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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 March 31, 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)
<TABLE>
<S> <C>
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)
</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 May 10, 2000, there were
104,398,864 shares outstanding of the registrant's Ziff-Davis Inc.--ZD Common
Stock, par value $0.01 per share, and 15,288,544 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
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
<S> <C>
Ziff-Davis Inc.
Consolidated Balance Sheets as of March 31, 2000 (Unaudited) and December
31, 1999 ............................................................... 1
Consolidated Statements of Operations (Unaudited) for the three months
ended March 31, 2000 and 1999........................................... 2
Consolidated Statements of Comprehensive Income (Unaudited) for the three
months ended March 31, 2000 and 1999.................................... 3
Consolidated Statements of Cash Flows (Unaudited) for the three months
ended March 31, 2000 and 1999........................................... 4
Consolidated Statement of Changes in Stockholders' Equity (Unaudited) for
the three months ended March 31, 2000................................... 5
Notes to unaudited consolidated financial statements..................... 6
ZDNet
Combined Balance Sheets as of March 31, 2000 (Unaudited) and December 31,
1999.................................................................... 13
Combined Statements of Operations (Unaudited) for the three months ended
March 31, 2000 and 1999................................................. 14
Combined Statements of Comprehensive Income (Unaudited) for the three
months ended March 31, 2000 and 1999.................................... 15
Combined Statements of Cash Flows (Unaudited) for the three months ended
March 31, 2000 and 1999................................................. 16
Combined Statement of Changes in Division Equity (Unaudited) for the
three months ended March 31, 2000....................................... 17
Notes to unaudited combined financial statements......................... 18
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Ziff-Davis Inc. ......................................................... 21
ZDNet.................................................................... 27
Item 3. Quantitative and Qualitative Disclosures about Market Risk....... 30
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................ 31
Item 2. Changes in Securities and Use of Proceeds........................ 31
Item 3. Defaults Upon Senior Securities.................................. 31
Item 4. Submission of Matters to a Vote of Security Holders.............. 31
Item 5. Other Information................................................ 32
Item 6. Exhibits and Reports on Form 8-K................................. 32
SIGNATURES............................................................... 33
EXHIBIT INDEX............................................................ 34
</TABLE>
i
<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 timing
of the various remaining restructuring transactions described herein (or even
whether those transactions will in fact close), the amount of cash that may be
borrowed by the ZD Events group, the timing and amount of the cash dividend to
be paid to holders of ZD stock as part of the restructuring, the ZD liabilities
that will need to be provided for as part of the restructuring, the timing of
the merger that will eliminate the tracking stock structure, the ZD/ZDNet
equivalency ratio and the exchange ratio for that merger, 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, 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 each of Ziff-Davis Inc.
and ZDNet 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.
ii
<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>
March 31, December 31,
2000 1999
----------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ 14,516 $ 10,207
Accounts receivable, net............................ 38,685 33,733
Inventories......................................... 175 468
Prepaid expenses and other current assets........... 3,222 2,835
Due from affiliates................................. 1,343 4,485
Deferred taxes...................................... 6,178 6,423
---------- ----------
Total current assets............................... 64,119 58,151
Securities available for sale......................... 281 513
Property and equipment, net........................... 20,515 23,181
Assets held for sale.................................. 780,000 780,000
Net assets of discontinued operations................. 768,506 934,669
Intangible assets, net................................ 160,888 141,636
Investments, at cost.................................. 41,485 25,404
Other assets.......................................... 44,452 24,291
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Total assets....................................... $1,880,246 $1,987,845
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................... $ 519 $ 1,734
Accrued expenses.................................... 89,833 79,240
Deferred income, net................................ 8,085 12,808
Due to affiliates and management.................... 2,409 --
Current portion of notes payable to affiliates...... 6,923 6,923
Other current liabilities........................... 11,294 10,224
---------- ----------
Total current liabilities.......................... 119,063 110,929
Notes payable to affiliates........................... 62,308 64,039
Notes payable, net of unamortized discount............ 784,736 1,100,736
Other liabilities..................................... 2,721 3,876
---------- ----------
Total liabilities.................................. 968,828 1,279,580
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Commitments and contingencies (See Note 6)
Stockholders' equity:
Preferred stock(1) -- --
Common stock--Ziff-Davis Inc.--ZD common stock(2)... 1,041 1,034
Common stock--Ziff-Davis Inc.--ZDNet common
stock(2)........................................... 151 138
Additional paid-in capital.......................... 1,981,524 1,915,173
Accumulated deficit................................. (1,058,078) (1,193,934)
Deferred compensation............................... (13,993) (15,388)
Unrealized loss on securities available for sale.... (388) (249)
Cumulative translation adjustment................... 1,161 1,491
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Total stockholders' equity......................... 911,418 708,265
---------- ----------
Total liabilities and stockholders' equity......... $1,880,246 $1,987,845
========== ==========
</TABLE>
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(1) March 31, 2000 and December 31, 1999: par value $0.01 per share,
10,000,000 shares authorized, no shares issued and outstanding.
(2) March 31, 2000: par value $0.01 per share, 210,000,000 shares authorized,
104,092,731 shares of ZD common stock and 15,065,844 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.
1
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ZIFF-DAVIS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited-dollars in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------
2000 1999
------------ ------------
<S> <C> <C>
Revenue, net:
Publishing...................................... $ 140,298 $ 144,609
Internet........................................ 35,940 18,561
Cost of production................................ 44,488 48,091
Selling, general and administrative expenses...... 115,445 90,426
Stock-based compensation.......................... 1,395 1,295
Depreciation and amortization of property and
equipment........................................ 1,363 4,763
Amortization of intangible assets................. 4,227 21,559
Restructuring charge.............................. 63,992 --
------------ ------------
Loss from operations.............................. (54,672) (2,964)
Interest expense, net............................. (10,970) (24,537)
Other non-operating income (loss), net............ 120 (136)
Minority interest in losses of subsidiaries....... -- 117
------------ ------------
Loss before taxes and discontinued operations..... (65,522) (27,520)
Income tax benefit................................ 97,532 3,345
------------ ------------
Income (loss) from continuing operations.......... 32,010 (24,175)
------------ ------------
Results of operations from discontinued
operations, net.................................. -- (13,600)
Gain on disposal of discontinued operations (net
of taxes of $96,673)............................. 103,846 --
------------ ------------
Income (loss) from discontinued operations........ 103,846 (13,600)
------------ ------------
Net income (loss)................................. $ 135,856 $ (37,775)
============ ============
ZD earnings (loss) per basic share from continuing
operations....................................... $0.31 $(0.24)
ZD earnings (loss) per basic share from
discontinued operations.......................... $1.00 $(0.13)
ZD earnings (loss) per basic share................ $1.31 $(0.37)
ZD weighted average basic shares outstanding...... 103,699,332 101,015,813
ZD earnings per diluted share from continuing
operations....................................... $0.30 N/A
ZD earnings per diluted share from discontinued
operations....................................... $0.96 N/A
ZD earnings per diluted share..................... $1.26 N/A
ZD weighted average diluted shares outstanding.... 107,696,019 N/A
ZDNet pro forma earnings (loss) per pro forma
basic share...................................... $(0.02) $0.00
ZDNet pro forma weighted average basic shares
outstanding...................................... 74,168,844 71,500,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
ZIFF-DAVIS INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited-dollars in thousands)
<TABLE>
<CAPTION>
Three months
ended March 31,
------------------
2000 1999
-------- --------
<S> <C> <C>
Net income (loss)........................................... $135,856 $(37,775)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments.................. 757 (1,827)
Unrealized (loss) gain on securities available for sale... (139) 3,086
-------- --------
Comprehensive income (loss)................................. $136,474 $(36,516)
======== ========
</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>
Three Months Ended
March 31,
-------------------
2000 1999
--------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)........................................ $ 135,856 $(37,775)
Adjustments to reconcile net income (loss) to net cash
(used) provided by operating activities:
Depreciation and amortization.......................... 5,590 40,414
Amortization of debt issuance costs and discounts...... 935 709
Gain on sale of business units......................... (200,519) --
Restructuring charge................................... 63,992 --
Income from equity investments......................... -- (465)
Deferred tax benefit................................... (859) (19,905)
Stock-based compensation............................... 1,395 1,472
Minority interest...................................... -- (3,473)
Changes in operating assets and liabilities:
Accounts receivable.................................. (5,049) 22,848
Inventories.......................................... 293 2,687
Accounts payable and accrued expenses................ 9,380 (34,729)
Unearned income...................................... (4,723) 39,506
Due to/from affiliates and management................ (733) 2,679
Other, net........................................... (40,584) (4,574)
--------- --------
Net cash provided (used) by operating activities......... (35,026) 9,394
--------- --------
Cash flows from investing activities:
Capital expenditures................................... (2,365) (36,531)
Investments and other.................................. (10,998) (1,250)
Proceeds from sale of businesses....................... 376,800 --
Acquisitions, net of cash acquired..................... (6,371) (32,800)
--------- --------
Net cash provided (used) by investing activities......... 357,066 (70,581)
--------- --------
Cash flows from financing activities:
Proceeds from sale of common stock..................... -- 50,864
Proceeds from sale of interests in ZDTV................ -- 54,000
Principal payments on notes payable to affiliates...... (1,731) (1,730)
Repayments of credit facility.......................... (342,500) (72,000)
Borrowings under credit facility....................... 26,500 35,500
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Net cash provided (used) by financing activities......... (317,731) 66,634
--------- --------
Net increase in cash and cash equivalents................ 4,309 5,447
Cash and cash equivalents at beginning of period......... 10,207 32,566
--------- --------
Cash and cash equivalents at end of period............... $ 14,516 $ 38,013
--------- --------
Supplemental cash flow information:
Cash paid for income taxes............................. $ 622 $ --
Cash paid for interest................................. $ 17,724 $ 20,696
</TABLE>
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
------------------------------------
ZD Stock ZDNet Stock Additional Retained Unrealized Cumulative
------------------ ----------------- paid-in Earnings Deferred loss on translation
Shares Amount Shares Amount capital (deficit) compensation securities adjustment Total
----------- ------ ---------- ------ ---------- ----------- ------------ ---------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31,
1999........... 103,467,728 $1,034 13,707,063 $138 $1,915,173 $(1,193,934) $(15,388) $(249) $1,491 $708,265
Shares issued to
acquire
FerretSoft,
LLC............ -- -- 601,502 6 16,994 -- -- -- -- 17,000
Shares issued to
acquire Ziff-
Davis Richina
Media LDC...... -- -- 186,046 2 5,090 -- -- -- -- 5,092
Accelerated
vesting of
stock options.. -- -- -- -- 36,893 -- -- -- -- 36,893
Stock options
exercised...... 552,254 6 571,233 5 6,466 -- -- -- -- 6,477
Sale of shares
under employee
stock purchase
plan........... 72,749 1 -- -- 908 -- -- -- -- 909
Compensation
earned on stock
options........ -- -- -- -- -- -- 1,395 -- -- 1,395
Unrealized gain
on securities
available for
sale, net...... -- -- -- -- -- -- -- (139) -- (139)
Net income...... -- -- -- -- -- 135,856 -- -- -- 135,856
Foreign currency
translation
adjustment..... -- -- -- -- -- -- -- -- (330) (330)
----------- ------ ---------- ---- ---------- ----------- -------- ----- ------ --------
Balance at March
31, 2000
(unaudited).... 104,092,731 $1,041 15,065,844 $151 $1,981,524 $(1,058,078) $(13,993) $(388) $1,161 $911,418
=========== ====== ========== ==== ========== =========== ======== ===== ====== ========
</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 have
been included to present fairly the consolidated financial position of Ziff-
Davis Inc. ("Ziff-Davis") at March 31, 2000 and the results of its consolidated
operations for the three months ended March 31, 2000 and 1999 and cash flows
for the three months ended March 31, 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. 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' Annual Report on Form 10-K
for the year ended December 31, 1999 (the "1999 Form 10-K").
1999-2000 Restructuring
Ziff-Davis is in the process of disposing of substantially all of its ZD
businesses as part of a comprehensive restructuring described in its proxy
statement dated February 7, 2000. Ziff-Davis has already completed the sale of
ZD Market Intelligence, ZD Education, ZD Publishing (excluding Computer Shopper
and an investment in Red Herring Communications Inc.) and its equity interest
in ZDTV. In addition, Ziff-Davis announced on March 7, 2000 that it intends to
recapitalize and spin off its ZD Events group to the holders of ZD stock. See
Notes 8, 9 and 10.
Ziff-Davis expects to form a new holding company for the ZD Events group.
That holding company will borrow approximately $400 million from bank lenders,
the capital markets, or a combination of both. The proceeds of that borrowing
will be used to retire Ziff-Davis' remaining indebtedness and to fund a cash
dividend to holders of ZD Common stock. The cash dividend is expected to range
from $2.50 to $3.00 per share of ZD stock, but the exact amount will depend on
the amount set aside to cover ZD's actual and contingent liabilities. At the
time of the dividend or shortly thereafter, Ziff-Davis intends to distribute
all of the shares it owns in the ZD Events holding company to the holders of ZD
common stock. Ziff-Davis expects to complete these transactions at or around
the end of the second quarter.
After Ziff-Davis completes these transactions, Ziff-Davis expects to
transfer Computer Shopper magazine, Smart Planet, its investment in Red Herring
Communications and any other residual ZD assets to ZDNet in return for an
increase in ZD's retained interest in ZDNet. Thereafter, Ziff-Davis expects to
merge with a newly formed subsidiary to eliminate its tracking stock structure.
The surviving company will be renamed ZDNet Inc. As a result of the merger,
each outstanding share of ZD stock will remain outstanding as one share of the
newly named ZDNet Inc., and each outstanding share of ZDNet stock will convert
into a number of shares of ZDNet Inc. expected to fall between 1.7 and 1.9
shares. From the point of view of a holder of ZDNet stock, the transaction is
similar to a stock split-- the price per share will decrease but the holder
will end up with more shares.
The restructuring transactions referred to above and the risks related
thereto are described in more detail in the proxy statement dated February 7,
2000, the 1999 Form 10-K and the Registration Statement on Form S-3 (File No.
333-35550).
6
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ZIFF-DAVIS INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
During the first quarter of 2000, Ziff-Davis incurred a restructuring charge
totaling $64.0 million in connection with the disposition of its ZD businesses.
The charge was for severance and accelerated vesting of terminating employees'
stock options and other expenses incurred with the sale of its ZD businesses.
All of the cash payments accrued for in the first quarter will be paid by the
end of the second quarter. In the second quarter of 2000 Ziff-Davis expects to
record additional charges currently estimated at $125 million for accelerated
vesting of terminating employees' stock options and other expenses associated
with the restructuring of its businesses.
Ziff-Davis operates in two business segments: (1) publishing and (2)
Internet.
Publishing
The publishing segment is engaged in publishing magazines and electronic
information products 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.
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 and Asia.
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 Ziff-Davis' events, television, education and market
intelligence businesses as discontinued operations in accordance with
Accounting Principle Board Opinion No. 30.
Earnings per share
The earnings per share for ZD (as defined in Note 2) has been presented
based on the separate income (loss) of the ZD group on a continuing and a
discontinued operations basis. In order to reflect the initial issuance of
ZDNet stock on March 31, 1999 (as described in Note 2), 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 and
approximately 84% of the income of the ZDNet group for the first quarter of
2000. As a result, in the first quarter of 1999 ZD had a loss from continuing
operations of $24,175,000 and a loss from discontinued operations of
$13,600,000 for a net combined loss of $37,775,000, while in the first quarter
of 2000 ZD had income from continuing operations of $32,010,000 and income from
discontinued operations of $103,846,000 for a combined net income of
$135,856,000. Options to purchase shares of ZD stock that could potentially
dilute basic earnings per share were not included in the computation of diluted
earnings per share in 1999, because they were anti-dilutive.
For the quarter ending March 31, 1999, Ziff-Davis has presented its earnings
per share for both series of common stock--ZD and ZDNet. The earnings per share
for ZDNet for the 1999 period is presented on a pro forma basis for the 1999
period based on the separate income of the ZDNet group (as set forth in the
ZDNet financial statements included elsewhere in this Form 10-Q), assuming all
shares had been issued on
7
<PAGE>
ZIFF-DAVIS INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
January 1, 1999. Options to purchase ZDNet stock that could potentially dilute
basic earnings per share were not included in the calculation of diluted
earnings per share for ZDNet because they were anti-dilutive.
Diluted earnings per share are not shown when the impact of stock options
would be anti-dilutive.
2. ZDNet 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, which is intended to reflect the
performance of Ziff-Davis' Internet business division ("ZDNet"). When the ZDNet
stock was issued, Ziff-Davis' existing common stock was re-classified as Ziff-
Davis Inc.--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 stock are referred to as "ZD." On March 31, 1999, Ziff-Davis
sold to the public, for cash, 11,500,000 shares of ZDNet stock. ZD's retained
interest at that time (after giving effect to the offering) was 84%.
3. 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.
4. Acquisitions and Dispositions
FerretSoft, LLC
On March 24, 2000, ZDNet acquired FerretSoft, LLC for $6.4 million in cash
and 601,502 shares of ZDNet stock valued at $17.0 million. This acquisition was
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.
5. Investments
In February 2000, ZDNet acquired a 35% interest in Ziff-Davis Richina Media
LDC ("ZDRM") for $7.0 million in cash and 186,046 shares of ZDNet stock valued
at $5.1 million or $27.375 per share. ZDNet is accounting for this investment
using the equity method of accounting as the other 65% interest in ZDRM held by
Ziff-Davis was sold on April 5, 2000 in connection with its sale of the ZD
Publishing business discussed elsewhere in these financial statements and,
therefore, control of ZDRM by Ziff-Davis was temporary.
6. Commitments and Contingencies
Ziff-Davis is subject to various claims and legal proceedings arising in the
normal course of business.
Ziff-Davis 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
8
<PAGE>
ZIFF-DAVIS INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
indirect subsidiary of SOFTBANK Corp. The complaint alleged, among other
things, that SBH, SIM's majority stockholder, acting with Ziff-Davis 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) and failed to act in the best
interests of SIM and the minority stockholders by taking actions which
benefited Ziff-Davis. The complaint stated claims based on common law fraud,
breach of fiduciary duty and aiding and abetting theories and sought in excess
of $200,000,000 in damages. Upon motion of Ziff-Davis and the other defendants,
all of the claims against them other than a breach of contract claim which was
solely against SBH, were dismissed on February 26, 1999. On April 1, 1999,
plaintiffs filed a notice of appeal of the dismissal. On September 2, 1999, the
remaining claim, which was solely against SBH, was dismissed. On October 6,
1999, plaintiffs filed a notice of appeal of this dismissal. On March 28, 2000,
the decisions of dismissal were affirmed on appeal.
There are no other legal proceedings to which Ziff-Davis is a party except
those described in the 1999 Form 10-K and ordinary routine litigation
incidental to its business that is not otherwise material to the financial
condition or results of operations of Ziff-Davis.
7. Segment Information
Ziff-Davis operates in two reportable business segments: (1) publishing and
(2) Internet. All material inter-segment revenue has been eliminated. The
following table presents information about each of the reported segments:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------
2000 1999
---------- ------------
(dollars in thousands)
<S> <C> <C>
EBITDA:
Publishing.......................................... $ 12,245 $ 22,571
Internet............................................ 4,180 1,946
---------- ----------
Total ............................................ $ 16,425 $ 24,517
========== ==========
<CAPTION>
March 31, December 31,
2000 1999
---------- ------------
(dollars in thousands)
<S> <C> <C>
Total Assets:
Publishing.......................................... $ 121,048 $ 83,811
Internet............................................ 210,692 189,365
Net assets held for sale............................ 780,000 780,000
Net assets of discontinued operations............... 768,506 934,669
---------- ----------
Total ............................................ $1,880,246 $1,987,845
========== ==========
</TABLE>
9
<PAGE>
ZIFF-DAVIS INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
A reconciliation of EBITDA to loss before income taxes is below:
<TABLE>
<CAPTION>
Three Months
Ended
March 31,
------------------
2000 1999
-------- --------
(dollars in
thousands)
<S> <C> <C>
Total segment EBITDA................................... $ 16,425 $ 24,517
Depreciation and amortization of property and
equipment............................................. (1,363) (4,763)
Amortization of intangible assets...................... (4,227) (21,559)
Stock-based compensation............................... (1,395) (1,295)
Restructuring charge................................... (63,992) --
Minority interest in ZDTV's non-EBITDA losses.......... -- 117
Interest expense, net.................................. (10,970) (24,537)
-------- --------
Loss before income taxes............................... $(65,522) $(27,520)
======== ========
</TABLE>
8. Discontinued Operations
On July 14, 1999, Ziff-Davis announced that it had engaged Morgan Stanley
Dean Witter to explore strategic alternatives to maximize shareholder value. As
a result of this process, Ziff-Davis has sold its market intelligence,
education and television businesses and determined to spin off to its
shareholders the events business into its own separate company.
Specifics of these transactions follow:
Ziff-Davis sold its market intelligence business in early October 1999.
During the fourth quarter of 1999, Ziff-Davis recognized a pre-tax gain of
approximately $60 million from this sale.
On November 17, 1999, Ziff-Davis announced that it had signed a
definitive agreement to sell its business-to-business IT learning
organization, ZD Education, for $172 million in cash to a company formed by
U.S. Equity Partners, L.P. The transaction closed February 2000. U.S.
Equity Partners is a private equity fund managed by Wasserstein Parella
Group, Inc. Ziff-Davis recognized a pre-tax gain on the sale of this
business of approximately $115.5 million in the first quarter of 2000.
On November 19, 1999, Ziff-Davis announced that it had signed a
definitive agreement to sell its 64% interest in ZDTV to Vulcan Ventures,
Inc., the investment organization of Paul G. Allen, for $204.8 million. The
sale closed in January 2000. Ziff-Davis recognized a pre-tax gain on the
sale of this business of approximately $85.9 million in the first quarter
of 2000.
Ziff-Davis expects to form a new holding company for the ZD Events
group. That holding company will borrow approximately $400 million from
bank lenders, the capital markets, or a combination of both. The proceeds
of that borrowing will be used to retire Ziff-Davis' remaining indebtedness
and to fund a cash dividend to holders of ZD stock. At the time of the
dividend or shortly thereafter, Ziff-Davis intends to distribute all of the
shares it owns in the ZD Events holding company to the holders of ZD stock.
These transactions are expected to be completed at or around the end of the
second quarter of 2000.
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 Statement of Operations for the three
months ended March 31, 1999 have been restated to reflect this treatment.
The proceeds of $376.8 million from the sale of ZD Education and ZDTV are
reflected in the investing activities of the Consolidated Statement of Cash
Flows for the three months ended March 31, 2000.
10
<PAGE>
ZIFF-DAVIS INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
9. Sale of ZD Publishing
On December 6, 1999, Ziff-Davis agreed to sell its print publishing
business, excluding Computer Shopper and an investment in Red Herring
Communications Inc., to companies controlled by Willis Stein & Partners for
$780 million, subject to certain adjustments. In connection with this sale,
Ziff-Davis has written down its book value of the related net assets to fair
value, and has reported the net assets of the publishing business being sold as
"Assets held for sale" in the March 31, 2000 Consolidated Balance Sheet. See
Note 10.
At March 31, 2000, assets held for sale consisted of:
<TABLE>
<CAPTION>
(dollars
in
thousands)
<S> <C>
Current assets.................................................... $121,979
Total assets...................................................... $879,293
========
Total liabilities(1).............................................. $ 99,293
========
</TABLE>
- --------
(1) All liabilities were current at March 31, 2000
10. Subsequent Events
On April 5, 2000, Ziff-Davis completed the sale of its ZD Publishing
division (excluding Computer Shopper and Ziff-Davis' investment in Red Herring
Communications Inc.) to companies controlled by Willis Stein & Partners. The
purchase price was $780,000,000. During the second quarter of 2000, Ziff-Davis
will record charges of approximately $72,500,000 related to the sale of the
publishing division. The majority of the charges are related to stock-based
compensation from accelerated vesting of stock options held by publishing
employees, which is expected to be approximately $59,000,000 and will be a non-
cash charge.
On April 5, 2000, Ziff-Davis repaid the remaining balance on its bank credit
facility in full from 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
expects to recognize a pre-tax gain of approximately $13,600,000 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 of the approximately $400 million ZD Events group borrowing
described in Note 8 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 expects to incur a pre-tax charge of approximately
$36,600,000 in the second quarter of 2000 as a result of this repurchase,
composed of a premium to repay the Notes of approximately $20,700,000 and the
write-off of debt issuance costs of $15,900,000 which were being amortized over
the original life of the Notes.
Ziff-Davis plans, after recapitalizing and spinning off ZD Events and paying
a special cash dividend, to eliminate its tracking stock structure and as a
result, establish ZDNet as a stand-alone, independent Internet
11
<PAGE>
ZIFF-DAVIS INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(numbers rounded to the nearest thousand, except share and per share amounts)
company. This will be accomplished by merging a newly formed subsidiary into
Ziff-Davis Inc. so that all current holders of its ZD stock (NYSE: ZD) and
ZDNet stock (NYSE: ZDZ) will hold their investments through a single class of
ordinary common stock. The surviving company will be renamed ZDNet Inc. The
merger is expected to be completed at or around the end of the second quarter
of 2000.
For additional details, please refer to the Ziff-Davis Inc. proxy statement
dated February 7, 2000 and the 1999 Form 10-K.
In April 2000, ZDNet purchased 250,000 shares of common stock of Opus360 for
$2.5 million in cash. This investment will be accounted for under the cost
method of accounting.
In April 2000, ZDNet acquired LinuxDevices.com for $1.0 million, with a
potential additional earn-out of $3.0 million worth of ZDNet stock based on
achievement of specified traffic targets. This acquisition will be accounted
for under the purchase method of accounting.
In May 2000, ZDNet acquired 3Dfiles web site for $2 million in cash and
380,772 shares of ZDNet stock valued at $5.0 million or $13.13 per share.
12
<PAGE>
ZDNET
(a division of Ziff-Davis Inc.)
COMBINED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
----------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................ $ 15 $ 108
Accounts receivable, net............................. 26,101 27,161
Receivable from ZD................................... -- 12,763
Deferred taxes....................................... 3,920 4,165
Other current assets................................. 694 512
--------- ---------
Total current assets............................... 30,730 44,709
Property and equipment, net............................ 7,460 7,336
Investments, at cost................................... 41,485 25,404
Deferred taxes......................................... 2,258 2,258
Securities available for sale.......................... 281 513
Intangible assets, net................................. 128,478 109,145
--------- ---------
Total assets....................................... $ 210,692 $ 189,365
========= =========
LIABILITIES AND DIVISION EQUITY
Current liabilities:
Accounts payable..................................... $ 519 $ 1,734
Accrued expenses..................................... 15,408 15,258
Payable to ZD........................................ 6,685 --
Deferred income...................................... 3,955 9,257
--------- ---------
Total liabilities.................................. 26,567 26,249
--------- ---------
Commitments and contingencies (Note 7)
Division equity........................................ 184,125 163,116
--------- ---------
Total liabilities and division equity.............. $ 210,692 $ 189,365
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
13
<PAGE>
ZDNET
(a division of Ziff-Davis Inc.)
COMBINED STATEMENTS OF OPERATIONS
(Unaudited-dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------
2000 1999
----------- -----------
<S> <C> <C>
Revenue, net........................................ $ 35,940 $ 18,561
Cost of operations:
Production and content............................ 12,665 7,760
Selling, general and administrative expenses...... 18,765 8,972
Stock-based compensation.......................... 793 836
Depreciation and amortization of property and
equipment........................................ 809 532
Amortization of intangible assets................. 3,895 1,022
----------- -----------
Loss from operations................................ (987) (561)
Interest income, related party...................... 90 --
Minority interest................................... -- 117
Non-operating expense............................... (330) --
----------- -----------
Loss before income taxes............................ (1,227) (444)
Income tax provision (benefit)...................... 338 (258)
----------- -----------
Net loss............................................ $ (1,565) $ (186)
=========== ===========
Net loss per pro forma basic share.................. $ (.02) $ .00
Pro forma weighted average number of basic shares
outstanding........................................ 74,168,844 71,500,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
14
<PAGE>
ZDNET
(a division of Ziff-Davis Inc.)
COMBINED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited-dollars in thousands)
<TABLE>
<CAPTION>
Three Months
Ended
March 31,
---------------
2000 1999
------- ------
<S> <C> <C>
Net loss....................................................... $(1,565) $ (186)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments..................... (172) 401
Unrealized gain (loss) on securities available for sale...... (139) 3,086
------- ------
Comprehensive income (loss).................................... $(1,876) $3,301
======= ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
15
<PAGE>
ZDNET
(a division of Ziff-Davis Inc.)
COMBINED STATEMENTS OF CASH FLOWS
(Unaudited-dollars in thousands)
<TABLE>
<CAPTION>
Three Months
Ended
March 31,
----------------
2000 1999
-------- ------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................... $ (1,565) $ (186)
Adjustments to reconcile net loss to net cash provided
(used) by operating activities:
Depreciation and amortization of property and equipment... 809 532
Amortization of intangible assets......................... 3,895 1,022
Minority interest......................................... -- (117)
Deferred tax provision (benefit).......................... 338 (258)
Stock-based compensation.................................. 793 836
Changes in operating assets and liabilities:
Accounts receivable..................................... 1,157 1,420
Other current assets.................................... (181) (388)
Accounts payable and accrued expenses................... (1,127) (183)
Unearned income......................................... (5,301) 449
Other, net.............................................. (115) 411
-------- ------
Net cash provided (used) by operating activities............ (1,297) 3,538
-------- ------
Cash flows from investing activities:
Capital expenditures...................................... (886) (872)
Investments............................................... (10,988) --
Acquisitions, net of cash acquired........................ (6,371) --
-------- ------
Net cash used by investing activities....................... (18,245) (872)
-------- ------
Cash flows from financing activities:
Return of capital to ZD................................... -- (2,723)
Repayment by ZD of advances to ZD......................... 12,764 --
Borrowings from ZD, net................................... 6,685 --
-------- ------
Net cash provided (used) by financing activities............ 19,449 (2,723)
-------- ------
Net decrease in cash and cash equivalents................... (93) (57)
Cash and cash equivalents at beginning of period............ 108 292
-------- ------
Cash and cash equivalents at end of period.................. $ 15 $ 235
======== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
16
<PAGE>
ZDNET
(a division of Ziff-Davis Inc.)
COMBINED STATEMENTS OF CHANGES IN DIVISION EQUITY
(dollars in thousands)
<TABLE>
<CAPTION>
Unrealized
loss
on securities Cumulative
Division Deferred Accumulated available for translation
capital compensation deficit sale adjustment Total
-------- ------------ ----------- ------------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1999................... $216,123 $(9,475) $(44,108) $(249) $ 825 $163,116
Stock-based compensation
earned................. -- 793 -- -- -- 793
Unrealized loss on
securities available
for sale, net.......... -- -- -- (139) -- (139)
Acquisition of Ziff-
Davis Richina Media
LDC.................... 5,092 -- -- -- -- 5,092
Acquisition of
FerretSoft, LLC........ 17,000 -- -- -- -- 17,000
Net loss................ -- -- (1,565) -- -- (1,565)
Foreign exchange
translation
Adjustment............. -- -- -- -- (172) (172)
-------- ------- -------- ----- ----- --------
Balance at March 31,
2000 (unaudited)....... $238,215 $(8,682) $(45,673) $(388) $ 653 $184,125
======== ======= ======== ===== ===== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
17
<PAGE>
ZDNET
(a division of Ziff-Davis Inc.)
NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS
1. The Company 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 March 31, 2000 and the results of its
consolidated operations for the three months ended March 31, 2000 and 1999 and
cash flows for the three months ended March 31, 2000 and 1999 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,
2000. It is suggested that the statements be read in conjunction with ZDNet's
combined financial statements and notes thereto and consolidated financial
statements of Ziff Davis Inc. ("Ziff-Davis") and notes thereto included in
Ziff-Davis' Annual Report on Form 10-K for the year ended December 31, 1999
(the "1999 Form 10-K") as well as the consolidated financial statements of
Ziff-Davis included herein.
ZDNet is the Internet business division of Ziff-Davis. ZD is the division of
Ziff-Davis that was focused on the business of print publishing, trade shows
and conferences, television, market research and education.
Restructuring
Ziff-Davis is in the process of disposing of substantially all of its ZD
businesses as part of a comprehensive restructuring described in its proxy
statement dated February 7, 2000, in our 1999 Form 10-K and our Registration
Statement on Form S-3. Ziff-Davis has already completed the sale of ZD Market
Intelligence, ZD Education, ZD Publishing (excluding Computer Shopper, Smart
Planet and an investment in Red Herring Communications) and its equity interest
in ZDTV. In addition, Ziff-Davis announced on March 7, 2000 that it intends to
recapitalize and spin-off its ZD Events group to the holders of ZD common
stock.
Upon completion of the restructuring transactions, Ziff-Davis expects to
transfer Computer Shopper magazine, Smart Planet, its investment in Red Herring
Communications and any other residual ZD assets to ZDNet in return for an
increase in ZD's retained interest in ZDNet. Thereafter, Ziff-Davis expects to
merge with a newly formed subsidiary to eliminate its tracking stock structure.
The surviving company will be renamed ZDNet Inc. As a result of the merger,
each outstanding share of ZD stock will remain outstanding as one share of the
newly named ZDNet Inc., and each outstanding share of ZDNet stock will convert
into a number of shares of ZDNet Inc. expected to fall between 1.7 and 1.9
shares. From the point of view of a holder of ZDNet stock, the transaction is
similar to a stock split--the price per share will decrease but the holder will
end up with more shares.
The restructuring transactions referred to above and the risks related
thereto are described in more detail in the proxy statement dated February 7,
2000 and in Note 1 to the combined financial statements of ZDNet in the 1999
Form 10-K and Notes 1, 8, 9 and 10 to the consolidated financial statements of
Ziff-Davis included herein.
Reclassifications
Certain amounts have been reclassified, where appropriate, to conform to the
current financial statement presentation.
18
<PAGE>
ZDNET
(a division of Ziff-Davis Inc.)
NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS--(Continued)
2. ZDNet Stock
Refer to Note 2, "ZDNet Stock," of the consolidated financial statements of
Ziff-Davis included herein.
3. Investments
In February 2000, ZDNet acquired a 35% interest in Ziff-Davis Richina Media
LDC ("ZDRM") for $7.0 million in cash and 186,046 shares of ZDNet stock valued
at $5.1 million or $27.375 per share. ZDNet accounts for this investment using
the equity method of accounting as the other 65% interest in ZDRM held by Ziff-
Davis was sold on April 5, 2000, in connection with its sale of the publishing
business discussed elsewhere in the consolidated financial statements of Ziff-
Davis included herein and, therefore, control of ZDRM by Ziff-Davis was
temporary.
4. Acquisitions
In March 2000, ZDNet acquired 100% of FerretSoft, LLC for $6.4 million in
cash and 601,502 shares of ZDNet stock valued at $17.0 million or $28.26 per
share. The acquisition was 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.
<TABLE>
<S> <C>
Cash................................................................ $ 6,400
ZDNet stock......................................................... 17,000
-------
Total purchase price.............................................. 23,400
Net assets acquired................................................. (143)
-------
Value assigned to intangible assets................................. $23,257
=======
</TABLE>
5. 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 nondeductible goodwill
amortization and the effect of local taxes.
6. Earnings per share
The earnings per share for ZDNet for 1999 is presented on a pro forma basis
based on the separate income of the ZDNet group (as set forth in the ZDNet
financial statements included earlier in this Form 10-Q), assuming all shares
had been issued on January 1, 1999. Options to purchase ZDNet stock that could
potentially dilute basic earnings per share were not included in the
calculation of diluted earnings per share for ZDNet, because they were anti-
dilutive.
Diluted earnings per share are not shown when the impact of stock options
would be anti-dilutive.
7. Commitments and Contingencies
Refer to note 6, "Commitments and Contingencies," of the consolidated
financial statements of Ziff-Davis included herein.
19
<PAGE>
ZDNET
(a division of Ziff-Davis Inc.)
NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS--(Continued)
8. Subsequent Events
In April 2000, ZDNet purchased 250,000 shares of common stock of Opus360 for
$2.5 million in cash. This investment will be accounted for under the cost
method of accounting.
In April 2000, ZDNet acquired LinuxDevices.com for $1.0 million, with a
potential additional earn out of $3.0 million worth of ZDNet stock based on
achievement of specified traffic targets. This acquisition will be accounted
for under the purchase method of accounting.
In May 2000, ZDNet acquired 3Dfiles Web site for $2 million in cash and
380,772 shares of ZDNet stock valued at $5.0 million or $13.13 per share.
20
<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
Revenue
Ziff-Davis Inc. ("Ziff-Davis") had net revenue of $176.2 million for the
three months ended March 31, 2000. A substantial portion of Ziff-Davis' revenue
is derived from the sale of advertising, which accounted for 77.4% of total
revenue. No single advertiser has comprised more than 3.0% of Ziff-Davis'
advertising revenue during any of the last three years. However, Ziff-Davis'
top 20 advertisers accounted for 37.1% of total advertising revenue during the
three months ended March 31, 2000.
In the publishing segment, Ziff-Davis' principal sources of revenue have
been advertising (73.8% of first quarter 2000 total publishing revenue),
circulation (21.7%) and other (4.5%). Circulation comprises both paid
subscriptions (11.7%) and newsstand sales (10.0%) while other primarily
consists of royalties, reprints and other miscellaneous sales. In the Internet
segment, Ziff-Davis' principal source of revenue is from advertising (96% of
total Internet revenue for first quarter 2000). The Internet segment also
derives revenue from subscription-based fees and services (4% of total Internet
revenue in first quarter 2000).
Cost of operations
In the publishing business, the principal components of Ziff-Davis'
production costs are raw materials, printing and distribution, which
represented 33.3%, 37.6%, 29.1%, respectively of total publishing production
expenses during the first quarter of 2000. Ziff-Davis' 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. Production costs in the Internet segment consist primarily of third
party web hosting costs.
The other principal operating cost for Ziff-Davis are selling, general and
administrative expenses, including editorial costs. Included in these costs are
salaries, sales commissions and benefits (41.3% in first quarter 2000) along
with marketing and promotion expenses related to advertising and circulation
(32.0% in first quarter 2000.
Factors affecting future periods
Our future financial condition, results of operations and cash flow will be
materially impacted by the restructuring of Ziff-Davis described in our proxy
statement dated February 7, 2000 (the "Proxy Statement"), Registration
Statement on Form S-3 (File No. 333-35550) and in our Form 10-K for the year
ended December 31, 1999 (the "1999 Form 10-K"). After giving effect to the
restructuring, Ziff-Davis (which will be renamed ZDNet Inc.) will be primarily
an internet company and will have only one class of ordinary common stock.
Investors in ZD stock and ZDNet stock will be investors in all of the remaining
assets, liabilities and businesses of the consolidated company. For additional
information, see "Risk Factors" in our Proxy Statement and our 1999 Form 10-K.
Presentation of earnings per share
Ziff-Davis has presented its earnings per share for both series of common
stock--ZD and ZDNet. The earnings per share for ZDNet is presented on a pro
forma basis for the 1999 period based on the separate income (loss) of the
ZDNet group (as set forth in the ZDNet financial statements included elsewhere
in this Form 10-Q), assuming all shares had been issued on January 1, 1999.
21
<PAGE>
Comparison of Three Months Ended March 31, 2000 and 1999
Revenue, net
Revenue increased by $13.0 million or 8.0% to $176.2 million in 2000 from
$163.2 million in 1999.
Publishing--Net revenue from publishing decreased by $4.3 million or 3.0%
from $144.6 million in first quarter 1999 to $140.3 million in first quarter
2000. The decrease was primarily due to lower advertising in the larger
business publications partly offset by growth in advertising in consumer
publications. Advertising revenue was lower in business publications
principally due to factors affecting the computer technology industry; namely,
consolidation within the computer and Internet industries, margin pressure on
computer equipment manufacturers and product delays. Revenue from international
operations, which generated 14% of the segment's revenue, decreased by $0.5
million primarily because the growth of IT Week in the UK was more than offset
by the stronger US dollar.
Internet--Net revenue increased $17.3 million or 93.6% to $35.9 million for
the first quarter of 2000 from $18.6 million in the first quarter of 1999.
Revenue from advertising was 96% of net revenue for the first quarter of 1999
compared to 91% for the first quarter of 1999. Revenue from advertising
increased 104% to $34.5 million for the first quarter of 2000 from $16.9
million for the first quarter of 1999. The increase in advertising revenue was
attributed to an increase in volume as both the number of advertisers and the
average monthly revenue per advertiser increased. Included in first quarter
2000 advertising revenue was $4.1 million of accelerated deferred revenue as a
result of terminating a multi-year revenue-generating contract during the
period. Subscription-based fees and services decreased by 17.6% to $1.4 million
for the quarter ended March 31, 2000 from $1.7 million for the quarter ended
March 31, 1999.
Cost of production
Production costs decreased by 7.5% or $3.6 million from $48.1 million in
first quarter 1999 to $44.5 million in 2000.
Publishing production costs decreased by $2.9 million or 6.4% from $45.4
million in first quarter 1999 to $42.5 million in 2000. The decrease was
related to a decline in the number of advertising pages produced.
Internet production costs decreased by $0.7 million or 26.6% from $2.7
million in 1999 to $1.9 million in 2000. The decrease was due to a shift
towards increased marketing costs and less infrastructure costs.
Selling, general and administrative expenses
Selling, general and administrative expenses increased by $25.0 million or
27.7% from $90.4 million in 1999 to $115.4 million in 2000. The increase was
due to increased personnel and services required to support the growth of ZDNet
advertising and increased advertising expenses as a result of the $25 million
consumer advertising campaign launched in December 1999 and start-up expenses
from Smart Planet.
Stock-based compensation
Ziff-Davis incurred compensation expense related to stock options on the
internet business granted during 1998 in anticipation of an initial public
offering where the exercise price was deemed to be below the market price on
the date of grant. Ziff-Davis recognizes this cost on a straight-line basis
over the vesting period of the underlying options.
Ziff-Davis also incurred compensation expense relating to the acceleration
of the vesting of stock options in connection with the termination of certain
employees; however, these amounts were included in the restructuring charges
and gain on disposal of discontinued operations.
22
<PAGE>
Total stock-based compensation expense was $56.0 million in the current
period compared to $1.3 million in the 1999 period.
Depreciation and amortization
Total depreciation and amortization decreased $20.7 million from $26.3
million in first quarter 1999 to $5.6 million in first quarter 2000. The
decrease was primarily a result of terminating depreciation and amortization at
applicable publishing assets, except for those of Computer Shopper and Smart
Planet, as the publishing assets were written-down to fair market value in the
fourth quarter of 1999 and reclassified as assets held for sale.
Restructuring charges
During the first quarter of 2000, Ziff Davis incurred a restructuring charge
totaling $64.0 million in connection with the disposition of its ZD businesses.
The charge was for severance and accelerated vesting of terminating employees'
stock options and other expenses incurred with the sale of its ZD businesses.
All of the cash payments accrued for in the first quarter will be paid by the
end of the second quarter. In the second quarter of 2000 Ziff-Davis expects to
record additional charges currently estimated at $125 million for accelerated
vesting of terminating employees' stock options and other expenses associated
with the restructuring of its businesses.
Interest expense, net
Interest expense decreased by $13.5 million or 55.1% from $24.5 million in
first quarter 1999 to $11.0 million in first quarter 2000. The reduction was
due primarily to lower average levels of debt outstanding as proceeds from the
ZDNet offering and from the sale of businesses have been used to repay
indebtedness.
Other non-operating income, net
Other non-operating income, net primarily reflects Ziff-Davis' equity share
in earnings and losses from joint ventures. Income of $0.1 million improved
$0.2 million from a loss of $0.1 million in first quarter 1999 due to higher
income from ZDNet's joint ventures.
Minority interest
There was no minority interest in the current period as ZDNet had purchased
the outstanding shares of its GameSpot subsidiary in 1999.
Income taxes
The first quarter 2000 income tax benefit of $97.5 million increased from a
benefit of $3.3 million in first quarter 1999, primarily as a result of the
release of valuation allowances established on previously generated net
operating losses. The release was triggered by the generation of taxable income
from discontinued operations.
Income (loss) from continuing operations
As a result of the changes described above, Ziff-Davis produced income from
continuing operations of $32 million in first quarter 2000 compared to a loss
from continuing operations of $24.2 million in first quarter 1999.
23
<PAGE>
EBITDA
EBITDA for the quarter ended March 31, 2000 was $16.4 million compared to
$24.5 million for the quarter ended March 31, 1999. Results were unfavorable as
compared to first quarter 1999 due to a lower level of earnings from
advertising in the higher margin business publications partly offset by
improved results in the consumer publications and EBITDA in the Internet
segment. EBITDA from the Internet segment increased primarily as a result of
revenue growth exceeding increases in expenses. The ratio of EBITDA to revenue
was 9.3% for first quarter 2000 compared to 15.0% in first quarter 1999.
Discontinued Operations
As result of Ziff-Davis' decision to sell its market intelligence, education
and television businesses and to spin off its events business, the results of
operations from these businesses have been reported as discontinued operations.
The accounting for discontinued operations requires that the results of the
businesses being discontinued are reported separately, net of taxes.
Management's key performance indicators for each of these businesses are
revenue and earnings before interest, taxes, depreciation and amortization and
other non-cash charges ("EBITDA").
Ziff-Davis sold its market intelligence business in early October 1999.
During the fourth quarter of 1999, Ziff-Davis recognized a pre-tax gain of
approximately $60 million from this sale.
On November 17, 1999, Ziff-Davis announced that it had signed a definitive
agreement to sell its business-to-business IT learning organization, ZD
Education, for $172 million cash to a company formed by U.S. Equity Partners,
L.P. The transaction closed in the first quarter of 2000. U.S. Equity Partners
is a private equity fund managed by Wasserstein Parella Group, Inc. Ziff-Davis
recognized a pre-tax gain on the sale of this business of approximately $115.5
million in the first quarter of 2000.
On November 19, 1999, Ziff-Davis announced that it had signed a definitive
agreement to sell its 64% interest in ZDTV to Vulcan Ventures, Inc., the
investment organization of Paul G. Allen, for $204.8 million. The sale closed
in January 2000. Ziff-Davis recognized a pre-tax gain on the sale of this
business of approximately $85.9 million in the first quarter of 2000.
Ziff-Davis expects to form a new holding company for the ZD Events group.
That holding company will borrow approximately $400 million from bank lenders,
the capital markets, or a combination of both. The proceeds of that borrowing
will be used to retire Ziff-Davis' remaining indebtedness and to fund a cash
dividend to holders of ZD stock. At the time of the dividend or shortly
thereafter, Ziff-Davis intends to distribute all of the shares it owns in the
ZD Events holding company to the holders of ZD stock. These transactions are
expected to be completed at or around the end of the second quarter of 2000.
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 Statement of Operations for the three months ended March
31, 1999 have been restated to reflect this treatment. The proceeds of $376.8
million from the sale of ZD Education and ZDTV are reflected in the investing
activities of the Consolidated Statement of Cash Flows for the three months
ended March 31, 2000.
Events Segment
This discussion of the results from the Events segment is to provide an
understanding of the major effects on revenue and EBITDA. Ziff-Davis announced
on March 7, 2000 its intent to spin off the Events business into its own
separate company and that ZD shareholders would become shareholders in the new
Events company. This transaction is expected to be completed at or around the
end of the second quarter of 2000.
24
<PAGE>
Comparison of the three months ended March 31, 2000 and 1999
Revenue, net
Revenue from the Events segment increased $2.1 million or 11.3%, from $18.5
million in first quarter 1999 to $20.6 million in the first quarter 2000. The
increase was primarily due to the continuing development of custom products for
individual clients and specific areas of information technology. The ASP and
Service Provider Summit events generated revenue of $2.8 million compared to
$1.0 million last year from the New World Summit event. An individual client's
event, Intel Developers Forum, contributed an incremental $500,000.
EBITDA
EBITDA for the current quarter was a loss of $7.8 million, compared to last
year's loss of $6.0 million. The decrease in EBITDA was attributed to an
increase in general and administrative costs attributed primarily to changes in
staffing, including severance costs of terminated employees the company in
preparation for its spin-off as a separate public company from Ziff-Davis.
Liquidity and Capital Resources
At March 31, 2000, Ziff Davis' outstanding total debt was $854 million,
excluding unamortized discount, which consisted of $69 million due to Softbank,
and $250 million of notes payable and $535 million under a credit facility.
Cash and equivalents were $14.5 million at March 31, 2000, an increase of
$4.3 million from $10.2 million at December 31, 1999. The increase was due to
factors described below:
Cash used by operations was $35.0 million for the quarter ended March 31,
2000 compared to cash provided by operations of $9.4 million at March 31, 1999.
The decrease was due primarily to lower cash generated from the publishing and
events businesses.
Cash provided from investing for the quarter ending March 31, 2000 was
$357.1 million compared to cash used by investing of $70.6 million for the
quarter ended March 31, 1999. In January 2000, Ziff-Davis closed on the sale of
its two-thirds interest in ZDTV, receiving proceeds of $204.5 million, and
received an additional $6.2 million of proceeds related to purchase price
adjustments from the sale of ZD Market Intelligence. In February 2000, Ziff-
Davis closed on the sale of its ZD Education business, generating proceeds of
$172.0 million. These cash inflows were partially offset by the cash portion of
ZDNet's acquisition of a 35% interest in Ziff-Davis Richina Media LDC for $7
million and acquisition of Ferretsoft, LLC for 6.4 million along with a variety
of investments in Internet and Internet-related companies.
Cash used in financing for the quarter ended March 31, 2000 was $317.7
million compared to cash provided by financing of $66.6 million for the quarter
ended March 31, 1999. The proceeds from the various sales transactions were
used to repay outstanding indebtedness.
As of March 31, 2000, Ziff-Davis believes, based on its current level of
operations and proceeds from the restructuring, that Ziff-Davis' 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 Ziff-
Davis' indebtedness and to fund anticipated capital expenditures and working
capital requirements. However, actual capital expenditures may change,
particularly as a result of any acquisitions ZDNet may pursue.
On April 5, 2000, Ziff-Davis repaid the remaining balance on its bank credit
facility in full out of proceeds from the sale by Ziff-Davis of its publishing
business. 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 the proceeds of the approximately $400 million ZD Events group
borrowing described in the 1999 Form 10-K.
25
<PAGE>
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. This left Ziff-Davis with approximately $100 million in cash at April
13, 2000.
Ziff-Davis plans to use approximately $70 million of this cash, net of sale
related expenses, to repay in full the outstanding note payable to SOFTBANK
Corp. and to use the remaining cash along with the proceeds of the ZD Events
group borrowing, net of repayment of the interim credit facility, to fund a
special dividend to holders of ZD stock.
Credit Facility and Interest Rate Swaps
At March 31, 1999 Ziff-Davis' credit facility, as amended, consisted of a
seven-year $400 million reducing revolving credit facility, a seven-year $260
million term loan and an eight-year $290 million term loan. There were at that
time no scheduled reductions in the revolving credit commitment or amortization
under the term loan until September 2000.
Ziff-Davis' credit facility exposed it to market risk with respect to
changes in interest rates. Ziff-Davis managed this risk through the use of
interest swap agreements, as described under Item 3 below.
Ziff-Davis repaid this credit facility in full on April 5, 2000.
Seasonality
Historically, Ziff-Davis' business has been seasonal as a significant
portion of annual revenue has occurred in the second and fourth quarters.
Year 2000 Readiness Disclosure
Ziff-Davis completed its identification, remediation and testing of Year
2000 issues by the end of 1999 and has not, to date, experienced any
significant problems as a result of the Year 2000 transition. Ziff-Davis
incurred costs of approximately $14.3 million in 1999, of which approximately
$7.3 million was capital in nature, to remediate Year 2000 issues.
26
<PAGE>
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. ("Ziff-Davis") was among the
first content providers to focus its efforts on the Internet, launching its
zdnet.com service in the fall of 1994.
Acquisition of FerretSoft, LLC
In March 2000, ZDNet acquired FerretSoft, LLC for $6.4 million in cash and
601,502 shares of ZDNet stock valued at $17.0 million. ZDNet accounts for this
acquisition using the purchase method of accounting.
Investment in Richina
In February 2000, ZDNet acquired a 35% interest in Ziff-Davis Richina Media
LDC ("ZDRM") for $7.0 million in cash and 186,046 shares of ZDNet stock valued
at $5.1 million or $27.375 per share. ZDNet accounts for this investment using
the equity method of accounting as the other 65% interest in ZDRM held by Ziff-
Davis was sold on April 5, 2000, in connection with its sale of the publishing
business discussed elsewhere in this Form 10-Q, and, therefore, control of ZDRM
by Ziff-Davis was temporary.
In connection with the acquisition and investment described above and those
described in our Form 10-K for the year ended December 31, 1999 (the "1999 Form
10-K"), amortization expense for the first quarter of 2000 increased by
approximately $2.9 million compared to first quarter 1999.
Factors affecting future periods
Our future financial condition, results of operations and cash flow will be
materially impacted by the restructuring of Ziff-Davis described in our proxy
statement dated February 7, 2000 (the "Proxy Statement") and in our 1999 Form
10-K. After giving effect to the restructuring, Ziff-Davis (which will be re-
named ZDNet Inc.) will be primarily an internet company and will have only one
class of ordinary common stock. Investors in ZDNet stock will be investors in
all of the remaining assets, liabilities and businesses of the consolidated
company. Various expenses of the consolidated company (e.g., selling, general
and administrative expenses) are expected to be higher than the corresponding
historical expenses for ZDNet. For additional information, see "Risk Factors"
in our Proxy Statement, our Registration Statement on Form S-3 (File No. 333-
35550) and our 1999 Form 10-K.
Results of Operations
Comparison of the three months ended March 31, 2000 and 1999 (unaudited)
Revenue, net
Net revenue increased 93.6% to $35.9 million for the quarter ended March 31,
2000 from $18.6 million for the quarter ended March 31, 1999. Revenue from
advertising was 96% of net revenue for the quarter ended March 31, 2000
compared to 91% for the quarter ended March 31, 1999.
27
<PAGE>
Revenue from advertising increased 104.1% to $34.5 million for the quarter
ended March 31, 2000 from $16.9 million for the quarter ended March 31, 1999.
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 through an
acceleration of deferred revenue, a result of the termination of a multi-year
revenue generating contract during the quarter. Subscription-based fees and
services decreased by 17.6% to $1.4 million for the quarter ended March 31,
2000 from $1.7 million for the quarter ended March 31, 1999. Management expects
that subscription revenue will continue to decrease in the future as a
percentage of ZDNet's total revenue.
Cost of operations
Production and content. Production and content expenses were $12.7 million
or 35.2% of net revenue for the quarter ended March 31, 2000, compared to $7.8
million or 41.8% of net revenue for the prior quarter. The absolute dollar
increase in production and content charges was due to an increase in ZD's
revenue-based royalty charges to ZDNet due to higher revenue, as well as an
increase in production costs to support higher user traffic levels and
increased editorial costs associated with the launch of new content areas. In
October 1999, ZDNet and ZD amended the royalty agreement to charge the royalty
on revenue net of the provision for bad debts. The cost of production and
content decreased as a percentage of revenue primarily due to economies of
scale. ZDNet expects this trend to continue. Royalty payments to ZD were $1.7
million and $0.9 million for the quarters ended March 31, 2000 and 1999,
respectively.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $18.8 million or 52.4% of net revenue for the
quarter ended March 31, 2000, compared to $9.0 million or 48.4% of net revenue
for the quarter ended March 31, 1999. The absolute dollar increase was
primarily due to increased personnel and services required to support the
growth of ZDNet. Sales and marketing costs were $15.4 million or 42.8% of net
revenue for the quarter ended March 31, 2000 compared to $6.7 million or 36.2%
of net revenue for the quarter ended March 31, 1999. ZDNet intends to continue
to increase spending in absolute dollars on sales and marketing. During
December 1999, ZDNet launched a $25.0 million consumer advertising campaign to
further extend awareness of its brand among the growing population of
technology interested Web users. Sales and marketing expenses are incurred both
to drive traffic to ZDNet's Web site and to increase the number of advertisers
and advertising sales. Administrative and overhead costs were $3.4 million or
9.5% of net revenue for the quarter ended March 31, 2000 compared to $2.3
million or 12.1% of net revenue for the quarter ended March 31, 1999.
Included in selling, general, and administrative expenses was an allocation
from Ziff-Davis relating to certain shared services provided on a centralized
basis amounting to $1.3 million and $1.5 million for the quarters ended March
31, 2000 and 1999, respectively.
Depreciation. Depreciation expense was $0.8 million for the quarter ended
March 31, 2000 compared to $0.5 million for the quarter ended March 31, 1999.
The increase related primarily to the 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 of intangible assets was
$3.9 million for the quarter ended March 31, 2000 compared to $1.0 million for
the quarter ended March 31, 1999. The increase in amortization expense was due
to the acquisition of the remaining 30% interest in GameSpot Inc. ("GameSpot")
and the acquisitions of Updates.com and Softseek, Inc.
Non-operating expenses
Non-operating expenses for the quarter ended March 31, 2000 were $0.3
million which primarily consisted of ZDNet's share of losses from its joint
ventures.
28
<PAGE>
Minority interest
The minority interest of $0.1 million in 1999 represented losses attributed
to the holders of the minority interest in GameSpot. The minority interest in
GameSpot was acquired during the third quarter of 1999.
Income taxes
The 2000 tax provision of $0.3 million increased from a benefit of $0.3
million reported in 1999. The increase is attributable to higher non-deductible
goodwill related to the acquisition of the remaining 30% GameSpot stock
interest, and 100% of Softseek, Inc.
Net loss
As a result of the items described above, ZDNet's net loss increased to $1.6
million from a loss of $0.2 million for the quarters ended March 31, 2000 and
1999, respectively.
EBITDA
EBITDA for the quarter ended March 31, 2000 was $4.2 million compared to
$1.9 million for the same period in 1999. The increase was due to higher
revenue offset to some extent by higher cash operating costs.
Liquidity and Capital Resources
Funding from ZD
Historically, the cash needs for ZDNet, excluding the cash needs of ZDNet's
foreign operations and operations that were 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 was reflected in the financial statements of ZDNet prior to the ZDNet
stock offering. After the completion of the ZDNet Stock offering, Ziff-Davis
has accounted for all cash transfers between ZD and ZDNet, other than transfers
in return for assets or services rendered or transfers in return for an
adjustment in ZD's retained interest, as inter-group revolving credit advances.
These advances between ZD and ZDNet bear interest at the rate at which Ziff-
Davis could borrow such funds on a revolving credit basis as the board of
directors has determined in its sole discretion. At March 31, 2000 ZDNet had an
amount due to ZD of $6.7 million. There is no assurance that ZDNet will
continue to be able to obtain sufficient funding from ZD or third parties.
Sources and uses of cash
Cash and cash equivalents were $15,000 at March 31, 2000, a decrease of
$220,000 from $235,000 at March 31, 1999. The decrease was due to the factors
discussed below:
Cash (used) provided by operations was $(1.3) million for the quarter ended
March 31, 2000 compared to $3.5 million for the quarter ended March 31, 1999.
The decrease of $4.8 million from 2000 to 1999 was due to increased marketing
and production content expenses partially offset by higher revenue.
Cash used by investing activities for the quarter ended March 31, 2000
totaled $18.2 million and $0.9 million for the quarter ended March 31, 1999.
The increase in cash used of $17.3 million was primarily due to the investment
in Richina of $7.2 million and the acquisition of FerretSoft, LLC for $6.4
million during the first quarter of 2000. In addition, we made investments in
various other internet and PC services companies totaled $4.0 million during
the first quarter of 2000.
Cash provided (used) by financing activities increased to $19.4 million for
the quarter ended March 31, 2000 from $(2.7) million for the quarter ended
March 31, 1999. During 1999, ZDNet completed its initial public offering and
generated cash, net of offering costs, of $25.9 million. ZDNet loaned these
proceeds to ZD
29
<PAGE>
in the form of an interest bearing loan. During the first quarter of 2000,
ZDNet has received repayments on the full amount of the remaining balance of
its loan to ZD ($12.7 million) and was loaned $6.8 million from ZD all of which
has been used to finance ZDNet's investments and acquisitions.
Year 2000 Readiness Disclosure
Ziff-Davis completed its identification, remediation and testing of Year
2000 issues prior to the end of 1999 and has not, to date, experienced any
significant problems as a result of the Year 2000 transition. Ziff-Davis
incurred costs of approximately $14.3 million, of which approximately $7.3
million was capital in nature. ZDNet's share of the expense was approximately
$0.4 million.
Item 3. Qualitative and Quantitative Disclosures About Market Risk.
Ziff-Davis' credit facility exposed it to market risk with respect to
changes in interest rates. Ziff-Davis managed this risk through the use of
interest rate swap agreements.
Through the use of swap agreements, as of March 31, 2000 Ziff-Davis had
effectively established a fixed interest rate for $400 million of the
outstanding credit facility. Based on the $ 851.5 million outstanding under the
credit facility as of March 31, 2000, if the LIBOR rate were to have increased
by 1%, Ziff-Davis would have incurred, after giving effect to the swap
agreements, an additional $4.5 million of annual interest expense. The weighted
average fixed rate Ziff-Davis paid under these agreements was approximately
5.0%.
On April 5, 2000, Ziff-Davis repaid its credit facility in full out of the
proceeds from the sales of ZD Publishing, ZD Education and ZDTV. As a result,
Ziff-Davis unwound the remaining swap agreements on or prior to April 12, 2000
and received a payment of approximately $10.8 million in connection therewith.
These swap agreements were viewed by Ziff-Davis as risk management tools and
were not used for trading or speculative purposes. The notional amount of $400
million did not represent a real amount exchanged by the parties, and
therefore, was not a measure of Ziff-Davis' exposure through its use of swap
agreements.
30
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
Ziff-Davis is subject to various claims and legal proceedings arising in the
normal course of business.
Ziff-Davis 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 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
investment in Ziff-Davis) and failed to act in the best interests of SIM and
the minority stockholders by taking actions which benefited Ziff-Davis. The
complaint stated claims based on common law fraud, breach of fiduciary duty and
aiding and abetting theories and sought in excess of $200,000,000 in damages.
Upon motion of Ziff-Davis and the other defendants, all of the claims against
them other than a breach of contract claim which was solely against SBH, were
dismissed on February 26, 1999. On April 1, 1999, plaintiffs filed a notice of
appeal of the dismissal. On September 2, 1999, the remaining claim, which was
solely against SBH, was dismissed. On October 6, 1999, plaintiffs filed a
notice of appeal of this dismissal. On March 28, 2000, the decisions of
dismissal were affirmed on appeal.
There are no other legal proceedings to which Ziff-Davis is a party, except
those described in its Form 10-K for the year ended December 31, 1999 and
ordinary routine litigation incidental to its business that is not otherwise
material to the business or financial condition of Ziff-Davis.
Item 2. Changes in Securities and Use of Proceeds.
On March 24, 2000, Ziff-Davis Inc. issued 601,502 shares of Ziff-Davis
Inc.ZDNet Common Stock, par value $0.01 per share, to certain designees of
FerretSoft, LLC (the "Designees") as part of the $23.4 million purchase price
for Ziff-Davis' purchase of substantially all of the assets of FerretSoft, LLC,
pursuant to an exemption from registration under Section 4(2) of the Securities
Act of 1933, as amended (the "Securities Act").
The Designees have represented that, either alone or with their purchaser
representative, they have such knowledge and experience in financial and
business matters so that they are capable of evaluating the merits and risks of
their investment in Ziff-Davis, they have the capacity to protect their own
interests and they are capable of bearing the economic risk of such investment
until the above-referenced shares are registered under the Securities Act or
until an exemption from registration is available. The Designees have
represented that they purchased the 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.
Ziff-Davis held a special meeting of stockholders on February 29, 2000 to
consider and vote upon the following proposals described in greater detail in
its proxy statement dated February 7, 2000:
PROPOSAL 1. The restructuring of Ziff-Davis Inc.
PROPOSAL 2. To amend the Amended 1998 Incentive Compensation Plan to
increase the number of shares available for issuance thereunder.
PROPOSAL 3. To amend the Amended 1998 Non-Employee Directors' Stock
Option Plan to increase the number of shares available for issuance
thereunder.
31
<PAGE>
The following is a compilation of the votes cast for, against or abstained
for each of the proposals above:
<TABLE>
<CAPTION>
Abstentions and
For Against Broker Non-Votes
----------- ---------- ----------------
<S> <C> <C> <C>
PROPOSAL 1.............................. 100,278,231 105,117 47,924
PROPOSAL 2.............................. 84,036,513 16,227,343 167,416
PROPOSAL 3.............................. 88,184,634 12,054,061 192,577
</TABLE>
Item 5. Other Information.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
<TABLE>
<C> <S>
27.1 Financial Data Schedule (EDGAR filing only)
99.1 Ziff-Davis Inc.'s Definitive Proxy Statement on Schedule 14A, dated
February 7, 2000 (incorporated by reference to Ziff-Davis Inc.'s
Definitive Proxy Statement on Schedule 14A, File No. 001-14055)
99.2 Ziff-Davis Inc.'s Registration Statement on Form S-3 (incorporated by
reference to Ziff-Davis Inc.'s Registration Statement on Form S-3, File
No. 333-35550)
99.3 Ziff-Davis Inc.'s Annual Report on Form 10-K for the year ended
December 31, 1999 (incorporated by reference to Ziff-Davis Inc.'s
Annual Report on Form 10-K for the year ended December 31, 1999, File
No. 001-14055)
</TABLE>
(b) Reports on Form 8-K
Not applicable.
32
<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/ Mark D. Moyer
By: _________________________________
Mark D. Moyer
Vice President and Controller
(On behalf of the Registrant and
as
Principal Financial and Accounting
Officer)
Date: May 15, 2000
33
<PAGE>
EXHIBIT INDEX
<TABLE>
<C> <S>
27.1 Financial Data Schedule (EDGAR filing only)
99.1 Ziff-Davis Inc.'s Definitive Proxy Statement on Schedule 14A, dated
February 7, 2000 (incorporated by reference to Ziff-Davis Inc.'s
Definitive Proxy Statement on Schedule 14A, File No. 001-14055)
99.2 Ziff-Davis Inc.'s Registration Statement on Form S-3 (incorporated by
reference to Ziff-Davis Inc.'s Registration Statement on Form S-3, File
No. 333-35550)
99.3 Ziff-Davis Inc.'s Annual Report on Form 10-K for the year ended
December 31, 1999 (incorporated by reference to Ziff-Davis Inc.'s
Annual Report on Form 10-K for the year ended December 31, 1999, File
No. 001-14055)
</TABLE>
34
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FORM LIFE-DAVIS
INC.'S FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIALS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 14,516
<SECURITIES> 281
<RECEIVABLES> 54,627
<ALLOWANCES> 15,943
<INVENTORY> 175
<CURRENT-ASSETS> 64,119
<PP&E> 35,308
<DEPRECIATION> 14,793
<TOTAL-ASSETS> 1,880,246
<CURRENT-LIABILITIES> 119,063
<BONDS> 847,044
0
0
<COMMON> 1,192
<OTHER-SE> 910,226
<TOTAL-LIABILITY-AND-EQUITY> 1,880,246
<SALES> 176,238
<TOTAL-REVENUES> 176,238
<CGS> 416,488
<TOTAL-COSTS> 230,910
<OTHER-EXPENSES> 10,850
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,970
<INCOME-PRETAX> (65,522)
<INCOME-TAX> (97,532)
<INCOME-CONTINUING> 32,010
<DISCONTINUED> 103,846
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 135,856
<EPS-BASIC> 0
<EPS-DILUTED> 0<F1>
<FN>
<F1>EPS IS NOT IN THOUSANDS AND REPORTED FOR ZIFF-DAVIS INC.'S TWO CLASSES OF
COMMON STOCK. ZD COMMON STOCK EPS PER BASIC SHARE WAS $1.31 AND ZDNET EPS WAS
$(0.02) ZD COMMON STOCK EPS DILUTED WAS $1.26 AND ZDNET COMMON STOCK DILUTIVE
IS N/A AS IT WOULD BE ANTIDILUTIVE.
</FN>
</TABLE>
