Back to GetFilings.com

Table of Contents

SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

ZIFF DAVIS HOLDINGS INC.

28 East 28th Street

(212) 503-3500

Shares registered pursuant to Section 12(b) of the Act:     None

Shares registered pursuant to Section 12(g) of the Act:     None

      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 þ          No o

      Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by references in Part III of this Form 10-K or any amendment to this Form 10-K.     þ

      Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).     Yes o          No þ

      Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date:

      As of March 30, 2004, 2,312,928 shares of common stock, par value, $0.001 per share, were outstanding. The issuer’s common stock is not publicly traded.

DOCUMENTS INCORPORATED BY REFERENCE

None

ZIFF DAVIS HOLDINGS INC.

Index to Form 10-K for the Year Ended December 31, 2003

1

Table of Contents

PART I

      Important Note: Please see the sections entitled “Forward-Looking Statements” and “Certain Risk Factors” appearing below in Item 1.

      References to “we,” “us,” “our,” “Ziff Davis” and “the Company” refer to Ziff Davis Holdings Inc. and its subsidiaries. In those situations where it is important to distinguish between Ziff Davis Holdings Inc. and Ziff Davis Media Inc., we use the term “Ziff Davis Holdings” to refer to Ziff Davis Holdings Inc. and the term “Ziff Davis Media” to refer to Ziff Davis Media Inc.

Background and Organization

      We are a leading integrated media company focused on the technology, videogame and consumer lifestyle markets. We are an information services provider of technology media including publications, websites, conferences, events, eSeminars, eNewsletters, custom publishing, list rental, research and market intelligence. Ziff Davis Holdings is majority owned by various investment funds managed by Willis Stein & Partners Management III, L.L.C. (“Willis Stein” or “controlling stockholders”), a private equity investment firm. Ziff Davis Holdings 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. Ziff Davis Holdings has no material assets other than its investment in the capital stock of Ziff Davis Media. 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., an unrelated company. Our major operating subsidiaries are Ziff Davis Publishing Inc., Ziff Davis Development Inc. (“LaunchCo”) and Ziff Davis Internet Inc. (“InternetCo”). In January 2002, we changed our fiscal year-end from March 31 to December 31, effective December 31, 2001.

      We had no operations prior to April 5, 2000, when we completed the acquisition of ZDP for $780.0 million plus expenses. This acquisition was accounted for under the purchase method of accounting and was funded by: (1) issuing preferred and common stock for $353.7 million in proceeds; (2) executing a $405.0 million senior credit facility of which $355.0 million was borrowed at closing; and (3) issuing a bridge loan totaling $175.0 million in proceeds. Fees and expenses, including debt issuance costs associated with the acquisition, which totaled approximately $30.0 million, were paid with the equity and debt proceeds. On July 18, 2000, we issued $250.0 million 12% senior subordinated notes due 2010 (the “12% Notes”). The proceeds from the offering of the 12% Notes were used to repay the bridge loan and approximately $59.7 million of the senior credit facility. In addition, proceeds from the offering of the 12% Notes were used to pay approximately $8.5 million of expenses associated with the offering and approximately $6.8 million of accrued interest.

      In August 2002, we completed a financial restructuring, including an exchange of most of our 12% Notes for new compounding notes and equity as well as the amendment and restatement of our senior credit facility. (See “Management Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Financial Restructuring” and Note 13 to our audited Consolidated Financial Statements.)

      Our operations are classified into two reportable segments, Established Businesses and Developing Businesses. The Established Businesses segment is primarily comprised of the Ziff Davis Publishing Inc. subsidiary which includes the publishing assets that were acquired when we were formed in April 2000 and are collectively referred to and defined under our Amended and Restated Senior Credit Facility (the “Senior Credit Facility”) as the “Restricted Subsidiaries.” This segment is engaged in publishing and licensing magazines and providing editorial content about technology, videogames and the Internet. This segment also licenses its content and brands in 44 countries and 20 languages worldwide.

      The Developing Businesses segment is comprised of the LaunchCo and InternetCo subsidiaries, which are collectively referred to and defined under our Senior Credit Facility as the “Unrestricted Subsidiaries.”

2

Table of Contents

Strategy

      The principal focus of our business strategy continues to be our consistent and disciplined practice of investing in our core assets and brands, with an emphasis on organic growth initiatives to create new business opportunities with new and existing customers. Our strategy is designed to drive future revenue growth and increase asset and shareholder value and includes the following initiatives:

	•	Capitalize on New Revenue Opportunities from Existing Products and Services — We intend to continue leveraging the strength of our magazine, Internet and event products, as well as our circulation base to expand and transition our business platform in the following manner:

	—	Utilize Publishing and Technology Expertise to Evolve Product Content. As technology continues to evolve, we will continue to transition our publications, events and branded/ enthusiast websites to ensure that our properties remain among the most influential and relevant to the audiences and advertiser communities we serve.
	—	Broaden Composition of Advertiser Base. Because technology has become more mainstream, our readership has broadened to include a more diverse group of IT and business professionals, videogame enthusiasts and consumers. We believe the future growth and segmentation of this audience will be even more attractive to prospective customers going forward. We intend to continue new business development by aggressively pursuing advertising sales and event opportunities with companies targeting these diverse market segments.
	—	Increase Advertising and Subscriber Cross-Selling Opportunities. We will continue to utilize our long-standing and strong relationships with key advertisers for each of our publications to cross-sell new advertising programs and provide integrated marketing solutions to these customers. In addition, we will continue to utilize our extensive subscriber database of individuals to maximize circulation and cross-selling opportunities among our titles.

	•	Develop Ancillary Revenue Opportunities — We will use our corporate, magazine, Internet and event brand names, established market presence and existing subscriber base to extend our brands into new products and services including custom publishing and research. Specifically, our Integrated Media Group identifies and customizes editorial solutions that highlight customer product benefits and corporate messages for technology and non-technology companies. We believe these activities increase product awareness and sales leads for our customers as well as generate additional advertising and other revenue for the Company.
	•	Selectively Expand Our Portfolio of Publications, Internet Properties and Events — Our management team has significant experience in launching and acquiring new magazines and media businesses. In January 2003 we debuted GMR, which increased its target circulation from 225,000 to 425,000 in its first nine months. This growth reflects its strong acceptance among advertisers and readers. We also unveiled 1up.com in October 2003 as our new online destination for videogame enthusiasts and, according to internal server logs, unique visitors and page views have risen 200% since its launch. In addition, we launched Business 4Site in November 2003, a new strategic event that will debut in June 2004 at the Century Plaza Hotel in Los Angeles; and in December 2003 we launched our new consumer event, DigitalLife, which will debut in October 2004 at the Jacob K. Javits Convention Center in New York City. Finally, we announced in January 2004 the launch of Sync magazine, which will debut in the summer of 2004 with a target circulation of 200,000. We believe that improvement in the current business environment along with rapid advances in technology, the consumer electronics marketplace and the online advertising sector may create further opportunities to launch additional new brands. As a result, we plan to continue to develop new publications, websites and events, and evaluate opportunities to expand our portfolio.

3

Table of Contents

	•	Optimize Circulation and Production Strategies — We intend to continue to be at the forefront of key industry circulation and production initiatives. We will pursue strategies such as Internet marketing, business partnership development, enhanced vendor relationships and the use of new technology in an effort to achieve further operational and financial efficiencies in the production and circulation areas.

General

      We are a leading integrated media company serving the technology, videogame and consumer lifestyle markets and one of the largest technology magazine publishers in the United States as measured by revenue. In 2003, we had an estimated 18.6% share of gross advertising revenue in the technology magazine industry based on data compiled by IMS/ The Auditor (Toronto, Canada) (“IMS”). Our current U.S. titles have a combined circulation of approximately 3.7 million and our U.S. based brands reach over 22 million people per month at work, home and play based on syndicated research and management’s estimates. Our audiences also cover the full spectrum of readership, from corporate technology buyers and users to consumer enthusiasts, influencers and gamers.

      We distinguish ourself through our comprehensive labs-based evaluations, trusted buying advice, recognized industry experts, and thought-provoking news, reviews, opinions and insights. We publish 9 industry-leading technology, videogame and consumer lifestyle magazines including PC Magazine, eWEEK, Baseline, CIO Insight, Electronic Gaming Monthly, Official U.S. Playstation Magazine, Computer Gaming World, Xbox Nation and GMR. PC Magazine and eWEEK were the number one and number six ranked technology magazines, respectively, in the United States in 2003 as measured by advertising pages from the Publishers Information Bureau. Our videogame publications led the market in 2003 with an estimated 36.0% market share based on IMS’s gross advertising revenue data. Additionally, we launched a new consumer lifestyle publication, Sync, which will debut in the summer of 2004.

      Our readers are well-educated, influential buyers of technology and other products and decision-makers in their professional fields and households, which makes them attractive to a wide range of advertisers. For example, the 4,190,000 estimated business influencers (professionals who are involved in purchasing technology for their businesses) who read PC Magazine each spend an estimated average of $339,457 on technology products and services according to Millward Brown Intelliquest CIMS, v10 Business Study released in 2003. Similarly, in December 2003, the average information technology budget for corporate business readers of eWEEK was approximately $46.4 million, according to our subscriber qualification surveys. Lastly, according to internal readership surveys, the average Ziff Davis Game Group reader purchases two games per month and influences approximately five other people regarding which games to buy.

      We extend the power of our brands online through magazine companion sites, as well as original technology and videogame enthusiast websites. These include pcmag.com, eweek.com, extremetech.com and 1up.com. We also produce highly targeted business-to-business and consumer technology events. Furthermore, we export the power of our brands internationally, licensing our content to publications in 44 countries that are produced in 20 languages.

4

Table of Contents

Established Businesses Segment

      Our current portfolio of established business titles can be divided into the following two categories: (1) technology publications and (2) videogame publications. The following table sets forth information regarding these titles:

*	Target circulation; no rate base is claimed for these publications.

      Our titles in this category provide authoritative, independent guidance to consumer and business influencers and business professionals that are considered by their readers as a primary resource for purchasing decisions and business solutions.

      PC Magazine is one of the largest technology publications in the world, delivering the most authoritative, comprehensive lab-based reviews and trusted recommendations for buyers of technology products and services. PC Magazine publishes 22 times a year in print (plus occasional special issues)with a paid circulation of more than 1.0 million. PC Magazine had a recent U.S. readership of nearly 5.8 million readers (MRI Fall 2003), and we believe more than 50% of U.S. adults recognize the PC Magazine brand and this recognition is more than 80% among individuals involved in the purchase of computer-related products and services. Reaching highly engaged technology influencers, PC Magazine differentiates itself through unique and extensive product reviews based on its exclusive benchmark testing performed in the PC Magazine Labs, supplemented by its “First Looks” section covering emerging technologies and products and opinionated columns from its renowned technology authorities.

      eWEEK is one of the largest controlled-circulation publications in the United States, reaching over 400,000 enterprise technology buyers who are evaluating and purchasing technology solutions for their companies. Controlled-circulation publications are distributed directly to qualified professionals for no charge and generate revenue principally from the sale of advertising. In order to qualify for a free subscription, eWEEK subscribers must be involved in one or more stages of the IT decision-making process within an enterprise and be active in the specification, recommendation, purchase or approval of multiple technologies, services and business applications. These qualifications are audited by BPA International. The criteria we use to qualify subscribers for this magazine are some of the highest standards in the industry. eWEEK differentiates itself by delivering to its readers breaking news, technology evaluations and strategic analyses of the technologies, platforms and trends that impact enterprise-wide computing. We believe this makes eWEEK extremely attractive to advertisers selling products and services to IT professionals and senior business readers evaluating and implementing enterprise technology solutions.

      Electronic Gaming Monthly, Official U.S. PlayStation Magazine, Computer Gaming World, GMR, Xbox Nation, Pocket Games and Game Guides. These paid publications are positioned to capitalize on the large and

5

Table of Contents

Developing Businesses Segment

      We are developing new publications and businesses through LaunchCo and developing Internet-related properties leveraging our editorial content, expertise and relationships in technology through InternetCo. During the second half of 2003, we introduced several new technology, videogame and consumer lifestyle brands into our product portfolio.

      The following table sets forth information regarding titles within LaunchCo:

*	All information for Sync is based on the estimated launch of its first issue in the summer of 2004.

      CIO Insight is a 50,000 subscriber, controlled-circulation strategic business journal for today’s senior IT decision makers. Its mission is to provide IT executives with cutting-edge strategies, management techniques and technology perspectives. Each month, CIO Insight provides an IT business source that senior-level technology executives can depend on for strategic business thinking and proprietary research. Writers are either proven experts in their fields or journalists who are well-versed in technology and management issues. In order to qualify for a free subscription, CIO Insight subscribers must be senior IT executives actively charged with setting their company’s IT business goals, direction and strategy. These senior IT executives must also have personal purchase authority for IT within their organizations or have personal budgets in certain IT categories.

      Baseline is a 125,000 subscriber, controlled-circulation magazine that is a guide to selecting and managing the deployment of leading-edge information systems for senior IT project leaders. Through case studies, news stories, company dossiers and financial tools, the publication provides technology leaders and business executives with a detailed look at how their peers are implementing strategic information technology projects and systems. The success, or failure, of each implementation is measured by the company’s actual progress against “baseline” expectations of financial returns and technology deliverables. In its first two years of publication, Baseline received a Jesse H. Neal National Business Journalism, Award for its excellent editorial coverage of business and technology issues. In order to qualify for a free subscription, Baseline subscribers must be actively involved in setting goals, evaluating or managing a company’s IT investment, or planning major IT projects or upgrades in the next 12 months. The subscriber must have a director-level title or higher, have a minimum personal budget authority of $50,000 and an organizational spending minimum of $100,000.

6

Table of Contents

      Sync is our new consumer lifestyle magazine and our entrance into the growing consumer electronics market. According to the Consumer Electronics Association, this market is estimated to be nearly $100 billion in sales in 2004. Sync is designed to give readers a stylish, exciting look at how consumers can use digital products in the context of everyday life. Sync’s first issue will debut during the summer of 2004 and will publish four issues throughout the year. Sync will launch with a target circulation of 200,000, consisting primarily of affluent readers, ages 25 — 44. The launch of Sync also coincides with the launch of our new consumer technology event, DigitalLife.

      In September 2003, we launched the Ziff Davis Event Marketing Group, a new business unit that will develop and build focused events for the business and consumer technology communities. Leveraging the editorial content and the highly qualified subscriber base of our market-leading publications, the new Ziff Davis Event Marketing Group will develop comprehensive and ground-breaking community events. These events will provide technology marketers with the best portfolio of integrated marketing solutions to attract new customers, accelerate the customer buying process and achieve more efficient use of their marketing dollars.

      In November 2003, the Ziff Davis Event Marketing Group announced the launch of Business 4Site, a new strategic event designed to meet the changing information needs of business technology decision makers. Business 4Site will kick off June 2004 at the Century Plaza Hotel in Los Angeles followed by a subsequent event in November 2004 at the New York Hilton in New York City. In December 2003, the Ziff Davis Event Marketing Group also announced the launch of DigitalLife, a new four-day special event that brings together the latest in digital technology for the home, work and play. DigitalLife will debut October 2004 at the Jacob K. Javits Convention Center in New York City. The event is expected to attract consumers and technology enthusiasts, all eager to experience the next generation in digital technology products.

      InternetCo produces online destinations for IT and business professionals, technology enthusiasts and gamers. Its portfolio of products are grounded in a tradition of lab-based reviews, advice and commentary from leading experts, and in-depth analysis and reporting. InternetCo products and services consist of Internet advertising, eSeminars, eNewsletters, sales lead-generation programs, integrated eCommerce opportunities, e-mail direct marketing, sponsorships and custom site development.

      InternetCo currently operates nine websites, primarily consisting of companion sites for our well-known magazine brands such as PC Magazine and eWeek. The pcmag.com site is the premier online destination for technology buyers making decisions for their business and personal technology needs and builds on PC Magazine’s original content, adding interactive features such as Tech Shop, which connects buyers and sellers in real time. The eweek.com site provides the first source for breaking news, vendor analysis/ roadmaps and critical examination of IT project deployments to help senior IT buyers build and mange their enterprise infrastructure. The cioinsight.com site meets the needs of high-level IT corporate executives with expert analysis, primary research and CIO roundtable discussions. Lastly, the baselinemag.com site reaches senior IT and corporate project managers online with case studies and tools to help drive project value assessment and implementation.

      In addition to the companion websites for our publications, InternetCo operates enthusiast websites such as extremetech.com, which targets “hardcore technologists” — i.e., IT professionals and computer enthusiasts who are truly passionate about technology. This site features extensive reviews, technical resources and interactive discussions about the components and core technologies behind the leading products. In October 2003, 1up.com was launched as our new online destination for videogame enthusiasts and provides in-depth content, up-to-the-minute news, multiple game reviews, tips and tricks and live forums with industry celebrities covering all game platforms. Unlike other competing videogame sites, 1up.com incorporates the unique editorial features from the Ziff Davis Game Group’s industry leading publications. In addition to videogames, the website also offers social networking, discussion groups, consumer news and lifestyle coverage of movies, music and gadgets.

7

Table of Contents

      InternetCo also produces eSeminars, which connects IT experts, buyers and sellers in online interactive groups to explore the latest issues in technology. We held 90 eSeminar events in 2003 with 1,300 average registrants per event. Furthermore, InternetCo produces 29 opt-in eNewsletters, as well as whitepapers and other targeted business-to-business sites.

      The following February 2004 monthly page view and unique visitor statistics show the relative scale of our Internet properties:

*	Includes miscellaneous sites such as eSeminars, Microsoft Watch and Ziff Davis Channelzone.

**	Unadjusted for duplication of unique visitors between sites.

Revenue

      Our principal sources of revenue for the year ended December 31, 2003 are advertising (68.4% of total revenue), circulation (20.6%) and other ancillary sources of revenue (11.0%). Circulation comprises both subscriptions (11.1%) and newsstand sales (9.5%). We record revenue net of agency commissions, estimated subscription cancellations and newsstand returns.

      Advertising. Advertising rates and rate structures vary among our publications and Internet properties and are based on, among other things, the circulation or audience of the particular property, the readership demographics, the scheduled frequency and the size and placement of the advertisement in the publication or website. Our advertising revenue is influenced by a number of external factors, including the volume of new technology product introductions, the amount and allocation of marketing expenditures by our advertising clients and the extent to which our customers elect to advertise using print and online media.

      Subscriptions. Generally, we sell subscriptions to our publications either directly by our circulation staff or by independent subscription direct marketing companies or agents. We receive approximately 9.7% of the total price of subscriptions sold through agents. In addition to agents, we have historically sold subscriptions using a variety of techniques including direct reply subscription cards, direct mail and the Internet.

      Newsstand. We sold approximately 5.5 million single copies of magazines for the year ended December 31, 2003. Generally we receive approximately 47.5% of the cover price of an individual magazine sold through the newsstand with the balance of the cover price going to the magazine’s distributor, wholesaler and retailer.

      Other Revenue Sources. We also derive revenue from a variety of ancillary activities, including mailing list rentals, custom conferences and events, royalty and license agreements and eNewsletters.

Operating Costs

      The principal components of our production costs are raw materials, printing and distribution, which represented 23.9%, 38.3% and 37.8%, respectively, of our publishing production expenses for the year ended December 31, 2003. Our principal raw material is paper. Paper supply and prices are subject to volatility and may be significantly affected by many factors, including market and economic conditions.

8

Table of Contents

      We outsource the printing process, including the majority of our pre-press and paper buying operations, for all of our publications. To facilitate efficient and timely printing of our publications, we have established long-term contractual relationships with certain printing companies, including R.R. Donnelley and Brown Printing Company. For the year ended December 31, 2003, approximately 39.7% of our total production costs were for printing services and paper supplied by or through R.R. Donnelley.

      Our other principal operating costs are selling, general and administrative expenses. Included in these costs are compensation expenses (salaries, commissions and incentives), benefits, editorial costs and circulation, marketing and promotion expenses.

Circulation

      Our publications include paid-circulation magazines, which generate revenue from advertising, newsstand sales and subscriptions, and controlled-circulation publications, which in our case are distributed to qualified IT professionals and generate revenue principally from the sale of advertising. Our controlled-circulation publications offer technology content that appeals to a professional audience in need of technology information and enterprise IT solutions, specifically in the areas of news, lab testing reviews, analysis, opinion and case studies. Our paid-circulation publications offer consumer and business-oriented content that appeals to a broader audience interested in technology products and services, the Internet and/or videogame hardware and software. As of December 31, 2003, we published six domestic paid-circulation publications and three domestic controlled-circulation publications.

      Our paid-circulation publications are distributed to subscribers and are also available for sale at newsstands and other retail outlets. We have an agreement with Warner Publishing Services to manage our newsstand and retail distribution. Warner Publishing Services in turn has agreements with magazine wholesalers to arrange for national and regional placements of our publications and to manage billing and collection of amounts due from the magazine retailers. Our paid subscribers receive their publications through the U.S. Postal Service and via Zinio Systems Inc. for digital delivery. We also have an agreement with Kable Fulfillment Services to manage our subscription billing, collection and processing, which includes providing mailing labels for each of the paid publications. Our controlled-circulation publications are distributed free of charge to individuals who meet demographic standards we established in an effort to make the publication attractive to advertisers. The qualified subscribers of our controlled-circulation publications receive these publications via the U.S. Postal Service and also via Zinio Systems Inc. for digital delivery. In addition, we have an agreement with Omeda Communications to manage our list and mailing labels for each of the controlled publications.

      In the year ended December 31, 2003, Circulation Management magazine awarded eWEEK and Baseline Circulation Excellence Awards, recognizing outstanding achievement, innovation and strategic performance in circulation marketing and management.

Customers

      The size and composition of our readership offers advertisers concentrated and efficient exposure to their critical target audiences. As a result, our top advertisers, including Microsoft, International Business Machines, Hewlett Packard and Dell Computer, have consistently advertised in our publications. Importantly, as technology and videogames have become more mainstream and appeal to broader demographics, our publications are becoming increasingly more appealing to a larger range of advertisers who are interested in marketing lifestyle and other general consumer products to this reader audience.

      We had over 600 advertising customers in 2003 according to internal records and an average paid circulation of over 3.1 million individuals according to the figures filed with the Audit Bureau of Circulation for the six months ended December 31, 2003. No single advertiser comprised more than 6.7% of our advertising revenue or 4.6% of total revenue for the year ended December 31, 2003. Our top ten advertisers accounted for 41.4% of our advertising revenue and 28.3% of our total revenue for the year ended December 31, 2003.

9

Table of Contents

Competition

      The magazine publishing industry is highly competitive. We compete with several much larger international companies that operate in many markets and have broad product offerings in publishing and trade shows and conferences. We compete for readers and advertisers in the general publishing marketplace, which is fragmented. According to SRDS Media, there are about 6,900 domestic trade magazine titles. We also compete for advertising and circulation revenue principally with publishers of other technology magazines and Internet sites with similar editorial content to ours. We believe our core competitive set includes approximately 20 print publishing and Internet companies. The technology magazine industry has traditionally been dominated by a small number of large publishers. In 2003, the three largest technology-publishing companies, Ziff Davis Holdings, International Data Group and CMP Media, accounted for 66.2% of total technology magazine gross advertising revenue and 69.2% of total technology advertising pages according to IMS.

      Our publications generally compete on the basis of:

	•	editorial quality;
	•	quantity and quality of circulation;
	•	the strength of complementary products serving the same niche;
	•	the effectiveness of sales, research efforts and customer service; and
	•	advertising rates.

      We believe that we compete successfully with other technology and videogame publications based on our market-leading positions within the technology and videogame magazine sectors, the nature and quality of our magazines’ editorial content and the attractive demographics of our readers. In addition, our magazines also compete for advertising revenue with general-interest consumer and business magazines and other forms of media, including broadcast and cable television, radio, newspapers, direct marketing and other electronic media. In competing with general-interest consumer and business magazines and other forms of media, we rely on our ability to reach a targeted segment of the population in an efficient, cost-effective manner.

Certain License Agreements and Service Contracts

      Agreements with CNET Networks and ZDNet. On January 19, 2001, we amended a pre-existing content license agreement with ZDNet and its parent, CNET Networks Inc. (“CNET”), such that, beginning on March 1, 2001, ZDNet’s previously granted license to display certain of our magazine content online became non-exclusive and on March 1, 2002, all of ZDNet’s license rights to content from our magazines was terminated. The term of the content license agreement was subsequently extended until April 30, 2002, without any further payments required from ZDNet. In addition, ZDNet’s right and obligation to maintain websites for our publications terminated and we obtained the right to host these websites starting April 1, 2001. As consideration for amending the license agreement, ZDNet paid us a royalty termination fee of $4.5 million in two installments, of which $2.2 million and $2.3 million were paid on March 1, 2001 and 2002, respectively.

      Under the previous five-year license agreement with ZDNet, we were providing the editorial content of our publications existing as of April 4, 2000 to ZDNet, and ZDNet maintained websites for those publications. This agreement did not cover any new publications acquired or developed by us after the date of the acquisition of ZDP to which we retained all rights in every medium, and it specifically allowed us, in certain circumstances, to transact e-commerce independently of ZDNet for all publications. We have a perpetual, royalty-free license from ZDNet to use the trademark “ZD” in print. ZDNet continues to use the trademark “ZD” online and may use certain derivations of the trademark “ZD” in print.

      In connection with the closing of the acquisition of ZDP, we entered into a services agreement with ZDI. Under this agreement, we provided distribution, circulation and production services to ZDI for its Computer Shopper magazine, and ZDI paid us our costs in relation to the performance of these services plus an

10

Table of Contents

      Other Agreements. We have been granted an exclusive license until June 30, 2004 to use certain trademarks owned by Sony Computer Entertainment America Inc. in connection with the publishing of the magazine Official U.S. PlayStation Magazine in the United States and Canada. The parties are currently in discussion concerning a potential renewal of the exclusive license, but we cannot be assured that we will continue to publish Official U.S. PlayStation Magazine in the United States and Canada beyond June 30, 2004.

      We have also been granted a license to use certain trademarks owned by Microsoft Corporation in connection with the publishing of Xbox Nation magazine both in print and online. The term of our right to use these trademarks expires on October 31, 2005.

      We also have a license to use certain trademarks and copyrighted content owned by Electronics Boutique of America, Inc., in connection with our publication of GMR. The term of our right to use these interests expires on December 31, 2005, subject to early termination by either party.

      Lastly, we license various of our trademarks and copyrighted content to third parties, including publishers of foreign editions of our magazines and other foreign magazines. Our brands and content currently appear in 44 countries and 20 languages worldwide.

Trademarks and Intellectual Property Rights

      We have developed strong brand awareness for our principal publications and services. Accordingly, we consider our trademarks, copyrights, trade secrets and similar intellectual property critical to our success and rely on trademark, copyright and trade secrets laws, as well as licensing and confidentiality agreements, to protect our intellectual property rights. We generally register our material trademarks in the U.S. and in certain other key countries in which these trademarks are used. Effective trademark, copyright and trade secret protection may not be available in every country where our publications and services are available.

      We may be subject to claims by third parties of alleged infringement of trademarks, copyrights, patents and other intellectual property rights, from time to time in the ordinary course of business. We do not believe there are any such legal proceedings or claims that are likely to have, individually or in the aggregate, a material adverse affect on our business, financial condition or results of operations.

Employees

      As of December 31, 2003, we had a total of approximately 460 employees, all based in the U.S. None of our employees are represented by a labor union. We believe that our relations with our employees are good.

Forward-Looking Statements

      All statements in this Form 10-K that are not statements of historical fact are “forward-looking statements,” as that term is used in Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. Examples of forward-looking statements include: projections of earnings, revenue, 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, you can identify forward-looking statements by the use of words such as “may,” “will,” “expects,” “should,” “believes,” “plans,”

11

Table of Contents

      Any or all of our forward-looking statements in this Form 10-K and in any other public statements we make may turn out to be materially wrong. They can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties. Many factors mentioned in this Form 10-K will be important in determining future results. Consequently, no forward-looking statement can be guaranteed. Actual future results may vary materially. Forward-looking statements herein speak only as of the date of filing of this Form 10-K. 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 (“SEC”).

      Statements regarding our future financial performance or results of operations, including expected revenue growth; future paper, postage, printing or other expenses; future operating margins; licensing or contract renewals; anticipated capital spending; our ability to obtain funding and other future or expected performance are subject to risk factors, some of which are discussed immediately below under “Certain Risk Factors.”

Certain Risk Factors

      Below we provide a cautionary discussion of certain risks, uncertainties and possibly inaccurate assumptions relevant to our businesses. These are certain factors that we think could cause our actual results to differ materially from expected and historical results. Other factors besides those listed here could also adversely affect us. This discussion is provided as permitted by the Private Securities Litigation Reform Act of 1995. In addition to other information in this Form 10-K, you should carefully evaluate the following risk factors:

      We have a significant amount of indebtedness. As of December 31, 2003, we have approximately $309.0 million of outstanding debt, $739.6 million of redeemable preferred stock (which was classified as debt beginning January 1, 2004) and approximately $863.4 million of stockholders’ deficit. Our earnings were insufficient to cover fixed charges plus preferred dividends for the year ended December 31, 2003 by $46.3 million.

      Our substantial indebtedness could continue to:

	•	require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund our operations;
	•	limit our flexibility in planning for, or reacting to, changes in our business and the publishing industry generally;
	•	place us at a competitive disadvantage compared to our competitors that have less debt;
	•	limit, along with the financial and other restrictive covenants in our indebtedness, among other things, our ability to borrow additional funds, make acquisitions or invest in new products; and
	•	if we fail to comply with those covenants, trigger an event of default under the agreements governing our indebtedness that, if not cured or waived, could have a material adverse effect on us.

      Our ability to service our indebtedness will depend on our future performance, which will be affected by prevailing economic conditions and financial, business and other factors. Certain of these factors are beyond our control. We believe that, based upon current levels of operations, we will be able to meet our debt service obligations for 2004 when due. The scheduled maturities for our principal indebtedness for 2004, 2005 and 2006 are approximately $8.6 million (plus an obligation to pay an “excess cash flow” payment currently

12

Table of Contents

      Ziff Davis Holdings is a holding company with no assets other than its ownership of the capital stock of a holding company that owns the capital stock of Ziff Davis Media. Accordingly, Ziff Davis Holdings’ ability to perform its obligations to the holders of its preferred stock depends upon the operating cash flow of Ziff Davis Media and its direct and indirect subsidiaries and their payments to Ziff Davis Holdings in the form of loans, dividends or otherwise. Ziff Davis Media is restricted from making any payments to Ziff Davis Holdings before such time as its obligations under the Compounding Notes and the Senior Credit Facility are satisfied. In addition, the making of loans, advances or other payments by Ziff Davis Media to Ziff Davis Holdings may be subject to regulatory and contractual restrictions. Subsidiary payments are also contingent upon earnings and various business and other considerations. If Ziff Davis Holdings is unable to obtain payments from Ziff Davis Media or its direct and indirect subsidiaries, Ziff Davis Holdings may be unable to redeem its preferred stock upon mandatory redemption on March 31, 2010 (or upon an earlier change in control, in certain circumstances with respect to certain classes of our preferred stock), or pay any cash dividends accruing on its preferred stock. In addition, Ziff Davis Holdings will be unable to pay any cash dividends on certain classes of preferred stock unless it has first paid in full all accrued dividends on classes that have liquidation preference.

      A majority of the equity securities of Ziff Davis Holdings are held by Willis Stein and its equity co-investors. Through their controlling interest in us and pursuant to the terms of an investor rights agreement among certain of Ziff Davis Holdings’ stockholders (“Investor Rights Agreement”), Willis Stein has the ability to control our operations and policies. Circumstances may occur in which the interests of Willis Stein and its affiliates, as controlling stockholders, could be in conflict with the interests of other investors. In addition, our equity investors may have an interest in pursuing acquisitions, divestitures or other transactions that, in their judgment, could enhance their equity investment, even though such transactions might involve risks to holders of our debt.

      Under the terms of the indenture governing the Compounding Notes and under the terms of the series E redeemable preferred stock (the “Series E Preferred Stock”) as set forth in the certificate of incorporation of Ziff Davis Holdings, we will be required to offer to repurchase all the Compounding Notes for a price equal to 101% of the principal amount, plus interest that has accrued but has not been paid as of the repurchase date, and to offer to redeem all the Series E Preferred Stock, if a change of control (as defined in the indenture governing the Compounding Notes or in the certificate of incorporation of Ziff Davis Holdings, respectively) occurs. However, it is possible that we will not have sufficient funds at the time of the change of control to make the required repurchases, or that we will not have sufficient funds to pay our other debts. In addition, our Senior Credit Facility may prohibit us from repurchasing the Compounding Notes and/or redeeming the Series E Preferred Stock after a change in control until we have repaid in full our debt under such credit facilities. If we fail to repurchase the Compounding Notes upon a change in control, we will be in default

13

Table of Contents

      The Series E Preferred Stock offers limited preemptive rights on issuances by Ziff Davis Holdings that are senior to such shares and a right to approve the issuance of shares junior to the series D redeemable preferred stock (“Series D Preferred Stock”) but senior to or on par with the Series E Preferred Stock. However, these rights are subject to certain limitations, which may result in the dilution of your equity interest in Ziff Davis Holdings. We may offer and sell additional shares of capital stock in the future, including capital stock issued under our Amended and Restated 2002 Employee Stock Option Plan (“2002 Stock Option Plan”). In connection with our financial restructuring, we issued approximately 38.6 million common stock warrants to Willis Stein, each entitling Willis Stein to obtain upon exercise one share of the common stock of Ziff Davis Holdings at an exercise price of $0.001 per share, and approximately 5.2 million common stock warrants to the tendering holders of our 12% Notes (of which approximately 1.4 million common stock warrants were issued to Willis Stein as a tendering holder), each giving such holders the right to acquire upon exercise one share of the common stock of Ziff Davis Holdings at an exercise price of $0.001 per share.

      Our Senior Credit Facility and the Compounding Notes indenture contain restrictive and information covenants and a breach of any of these restrictive covenants under the Senior Credit Facility or our inability to comply with the amended financial ratios would result in an event of default under our Senior Credit Facility. If such default occurs, the lenders under our Senior Credit Facility may elect to declare all outstanding borrowings, together with accrued and unpaid interest and other fees, to be immediately due and payable. Further, they may require us to use all of our available cash to partially repay such borrowings and could prevent us from making debt service payments on the Compounding Notes, which would result in an event of default under the indenture governing the Compounding Notes. Our Senior Credit Facility lenders also have the right in such circumstances to terminate any commitments they have to provide further financing, including those under the revolving portion of our Senior Credit Facility. Finally, our Senior Credit Facility lenders could foreclose on our assets.

      Our ability to implement our business strategy is subject to a number of risks and uncertainties. Among other things, we cannot assure you that we will be successful in:

	•	capitalizing on new revenue opportunities from existing products and services;
	•	developing ancillary revenue opportunities;
	•	selectively expanding our portfolio of publications, Internet properties and events; or
	•	optimizing circulation and production strategies.

In addition, our ability to pursue our business strategy may be limited by liquidity constraints and the restrictive covenants contained in our Senior Credit Facility and the indenture governing the Compounding Notes. Accordingly, the implementation of our business strategy may be adversely affected.

      We expect that advertising revenue will continue to be the principal source of our revenue in the foreseeable future. Most of our advertising contracts are either short-term contracts and/or can be terminated by the advertiser at any time with little notice. We cannot assure you that we will be able to retain current advertisers or obtain new advertising contracts. Advertising revenue for the magazine industry is cyclical and

14

Table of Contents

      In 2001 and 2002, we experienced a significant decline in revenue and earnings, primarily due to weak economic conditions, which were exacerbated by the terrorist attacks of September 11, 2001. We took a number of steps designed to improve our profits and margins despite decreased revenue. We restructured a number of our businesses and support departments and reduced overhead infrastructure by consolidating and closing several offices and outsourcing certain corporate functions. As a result, we recorded special restructuring and writedown charges to our operations of $277.5 million in 2001 and $128.2 million during 2002 related to these operating and financial restructuring decisions. If the U.S. economy worsens, our revenue would likely decline further. Because of our fixed cost structure, decreases in our revenue cause disproportionately greater decreases in our earnings. Accordingly, if revenue declines beyond our expectations, we will be forced to take additional cost-saving steps that could result in additional restructuring charges and materially adversely affect our business.

      We rely on copyright and trademark rights to protect our publishing products. Effective trademark and copyright protection may be unavailable or limited, or we may not have applied for such protection in the United States or abroad. In addition, we have been, and may in the future be, notified of claims that our publishing products may infringe trademarks, copyrights, patents and/or other intellectual property rights of others. Such claims, including any related litigation, could result in significant expense to us and adversely affect our cash flow, whether or not such litigation is resolved in our favor.

      Our business is managed by a small group of key executive officers. The loss of services of one or more of these senior executives could adversely affect our ability to effectively manage our overall operations or successfully execute current or future business strategies. The employment contracts we have with some of our top executives expire as of December 31, 2004, and we have not yet commenced formal discussions to extend these agreements. In addition, our success depends on our continued ability to recruit and retain highly skilled, knowledgeable and sophisticated editorial, sales and technical personnel. Competition for these key executives and personnel is intense. We cannot assure you of our ongoing ability to attract and retain such qualified employees.

      Our future success will depend in part on our ability to continue offering new products and services that successfully gain market acceptance by addressing the needs of our current and future customers. Our efforts to introduce new or integrate acquired products may not be successful or profitable. The process of internally researching and developing, launching, gaining acceptance and establishing profitability for a new product or service, or assimilating and marketing an acquired product, is both risky and costly. New products generally incur initial operating losses.

15

Table of Contents

      Costs related to the development of new products and services are generally expensed as incurred and, accordingly, our profitability from year to year may be adversely affected by the number and timing of new product launches.

      We face significant competition from a number of technology publishers, some of which may have greater financial and other resources than we have, which may enhance their ability to compete in the technology publishing market. We principally compete for advertising and circulation revenue with publishers of other technology publications. We also face broad competition from media companies that produce general-interest magazines and newspapers. Competition for advertising revenue is primarily based on advertising rates, the nature and scope of readership, reader response to advertisers’ products and services and the effectiveness of sales teams. Other competitive factors in publishing include product positioning, editorial quality, circulation, price and customer service, which impact readership audience, circulation revenues and, ultimately, advertising revenues. Because our industry is relatively easy to enter, we anticipate that additional competitors, some of whom have greater resources than we do, may enter these markets and intensify competition. We announced effective January 2004 a reduction in the rate base of PC Magazine to 1,050,000 as did our primary competitor, PC World, when it reduced its rate base to 1,025,000 effective January 2004. Although reduced circulation lowers our production and distribution expenses, it could also have a negative impact on our revenues that potentially equals or exceeds the production and distribution cost savings.

      We rely on our principal vendors and their ability or willingness to sell goods and services to us at favorable prices and other terms. Many factors outside our control may harm these relationships and the ability and willingness of these vendors to sell these goods and services to us on such terms. Our principal vendors include paper suppliers, printers, subscription fulfillment houses and national newsstand wholesalers, distributors and retailers. Each of these industries is currently experiencing consolidation among its principal participants. Such consolidation may result in all or any of the following, which could adversely affect our results of operations:

	•	decreased competition, which may lead to increased prices;
	•	interruptions and delays in services provided by such vendors; and
	•	greater dependence on certain vendors.

      Our principal raw material is paper. Paper prices have fluctuated over the past several years. We generally enter into contracts for the purchase of paper that adjust the price on a quarterly basis. We have not entered, and do not currently plan to enter, into long-term forward price or option contracts for paper. Accordingly, significant increases in paper prices could adversely affect our future results of operations.

      Postage for magazine distribution is also one of our significant expenses. We primarily use the U.S. Postal Service to distribute magazine subscriptions. We may not be able to recover, in whole or in part, paper or postage cost increases. Postal rates increased 9.9% in January 2001, 2.6% in July 2001 and 9.9% in June 2002. Each of these price increases has had a significant adverse effect on our cash flow, and any further significant cost increases will also have an adverse effect on our cash flow.

We may be adversely affected by a continued weakening of newsstand sales.

      The magazine industry has seen a weakening of newsstand sales during the past few years. A continuation of this decline could adversely affect our financial condition and results of operations by reducing our circulation revenue and thereby causing us to either incur higher circulation expense to maintain our guaranteed rate bases, or to reduce our rate bases which could then cause further negative impacts to our revenue.

16

Table of Contents

Properties

      Our principal properties and the approximate square feet occupied by us (excluding excess space vacated or sublet to others) are currently as follows:

      Properties other than those listed above include smaller sales and/or general offices in Chicago, Illinois and Atlanta, Georgia, under leases expiring through 2007. We do not own real property and we lease all of our offices from third parties. We believe our facilities are in good operating condition and are suitable and adequate for our current operations.

      In connection with prior years’ cost reduction programs, we undertook a real estate consolidation and relocation project designed to reduce our total real estate costs and square feet leased. In 2001, we closed eight facilities covering approximately 60,000 square feet with lease terms expiring through 2006. Two of the facilities covering approximately 24,000 square feet have been subleased. We also subleased approximately 194,000 square feet of our New York headquarters with sublease terms expiring in 2019. In 2002, we closed three more facilities covering approximately 125,000 square feet with terms expiring in 2010 and vacated approximately 60,000 square feet in our New York headquarters, which runs through 2019. In 2003, we entered into a sublease agreement for the vacated space in our New York headquarters that will also expire in 2019. We are currently in the process of attempting to negotiate subleases or lease terminations relating to the remaining closed facilities and excess leased space. We cannot assure you, however, that we will successfully negotiate and execute these additional subleases or lease terminations, or comment as to the terms on which we could do so.

      On October 17, 2001, the former Publisher of The Net Economy initiated a lawsuit in the Supreme Court of the State of New York, Nassau County, alleging breach of contract, fraudulent inducement and various other claims arising out of the termination of his employment. We made a motion to dismiss in December 2001, which was subsequently denied as against Ziff Davis Media and granted as against defendants Alan Perlman and Willis Stein. In June 2003, the Appellate Division modified the lower court’s order to grant defendants’ motion to dismiss plaintiff’s claim for punitive damages and otherwise affirmed the lower court’s order. We believe we have meritorious defenses to the claims raised and intend to continue vigorously defending this lawsuit. We cannot assure you, however, that we will prevail in this matter or comment as to the amount of monetary damages, if any, that the plaintiff could be awarded were the plaintiff to prevail.

      Ziff Davis Media was a defendant, along with numerous other magazine publishing companies, in In Re Magazine antitrust litigation, a consolidation of approximately 25 separate class action price fixing lawsuits that were commenced beginning on July 19, 2000, alleging a conspiracy among the magazine publishers to inflate subscription prices by agreeing not to offer subscriptions at more than a 50% discount off list price. The Court in February 2004 approved a settlement agreement, which does not impose any payment obligations upon the defendants and the action was dismissed.

      In March 2002, Ziff Davis France (“ZDF”) and other unrelated parties were sued by a freelance author alleging that certain publication of his works infringed his rights, which case was dismissed pursuant to a settlement agreement in July 2003.

      We are also 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.

17

Table of Contents

      Not applicable.

PART II

      There is no public trading market for Ziff Davis Holdings’ common stock. There are approximately 37 holders of record of Ziff Davis Holdings’ common stock.

      Ziff Davis Holdings did not pay cash dividends on its common stock and currently intends to retain any future earnings to finance operations, debt service and business expansion. Therefore, the payment of any cash dividends on the common stock is unlikely in the foreseeable future. Any future determination to pay cash dividends will be at the discretion of the Board of Directors of Ziff Davis Holdings and subject to terms of the Senior Credit Facility, the indenture governing the Compounding Notes and Ziff Davis Holdings’ certificate of incorporation and will be dependent upon our earnings, capital requirements, financial condition and such other factors deemed relevant by the Board of Directors.

      The following table presents the selected historical financial information of Ziff Davis Holdings. The selected financial information as of December 31, 2003, 2002, and 2001, March 31, 2001, and for the years ended December 31, 2003, and 2002 and the nine month period ended December 31, 2001, and the fiscal year ended March 31, 2001, were derived from the audited consolidated financial statements and the related notes of Ziff Davis Holdings, which appear in Item 8 in this Form 10-K. The selected financial information as of April 4, 2000, and December 31, 1999, and for the period January 1 to April 4, 2000, and for each of the two years in the period ended December 31, 1999, were derived from the audited carve-out financial statements and the related notes of ZDP. Certain of the selected historical financial information may not be comparable due to differing accounting bases resulting from changes in ownership. On April 5, 2000, ZDP was purchased by Ziff Davis Holdings. Accordingly, we have separated the periods of different ownership in the table below.

18

Table of Contents

     The following selected historical financial and operating information of Ziff Davis Holdings should be read in conjunction with “Business,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the consolidated financial statements and related notes of Ziff Davis Holdings, which appear in this Form 10-K.

ZIFF DAVIS HOLDINGS INC.

(1)	The financial information presented is for Ziff Davis Holdings. See Note 20 to our Consolidated Financial Statements for condensed consolidating financial information for Ziff Davis Media and our subsidiary guarantors.
(2)	As of January 1, 2002, Ziff Davis Holdings 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. Amounts prior to January 1, 2002, have been reclassified to reflect the current year adoption of this accounting pronouncement.
(3)	The restructuring charges incurred in 2001 and 2002 were primarily related to the closure of magazines. They include the write-off of intangible assets, severance costs and costs to exit certain activities, such as facilities closure costs. The credit incurred in 2003 represents a reversal of a portion of the prior years’ accruals primarily relating to adjustments to our estimated future real estate lease costs after excess vacant space was sublet.
(4)	Reflects an adjustment by the seller in 1999 to write-down the intangible assets to reflect the $780.0 million acquisition price of the publishing assets of ZDI. In 2001 and 2002, the adjustment reflects asset impairment charges primarily related to the closure of magazines.
(5)	For purposes of the computations, earnings consist of income (loss) before income taxes and equity in income (loss) from joint ventures, plus fixed charges. Fixed charges are defined as interest expense plus one-third of gross rent expense, which is deemed to be representative of interest. Preferred dividends consist of dividends payable on redeemable preferred stock. For the years ended December 31, 2003 and 2002, the nine months ended December 31, 2001, the fiscal year ended March 31, 2001 and the year ended December 31, 1999, our earnings were insufficient to cover combined fixed charges and preferred dividends by $46,262; $207,678; $411,642; $58,267; and $761,197, respectively.
(6)	For purposes of the computations, earnings consist of income (loss) before income taxes and equity in income (loss) from joint ventures, plus fixed charges. Fixed charges are defined as interest expense plus one-third of gross rent expense, which is deemed to be representative of interest. For the year ended December 31, 2002, the nine months ended December 31, 2001, the fiscal year ended March 31, 2001, and the year ended December 31, 1999, our earnings were insufficient by $157,930; $370,218; $15,847; and $761,197, respectively.
(7)	Division equity is presented because prior to the closing of the ZDP acquisition we were a division of ZDI and were not a separate legal entity.

19

Table of Contents

      The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements, including the notes to those statements, which are included in Item 8 of this Form 10-K and in conjunction with the sections of Item 1 of this Form 10-K titled “Forward-Looking Statements” and “Certain Risk Factors.” Historical results and percentage relationships set forth in the audited consolidated financial statements, including trends that might appear, should not be taken as indicative of results of future operations.

Overview

      We are a leading integrated media company focused on the technology, videogame and consumer lifestyle markets. We are an information services provider of technology media including publications, websites, conferences, events, eSeminars, eNewsletters, custom publishing, list rental, research and market intelligence. Ziff Davis Holdings is majority owned by various investment funds managed by Willis Stein, a private equity investment firm. Ziff Davis Holdings is a holding company that 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. Ziff Davis Holdings has no material assets other than its investment in the capital stock of Ziff Davis Media. 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., an unrelated company. Our major operating subsidiaries are Ziff Davis Publishing Inc., Ziff Davis Development Inc. (“LaunchCo”) and Ziff Davis Internet Inc. (“InternetCo”). In January 2002, we changed our fiscal year-end from March 31 to December 31, effective December 31, 2001.

      Our operations are classified into two reportable segments, Established Businesses and Developing Businesses. The Established Businesses segment is primarily comprised of the Ziff Davis Publishing Inc. subsidiary which includes the publishing assets that were acquired when we formed in April 2000 and are collectively referred to and defined under our Senior Credit Facility as the “Restricted Subsidiaries.” This segment is engaged in publishing and licensing magazines and providing editorial content about technology, videogames and the Internet. This segment also licenses its content and brands in 44 countries and 20 languages worldwide.

      The Developing Businesses segment is comprised of the LaunchCo and InternetCo subsidiaries, which are collectively referred to and defined under our Senior Credit Facility as the “Unrestricted Subsidiaries.” This segment is focused on developing new businesses, including: (1) publications, which consist of Baseline, CIO Insight and now Sync, our new consumer lifestyle magazine; (2) Internet-related properties leveraging our editorial content, expertise and relationships with our audience and advertisers in our Established Businesses segment; and (3) events, including those developed by our new Event Marketing Group, which is building targeted events for the business and consumer technology communities. Where appropriate in our discussion below, we have separately identified amounts associated with the Restricted Subsidiaries and Unrestricted Subsidiaries when comparing amounts to prior year periods. For further segment information, see Note 23 to our audited consolidated financial statements included herein.

      Ziff Davis Holdings’ financial statements as of December 31, 2003 and 2002, and for the years then ended and as of December 31, 2001, and for the nine months then ended are prepared on a consolidated basis and include the accounts of Ziff Davis Holdings and its subsidiaries.

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

20

Table of Contents

      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 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.

      Recent years’ economic trends in the United States have had a significant negative impact on our business. These trends include a general decline in all advertising spending, consolidation among our technology and videogame advertisers and a significant decrease in core technology advertising spending. In response to this decline, we undertook a cost reduction and restructuring program in 2001, which continued into 2002, and as a result of which we have discontinued unprofitable publications, consolidated operations and reduced our workforce. In August 2002, we also completed a comprehensive financial restructuring (see “Liquidity and Capital Resources — Financial Restructuring” and Note 13 to the Consolidated Financial Statements).

Results of Operations — Year Ended December 31, 2003 Compared to Year Ended December 31, 2002

      The table below presents results for the year ended December 31, 2003 and compares this to the results for the year ended December 31, 2002.

      Revenue was $194.1 million for the year ended December 31, 2003, compared to $209.0 million in the comparable prior year period, a decrease of $14.9 million, or 7.1%. Excluding discontinued publications and a business sold in 2002 (Yahoo! Internet Life, Ziff Davis SMART BUSINESS, The Net Economy and eTESTING LABS, Inc.), revenue increased $3.9 million, or 2.1%.

21

Table of Contents

      Revenue from the Restricted Subsidiaries was $162.1 million compared to $183.3 in the comparable prior year period, a decrease of $21.2 million, or 11.6%. Excluding discontinued publications within the Restricted Subsidiaries (Yahoo! Internet Life and Ziff Davis SMART BUSINESS), revenue was down $8.1 million, or 4.8%, from $170.2 million. The $8.1 million decrease in revenue from continuing publications was largely due to an advertising revenue decline of $11.3 million related to continued softness in the business-to-business enterprise technology capital spending and advertising marketplaces causing a decline in our enterprise technology magazine advertising pages and our average revenue per page. We also continued to see some shifting of marketing budgets towards advertising on our publication-affiliated websites and these advertising dollars are captured in the Unrestricted Subsidiaries. In addition, there was a decrease in videogame advertising pages due to fewer new game releases and “hit” games during the year. However, this decrease was partially offset by an increase in the average revenue per page for both our consumer technology and our videogame publications. Total paid advertising pages for continuing publications in the Restricted Subsidiaries decreased by 9.5% for the year ended December 31, 2003. Circulation revenue for the continuing businesses in the Restricted Subsidiaries decreased $1.8 million or 4.3%, to $40.0 million, primarily due to decreased newsstand revenue for our videogame publications. Other revenue related to the Restricted Subsidiaries’ continuing businesses increased $5.0 million, or 48.2%, due to increased list rental, custom conferences and events and insert revenues.

      Revenue from the Unrestricted Subsidiaries was $32.0 million for the year ended December 31, 2003, compared to $25.7 million in the comparable prior year period, a $6.3 million or 24.5% increase. Excluding the discontinued publication and a business sold within the Unrestricted Subsidiaries (The Net Economy and eTESTING LABS, Inc.), revenue was $20.0 million in 2002, representing an increase of $12.0 million or 60.0% from the prior year period. The increase primarily relates to increased advertising revenue for our Internet operations and increased advertising and event revenue for Baseline and CIO Insight. Total paid advertising pages for the continuing businesses within the Unrestricted Subsidiaries increased by 3.3% for the year ended December 31, 2003.

      Cost of production was $60.6 million for the year ended December 31, 2003, compared to $75.8 million for the comparable prior year period, a $15.2 million or 20.1% decrease. Excluding discontinued publications and a business sold in 2002, cost of production decreased $8.2 million, or 11.9%.

      Cost of production related to the Restricted Subsidiaries decreased $12.5 million, or 17.8% from $70.4 million in 2002 to $57.9 million for the year ended December 31, 2003. Excluding discontinued publications within the Restricted Subsidiaries, cost of production decreased 8.8% from $63.5 million to $57.9 million. The decrease primarily relates to manufacturing, paper and distribution cost savings achieved through implementation of a number of new production and distribution initiatives across all of our publications and the impact of more favorable third-party supplier contracts. As a result, cost of production for continuing businesses in the Restricted Subsidiaries as a percentage of revenue decreased from 37.3% to 35.7% for the years ended December 31, 2002 and 2003, respectively.

      Cost of production related to the Unrestricted Subsidiaries was $2.7 million for the year ended December 31, 2003 compared to $5.4 million for the comparable prior year period. Excluding $0.5 million of cost for the discontinued publication and a business sold within the Unrestricted Subsidiaries for the year ended December 31, 2002, cost of production for the year ended December 31, 2003 decreased 44.9%, or $2.2 million, from $4.9 million. The decrease is primarily due to significantly reduced Internet infrastructure and operating costs resulting from our cost management initiatives and the impact of more favorable third-party supplier contracts. As a result of both the cost reductions and revenue growth, cost of production for continuing businesses in the Unrestricted Subsidiaries as a percentage of revenue decreased from 24.5% to 8.4% for the years ended December 31, 2002 and 2003, respectively.

22

Table of Contents

Selling, general and administrative expenses

      Selling, general and administrative expenses for the year ended December 31, 2003 were $99.0 million, compared to $125.2 million for the year ended December 31, 2002, a $26.2 million or 20.9% decrease. Excluding discontinued publications and a business sold in 2002, selling, general and administrative expenses decreased $4.9 million or 4.7%.

      Selling, general and administrative expenses related to the Restricted Subsidiaries decreased $17.2 million, or 21.9%, from $78.6 million to $61.4 million. Excluding $12.2 million of expenses from discontinued publications within the Restricted Subsidiaries for the year ended December 31, 2002, selling, general and administrative expenses decreased $5.0 million or 7.5% from $66.4 million. The decrease was primarily due to the workforce, facilities and other cost savings achieved as a result of cost management initiatives, our ability to reduce our bad debt expense from prior year levels and other year-end adjustments. As a result, selling, general and administrative expenses for continuing businesses in the Restricted Subsidiaries as a percentage of revenue decreased from 39.0% to 37.9% for the years ended December 31, 2002 and 2003, respectively.

      Selling, general and administrative expenses related to the Unrestricted Subsidiaries decreased $9.0 million, or 19.4%, from $46.5 million to $37.5 million for the years ended December 31, 2002 and 2003, respectively. Excluding $9.1 million of expenses related to the discontinued publication and a business sold within the Unrestricted Subsidiaries for the year ended December 31, 2002, selling, general and administrative expenses increased $0.1 million or 0.3% from $37.4 million. The increase was primarily due to incremental costs associated with our new business initiatives: Sync, 1up.com and the Event Marketing Group, but also included increased Internet audience production costs and higher Baseline and CIO Insight event costs due to higher sales volume in these areas. As a result, selling, general and administrative expenses for continuing businesses in the Unrestricted Subsidiaries as a percentage of revenue decreased from 187.0% to 117.2% for the years ended December 31, 2002 and 2003, respectively.

      Depreciation and amortization expenses were $25.9 million and $37.8 million for the years ended December 31, 2003 and 2002, respectively. The decrease is principally attributable to lower depreciation and amortization expense resulting from the write-off of finite-lived intangible assets and certain fixed assets as part of our 2002 cost reduction and restructuring program.

      For the year ended December 31, 2003, we reversed a portion of the prior years’ accrued restructuring balance and recognized a credit of $6.2 million to Restructuring charges, net in our Consolidated Statement of Operations. This credit primarily related to real estate lease costs and reflected our recent sublet of excess space in our New York headquarters for an amount higher than originally estimated. As of December 31, 2003, there were $23.4 million of accrued restructuring charges included in our Consolidated Balance Sheet under the Accrued expenses and other current liabilities and Accrued expenses — long-term captions. The remaining accrued balance primarily relates to future real estate lease costs for vacated facilities. We anticipate making cash payments in 2004 of approximately $9.4 million with the remainder being paid through 2019 due to the long-term nature of related real estate lease agreements.

      We incurred a total pre-tax charge of $128.2 million for the cost reduction and restructuring program for the year ended December 31, 2002, $79.2 million of which was recorded as a write-down of intangible assets and the remainder as Restructuring charges, net in our Consolidated Statement of Operations. The total charge of $128.2 million is comprised of non-cash asset impairment costs of $85.2 million, employee severance costs of $8.1 million and costs to exit certain activities of $34.9 million. These costs primarily relate to: (1) the discontinuation of Yahoo! Internet Life, Ziff Davis SMART BUSINESS and The Net Economy; (2) the write-down of certain intangible assets; and (3) the further consolidation of our real estate facilities.

23

Table of Contents

      In September 2003, we sold an international trademark to an unrelated third-party for approximately $5.0 million and realized a gain on sale of $2.5 million. We also received a final contingent payment of the 2002 sale of our eTESTING LABS, Inc. subsidiary that was recognized as a gain of $0.1 million. In July 2002, we sold our eTESTING LABS, Inc. subsidiary for approximately $1.6 million in net proceeds, realizing a gain of approximately $0.6 million.

      Interest expense was $19.1 million for the year ended December 31, 2003, compared to $39.3 million for the year ended December 31, 2002. Our weighted average debt outstanding was approximately $306.8 million and $390.9 million, and our weighted average interest rate was 8.81% and 10.35%, for the years ended December 31, 2003 and 2002, respectively.

      The decline in interest expense is a reflection of the full year benefit from our financial restructuring, which was completed in August 2002. As a result, we reduced our outstanding debt balance by $147.4 million and our Senior Credit Facility was amended such that we are now paying market interest rates. Interest expense for the year ended December 31, 2003, included the following non-cash items: (1) $2.1 million of amortization of debt issuance costs; (2) $1.9 million related to long-term real estate leases recorded in prior year periods at their net present value and (3) $1.3 million of net interest expense related to the Compounding Notes. Of the $39.3 million of interest in 2002, $2.5 million and $0.5 million was non-cash in nature related to amortization of debt issuance costs and the Compounding Notes, respectively.

      The income tax provision of $0.2 million for the year ended December 31, 2003, and the income tax provision of $0.3 million for the year ended December 31, 2002, represent effective rates of negative 13.4% and negative 0.1%, respectively. The negative effective rates result from foreign withholding taxes on our international licensing revenue as well as certain minimum state and local taxes, despite the consolidated entity having a pre-tax loss.

      Net loss of $1.9 million for the year ended December 31, 2003, represents an improvement of $194.9 million compared to net loss of $196.8 million for the year ended December 31, 2002. The improvement is primarily due to the absence in 2003 of a write-down of intangible assets, the impact of our cost reduction and financial restructuring program and the development and revenue growth of our businesses in the Unrestricted Subsidiaries.

24

Table of Contents

Results of Operations — Year Ended December 31, 2002 Compared to Pro forma Year Ended December 31, 2001

      The table below presents unaudited pro forma results for the full year ended December 31, 2001 by adding our nine-month transitional period ended December 31, 2001 with the three-month period ended March 31, 2001 and compares this to the results for the year ended December 31, 2002.

      Revenue was $209.0 million for the year ended December 31, 2002, compared to $300.1 million in the comparable prior year period, a decrease of $91.1 million, or 30.4%.

      Revenue from the Restricted Subsidiaries was $183.3 million compared to $277.8 in the comparable prior year period, a decrease of $94.5 million, or 34.0%. Excluding the discontinued publications within the Restricted Subsidiaries (FamilyPC, Smart Partner, Yahoo! Internet Life, Ziff Davis SMART BUSINESS and Interactive Week), revenue was down $28.1 million or 14.2% from $198.3 million. Discontinued publications accounted for $13.1 million of revenue for the year ended December 31, 2002 and $79.5 million for the same period in 2001. The $28.1 million decrease in revenue from continuing publications was largely due to an advertising revenue decline of $21.2 million related to a significant decrease in advertising pages and average revenue per page for our technology publications, partially offset by strong gains in ad pages and average revenue per page for our videogame publications. Circulation revenue for the continuing businesses in the Restricted Subsidiaries increased $0.4 million, or 0.9%, to $41.9 million, primarily due to increased newsstand revenue for our videogame publications. Other revenue related to the Restricted Subsidiaries’ continuing businesses decreased $7.2 million, or 40.8%, primarily driven by decreased royalty revenue resulting from the termination of our content license agreement with ZDNet.

25

Table of Contents

      Revenue from the Unrestricted Subsidiaries was $25.7 million for the year ended December 31, 2002, compared to $22.3 million in the comparable prior year period, a $3.4 million or 15.3% increase. Excluding the discontinued publications and websites within the Unrestricted Subsidiaries (Expedia Travels and The Net Economy), revenue was $20.0 million in 2002 and $5.8 million in 2001, an increase of $14.2 million. The increase in revenue from continuing businesses primarily relates to: (1) increased advertising revenue from new publications (CIO Insight and Baseline); and (2) growing revenue from our Internet properties which was nearly zero in the prior year period.

      Cost of production was $75.8 million for the year ended December 31, 2002, compared to $114.6 million for the comparable prior year period, a $38.8 million or 33.9% decrease.

      Cost of production related to the Restricted Subsidiaries decreased $34.1 million, or 32.6% from $104.5 million in 2001 to $70.4 million for the year ended December 31, 2002. Excluding discontinued publications within the Restricted Subsidiaries, cost of production decreased 8.9% from $69.7 million to $63.5 million. This decrease was primarily due to a decline in total pages produced in our magazine portfolio together with reduced paper prices and was partially offset by an increase in postage rates. In July 2001, the Governor of the U.S. Postal Service approved a 2.6% increase in postage rates and this was followed by a 9.9% increase in June 2002. Excluding discontinued publications, cost of production as a percentage of revenue increased to 37.3% from 35.2% of revenue for the year ended December 31, 2002 versus 2001. This increase is primarily attributable to the revenue decline described above.

      Cost of production related to the Unrestricted Subsidiaries was $5.4 million compared to $10.1 million in the prior year period. The cost decrease was due to the closure of Expedia Travels, The Net Economy and certain websites, partially offset by increased costs at CIO Insight, Baseline and our Internet properties, which were in their early development stages during the prior year period.

      Selling, general and administrative expenses for the year ended December 31, 2002, were $125.2 million, compared to $230.0 million for the year ended December 31, 2001, a $104.8 million or 45.6% decrease.

      Selling, general and administrative expenses related to the Restricted Subsidiaries decreased $67.6 million, or 46.2% from $146.2 million to $78.6 million. Excluding discontinued publications within the Restricted Subsidiaries, selling, general and administrative expenses decreased $14.5 million, or 17.9% from $81.0 million to $66.5 million. This decrease was primarily related to our cost reduction program and cost savings realized in circulation acquisition, editorial, marketing and sales as well as bad debt expense. Excluding discontinued publications, selling, general and administrative expenses as a percentage of revenue decreased from 40.8% for the year ended December 31, 2001 to 39.1% for the year ended December 31, 2002, primarily related to our cost control efforts.

      Selling, general and administrative expenses related to the Unrestricted Subsidiaries were $46.5 million and $83.7 million for the years ended December 31, 2002 and 2001, respectively. Excluding discontinued publications and websites within the Unrestricted Subsidiaries, selling, general and administrative expenses were $37.4 million, a decrease of $5.9 million or 13.6% from $43.3 million for the year ended December 31, 2001. The decrease in selling, general and administrative expenses primarily resulted from our cost reduction program and the impact of lower Internet content and audience development costs in 2002 compared to 2001, when our Internet properties were in their start-up phase.

      Depreciation and amortization expenses were $37.8 million and $81.6 million for the years ended December 31, 2002 and 2001, respectively. The decrease is principally attributable to lower depreciation and amortization expense resulting from the write-off of goodwill, intangible assets and certain fixed assets as part

26

Table of Contents

      Our cost reduction and restructuring program continued in 2002. We incurred a total pre-tax charge of $128.2 million for this restructuring program for the year ended December 31, 2002, $79.2 million of which was recorded as a write-down of intangible assets and the remainder as Restructuring charges, net in our Consolidated Statement of Operations. The total charge of $128.2 million was comprised of non-cash asset impairment costs of $85.2 million, employee severance costs of $8.1 million and costs to exit certain activities of $34.9 million. These costs primarily related to: (1) the discontinuation of Yahoo! Internet Life, Ziff Davis SMART BUSINESS and The Net Economy; (2) the write-down of certain intangible assets; and (3) the further consolidation of our real estate facilities. As of December 31, 2002, we had approximately $38.2 million of accrued restructuring costs remaining on the Consolidated Balance Sheet.

      In 2001 we incurred a total pre-tax charge of $277.5 million, $240.1 million of which was recorded as a write-down of intangible assets and the remainder as a restructuring charge in our Consolidated Statement of Operations for the year ended December 31, 2001. The total charge was comprised of non-cash asset impairment costs of $251.6 million, employee severance costs of $13.0 million and costs to exit certain activities of $12.9 million. These costs primarily related to: (1) the closure of Family PC, Expedia Travels and Smart Partner magazines and related websites; (2) the consolidation of Interactive Week into eWEEK; (3) the restructuring of our sales, marketing, editorial and overhead functions across all platforms; (4) the closure of Zcast.tv, a website; and (5) the consolidation of our real estate facilities.

      In October 2001, we sold our 50% ownership interest in Mac Publishing LLC. Proceeds from the sale were $4.1 million resulting in a non-cash loss of $7.8 million. Accordingly, we had no income or loss from joint ventures in 2002.

      In July 2002, we sold our eTESTING LABS, Inc. subsidiary for approximately $1.6 million in net proceeds realizing a gain of approximately $0.6 million.

      Interest expense was $39.3 million for the year ended December 31, 2002 compared to $49.0 million for the year ended December 31, 2001. Our weighted average debt outstanding was approximately $390.9 million and $450.0 million, and our weighted average interest rate was 10.35% and 10.48% for the years ended December 31, 2002 and 2001, respectively.

      The decline in interest expense is primarily due to the financial restructuring which we completed in August 2002. As a result, we reduced our outstanding debt balance by $147.4 million and our Senior Credit Facility was amended such that we were able to resume paying market interest rates. Of the $39.3 million in interest in 2002, $2.5 million and $0.5 million was non-cash in nature related to amortization of debt issuance costs and the new Compounding Notes, respectively. In 2001, $2.2 million was non-cash in nature related to the amortization of debt issuance costs.

      The income tax provision of $0.3 million for the year ended December 31, 2002 and the income tax provision of $0.4 million for the year ended December 31, 2001 represent effective rates of negative 0.1% for both years. The negative effective rate results from foreign withholding tax on our international licensing revenue as well as certain minimum state and local taxes despite the consolidated entity having a pre-tax loss.

27

Table of Contents

      As a result of the factors describe above, we incurred a net loss of $196.8 million for the year ended December 31, 2002, reflecting an improvement of $263.8 million, compared to a net loss of $460.6 million for the year ended December 31, 2001. The improvement is primarily due to the year-to-year decrease in the write-down of intangible assets and the impact of our cost reduction and financial restructuring program.

Results of Operations — Nine Months Ended December 31, 2001 Compared to Nine Months Ended December 31, 2000

      The table below presents results for the nine month transition period ended December 31, 2001 and for the comparable nine month period ended December 31, 2000.

      Revenue was $215.9 million for the nine months ended December 31, 2001, compared to $346.7 million in the comparable prior year period, a decrease of $130.8 million, or 37.7%.

      Revenue from the Restricted Subsidiaries was $197.2 million compared to $340.1 in the comparable prior year period, a decrease of $142.9 million, or 42.0%. Excluding discontinued publications within the Restricted Subsidiaries (Family PC, Smart Partner and Interactive Week), revenue was down $91.4 million or 34.4% from $265.8 million. Discontinued publications accounted for $22.8 million of revenue for the nine months ended December 31, 2001 and $74.3 million of the comparable prior year period. The $91.4 million decrease in revenue from continuing publications was largely due to an advertising revenue decline of $69.4 million, primarily related to a decrease in ad pages of 36.4%. Circulation revenue for the continuing businesses in the Restricted Subsidiaries decreased $17.0 million, or 31.9%, to $36.3 million. This decline relates to a 25.6% decrease in newsstand revenue and a 35.6% decline in subscription revenue compared to the same prior year period. Both newsstand and subscription revenue were dramatically impacted by negative economic conditions. Other revenue related to the Restricted Subsidiaries’ continuing businesses was down $5.1 million, or 28.4%, primarily driven by decreased royalty revenue resulting from the termination of our license agreement with ZDNet.

28

Table of Contents

      Revenue from the Unrestricted Subsidiaries was $18.6 million for the nine months ended December 31, 2001 compared to $6.6 million in the comparable prior year period. The increase primarily relates to: (1) increased advertising revenue from new magazine publications (The Net Economy, CIO Insight and Baseline); and (2) revenue from our Internet properties which was nearly zero in the prior year period. This growth in revenue was partially offset by the closure of Expedia Travels magazine in October 2001.

Cost of production

      Cost of production was $81.7 million for the nine months ended December 31, 2001, compared to $106.4 million for the comparable prior year period, a $24.7 million or 23.2% decrease.

      Cost of production related to the Restricted Subsidiaries decreased $27.2 million, or 26.6% from $102.1 million to $74.9 million for the nine months ended December 31, 2001 and 2000, respectively. Excluding discontinued publications within the Restricted Subsidiaries, cost of production decreased 21.3% to $64.3 million from $81.7 million for the nine months ended December 31, 2001 and 2000, respectively. This decrease was primarily due to a decline in total pages produced in our magazine portfolio and paper prices, partially offset by an increase in postage rates. In January 2001, the Governor of the U.S. Postal Service approved a 9.9% increase in postage rates for calendar year 2001. In addition, a further 2.6% increase in postage rates became effective July 2001. Excluding discontinued publications, cost of production as a percentage of revenue increased from 30.0% to 35.3% of revenue for the nine months ended December 31, 2000 and 2001, respectively. This increase is primarily attributable to the decline in revenue described above.

      Cost of production related to the Unrestricted Subsidiaries was $6.8 million compared to $4.3 million for the nine months ended December 31, 2001 and 2000, respectively. The cost increase was primarily related to new magazine publications (The Net Economy, CIO Insight and Baseline) and our new Internet properties, which were in their early development stages during the prior year period.

Selling, general and administrative expenses

      Selling, general and administrative expenses for the nine months ended December 31, 2001, were $164.4 million compared to $179.4 million for the nine months ended December 31, 2000.

      Selling, general and administrative expenses related to the Restricted Subsidiaries decreased $46.6 million, or 30.6% from $152.3 million to $105.7 million for the nine months ended December 31, 2001 and 2000, respectively. Excluding discontinued publications within the Restricted Subsidiaries, selling, general and administrative expenses decreased $29.8 million or 25.9% from $115.0 million to $85.2 million for the nine months ended December 31, 2001 and 2000, respectively. This decrease was primarily related to cost reductions realized in circulation acquisition, editorial, marketing and sales as well as bad debt expense. Excluding discontinued publications, selling, general and administrative expenses as a percentage of revenue increased from 43.3% for the nine months ended December 31, 2000, to 48.9% for the nine months ended December 31, 2001. This increase primarily related to the revenue decline described above.

      Selling, general and administrative expenses related to the Unrestricted Subsidiaries were $58.6 million and $27.1 million for the nine months ended December 31, 2001 and 2000, respectively. The increase primarily related to the newly launched magazine publications and Internet properties which were in their early development stages during the prior year period.

Depreciation and amortization

      Depreciation and amortization expenses were $62.6 million and $47.2 million for the nine months ended December 31, 2001 and 2000, respectively. The increase is principally attributable to higher depreciation expense for capital spending in the second half of the prior fiscal year for computer hardware and software related to the startup of our Internet properties.

      As part of the cost reduction and restructuring program, we also wrote-off a net book value of $219.8 million of goodwill and intangible assets and $30.8 million of fixed assets during the nine months ended December 31, 2001.

29

Table of Contents

Restructuring charges, net and write-down of intangible assets

      Economic and technology sector trends in the United States had a significant negative impact on our business in 2001. These trends included consolidation among our advertisers and a general decline in advertising spending. In response to this decline, we began a restructuring program in the quarter ended June 30, 2001, under which we started to eliminate unprofitable operations, consolidate facilities and reduce our workforce in order to decrease excess operating costs.

      We incurred a total pre-tax charge of $277.5 million for this restructuring program for the nine months ended December 31, 2001, $240.1 million of which was recorded as a write-down of intangible assets and the remainder as Restructuring charges, net in our Consolidated Statement of Operations. The total charge of $277.5 million is comprised of non-cash asset impairment costs of $251.6 million, employee severance costs of $13.0 million and costs to exit certain activities of $12.9 million. These costs primarily relate to: (1) the closure of Family PC, Expedia Travels and Smart Partner magazines and related websites; (2) the consolidation of Interactive Week into eWEEK; (3) the restructuring of our sales, marketing, editorial and overhead functions across all platforms; (4) the closure of Zcast.tv, a website; and (5) the consolidation of our real estate facilities. Due to the timing of decisions made in regard to these plans, $1.1 million of the charge was recorded during the quarter ended June 30, 2001, $24.4 million was recorded during the quarter ended September 30, 2001 and the remainder was recorded during the quarter ended December 31, 2001. As of December 31, 2001, we had approximately $17.6 million of accrued restructuring costs remaining on the Consolidated Balance Sheet. The remaining accrued expenditures primarily related to facilities consolidation expenses, employee severance costs and financial restructuring plan costs, and we made approximately $11.0 million of cash payments related to those accruals in 2002.

Equity in (loss) income from joint ventures and loss on sale of joint venture

      Our equity in (loss) income from joint ventures decreased $1.2 million from income of $1.0 million in the nine months ended December 31, 2000 to a loss of $0.2 million in the nine months ended December 31, 2001, primarily due to a decrease in income from Mac Publishing LLC. In October 2001, we sold our 50% ownership interest in Mac Publishing LLC. Proceeds from the sale were $4.1 million resulting in a non-cash loss of $7.8 million.

Interest expense, net

      Interest expense was $36.8 million for the nine months ended December 31, 2001, compared to $44.8 million for the nine months ended December 31, 2000. Our weighted average debt outstanding was approximately $441.1 million and $545.5 million, and our weighted average interest rate was 10.35% and 11.16% for the nine months ended December 31, 2001 and 2000, respectively.

      The income tax provision of $0.3 million for the nine months ended December 31, 2001, and the income tax provision of $0.8 million in the nine months ended December 31, 2000 represent effective rates of negative 0.1% and negative 2.5%, respectively. The negative effective rate results from foreign withholding tax on our international licensing revenue as well as certain minimum state and local taxes despite the consolidated entity having a nine-month pre-tax loss.

      As a result of the factors described above, we incurred a net loss of $415.4 million for the nine months ended December 31, 2001, compared to a net loss of $30.8 million for the nine months ended December 31, 2000.

30

Table of Contents

Liquidity and Capital Resources

      Total cash at December 31, 2003 was $47.3 million. We have historically relied upon cash flow from operating activities, borrowings under our Senior Credit Facility and additional investments from our equity sponsors 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 and are generally comprised of businesses that were acquired from ZDI in April 2000. The Senior Credit Facility and the indenture governing the Compounding Notes place restrictions on funding provided by 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. At December 31, 2003, $17.4 million of our cash balance is available to fund the Unrestricted Subsidiaries.

      As of December 31, 2003, we were in compliance with all of our debt covenants. Total indebtedness at December 31, 2003 was $309.0 million and consisted of $181.0 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, $107.5 million under the Compounding Notes and $12.3 million under the 12% Notes.

      Borrowings under the Senior Credit Facility bore interest rates ranging from 5.42% to 5.92% as of December 31, 2003. At December 31, 2003, no additional borrowing was available under the revolving portion of our Senior Credit Facility. Interest on the Senior Credit Facility is payable monthly in cash. Interest of $0.7 million on the 12% Notes is payable on January 15 and July 15 of each year. No cash payments of interest or principal are required on the Compounding Notes until February 2007.

      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 exchanged a combination of cash, Compounding Notes, Series E Preferred Stock and warrants to purchase Ziff Davis Holdings common stock for most of our existing 12% Notes. In addition, we amended and restated our Senior Credit Facility.

      Key terms of the financial restructuring were as follows: (1) we received an equity contribution of $80.0 million from Willis Stein in exchange for the issuance of Series D Preferred Stock with an aggregate liquidation preference of $80.0 million, as well as approximately 38.6 million warrants, each representing the right to purchase one share of our common stock at an exercise price of $0.001 per share; (2) accredited investors holding approximately 95.1% in aggregate principal amount of our 12% Notes tendered their notes and 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 Series E Preferred Stock and warrants for the purchase of approximately 5.2 million shares of our common stock in exchange for their 12% Notes; and (3) we amended and restated our Senior Credit Facility providing for, among other terms: (a) waiver of all existing defaults, (b) deferral of principal payments for eight quarters, (c) removal of the obligation to pay the default interest rate on the outstanding principal, and (d) mandatory use of a portion of excess cash flows, as defined, to repay amounts owed under the Senior Credit Facility.

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

      Our commitments under the amended Senior Credit Facility are subject to quarterly principal payments, commencing September 30, 2004, with the final payment due on March 31, 2007. The aggregate principal

31

Table of Contents

      As a result of our financial restructuring and cost reduction program, we believe 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 2004. We believe that, based upon current levels of operations, we will be able to meet our debt service obligations for 2004 when due. We also believe that our Senior Credit Facility and the Compounding Notes indenture contain achievable restrictive and information covenants which we will also be able to meet in 2004. Significant assumptions and risks apply to this belief, including, among other things, that we will continue to be successful in implementing our business strategy and that there will be no material adverse developments in our business, liquidity or capital requirements. See “Business — Certain Risk Factors”.

      Details for the changes in cash and cash equivalents during the years ended December 31, 2003 and 2002 are discussed below:

      Operating Activities. Cash provided/(used) by operating activities was $8.5 million for the year ended December 31, 2003, compared to $(48.0) million for year ended December 31, 2002, an improvement of $56.5 million. This change was primarily attributable to higher net income resulting from significantly reduced operating costs, lower cash interest payments and decreased cash restructuring payments.

      Investing Activities. Cash provided/(used) by investing activities was $2.4 million and $(1.0) million for the years ended December 31, 2003 and 2002, respectively. These amounts represent capital expenditures of $2.5 million for the year ended December 31, 2003 and $2.6 million for the year ended December 31, 2002. This was offset by net proceeds from the sale of assets of $4.9 million and $1.6 million for the years ended December 31, 2003 and 2002, respectively. The $4.9 million of net proceeds in 2003 related to the sale of an international trademark to an unrelated third-party.

      Financing Activities. Cash provided/(used) by financing activities was $(4.9) million for the year ended December 31, 2003 compared to $70.3 million for the year ended December 31, 2002. The 2003 outflow related to an unscheduled principal payment of $4.9 million of our Senior Credit Facility related to the proceeds from the sale of the international trademark. The 2002 inflow primarily relates to net proceeds from our financial restructuring including $77.6 million from the issuance of new preferred stock.

      Details for the changes in cash and cash equivalents during the year ended December 31, 2002 and pro forma year ended December 31, 2001 are discussed below:

      Operating Activities. Cash used by operating activities was $48.0 million for the year ended December 31, 2002, compared to $76.1 million for the pro forma year ended December 31, 2001, an improvement of $28.1 million or 36.9%. This change was primarily due to significantly reduced operating costs and lower cash interest payments resulting from our cost reduction and financial restructuring efforts.

      Investing Activities. Cash used by investing activities was $1.0 million for the year ended December 31, 2002, compared to $22.9 million for the pro forma year ended December 31, 2001. The 2002 spending represented capital spending of $2.6 million net of $1.6 million of net proceeds from the sale of our eTESTING LABS Inc. subsidiary. In 2001, approximately $38.0 million of capital spending (primarily related to developing Internet properties) was partially offset by proceeds from the sale of our International operations and joint ventures.

32

Table of Contents

      Financing Activities. Cash provided by financing activities was $70.3 million for the year ended December 31, 2002, compared to $16.7 million for the pro forma year ended December 31, 2001. The 2002 inflow includes $77.6 million from the issuance of preferred stock and $14.9 million of net borrowings under the Senior Credit Facility. These increases in cash were partially offset by $21.2 million paid to holders of the 12% Notes as part of the financial restructuring as well as $1.0 million of debt issuance costs paid in 2002. In 2001, we received approximately $99.0 million from the issuance of preferred stock, partially offset by net repayments of our Senior Credit Facility and debt issuance costs, totaling approximately $82.3 million.

Contractual Obligations and Commitments

      As of December 31, 2003, we had long-term debt and preferred stock obligations totaling $309.0 million and $739.6 million, respectively. The long-term debt obligations include amounts outstanding under the Senior Credit Facility, Compounding Notes and 12% Notes. Such obligations were incurred to obtain proceeds for general corporate purposes, finance acquisitions and refinance other debt obligations. Our obligations with respect to these debt instruments can be found in the agreements which govern them which were filed as Exhibits 4.3, 4.4, and 10.9 to our Registration Statement on Form S-4 dated October 9, 2002.

The following table sets forth our contractual obligations at December 31, 2003:

      The caption Non-cancelable operating lease obligations in the above table includes our real estate operating lease obligations net of existing subleases at December 31, 2003. However, the lease obligation amounts have not been reduced for estimated future sublease income related to vacated facilities that were not subleased as of December 31, 2003.

      In connection with our commercial agreements, we often provide indemnifications of varying scope and terms to customers, business partners and other parties with respect to certain matters, including, but not limited to, losses arising out of our breach of such agreements and out of intellectual property infringement claims made by third parties. In addition, we have entered into indemnification agreements with certain of our directors and officers that will require us, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers. We maintain director and officer insurance, which may cover certain liabilities arising from our obligation to indemnify our directors and officers in certain circumstances. The indemnification provided by us to our officers and directors does not have a stipulated maximum, therefore we are not able to develop a reasonable estimate of the maximum liabilities. To date, we have not incurred material costs as a result of such obligations and have not accrued any liabilities related to such indemnification obligations in our financial statements.

      Lastly, certain legal proceedings described in Item 3 of this Form 10-K are potential contingencies, which could also affect our liquidity in future periods.

Off-Balance-Sheet Arrangements

      At December 31, 2003, we did not have any relationships with variable interest (otherwise known as “special purpose”) entities that have been established for the purpose of facilitating off-balance-sheet debt.

      In the ordinary course of business, we have indemnification obligations with respect to letters of credit primarily used as security against non-performance in relation to certain of our non-cancelable operating lease obligations. The outstanding letters of credit approximated $1.8 million at December 31, 2003, and are not recorded on the Consolidated Balance Sheet as of December 31, 2003.

33

Table of Contents

      We enter into certain incentive agreements, from time to time, with executives and senior management that include earn-out payments that are calculated based on the achievement of future revenue and other financial thresholds. Several of these agreements currently exist with measurement dates beginning with the close of our 2006 fiscal year. As of December 31, 2003, we cannot provide a reasonable estimate of the likelihood and amount we would be required to pay to fulfill these commitments. Based on this, we have not accrued any liabilities in relation to these incentive obligations as of December 31, 2003.

Cyclicality

      Revenue from print advertising accounted for approximately 60.2% of our total revenue for the year ended December 31, 2003. Cyclicality in advertising expenditures generally, or with respect to magazine-based advertising specifically, could therefore have a material effect on our business, financial condition and operating results with respect to prior periods.

Seasonality

      Historically, our business has been seasonal and we have earned a significant portion of our annual revenue in the 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. Other factors affecting the seasonality of our business are 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 future quarter or for the entire year. We also cannot assure that our fourth quarter revenue will be higher than revenue for our other quarters.

Critical Accounting Policies and Estimates

      In December 2001, the Securities and Exchange Commission (“SEC”) issued disclosure guidance for “critical accounting policies.” The SEC defines “critical accounting policies” as those that require application of management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods.

      The preparation of our financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to allowances for doubtful accounts, reserves for sales returns and allowances, reserves for severance, closures and restructuring-related costs and the recoverability of long-lived assets, including the excess of purchase price over net assets acquired. We base our estimates on historical experience and on various assumptions that we believe are reasonable under the circumstances. These form the basis of our judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates which would affect our reported results of operations. We believe the following is a description of the critical accounting policies and estimates used in the preparation of our consolidated financial statements.

      Allowances for doubtful accounts are estimated losses resulting from our customers’ failure to make required payments. We continually monitor collections from customers and provide for estimated credit losses. We aggressively pursue collection efforts on these overdue accounts and upon collection reverse the write-off in future periods. If future payments by our customers were to differ from our estimates, we may need to increase or decrease our allowances for doubtful accounts.

      Reserves for sales returns and allowances are primarily related to our newsstand sales, and to a lesser extent, subscription sales in which subscribers are billed. We estimate and maintain these reserves based primarily on our distributors’ historical return practices, our subscribers’ historical collection rates and our actual return experience. If actual sales returns and allowances differ from the estimated returns and allowances rates used, we may need to increase or decrease our reserve for sales returns and allowances.

34

Table of Contents

      Reserves for restructuring-related costs, including severance, magazine and facilities closures, are estimated costs resulting from management’s plans and actions to consolidate operations and eliminate headcount to reduce total operating costs. If the future payments of these costs were to differ from our estimates, we may need to increase or decrease our reserves. We recorded restructuring charges or (credits) related to our 2001 and 2002 cost reduction and restructuring programs of approximately $(6.2) million, $50.0 million and $37.4 million for the years ended December 31, 2003 and 2002, and the nine months ended December 31, 2001, respectively.

      We periodically evaluate the recoverability of our long-lived assets, including property and equipment, goodwill and identifiable intangible assets, whenever events or changes in circumstances indicate that the carrying amount may not be recoverable or in connection with our annual financial review process. Our evaluations include analyses based on the cash flows generated by the underlying assets and profitability information, including estimated future operating results, trends or other determinants of fair value. If the fair value of the asset determined by these evaluations is less than its carrying amount, an impairment charge is recognized for the difference. Future adverse changes in market conditions or continuing poor operating results of certain businesses may also indicate an inability to recover the carrying value of the assets, thereby possibly requiring an impairment evaluation and charge. For the year ended December 31, 2002, we recognized a goodwill impairment charge of approximately $25.0 million, an impairment of our indefinite-lived intangible assets of approximately $16.9 million and wrote-off a net book value of approximately $6.0 million of fixed assets in connection with an assessment of the recoverability of such long-lived assets and our cost reduction and restructuring program.

Effect of Recently Issued Accounting Standards

      In November 2002, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 45 “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”). FIN 45 requires that a liability be recognized at fair value at the inception of certain guarantees for the obligations undertaken by the guarantor. FIN 45 also requires additional disclosures for certain guarantee contracts. The disclosure provisions of FIN 45 are effective for financial statements ending after December 15, 2002, while the recognition and initial measurement provisions are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The adoption of FIN 45 had no material impact on our financial statements.

      In January 2003, the FASB issued Interpretation No. 46 “Consolidation of Variable Interest Entities” (“FIN 46”). FIN 46 provides guidance on the identification of variable interest entities, and the assessment of a company’s interests in a variable interest entity to determine whether consolidation is appropriate. FIN 46 requires the consolidation of a variable interest entity by the primary beneficiary if the entity does not effectively disperse risks among the parties involved. FIN 46 applies immediately to variable interest entities created after January 31, 2003, and is effective for periods beginning after June 15, 2003, for existing variable interest entities. As we have no material exposures to variable interest entities or other off-balance-sheet arrangements, the effects of adopting FIN 46 were not material to our results of operations or financial condition.

      In May 2003, the FASB issued Statement No. 150 “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”(“SFAS 150”). SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments that have characteristics of both liabilities and equity. It requires than an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). The FASB has directed that the effective date of SFAS 150 be deferred for certain nonpublic entities with mandatorily redeemable financial instruments until fiscal periods beginning after December 31, 2003. We believe that under SFAS 150, we are defined as a nonpublic entity and have outstanding preferred stock that is considered mandatorily redeemable. Therefore, effective January 1, 2004, we will record the accrued dividends on the mandatorily redeemable preferred stock as interest expense and

35

Table of Contents

Interest Rate Risk

      In connection with our 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 received a floating rate of interest based on three-month London Inter-Bank Offering Rate (“LIBOR”), which resets quarterly, and paid a fixed rate of interest each quarter for the term of the agreement. The interest rate swap agreement ended on October 11, 2003 and was not renewed.

      Due to the Senior Credit Facility having a floating interest rate based on LIBOR, but our Compounding Notes and 12% Notes having fixed rates, only $119.8 million or 38.8% of our total debt is effectively set at a fixed rate of interest as of December 31, 2003. Accordingly a 1.00% fluctuation in market interest rates would cause a $1.9 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 cost of production. In 2001 and 2002, paper prices declined significantly and have remained essentially unchanged throughout 2003. In addition, during 2001 we outsourced the majority of our paper buying to our printers. As a result, we hold significantly lower levels of inventory and have generally been able to purchase paper at or below market prices at the time of use. However, there can be no assurance that these trends will continue or that we can recover future paper price increases.

      Postage rates increased 5.0% in January 1999, 9.9% in January 2001, 2.6% in July 2001 and most recently 9.9% in July 2002. Due to new legislation in 2003, the Postmaster General has announced that postage rates will not increase again until 2006.

36

Table of Contents