Claims and Counterclaims Ricochet Over Publishing Wreckage

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NEW YORK (AdAge.com) -- In the summer of 2000, which seems like a very long time ago, Ziff Davis Media's then Chairman-CEO Jim Dunning liked to receive guests and strategize, sometimes smoking expensive cigars, on a private portion of the wooden terrace he had built on the 13th floor of his company's Manhattan headquarters.

From there, through the haze blanketing Midtown, he could dream upon the vista: the Empire State Building on one end, the World Trade Center on another. Back then, Ziff Davis billed itself as the sixth-largest U.S. magazine company.

No one could have predicted what would transpire in little more than a year. Mr. Dunning no longer sits at the company's top perch. His lengthy and mutually profitable association with Chicago-based financial players Willis Stein & Partners imploded in a pair of rancorous court filings. The Net economy that nourished Mr. Dunning's dreams has vanished. The World Trade Center is gone.

A fall from headier days
Since the

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heady days at last year's peak, Ziff Davis has cut five titles -- Expedia Travels, eShopper, Family PC, Interactive Week and Smart Partner. Revenue fell 32.9% for the quarter ended June 30.

It's now up to new CEO Bob Callahan, formerly president of Walt Disney Co.'s ABC Broadcasting, to make sense of the wreckage. Since coming on Oct. 1, he's shuttered Smart Partner, Interactive Week and Expedia Travels, taken on a new executive vice president of sales and marketing and a new chief operating officer, sold the company's stake in the U.S. edition of Macworld and proceeded with the planned launch of trade title Baseline.

Mr. Callahan, through a spokeswoman, declined requests to comment for this story; the spokeswoman said he was at work assembling strategy and communicating it first to advertisers and employees. A Willis Stein spokeswoman said executives were unavailable to comment on the state of Ziff Davis. Mr. Dunning did not return calls seeking comment.

The $780 million deal for Ziff Davis Media is Mr. Dunning and Willis Stein's biggest, and is also the largest single investment among the $3 billion in Willis Stein's three equity funds.

$400 million in debt
But bondholders can't be happy. A 12% 10-year bond issue

Former Ziff Davis CEO, Jim Dunning
Ziff Davis Media floated early this year, while not traded since the day following Mr. Dunning's firing Aug. 13, last changed hands for $47.44 -- substantially down from the $73 levels it traded at earlier this year. Ziff Davis carries more than $400 million in debt.

Skepticism as to the wisdom of the Ziff Davis deal will most likely only deepen as the former partners sort out who wronged whom in dueling lawsuits. Mr. Dunning sued Willis Stein on Sept. 6 in New York County Supreme Court, charging, among other allegations, breach of contract, defamation, negligent misrepresentation, fraud, age discrimination and "intentional infliction of emotional distress."

Willis Stein, in a counterclaim filed Oct. 1, generally denied all allegations of wrongdoing and laid down its own against Mr. Dunning, including breach of contract, misrepresentation and omission, and breach of fiduciary duty.

Mr. Dunning and Willis Stein's partnership, court filings from both sides indicate, resulted in hundreds of millions in profits. A 1993 purchase of Yellow Pages provider TransWestern Publishing cost $35 million; it was sold four years later for $300 million. In 1995, they purchased directory publisher Standard Rate and Data Service for $40 million, later selling it for $85 million.

The big score
The big kahuna came with their third deal in early 1999, when Mr. Dunning sold the Petersen magazine group to Britain's Emap PLC for a $1.5 billion in cash and debt. When Mr. Dunning and Willis Stein purchased Petersen for around $470 million in 1996, many thought that valuation was overpriced. (Mr. Dunning's chesty manner has not always played well, but even executives who dislike it praise his business savvy.)

The two partners bought Ziff Davis' stable of tech magazines for $780 million in late 1999. Mr. Dunning later negotiated back the rights to related Web sites from CNET Networks -- the breakup of Ziff Davis had left the magazines without online rights to their brands -- and embarked upon an ambitious Net strategy.

Much of what happened next is now a legal matter.

The court filings are studded with inflammatory subheadings such as "Willis Stein Begins to Show Its True Colors and Deprive Mr. Dunning of The Benefits For Which He Worked So Hard," and "Dunning's Disappointing and Woefully Inadequate Leadership as CEO of Ziff Davis Causes Ziff Davis to Fire Him."

The counterfiling claims Willis Stein demanded in late June that consultants McKinsey & Co. be brought in to evaluate the company's business strategy. One executive familiar with that process said while much of McKinsey's consulting after that appeared to center on Mr. Dunning's Internet plans, some key questioning was aimed at uncovering top executives' feelings regarding overall leadership of the company.

Explosive accusations
The suits don't lack for explosive accusations. Willis Stein "knowingly deceived Mr. Dunning and their investors, with respect to budget forecasts," reads one passage of Mr. Dunning's suit, which seeks more than $500 million in damages and more than $200 million in punitive damages. Elsewhere in the suit, Mr. Dunning charges Avy Stein, managing director of Willis Stein, "started issuing directions to Mr. Dunning to ... overstate Ziff Davis' financial outlook to investment banks."

Among Willis Stein's countercharges: "In the aftermath of Dunning's termination, Willis Stein ... uncovered a shocking pattern of utter neglect and abuse by Dunning," ranging "from chronic absenteeism and refusal to make a single sales call to Ziff Davis customers to outright fraud." He's also accused of "misrepresenting the revenues earned by the Internet business" in order to win more financial support for his plans.

The countersuit also claims Mr. Dunning told Willis Stein executives "he did not feel comfortable communicating directly with Ziff Davis' customers due to his lack of understanding of technology markets."

'Did not know how to use e-mail'
It later states, "Willis Stein came to realize that Dunning had failed to establish any presence at all in the technology market that Ziff Davis served. Willis Stein also learned that Dunning did not even know how to use his own computer or e-mail."

The size of Mr. Dunning's stake in Ziff Davis is also in dispute, as is the status of stock-related promissory notes between the two parties.

The case is only entering the discovery phase, but already it has many members of the magazine world shifting uncomfortably.

More luridly, Mr. Dunning, whose base salary was $2 million, is accused of "extraordinary" expenses during his tenure at Ziff Davis -- among them, five country club memberships, nearly $1 million in chartered flights and installation of heated seats in his Mercedes -- and "[hiring] his new girlfriend as a consultant for Ziff Davis."

"That is an absolute malicious lie," said Mr. Dunning's lawyer Blair Fensterstock, when asked to comment on such charges. "I have the evidence to prove that right now, and we will."

"I just think it's outrageous that a vulture capitalist like Avy Stein would breach representation to an honorable and successful executive like Jim Dunning, when Jim has made Avy probably a billion dollars," Mr. Fensterstock said.

While no court dates are currently scheduled, Mr. Fensterstock said that "we may get some interesting decisions by the end of the year."

In a statement through his spokeswoman Nov. 2, Mr. Stein said, "We have no regrets about the decision we made to terminate [Mr. Dunning]. ... Jim's claims against Willis Stein lack merit, as is evident from the papers that we have now filed with the court."

'I kind of dug him'
Meanwhile, Ziff Davis staffers express unease and fondness. "In a weird way, [Mr. Dunning] was good for morale," said one staffer. "He built a deck, seemed fun, fraternized with security guards, smoked cigars. ... There was this funny energy about him. I heard him yell more than once, but I kind of dug him."

And even those who found his style off-putting, too, express some sympathy for the ousted CEO.

"It's not so much that there was mismanagement, it's that the bottom fell out before he could flip it," said an industry executive familiar with the deal markets, who took pains to stress ignorance of Ziff Davis's inner workings. "For that, there needs to be a fall guy. And it's never the bank who's the fall guy."

Business editor Mercedes M. Cardona contributed to this report.

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