ZIFF DAVIS HOLDINGS INC - 10-Q Quarterly Report

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

x		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2002

OR

o		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 333-99939

ZIFF DAVIS HOLDINGS INC.
(Exact Name of Registrant as Specified in Its Charter)


DELAWARE		36-4355050
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

28 East 28^th Street,
New York, New York 10016
(Address of principal executive offices)

(212) 503-3500
(Registrants telephone number, including area code)

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

As of November 14, 2002, 2,387,326 shares of common stock, par value $0.001 per share were issued and outstanding.

ZIFF DAVIS HOLDINGS INC.
FORM 10-Q
INDEX

			Page

PART I. FINANCIAL INFORMATION

Item 1.		Condensed Consolidated Financial Statements (unaudited)

	Condensed Consolidated Balance Sheets as of September 30, 2002 and December 31, 2001		1

	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2002 and 2001		2

	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2002 and 2001		3

	Condensed Consolidated Statement of Changes in Stockholders’ Deficit for the Nine Months Ended September 30, 2002		4

	Notes to Unaudited Condensed Consolidated Financial Statements		5

Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations	22

Item 3.		Quantitative and Qualitative Disclosures About Market Risk	34

Item 4.		Controls and Procedures	34

PART II. OTHER INFORMATION

Item 1.		Legal Proceedings	35

Item 2.		Changes in Securities and Use of Proceeds	35

Item 3.		Default Upon Senior Securities	35

Item 4.		Submission of Matters to a Vote of Security Holders	35

Item 5.		Other Information	35

Item 6.		Exhibits and Reports on Form 8-K	35

SIGNATURE			37

PART I – FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

ZIFF DAVIS HOLDINGS INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data)

			September 30, 2002			December 31, 2001

			(unaudited)
ASSETS
Current assets:
	Cash and cash equivalents		$	31,911		$	19,956
	Accounts receivable, net			33,099			45,226
	Inventories			429			360
	Prepaid expenses and other current assets			8,031			7,949

		Total current assets		73,470			73,491
Property and equipment, net				28,199			48,280
Intangible assets, net				346,164			375,271
Other assets, net				15,533			18,253

		Total assets	$	463,366		$	515,295

LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
	Accounts payable		$	7,991		$	21,347
	Accrued expenses and other current liabilities			36,200			58,983
	Current portion of long-term debt			—			7,127
	Unexpired subscriptions, net			37,370			36,212

		Total current liabilities		81,561			123,669
Long-term debt				298,306			422,074
Accrued interest compounding notes				103,569			—
Other non-current liabilities				10,599			8,879

		Total liabilities		494,035			554,622

Commitments and contingencies (Note 6)
Redeemable preferred stock				658,156			515,987

Stockholders’ deficit:
	Common stock - $0.001 par value, 100,000,000 shares authorized, 2,499,526 and 2,387,326 shares issued and outstanding, respectively			17,901			18,743
	Stock subscription loans			(572	)		(1,164	)
	Additional paid-in capital			8,468			3,468
	Accumulated deficit			(713,022	)		(574,561	)
	Accumulated other comprehensive loss			(1,600	)		(1,800	)

		Total stockholders’ deficit		(688,825	)		(555,314	)

		Total liabilities and stockholders’ deficit	$	463,366		$	515,295

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

ZIFF DAVIS HOLDINGS INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(dollars in thousands)

		Three Months Ended September 30,						Nine Months Ended September 30,

			2002			2001			2002			2001

Revenue, net		$	41,795		$	62,670		$	152,738		$	228,821
Operating expenses:
	Cost of production		15,829			24,600			56,893			88,100
	Selling, general and administrative expenses		24,793			50,082			100,892			180,693
	Depreciation and amortization of property and equipment		4,377			7,316			14,669			20,841
	Amortization of intangible assets		4,655			14,428			14,264			41,466
	Restructuring charges, net		13,431			12,950			21,836			14,000
	Write-down of intangible assets		—			11,500			14,108			11,500

	Total operating expenses		63,085			120,876			222,662			356,600

Loss from operations			(21,290	)		(58,206	)		(69,924	)		(127,779	)
Equity in income from joint ventures			—			16			—			164
Gain on sale of subsidiary			684			—			684			—
Interest expense, net			8,411			11,984			34,351			36,702

	Loss before income taxes		(29,017	)		(70,174	)		(103,591	)		(164,317	)
Income tax provision			50			294			478			692

	Net loss	$	(29,067	)	$	(70,468	)	$	(104,069	)	$	(165,009	)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

ZIFF DAVIS HOLDINGS INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(dollars in thousands)

						Nine Months Ended September 30,

						2002			2001

Cash flows from operating activities:
Net loss						$	(104,069	)	$	(165,009	)
Adjustments to reconcile net loss to net cash used by operating activities:
					Depreciation and amortization		28,933			62,307
					Equity in income from joint ventures		—			(164	)
					Non-cash rent expense		1,763			1,614
					Amortization of accrued interest on compounding notes, net		160			—
					Amortization of debt issuance costs		1,810			1,660
					Non-cash restructuring charges		4,736			—
					Write-down of intangible assets		14,108			11,500
Changes in operating assets and liabilities:
					Account receivable		11,182			26,431
					Inventories		(69	)		1,099
					Accounts payable and accrued expenses		(19,381	)		(6,319	)
					Unexpired subscriptions and deferred revenue, net		1,806			(5,189	)
					Due from affiliates		—			125
					Prepaid expenses and other, net		949			6,856

Net cash used by operating activities							(58,072	)		(65,089	)

Cash flows from investing activities:
					Capital expenditures		(1,876	)		(33,620	)
				Net proceeds from sale of subsidiary			1,554			—
				Distributions from joint venture			—			625
				Net proceeds from sale of joint venture			—			1,700
			Net proceeds from sale of international operations				—			7,783
			Acquisitions and investments, net of cash acquired				—			(251	)
		Acquisition of ZDP, net of cash acquired					—			(3,625	)

Net cash used by investing activities							(322	)		(27,388	)

Cash flows from financing activities:
		Proceeds from issuance of common stock					—			4
		Proceeds from issuance of preferred stock					77,631			88,953
		Proceeds from borrowings under senior credit facilities					21,000			10,000
		Repayment of borrowings under senior credit facilities					(6,085	)		(89,539	)
		Cash paid to bondholders in debt restructuring					(21,158	)		—
	Debt issuance costs						(1,039	)		(1,075	)

Net cash provided by financing activities							70,349			8,343

Net increase (decrease) in cash and cash equivalents							11,955			(84,134	)
Cash and cash equivalents at beginning of period							19,956			102,256

Cash and cash equivalents at end of period						$	31,911		$	18,122

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

ZIFF DAVIS HOLDINGS INC.

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIT
(UNAUDITED)
(dollars in thousands)

									Stock Subscription Loans			Additional Paid-in Capital		Accumulated Deficit			Accumulated Other Comprehensive Loss			Total Stockholders’ Deficit			Comprehensive Loss
		Common Stock

			Shares			Amount

Balance at December 31, 2001			2,499,526		$	18,743		$	(1,164	)	$	3,468	$	(574,561	)	$	(1,800	)	$	(555,314	)
	Cancellation of shareholders loans		(112,200	)		(842	)		592			250		—			—			—
	Return of preferred stock in the settlement with former CEO		—			—			—			4,750		—			—			4,750
	Dividends payable on redeemable preferred stock		—			—			—			—		(34,392	)		—			(34,392	)
	Changes in fair value of interest rate swap		—			—			—			—		—			200			200		$	200
	Net loss		—			—			—			—		(104,069	)		—			(104,069	)		(104,069	)

Balance at September 30, 2002			2,387,326		$	17,901		$	(572	)	$	8,468	$	(713,022	)	$	(1,600	)	$	(688,825	)	$	(103,869	)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

ZIFF DAVIS HOLDINGS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)

NOTE 1 - THE COMPANY AND BASIS OF PRESENTATION

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary to present fairly the consolidated financial position of Ziff Davis Holdings Inc. at September 30, 2002 and December 31, 2001 and the results of its consolidated operations for the three and nine months ended September 30, 2002 and 2001 and cash flows for the nine months ended September 30, 2002 and 2001 have been included. Operating results for the periods presented are not necessarily indicative of the results that may be expected for the fiscal year ended December 31, 2002. For further information refer to Ziff Davis Holdings Inc.’s audited consolidated financial statements, including the notes to those statements for the nine months ended December 31, 2001, that are included in the Registration Statement filed on Form S-4 dated as of October 9, 2002.

Formation of Ziff Davis Holdings Inc.

Ziff Davis Holdings Inc. (“Ziff Davis Holdings”, or, collectively with its subsidiaries, the “Company”) is majority owned by various investment funds managed by Willis Stein & Partners Management III, L.L.C. (“Willis Stein”, “controlling stockholders”) a private equity investment firm. Ziff Davis Holdings Inc. is a holding company which indirectly owns 100% of Ziff Davis Media Inc. (“Ziff Davis Media”). Ziff Davis Holdings does not conduct any operations, but rather all operations are conducted by Ziff Davis Media and its direct and indirect subsidiaries and Ziff Davis Holdings has no material assets other than its investment in the capital stock of Ziff Davis Media. The Company is a multimedia content company whose principal business is publishing. The Company publishes and licenses magazines, provides editorial content about technology and electronic video games, both in print and online, and produces eSeminars and webcasts. Ziff Davis Holdings was incorporated in the state of Delaware and was formed to acquire certain publishing assets (“Ziff-Davis Publishing”, “ZDP”, or “Predecessor”) from Ziff-Davis Inc. (“ZDI”), an unrelated company. The Company’s major operating subsidiaries are Ziff Davis Publishing Inc., Ziff Davis Development Inc. (“LaunchCo”) and Ziff Davis Internet Inc. (“InternetCo”). In January 2002, the Company changed its fiscal year-end from March 31 to December 31, effective December 31, 2001.

The Company was capitalized in April 2000 through the issuance of approximately $225,300 in preferred and common stock, in order to fund its acquisition of ZDP. In addition, the Company issued $125,000 senior secured notes (the “Equity Bridge Notes”). Proceeds from these transactions were used to purchase the common stock of Ziff Davis Media. The Equity Bridge Notes were fully repaid in July 2000, including interest thereon, with proceeds from the issuance of approximately $128,400 in preferred and common stock.

Ziff Davis Media had no operations prior to April 5, 2000 when it completed the acquisition of ZDP for $780,000 plus expenses. The acquisition of ZDP was accounted for under the purchase method of accounting. The acquisition of ZDP was funded by (i) proceeds from the issuance of preferred and common stock and Equity Bridge Notes described above, (ii) executing a $405,000 Senior Credit Facility agreement (the “Senior Credit Facility”) of which $355,000 was borrowed at closing and (iii) issuing $175,000 of senior subordinated notes (the “Bridge Loan”). Fees and expenses, including debt issuance costs associated with the acquisition of ZDP, which totaled approximately $30,000, were paid with the equity and debt proceeds. On July 18, 2000 the Company issued $250,000 of 12% senior subordinated notes 2010 (“12% Notes”). The proceeds of this offering were used to repay the Bridge Loan and approximately $59,700 of the Senior Credit Facility. In addition, proceeds were used to pay approximately $8,500 of expenses associated with the offering and approximately $6,800 of accrued interest.

In connection with the acquisition of ZDP, the Company determined that ZDP’s wholly-owned international operations (excluding international licensing operations and international joint ventures), did not meet its long-term strategic objectives. As a result, the operations were sold on August 4, 2000.

ZIFF DAVIS HOLDINGS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)
(dollars in thousands, except per share data)

NOTE 1 - THE COMPANY AND BASIS OF PRESENTATION – (continued)

Operations

The Company’s operations are classified into two operating segments, Established Businesses and Developing Businesses. The Established Businesses Segment is comprised of the Restricted Subsidiaries (described below) and the Developing Businesses Segment is comprised of the Unrestricted Subsidiaries (described below).

The Established Businesses segment is primarily comprised of the publishing assets that were acquired from ZDI, which are collectively referred to and defined under the Senior Credit Facility as the Restricted Subsidiaries. This segment is engaged in publishing and licensing magazines and providing editorial content about technology and electronic video games. This segment also licenses its content and brands to 33 licensees in over 70 countries worldwide. In addition, this segment also published Macworld through a 50% owned joint venture with International Data Group (“IDG”), which was sold in October 2001 to IDG.

The Developing Businesses segment is comprised of the LaunchCo and InternetCo subsidiaries, which are collectively referred to and defined under the Company’s debt agreements as the Unrestricted Subsidiaries. This segment is focused on developing (1) new businesses, including two new publications and (2) Internet-related ventures leveraged off the Company’s editorial content, expertise and relationships with its audience and advertisers in its Established Businesses segment.

For additional information on the Company’s operating segments, see Note 8.

As discussed in Note 4, the Company completed a financial restructuring in August 2002.

Principles of Consolidation

The financial statements of the Company as of September 30, 2002 and December 31, 2001 and for the three and nine months ended September 30, 2002 and 2001 are prepared on a consolidated basis and include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Investments in companies in which ownership interests are greater than 20 percent and in which the Company has the ability to exercise significant influence, but not control, over the operating and financial policies of such companies are accounted for under the equity method.

Recent Accounting Pronouncements

In April 2001, the Emerging Issues Task Force (“EITF”) reached a final consensus for EITF Issue No. 00-25, “Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor’s Products”, which was later codified along with other similar issues, into EITF 01-9 “Accounting for Consideration Given by a Vendor to a Customer or a Reseller of the Vendor’s Products” (“EITF 01-9”). EITF 01-9 clarifies the income statement classification of costs incurred by a vendor in connection with the resellers’ purchase or promotion of the vendor’s products, resulting in certain cooperative advertising and product placement costs previously classified as selling expenses to be reflected as a reduction of revenues earned from that activity. The Company adopted this EITF as of January 1, 2002, and as required, has reclassified prior period amounts. The impact of this EITF on the Company’s financial statements for the three and nine months ended September 30, 2001 was a reclassification of selling, general and administrative expense as an offset to revenue in the amount of $2,878 and $9,207, respectively.

In May 2002, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections”. SFAS No. 145 rescinds the automatic treatment of gains or losses from extinguishment of debt as extraordinary unless they meet the criteria for extraordinary items as outlined in APB Opinion No. 30, Reporting the Results of Operations, Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions . In addition, SFAS No. 145 also requires sale-leaseback accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions and make various technical corrections to existing pronouncements. The provisions of SFAS No. 145 are effective for fiscal years beginning after May 15, 2002. The impact of this pronouncement on the Company’s financial results is currently being evaluated.

ZIFF DAVIS HOLDINGS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)
(dollars in thousands, except per share data)

NOTE 1 - THE COMPANY AND BASIS OF PRESENTATION – (continued)

In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”. SFAS No. 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of commitment to an exit or disposal plan. The provisions of SFAS No. 146 are effective for fiscal years beginning after December 31, 2002. The impact of this pronouncement on the Company’s financial results is currently being evaluated.

Reclassifications

Certain amounts have been reclassified, where appropriate, to conform to the current financial statement presentation.

NOTE 2 - INTANGIBLE ASSETS, NET

Effective January 1, 2002, the Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets”. SFAS No. 142 requires goodwill to be tested for impairment under certain circumstances, and written down when impaired, rather than being amortized as previous standards required. Furthermore, SFAS No. 142 requires purchased intangible assets other than goodwill to be amortized over their useful lives unless these lives are determined to be indefinite. In accordance with SFAS No. 142, the Company stopped amortizing goodwill and indefinite lived intangible assets of approximately $154,000. There was no impairment of goodwill upon adoption of SFAS 142 and as such, the Company did not recognize a transition adjustment in 2002.

As part of its continued cost reduction and restructuring program, during the second quarter of 2002, the Company wrote-off $14,108 of trademarks/trade names, advertiser lists and goodwill related to the closures of Ziff Davis SMART BUSINESS and Yahoo! Internet Life (See Note 3).

As of December 31, 2001 and September 30, 2002 , the Company’s intangible assets and related accumulated amortization, primarily all of which are attributable to the Established Businesses segment, consisted of the following:

									As of September 30, 2002							As of December 31, 2001

									Gross		Accumulated Amortization			Net		Gross		Accumulated Amortization			Net

Amortized intangible assets:
					Advertising lists				$	219,200	$	(34,987	)	$	184,213	$	219,675	$	(24,256	)	$	195,419
				Trademark/trade names						14,344		(1,805	)		12,539		22,544		(1,983	)		20,561
			Subscriber lists							11,600		(8,992	)		2,608		11,600		(6,302	)		5,298

								Total amortized intangible assets		245,144		(45,784	)		199,360		253,819		(32,541	)		221,278

Unamortized intangible assets:
		Trademark/trade names								83,464		—			83,464		89,893		—			89,893
	Goodwill									63,340		—			63,340		64,100		—			64,100

							Total unamortized intangible assets			146,804		—			146,804		153,993		—			153,993

						Total intangible assets			$	391,948	$	(45,784	)	$	346,164	$	407,812	$	(32,541	)	$	375,271

During the three and nine months ended September 30, 2002, a reversal of unused purchase accounting reserves resulted in a $0 and $735 reduction in goodwill, respectively.

Based on the current amounts of intangible assets subject to amortization, the estimated amortization expense for each of the succeeding 5 years are as follows:

For the Year Ended December 31, 2002	$	18,919
For the Year Ended December 31, 2003		16,881
For the Year Ended December 31, 2004		15,142
For the Year Ended December 31, 2005		15,142
For the Year Ended December 31, 2006		15,142

ZIFF DAVIS HOLDINGS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)
(dollars in thousands, except per share data)

NOTE 2 - INTANGIBLE ASSETS, NET – (continued)

The following table presents the impact of SFAS No. 142 on net loss had the standard been in effect for the three and nine months ended September 30, 2001:

		Three Months Ended September 30,			Nine Months Ended September 30,
		2001			2001

Net loss – as reported		$	(70,468	)	$	(165,009	)
Adjustments:
	Amortization of goodwill		1,537			3,073
	Amortization of acquired trademarks and trade names		1,366			5,634

	Net adjustments		2,903			8,707

Net loss – adjusted		$	(67,565	)	$	(156,302	)

The Company is required to perform impairment tests of its unamortized intangible assets on an annual basis and between annual tests in certain circumstances. As of September 30, 2002, no impairment of these assets has been recognized. There can be no assurance that future impairment tests will not result in a charge to earnings.

NOTE 3 - COST REDUCTION PROGRAM AND RESTRUCTURING CHARGES

During the nine months ended December 31, 2001, the Company implemented a comprehensive cost reduction and restructuring program including the closure of Family PC, Expedia Travels, Smart Partner and the consolidation of Interactive Week into eWEEK in an effort to reduce future operating losses, consolidate operations and eliminate headcount to reduce costs.

Reflecting the continued difficult economic climate and weak magazine advertising marketplace throughout 2002, the Company (1) discontinued Ziff Davis SMART BUSINESS in May 2002, (2) sold the assets of The Net Economy to Advanstar Communications in June 2002, (3) suspended publication of Yahoo! Internet Life in July 2002 (4) sold the Company’s eTESTING LABS Inc. subsidiary in July 2002 and (5) continued to reduce its related infrastructure costs and consolidate its real estate facilities. The Company also restructured its debt obligations (See Note 4).

As a result of these operating decisions and the implementation of the Company’s financial restructuring plans, the Company recorded a net restructuring charge and write-down of intangible assets for the nine months ended September 30, 2002 totaling $35,944. This charge reflects $17,100 of cash expenses associated with employee severance and consolidation costs for certain office locations, legal and other professional fees associated with the Company’s financial restructuring plan, and $18,844 of non-cash expenses associated with the write-off of intangible assets and fixed assets related to closed publications and facilities consolidation.

At September 30, 2002, there was approximately $16,397 of accrued restructuring charges included in accrued expenses and other current liabilities. These accrued expenditures primarily relate to employee severance and other costs to exit activities. The Company anticipates making approximately $5,100 in cash payments related to these accruals in the fourth quarter of 2002.

The following table summarizes the activity with respect to the remaining accrued balances at September 30, 2002 related to the restructuring charges taken in 2001 and 2002:

			2002 Activity

	Balance December 31, 2001		Expenses/ Adjustments		Payments			Applied Against Related Asset			Balance September 30, 2002

Employee related costs	$	5,826	$	5,010	$	(8,539	)	$	—		$	2,297
Write-down of intangible assets		—		14,108		—			(14,108	)		—
Financial restructuring, facility and other costs		11,794		16,826		(9,784	)		(4,736	)		14,100

Total	$	17,620	$	35,944	$	(18,323	)	$	(18,844	)	$	16,397

ZIFF DAVIS HOLDINGS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)
(dollars in thousands, except per share data)

NOTE 4 - DEBT

General

In connection with the acquisition of ZDP, the Company entered into the Senior Credit Facility with a syndicate of lenders, comprised of (i) a $355,000 term loan facility and (ii) a $50,000 revolving credit facility. The Company also entered into the $175,000 Bridge Loan, which bore interest at 12.5% per annum. On July 18, 2000, the Company issued $250,000 of 12% senior subordinated notes due 2010 (the “12% Notes“). Interest is paid semi-annually and the 12% Notes mature on July 15, 2010. The 12% Notes are unsecured and subordinated to all existing and future senior indebtedness. All existing and future domestic subsidiaries will guarantee the 12% Notes. The proceeds of the 12% Notes were used to repay the Bridge Loan and $59,710 of the Senior Credit Facility. In addition, proceeds were used to pay approximately $8,500 of expenses associated with the offering and approximately $6,790 of accrued interest.

Financial Restructuring Plan

In order to address certain liquidity and debt compliance issues, the Company initiated a financial restructuring plan in 2001, which was completed on August 12, 2002. As part of the restructuring, the Company offered to exchange a combination of (i) cash, (ii) new senior subordinated compounding notes due 2009 (the “Compounding Notes”) and (iii) preferred stock and common stock warrants for the existing 12% Notes (collectively, the “Exchange Offer”). In addition, the Company amended and restated its Senior Credit Facility and received an equity contribution from Willis Stein.

Key terms of the financial restructuring were as follows:

	•	The Company received an equity contribution of $80,000 from Willis Stein in exchange for the issuance of a new series D redeemable preferred stock issued by Ziff Davis Holdings with an aggregate liquidation preference of approximately $80,000 as well as approximately 38.6 million warrants, each representing the right to purchase one share of the common stock of Ziff Davis Holdings at an exercise price of $0.001 per share. The contribution was comprised of $10,100 of cash received during the quarter ended June 30, 2002, approximately $62,531 of cash received in August 2002, and approximately $7,369 in liquidation preference of series D redeemable preferred stock issued by Ziff Davis Holdings in lieu of a cash payment which otherwise would have been owed to Willis Stein by the Company with respect to the 12% Notes held by Willis Stein.

	•	Accredited investors representing approximately 95.1% in aggregate principal amount of the Company’s 12% Notes who tendered their notes received an aggregate of approximately $21,158 in cash and $90,334 in aggregate principal amount of Compounding Notes. These holders also received an aggregate of approximately $28,526 in liquidation preference of a new series of redeemable preferred stock (“Series E preferred stock”) and warrants for the purchase of 5.2 million shares of common stock of Ziff Davis Holdings in exchange for their 12% Notes.

	•	The Compounding Notes will accrue interest in semi-annual periods, commencing on February 15 and August 15 of each year, with the first period ending on February 15, 2003. For the first four years, interest will accrue at rates ranging from 12% to 14% and may be paid, at the Company’s option and subject to certain restrictions under the Senior Credit Facility, either in cash or by compounding such interest on the Compounding Notes. For all payments of interest accruing after August 12, 2006, interest shall be payable in cash at a rate of 12% per annum.

	•	The Series E preferred stock will accrue dividends at a rate of 10% per annum and is subject to mandatory redemption on the earlier of March 31, 2010 or the date of a change in control. Dividends will only be paid in cash if declared for payment by Ziff Davis Holdings’ board of directors. In addition, so long as any series D redeemable preferred stock remains outstanding, and without the prior written consent of Willis Stein, together with the holder or holders of a majority of the outstanding shares of series D redeemable preferred stock, Ziff Davis Holdings will not be permitted directly or indirectly to pay or declare any cash dividend or make any distribution to the holders of series E preferred stock and the Company’s Senior Credit Facility and the indentures governing the 12% Notes and the Compounding Notes each restricts the payment of dividends to holders of capital stock of Ziff Davis Holdings.

ZIFF DAVIS HOLDINGS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)
(dollars in thousands, except per share data)

NOTE 4 - DEBT – (continued)

	•	Interest due to holders of the $12,279 principal amount of 12% Notes not tendered, previously due on July 15, 2002, was funded on August 14, 2002.

	•	The Company amended and restated its Senior Credit Facility providing for, among other terms: (1) waiver of all existing defaults, (2) deferral of principal payments for eight quarters, (3) removal of the obligation to pay the default interest rate on the outstanding principal and (4) mandatory use of a portion of excess cash flows, as defined, to repay amounts owed under the Senior Credit Facility.

The Exchange Offer was accounted for in accordance with the troubled debt restructuring provision of SFAS 15. Accordingly, no gain was recognized on the exchange, rather the value related to the Compounding Notes as reported on the Company’s balance sheet was increased by an amount deemed to be accrued interest.

On July 15, 2002, the Company sold its subsidiary, eTESTING LABS Inc. for approximately $1,554 in net proceeds. In accordance with the terms of the Senior Credit Facility, 50% of the net proceeds from the sale were used to repay amounts owed under the Senior Credit Facility.

As of September 30, 2002, total indebtedness was $298,306 and consisted of $185,916 of outstanding principal under the term loan portion of the Senior Credit Facility, $8,200 of outstanding principal under the revolving credit facility, $12,279 in 12% Notes and $91,911 in Compounding Notes.

NOTE 5 - CAPITAL STRUCTURE

Redeemable Preferred Stock

The following table details activity in the redeemable preferred stock account:

						Redeemable Preferred Stock

						Series A			Series B			Series C			Series D		Series E		Loans			Total

Balance at December 31, 2001						$	414,568		$	100,151		$	4,973		$	—	$	—	$	(3,705	)	$	515,987
					Issued		—			13,395			705			—		—		—			14,100
				Issued in connection with financial restructuring			—			2,850			150			66,901		28,526		—			98,427
			Converted				—			(12,649	)		(655	)		13,304		—		—			—
		Dividends payable					22,167			9,473			—			2,369		383		—			34,392
	Return of former CEO shares						(8,455	)		—			—			—		—		3,705			(4,750	)

Balance at September 30, 2002						$	428,280		$	113,220		$	5,173		$	82,574	$	28,909	$	—		$	658,156

Common Stock

In connection with the consummation of the financial restructuring in August 2002, Ziff Davis Holdings completed a reverse stock split on its common stock. Pursuant to this reverse stock split, Ziff Davis Holdings exchanged one new share of its common stock for every 30 shares of its outstanding common stock. Unless otherwise noted, all references to common stock have been restated to reflect the stock split.

NOTE 6 - CONTINGENCIES

The Company is subject to various claims and legal proceedings that arise in the ordinary course of business. However, the Company does not expect any of these claims or legal proceedings, either individually or in the aggregate, to have a material adverse effect on its financial condition, results of operations or liquidity.

ZIFF DAVIS HOLDINGS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)
(dollars in thousands, except per share data)

NOTE 7 - SUPPLEMENTAL FINANCIAL INFORMATION

Guarantor Financial Information

Ziff Davis Holdings Inc. and Ziff Davis Media Inc. are holding companies and their only assets are the ownership of the capital stock of their subsidiaries and cash balances. All of the Company’s consolidated subsidiaries have guaranteed Ziff Davis Media’s debt on a full unconditional, joint and several basis. There are no restrictions which limit the ability of the Company’s subsidiaries to transfer funds to Ziff Davis Media in the form of cash dividends, loans or advances.

No separate financial information for Ziff Davis Media has been provided herein because Ziff Davis Holdings’ financial information is materially the same as Ziff Davis Media’s financial information as a result of the fact that (i) Ziff Davis Holdings does not itself conduct any business but rather all of its operations are conducted by Ziff Davis Media and its direct and indirect subsidiaries, (ii) Ziff Davis Holdings has no material assets other than its equity interest in Ziff Davis Media, and (iii) Ziff Davis Holdings has unconditionally guaranteed the Compounding Notes and 12% Notes.

The table below presents combining financial data detailing Ziff Davis Holdings Inc., Ziff Davis Media Inc., the guarantor and non-guarantor subsidiaries, and related elimination entries.

														At September 30, 2002

														Ziff Davis Holdings Inc.			Ziff Davis Media Inc.			Guarantors			Eliminations			Total

ASSETS
Current assets:
										Cash and cash equivalents				$	1		$	31,718		$	192		$	—		$	31,911
										Accounts receivable, net					—			—			33,099			—			33,099
									Inventories						—			—			429			—			429
									Prepaid expenses and other current assets						—			—			8,031			—			8,031
								Due (to) from affiliates							—			(73,429	)		73,429			—			—

											Total current assets				1			(41,711	)		115,180			—			73,470
Property and equipment, net															—			—			28,199			—			28,199
Investments in subsidiaries															567,487			514,655			—			(1,082,142	)		—
Intangible assets, net															—			—			346,164			—			346,164
Notes receivable – affiliate															—			506,788			—			(506,788	)		—
Other assets, net															—			15,533			—			—			15,533

													Total assets	$	567,488		$	995,265		$	489,543		$	(1,588,930	)	$	463,366

LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY
Current liabilities:
								Accounts payable						$	—		$	—		$	7,991		$	—		$	7,991
							Accrued expenses and other current liabilities								—			2,276			33,924			—			36,200
						Unexpired subscriptions, net									—			—			37,370			—			37,370

												Total current liabilities			—			2,276			79,285			—			81,561
Long-term debt															—			298,306			—			—			298,306
Other long-term liabilities															—			103,569			—			—			103,569
Notes payable – affiliate															—			—			506,788			(506,788	)		—
Other non-current liabilities															—			—			10,599			—			10,599

												Total liabilities			—			404,151			596,672			(506,788	)		494,035

Redeemable preferred stock															658,156			—			—			—			658,156

Stockholders’ (deficit) equity:
						Preferred stock									—			—			1,234			(1,234	)		—
					Common stock										17,901			—			28			(28	)		17,901
				Stock subscription loan											(572	)		—			—			—			(572	)
			Additional paid-in capital												8,468			566,631			514,249			(1,080,880	)		8,468
		(Accumulated deficit) retained earnings													(116,465	)		26,083			(622,640	)		—			(713,022	)
	Accumulated other comprehensive loss														—			(1,600	)		—			—			(1,600	)

											Total stockholders’ (deficit) equity				(90,668	)		591,114			(107,129	)		(1,082,142	)		(688,825	)

											Total liabilities and stockholders’ (deficit) equity			$	567,488		$	995,265		$	489,543		$	(1,588,930	)	$	463,366

ZIFF DAVIS HOLDINGS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)
(dollars in thousands, except per share data)

NOTE 7 - SUPPLEMENTAL FINANCIAL INFORMATION – (continued)

													At December 31, 2001

													Ziff Davis Holdings Inc.			Ziff Davis Media Inc.			Guarantors			Eliminations			Total

ASSETS
Current assets:
								Cash and cash equivalents					$	401		$	16,453		$	3,102		$	—		$	19,956
							Accounts receivable, net							—			—			45,226			—			45,226
						Inventories								—			—			360			—			360
					Prepaid expenses and other current assets									—			—			7,949			—			7,949
				Due (to) from affiliates										—			(95,207	)		95,207			—			—

												Total current assets		401			(78,754	)		151,844			—			73,491
Property and equipment, net														—			—			48,280			—			48,280
Investments in subsidiaries														454,556			436,042			—			(890,598	)		—
Intangible assets, net														—			—			375,271			—			375,271
Notes receivable – affiliate														—			535,703			—			(535,703	)		—
Other assets, net														—			18,253			—			—			18,253

											Total assets		$	454,957		$	911,244		$	575,395		$	(1,426,301	)	$	515,295

LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY
Current liabilities:
			Accounts payable										$	—		$	—		$	21,347		$	—		$	21,347
		Accrued expenses and other current liabilities												—			15,953			43,030			—			58,983
		Current portion of long-term debt												—			7,127			—			—			7,127
	Unexpired subscriptions, net													—			—			36,212			—			36,212

										Total current liabilities				—			23,080			100,589			—			123,669
Long-term debt														—			422,074			—			—			422,074
Notes payable – affiliate														—			—			535,703			(535,703	)		—
Other non-current liabilities														—			—			8,879			—			8,879

									Total liabilities					—			445,154			645,171			(535,703	)		554,622

Redeemable preferred stock														515,987			—			—			—			515,987

Stockholders’ (deficit) equity:
	Preferred stock													—			—			1,234			(1,234	)		—
	Common stock													18,743			—			28			(28	)		18,743
	Stock subscription loans													(1,164	)		—			—			—			(1,164	)
	Additional paid-in capital													3,468			453,700			435,636			(889,336	)		3,468
	(Accumulated deficit) retained earnings													(82,077	)		14,190			(506,674	)		—			(574,561	)
	Accumulated other comprehensive loss													—			(1,800	)		—			—			(1,800	)

											Total stockholders’ (deficit) equity			(61,030	)		466,090			(69,776	)		(890,598	)		(555,314	)

											Total liabilities and stockholders’ (deficit) equity		$	454,957		$	911,244		$	575,395		$	(1,426,301	)	$	515,295

ZIFF DAVIS HOLDINGS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)
(dollars in thousands, except per share data)

NOTE 7 - SUPPLEMENTAL FINANCIAL INFORMATION – (continued)

								Three Months Ended September 30, 2002

								Ziff Davis Holdings Inc.			Ziff Davis Media Inc.			Guarantors			Total

Revenue, net								$	—		$	—		$	41,795		$	41,795
Operating expenses:
				Cost of production					—			—			15,829			15,829
			Selling, general and administrative expenses						—			—			24,793			24,793
		Depreciation and amortization of property and equipment							—			—			4,377			4,377
		Amortization of intangible assets							—			—			4,655			4,655
	Restructuring charges, net								—			—			13,431			13,431

							Total operating expenses		—			—			63,085			63,085

Loss from operations									—			—			(21,290	)		(21,290	)
Gain on sale of subsidiary									—			—			684			684
Intercompany interest (income) expense									—			(15,401	)		15,401			—
Interest (income) expense, net									(1	)		8,505			(93	)		8,411

						Net income (loss) before income taxes			1			6,896			(35,914	)		(29,017	)
Income tax provision									—			—			50			50

					Net income (loss)			$	1		$	6,896		$	(35,964	)	$	(29,067	)

					Three Months Ended September 30, 2001

					Ziff Davis Holdings Inc.			Ziff Davis Media Inc.			Guarantor			Non-Guarantor		Total

Revenue, net					$	—		$	—		$	62,670		$	—	$	62,670
Operating expenses:
	Cost of production					—			—			24,600			—		24,600
	Selling, general and administrative expenses					—			—			50,082			—		50,082
	Depreciation and amortization of property and equipment					—			—			7,316			—		7,316
	Amortization of intangible assets					—			—			14,428			—		14,428
	Restructuring charges, net					—			—			12,950			—		12,950
	Write-down of intangible assets					—			—			11,500			—		11,500

				Total operating expenses		—			—			120,876			—		120,876

Loss from operations						—			—			(58,206	)		—		(58,206	)
Equity in income from joint venture						—			—			—			16		16
Intercompany interest (income) expense						—			(15,712	)		15,712			—		—
Interest (income) expense, net						(6	)		12,021			(31	)		—		11,984

			Net income (loss) before income taxes			6			3,691			(73,887	)		16		(70,174	)
Income tax provision (benefit)						—			473			(179	)		—		294

		Net income (loss)			$	6		$	3,218		$	(73,708	)	$	16	$	(70,468	)

ZIFF DAVIS HOLDINGS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)
(dollars in thousands, except per share data)

NOTE 7 - SUPPLEMENTAL FINANCIAL INFORMATION – (continued)

				Nine Months Ended September 30, 2002

				Ziff Davis Holdings Inc.			Ziff Davis Media Inc.			Guarantors			Total

Revenue, net				$	—		$	—		$	152,738		$	152,738
Operating expenses:
	Cost of production				—			—			56,893			56,893
	Selling, general and administrative expenses				—			—			100,892			100,892
	Depreciation and amortization of property and equipment				—			—			14,669			14,669
	Amortization of intangible assets				—			—			14,264			14,264
	Restructuring charges, net				—			—			21,836			21,836
	Write-down of intangible assets				—			—			14,108			14,108

			Total operating expenses		—			—			222,662			222,662

Loss from operations					—			—			(69,924	)		(69,924	)
Gain on sale of subsidiary					—			—			684			684
Intercompany interest (income) expense					—			(46,466	)		46,466			—
Interest (income) expense, net					(4	)		34,573			(218	)		34,351

		Net income (loss) before income taxes			4			11,893			(115,488	)		(103,591	)
Income tax provision (benefit)					—			—			478			478

		Net income (loss)		$	4		$	11,893		$	(115,966	)	$	(104,069	)

				Nine Months Ended September 30, 2001

				Ziff Davis Holdings Inc.			Ziff Davis Media Inc.			Guarantor			Non-Guarantor		Total

Revenue, net				$	—		$	—		$	228,821		$	—	$	228,821
Operating expenses:
	Cost of production				—			—			88,100			—		88,100
	Selling, general and administrative expenses				—			—			180,693			—		180,693
	Depreciation and amortization of property and equipment				—			—			20,841			—		20,841
	Amortization of intangible assets				—			—			41,466			—		41,466
	Restructuring charges, net				—			—			14,000			—		14,000
	Write-down of intangible assets				—			—			11,500			—		11,500

			Total operating expenses		—			—			356,600			—		356,600

Loss from operations					—			—			(127,779	)		—		(127,779	)
Equity in income from joint ventures					—			—			—			164		164
Intercompany interest (income) expense					—			(51,249	)		51,249			—		—
Interest (income) expense, net					(269	)		39,200			(2,229	)		—		36,702

		Net income (loss) before income taxes			269			12,049			(176,799	)		164		(164,317	)
Income tax provision (benefit)					130			1,524			(962	)		—		692

		Net income (loss)		$	139		$	10,525		$	(175,837	)	$	164	$	(165,009	)

ZIFF DAVIS HOLDINGS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)
(dollars in thousands, except per share data)

NOTE 7 - SUPPLEMENTAL FINANCIAL INFORMATION – (continued)

									Nine Months Ended September 30, 2002

									Ziff Davis Holdings Inc.			Ziff Davis Media Inc.			Guarantor			Eliminations			Total

Cash flows from operating activities:
Net income (loss)									$	4		$	11,893		$	(115,966	)	$	—		$	(104,069	)
Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities:
								Depreciation and amortization		—			—			28,933			—			28,933
							Non-cash rent expense			—			—			1,763			—			1,763
						Amortization of accrued interest on compounding notes, net				—			160			—			—			160
					Amortization of debt issuance costs					—			1,810			—			—			1,810
				Non-cash restructuring charges						—			—			4,736			—			4,736
				Write-down of intangible assets						—			—			14,108			—			14,108
Changes in operating assets and liabilities:
			Accounts receivable							—			—			11,182			—			11,182
		Inventories								—			—			(69	)		—			(69	)
		Accounts payable and accrued expenses								—			(13,677	)		(5,704	)		—			(19,381	)
		Unexpired subscriptions and deferred revenue, net								—			—			1,806			—			1,806
		Due to (from) affiliate								—			(5,772	)		5,772			—			—
		Prepaid expenses and other, net								—			200			749			—			949

Net cash provided (used) by operating activities										4			(5,386	)		(52,690	)		—			(58,072	)

Cash flows from investing activities:
		Capital expenditures								—			—			(1,876	)		—			(1,876	)
	Net proceeds from the sale of subsidiary									—			—			1,554			—			1,554
	Investments in subsidiaries									(78,035	)		(78,613	)		—			156,648			—

Net cash (used) provided by investing activities										(78,035	)		(78,613	)		(322	)		156,648			(322	)

Cash flows from financing activities:
	Proceeds from issuance of preferred stock									77,631			—			—			—			77,631
	Proceeds from capital contributions									—			77,631			79,017			(156,648	)		—
	Proceeds from borrowings under senior credit facilities									—			21,000			—			—			21,000
	Repayment of borrowings under senior credit facilities									—			(6,085	)		—			—			(6,085	)
	Cash paid to bondholders in debt restructuring									—			(21,158	)		—			—			(21,158	)
	Proceeds from collection of intercompany notes receivable									—			28,915			—			(28,915	)		—
	Repayment of intercompany notes payable									—			—			(28,915	)		28,915			—
	Debt issuance costs									—			(1,039	)		—			—			(1,039	)

Net cash provided (used) by financing activities										77,631			99,264			50,102			(156,648	)		70,349

Net (decrease) increase in cash and cash equivalents										(400	)		15,265			(2,910	)		—			11,955
Cash and cash equivalents at beginning of period										401			16,453			3,102			—			19,956

Cash and cash equivalents at end of period									$	1		$	31,718		$	192		$	—		$	31,911

ZIFF DAVIS HOLDINGS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)
(dollars in thousands, except per share data)

NOTE 7 - SUPPLEMENTAL FINANCIAL INFORMATION – (continued)

						Nine Months Ended September 30, 2001

						Ziff Davis Holdings Inc.			Ziff Davis Media Inc.			Guarantor			Non-Guarantors			Eliminations			Total

Cash flows from operating activities:
Net income (loss)						$	139		$	10,525		$	(175,837	)	$	164		$	—		$	(165,009	)
Adjustments to reconcile net income (loss) to net cash used by operating activities:
					Depreciation and amortization		—			—			62,307			—			—			62,307
				Equity in income from joint ventures			—			—			—			(164	)		—			(164	)
				Non-cash rent expense			—			—			1,614			—			—			1,614
			Amortization of debt issuance costs				—			1,660			—			—			—			1,660
		Write-down of intangible assets					—			—			11,500			—			—			11,500
Changes in operating assets and liabilities:
		Accounts receivable					—			—			26,431			—			—			26,431
		Inventories					—			—			1,099			—			—			1,099
		Accounts payable and accrued expenses					(170	)		(11,570	)		5,421			—			—			(6,319	)
		Unexpired subscriptions and deferred revenue, net					—			—			(5,189	)		—			—			(5,189	)
		Due to (from) affiliate					300			116,316			(116,491	)		—			—			125
		Prepaid expenses and other, net					—			—			6,856			—			—			6,856

Net cash provided (used) by operating activities							269			116,931			(182,289	)		—			—			(65,089	)

Cash flows from investing activities:
		Capital expenditures					—			—			(33,620	)		—			—			(33,620	)
		Distributions from joint venture					—			—			625			—			—			625
		Net proceeds from sale of joint venture					—			—			1,700			—			—			1,700
		Net proceeds from sale of international operations					—			—			7,783			—			—			7,783
		Investments in subsidiaries					(106,000	)		(137,907	)		—			—			243,907			—
		Acquisitions and investments, net of cash acquired					—			—			(251	)		—			—			(251	)
		Acquisition of ZDP, net of cash acquired					—			—			(3,625	)		—			—			(3,625	)

Net cash (used) provided by investing activities							(106,000	)		(137,907	)		(27,388	)		—			243,907			(27,388	)

Cash flows from financing activities:
		Proceeds from issuance of common stock					4			—			1,234			—			(1,234	)		4
		Proceeds from issuance of preferred stock					88,953			—			28			—			(28	)		88,953
		Proceeds from issuance of equity securities					—			106,000			136,645			—			(242,645	)		—
	Proceeds from long-term borrowings						—			10,000			—			—			—			10,000
	Repayment of borrowings under senior credit facilities						—			(89,539	)		—			—			—			(89,539	)
	Proceeds from collection of intercompany notes receivable						—			9,412			—			—			(9,412	)		—
	Repayment of intercompany notes receivable						—			—			(9,412	)		—			9,412			—
	Debt issuance costs						—			(1,075	)		—			—			—			(1,075	)

Net cash provided (used) by financing activities							88,957			34,798			128,495			—			(243,907	)		8,343

Net (decrease) increase in cash and cash equivalents							(16,774	)		13,822			(81,182	)		—			—			(84,134	)
Cash and cash equivalents at beginning of period							17,371			371			84,514			—			—			102,256

Cash and cash equivalents at end of period						$	597		$	14,193		$	3,332		$	—		$	—		$	18,122

ZIFF DAVIS HOLDINGS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)
(dollars in thousands, except per share data)

NOTE 7 - SUPPLEMENTAL FINANCIAL INFORMATION – (continued)

Restricted and Unrestricted Subsidiaries Financial Data

The Company is the borrower and its consolidated subsidiaries are all guarantors under the Company’s debt agreements on a full, unconditional, joint and several basis. The Company is required to exclude the results of operations of the Unrestricted Subsidiaries and separately report the combining financial statements of the Restricted and Unrestricted Subsidiaries, as defined in these agreements. Reflected below are combining balance sheets and statements of operations for the Company detailing the Restricted and Unrestricted Subsidiaries.

								At September 30, 2002

								Ziff Davis Holdings Inc.⁽¹⁾			Ziff Davis Media Inc. and Restricted Subsidiaries			Unrestricted Subsidiaries			Eliminations			Total

ASSETS
Current assets:
	Cash and cash equivalents							$	1		$	31,909		$	1		$	—		$	31,911
	Accounts receivable, net								—			30,011			3,088			—			33,099
	Inventories								—			429			—			—			429
	Prepaid expenses and other current assets								—			7,372			659			—			8,031
	Due from (to) affiliates								—			7,950			(7,950	)		—			—

							Total current assets		1			77,671			(4,202	)		—			73,470
Property and equipment, net									—			24,535			3,664			—			28,199
Investments in subsidiaries									567,487			(3,779	)		—			(563,708	)		—
Intangible assets, net									—			346,164			—			—			346,164
Other assets, net									—			15,533			—			—			15,533

						Total assets		$	567,488		$	460,124		$	(538	)	$	(563,708	)	$	463,366

LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY
Current liabilities:
		Accounts payable						$	—		$	7,462		$	529		$	—		$	7,991
		Accrued expenses and other current liabilities							—			33,510			2,690			—			36,200
		Unexpired subscriptions, net							—			37,348			22						37,370

			Total current liabilities						—			78,320			3,241			—			81,561
Long-term debt									—			298,306			—			—			298,306
Other long-term liabilities									—			103,569			—			—			103,569
Other non-current liabilities									—			10,599			—			—			10,599

				Total liabilities					—			490,794			3,241			—			494,035

Redeemable preferred stock									658,156			—			—			—			658,156

Stockholders’ (deficit) equity:
		Preferred stock							—			—			1,234			(1,234	)		—
		Common stock							17,901			—			28			(28	)		17,901
		Stock subscription loans							(572	)		—			—			—			(572	)
		Additional paid-in capital							11,824			(3,356	)		148,609			(148,609	)		8,468
		Accumulated deficit							(119,821	)		(25,714	)		(153,650	)		(413,837	)		(713,022	)
		Accumulated other comprehensive loss							—			(1,600	)		—			—			(1,600	)

				Total stockholders’ (deficit) equity					(90,668	)		(30,670	)		(3,779	)		(563,708	)		(688,825	)

					Total liabilities and stockholders’ (deficit) equity			$	567,488		$	460,124		$	(538	)	$	(563,708	)	$	463,366

ZIFF DAVIS HOLDINGS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS–(continued)
(dollars in thousands, except per share data)

NOTE 7 - SUPPLEMENTAL FINANCIAL INFORMATION – (continued)

												At December 31, 2001

												Ziff Davis Holdings Inc.⁽¹⁾			Ziff Davis Media Inc. and Restricted Subsidiaries			Unrestricted Subsidiaries			Eliminations			Total

ASSETS
Current assets:
							Cash and cash equivalents					$	401		$	19,553		$	2		$	—		$	19,956
						Accounts receivable, net							—			40,026			5,200			—			45,226
					Inventories								—			360			—			—			360
				Prepaid expenses and other current assets									—			5,643			2,306			—			7,949
			Due from (to) affiliates										—			7,950			(7,950	)		—			—

											Total current assets		401			73,532			(442	)		—			73,491
Property and equipment, net													—			40,207			8,073			—			48,280
Investments in subsidiaries													451,200			128,189			—			(579,389	)		—
Intangible assets, net													—			375,199			72			—			375,271
Other assets, net													—			18,253			—			—			18,253

										Total assets		$	451,601		$	635,380		$	7,703		$	(579,389	)	$	515,295

LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY
Current liabilities:
		Accounts payable										$	—		$	20,504		$	843		$	—		$	21,347
		Accrued expenses and other current liabilities											—			53,426			5,557			—			58,983
	Current portion of long-term debt												—			7127			—			—			7127
	Unexpired subscriptions, net												—			35,126			1,086			—			36,212

									Total current liabilities				—			116,183			7,486			—			123,669
Long-term debt													—			422,074			—			—			422,074
Other non-current liabilities													—			8,879			—			—			8,879

								Total liabilities					—			547,136			7,486			—			554,622

Redeemable preferred stock													515,987			—			—			—			515,987

Stockholders’ (deficit) equity:
	Preferred stock												—			—			1,234			(1,234	)		—
	Common stock												18,743			—			28			(28	)		18,743
	Stock subscription loans												(1,164	)		—			—			—			(1,164	)
	Additional paid-in capital												3,468			451,200			126,927			(578,127	)		3,468
	Accumulated deficit												(85,433	)		(361,156	)		(127,972	)		—			(574,561	)
	Accumulated other comprehensive loss												—			(1,800	)		—			—			(1,800	)

Total stockholders’ (deficit) equity													(64,386	)		88,244			217			(579,389	)		(555,314	)

Total liabilities and stockholders’ (deficit) equity												$	451,601		$	635,380		$	7,703		$	(579,389	)	$	515,295

ZIFF DAVIS HOLDINGS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS–(continued)
(dollars in thousands, except per share data)

NOTE 7 - SUPPLEMENTAL FINANCIAL INFORMATION – (continued)

			Three Months Ended September 30, 2002

			Ziff Davis Holdings Inc.⁽¹⁾			Ziff Davis Media Inc. and Restricted Subsidiaries			Unrestricted Subsidiaries			Total

Revenue, net			$	—		$	37,175		$	4,620		$	41,795
Operating expenses:
	Cost of production			—			14,605			1,224			15,829
	Selling, general and administrative expenses			—			16,503			8,290			24,793
	Depreciation and amortization of property and equipment			—			3,513			864			4,377
	Amortization of intangible assets			—			4,655			—			4,655
	Restructuring charges, net			—			13,431			—			13,431

		Total operating expenses		—			52,707			10,378			63,085

Loss from operations				—			(15,532	)		(5,758	)		(21,290	)
Gain on sale of subsidiary				—			—			684			684
Interest (income) expense, net				(1	)		8,412			—			8,411

		Income (loss) before income taxes		1			(23,944	)		(5,074	)		(29,017	)
Income tax provision (benefit)				—			86			(36	)		50

		Net income (loss)	$	1		$	(24,030	)	$	(5,038	)	$	(29,067	)

			Three Months Ended September 30, 2001

			Ziff Davis Holdings Inc.⁽¹⁾			Ziff Davis Media Inc. and Restricted Subsidiaries			Unrestricted Subsidiaries			Total

Revenue, net			$	—		$	57,194		$	5,476		$	62,670
Operating expenses:
	Cost of production			—			23,029			1,571			24,600
	Selling, general and administrative expenses			—			30,253			19,829			50,082
	Depreciation and amortization of property and equipment			—			4,473			2,843			7,316
	Amortization of intangible assets			—			14,428			—			14,428
	Restructuring charges, net			—			9,669			3,281			12,950
	Write-down of intangible assets			—			10,545			955			11,500

		Total operating expenses		—			92,397			28,479			120,876

Loss from operations				—			(35,203	)		(23,003	)		(58,206	)
Equity in income from joint venture				—			16			—			16
Interest (income) expense, net				(6	)		11,990			—			11,984

		Income (loss) before income taxes		6			(47,177	)		(23,003	)		(70,174	)
Income tax provision				—			92			202			294

		Net income (loss)	$	6		$	(47,269	)	$	(23,205	)	$	(70,468	)

ZIFF DAVIS HOLDINGS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)
(dollars in thousands, except per share data)

NOTE 7 - SUPPLEMENTAL FINANCIAL INFORMATION – (continued)

			Nine Months Ended September 30, 2002

			Ziff Davis Holdings Inc.⁽¹⁾			Ziff Davis Media Inc. and Restricted Subsidiaries			Unrestricted Subsidiaries			Total

Revenue, net			$	—		$	133,134		$	19,604		$	152,738
Operating expenses:
	Cost of production			—			52,650			4,243			56,893
	Selling, general and administrative expenses			—			63,059			37,833			100,892
	Depreciation and amortization of property and equipment			—			11,825			2,844			14,669
	Amortization of intangible assets			—			14,264			—			14,264
	Restructuring charges, net			—			20,871			965			21,836
	Write-down of intangible assets			—			14,030			78			14,108

		Total operating expenses		—			176,699			45,963			222,662

Loss from operations				—			(43,565	)		(26,359	)		(69,924	)
Gain on sale of subsidiary				—			—			684			684
Interest (income) expense, net				(4	)		34,355			—			34,351

		Income (loss) before income taxes		4			(77,920	)		(25,675	)		(103,591	)
Income tax provision				—			475			3			478

		Net income (loss)	$	4		$	(78,395	)	$	(25,678	)	$	(104,069	)

			Nine Months Ended September 30, 2001

			Ziff Davis Holdings Inc.⁽¹⁾			Ziff Davis Media Inc. and Restricted Subsidiaries			Unrestricted Subsidiaries			Total

Revenue, net			$	—		$	213,652		$	15,169		$	228,821
Operating expenses:
	Cost of production			—			80,511			7,589			88,100
	Selling, general and administrative expenses			—			115,025			65,668			180,693
	Depreciation and amortization of property and equipment			—			13,246			7,595			20,841
	Amortization of intangible assets			—			41,466			—			41,466
	Restructuring charges, net			—			10,719			3,281			14,000
	Write-down of intangible assets			—			10,545			955			11,500

		Total operating expenses		—			271,512			85,088			356,600

Loss from operations				—			(57,860	)		(69,919	)		(127,779	)
Equity in income from joint ventures				—			164			—			164
Interest (income) expense, net				(268	)		36,973			(3	)		36,702

		Income (loss) before income taxes		268			(94,669	)		(69,916	)		(164,317	)
Income tax provision (benefit)				854			(4,583	)		4,421			692

		Net loss	$	(586	)	$	(90,086	)	$	(74,337	)	$	(165,009	)

⁽¹⁾	Includes amounts related to Ziff Davis Intermediate Holdings Inc., which is a wholly-owned subsidiary of Ziff Davis Holdings and the direct 100% stockholder of Ziff Davis Media.

NOTE 8 - SEGMENT INFORMATION

Segment information is presented in accordance with SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information”. This standard is based on a management approach, which designates the internal organization that is used by management for making operating decisions and assessing performance as the sources of the Company’s reportable segments. Asset information is not used for decision-making.

ZIFF DAVIS HOLDINGS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)
(dollars in thousands, except per share data)

NOTE 8 - SEGMENT INFORMATION – (continued)

The Company has determined that its reportable segments are those that are based on the Company’s method of internal reporting, which segregates its business by media platforms and product lines. The Company’s reportable segments are:

	•	Established Businesses-established publications targeted to customers in the technology and electronic video games markets. This segment is comprised of the Restricted Subsidiaries and includes Ziff Davis Holdings Inc., the ultimate parent company.

	•	Developing Businesses-recently launched publications, internet operations and business services for emerging product categories targeted to the consumer and business markets. This segment is comprised of the Unrestricted Subsidiaries.

The Company evaluates the performance of its segments and allocates resources to them based on income before interest expense, provision for income taxes, depreciation and amortization expense and other non-cash charges and restructuring charges (“EBITDA”). Any inter-segment revenues included in segment data are not material.

The following table presents information about the reported segments for the periods ending:

			Three Months Ended September 30,				Nine Months Ended September 30,

			2002		2001		2002		2001

Revenue, net:
	Established Businesses		$	37,175	$	57,194	$	133,134	$	213,652
	Developing Businesses			4,620		5,476		19,604		15,169

		Total	$	41,795	$	62,670	$	152,738	$	228,821

			Three Months Ended September 30,						Nine Months Ended September 30,

			2002			2001			2002			2001

EBITDA:
	Established Businesses		$	6,067		$	3,928		$	17,425		$	18,280
	Developing Businesses			(4,894	)		(15,924	)		(22,472	)		(58,088	)

		Total	$	1,173		$	(11,996	)	$	(5,047	)	$	(39,808	)

		Three Months Ended September 30,						Nine Months Ended September 30,

			2002			2001			2002			2001

*Reconciliation of Segment EBITDA to consolidated loss before income taxes*
Total segment EBITDA		$	1,173		$	(11,996	)	$	(5,047	)	$	(39,808	)
	Depreciation and amortization		9,032			21,744			28,933			62,307
	Restructuring charges, net		13,431			12,950			21,836			14,000
	Write-down of intangible assets		—			11,500			14,108			11,500
	Gain on sale of subsidiary		(684	)		—			(684	)		—
	Interest expense, net		8,411			11,984			34,351			36,702

Loss before income taxes		$	(29,017	)	$	(70,174	)	$	(103,591	)	$	(164,317	)

Equity in income of investees included in the Established Businesses EBITDA for the three and nine months ended September 30, 2001 was $16 and $164, respectively. All of the Company’s revenue is attributable to the United States.

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with our audited consolidated financial statements for the nine months ended December 31, 2001 and notes thereto included in our Registration Statement on Form S-4 dated as of October 9, 2002 as well as the unaudited condensed financial statements included herein. Historical results and percentage relationships set forth in these unaudited consolidated financial statements, including trends that might appear, should not be taken as indicative of future operations.

Overview

Ziff Davis Holdings Inc. is a holding company which indirectly owns 100% of Ziff Davis Media. Ziff Davis Holdings does not conduct any business, but rather all operations are conducted by Ziff Davis Media and its direct and indirect subsidiaries and Ziff Davis Holdings has no material assets other than its investment in the capital stock of Ziff Davis Media. We are a multimedia content company whose principal business is publishing. We publish and license magazines, provide editorial content about technology and electronic video games, both in print and online, and produce eSeminars and webcasts. On April 5, 2000, we acquired ZDP from ZDI for $780.0 million plus expenses. This acquisition was accounted for under the purchase method of accounting. In January 2002, we changed our year-end from March 31 to December 31, effective December 31, 2001. Ziff Davis Holdings is majority owned by Willis Stein.

We had no operations prior to April 5, 2000. Ziff Davis Holdings’ financial statements as of December 31, 2001 and for the nine months then ended, and as of March 31, 2001 and for the fiscal year then ended, are prepared on a consolidated basis and include the accounts of Ziff Davis Holdings and its subsidiaries. Ziff Davis Holdings’ financial statements as of September 30, 2002 and 2001 and for the three and nine month periods then ended are unaudited.

Our operations are classified into two reportable operating segments, Established Businesses and Developing Businesses. The Established Businesses segment is primarily comprised of the publishing assets that were acquired from ZDI and are collectively referred to under our debt agreements as the “Restricted Subsidiaries”. Since April 5, 2000, we have formed two subsidiaries which are focused on developing and launching new products and businesses. These subsidiaries, LaunchCo and InternetCo, represent our Developing Businesses segment and are collectively referred to and defined under our debt agreements as “Unrestricted Subsidiaries”. We are developing new publications and businesses through LaunchCo and developing Internet-related ventures leveraged off our editorial expertise and relationships with our audience and advertisers through InternetCo. For further segment information, see Note 8 to our unaudited financial statements included herein.

In connection with the ZDP acquisition, we determined that certain of the wholly-owned international operations (excluding international licensing operations and international joint ventures) did not meet our long-term strategic objectives. As a result, these operations were sold on August 4, 2000.

Technology Sector and Economic Trends

Our revenue and profitability are influenced by a number of external factors, including the volume of new technology product introductions, the amount and allocation of marketing expenditures by our clients, the extent to which sellers elect to advertise using print and online media, changes in paper prices and postage rates, and competition among computer technology marketers, including print publishers, and providers of other technology information services. Accordingly, we may experience fluctuations in revenue and profitability from period to period. Many of our large customers concentrate their advertising expenditures around major new product or service launches. Marketing expenditures by technology companies can also be affected by factors generally affecting the technology industry, including pricing pressures and temporary surpluses of inventory.

Our revenue and profitability are also influenced by internal factors such as product mix and the timing and frequency of our new product launches. New publications generally require several years to achieve profitability and upon achieving initial profitability, often have lower operating margins than more established publications. Accordingly, our total Company revenue and profitability from year to year may be affected by the number and timing of new product launches. If we conclude that a new publication or service will not achieve certain milestones with regard to revenue, profitability and cash flow within a reasonable period of time, management may discontinue such publication or service or merge it into another existing publication or service.

Current economic trends in the United States have had a significant negative impact on our business. These trends include consolidation among our advertisers and a general decline in advertising spending. In response to this decline, we began a cost reduction and restructuring program in 2001, which has continued into 2002, and as a result of which we discontinued publications, consolidated operations and eliminated headcount. In August 2002, we completed a comprehensive financial restructuring plan (see Liquidity and Capital Resources).

Results of Operations – Three Months Ended September 30, 2002 Compared to Three Months Ended September 30, 2001

The table below sets forth our results of operations for the three months ended September 30, 2002 and 2001. For comparative purposes, closed titles and businesses have been segregated in the discussion below. In 2002, Ziff Davis SMART BUSINESS, Yahoo! Internet Life and related websites were closed, The Net Economy’s assets were sold and eTESTING LABS Inc. was sold. In 2001, we closed Family PC, Expedia Travels, Interactive Week, Smart Partner and certain other developmental businesses.

			Three Months Ended September 30, 2002

			Established Businesses									Developing Businesses
																					Total Company
(in millions)			Continuing			Closed			Total			Continuing			Closed			Total			Total Company

Revenue, net			$	36.1		$	1.1		$	37.2		$	4.6		$	—		$	4.6		$	41.8
Operating expenses:
	Cost of production			14.0			0.6			14.6			1.2			—			1.2			15.8
	Selling, general and administrative expenses			16.0			0.5			16.5			8.4			(0.1	)		8.3			24.8
	Depreciation and amortization of property and equipment			3.5			—			3.5			0.9			—			0.9			4.4
	Amortization of intangible assets			4.7			—			4.7			—			—			—			4.7
	Restructuring charges, net			13.4			—			13.4			—			—			—			13.4

	Total operating expenses			51.6			1.1			52.7			10.5			(0.1	)		10.4			63.1

(Loss) income from operations				(15.5	)		—			(15.5	)		(5.9	)		0.1			(5.8	)		(21.3	)
Gain on sale of subsidiary				—			—			—			—			0.7			0.7			0.7
Interest expense, net				8.4			—			8.4			—			—			—			8.4

(Loss) income before income taxes				(23.9	)		—			(23.9	)		(5.9	)		0.8			(5.1	)		(29.0	)
Income tax provision				0.1			—			0.1			—			—			—			0.1

Net loss			$	(24.0	)	$	—		$	(24.0	)	$	(5.8	)	$	0.8		$	(5.0	)	$	(29.0	)

EBITDA⁽²⁾			$	6.1		$	—		$	6.1		$	(5.0	)	$	0.1		$	(4.9	)	$	1.2


			Three Months Ended September 30, 2001⁽¹⁾

			Established Businesses									Developing Businesses
																					Total Company
(in millions)			Continuing			Closed			Total			Continuing			Closed			Total			Total Company

Revenue, net			$	39.4		$	17.8		$	57.2		$	1.5		$	4.0		$	5.5		$	62.7
Operating expenses:
	Cost of production			14.6			8.4			23.0			0.6			1.0			1.6			24.6
	Selling, general and administrative expenses			18.0			12.3			30.3			10.7			9.1			19.8			50.1
	Depreciation and amortization of property and equipment			4.4			0.1			4.5			2.3			0.5			2.8			7.3
	Amortization of intangible assets			14.4			—			14.4			—			—			—			14.4
	Restructuring charges, net			9.7			—			9.7			3.3			—			3.3			13.0
	Write-down of intangible assets			10.5			—			10.5			1.0			—			1.0			11.5

	Total operating expenses			71.7			20.7			92.4			17.9			10.6			28.5			120.9

Loss from operations				(32.2	)		(3.0	)		(35.2	)		(16.3	)		(6.7	)		(23.0	)		(58.2	)
Equity in income from joint ventures				—			—			—			—			—			—			—
Interest expense, net				12.0			—			12.0			—			—			—			12.0

Loss before income taxes				(44.2	)		(3.0	)		(47.2	)		(16.3	)		(6.7	)		(23.0	)		(70.2	)
Income tax provision				0.1			—			0.1			0.2			—			0.2			0.3

Net loss			$	(44.3	)	$	(3.0	)	$	(47.3	)	$	(16.5	)	$	(6.7	)	$	(23.2	)	$	(70.3	)

EBITDA⁽²⁾			$	6.8		$	(2.9	)	$	3.9		$	(9.8	)	$	(6.1	)	$	(15.9	)	$	(12.0	)



(1)		Prior year amounts have been reclassified to reflect current year adoption of a newly issued accounting pronouncement. As of January 1, 2002, the Company adopted the Emerging Issues Task Force Nos. 01-9 and 00-25, which required the netting of product placement and distribution costs against reported revenue. There was no effect on EBITDA.
(2)		EBITDA is defined as income before interest expense, provision for income taxes, depreciation and amortization expense and other charges, such as the write-down of intangible assets and restructuring charges. EBITDA, as defined, is not a measure of performance under GAAP, and EBITDA should not be considered in isolation or as a substitute for net income, cash flows from operating activities and other income or cash flow statement data prepared in accordance with GAAP, or as a measure of profitability or liquidity. EBITDA is presented because it is commonly used by certain investors and analysts to analyze a company’s ability to service debt. EBITDA (subject to certain adjustments) is also a component of our debt compliance calculations. However, our method of computation may not be comparable to similarly titled measures of other companies.

Established Businesses segment

Total revenue from the Established Businesses was $37.2 million for the three months ended September 30, 2002, a decrease of $20.0 million, or 35.0% compared to $57.2 million in the same period last year. Closed titles accounted for $16.7 million of the revenue decrease, representing $1.1 million and $17.8 million of total revenue in the three months ended September 30, 2002 and 2001, respectively. Revenue from the continuing Established Businesses was $36.1 million for the three months ended September 30 2002, a decrease of $3.3 million or 8.4%, compared to $39.4 million in the same period last year. The decrease was primarily due to the weak technology advertising market and related pricing pressure, partially offset by an increase in total advertising pages. The $3.3 million decrease was largely due to an advertising revenue decline of $2.7 million primarily related to a decline in advertising pages from our technology publications, offset by an increase in advertising pages from our electronic games publications. Circulation revenue increased $0.4 million or 4.9%, to $8.7 million. This increase relates to a 13.7% increase in single-copy revenue, partially offset by a 3.3% decrease in subscription revenue. Newsstand sales improved largely from increased single copy sales for our electronic games publications, however, subscription revenue has been negatively impacted by current economic conditions. Other revenue was down $1.0 million, or 28.0%, primarily driven by decreased royalty revenue due to the termination of our license agreement with ZDNet.

Total cost of production related to the Established Businesses was $14.6 million for the three months ended September 30, 2002, compared to $23.0 million for the comparable prior year period, an $8.4 million, or 36.5% decrease. Cost of production related to our closed titles within this segment was $0.6 million and $8.4 million in the three months ended September 30, 2002 and 2001, respectively. Cost of production for the continuing Established Businesses for the three months ended September 30, 2002 was $14.0 million, down 4.1% or $0.6 million, compared to $14.6 million in the prior year period. The decrease was primarily related to lower manufacturing and paper costs resulting from the decline in the total number of advertising and editorial pages produced in our technology publications. This decrease was partially offset by increased pages produced by our electronic games publications and higher distribution costs due to the 9.9% U.S. Postal Service increase in July 2002. Cost of production as a percentage of revenue increased from 37.1% to 38.8% for the three months ended September 30, 2001 and 2002, respectively. This increase is primarily attributable to the decline in revenue described above.

Total selling, general and administrative expenses, excluding restructuring charges, related to the Established Businesses were $16.5 million for the three months ended September 30, 2002, compared to $30.3 million for the comparable prior year period, a $13.8 million, or 45.5% decrease. Closed titles represented $11.8 million of the cost reduction with their related expenses decreasing to $0.5 million in the three months ended September 30, 2002 from $12.3 million in the prior year period. Selling, general and administrative expenses, excluding restructuring charges, related to the continuing Established Businesses were $16.0 million for the three months ended September 30, 2002, down 11.1% or $2.0 million from $18.0 million in the same period last year. This decrease was primarily related to cost reductions realized in editorial, sales, marketing and circulation acquisition expense. Selling, general and administrative expenses as a percentage of revenue decreased from 45.7% for the three months ended September 30, 2001 to 44.3% for the three months ended September 30, 2002. This decline is primarily due to the Company’s continuing cost reduction program.

During the three months ended September 30, 2002, closed titles results within the Established Businesses included Yahoo! Internet Life. During the three months ended September 30, 2001, in addition to the title above, closed titles results included Ziff Davis SMART BUSINESS, Family PC, Interactive Week and Smart Partner.

Developing Businesses segment

Total revenue from the Developing Businesses was $4.6 million for the three months ended September 30, 2002, a decrease of $0.9 million from $5.5 million in the same period last year. Closed titles and businesses within this segment accounted for $4.0 million of the total revenue in the three months ended September 30. 2001 and zero in the current period. Revenue from the continuing Developing Businesses was $4.6 million for the three months ended September 30, 2002 compared to $1.5 million for the prior year period. The increase primarily relates to increased advertising revenue for Baseline and for our Internet properties.

Total cost of production related to the Developing Businesses was $1.2 million for the three months ended September 30, 2002, compared to $1.6 million for the comparable prior year period, a $0.4 million decrease. Developing Businesses had no cost of production related to closed titles and businesses in the three months ended September 30, 2002 compared to $1.0 million in the prior year period. Cost of production related to continuing Developing Businesses was $1.2 million for the three months ended September 30, 2002, compared to $0.6 million for the same prior year period. The increase is primarily due to higher production costs related to Baseline, which was in its early development stages during the same period last year.

Total selling, general and administrative expenses, excluding restructuring charges, related to the Developing Businesses were $8.3 million for the three months ended September 30, 2002, compared to $19.8 million for the comparable prior year period, an $11.5 million decrease. Closed titles represented $9.1 million of the total expense reduction, all of which was incurred in the three months ended September 30, 2001 compared to none in the current period. Selling, general and administrative expenses related to the continuing Developing Businesses were $8.4 million and $10.7 million for the three months ended September 30, 2002 and 2001, respectively. The decrease relates primarily to our Internet properties, which were in their early development stages during the same prior year period and incurred significant audience and content development costs that did not reoccur in the current year period.

During the three months ended September 30, 2002, closed titles results within the Developing Businesses included eTESTING LABS Inc., which was sold in July 2002. During the three months ended September 30, 2001, in addition to eTESTING LABS Inc., closed titles results included The Net Economy, Expedia Travels and certain other developmental businesses. The online businesses associated with all of our closed publications are also in the results of closed titles for the respective periods.

Depreciation and amortization expense and write-down of intangible assets

Depreciation and amortization expenses were $4.4 million and $7.3 million for the three months ended September 30, 2002 and 2001, respectively. The decrease is primarily attributable to a decrease in the balance of assets being depreciated or amortized. This decrease occurred as a result of our cost reduction and restructuring program, begun in 2001, during which we wrote-down a net book value of $219.8 million of goodwill and intangible assets and $30.8 million of fixed assets related to closed titles and businesses for the nine months ended December 31, 2001.

In the nine months ended September 30, 2002, we wrote-down a net book value of $14.1 million of goodwill and intangible assets and $4.7 million of fixed assets, including $2.0 million in the three months ended September 30, 2002 as our cost reduction and restructuring program continued. These write-offs, and write-offs in prior periods, will reduce quarterly and calendar 2002 depreciation and amortization expense by approximately $9.1 million and $36.0 million, respectively. In the three months ended September 30, 2001, we wrote-off a net book value of $11.5 million in intangible assets primarily related to the closure of Family PC.

Upon adoption of Statement of Financial Accounting Standard No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”), we no longer amortize goodwill and indefinite lived intangible assets beginning January 1, 2002, which resulted in further reduction of quarterly and annual amortization expense by approximately $2.9 million and $11.6 million, respectively.

Restructuring charges, net

As a result of our cost reduction and restructuring program, we recorded a net restructuring charge of $13.0 million in the three months ended September 30, 2002. This charge reflects, $11.4 million of cash expenses associated with employee severance and consolidation costs for certain office locations, legal and other professional fees associated with our financial restructuring plan and $2.0 million of non-cash expenses associated with the write-off fixed assets related to facilities consolidation.

For the three months ended September 30, 2001, we incurred a charge of $14.0 million for our 2001 cost reduction and restructuring program. These costs primarily related to employee severance and the cost to exit activities associated with the closure of Family PC magazine and its related website, the restructuring of our sales, marketing and editorial functions across all platforms, the closure of Zcast.tv, a website, and the consolidation of our facilities.

Interest expense, net

Interest expense was $8.4 million for the three months ended September 30, 2002 compared to $12.0 for the three months ended September 30, 2001. Our weighted average debt outstanding was approximately $369.5 million and $433.7 million, and our weighted average interest rate was 10.37% and 10.44% for the three months ended September 30, 2002 and 2001, respectively. Interest rates through August 12, 2002 include a 2.00% default rate due to our October 2001 event of

default under our Senior Credit Facility. As discussed below, we completed our financial restructuring plan in August 2002. As a result of this financial restructuring, our interest expense will be lower in future periods due to lower debt levels and the elimination of the default interest rates.

Gain on sale of subsidiary

On July 15, 2002, we sold our subsidiary, eTESTING LABS Inc. and realized a gain of approximately $0.7 million in the three months ended September 30, 2002.

Joint ventures

In October 2001, we sold our 50% ownership interest in Mac Publishing LLC. For the three months ended September 30, 2001, our earnings in income from joint ventures was approximately break even.

Income taxes

The income tax provision of $0.1 million for the three months ended September 30, 2002 and the income tax provision of $0.3 million in the three months September 30, 2001 represent effective rates of negative 0.2% and negative 0.4%, respectively. The negative effective rate for the three months ended September 30, 2002 results from certain minimum state and local taxes despite the consolidated entity estimating a full-year pre-tax loss position. Effective tax rates are estimated based on expectations of current year results.

Net loss

Net loss of $29.1 million for the three months ended September 30, 2002 represents an improvement of $41.4 million compared to net loss of $70.5 million for the three months ended September 30, 2001. The improvement is primarily due to the impact of our cost reduction and restructuring program implemented over the last several quarters along with our ceasing the amortization of goodwill and certain indefinite lived intangible assets, in accordance with SFAS 142.

Results of Operations – Nine Months Ended September 30, 2002 Compared to Nine Months Ended September 30, 2001

The table below sets forth our results of operations for the nine months ended September 30, 2002 and 2001. For comparative purposes, closed titles and businesses have been segregated in the discussion below. In 2002, Ziff Davis SMART BUSINESS, Yahoo! Internet Life and related websites were closed, The Net Economy’s assets were sold and eTESTING LABS Inc. was sold. In 2001, we closed Family PC, Expedia Travels, Interactive Week, Smart Partner and certain other developmental businesses.

			Nine Months Ended September 30, 2002

			Established Businesses									Developing Businesses
																					Total Company
(in millions)			Continuing			Closed			Total			Continuing			Closed			Total			Total Company

Revenue, net			$	120.0		$	13.1		$	133.1		$	13.9		$	5.7		$	19.6		$	152.7
Operating expenses:
	Cost of production			45.7			6.9			52.6			3.8			0.5			4.3			56.9
	Selling, general and administrative expenses			50.9			12.2			63.1			28.8			9.0			37.8			100.9
	Depreciation and amortization of property and equipment			11.8			—			11.8			2.8			—			2.8			14.7
	Amortization of intangible assets			14.3			—			14.3			—			—			—			14.3
	Restructuring charges, net			20.9			—			20.9			0.9			—			0.9			21.8
	Write-down of intangible assets			14.0			—			14.0			0.1			—			0.1			14.1

	Total operating expenses			157.6			19.1			176.7			36.5			9.6			46.0			222.7

Loss from operations				(37.6	)		(6.0	)		(43.6	)		(22.6	)		(3.8	)		(26.4	)		(69.9	)
Gain on sale of subsidiary				—			—			—			—			0.7			0.7			0.7
Interest expense, net				34.4			—			34.4			—			—			—			34.4

Loss before income taxes				(72.0	)		(5.9	)		(77.9	)		(22.6	)		(3.1	)		(25.7	)		(103.6	)
Income tax provision				0.5			—			0.5			—			—			—			0.5

Net loss			$	(72.5	)	$	(5.9	)	$	(78.4	)	$	(22.6	)	$	(3.1	)	$	(25.7	)	$	(104.1	)

EBITDA⁽²⁾			$	23.4		$	(5.9	)	$	17.4		$	(18.7	)	$	(3.8	)	$	(22.5	)	$	(5.1	)


			Nine Months Ended September 30, 2001⁽¹⁾

			Established Businesses									Developing Businesses
																					Total Company
(in millions)			Continuing			Closed			Total			Continuing			Closed			Total			Total Company

Revenue, net			$	145.8		$	67.8		$	213.6		$	2.4		$	12.8		$	15.2		$	228.8
Operating expenses:
	Cost of production			50.8			29.7			80.5			2.3			5.3			7.6			88.1
	Selling, general and administrative expenses			61.4			53.6			115.0			32.9			32.8			65.7			180.7
	Depreciation and amortization of property and equipment			13.0			0.2			13.2			6.3			1.3			7.6			20.8
	Amortization of intangible assets			41.5			—			41.5			—			—			—			41.5
	Restructuring charges, net			10.7			—			10.7			3.3			—			3.3			14.0
	Write-down of intangible assets			10.5			—			10.5			1.0			—			1.0			11.5

	Total operating expenses			187.9			83.6			271.5			45.7			39.4			85.1			356.6

Loss from operations				(42.1	)		(15.8	)		(57.9	)		(43.3	)		(26.6	)		(69.9	)		(127.8	)
Equity in income from joint ventures				—			0.2			0.2			—			—			—			0.2
Interest expense, net				36.7			—			36.7			—			—			—			36.7

Loss before income taxes				(78.8	)		(15.6	)		(94.4	)		(43.4	)		(26.6	)		(70.0	)		(164.3	)
Income tax (benefit) provision				(3.7	)		—			(3.7	)		4.4			—			4.4			0.7

Net loss			$	(75.1	)	$	(15.6	)	$	(90.7	)	$	(47.8	)	$	(26.6	)	$	(74.3	)	$	(165.0	)

EBITDA⁽²⁾			$	33.6		$	(15.3	)	$	18.3		$	(32.8	)	$	(25.3	)	$	(58.1	)	$	(39.6	)



(1)		Prior year amounts have been reclassified to reflect current year adoption of a newly issued accounting pronouncement. As of January 1, 2002, the Company adopted the Emerging Issues Task Force Nos. 01-9 and 00-25, which required the netting of product placement and distribution costs against reported revenue. There was no effect on EBITDA.

(2)		EBITDA is defined as income before interest expense, provision for income taxes, depreciation and amortization expense and other charges, such as the write-down of intangible assets and restructuring charges. EBITDA, as defined, is not a measure of performance under GAAP, and EBITDA should not be considered in isolation or as a substitute for net income, cash flows from operating activities and other income or cash flow statement data prepared in accordance with GAAP, or as a measure of profitability or liquidity. EBITDA is presented because it is commonly used by certain investors and analysts to analyze a company’s ability to service debt. EBITDA (subject to certain adjustments) is also a component of our debt compliance calculations. However, our method of computation may not be comparable to similarly titled measures of other companies.

Established Businesses segment

Total revenue from the Established Businesses was $133.1 million for the nine months ended September 30, 2002, a decrease of $80.5 million or 37.7% compared to $213.6 million in the same period last year. Closed titles accounted for $54.7 million of the revenue decrease, representing $13.1 million and $67.8 million of total revenue in the nine months ended September 30, 2002 and 2001, respectively. Revenue from the continuing Established Businesses was $120.0 million for the nine months ended September 30 2002, a decrease of $25.8 million, or 17.7% compared to $145.8 million in the same period last year. The decrease was primarily due to the weak technology advertising market and related pricing pressure, partially offset by an increase in total advertising pages. The $25.8 million decrease was largely due to an advertising revenue decline of $19.3 million primarily related to a decline in advertising pages from our technology publications, offset by an increase in

advertising pages from our electronic games publications. Circulation revenue increased $0.5 million or 1.6%, to $30.6 million. This increase relates to a 19.5% increase in single-copy revenue, partially offset by an 11.5% decrease in subscription revenue. Newsstand sales improved largely from increased single copy sales for our game publications, however, subscription revenue has been negatively impacted by current economic conditions. Other revenue was down $7.0 million, or 47.6%, primarily driven by decreased royalty revenue due to the termination of our license agreement with ZDNet.

Total cost of production related to the Established Businesses was $52.6 million for the nine months ended September 30, 2002, compared to $80.5 million for the comparable prior year period, a $27.9 million, or 34.7% decrease. Closed titles had $6.9 million and $29.7 million in cost of production expense in the nine months ended September 30, 2002 and 2001, respectively, accounting for $22.8 million of the total expense decrease. Cost of production for continuing Established Businesses for the nine months ended September 30, 2002 was $45.7 million, down 10.0% or $5.1 million compared to $50.8 million in the prior year period. The decrease was primarily related to lower manufacturing and paper costs because of the decline in the total number of advertising and editorial pages produced in our technology publications, partially offset by increased pages produced by our electronic games publications and by an increase in postage rates. Cost of production as a percentage of revenue increased from 34.8% to 38.1% for the nine months ended September 30, 2001 and 2002, respectively. This increase is primarily attributable to the decline in revenue described above.

Total selling, general and administrative expenses, excluding restructuring charges, related to the Established Businesses were $63.1 million for the nine months ended September 30, 2002, compared to $115.0 million for the comparable prior year period, a $51.9 million, or 45.1% decrease. Closed titles represented $41.4 million of the cost reduction with their related expenses decreasing to $12.2 million in the nine months ended September 30, 2002 from $53.6 million in the prior year period. Selling, general and administrative expenses, excluding restructuring charges, related to continuing Established Businesses were $50.9 million for the nine months ended September 30, 2002, down 17.1% or $10.5 million from $61.4 million in the same period last year. This decrease was primarily related to cost reductions realized in editorial, sales, marketing and circulation acquisition expense. Selling, general and administrative expenses as a percentage of revenue increased from 42.1% for the nine months ended September 30, 2001 to 42.4% for the nine months ended September 30, 2002. This increase is primarily related to the revenue decline described above.

During the nine months ended September 30, 2002 and 2001, closed titles results within the Established Businesses included Yahoo! Internet Life, Ziff Davis SMART BUSINESS, Family PC, Interactive Week and Smart Partner.

Developing Businesses segment

Total revenue from the Developing Businesses was $19.6 million for the nine months ended September 30, 2002, an increase of $4.4 million compared to $15.2 million in the same period last year. Closed titles and businesses in this segment accounted for $5.7 million of revenue in the nine months ended September 30, 2002, representing a revenue decrease of $7.1 million from the $12.8 million of related revenue in the prior year period. Revenue from the continuing Developing Businesses was $13.9 million for the nine months ended September 30, 2002 compared to $2.4 million, for the prior year period. The increase primarily relates to increased advertising revenue for CIO Insight, Baseline and for our Internet properties, all of which were in their early launch stages in 2001.

Total cost of production related to the Developing Businesses was $4.3 million for the nine months ended September 30, 2002, compared to $7.6 million for the comparable prior year period, a $3.3 million decrease. Cost of production related to closed titles and businesses decreased to $0.5 million in the nine months ended September 30, 2002 from $5.3 million in the same period last year, accounting for a $4.8 million expense reduction. Cost of production related to the continuing Developing Businesses was $3.8 million for the nine months ended September 30, 2002 compared to $2.3 million for the same prior year period. The increase is primarily due to higher production costs related to Baseline, which was in its early development stages during the same period last year.

Total selling, general and administrative expenses, excluding restructuring charges, related to the Developing Businesses were $37.8 million for the nine months ended September 30, 2002, compared to $65.7 million for the comparable prior year period, a $27.9 million decrease. Closed titles and businesses represented $23.8 million of the cost reduction with their related expenses decreasing to $9.0 million in the nine months ended September 30, 2002 from $32.8 million in the prior year period. Selling, general and administrative expenses, excluding restructuring charges, related to the continuing Developing Businesses were $28.8 million and $32.9 million for the nine months ended September 30, 2002 and 2001, respectively. The decrease relates primarily to our Internet properties, which were in their early development stages during the same prior year period and incurred significant audience and content development costs that did not reoccur in the current year period.

During the nine months ended September 30, 2002 and 2001, closed titles results within the Developing Businesses included The Net Economy, Expedia Travels, eTESTING LABS Inc. and certain other developmental businesses. The online businesses associated with all of our closed publications are also in the results of closed titles for the respective periods.

Depreciation and amortization expense and write-down of intangible assets

Depreciation and amortization expenses were $14.7 million and $20.8 million for the nine months ended September 30, 2002 and 2001, respectively. The decrease is primarily attributable to significant write-offs recorded as part of the cost reduction and restructuring program, described earlier, which resulted in a decrease in the balance of assets being depreciated or amortized.

In the nine months ended September 30, 2002, we wrote-off a net book value of $14.1 million of goodwill and intangible assets and $4.7 million of fixed assets as our cost reduction and restructuring program continued. In the nine months ended September 30, 2001, we wrote-off a net book value of $11.5 million primarily related to the closure of Family PC. The above mentioned write-offs and write-offs in other periods, will reduce quarterly and calendar 2002 depreciation and amortization expense by approximately $9.1 million and $36.0 million, respectively

Upon adoption of SFAS 142, we no longer amortized goodwill and indefinite lived intangible assets beginning January 1, 2002, which will result in further reduction of quarterly and annual amortization expense by approximately $2.9 million and $11.6 million, respectively.

Restructuring charges, net

As a result of our 2002 cost reduction and restructuring program, we recorded a net restructuring charge of $21.8 million for the nine months ended September 30, 2002, which is in addition to the $14.1 million write-down of intangible assets described above. This charge reflects, $17.1 million of cash expenses associated with employee severance and consolidation costs for certain office locations legal and other professional fees associated with our financial restructuring plan and $4.7 million reflects non-cash expenses associated with the write-off of intangible assets related to the closure of Ziff Davis SMART BUSINESS and Yahoo! Internet Life and fixed assets related to facilities consolidation.

For the nine months ended September 30, 2001, we incurred a charge of $14.0 million for our 2001 cost reduction and restructuring program. These costs are primarily related to employee severance and cost to exit activities associated with the closure of Family PC magazine and its related website, the restructuring of our sales, marketing and editorial functions across all platforms, the closure of Zcast.tv, a website, and the consolidation of the our facilities.

As of September 30, 2002, we had approximately $16.4 million of accrued costs remaining related to our restructuring program. The remaining accrued expenditures primarily relate to workforce reduction costs, facilities consolidation expenses and financial restructuring plan costs, and we anticipate making approximately $5.1 million of cash payments related to those accruals in 2002.

Interest expense, net

Interest expense was $34.4 million for the nine months ended September 30, 2002 compared to $36.7 for the nine months ended September 30, 2001. Our weighted average debt outstanding was approximately $419.5 million and $461.3 million, and our weighted average interest rate was 10.77% and 10.56% for the nine months ended September 30, 2002 and 2001, respectively. Interest rates during the nine months ended September 30, 2002 include a 2.00% default rate through August 12, 2002 due to our October 2001 event of default under our Senior Credit Facility. As discussed below, we completed our financial restructuring plan in August 2002. As a result of this financial restructuring, our interest expense will be lower in future periods due to lower debt levels and the elimination of the default interest rates.

Gain on sale of subsidiary

On July 15, 2002, we sold our subsidiary, eTESTING LABS Inc., and realized a gain of approximately $0.7 million in the nine months ended September 30, 2002.

Joint ventures

In October 2001, we sold our 50% ownership interest in Mac Publishing LLC. Our equity in income from this joint venture was $0.2 million in the nine months ended September 30, 2001.

Income taxes

The income tax provision of $0.5 million for the nine months ended September 30, 2002 and the income tax provision of $0.7 million in the nine months ended September 30, 2001 represent effective rates of negative 0.5% and negative 0.4%, respectively. The negative effective rate for the nine months ended September 30, 2002 results from certain minimum state and local taxes despite the consolidated entity estimating a full-year pre-tax loss position. Effective tax rates are estimated based on expectations of current year results.

Net loss

Net loss of $104.1 million for the nine months ended September 30, 2002 represents an improvement of $60.9 million compared to net loss of $165.0 million for the nine months ended September 30, 2001. The improvement is primarily due to the impact of our cost reduction and restructuring program implemented over the last several quarters along with our ceasing the amortization of goodwill and certain indefinite lived intangible assets, in accordance with SFAS 142.

Liquidity and Capital Resources

Total cash at September 30, 2002 was $31.9 million. We have historically relied upon cash flow from operating activities, borrowings under our Senior Credit Facility and additional investments to finance our operations.

Under our Senior Credit Facility, we have Restricted and Unrestricted Subsidiaries. As described above, the Unrestricted Subsidiaries are our Developing Businesses represented by LaunchCo and InternetCo. The Restricted Subsidiaries represent our Established Businesses segment and are generally comprised of businesses that were acquired from ZDI. The Senior Credit Facility and indentures governing the 12% Notes and Compounding Notes place restrictions on funding from the Restricted Subsidiaries to the Unrestricted Subsidiaries and generally require them to be funded through separate and distinct sources. The Unrestricted Subsidiaries have historically been funded primarily by equity contributions and loans from the Restricted Subsidiaries.

As of September 30, 2002, total indebtedness was $298.3 million and consisted of $185.9 million of outstanding principal under the term loan portion of the Senior Credit Facility, $8.2 million of outstanding principal under the revolving portion of the Senior Credit Facility, $12.3 million under the 12% Notes and $91.9 million under the Compounding Notes.

Borrowings under the Senior Credit Facility bore interest rates ranging from 6.01% to 6.58% as of September 30, 2002. At September 30, 2002, no additional borrowing was available under the revolving portion of our Senior Credit Facility.

Financial Restructuring Plan

In order to address certain liquidity and debt compliance issues, we initiated a financial restructuring plan in 2001, which was completed on August 12, 2002. As part of the restructuring, we offered to exchange a combination of (i) cash, (ii) new compounding senior subordinated notes (the “Compounding Notes”) and (iii) preferred stock and common stock warrants for our existing 12% Notes (collectively, the “Exchange Offer”). In addition, we amended and restated our Senior Credit Facility.

Key terms of the financial restructuring were as follows:

	•	We received an equity contribution of $80.0 million from Willis Stein in exchange for the issuance of a new series D redeemable preferred stock issued by Ziff Davis Holdings with an aggregate liquidation preference of approximately $80.0 million as well as approximately 38.6 million warrants, each representing the right to purchase one share of the common stock of Ziff Davis Holdings at an exercise price of $0.001 per share. The contribution was comprised of $10.1 million of cash received during the quarter ended June 30, 2002, approximately $62.5 million of cash received in August 2002, and approximately $7.4 million in liquidation preference of series D preferred stock issued by Ziff Davis Holdings in lieu of a cash payment which otherwise would have been owed to Willis Stein by the Company with respect to the 12% Notes held by Willis Stein.

	•	Accredited investors representing approximately 95.1% in aggregate principal amount of our 12% Notes who tendered their notes received an aggregate of approximately $21.2 million in cash and $90.3 million in aggregate principal amount of Compounding Notes. These holders also received an aggregate of approximately $28.5 million

		in liquidation preference of a new series of preferred stock (“Series E preferred stock”) and warrants for the purchase of 5.2 million shares of common stock of Ziff Davis Holdings in exchange for their 12% Notes.

	•	The Compounding Notes will accrue interest in semi-annual periods, commencing on February 15 and August 15 of each year, with the first period ending on February 15, 2003. For the first four years, interest will accrue at rates ranging from 12% to 14% and may be paid, at the Company’s option and subject to certain restrictions under the Senior Credit Facility, either in cash or by compounding such interest on the Compounding Notes. For all payments of interest accruing after August 12, 2006, interest shall be payable in cash at a rate of 12% per annum.

	•	The Series E preferred stock will accrue dividends at a rate of 10% per annum and is subject to mandatory redemption on the earlier of March 31, 2010 or the date of a change in control. Dividends will only be paid in cash if declared for payment by Ziff Davis Holdings’ board of directors. In addition, so long as any series D redeemable preferred stock remains outstanding, and without the prior written consent of Willis Stein, together with the holder or holders of a majority of the outstanding shares of series D redeemable preferred stock, Ziff Davis Holdings will not be permitted directly or indirectly to pay or declare any cash dividend or make any distribution to the holders of series E preferred stock and our Senior Credit Facility and the indenture governing the 12% Notes and the Compounding Notes each restricts the payment of dividends to holders of capital stock of Ziff Davis Holdings.

	•	Interest due to holders of the $12.3 million principal amount of 12% Notes not tendered, previously due on July 15, 2002, was funded on August 14, 2002.

	•	We amended and restated our Senior Credit Facility providing for, among other terms: (1) waiver of all existing defaults, (2) deferral of principal payments for eight quarters, (3) removal of the obligation to pay the default interest rate on the outstanding principal and (4) mandatory use of a portion of excess cash flows, as defined, to repay amounts owed under the Senior Credit Facility.

The Exchange Offer was accounted for in accordance with the troubled debt restructuring provision of SFAS 15. Accordingly, no gain was recognized on the exchange, rather the value of the Compounding Notes as reported on our balance sheet was increased by an amount deemed to be accrued interest. After completing this transaction, our total debt was reduced by approximately $147.4 million.

Outlook and Future Liquidity Needs

We anticipate that consolidated EBITDA for the fourth quarter of 2002 for Ziff Davis Holdings Inc. will be in the range of $10.0 million to $12.0 million, compared to $(4.5) million of EBITDA losses for the quarterly period ended December 31, 2001.

As a result of the financial restructuring, we believe that our cash on hand, coupled with future cash generated from operations will be sufficient to meet our liquidity, working capital and capital spending needs for the foreseeable future. The financial restructuring will also result in a significant reduction on cash debt service requirements, estimated at over $30.0 million annually over the next several years.

In addition, we will continue to benefit from our cost reduction program as we further streamline our operations and consolidate our facilities. As a result of these factors, we expect to generate positive cash flow in the fourth quarter of 2002 in the range of $4.0 million to $6.0 million

The foregoing three paragraphs (as well as certain other information in this report) constitute “forward-looking statements” within the meaning of Section 21D of the Securities Exchange Act of 1934 as amended (the “Exchange Act”). You should not place undue reliance on these statements because they speak as of the date of this report and are based on assumptions, some of which may turn out to be incorrect. You should understand that many factors could affect our actual financial results or results of operations and could cause our actual results to differ materially from those in the forward-looking statements. See the discussion of “Forward-Looking Statements and Risk Factors”. We do not have any obligation or intention to release publicly any revisions to these forward-looking statements to reflect events or circumstances in the future or to reflect the occurrence of unanticipated events. All prior forward-looking statements made by the Company regarding its anticipated operating results, including those made in previous reports filed or provided under the Exchange Act should not be relied upon in any manner in light of this updated information.

Sources and Uses of Cash – Nine Months Ended September 30, 2002 and 2001

Details of changes in cash and cash equivalents during the nine months ended September 30, 2002 and 2001 are discussed below.

Operating Activities. Cash used by operating activities was $58.1 million for the nine months ended September 30, 2002, compared to $65.1 million used by operating activities for the nine months ended September 30, 2001, representing decreased cash usage of $7.0 million. The decrease in cash used was primarily attributable to improved operating results partially offset by cash expenditures related to the cost reduction and restructuring program.

Investing Activities. Cash used by investing activities was $0.3 million for the nine months ended September 30, 2002, representing $1.9 million of capital expenditures offset by $1.6 million in net proceeds from the sale of eTESTING LABS Inc. Cash used by investing activities was $27.4 million in the nine months ended September 30, 2001. This reflects $33.6 million in capital expenditures (primarily related to our Internet operations which were in their early developmental stages), partially offset by proceeds of $9.5 million from the sale of our international operations and our joint venture, ZDNet Media (China) LDC, and distributions of $0.6 million from our Macworld joint venture. We anticipate making additional capital investments in connection with the continued development of the businesses of the Unrestricted Subsidiaries, however, the amount and timing of such investments has not yet been determined and will vary depending upon the implementation of the related business plans.

Financing Activities. Cash provided by financing activities was $70.3 million for the nine months ended September 30, 2002. Proceeds from the sale of preferred stock were $77.6 million. Additionally, we borrowed $21.0 million under our Senior Credit Facility. These proceeds were partially offset by $21.2 million paid to bondholders in connection with the financial restructuring, the repayment of $6.1 million of borrowings under our Senior Credit Facility and $1.0 million in debt issuance costs for fees paid in consideration for amendments of our Senior Credit Facility. Cash provided by financing activities was $8.3 million for the nine months ended September 30, 2001. This primarily related to $89.0 million in proceeds from the sale of preferred and common stock along with $10.0 million of proceeds from borrowings under our Senior Credit Facility, partially offset by $89.5 million in repayments of outstanding principal under our Senior Credit Facility and $1.1 million in debt issuance costs.

Cyclicality

Revenue from advertising accounted for approximately 66.2% and 64.0% of our total revenue for the three and nine months ended September 30, 2002, respectively. Cyclicality in advertising expenditures generally, or with respect to magazine-based advertising specifically, could therefore have a material effect on our business, financial condition or operating results. Further, economic trends could also significantly impact the growth of our revenue and operating results with respect to prior periods.

Seasonality

Historically, our business has been seasonal because we have earned a significant portion of our annual revenue in our fourth calendar quarter. This is largely due to the general increase in advertising revenue in the fourth quarter as a result of increased consumer buying activity during the holiday season. Factors affecting the seasonality of our business are holiday spending, customer budgetary spending patterns, new product introductions and general economic trends. Quarterly results may also be affected by variations in the number of magazines sold in any quarter, timing and termination of existing contractual agreements, costs incurred in connection with internal growth, changes in our mix of customers, fluctuation in the costs of raw materials and other general economic conditions. Accordingly, our operating results in any particular quarter may not be indicative of the results that can be expected for any quarter or for the entire year. We cannot assure that our fourth quarter revenue will be higher than revenue for our other quarters.

Changes in Critical Accounting Policies

Effective January 1, 2002, we adopted SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”). SFAS No. 142 addresses the initial recognition and measurement of intangible assets acquired outside of a business combination and the accounting for goodwill and other intangible assets subsequent to their acquisition. SFAS No. 142 provides that goodwill and intangible assets which have indefinite useful lives will not be amortized but rather will be tested at least annually for impairment at the reporting unit level. It also provides that intangible assets that have finite useful lives be amortized. There was no impairment of goodwill upon adoption of SFAS No. 142 and as such, we did not recognize a transition adjustment during 2002. The effect of adopting SFAS No. 142 is more fully explained in Note 2 to the

Condensed Consolidated Financial Statements. Goodwill may become impaired as a result of several factors, such as increased competition and lower demand products and services.

Effect of Recently Issued Accounting Standards

In April 2001, the Emerging Issues Task Force (“EITF”) reached a final consensus of EITF Issue No. 00-25, “Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor’s Products”, which was later codified along with other similar issues, into EITF 01-9 “Accounting for Consideration Given by a Vendor to a Customer or a Reseller of the Vendor’s Products” (“EITF 01-9”). EITF 01-9 clarifies the income statement classification of costs incurred by a vendor in connection with the reseller’s purchase or promotion of the vendor’s products, resulting in certain cooperative advertising and product placement costs previously classified as selling expenses to be reflected as a reduction of revenues earned from that activity. We adopted this EITF as of January 1, 2002 and as required, have reclassified prior period amounts. The impact of this EITF on our financial statements for the three and nine months ended September 30, 2001 was a reclassification of selling, general and administrative expense as an offset to revenue in the amount of $2.9 million and $9.2 million, respectively.

In May 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections”. SFAS No. 145 rescinds the automatic treatment of gains or losses from extinguishment of debt as extraordinary unless they meet the criteria for extraordinary items as outlined in APB Opinion No. 30, “Reporting the Results of Operations, Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions”. In addition, SFAS No. 145 also requires sale-leaseback accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions and make various technical corrections to existing pronouncements. The provisions of SFAS No. 145 are effective for fiscal years beginning after May 15, 2002. The impact of this pronouncement on our financial results is currently being evaluated.

In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”. SFAS No. 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather that at the date of a commitment to an exit or disposal plan. The provisions of SFAS No. 146 are effective for fiscal years beginning after December 31, 2002. The impact of this pronouncement on our financial results is currently being evaluated.

Forward-Looking Statements and Risk Factors

Certain statements in this Quarterly Report on Form 10-Q contain “forward-looking statements.” Forward-looking statements are any statements other than statements of historical fact. Examples of forward-looking statements include projections of earnings, revenues, financing needs, or other financial items, statements of the plans and objectives of management for future operations, statements concerning proposed new products and services, and any statements of assumptions underlying any of the foregoing. In some cases, forward-looking statements can be identified by the use of words such as “may”, “will”, “expects”, “should”, “believes”, “plans”, “anticipates”, “estimates”, “predicts”, “potential”, or “continue”, and any other words of similar meaning.

Any or all of our forward-looking statements in this report and in any other public statements we make may turn out to be wrong. They can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties. Many factors mentioned in the discussion in this report will be important in determining future results. Consequently, no forward-looking statement can be guaranteed. Actual future results may vary materially. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosures we make on related subjects in our reports to the Securities and Exchange Commission.

Statements regarding the Company’s future financial performance or results of operations, including expected revenue growth, future paper, postage, printing, interest or other expenses, future operating margins, anticipated capital spending, the amount of anticipated restructuring charges and other future or expected performance are subject to the following risks: our ability to comply with the covenants in our financing documents; insufficient liquidity to meet our long-term obligations; the acquisition of businesses or the launch of new lines of business, which could increase operating expenses and decrease operating margins; the inability to identify, develop and achieve success for new products, services and technologies; the inability to attract new customers for our publications and services; increased competition, which could lead to decreases in users or negative pressure on our pricing and the need for increased marketing; the inability to maintain, establish or renew relationships with suppliers and advertisers; a decrease in the growth of advertising spending in magazines or in general or on our businesses in particular; and failure of advertisers to meet their commitments under their contracts to purchase advertising. For additional information about certain risks concerning our business, see our Registration Statement on Form

S-4 dated as of October 9, 2002, and specifically the headings “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

In connection with the Senior Credit Facility, we entered into an interest rate swap agreement on September 27, 2000 for the notional amount of $25.0 million and a maturity date of October 11, 2003. Under this swap agreement, we receive a floating rate of interest based on three-month LIBOR, which resets quarterly, and pay a fixed rate of interest each quarter for the term of the agreement. The effect of this swap agreement, coupled with the fixed interest rate on the 12% Notes and the Compounding Notes, results in $129.2 million, or 43.3%, of our funded debt being effectively set at a fixed rate of interest as of September 30, 2002. Accordingly, a 1.00% fluctuation in interest rates would cause a $1.7 million fluctuation in interest expense.

Inflation and Fluctuations in Paper Prices and Postage Costs

We continually assess the impact of inflation and changes in paper and postage prices as these costs represent a significant portion of our costs of production. Paper prices began to rise in 1994, rose significantly in 1995 and 1996, and then decreased in 1997. During 1998 and 1999, paper prices were relatively flat, with only one price increase occurring in 2000. In 2001, paper prices significantly declined. During fiscal 2001, we outsourced the majority of our paper buying to printers. As a result, we hold significantly lower levels of inventory and are purchasing paper at or below market prices at the time of use.

Postage rates increased 5.0% in January 1999, 9.9% in January 2001, 2.6% in July 2001 and 9.9% in July 2002. Management considers announced postage rate increases in our pricing policies but there can be no assurance we will recover the added costs incurred.

ITEM 4. CONTROLS AND PROCEDURES

	a.	Evaluation of disclosure controls and procedures. Our chief executive officer and our chief financial officer, after evaluation of the effectiveness of our “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 Rules 13a-14(c) and 15d-14(c) as of a date (the “Evaluation Date”) within 90 days before the filing date of this quarterly report, have concluded that, as of the Evaluation Date, our disclosure control and procedures were adequate and designed to ensure that material information relating to us and our consolidated subsidiaries would be made known to them by others within those entities.

	b.	Changes in internal controls. There were no significant changes in our internal controls or, to our knowledge, in other factors that could significantly affect our disclosure controls and procedures subsequent to the Evaluation Date.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are subject to various claims and legal proceedings that arise in the ordinary course of business. However, we do not expect any of these claims or legal proceedings, either individually or in the aggregate, to have a material adverse effect on our financial condition, results of operations or liquidity.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

In connection with the Company’s financial restructuring, the indenture governing Ziff Davis Media’s 12% senior subordinated notes due 2010 was amended on August 12, 2002 to eliminate substantially all of the restrictive covenants contained therein. Specifically, the indenture amendment eliminated the covenants relating to reports to holders, compliance certificates, taxes, restricted payments, limitations on dividends and other restrictions affecting restricted subsidiaries, limitations on incurrence of additional indebtedness, limitations on asset sales, limitations on transactions with affiliates, limitations on liens, conduct of business, corporate existence, offer to repurchase on a change of control, no senior subordinated indebtedness, merger, consolidation and sales of assets or successor corporation substituted. A copy the supplemental indenture has been filed as an exhibit to this Form 10-Q.

ITEM 3. DEFAULT UPON SENIOR SECURITIES

The Company was in default under the terms of its Senior Credit Facility for failure to comply with financial covenants and it was in default under the terms of its indenture governing its 12% Notes for failure to pay interest during a portion of the period covered by this report. All defaults were cured or waived in connection with our August 12, 2002 financial restructuring described elsewhere in this report.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)	Exhibit Index

	4.1	Indenture, dated August 12, 2002, by and between Ziff Davis Media Inc., the guarantors thereunder and Deutsche Bank Trust Company Americas.*

	4.2	Registration Rights Agreement, dated August 12, 2002, by and among Ziff Davis Holdings Inc. and Ziff Davis Media Inc.*

	4.4	First Supplemental Indenture, dated as of August 12, 2002 by and between Ziff Davis Media, the guarantors thereunder and Deutsche Bank Trust Company Americas, supplementing that certain indenture, dated July 21, 2000, by and between Ziff Davis Media Inc., the guarantors thereunder and Bankers Trust Company.*

	4.6	Amendment No. 1 to Investor Rights Agreement, dated August 12, 2002, by and among Ziff Davis Holdings Inc., Willis Stein & Partners II, L.P., Willis Stein & Partners Dutch II, L.P., Willis Stein & Partners III, L.P. (and other partnerships sharing a common general partner therewith), the investors listed on the Schedule of Co-Investors, certain executive employees of Ziff Davis Holdings Inc., and certain other stockholders listed on the Schedule of New Stockholders.*

	4.7	Supplemental Indenture, dated as of September 18, 2002, by and among Ziff Davis Media Inc., Ziff Davis Holdings Inc., and Deutsche Bank Trust Company Americas, supplementing the indenture, dated as of August 12, 2002, by and between Ziff Davis Media Inc., the guarantors thereunder and Deutsche Bank Trust Company Americas.*

	4.8	Second Supplemental Indenture, dated as of September 18, 2002, by and among Ziff Davis Media Inc., Ziff Davis Holdings Inc. and Deutsche Bank Trust Company Americas, supplementing the indenture, dated as of July 21, 2000, by and between Ziff Davis Media Inc., the guarantors thereunder and Deutsche Bank Trust Company Americas (f/k/a Bankers Trust Company).*

	10.1	Series D Preferred Stock Purchase Agreement, dated August 12, 2002, by and between Ziff Davis Holdings Inc., and the purchasers thereunder.*

	10.6		Warrant Agreement, dated August 12, 2002, by and among Ziff Davis Holdings Inc. and Willis Stein & Partners II, L.P.*

	10.7		Warrant Agreement, dated August 12, 2002, by and among Ziff Davis Holdings Inc. and Deutsche Bank Trust Company Americas.*

	10.9		Amended and Restated Credit Agreement, dated as of August 12, 2002, by and between Ziff Davis Media Inc., CIBC World Markets Corp., Bankers Trust Company, Fleet National Bank, Canadian Imperial Bank of Commerce and other credit parties.*

	10.10		2002 Ziff Davis Holdings Inc. Employee Stock Option Plan*

	99.1		Certification for Robert F. Callahan pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**

	99.2		Certification for Bart W. Catalane pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**


	*	Incorporated by reference from the Registrar's Registration Statement on Form S-4 (SEC 333-99939), originally file with the SEC on September 20, 2002.

	**	Filed herewith

(b)	Reports on Form 8-K

	1.1		Report on Form 8-K dated July 15, 2002, contains information about the Company’s press release which discussed the Company’s second quarter results and the status of financial restructuring.

SIGNATURE

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 MEDIA INC.


	By:	/s/ BART W. CATALANE

		Bart W. Catalane Chief Operating Officer and Chief Financial Officer

	Date: November 14, 2002

Certification of Chief Executive Officer

I, Robert F. Callahan, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Ziff Davis Holdings Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weakness in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: November 14, 2002

	/s/ ROBERT F. CALLAHAN

	Robert F. Callahan Chief Executive Officer

Certification of Chief Financial Officer

I, Bart W. Catalane, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Ziff Davis Holdings Inc.;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

Date: November 14, 2002

	/s/ BART W. CATALANE

	Bart W. Catalane Chief Financial Officer and Chief Operating Officer

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued) (dollars in thousands, except per share data)

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)
(dollars in thousands, except per share data)