLE>
<CAPTION>
Three Months
Ended
June 30,
-----------------
1999 1998
-------- --------
(dollars in
thousands)
<S> <C> <C>
Revenue:
Publishing............................................ $178,369 $198,419
Events................................................ 75,591 65,782
Television............................................ 3,615 --
-------- --------
Total............................................... $257,575 $264,201
======== ========
</TABLE>
Revenue from the publishing segment decreased by $20.0 million or 10%, from
$198.4 million in the second quarter of 1998 to $178.4 million in the second
quarter of 1999. Excluding the effect of the three magazines that were closed
in October 1998 as part of a restructuring, publishing segment revenue
decreased by $11.6 million or 6.1%. Revenue from consumer publications
increased 49% but was more than offset by a revenue decline from business
publications. Margin pressure on computer equipment manufacturers, industry
and product delays, and a focus on Year 2000 transition contributed to reduced
demand for advertising in ZD's business magazines.
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<PAGE>
Revenue from the events segment increased by $9.8 million or 15% from $65.8
million in the second quarter of 1998 to $75.6 million in the second quarter
of 1999. The primary reason for the increase was the shift of two events from
the first quarter of 1998 to the second quarter of 1999, partially offset by
the shifting of an event from the second quarter in 1998 to the first quarter
in 1999. Excluding the shifting of events, revenue increased by $0.9 million
or 1.2%, primarily the result of continued growth of JavaOne and N+I Las
Vegas, mostly offset by the decrease in revenue at COMDEX/Spring and the
discontinuation of certain smaller events.
Revenue from the television segment was $3.6 million for 1999. The
television segment was acquired on February 4, 1999 when ZD purchased ZDTV
from MAC Holdings (America) Inc. for an aggregate purchase price of $81.4
million. (See Note 4 in the ZD Unaudited Consolidated Financial Statements.)
Cost of production
The cost of production decreased by $1.4 million or 1.9% from $74.7 million
in the second quarter of 1998 to $73.3 million in the second quarter of 1999.
The decline was consistent with the decrease in revenue attributed to the
discontinuation of three magazines in October 1998 and fewer advertising pages
in the business magazines. The decrease was partially offset by the shift of
timing of certain events and the acquisition of ZDTV.
Selling, general and administrative expenses
Selling, general and administrative expenses were $140.9 million for the
second quarter of 1999 compared to $127.1 million in the second quarter of
1998, an increase of $13.8 million or 10.9%. The increase was primarily
related to the acquisition of ZDTV and increased cost related to the timing of
trade shows, offset by the reduced costs as a result of the fourth quarter
1998 restructuring.
Stock-based compensation
Stock based compensation is a non-cash charge which is recorded over the
vesting period of certain stock option and restricted stock grants. Stock-
based compensation increased by $0.5 million from $0.1 million in the second
quarter of 1998 to $0.6 million for the second quarter of 1999. The increase
was a result of the issuance of certain options of ZDNet Stock and the
conversion of certain SOFTBANK Corp. stock options to ZD stock options in
December 1998, both of which resulted in compensation.
Depreciation and amortization
Total depreciation and amortization expense was $7.8 million for the second
quarter of 1999 compared to $7.3 million for the second quarter of 1998, an
increase of $0.5 million or 6.7%. The primary reason for the increase was
depreciation and amortization of assets associated with the acquisition of
ZDTV and ZD's new headquarters. These increases were partially offset by the
absence of amortization related to intangible assets written off as part of
the October 1998 restructuring.
Interest expense, net
Net interest expense declined by $7.0 million or 19.4% to $29.2 million for
the second quarter of 1999 from $36.2 million for the second quarter of 1998.
This was primarily due to a significant reduction in ZD's outstanding debt
through the reorganization and initial public offering completed in May 1998
and the ZDNet stock offering completed in April 1999.
Income (loss) related to retained interest in ZDNet
The retained interest in ZDNet decreased from a loss of $2.9 million in the
second quarter of 1998 to an income of $0.7 million in the second quarter of
1999. The change is due primarily to significant improvement in the
performance of the ZDNet business. See "ZDNet--Management's Discussion and
Analysis of Financial Condition and Results of Operations". Ziff-Davis Inc.
completed an initial public offering of the ZDNet Stock on April 6, 1999. As a
result of the ZDNet Stock offering, ZD's retained interest in ZDNet decreased
from 100% to approximately 83.9%. On April 7, 1999, ZDNet acquired the
minority interest in GameSpot, by issuing ZDNet Stock thus, reducing ZD's
retained interest to 83.2%.
48
<PAGE>
Other non-operating income, net
Other non-operating income primarily reflects ZD's equity share of earnings
and losses from joint ventures, fees earned from management of events not
produced by ZD and gains or losses realized on the disposition of businesses.
Income of $10.2 million for the quarter ended June 30, 1999 was $7.6 million
more than the income for the same period in 1998 of $2.6 million due primarily
to $6.2 million of one-time gain from the sale of several business units in
the second quarter. The sale of these business units is not expected to have a
material impact on ZD's future results of operations or cash flows.
Minority interest in losses of subsidiaries
Losses attributable to minority stockholders of ZD's subsidiaries increased
$6.7 million from a zero balance in 1998. The primary reason for this increase
is the sale of a one-third interest in ZDTV in February 1999, creating a
minority interest in the losses of ZDTV.
Income taxes
The tax benefit for the second quarter of 1999 was $6.2 million compared to
a provision of $64.6 million in the second quarter of 1998. The difference is
due to a significantly lower projected annual effective tax rate for 1999 as
compared to 1998. The effective tax rate for the three months ended June 30,
1999 was 66% compared to 541% for the 1998 quarter. These rates reflect
adjustments to record year-to-date income tax benefits or expense at revised
rates of 37% and negative 1.7%, for the years 1999 and 1998, respectively.
These rates are based on estimates for annual earnings and taxes available at
the time. The difference in the current estimate of the 1999 effective rate
and the actual annual effective rate for 1998 is primarily due to a higher
level of non-deductible items in 1998 when compared to 1999.
Income taxes are provided based on ZD'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 ZD and non-deductible goodwill amortization,
and the effect of state and local taxes. The deferred tax benefit for the
three months ended June 30, 1999 has been reflected as a reduction of the
long-term deferred tax liability.
Net loss
As a result of the factors discussed above, the net loss decreased from
$76.6 million for the three months ended June 30, 1998 to $3.3 million for the
three months ended June 30, 1999.
EBITDA
EBITDA is defined as income before provision for income taxes, interest
expense, depreciation and other non-cash charges. These non-cash charges
include amortization of intangible assets and stock-based compensation
expense. EBITDA as reported for ZD includes its interest in the EBITDA of ZDTV
and its retained interest in the EBITDA of ZDNet. At June 30, 1999, ZD's
interest in ZDTV and its retained interest in ZDNet were approximately 64.0%
and 83.2%, respectively.
EBITDA for the second quarter of 1999 was $62.6 million compared to $63.5
million for the second quarter of 1998, a decrease of $0.9 million or 1.4%.
The inclusion of losses from ZDTV more than offset EBITDA increases at the
publishing and events segments.
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<PAGE>
Comparison of the six months ended June 30, 1999 and 1998 (unaudited)
Revenue
Revenue for the six months ended June 30, 1999 was $453.1 million compared
to $482.6 million for the six months ended June 30, 1998, a decrease of $29.5
million or 6.1%. Revenue by segment is summarized in the following table:
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------------
1999 1998
----------- -----------
(dollars in thousands)
<S> <C> <C>
Revenue:
Publishing...................................... $ 353,358 $ 389,664
Events.......................................... 94,065 92,903
Television...................................... 5,701 --
----------- -----------
Total......................................... $ 453,124 $ 482,567
=========== ===========
</TABLE>
Revenue from the publishing segment decreased by $36.3 million or 9.3%, from
$353.4 million for six months ended June 30, 1998 to $390.0 million for the
six months ended June 30, 1999. Excluding the effect of the three magazines
that were closed in October 1998 as part of a restructuring, publishing
segment revenue decreased by $18.3 million or 4.9%. Revenue from consumer
publications increased 55.8% but was more than offset by a revenue decline
from business publications. Margin pressure on computer equipment
manufacturers, industry and product delays, and a focus on Year 2000
transition contributed to reduced demand for advertising in ZD's business
magazines.
Revenue from the events segment increased by $1.1 million or 1.3% from $92.9
million for the six months ended June 30, 1998 to $94.0 million for the six
months ended June 30, 1999. Revenue increases at N+I Las Vegas and JavaOne
were partially offset by declines related to COMDEX/Spring and discontinued
shows.
Revenue from the television segment was $5.7 million for 1999. The
television segment was acquired on February 4, 1999 when ZD purchased ZDTV
from MAC Holdings (America) Inc. for an aggregate purchase price of $81.4
million. (See Note 4 in the ZD Unaudited Consolidated Financial Statements.)
Cost of production
The cost of production decreased by $13.3 million or 9.2% from $143.8
million for the six months ended June 30, 1998 to $130.5 million for the six
months ended June 30, 1999. The decline was consistent with the decreases in
revenue attributed to the discontinuation of three magazines in October 1998
as well as the decline in advertising pages in the business magazines and the
shift of timing of certain events. These cost reductions were partially offset
by production costs incurred from the acquisition of ZDTV.
Selling, general and administrative expenses
Selling, general and administrative expenses were $268.6 million for the six
months ended June 30, 1999 compared to $258.2 million for the six months ended
June 30, 1998, an increase of $10.4 million or 4.0%. The increase primarily
related to an increase from the acquisition of ZDTV, partially offset by cost
cutting initiatives identified in the restructuring action taken during the
fourth quarter of 1998.
Stock-based compensation
Stock-based compensation increased by $1.2 million from $0.1 million for the
six months ended June 30, 1998 to $1.3 million for the six months ended June
30, 1999. The increase was a result of the issuance of certain options of
ZDNet Stock and the conversion of certain SOFTBANK Corp. stock options to ZD
stock options in December 1998, both of which resulted in compensation.
Depreciation and amortization
Total depreciation and amortization expense was $15.8 million for the six
months ended June 30, 1999 compared to $14.0 million for the six months ended
June 30, 1998, an increase of $1.8 million or 13%. The
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<PAGE>
primary reason for the increase was depreciation and amortization of assets
acquired through the acquisition of ZDTV as well as associated with Ziff-
Davis' new headquarters. These increases were partially offset by the absence
of amortization related to intangible assets written off as part of the
October 1998 restructuring.
Interest expense, net
Net interest expense declined by $20.6 million or 25.1% to $61.5 million for
the six months ended June 30, 1999 from $82.0 million for the six months ended
June 30, 1998. This was primarily due to a significant reduction in ZD's
outstanding debt through the reorganization and initial public offering
completed in May 1998 and the ZDNet Stock offering completed in April 1999.
Income (loss) related to retained interest in ZDNet
The retained interest in ZDNet decreased from a loss of $8.9 million in the
first half of 1998 to income of $0.5 million in the first half of 1999. The
difference is due primarily to a significant increase in the performance of
the ZDNet business. See "ZDNet--Management's Discussion and Analysis of
Financial Condition and Results of Operations". Ziff-Davis Inc. completed an
initial public offering of the ZDNet stock on April 6, 1999. As a result of
the ZDNet Stock offering and Gamespot acquisition, ZD's retained interest in
ZDNet decreased from 100% to approximately 83.2%.
Other non-operating income, net
Income of $11.5 million for the six months ended June 30, 1999 was $7.4
million more than the income for the same period in 1998 of $4.1 million,
primarily due to a $7.2 million one-time gain from the sale of several
business units. The sale of these business units is not expected to have a
material impact on ZD's future results from operations and cash flows.
Minority interest in losses of subsidiaries
Losses attributable to minority stockholders of ZD's subsidiaries increased
$10.1 million from a zero balance in 1998. This increase is due to the sale of
a one-third interest in ZDTV in February 1999, creating a minority interest in
the losses of ZDTV.
Income taxes
The tax benefit for the six months ended June 30, 1999 was $25.2 million
compared to a provision of $1.7 million for the six months ended June 30,
1998. The difference is due to a significantly lower projected annual
effective tax rate for 1999 as compared to 1998. The effective tax rate for
the six months ended June 30, 1999 was 38% compared to a negative 2.1% for the
1998 period. These rates are based on estimates for annual earnings and taxes
available at the time. The actual annual effective rate for 1998 was 25.4%.
The difference in the current estimate of the 1999 effective rate and the
actual annual effective rate for 1998 is primarily due to a higher level of
nondeductible items in 1998 when compared to 1999.
Income taxes are provided based on ZD'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 ZD and non deductible goodwill amortization,
and the effect of state and local taxes. The deferred tax benefit for the
three months ended June 30, 1999 has been reflected as a reduction of the
long-term deferred tax liability.
Net loss
As a result of the factors discussed above, the net loss decreased from
$81.7 million for the six months ended June 30, 1998 to $41.1 million for the
six months ended June 30, 1999.
EBITDA
EBITDA for the six months ended June 30, 1999 was $78.8 million compared to
$78.7 million for the same period of 1998. Increases in publishing and events
were mostly offset by the inclusion of ZDTV losses.
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Liquidity and Capital Resources
At June 30, 1999, ZD's total outstanding debt was $1,284.4 million,
excluding unamortized discount, and consisted of $74.4 million due to
Softbank, $1,180 million in notes and $30 million under the credit facility.
Cash and cash equivalents were $32.3 million at June 30, 1999 and December
31, 1998. The activity is discussed below:
Cash provided by operations was $25.6 million for the six months ended June
30, 1999 compared to $44.7 million for the six months ended June 30, 1998.
This change was primarily due to a lower decline in working capital in the
first half of 1999 compared to the 1998 period. Second quarter working capital
activity generally reflects collections on the seasonally high fourth quarter
of the preceding year.
Cash used by investing activities was $70.1 million for the six months ended
June 30, 1999 compared to $13.1 million for the six months ended June 30,1998.
The increase reflects higher capital spending of $47.5 million primarily due
to one time spending on relocation of the New York operations. The remainder
of the increase primarily relates to the acquisition of ZDTV for $32.8
million, net of cash acquired.
Cash provided by financing activities was $44.5 million for the six months
ended June 30, 1999 compared to a use of $19.1 million for the six months
ended June 30, 1998. During the first quarter of 1999, ZD received proceeds of
$54.0 million from Vulcan Programming Inc. for the sale of a one-third
interest in ZDTV and sold approximately 3 million shares of common stock to
Vulcan Ventures Inc. for $50.0 million. ZD also repaid approximately $295.4
million of indebtedness during the first half of 1999. Financing activities in
1998 primarily represent funding excess cash to Softbank to repay intercompany
obligations prior to ZD's initial public offering. Prior to the ZDNet & Stock
offering, ZD also received a return of capital of approximately $2.7 million
from ZDNet.
Upon completion of the offering of the ZDNet Stock, ZD received net proceeds
of approximately $172.5 million plus an additional $25.9 million advance from
ZDNet on April 6, 1999. These proceeds were used to repay indebtedness under
ZD's revolving credit agreement. The advance from ZDNet represents ZDNet's
proceeds from the ZDNet Stock offering and bears interest at the rate at which
funding is available to Ziff-Davis Inc.
In connection with Ziff-Davis Inc.'s intention to pursue strategic
alternatives, programs have been put in place in order to retain employees.
The cost of such programs, which include enhanced severance packages,
accelerated vesting of stock options and employer contributions to the 401(K)
plans, can not yet be estimated.
ZD believes, based on its current level of operations and anticipated
growth, that ZD'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 ZD's indebtedness and to fund anticipated capital
expenditures and working capital requirements. However, actual capital
expenditures may change, particularly as a result of any acquisitions ZD may
pursue. The ability of ZD to meet its debt service obligations and reduce its
total debt will depend on the future performance of ZD.
Interest rate swap
On June 15, 1999, Ziff-Davis Inc. amended a swap agreement (with a notional
amount of $100 million) by reducing the fixed rate paid to the counterparty
and providing the counterparty with a one-time option to cancel the swap
agreement on February 5, 2000. Ziff-Davis Inc. entered into another swap
agreement (with a notional amount of $50 million) on June 15, 1999. Under this
swap agreement, Ziff-Davis Inc. will receive a fixed rate of interest and pay
a floating rate of interest based on 3 months LIBOR, which resets quarterly,
for the term of the agreement.
Restructuring
In October 1998, ZD announced a restructuring program with the intent of
significantly reducing its cost base. As a result, a charge of $52.2 million
was recorded in the fourth quarter of 1998. The charge included asset
impairment costs ($37.9 million), employee termination costs ($8.6 million)
and costs to exit activities ($5.7 million). At June 30, 1999 all amounts
related to the restructuring have been paid and no accrual remains.
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Year 2000 Readiness Disclosure
During 1997, Ziff-Davis Inc., including the businesses comprising ZD, began
a review of its computer systems and software to identify systems and software
which might malfunction due to misidentification of the Year 2000. Ziff-Davis
Inc. is using both internal and external resources to identify, test, correct
and reprogram systems and software for Year 2000 readiness.
At December 31, 1998, Ziff-Davis Inc. was in the research and validation
phase of its Year 2000 project for information technology, or IT, systems and
non-IT systems. This phase consists of research and validation of all
infrastructure, hardware and software, including platform, wide-area network
and local-area network components. Research for non-IT systems includes
identifying systems that include embedded technology, such as micro-
controllers, which are not yet Year 2000 compliant.
Ziff-Davis Inc. has identified critical systems and applications that will
either be validated for compliance through formal documentation, through
vendors or through testing. During the second quarter of 1999, Ziff-Davis Inc.
entered the testing phase of its infrastructure, hardware, software and
databases and plans to complete such phase by September 1, 1999. Contingency
plans will be developed for any systems or platforms that are known to be non-
compliant as of September 1, 1999.
Some of Ziff-Davis Inc. computer systems and databases, including its
subscription fulfillment and payroll systems, are managed by third parties
under contractual arrangements. Ziff-Davis Inc. is not currently aware of any
Year 2000 compliance problems related to those third parties. Ziff-Davis Inc.
has requested those third parties with which Ziff-Davis Inc. has material
relationships in the second quarter of 1999 to advise it as to whether such
third parties anticipate difficulties in addressing Year 2000 compliance
problems, and if so, the nature of such difficulties. Such inquiries are
substantially complete and no material matters have been identified.
In addition, Ziff-Davis Inc. is developing contingency plans in order to
compensate for any disruption or downtime that could result from a Year 2000
compliance problem. Ziff-Davis plans to replace IT and non-IT systems that it
determines are not Year 2000 compliant prior to October 1, 1999 in order to
minimize any risk of a Year 2000 compliance problem.
Ziff-Davis Inc. has incurred remediation costs associated with its Year 2000
readiness efforts. These remediation costs have been incurred in connection
with replacement of systems and hardware, modification of software and
consulting costs related to Year 2000 solution providers. The costs to address
Year 2000 issues which have been included in the general and administrative
expenses of Ziff-Davis Inc. have not been tracked separately and are therefore
not determinable. However, management believes these expenses have been
substitutive rather than incremental to the recurring level of general and
administrative expenses. Total capitalized costs incurred in the replacement
of systems in connection with Ziff-Davis Inc.'s Year 2000 readiness efforts as
of December 31, 1997 and 1998 were $1.7 and $3.8 respectively. Ziff-Davis Inc.
estimates that it will incur external selling, general and administrative
expenses of approximately $7 to $9 million and capital costs of $5 to $6
million during 1999 related to its Year 2000 readiness efforts. The majority
of these costs will be allocated to the ZD Group.
Ziff-Davis Inc. expects to complete testing and replacement of critical
systems by the beginning of the fourth quarter of 1999. Ziff-Davis Inc.'s
estimate of its most reasonably likely "worst case scenario" would be the
failure of its internal applications and systems that process and store
certain information and data. Ziff-Davis Inc. would resolve the failure of
such applications and systems one by one, and management of Ziff-Davis Inc.
does not believe that the impact on its critical systems would be material.
However, if Ziff-Davis Inc. or any of its subscribers, advertisers, licensors,
vendors or other third parties on whom it relies experiences a Year 2000
compliance problem, this could have a material adverse effect on Ziff-Davis
Inc.'s profit and liquidity.
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 under the caption "Risk Factors" in the Prospectus dated March
30, 1999 contained in Ziff-Davis Inc.'s Registration Statement on Form S-1
(File No. 33-69447) and in the registration statement on Form S-3 (File No.
333-84555) which became effective August 11, 1999.
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ZDNet
(A Division of Ziff-Davis Inc.)
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
ZDNet's objective is to be the leading online content site focused on
technology products and services for users and the preferred online platform
for advertisers and merchants. ZDNet's Web sites are designed to capitalize on
the market opportunities created by the increasing importance of technology,
the emergence of the Internet as a mass medium and the appealing demographics
of technology-oriented Web users. ZDNet focuses on content, community and
commerce, enabling users to research topics of interest, interact with other
users, download software and evaluate and purchase a wide range of products
and services at a single destination. Ziff-Davis Inc. was among the first
content providers to focus its efforts on the Internet, launching its
zdnet.com service in the fall of 1994.
On July 14, 1999, Ziff-Davis Inc. announced that it had retained Morgan
Stanley Dean Witter ("Morgan Stanley") to explore strategic alternatives to
maximize shareholder value. The Ziff-Davis Inc. Board of Directors has not
embraced any particular strategic alternatives, and will investigate all
possible alternatives, including strategic alliances, mergers and the sale or
joint venture of all or some of the Ziff-Davis Inc.'s businesses. No
assurances can be given that any transaction will result from the exploration
process that Morgan Stanley has been retained to manage. On May 24, 1999,
Ziff-Davis Inc. retained Morgan Stanley to explore strategic alternatives for
its ZD Market Intelligence unit.
ZDNet Stock
The stockholders of Ziff-Davis Inc. voted, at a Special Meeting on March 30,
1999, to authorize the issuance of a new series of common stock, to be
designated as Ziff-Davis Inc.--ZDNet Common Stock ("ZDNet Stock"), which is
intended to reflect the performance of Ziff-Davis Inc.'s online business
division, ZDNet. When the ZDNet Stock was issued on April 6, 1999, Ziff-Davis
Inc.'s existing common stock was reclassified as Ziff-Davis Inc.--ZD Common
Stock ("ZD Stock"), which is intended to reflect the performance of Ziff-Davis
Inc.'s other businesses and a retained interest in ZDNet.
Prior to the ZDNet Stock offering, ZD held a 100% Retained Interest in
ZDNet. The ZDNet Stock offering was completed on April 6, 1999. Ziff-Davis
Inc. issued 11.5 million shares of ZDNet Stock, including 1.5 million shares
issued in conjunction with the underwriters' exercised their option to
purchase additional shares to cover over-allotments. Ziff-Davis Inc.
attributed to ZDNet 1,500,000 of the sold shares in a manner analogous to a
primary offering and attributed to ZD 10,000,000 of the sold shares in respect
of its retained interest in ZDNet, in a manner analogous to a secondary
offering. ZD received net proceeds of approximately $172.5 million and ZDNet
received net proceeds of approximately $25.9 million. The ZDNet net proceeds
were loaned to ZD as an intercompany loan which will bear interest at the rate
at which funding is currently available to Ziff-Davis Inc. After giving effect
to the ZDNet Stock offering, there were 11,500,000 shares of ZDNet Stock
outstanding and another 60,000,000 notional shares of ZDNet Stock intended to
be represented by ZD's retained interest in ZDNet, which was approximately
83.9% immediately following the offering.
Prior to the ZDNet Stock offering, Ziff-Davis Inc. provided all funding for
ZD and ZDNet, which was accounted for as division equity contributions or a
return of capital. Ziff-Davis Inc. continued with these practices until the
ZDNet Stock was issued. Accordingly no interest expense or income to or from
ZD has been reflected in the financial statements of ZDNet for any period
prior to the date on which the ZDNet Stock was issued.
Acquisition of GameSpot Inc.
On April 7, 1999, ZDNet closed on the acquisition of the remaining 30%
interest in GameSpot Inc. in exchange for 600,000 newly issued shares of ZDNet
stock valued at approximately $11.4 million. This acquisition was accounted
for under the purchase method of accounting.
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Updates.com Inc.
On July 2, 1999 ZDNet acquired Updates.com Inc. for $5 million in cash and
582,526 shares of ZDNet stock valued at $13.5 million. This acquisition will
be accounted for under the purchase method of accounting.
SoftSeek Inc.
On July 30, 1999, Ziff-Davis Inc. acquired SoftSeek Inc. for $7 million in
cash and 991,038 shares of ZDNet Stock valued at $19 million. This acquisition
will be accounted for under the purchase method of accounting.
In connection with the acquisitions described in the preceding three
paragraphs, amortization expense for 1999 will increase by approximately $5.5
million.
Presentation of Financial Information
ZDNet is comprised of certain operations which were acquired at various
times and completed a reorganization in May 1998. See Note 1 to ZDNet's
combined financial statements included in Ziff-Davis Inc.'s report on Form 8-
K, dated April 2, 1999 (File No. 001-14055).
Results of Operations
Comparison of the three months ended June 30, 1999 and 1998
Revenue
Revenue for the second quarter of 1999 increased by $10.7 million or 86.9%
from $12.3 million in 1998 to $23.0 million in 1999. Revenue from advertising
accounted for 93.3% of total revenue for 1999 compared to 82.7% for the same
period in 1998.
Revenue from advertising increased 110.8% to $21.4 million for the three
months ended June 30, 1999 from $10.2 million for the three months ended June
30, 1998. The increase in advertising revenue was attributed to an increase in
rates and volume. During the period both the number of advertisers and the
average monthly revenue per advertiser increased as did the average sale price
per page. Subscription-based fees and services declined as expected and were
$1.5 million for the three months ended June 30, 1999 compared to $2.1 million
for the same period in 1998. These results reflect the continuing shift from a
subscription-based business model to an advertising based model.
Cost of operations
Production and content. Production and content expenses were $8.5 million or
37.2% of revenue for the quarter ended June 30, 1999 compared to $6.6 million
or 53.6% of revenue in 1998. The absolute dollar increase was due to an
increase in ZD's revenue-based royalty charge to ZDNet, as well as an increase
in production costs to support higher user traffic. The cost of production and
content decreased as a percentage of sales due to economies of scale and
revenue growth significantly exceeding the growth of the cost base. Royalty
payments to ZD were $1.1 million and $0.6 million in the 1999 and 1998
periods, respectively.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $9.8 million or 42.7% of revenue for 1999
compared to $7.4 million or 60.4% of revenue in 1998. The absolute dollar
increase was due to additional personnel and advertising costs required to
support and strengthen the growth of ZDNet. Included in the selling, general
and administrative costs was an allocation from Ziff-Davis Inc. relating to
certain selling, general and administrative services and shared services
provided on a centralized basis which for the respective periods amounted to
$1.3 million in 1999 and $1.2 million in 1998.
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Stock-based compensation. As a result of the grant of certain stock options
in December of 1998, ZDNet incurred a deferred compensation charge of $13.3
million. This non-cash charge will be recognized ratably over the vesting
period of the underlying options. The charge on a quarterly basis is $0.8
million. This charge did not exist in 1998 because the options were granted in
December 1998 and vesting begins in December 1999. In addition, $0.4 million
of stock compensation was incurred in the 1999 quarter relating to the
exchange of GameSpot options for ZDNet options as part of completing the
GameSpot acquisition.
Depreciation. Depreciation expense was $0.6 million for the three months
ended June 30, 1999 compared to $0.4 million for the three months ended June
30, 1998. The increase related primarily to increased capital expenditures
made by ZDNet for equipment necessary to expand its network and infrastructure
in order to support its continued growth.
Amortization of intangible assets. Amortization was $1.4 million for the
three months ended June 30, 1999 compared to $1.0 million for the three months
ended June 30, 1998. The increase in amortization is a result of the
acquisition of the remaining interest in GameSpot Inc. which was completed in
April 1999.
Interest income. ZDNet's portion of the proceeds from the ZDNet stock
offering have been advanced to ZD. Such advance bears interest at the rate at
which funds are available to ZD (currently approximately 8.5%). As a result of
such advance, interest income of $0.6 million was reported in the second
quarter of 1999. No such amounts were reported in prior periods.
Minority interest. The minority interest of $0.1 million in each of 1999 and
1998 represents the losses attributed to the holders of the minority interest
in GameSpot Inc. The remaining minority interest was acquired in April 1999.
Income taxes. ZDNet recorded an income tax provision of $1.1 million in 1999
and $0.2 million in 1998. The effective tax rate for ZDNet is approximately
58.1% for 1999. Income taxes are provided based on ZDNet'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 at GameSpot prior to acquisition of the minority interest,
and the effect of state and local taxes.
Net loss. As a result of the items described above, ZDNet's net loss
improved from $2.9 million in 1998 to income of $0.8 million in 1999.
EBITDA
EBITDA is defined as income before provision for income taxes, interest
expense, depreciation and other non-cash charges. These non-cash charges
include amortization of intangible assets and stock based compensation.
EBITDA for the three months ended June 30, 1999 was $4.6 million compared to
an EBITDA loss of $1.6 million for the three months ended June 30, 1998. The
improvement was due primarily to higher revenue, offset to some extent by
higher production and content and selling, general and administrative
expenses.
Comparison of the six months ended June 30, 1999 and 1998
Revenue
Revenue for the six months ended June 30, 1999 increased by $19.5 million or
89.0% from $22.0 million in 1998 to $41.5 million in 1999. Revenue from
advertising accounted for 92.2% of total revenue for 1999 compared to 80.9%
for the same period in 1998.
Revenue from advertising increased 115.4% to $38.3 million for the six
months ended June 30, 1999 from $17.8 million for the six months ended June
30, 1998. The increase in advertising revenue was attributed to an
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increase in rates and volume. During the period both the number of advertisers
and the average monthly revenue per advertiser increased as did the average
sale price per page. Subscription-based fees and services declined as expected
and were $3.2 million for the six months ended June 30, 1999 compared to $4.2
million for the same period in 1998. These results reflect the continuing
shift from a subscription-based business model to an advertising based model.
Cost of operations
Production and content. Production and content expenses were $16.3 million
or 39.2% of revenue for the six months ended June 30, 1999 compared to $13.1
million or 59.5% of revenue in 1998. The absolute dollar increase was due to
an increase in ZD's revenue-based royalty charge to ZDNet, as well as an
increase in production costs to support higher user traffic. The cost of
production and content decreased as a percentage of sales due to economies of
scale and revenue growth significantly exceeding the growth of the cost base.
Royalty payments to ZD were $2.1 million and $1.1 million in the 1999 and 1998
periods, respectively.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $18.8 million or 45.2% of revenue for 1999
compared to $15.2 million or 69.4% of revenue in 1998. The absolute dollar
increase was due to additional personnel and advertising costs required to
support and strengthen the growth of ZDNet. Included in the selling, general
and administrative costs was an allocation from Ziff-Davis Inc. relating to
certain selling, general and administrative services and shared services
provided on a centralized basis which for the respective periods amounted to
$2.7 million in 1999 and $2.2 million in 1998.
Stock-based compensation. The charge for the six months ended June 30 1999
was $1.3 million. This charge did not exist in 1998 because the options were
granted in December 1998 and vesting begins in December 1999.
Depreciation. Depreciation expense was $1.2 million for the six months ended
June 30, 1999 compared to $0.7 million for the six months ended June 30, 1998.
The increase related primarily to increased capital expenditures made by ZDNet
for equipment necessary to expand its network and infrastructure in order to
support its continued growth.
Amortization of intangible assets. Amortization was $2.4 million for the six
months ended June 30, 1999 compared to $2.4 million for the six months ended
June 30, 1998. The decrease in amortization is a result of certain intangible
assets becoming fully amortized as of March 1, 1998. ZDNet's amortization
expense will increase in future quarters due to the acquisition of the
remaining interest in GameSpot Inc. which was completed in April 1999.
Interest income. ZDNet's portion of the proceeds from the ZDNet Stock
offering have been advanced to ZD. Such advance bears interest at the rate at
which funds are available to ZD (currently approximately 8.5%). As a result of
such advance, interest income of $0.6 million was reported in the second
quarter of 1999. No such amounts were reported in prior periods.
Minority interest. The minority interest of $0.1 million in 1999 and and
$0.3 in 1998 represents the losses attributed to the holders of the minority
interest in GameSpot Inc. The remaining minority interest was acquired in
April 1999.
Income taxes. ZDNet recorded an income tax provision of $0.8 million in 1999
and a benefit of $0.3 million in 1998. The effective tax rate for ZDNet is
approximately 58.1% for 1999. Income taxes are provided based on ZDNet'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 at GameSpot prior to acqusition of the minority
interest and the effect of state and local taxes.
Net loss. As a result of the items described above, ZDNet's net loss
improved from $8.9 million in 1998 to an income of $0.6 million in 1999.
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EBITDA
EBITDA for the six months ended June 30, 1999 was $6.6 million compared to
an EBITDA loss of $6.0 million for the six months ended June 30, 1998. The
improvement was due primarily to higher revenue, offset to some extent by
higher production and content and selling, general and administrative
expenses.
Liquidity and Capital Resources
Historically, the cash needs for ZDNet, excluding the cash needs of ZDNet's
foreign operations and operations that are not wholly owned, were funded by ZD
and accounted for as a capital contribution (i.e. as an increase in ZDNet's
division equity and ZD's retained interest in ZDNet). Accordingly, no interest
expense has been reflected in the financial statements of ZDNet. After the
completion of the ZDNet Stock offering, Ziff-Davis Inc. will account for all
cash transfers between ZD and ZDNet, other than transfers in return of assets
or services rendered or transfers in respect of ZD's retained interest that
correspond to dividends paid on ZDNet stock, as inter-group revolving credit
advances. ZDNet received net proceeds of $25.9 million from the initial public
offering of the ZDNet Stock, which were loaned to ZD as an interest bearing
advance. These advances will bear interest at the rate at which Ziff-Davis
Inc. could borrow such funds on a revolving credit basis as the board of
directors determines in its sole discretion. Funding for ZDNet's future cash
needs will be provided by ZD through a reduction of the interest bearing
advance and to the extent necessary, as a revolving credit advance bearing
interest.
Sources and uses of cash
Cash and cash equivalents were $0.3 million at June 30, 1999 compared to
$0.2 million at December 31, 1998. The increase was due to the factors
discussed below.
Cash provided by operations was approximately $6.8 million for the six
months ended June 30, 1999 compared to a use of $2.9 million for the second
quarter of 1998. The improvement was due primarily to an improvement in net
income from a loss of $8.9 million in 1998 to income of $0.6 million in 1999.
Cash used by investing activities was $3.0 million in 1999 compared to $2.0
million in 1998. This increase is a result of ZDNet's continued investment in
capital equipment necessary to support the increasing levels of user traffic
as well as a $1.6 million investment in Deja.com.
Cash used by financing in 1999 was $3.9 million compared to cash provided by
financing of $5.1 million in 1998. As a result of decreased losses, ZDNet did
not require the same level of funding from ZD in 1999 as was required in 1998.
ZDNet generated enough cash flow to provide a return of capital of
approximately $.2.7 million to ZD during the quarter ended June 30, 1999. In
addition, proceeds from the ZDNet stock offering were advanced to ZD Group
during the period. Subsequent to March 31, 1999, all inter-group advances will
be treated as revolving credit advances and will bear interest, as described
above.
Year 2000 Readiness Disclosure
During 1997, Ziff-Davis Inc. began a review of its computer systems and
software to identify systems and software which might malfunction due to
misidentification of the Year 2000. Ziff-Davis Inc. is using both internal and
external resources to identify, test, correct and reprogram systems and
software for Year 2000 readiness.
At December 31, 1998, Ziff-Davis Inc. was in the research and validation
phase of its Year 2000 project for information technology, or IT, systems and
non-IT systems. This phase consists of research and validation of all
infrastructure, hardware and software, including platform, wide-area network
and local-area network components. Research for non-IT systems includes
identifying systems that include embedded technology, such as micro-
controllers, which are not yet Year 2000 compliant.
Ziff-Davis Inc. has identified critical systems and applications that will
either be validated for compliance through formal documentation, through
vendors or through testing. During the second quarter of 1999, Ziff-Davis
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Inc. entered the testing phase of its infrastructure, hardware, software and
databases and plans to complete such phase by the fourth quarter of 1999.
Contingency plans will be developed for any systems or platforms that are
known to be non-compliant by the fourth quarter of 1999.
Some of Ziff-Davis Inc. computer systems and databases, including its
subscription fulfillment and payroll systems, are managed by third parties
under contractual arrangements. Ziff-Davis Inc. is not currently aware of any
Year 2000 compliance problems related to those third parties. Ziff-Davis Inc.
has requested those third parties with which Ziff-Davis Inc. has material
relationships in the second quarter of 1999 to advise it as to whether such
third parties anticipate difficulties in addressing Year 2000 compliance
problems, and if so, the nature of such difficulties. Such inquiries are
substantially complete and no material matters have been identified.
In addition, Ziff-Davis Inc. is developing contingency plans in order to
compensate for any disruption or downtime that could result from a Year 2000
compliance problem. Ziff-Davis plans to replace IT and non-IT systems that it
determines are not Year 2000 compliant by the fourth quarter of 1999, in order
to minimize any risk of a Year 2000 compliance problem.
Ziff-Davis Inc. has incurred remediation costs associated with its Year 2000
readiness efforts. These remediation costs have been incurred in connection
with replacement of systems and hardware, modification of software and
consulting costs related to Year 2000 solution providers. The internal costs
to address Year 2000 issues, which have been included in the general and
administrative expenses of Ziff-Davis Inc., have not been tracked separately
and are therefore not determinable. However, management believes these
expenses have been substitutive rather than incremental to the recurring level
of general and administrative expenses. Total capitalized costs incurred in
the replacement of systems in connection with Ziff-Davis Inc.'s Year 2000
readiness efforts as of December 31, 1997 and 1998 were $1.7 million and $3.8
million, respectively. Ziff-Davis Inc. estimates that it will incur external
selling, general and administrative expenses of approximately $7 to $9 million
and capital costs of $5 to $6 million during 1999 related to its Year 2000
readiness efforts. It is anticipated that ZDNet will be allocated a small
portion of these costs.
Ziff-Davis Inc. expects to complete testing and replacement of critical
systems in the fourth quarter of 1999. Ziff-Davis Inc.'s estimate of its most
reasonably likely "worst case scenario" would be the failure of its internal
applications and systems that process and store certain information and data.
Ziff-Davis Inc. would resolve the failure of such applications and systems one
by one, and management of Ziff-Davis Inc. does not believe that the impact on
its critical systems would be material. However, if Ziff-Davis Inc. or any of
its subscribers, advertisers, licensors, vendors or other third parties on
whom it relies experiences a Year 2000 compliance problem, this could have a
material adverse effect on Ziff-Davis Inc.'s profit and liquidity.
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"
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 under the caption "Risk Factors" in the Prospectus dated March
30, 1999 contained in Ziff-Davis Inc.'s Registration Statement on Form S-1
(File No. 333-69447) and in the registration statement on Form S-3 (File No.
333-84555), which became effective on August 11, 1999.
59
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Swap Agreements
Ziff-Davis Inc.'s credit facility exposes it to market risk with respect to
changes in interest rates. Ziff-Davis Inc. manages this risk through the use
of interest rate swap agreements.
On June 15, 1999, Ziff-Davis amended a swap agreement (with a notional
amount of $100 million) by reducing the fixed rate paid to the counterparty
and providing the counterparty with a one-time option to cancel the swap
agreement on February 5, 2000 (or reduce the term of the agreement by 3 1/2
years). Ziff-Davis entered into another swap agreement (with a notional amount
of $50 million) on June 15, 1999. Under this swap agreement, Ziff-Davis will
receive a fixed rate of interest and pay a floating rate of interest based on
3 months LIBOR, which resets quarterly, for the term of the agreement.
Through the use of swap agreements, Ziff-Davis Inc. has effectively
established a fixed interest rate for $500 million of the outstanding credit
facility. Based on the $960 million outstanding under the credit facility as
of June 30, 1999, if the LIBOR rate were to increase by 1%, Ziff-Davis Inc.
would incur, after giving effect to the swap agreements, an additional $1.6
million of annual interest expense. The weighted average fixed rate Ziff-Davis
pays under these agreements is approximately 5.1%.
These swap agreements are viewed by Ziff-Davis Inc. as risk management tools
and are not used for trading or speculative purposes. The notional amount of
$500 million does not represent a real amount exchanged by the parties, and
therefore, is not a measure of Ziff-Davis Inc.'s exposure through its use of
swap agreements. The fair values of these swap agreements were estimated by
obtaining quotes from brokers. These quotes represented the amounts that Ziff-
Davis Inc. would pay if the agreements were terminated at the balance sheet
date. While it is not Ziff-Davis Inc.'s intention to terminate these swap
agreements, these fair values indicated that the termination of the swap
agreements would have resulted in a loss of approximately $6.0 million. By
their nature, swap agreements involve credit risk, due to the possible
nonperformance by counterparties. To mitigate this risk, Ziff-Davis Inc.
enters into swap agreements with major financial institutions and diversifies
the counterparties used as a means to limit counterparty exposure and
concentration of risk.
Hedge transaction
In June 1999, Ziff-Davis entered into a short-sale to effect a hedge on
300,000 of its 438,057 shares of Beyond.com. These shares were sold on behalf
of Ziff-Davis by a third party, at a weighted average price of $22.50 per
share. Upon delivery of the shares to the third party, Ziff-Davis will receive
the cash proceeds of the sale and recognize a gain. Ziff-Davis is not required
to deliver the shares in any specified time-frame.
Ziff-Davis Inc. is subject to the risk of non-performance by its counter-
party, a major investment bank. In the event of non-performance by the
counter-party, Ziff-Davis Inc. would incur a loss if the market value of the
Beyond.com shares fell below Ziff-Davis Inc.'s cost basis.
60
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. Legal proceedings
ZD, ZDNet and Ziff-Davis Inc. are subject to various legal proceedings
arising in the normal course of business.
Class action and derivative litigations
Following a decline in the price per share of Ziff-Davis Inc.'s common stock
in October 1998, eight securities class action suits were filed against Ziff-
Davis Inc. and certain of its directors and officers in the United States
District Court for the Southern District of New York.
The complaints alleged that defendants violated Sections 11, 12(a) (2) and
15 of the Securities Act of 1933 in connection with the registration statement
filed by Ziff-Davis Inc. with the Securities and Exchange Commission relating
to the initial public offering of Ziff-Davis Inc.'s stock on April 29, 1998
(the "IPO"). More particularly, the complaints alleged that the registration
statement contained false and misleading statements and failed to disclose
facts that could have indicated an impending decline in Ziff-Davis Inc.'s
revenue. The complaints sought on behalf of a class of purchasers of Ziff-
Davis Inc.'s common stock from the date of the IPO through October 8, 1998
unspecified damages, interest, fees and costs, rescission, and injunctive
relief such as the imposition of a constructive trust upon the proceeds of the
IPO.
On January 28, 1999, the court entered an order consolidating the actions,
appointing lead plaintiff's counsel and requiring the filing of a consolidated
amended complaint. The consolidated amended complaint was filed on June 15,
1999 and only alleges claims under Section 11 of the Securities Act of 1933.
On May 20, 1999, Ziff-Davis Inc. moved to dismiss the consolidated amended
complaint. In July 1999, plaintiff filed their response to the motion. Ziff-
Davis Inc. filed a reply on August 11, 1999.
In addition, two derivative suits have been filed by stockholders against
Ziff-Davis Inc. and all of its directors in the Court of Chancery of the State
of Delaware for New Castle County. The complaints allege that the directors
breached their fiduciary duties to Ziff-Davis Inc. by repricing the stock
options awarded to certain directors and demand the nullification of the
repricing and an injunction against exercise by the directors of any repriced
option. Plaintiffs filed an amended complaint on February 17, 1999 (which is
substantially similar to the original complaints, except that the amended
complaint also addresses the granting of "new options" at an allegedly
"reduced exercise price") and the actions have been consolidated. Answers to
the amended complaint on behalf of both Ziff-Davis Inc. and its directors were
filed on April 12, 1999. Discovery is proceeding.
Other legal proceedings
Ziff-Davis Inc. was named as a defendant in an action, filed on April 17,
1998 in the Supreme Court of the State of New York, by minority stockholders
of SOFTBANK Interactive Marketing Inc. ("SIM"), formerly an indirect
subsidiary of SOFTBANK Corp. The complaint alleged, among other things, that
SBH, SIM's majority stockholder, acting with Ziff-Davis Inc. and two of its
senior officers and directors who were directors of SIM (and who were also
named as defendants), had conflicts of interest between SIM and other Softbank
investments (including investments in Ziff-Davis Inc.) and failed to act in
the best interests of SIM and the minority stockholders by taking actions
which benefited Ziff-Davis Inc. The complaint stated claims based on common
law fraud, breach of fiduciary duty and aiding and abetting theories and seeks
in excess of $200,000,000 in damages. Upon motion of Ziff-Davis Inc. and the
other defendants, all of the claims against them other than a breach of
contract claim which is solely against SBH, were dismissed on February 26,
1999. On April 1, 1999, plaintiffs filed a notice of appeal of the dismissal.
Although the outcome of these cases cannot be predicted, Ziff-Davis Inc.
believes that there are substantial defenses to the claims. Ziff-Davis Inc.
currently cannot estimate its ultimate liability, if any, with respect to such
pending litigations. Accordingly, no provision for such matters has been
included in the financial statements.
61
<PAGE>
ITEM 2. Changes in Securities and Use of Proceeds
Not applicable
ITEM 3. Defaults Upon Senior Securities
Not applicable
ITEM 4. Submission of Matters to a Vote of Security Holders
On May 27, 1999, Ziff-Davis Inc. held an Annual Meeting of Stockholders to
vote on the following proposals:
Proposal 1. Election of three Class I directors: (i) Jason E. Chudnofsky,
(ii) Ronald D. Fisher and (iii) Jonathan D. Lazarus
Proposal 2. Ratification of appointment of independent accountants
(PricewaterhouseCoopers LLP)
The following is a compilation of the votes cast for, against or abstained
for each of the proposals above:
<TABLE>
<CAPTION>
Votes
-------------------------------
For Withheld Total
---------- --------- ----------
<C> <S> <C> <C> <C>
Proposal 1................................
(i) Jason E. Chudnofsky............. 91,781,575 2,457,089 94,238,664
(ii) Ronald D. Fisher................ 91,782,300 2,456,364 94,238,664
(iii) Jonathan D. Lazarus............. 91,784,382 2,454,282 94,238,667
</TABLE>
<TABLE>
<CAPTION>
Votes
---------------------------------------
For Against Abstained Total
---------- ------- --------- ----------
<S> <C> <C> <C> <C>
Proposal 2........................ 94,081,575 105,771 51,318 94,238,664
</TABLE>
ITEM 5. Other Information
Not applicable.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule (EDGAR filing only)
(b) Reports on Form 8-K
On April 2, 1999, Ziff-Davis Inc. filed a Form 8-K (File No. 001-14055)
to report (1) Description of Business, (2) Selected Historical Financial
and other Data, (3) Management's Discussion and Analysis of Financial
Condition and Results of Operations and (4) Financial Statements for each
of Ziff-Davis Inc., ZD and ZDNet, respectively which were included as part
of Ziff-Davis Inc.'s Registration Statement on Form S-1, File No. 333-69447
which was filed with the Commission on March 30, 1999.
On February 19, 1999, Ziff-Davis Inc. filed a Form 8-K (File No. 001-
14055) to report the February 4, 1999 acquisition of ZDTV from MAC Holdings
(America) Inc. for $81.4 million. Ziff-Davis Inc. filed the required Form
8-K/A with the audited financial statements of ZDTV on April 20, 1999.
62
<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
By: _________________________________
Timothy C. O'Brien
Chief Financial Officer, Director
(On behalf of the Registrant and
as
Principal Financial Officer)
Date: August 16, 1999
/s/ Mark D. Moyer
By: _________________________________
Mark D. Moyer
Vice President and Controller
(On behalf of the Registrant and
as
Principal Accounting Officer)
Date: August 16, 1999
63
<PAGE>
EXHIBIT INDEX
27.1 Financial Data Schedule (EDGAR filing only)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ZIFF DAVIS
INC.'S 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> JUN-30-1999 JUN-30-1998
<CASH> 32,529 32,566
<SECURITIES> 0 0
<RECEIVABLES> 317,433 312,706
<ALLOWANCES> 82,538 85,381
<INVENTORY> 11,956 15,551
<CURRENT-ASSETS> 349,901 386,231
<PP&E> 206,268 170,905
<DEPRECIATION> 96,513 79,716
<TOTAL-ASSETS> 3,459,972 3,433,803
<CURRENT-LIABILITIES> 404,601 350,698
<BONDS> 0 0
0 0
0 0
<COMMON> 1,153 1,000
<OTHER-SE> 1,580,013 1,351,598
<TOTAL-LIABILITY-AND-EQUITY> 3,459,972 3,433,803
<SALES> 494,624 504,529
<TOTAL-REVENUES> 494,624 504,529
<CGS> 136,064 146,059
<TOTAL-COSTS> 520,654 507,382
<OTHER-EXPENSES> (21,686) (4,626)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (60,970) (82,092)
<INCOME-PRETAX> (65,314) (80,319)
<INCOME-TAX> 24,397 (1,362)
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (40,917) (81,681)
<EPS-BASIC> 0 0
<EPS-DILUTED> 0 0
</TABLE>
