<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, 2000
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)
DELAWARE 13-3987754
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
28 East 28th Street,
New York, New York 10016
(Address of Principal Executive Offices) (Zip Code)
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 10, 2000, there
were 106,824,482 shares outstanding of the registrant's Ziff-Davis Inc.--ZD
Common Stock, par value $0.01 per share, and 16,978,283 shares outstanding of
the registrant's Ziff-Davis Inc.--ZDNet Common Stock, par value $0.01 per share.
1
<PAGE>
ZIFF-DAVIS INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2000 (Unaudited) and December 31, 4
1999
Consolidated Statements of Operations (Unaudited) for the three and six months 5
ended June 30, 2000 and 1999
Consolidated Statements of Comprehensive Income (Unaudited) for the three and 6
six months ended June 30, 2000 and 1999.
Consolidated Statements of Cash Flows (Unaudited) for the six months ended 7
June 30, 2000 and 1999
Consolidated Statement of Changes in Stockholders' Equity (Unaudited) for the 8
six months ended June 30, 2000
Notes to unaudited consolidated financial statements. 9
Item 2. Management's Discussion and Analysis of Financial Condition and 17
Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk 24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 2. Changes in Securities and Use of Proceeds 25
Item 3. Defaults Upon Senior Securities 25
Item 4. Submission of Matters to a Vote of Security Holders 25
Item 5. Other Information 25
Item 6. Exhibits and Reports on Form 8-K 25
SIGNATURES 26
EXHIBIT INDEX 27
</TABLE>
2
<PAGE>
CAUTIONARY LEGEND REGARDING FORWARD-LOOKING STATEMENTS
Some of the information in this Form 10-Q may constitute forward-looking
statements which are subject to various risks and uncertainties. These forward-
looking statements include, without limitation, statements regarding the CNET
merger, the financing plans for Key3Media Group, the amount of the planned cash
dividend on the ZD common stock and the timing of the various Key3Media Group
transactions, our future business plans and strategies and our future financial
condition or results of operations, as well as other statements that are not
historical. You can find many of these statements by looking for words like
"will," "may," "believes," "expects," "anticipates," "plans" and "estimates" and
for similar expressions.
Because forward-looking statements involve risks and uncertainties, there
are factors that could cause the actual results to differ materially from those
expressed or implied. For example, there is a possibility that the CNET merger
will not close due to failure to obtain regulatory or stockholder approval or
for some other reason, or that one or more of the Key3Media Group financings
will be delayed, materially changed or abandoned as a result of a material
adverse change in Key3Media Group's business or financial position or in the
markets generally. Important cautionary statements and risk factors that could
affect the Key3Media Group transactions are discussed in Key3Media Group's Form
S-1 and prospectus filed with the SEC (incorporated by reference herein),
including under the caption "Risk Factors" appearing in that prospectus. In
addition, the statements appearing under "Risk Factors" in our proxy statement
dated February 7, 2000 and Registration Statement on Form S-3 (File No. 333-
35550) incorporated by reference herein and other cautionary statements
appearing in Management's Discussion and Analysis of Financial Condition and
Results of Operations for Ziff-Davis Inc. appearing in our Form 10-K for the
year ended December 31, 1999 (incorporated by reference herein) and elsewhere in
this Form 10-Q, describe circumstances that could materially affect the accuracy
of forward-looking statements.
If there are any subsequent written or oral forward-looking statements made
by us or any person acting on our behalf, they are qualified in total by the
cautionary statements contained or referred to in this section. We do not
undertake any obligation to release publicly any revisions to the forward-
looking statements to reflect events or circumstances after the date of this
document or to reflect the occurrence of unanticipated events.
3
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
ZIFF-DAVIS INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share amounts)
<TABLE>
June 30, December 31,
2000 1999
---- ----
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (including restricted cash of $20,000 at June 30, 2000 and
$0 at December 31, 1999)............................................................ $ 63,616 $ 10,207
Accounts receivable, net.............................................................. 45,906 33,733
Inventories........................................................................... 722 468
Prepaid expenses and other current assets............................................. 2,161 2,835
Due from affiliates................................................................... 2,107 4,485
Securities available for sale......................................................... 7,653 513
Deferred taxes........................................................................ 9,158 6,423
----------- -----------
Total current assets................................................................ 131,323 58,664
Property and equipment, net............................................................. 9,853 23,181
Assets held for sale.................................................................... - 780,000
Net assets of discontinued operations................................................... 780,150 934,669
Intangible assets, net.................................................................. 175,808 141,636
Investments, at cost.................................................................... 30,668 25,404
Other assets............................................................................ 38,090 24,291
----------- -----------
Total assets........................................................................ $ 1,165,892 $ 1,987,845
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................................................... $ 3,569 $ 1,734
Due to affiliates..................................................................... 13,025 -
Accrued expenses...................................................................... 69,739 79,240
Deferred income, net.................................................................. 8,145 12,808
Current portion of notes payable to affiliates........................................ - 6,923
Other current liabilities............................................................. 11,274 10,224
----------- -----------
Total current liabilities........................................................... 105,752 110,929
Notes payable to affiliates............................................................. - 64,039
Notes payable, net of unamortized discount.............................................. 150,500 1,100,736
Other liabilities....................................................................... - 3,876
----------- -----------
Total liabilities................................................................... 256,252 1,279,580
----------- -----------
Commitments and contingencies (See Note 5)
Stockholders' equity:
Preferred stock(1).................................................................... - -
Common stock - Ziff-Davis Inc. - ZD common stock(2)................................... 1,061 1,034
Common stock - Ziff-Davis Inc. - ZDNet common stock(2)................................ 165 138
Additional paid-in capital............................................................ 2,017,521 1,915,173
Accumulated deficit................................................................... (1,097,164) (1,193,934)
Deferred compensation................................................................. (12,975) (15,388)
Unrealized gain (loss) on securities available for sale............................... 1,935 (249)
Cumulative translation adjustment..................................................... (903) 1,491
----------- -----------
Total stockholders' equity.............................................. 909,640 708,265
----------- -----------
Total liabilities and stockholders' equity.............................. $ 1,165,892 $ 1,987,845
=========== ===========
</TABLE>
__________
(1) June 30, 2000 and December 31, 1999: par value $0.01 per share, 10,000,000
shares authorized, no shares issued and outstanding;
(2) June 30, 2000: par value $0.01 per share, 210,000,000 shares authorized,
106,107,420 shares of ZD common stock and 16,438,320 shares of ZDNet common
stock issued and outstanding; December 31, 1999: par value $0.01 per share,
210,000,000 shares authorized, 103,467,728 shares of ZD common stock and
13,707,063 shares of ZDNet common stock issued and outstanding.
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
ZIFF-DAVIS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited-dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-----------------------------------------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue, net:
Internet........................................... $ 39,227 $ 22,939 $ 75,171 $ 41,500
Publishing......................................... 13,675 147,869 153,969 292,478
Cost of operations:
Production and content............................. 5,795 47,364 50,285 95,455
Selling, general and administrative expenses....... 46,080 92,815 161,523 183,242
Stock-based compensation........................... 2,416 1,741 3,811 3,035
Depreciation and amortization of property and
equipment......................................... 926 5,243 2,289 10,005
Amortization of intangible assets.................. 6,072 22,982 10,299 44,541
Restructuring charge............................... 14,653 - 78,645 -
------------ ------------ ------------ ------------
Income (loss) from operations........................ (23,040) 663 (77,712) (2,300)
Interest expense, net................................ (1,496) (22,966) (12,466) (47,503)
Other non-operating income, net...................... 660 445 780 309
Minority interest in losses of subsidiaries.......... - - - 117
------------ ------------ ------------ ------------
Loss before income taxes, discontinued operations
and extraordinary item.............................. (23,876) (21,858) (89,398) (49,377)
Income tax benefit................................... 2,252 1,643 99,784 4,988
------------ ------------ ------------ ------------
Income (loss) from continuing operations............. (21,624) (20,215) 10,386 (44,389)
------------ ------------ ------------ ------------
Results of operations from discontinued operations,
net................................................. - 17,073 - 3,472
Gain on disposal of discontinued operations (net of
taxes of $3,296 and $99,969 for the three months
and six months ended June 30, 2000, respectively)... 5,817 - 109,664 -
------------ ------------ ------------ ------------
Income from discontinued operations.................. 5,817 17,073 109,664 3,472
------------ ------------ ------------ ------------
Income (loss) before extraordinary item.............. (15,807) (3,142) 120,050 (40,917)
------------ ------------ ------------ ------------
Extraordinary loss - early retirement of debt,
net of tax (Note 9)................................. (23,280) - (23,280) -
------------ ------------ ------------ ------------
Net income (loss).................................... $ (39,087) $ (3,142) $ 96,770 $ (40,917)
============ ============ ============ ============
ZD earnings (loss) per basic share from continuing
operations.......................................... (0.21) $ (0.20) $ 0.10 $ (.43)
ZD earnings per basic share from discontinued
operations.......................................... $ 0.06 $ 0.17 $ 1.05 $ .03
ZD loss per basic share from extraordinary item...... $ (0.22) $ - $ (0.22) $ -
------------ ------------ ------------ ------------
ZD earnings (loss) per basic share................... $ (0.37) $ (0.03) $ 0.93 $ (.40)
ZD weighted average basic shares outstanding......... 104,585,319 103,130,069 104,142,325 102,078,285
ZD earnings per diluted share from continuing
operations.......................................... N/A N/A $ 0.10 N/A
ZD earnings per diluted share from discontinued
operations.......................................... N/A N/A $ 1.03 N/A
ZD loss per diluted share from
extraordinary item.................................. N/A N/A (0.22) N/A
------------ ------------ ------------ ------------
ZD earnings per diluted share........................ N/A N/A $ 0.91 N/A
ZD weighted average diluted shares outstanding....... N/A N/A 106,918,356 N/A
ZDNet pro forma earnings (loss) per pro forma basic
share............................................... $ (0.03) $ 0.01 $ (0.06) $ 0.01
ZDNet pro forma weighted average basic shares
outstanding......................................... 75,627,641 72,060,967 74,896,249 71,782,033
ZDNet pro forma earnings per pro forma
diluted share....................................... N/A 0.01 N/A $ 0.01
ZDNet pro forma weighted average diluted shares
outstanding......................................... 81,205,708 80,913,659 81,867,721 80,492,169
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
ZIFF-DAVIS INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited-dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
<S> <C> <C> <C> <C>
2000 1999 2000 1999
---- ---- ---- ----
Net income (loss).......................................... $(39,087) $(3,142) $ 96,770 $(40,917)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments................. (2,064) (3,501) (2,394) (5,328)
Unrealized (loss) gain on securities available for sale.. 2,323 (449) 2,184 2,637
-------- ------- -------- --------
Comprehensive income (loss)................................ $(38,828) $(7,092) $ 96,560 $(43,608)
-------- ------- -------- --------
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
ZIFF-DAVIS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited-dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)........................................................................ $ 96,770 $ (40,917)
Adjustments to reconcile net income (loss) to net cash provided (used) by operating
activities:
Depreciation and amortization........................................................... 12,588 83,123
Amortization of debt issuance costs and discounts....................................... 935 1,416
Gain on sale of business units.......................................................... (209,630) -
Restructuring charge.................................................................... 78,645 -
Income from equity investments.......................................................... - (1,806)
Deferred tax benefit.................................................................... - (24,397)
Stock-based compensation................................................................ 3,811 3,389
Minority interest....................................................................... (398) (10,195)
Extraordinary loss...................................................................... 23,280 -
Changes in operating assets and liabilities:
Accounts receivable.................................................................. (16,848) (5,323)
Inventories.......................................................................... (1,300) 3,595
Accounts payable and accrued expenses................................................ 11,503 (585)
Unearned income...................................................................... (4,615) 56,291
Due to/from affiliates and management................................................ (2,378) (2,817)
Other, net........................................................................... (28,281) (29,324)
----------- ---------
Net cash provided (used) by operating activities......................................... (35,918) 32,450
----------- ---------
Cash flows from investing activities:
Capital expenditures.................................................................... (5,301) (48,929)
Investments and other................................................................... (10,998) (5,175)
Proceeds from sale of businesses....................................................... 1,156,800 9,755
Distributions from joint ventures - 4,000
Acquisitions, net of cash acquired...................................................... (22,625) (32,800)
----------- ---------
Net cash provided (used) by investing activities......................................... 1,117,876 (73,149)
----------- ---------
Cash flows from financing activities:
Proceeds from sale of Ziff-Davis Inc. - ZD common stock................................. - 51,420
Proceeds from sale of Ziff-Davis Inc. - ZDNet common stock - 198,603
Proceeds from sale of interest in ZDTV.................................................. - 54,000
Payment for premium to retire debt...................................................... (20,951) -
Proceeds from unwinding swaps........................................................... 13,600 -
Principal payments on notes payable to affiliates....................................... (64,039) (3,461)
Repayments of credit facility........................................................... (1,107,159) (295,400)
Borrowings under credit facility........................................................ 150,000 35,500
----------- ---------
Net cash provided (used) by financing activities......................................... (1,028,549) 40,662
----------- ---------
Net increase (decrease) in cash and cash equivalents...................................... 53,409 (37)
Cash and cash equivalents at beginning of period.......................................... 10,207 32,566
----------- ---------
Cash and cash equivalents at end of period................................................ $ 63,616 $ 32,529
----------- ---------
Supplemental cash flow information:
Cash paid for income taxes.............................................................. $ 697 $ 0
Cash paid for interest.................................................................. $ 26,874 $ 55,612
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
ZIFF-DAVIS INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(dollars in thousands)
<TABLE>
<CAPTION>
Common Stock
------------
ZD Common Stock ZDNet Common Stock Additional
--------------- ------------------ paid-in
Shares Amount Shares Amount capital
------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C>
Balance at December 31,
1999 .................................... 103,467,728 $ 1,034 13,707,063 $ 138 $ 1,915,173
Shares issued for various
acquisitions and investments ............ - - 1,206,397 12 27,580
Stock options exercised ...................... 2,566,943 26 1,524,860 15 73,860
Sale of shares under employee
stock purchase plan...................... 72,749 1 - - 908
Compensation earned on stock
options ................................. - - - - -
Unrealized gain on securities
available for sale, net ................. - - - - -
Net income ................................... - - - - -
Foreign currency translation
adjustment .............................. - - - - -
----------- ----------- ----------- ----------- -----------
Balance at June 30, 2000
(unaudited) ............................. 106,107,420 $ 1,061 16,438,320 $ 165 $ 2,017,521
=========== =========== =========== =========== ===========
Retained Unrealized Cumulative
Earnings Deferred loss on translation
(deficit) compensation securities adjustment Total
--------- ------------ ---------- ---------- -----
<S> <C> <C> <C> <C> <C>
Balance at December 31,
1999 .................................... $(1,193,934) $ (15,388) $ (249) $ 1,491 $ 708,265
Shares issued for various
acquisitions and investments ............ 27,592
Stock options exercised ...................... - - - - 73,901
Sale of shares under employee
stock purchase plan...................... 909
Compensation earned on stock
options ................................. - 2,413 - - 2,413
Unrealized gain on securities
available for sale, net ................. - - 2,184 - 2,184
Net income ................................... 96,770 96,770
Foreign currency translation
adjustment .............................. - - - (2,394) (2,394)
----------- ----------- ----------- ----------- -----------
Balance at June 30, 2000
(unaudited) ............................. $(1,097,164) $ (12,975) $ 1,935 $ (903) $ 909,640
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
ZIFF-DAVIS INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(numbers rounded to the nearest thousand, except share and per share amounts)
1. 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 have been included to present
fairly the consolidated financial position of Ziff-Davis Inc. ("Ziff-Davis") at
June 30, 2000 and the results of its consolidated operations for the three and
six months ended June 30, 2000 and 1999 and cash flows for the six months ended
June 30, 2000 and 1999. Operating results for the periods presented are not
necessarily indicative of the results that may be expected for the year ended
December 31, 2000. The statements should be read in conjunction with the
consolidated financial statements of Ziff-Davis and notes thereto included in
its Annual Report on Form 10-K for the year ended December 31, 1999 (the "1999
Form 10-K") and its Quarterly Report on Form 10-Q for the quarter ended March
31, 2000 ("2000 Q1 10-Q.").
1999-2000 restructuring
On July 14, 1999, Ziff-Davis announced that it had engaged Morgan Stanley Dean
Witter to explore strategic alternatives to maximize stockholder value. As a
result of this process, Ziff-Davis sold its market intelligence business in
October 1999, its television business in January 2000, its education business in
February 2000 and its print publishing businesses (excluding Computer Shopper
and an investment in Red Herring Communications Inc.) in April 2000. In
addition, Ziff-Davis expects to recapitalize and spin-off its trade show and
conference business (now known as Key3Media Group) and pay a $2.50 per share
cash dividend on August 18, 2000 to the holders of its ZD common stock of
record on August 14, 2000.
In the first and second quarters of 2000, Ziff-Davis incurred substantial
restructuring charges in connection with the disposition and restructuring of
these businesses. These charges were for severance, accelerated vesting of
employee stock options and other expenses associated with the restructuring.
For further information about these dispositions, see Note 7 (Discontinued
Operations) and Note 8 (Sale of ZD Publishing) below.
Segments
Ziff-Davis Inc. operates in two business segments: (1) Internet and (2)
publishing.
The Internet segment is engaged in providing computer technology and Internet
related news, information and services to Internet users worldwide. The Internet
segment's principal operations are in the U.S. and to a lesser extent in Europe
and Asia.
The publishing segment is engaged in publishing magazines and electronic
information products about computer technology and the Internet. Most of this
segment has been sold, but Ziff-Davis continues to publish Computer Shopper
Magazine. See Note 8 below.
9
<PAGE>
ZIFF-DAVIS INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(numbers rounded to the nearest thousand, except share and per share amounts)
Reclassifications and restatements
Certain amounts have been reclassified, where appropriate, to conform to the
current financial statement presentation. The 1999 financial statements have
been restated to reflect the market intelligence, television; education, and
trade shows and conference businesses as discontinued operations in accordance
with Accounting Principle Board Opinion No. 30.
ZDNet common stock
The stockholders of Ziff-Davis 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 common stock"), which is intended to
reflect the performance of Ziff-Davis' Internet division ("ZDNet"). When the
ZDNet common stock was issued on April 6, 1999, Ziff-Davis' existing common
stock was re-classified as Ziff-Davis' Inc.--ZD Common Stock ("ZD common
stock"), which is intended to reflect the performance of Ziff-Davis' other
businesses and a retained interest in ZDNet. The businesses represented by ZD
common stock are referred to as "ZD".
Earnings per share
The earnings per share for ZD have been presented based on the separate income
(loss) of the ZD group on a continuing and a discontinued operations basis, and
also presented for an extraordinary item, see Note 8. In order to reflect the
initial issuance of ZDNet common stock on April 6, 1999, the separate income
(loss) of the ZD group on a continuing operations basis included 100% of the
income (loss) of the ZDNet group for the first quarter of 1999. For periods
after the First Quarter of 1999, the separate income (loss) of the ZD group on a
continuing operations basis included all of the income (loss) of the ZDNet group
for the corresponding period except for the percentage of the ZDNet group
intended to be represented of ZDNet common stock then outstanding. The following
table shows the separate income (loss) of the ZD group for the periods
presented:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
---- ---- ---- ----
(dollars in thousands)
<S> <C> <C> <C> <C>
ZD income (loss) from continuing operations $(20,163) $(20,351) $ 10,470 $(44,525)
ZD income (loss) from discontinued operations 5,424 17,073 110,548 3,472
ZD loss from extraordinary item (21,707) - (23,468) -
-------- -------- -------- --------
Net ZD income (loss) $(36,446) $ (3,278) $ 97,550 $(41,053)
======== ======== ======== ========
</TABLE>
Options to purchase shares of ZD common stock that could potentially dilute
basic earnings per share from continuing operations were not included in the
computation of diluted earnings per share for any period other than the first
six months of 2000 because they were anti-dilutive.
10
<PAGE>
ZIFF-DAVIS INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(numbers rounded to the nearest thousand, except share and per share amounts)
The earnings per share for ZDNet have been presented based on the separate
income (loss) of the ZDNet group on a pro forma basis, assuming all shares of
ZDNet common stock issued on April 6, 1999 had instead been issued on January 1,
1999. The following table shows the separate income (loss) of the ZDNet group on
a pro forma basis for the periods presented:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
---- ---- ---- ----
(dollars in thousands)
<S> <C> <C> <C> <C>
Pro forma ZDNet income (loss) $ (2,641) $ 816 $ (4,204) $ 630
</TABLE>
Options to purchase shares of ZDNet common stock that could potentially dilute
basic earnings per share were not included in the computation of diluted
earnings per share for the three and six months periods ended June 20, 2000
because they were anti-dilutive.
2. Income Taxes
Income taxes are provided based on a discrete period method using a statutory
rate of 35%. The effective tax rate on continuing operations differs from the
statutory rate primarily as a result of adjustments to valuation allowance that
were reserved for prior periods, non-deductible goodwill amortization and the
effect of state and local taxes. Management believes that these tax benefits
will, more likely than not, be realized because they will offset gains realized
on the disposition of discontinued operations, with the gain from the
disposition shown net of the resulting tax provision.
3. Acquisitions and Dispositions
In April 2000, Ziff-Davis acquired the assets of LinuxDevices for $1.0
million in cash, with a potential additional earn-out of $3.0 million worth of
ZDNet common stock based on achievement of specified traffic targets.
In May 2000, Ziff-Davis acquired the assets of 3Dfiles web site for $2.0
million in cash and 380,772 shares of ZDNet common stock valued at $5.0 million.
Also in May 2000, Ziff-Davis acquired the assets of In Mind Communications,
LLC related to the Search IQ web site for $75,000 in cash and 38,077 shares of
ZDNet common stock valued at $500,000.
In June 2000, Ziff-Davis acquired the assets of DataPower Technology, Inc.
related to Linux Hardware Database for $150,000 in cash and 40,816 shares of
ZDNet common stock valued at $450,000.
These acquisition were accounted for using the purchase method of accounting.
The excess of purchase price over the fair market value of assets acquired, net
of cash, was allocated to intangible assets.
For information about various recent dispositions, see Note 7 (Discontinued
Operations) and Note 8 (Sale of ZD Publishing) below.
11
<PAGE>
ZIFF-DAVIS INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(numbers rounded to the nearest thousand, except share and per share amounts)
4. Investments
In June 2000, Ziff-Davis agreed to purchase for cash Senior Subordinated
Convertible Notes of Deja.com Inc. with a maximum principal amount of $200,000.
Ziff-Davis purchased the initial $124,467 of these notes in June 2000.
Simultaneously with the purchase of the notes, Ziff-Davis received a warrant to
purchase $40,000 of preferred stock of Deja.com. The price and number of shares
subject to the warrant are dependent upon the timing and price of Deja.com's
next round of financing. No consideration was paid for the warrant. This
investment is being accounted for under the cost method of accounting.
In June 2000, Ziff-Davis purchased 689,655 shares of common stock of
Kelkoo.com for $945,000 in cash. This investment is being accounted for under
the cost method of accounting.
12
<PAGE>
ZIFF-DAVIS INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(numbers rounded to the nearest thousand, except share and per share amounts)
5. Commitments and Contingencies
On May 15, 2000 the action described in the 1999 Form 10-K against Ziff-Davis
and its former affiliate, ZDTV, LLC brought by Sky TV and related entities and
two individuals in connection with the purchase of Sky TV, was dismissed without
prejudice.
In June 2000, the Ziff-Davis motion to dismiss the amended complaint in the
securities class action litigation described in the 1999 Form 10-K was denied
and discovery in that litigation has commenced. Although the outcome of this
case cannot be predicted, Ziff-Davis believes that there are substantial
defenses to the claims. Ziff-Davis currently cannot estimate its ultimate
liability, if any, with respect to this case. Accordingly, no provision for such
matters has been included in the financial statements.
There are no other material legal proceedings to which Ziff-Davis is a party,
except those described in the 1999 Form 10-K and the 2000 Q1 10Q and ordinary
routine litigation incidental to its business that is not otherwise material to
the financial condition or results of operations of Ziff-Davis.
13
<PAGE>
ZIFF-DAVIS INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(numbers rounded to the nearest thousand, except share and per share amounts)
6. Segment Information
Ziff-Davis operates in two reportable business segments: (1) Internet and (2)
publishing. All material inter-segment revenue has been eliminated. The
following table presents information about each of the reported segments:
<TABLE>
<CAPTION>
Three Months Ended June Six Months Ended June
30, 30,
2000 1999 2000 1999
---- ---- ---- ----
(dollars in thousands)
<S> <C> <C> <C> <C>
EBITDA:
Internet....................................... $ 6,794 $ 4,608 $ 10,977 $ 6,555
Publishing..................................... (5,107) 26,466 7,135 49,152
------ ------ ------ ------
Total..................................... $ 1,687 $ 31,074 $ 18,112 $ 55,707
====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
---- ----
(dollars in thousands)
<S> <C> <C>
Total Assets:
Internet...................................... $ 238,358 $ 189,365
Publishing.................................... 147,384 83,811
Net assets held for sale...................... - 780,000
Net assets of discontinued operations......... 780,150 934,669
----------- -----------
Total $ 1,165,892 $ 1,987,845
=========== ===========
</TABLE>
A reconciliation of EBITDA to loss before income taxes and discontinued
operations is set forth below:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
2000 1999 2000 1999
---- ---- ---- ----
(dollars in thousands)
<S> <C> <C> <C> <C>
Total segment EBITDA $ 1,687 $ 31,074 $ 18,112 $ 55,707
Depreciation and amortization of property and equipment (926) (5,243) (2,289) (10,005)
Amortization of intangible assets (6,072) (22,982) (10,299) (44,541)
Stock-based compensation (2,416) (1,741) (3,811) (3,035)
Restructuring charge (14,653) - (78,645) -
Interest expense, net (1,496) (22,966) (12,466) (47,503)
------- ------- -------- -------
Loss before income taxes, discontinued operations and $ (23,876) $ (21,858) $ (89,398) $ (49,377)
extraordinary item ======= ======= ======== =======
</TABLE>
14
<PAGE>
ZIFF-DAVIS INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(numbers rounded to the nearest thousand, except share and per share amounts)
7. Discontinued Operations
Ziff-Davis sold its market intelligence business for $101.0 million in October
1999 and recognized a pre-tax gain of approximately $60 million from this sale
in the fourth quarter of 1999.
Ziff-Davis sold its 64% interest in its television business for $204.8 million
in January 2000 and recognized a pre-tax gain of approximately $109.2 million
from this sale in the first quarter of 2000.
Ziff-Davis sold its education business for $172.0 million in February 2000 and
recognized a pre-tax gain of approximately $96.4 million from this sale in the
first quarter of 2000.
In addition, Ziff-Davis expects to recapitalize and spin-off its trade show
and conference business (now known as Key3Media Group) and pay a $2.50 per share
cash dividend on August 18, 2000 to the holders of its ZD common stock of record
on August 14, 2000. The spin-off and cash dividend are subject to the closing of
various financing arrangements, which in turn are subject to customary closing
conditions.
The businesses that have been identified above have been accounted for as
discontinued operations in the consolidated financial statements of Ziff-Davis,
and the Consolidated Statements of Operations for the three and six months ended
June 30, 1999 have been restated to reflect this treatment. The proceeds of
$376.8 million from the sale of the television and education businesses are
reflected in the investing activities on the Consolidated Statement of Cash
Flows for the six months ended June 30, 2000.
8. Sale of ZD Publishing and restructuring
Ziff-Davis agreed to sell its print publishing business (excluding Computer
Shopper and an investment in Red Herring Communications Inc.) for $780 million
in December 1999 and recognized a pre-tax loss (after giving effect to a write
down of intangible assets related to Computer Shopper) of approximately $858
million from this sale in the fourth quarter of 1999.
During the first six months of 2000, Ziff-Davis recorded approximately $12.9
million in additional charges related to this sale. Approximately $6.1 million
of these charges related to transaction costs related to the sale and $6.8
million of these charges were non-cash charges related to stock-compensation
from accelerated vesting of stock options held by publishing employees.
Ziff-Davis closed this sale in April 2000. The proceeds of $780 million that
we received from the sale are reflected in the investing activities on the
Consolidated Statement of Cash Flows for the six months ended June 30, 2000.
During second quarter 2000, we recognized a $5.5 million restructuring charge
in connection with the reorganization of Smart Planet. The costs primarily
relate to severence and the termination of contracts and obligations.
9. Repayment of Debt
On April 5, 2000, Ziff-Davis repaid in full the remaining balance on its bank
credit facility using the proceeds from the sale of Ziff-Davis businesses.
Thereafter, it unwound the interest rate swaps that it had entered into in order
to hedge its interest rate exposure under the credit facility. Ziff-Davis
recognized a pre-tax gain of approximately $13.6 million in the second quarter
of 2000 in connection with the unwinding of these interest rate swaps.
On April 13, 2000, Ziff-Davis, through its ZD Events subsidiary, borrowed $150
million under an interim credit facility, which it plans to repay in full out of
proceeds from the recapitalization of ZD Events (now known as Key 3 Media)
referred to in Note 7 (Discontinued Operations) above. Ziff-Davis used the
proceeds from the borrowing under this interim credit facility, together with
approximately $130 million in cash on hand, to repurchase substantially all of
its outstanding 8.5% Senior Subordinated Notes Due 2008. In connection with this
repurchase, Ziff-Davis received consents to certain amendments to the Indenture
under which these Notes were issued in order to eliminate certain restrictive
covenants contained therein. Ziff-Davis incurred a pre-tax charge of
approximately $36.6 million in the second quarter of 2000 as a result of this
repurchase, composed of a premium to repay the Notes of approximately $20.7
million and the write-off of debt issuance costs of $15.9 million which were
being amortized over the original life of the Notes.
The net amount of the gain on unwinding swaps, premium to retire debt and
write off of debt issuance costs have been included as an extraordinary loss.
15
<PAGE>
ZIFF-DAVIS INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(numbers rounded to the nearest thousand, except share and per share amounts)
10. Subsequent Events
On July 19, 2000, Ziff-Davis and CNET Networks, Inc. entered into a definitive
merger agreement under which a CNET subsidiary will merge into Ziff- Davis, with
Ziff-Davis Inc. as the surviving company in the merger. As a result of the
merger, each share of ZD common stock will convert into 0.3397 shares of CNET
common stock and each share of ZDNet common stock will convert into 0.5932
shares of CNET common stock. The merger is subject to termination of the waiting
period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, approval
from the stockholders of both companies and other customary closing conditions.
Softbank, which owns a majority of the voting stock of Ziff-Davis, and members
of CNET management owning about 20% of CNET's voting stock, have agreed to vote
for the transaction. The merger agreement is further described in Ziff-Davis'
Current Report on Form 8-K filed on July 21, 2000 which is incorporated by
reference herein.
Ziff-Davis expects to recapitalize and spin-off its trade show and conference
business (now known as Key3Media Group) and pay a $2.50 per share cash dividend
on August 18, 2000 to the holders of its ZD common stock of record on August 14,
2000. The spin-off and cash dividend are subject to the closing of various
financing arrangements, which in turn are subject to customary closing
conditions. These transactions are described in greater detail in Key3Media
Group's Form S-1 which was declared effective on August 10, 2000 and which is
incorporated herein by reference.
In July 2000, Ziff Davis acquired a convertible Subordinated Promissory Note
of Techies.Com Inc. in the principal amount of $797,385, and received warrants
to purchase 87,928 shares of Techies.com common stock. This investment is being
accounted for under the cost method of accounting.
16
<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
Recent Developments
On July 19, 2000, we entered into a definitive merger agreement with CNET
Networks, Inc. under which a CNET subsidiary will merge into Ziff-Davis, with
CNET as the surviving company in the merger. As a result of the merger,
each share of ZD common stock will convert into 0.3397 shares of CNET common
stock and each share of ZDNet common stock will convert into 0.5932 shares of
CNET common stock. The merger is subject to termination of the waiting period
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, approval from
the stockholders of both companies and other customary closing conditions.
Softbank, which owns a majority of the voting stock of Ziff-Davis, and members
of CNET management owning about 20% of CNET's voting stock, have agreed to vote
for the transaction. The merger agreement is further described in Ziff-Davis'
Current Report on Form 8-K filed on July 21, 2000 which is incorporated by
reference herein.
We sold our market intelligence business in October 1999, our television
business in January 2000, our education business in February 2000 and our print
publishing business (excluding Computer Shopper and our investment in Red
Herring Communications Inc.) in April 2000. In addition, we expect to
recapitalize and spin-off our trade show and conference business (now known as
Key3Media Group) and pay a $2.50 per share cash dividend on August 18, 2000 to
the holders of ZD common stock of record on August 14, 2000.
Our future financial condition, results of operations and cash flow will be
materially impacted by these dispositions. For additional information, see Note
7 (Discontinued Operations) and Note 8 (Sale of ZD Publishing) to our unaudited
consolidated financial statements included elsewhere in this Form 10-Q as well
as "Risk Factors" in our Proxy Statement dated February 7, 2000, our
Registration Statement on Form S-3 (File No. 333-35550) and our Form 10-K for
the year ended December 31, 1999.
Revenue
79.2% of our total revenue for the six months ended June 30, 2000 was derived
from the sale of advertising. No single advertiser has comprised more than 3%
of our advertising revenue during any of the last three years.
In the Internet segment, our principal source of revenue is from advertising
(96% of total Internet revenue in the first six months of 2000). The Internet
segment also derives revenue from subscription-based fees and services (4% of
total Internet revenue in the first six months of 2000). In the publishing
segment, our principal sources of revenue are advertising (74% of total
publishing revenue in the first six months of 2000), circulation (21.3%) and
other (4.7%). Circulation comprises both paid subscriptions (11.4%) and
newsstand sales (9.9%) while other primarily consists of royalties, reprints and
other miscellaneous sales.
Cost of Operations
In the Internet segment, production and content costs consist primarily of
third party web hosting costs and royalty payments to Ziff Davis Media Inc. (the
purchaser of most of our print publishing business) for exclusive online rights
to certain of their print publications. In the publishing segment, the principal
components of our production costs are raw materials, printing and distribution,
which represented 35%, 35%, 30%, respectively, of total publishing production
expenses during the first six months of 2000. Our principal raw material is
paper. Paper supply and prices are subject to volatility and may be
significantly affected by many factors, including market and economic
conditions. In addition, we pay Ziff Davis Media a fee of $5 million per year
for certain services Ziff-Davis media performs with publishing our computer
shopper magazine.
Our other principal operating costs are selling, general and administrative
expenses, including editorial costs. Included in these costs are salaries, sales
commissions and benefits (35% in the first six months of 2000) along with
marketing and promotion expenses related to advertising and circulation (29% in
the first six months of 2000).
17
<PAGE>
Results of Operations
The table below presents our results on a pro forma basis as if the
dispositions described in Note 7 (Discontinued Operations) and Note 8 (Sale of
ZD Publishing) to our unaudited consolidated financial statements included
elsewhere in this Form 10-Q, and the repayment of debt referred to in Note 9
(Repayment of Debt) to those financial statements, had occurred immediately
prior to the beginning of each of the periods presented.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------------------------
2000 1999 2000 1999
---- ---- ---- ----
(Unaudited-dollars in thousands)
<S> <C> <C> <C> <C>
Pro forma revenue, net:
Internet........................................... $39,997 $23,856 $ 76,213 $42,417
Publishing......................................... 11,802 15,580 23,995 34,741
Pro forma cost of operations:
Production and content............................. 20,076 14,253 39,151 28,436
Selling, general and administrative expenses....... 24,919 21,329 54,936 36,163
Stock-based compensation........................... 2,209 1,278 3,002 2,114
Depreciation and amortization of property and 926 736 1,765 1,306
equipment.........................................
Amortization of intangible assets.................. 6,072 4,394 10,299 8,451
Restructuring charges.............................. 5,547 - 5,547 -
------- ------- -------- -------
Pro forma income (loss) from operations.............. (7,950) (2,554) (14,492) 688
Other pro forma non-operating income (loss), net..... (269) 550 (543) 550
Pro forma minority interest in losses of subsidiaries - - 117
------- ------- -------- -------
Pro forma income (loss) before income taxes.......... (8,219) (2,004) (15,035) 1,355
Pro forma income tax provision (benefit)............. (1,817) 466 (3,648) 3,459
------- ------- -------- -------
Pro forma net loss................................... $ (6,402) $(2,470) $(11,387) $(2,104)
======= ======= ======== =======
Other Data:
Pro forma EBITDA (1)................................. $ 1,257 $ 3,854 $ 31 $12,559
======= ======= ======== =======
</TABLE>
(1) "EBITDA" is defined as income before provision for income taxes, interest
expense, depreciation and amortization and other non-cash charges. EBITDA is not
intended to represent cash flows from operations and should not be considered as
an alternative to net income as an indicator of our operating performance or to
cash flows as a measure of liquidity. Although we believe that EBITDA is a
standard measure commonly reported and widely used by analysts, investors and
other interested parties in the media industry, the EBITDA presented here may
not be comparable to similarly titled measures reported by other companies.
Comparison of pro forma three months ended June 30, 2000 and 1999
Pro forma revenue, net
Net revenue from the Internet segment increased 67.7% from $23.9 million in
the second quarter of 1999 to $40.0 million in the second quarter of 2000.
Revenue from advertising was 93.5% of net revenue in the second quarter of 1999
compared to 96.3% for the second quarter of 2000. Revenue from advertising
increased 69.3% from $22.3 million in the second quarter of 1999 to $37.8
million in the second quarter of 2000. The increase in advertising revenue was
attributed to an increase in both the number of advertisers and the average
monthly revenue per advertiser. Subscription-based fees and services were $1.5
million in the second quarter of 1999 and 2000.
Net revenue from the publishing segment decreased by 24.2% from $15.6 million
in the second quarter of 1999 to $11.8 million in the second quarter of 2000.
The decrease was primarily due to lower advertising, principally due to factors
affecting the computer industry generally, including consolidation within the
computer and Internet industries, margin pressure on computer equipment
manufacturers and product delays.
18
<PAGE>
As a result of the foregoing, aggregate net revenue increased 31.5% from $39.4
million in the second quarter of 1999 to $51.8 million in the second quarter of
2000.
Pro forma cost of operations
Pro forma production and content
Production and content costs for the Internet segment increased from $8.5
million or 35.8% of net Internet revenue in the second quarter of 1999 to $15.4
million or 38.5% of net Internet revenue in the second quarter of 2000. The
absolute dollar increase was primarily due to an increase in our pro forma
revenue-based royalty charges to Ziff Davis Media (the purchaser of most of our
print publishing business) due to higher revenue and to an increase in
production costs to support higher user traffic levels and increased editorial
costs associated with the launch of new content areas. The increase in Internet
production and content costs as a percentage of Internet revenue was primarily
due to increases in staffing and production related costs to support higher
revenues.
Production costs for the publishing segment decreased from $5.7 million in the
second quarter of 1999 to $4.7 million in the second quarter of 2000. The
decrease was primarily due to a decline in the number of advertising pages
produced.
As a result of the foregoing, aggregate production costs increased from $14.3
million in the second quarter of 1999 to $20.1 million in the second quarter of
2000.
Pro forma selling, general and administrative expenses
Selling, general and administrative expenses allocated to the Internet segment
increased from $11.9 million or 49.7% of net Internet revenue in the second
quarter of 1999 to $20.2 million or 50.5% of net Internet revenue in the second
quarter of 2000. The absolute dollar increase was primarily due to increased
personnel and services required to support the growth of ZDNet, increased
advertising expenses as a result of ZDNet's $25 million consumer advertising
campaign launched in December 1999 and start-up expenses for Smart Planet.
Selling, general and administrative expenses allocated to the publishing
segment decreased from $9.5 million in the second quarter of 1999 to $4.7
million in the second quarter of 2000. The decrease was primarily due to a
decline of $4.1 million of bad debt expense from higher than usual charges
during the second quarter of 1999 of $4.8 million, compared to $0.07 million in
second quarter 2000.
As a result of the foregoing, aggregate selling, general and administrative
expenses increased from $21.3 million in the second quarter of 1999 to $24.9
million in the second quarter of 2000.
Pro forma stock-based compensation
We incurred compensation expense related to stock options on the Internet
division granted during 1998 in anticipation of an initial public offering of
ZDNet common stock where the exercise price was deemed to be below the market
price on the date of grant. We recognized this cost on a straight-line basis
over the vesting period of the underlying options.
Stock-based compensation expense increased from $1.3 million in the second
quarter of 1999 to $2.2 million in the second quarter of 2000.
Pro forma depreciation and amortization of property and equipment
Depreciation and amortization increased from $0.7 million in the second
quarter of 1999 to $0.9 million in the second quarter of 2000. The increase was
primarily due to additional depreciation on capital expenditures in the second
half of 1999 and first half of 2000.
Pro forma amortization of intangibles
Amortization of intangibles increased from $4.4 million in the second quarter
of 1999 to $6.1 million in the second quarter of 2000. The increase was
primarily due to acquisitions during 1999 and 2000.
Pro forma restructuring charges
The restructuring charges of $5.5 million were recognized during second
quarter 2000 in connection with the reorganization of Smart Planet. The costs
primarily relate to severance and the termination of contracts and obligations.
There were no restructuring charges recognized in 1999.
19
<PAGE>
Other pro forma non-operating income, net
Other non-operating income, net primarily reflects our equity share in
earnings and losses from joint ventures. This amount decreased from income of
$0.5 million in the second quarter of 1999 to a loss of $0.3 million in the
second quarter of 2000 due to increased income from ZDNet's joint ventures.
Pro forma income taxes
Income taxes increased from a $0.4 million expense in the second quarter of
1999 to a $1.8 million benefit in the second quarter of 2000.
Pro forma net loss
As a result of the changes described above, pro forma income (loss) decreased
from a loss of $2.4 million in the second quarter of 1999 to a loss of $6.4
million in the second quarter of 2000.
Pro forma EBITDA
EBITDA decreased from $3.9 million in the second quarter of 1999 to $1.3
million in the second quarter of 2000. The decrease was primarily due to the
restructuring charges recognized for Smart Planet, higher internet cash
operating costs and lower print revenue partially offset by higher Internet
revenue.
Comparison of pro forma six months ended June 30, 2000 and 1999
Pro forma revenue, net
Net revenue from the Internet segment increased 79.7% from $42.4 million in
the first six months of 1999 to $76.2 million in the first six months of 2000.
Revenue from advertising was 92.4% of net revenue for the first six months of
1999 compared to 96.2% for the first six months of 2000. Revenue from
advertising increased 87.0% from $39.2 million in the first six months of 1999
to $73.3 million in the first six months of 2000. The increase in advertising
revenue was attributed to an increase in both the number of advertisers and the
average monthly revenue per advertiser. In addition, advertising revenue of $4.1
million was realized during the first six months of 2000 through an acceleration
of deferred revenue as a result of the termination of a multi-year revenue-
generating contract during the period. Subscription-based fees and services
decreased by 9.4% from $3.2 million in the first six months of 1999 to $2.9
million in the first six months of 2000.
Net revenue from the publishing segment decreased by 30.9% from $34.7 million
in the first six months of 1999 to $24.0 million in the first six months of
2000. The decrease was primarily due to lower advertising, principally due to
factors affecting the computer industry generally, including consolidation
within the computer and Internet industries, margin pressure on computer
equipment manufacturers and product delays.
As a result of the foregoing, aggregate net revenue increased by 29.9% from
$77.1 million in the first six months of 1999 to $100.2 million in the first six
months of 2000.
Pro forma cost of operations
Pro forma production and content
Production and content costs for the Internet segment increased from $16.3
million or 38.4% of net Internet revenue in the first six months of 1999 to
$30.4 million or 39.9% of net Internet revenue in the first six months of 2000.
The absolute dollar increase was primarily due to an increase in our pro forma
revenue-based royalty charges to Ziff Davis Media (the purchaser of most of our
print publishing business) due to higher revenue and to an increase in
production costs to support higher user traffic levels and increased editorial
costs associated with the launch of new content areas. The increase in Internet
production and content costs as a percentage of Internet revenue was primarily
due to increases in staffing and production related costs to support higher
revenues.
Production costs for the publishing segment decreased from $12.1 million in
the first six months of 1999 to $8.8 million in the first six months of 2000.
The decrease was primarily due to a decline in the number of advertising
20
<PAGE>
pages produced.
As a result of the foregoing, aggregate production costs increased from $28.4
million in the first six months of 1999 to $39.2 million in the first six months
of 2000.
Pro forma selling, general and administrative expenses
Selling, general and administrative expenses allocated to the Internet segment
increased from $20.8 million or 49.1% of net Internet revenue in the first six
months of 1999 to $44.4 million or 58.2% of net Internet revenue in the first
six months of 2000. The absolute dollar increase was primarily due to increased
personnel and services required to support the growth of ZDNet and increased
advertising expenses as a result of ZDNet's $25 million consumer advertising
campaign launched in December 1999. The increase in Internet selling, general
and administrative expenses as a percentage of Internet revenue was primarily
due to start-up expenses for Smart Planet.
Selling, general and administrative expenses allocated to the publishing
segment decreased from $15.3 million in the first six months of 1999 to $10.6
million in the first six months of 2000. The decrease was primarily due to a
decline of $4.3 million in bad debt expense from higher than usual charges
during the second quarter of 1999 of $4.8 million compared to $0.7 million in
the second quarter of 2000.
As a result of the foregoing, aggregate selling, general and administrative
expenses increased from $36.2 million in the first six months of 1999 to $54.9
million in the first six months of 2000.
Pro forma stock-based compensation
We incurred compensation expense related to stock options on the Internet
division granted during 1998 in anticipation of an initial public offering of
ZDNet common stock where the exercise price was deemed to be below the market
price on the date of grant. We recognized this cost on a straight-line basis
over the vesting period of the underlying options.
Stock-based compensation expense increased from $2.1 million in the first six
months of 1999 to $3.0 million in the first six months of 2000
Pro forma depreciation and amortization of property and equipment
Total depreciation and amortization increased from $1.3 million in the first
six months of 1999 to $1.7 million in the first six months of 2000. The increase
was primarily due to additional depreciation on capital expenditures in the
second half of 1999 and first half of 2000.
Pro forma amortization of intangibles
Amortization of intangibles increased from $8.5 million in the second quarter
of 1999 to $10.3 million in the second quarter of 2000. The increase was
primarily due to the purchase of FerretSoft, 3 D Files and other acquisitions
during 1999 and 2000.
Pro forma restructuring charges
The restructuring charges of $5.5 million were recognized during second
quarter 2000 in connection with the reorganization of Smart Planet. The costs
primarily relate to severance and the termination of contracts and obligations.
There were no restructuring charges recognized in 1999.
Other pro forma non-operating income, net
Other non-operating income, net primarily reflects our equity share in
earnings and losses from joint ventures. This amount decreased from income of
$0.5 million in the second quarter of 1999 to a loss of $0.5 million in the
second quarter of 2000 due to increased income from ZDNet's joint ventures.
Pro forma minority interest in losses of subsidiaries
The minority interest of $0.1 million in the first six months of 1999
represented losses attributed to the holders of the minority interest in
GameSpot. We acquired that minority interest in the second quarter of 1999 and,
as a result, there was no minority interest in the first six months of 2000.
21
<PAGE>
Pro forma income taxes
Income taxes decreased from a $3.5 million expense in the first six months of
1999 to a $3.6 million benefit in the first six months of 2000.
Pro forma net loss
As a result of the changes described above, net loss declined from $2.1
million in the first six months of 1999 to a loss of $11.4 million in the first
six months of 2000.
Pro forma EBITDA
EBITDA decreased from $12.6 million in the first six months of 1999 to $0.03
million in the first six months of 2000. The decrease was primarily due to the
reduction in publishing revenue, the restructuring charges recognized for Smart
Planet, higher cash operating costs of the Internet segment and start-up costs
of Smart Planet partially offset by higher internet revenue.
Liquidity and Capital Resources
At June 30, 2000, our outstanding total debt was $150.5 million, which
consisted of $150 million owed by our ZD Events subsidiary under an interim
credit facility and $0.5 million in 8.5% Senior Subordinated Notes due 2008. We
expect to repay the interim credit facility in full out of proceeds from the
recapitalization of our events business referred to below.
Cash and equivalents increased from $10.2 million at December 31, 2000 to
$63.6 million at June 30, 2000. This increase was due to the following items of
cash flow:
Cash used by operations was $35.9 million for the six months ended June 30,
2000. This compared to cash provided of $32.5 million for the six months ended
June 30, 1999. The decrease was due primarily to the sale of most of our
publishing business that closed in April 2000.
Cash provided from investing for the six months ended June 30, 2000 was $1.0
billion. This compared to cash used of $73.1 million for the six months ended
June 30, 1999. In January 2000, we received $204.5 million from the sale of our
television business and an additional $6.2 million related to purchase price
adjustments from the sale of our market intelligence business. In February
2000, we received $172.0 million from the sale of our education business. In
April 2000, we received $780.0 million from the sale of most of our print
publishing business. These cash inflows were partially offset by approximately
$23.8 million in cash we spent in connection with a variety of acquisitions and
investments described in Note 3 (Acquisitions and Dispositions) and Note 4
(Investments) to our unaudited consolidated financial statements appearing
earlier in this Form 10-Q.
Cash used in financing for the six months ended June 30, 2000 was $1.0
billion, as we applied the proceeds from the sale of various businesses to repay
debt. This compared to $40.7 million provided from financing for the six months
ended June 30, 1999.
We expect to spin-off Key3Media Group and pay a $2.50 per share cash dividend
on August 18, 2000 to the holders of ZD common stock of record on August 14,
2000. We plan to fund the cash dividend from $275 million in cash we expect to
receive from Key3Media Group, which Key3Media Group plans to raise as part of a
recapitalization of the events business. The spin-off and cash dividend are
subject to the closing of various financing arrangements, which in turn are
subject to customary closing conditions. These transactions are described in
greater detail in Key3Media Group's Form S-1 which was declared effective on
August 10, 2000 and which is incorporated herein by reference. After giving
effect to these transactions, we expect to be left with $0.5 million of debt and
approximately $22.2 million in cash and cash equivalents.
We are currently in negotiations with a bank to provide approximately $16
million of additional working capital. We believe that our ability to generate
cash, together with cash on hand and potentially available lines of credit, will
be sufficient to fund anticipated capital expenditures and working capital
requirements. However, actual capital expenditures may change, particularly as a
result of any acquisitions we may pursue.
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Seasonality
Historically, our business has been seasonal as a significant portion of
annual revenue has occurred in the second and fourth quarters.
Year 2000 Readiness Disclosure
We completed our identification, remediation and testing of Year 2000 issues
by the end of 1999 and we have not, to date, experienced any significant
problems as a result of the Year 2000 transition. We incurred costs of
approximately $14.3 million in 1999, of which approximately $7.3 million was
capital in nature, to remediate Year 2000 issues.
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Item 3. Qualitative and Quantitative Disclosures About Market Risk.
For information about interest rate swap agreements that were unwound in
connection with the repayment of our credit facility in early April 2000, see
our Form 10-Q for the quarter ended March 31, 2000.
24
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PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
For an update on certain legal proceedings, see Note 5 (Commitments and
Contingencies) to our unaudited consolidated financial statements appearing
elsewhere in this Form 10-Q.
Item 2. Changes in Securities and Use of Proceeds.
In May 2000, we issued 418,849 shares of ZDNet common stock as part of the
purchase price for our acquisition of the 3DFiles web site (380,772 shares) and
as part of the purchase price for our acquisition of the assets of In Mind
Communications, LLC related to the Search IQ web site (38,077 shares). In June,
we issued 40,816 shares of ZDNET Common Stock as part of the purchase price
for our acquisition of the assets of DataPower Technology Inc. related to Linux
Hardware Devices.
We
issued these shares pursuant to an exemption from registration under Section
4(2) of the Securities Act of 1933, as amended (the "Securities Act").
The persons receiving those shares represented that, either alone or with
their purchaser representative, they have such knowledge and experience in
financial and business matters that they are capable of evaluating the merits
and risks of their investment in Ziff-Davis and they have the capacity to
protect their own interests. They have also represented that they are capable of
bearing the economic risk of such investment until their shares are registered
under the Securities Act or until an exemption from registration is available
and that they purchased those shares for their own account for investment
purposes and not with a view to distribution.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
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
We filed a report on Form 8-K on April 14, 2000 to report the closing of the
sale of most of our print publishing business. We filed an amendment to that
report on April 19, 2000 which included pro forma financial information
reflecting that sale. These were the only reports on Form 8-K that we filed
during the second quarter of 2000.
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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.
By: /s/ Art Fatum
----------------------------------
Art Fatum
Chief Financial Officer, ZDNet
(On behalf of the Registrant
and as
Principal Financial Officer)
Date: August 14, 2000
26
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EXHIBIT INDEX
27.1 Financial Data Schedule (EDGAR filing only)
27
