ZIFF DAVIS HOLDINGS INC - 10-Q Quarterly Report

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


x		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the quarterly period ended March 31, 2004
		OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the transition period from to

Commission file number 333-99939

ZIFF DAVIS HOLDINGS INC.

(Exact name of Registrant as Specified in Its Charter)


DELAWARE		36-4355050
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

28 East 28th Street

New York, New York 10016

(Address of Principal Executive Offices)

(212) 503-3500

(Registrants Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO o

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 x

As of May 5, 2004, 2,311,443 shares of common stock, par value $0.001 per share, were outstanding. The issuer’s outstanding common stock is not publicly traded.

ZIFF DAVIS HOLDINGS INC.

Index to Form 10-Q for the Quarter Ended March 31, 2004


		Page

PART I — FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements (unaudited)
	Condensed Consolidated Balance Sheets as of March 31, 2004 and December 31, 2003		1
	Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2004 and 2003		2
	Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2004 and 2003		3
	Condensed Consolidated Statement of Changes in Stockholders’ Deficit for the Three Months Ended March 31, 2004		4
	Notes to Unaudited Condensed Consolidated Financial Statements		5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		25
Item 4.	Controls and Procedures		26

PART II — OTHER INFORMATION
Item 1.	Legal Proceedings		27
Item 2.	Changes in Securities and Use of Proceeds		27
Item 3.	Defaults Upon Senior Securities		27
Item 4.	Submission of Matters to a Vote of Security Holders		27
Item 5.	Other Information		27
Item 6.	Exhibits and Reports on Form 8-K		27
SIGNATURE			28
CERTIFICATION FOR ROBERT F. CALLAHAN
CERTIFICATION FOR DEREK IRWIN
CERTIFICATION FOR ROBERT F. CALLAHAN
CERTIFICATION FOR DEREK IRWIN

PART I — FINANCIAL INFORMATION


ITEM 1.	CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

ZIFF DAVIS HOLDINGS INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(dollars in thousands, except per share data)


			March 31,			December 31,
			2004			2003

ASSETS
Current assets:
	Cash and cash equivalents		$	45,432		$	47,308
	Accounts receivable, net			29,087			32,836
	Inventories			307			321
	Prepaid expenses and other current assets			7,129			7,010

		Total current assets		81,955			87,475
Property and equipment, net				14,756			15,206
Intangible assets, net				216,738			220,544
Goodwill, net				38,139			38,139
Other assets, net				15,453			15,544

		Total assets	$	367,041		$	376,908


LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
	Accounts payable		$	16,610		$	13,938
	Accrued expenses and other current liabilities			25,028			31,706
	Current portion of long-term debt			19,373			15,766
	Unexpired subscriptions and deferred revenue, net			26,659			25,170

		Total current liabilities		87,670			86,580
Long-term debt				293,099			293,265
Accrued interest — compounding notes				86,445			89,532
Accrued expenses — long-term				12,938			14,027
Mandatorily redeemable preferred stock				757,366			—
Other non-current liabilities				17,580			17,253

		Total liabilities		1,255,098			500,657

Commitments and contingencies (Note 6)
Mandatorily redeemable preferred stock				—			739,602

Stockholders’ equity (deficit):
	Common stock — $0.001 par value, 100,000,000 shares authorized, 2,311,443 and 2,312,928 shares issued and outstanding, respectively			17,332			17,343
	Stock subscription loans			(3	)		(14	)
	Additional paid-in capital			8,468			8,468
	Accumulated deficit			(913,854	)		(889,148	)

		Total stockholders’ equity (deficit)		(888,057	)		(863,351	)

		Total liabilities and stockholders’ equity (deficit)	$	367,041		$	376,908

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

ZIFF DAVIS HOLDINGS INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

(dollars in thousands)



		Three Months
		Ended March 31,

		2004			2003

Revenue, net		$	41,968		$	42,091

Operating expenses:
	Cost of production		12,933			15,206
	Selling, general and administrative expenses		26,026			25,302
	Depreciation and amortization of property and equipment		1,793			2,901
	Amortization of intangible assets		3,806			4,212

	Total operating expenses		44,558			47,621

Loss from operations			(2,590	)		(5,530	)
Gain on sale of assets, net			—			65
Interest expense, net			(22,027	)		(5,011	)

	Loss before income taxes		(24,617	)		(10,476	)
Income tax provision			89			250

	Net loss	$	(24,706	)	$	(10,726	)

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

ZIFF DAVIS HOLDINGS INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(dollars in thousands)



		Three Months
		Ended March 31,

		2004			2003

Cash flows from operating activities:
Net loss		$	(24,706	)	$	(10,726	)
Adjustments to reconcile net loss to net cash used by operating activities:
	Depreciation and amortization		5,599			7,113
	Non-cash rent expense		179			595
	Amortization of accrued interest on compounding notes, net		354			304
	Amortization of debt issuance costs		540			1,072
	Accrued dividends on mandatorily redeemable preferred stock		17,764			—
Changes in operating assets and liabilities:
	Accounts receivable		3,749			3,512
	Inventories		14			77
	Accounts payable and accrued expenses		(5,297	)		(7,380	)
	Unexpired subscriptions and deferred revenue, net		1,489			(216	)
	Prepaid expenses and other, net		(219	)		1,394

Net cash used by operating activities			(534	)		(4,255	)

Cash flows from investing activities:
	Capital expenditures		(1,342	)		(504	)

Net cash used by investing activities			(1,342	)		(504	)

Net cash provided by financing activities			—			—

Net decrease in cash and cash equivalents			(1,876	)		(4,759	)
Cash and cash equivalents at beginning of period			47,308			41,290

Cash and cash equivalents at end of period		$	45,432		$	36,531

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

ZIFF DAVIS HOLDINGS INC.

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIT

(UNAUDITED)

(dollars in thousands)


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

Balance at December 31, 2003			2,312,928		$	17,343		$	(14	)	$	8,468	$	(889,148	)	$	—	$	(863,351	)	$	—
	Cancellation of shareholders loans		(1,485	)		(11	)		11			—		—			—		—			—
	Net loss		—			—			—			—		(24,706	)		—		(24,706	)		(24,706	)

Balance at March 31, 2004			2,311,443		$	17,332		$	(3	)	$	8,468	$	(913,854	)	$	—	$	(888,057	)	$	(24,706	)

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

ZIFF DAVIS HOLDINGS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

NOTE 1 — THE COMPANY AND BASIS OF PRESENTATION

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary to present fairly the consolidated financial position of Ziff Davis Holdings Inc. at March 31, 2004 and December 31, 2003 and the results of its consolidated operations for the three months ended March 31, 2004 and 2003 and cash flows for the three months ended March 31, 2004 and 2003 and changes in stockholders’ deficit from December 31, 2003 to March 31, 2004 have been included. Operating results for the periods presented are not necessarily indicative of the results that may be expected for the year ended December 31, 2004. For further information refer to Ziff Davis Holdings Inc.’s audited consolidated financial statements, including the notes to those statements, that are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.

Formation of Ziff Davis Holdings Inc.

The Company is a leading integrated media company focused on the technology, videogame and consumer lifestyle markets. The Company is 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 Inc. (“Ziff Davis Holdings” or, collectively with its subsidiaries, the “Company”) is majority owned by various investment funds managed by Willis Stein & Partners Management III, L.L.C. (“Willis Stein” or “controlling stockholders”), a private equity investment firm. Ziff Davis Holdings is a holding company which indirectly owns 100% of Ziff Davis Media Inc. (“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. (“ZDI”), an unrelated company. The Company’s major operating subsidiaries are Ziff Davis Publishing Inc., Ziff Davis Development Inc. (“LaunchCo”) and Ziff Davis Internet Inc. (“InternetCo”).

Operations

The Company’s 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 the Company was formed in April 2000 and are collectively referred to and defined under the Company’s 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 41 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 the 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, the Company’s new consumer lifestyle magazine; (2) Internet-related properties which leverage the Company’s editorial content, expertise and relationships with the Company’s audience and advertisers in its Established Businesses segment; and (3) events, including those developed by the

ZIFF DAVIS HOLDINGS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (continued)

(dollars in thousands, except per share data)

NOTE 1 — THE COMPANY AND BASIS OF PRESENTATION — (continued)

Company’s new Event Marketing Group which is building targeted events for the business and consumer technology communities.

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

Principles of Consolidation

The financial statements of the Company as of March 31, 2004 and December 31, 2003 and for the three months ended March 31, 2004 and 2003 are prepared on a consolidated basis and include the accounts of the Company and its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

Stock-based Compensation

Statement of Financial Accounting Standard (“SFAS”) No. 123 “Accounting for Stock-Based Compensation” requires that companies with stock-based compensation plans either recognize compensation expense based on the fair value of the options granted or continue to apply the existing accounting rules and disclose pro forma net income and earnings per share assuming the fair value method had been applied. The Company has chosen to continue applying Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations in accounting for its plans. The table below details pro forma net loss as if the compensation cost for the Company’s stock-based compensation plans was determined on the fair value basis at the respective grant dates and recognized over the vesting period (adjusted for forfeitures).



	Three Months
	Ended March 31,

	2004			2003

Net loss, as reported	$	(24,706	)	$	(10,726	)
Stock-based employee compensation income (expense) determined under the fair value basis for all awards, net of related tax effects		(2	)		(2	)

Pro forma net loss	$	(24,708	)	$	(10,728	)

During 2003, the Company’s Board of Directors or compensation committee thereof authorized the Company’s officers to execute and deliver option agreements with respect to an aggregate number of 10,652 shares of Series D Preferred Stock; 13,089 shares of Series B Preferred Stock; 43,814 shares of Series A Preferred Stock; and 6,975,000 shares of Common Stock. In connection with such authorization, the Company prepared and distributed form option agreements not executed by the Company to most of the authorized optionees. The Company has received signatures on such agreements from approximately one-half of such authorized optionees but has not executed any such agreements. Consequently, no options were deemed issued and outstanding at March 31, 2004 with respect to such authorized grants. The Company anticipates that during 2004 it will require the authorized optionees who have not returned signed agreements to do so or forfeit their ability to receive such options, and after such deadline the Company will execute all signed option agreements received from the authorized optionees and issue such options.

Recent Accounting Pronouncements

ZIFF DAVIS HOLDINGS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (continued)

(dollars in thousands, except per share data)

NOTE 1 — THE COMPANY AND BASIS OF PRESENTATION — (continued)

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. In December 2003, the FASB issued Interpretation 46 R, “Consolidation of Variable Interest Entities (revised December 2003)”, (“FIN 46 R”) which further clarified the provisions of FIN 46 and delayed the effective date for applying provisions of FIN 46 until the end of the first quarter of 2004 for interests held by public entities in variable interest entities or potential variable interest entities created before February 1, 2003. As the Company has no material exposures to variable interest entities or other off-balance sheet arrangements, the effects of adopting FIN 46 and FIN 46 R were not material to its 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 that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). The Company believes that under SFAS 150, it is defined as a nonpublic entity and has outstanding preferred stock that is considered mandatorily redeemable. Therefore, effective January 1, 2004, the Company has recorded the accrued dividends on the mandatorily redeemable preferred stock (“Redeemable Preferred Stock”) as interest expense and classified the Redeemable Preferred Stock as a long-term liability on the Condensed Consolidated Balance Sheet. The adoption of this statement increased the Company’s total liabilities by $757.4 million as of March 31, 2004 and increased the Company’s consolidated interest expense by $17.8 million for the quarter ended March 31, 2004. This will have no impact on the Company’s cash flow, its Senior Credit Facility financial covenants or its ability to service its debt payments under the Senior Credit Facility.

Reclassifications

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

NOTE 2 — INTANGIBLE ASSETS, NET

As of March 31, 2004 and December 31, 2003, the Company’s intangible assets and related accumulated amortization, all of which are attributable to the Established Businesses segment, consisted of the following:



			As of March 31, 2004							As of December 31, 2003

					Accumulated							Accumulated
			Gross		Amortization			Net		Gross		Amortization			Net

Amortized intangible assets:
	Advertising lists		$	183,729	$	(49,775	)	$	133,954	$	183,729	$	(46,318	)	$	137,411
	Trademarks/trade names			26,095		(4,094	)		22,001		14,300		(2,707	)		11,593
	Subscriber lists			11,600		(11,600	)		—		11,600		(11,600	)		—

		Total amortized intangible assets		221,424		(65,469	)		155,955		209,629		(60,625	)		149,004

Unamortized intangible assets:
	Trademarks/trade names			66,648		(5,865	)		60,783		78,443		(6,903	)		71,540
	Goodwill			45,406		(7,267	)		38,139		45,406		(7,267	)		38,139

		Total unamortized intangible assets		112,054		(13,132	)		98,922		123,849		(14,170	)		109,679

Total intangible assets			$	333,478	$	(78,601	)	$	254,877	$	333,478	$	(74,795	)	$	258,683

The Company modified certain estimated useful lives related to tradenames and advertiser lists during the first quarter of 2004. The impact was to increase amortization by $0.5 million related to these changes.

ZIFF DAVIS HOLDINGS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (continued)

(dollars in thousands, except per share data)

Amortization expense associated with intangible assets at March 31, 2004 is estimated to be $3,806 for each of the last three quarters of 2004 and approximately $15,225 for each year beginning in 2005 through 2009.

NOTE 3 — ACCRUED RESTRUCTURING CHARGES

During 2002 and 2001, the Company implemented a comprehensive cost reduction and restructuring program, which included closing or selling unprofitable operations, consolidating facilities and reducing the Company’s workforce in order to decrease excess operating costs. The Company incurred $48,950 and $37,412 of Restructuring charges, net in its Condensed Consolidated Statements of Operations for the year ended December 31, 2002 and the nine months ended December 31, 2001, respectively.

As of March 31, 2004, there was $21,642 of accrued restructuring charges included on the Balance Sheet in Accrued expenses and other current liabilities and Accrued expenses — long term. The remaining accrued expenditures primarily related to facilities consolidation expenses. During the three months ended March 31, 2004, the Company made $2,433 of payments, primarily related to real estate leases for vacant space. The Company anticipates making further payments in 2004 of approximately $7,000, with the remaining accrued balance being paid through 2019 due to the long-term nature of related real estate lease agreements.

The following table summarizes the activity with respect to the accrued restructuring charge balances for the three months ended March 31, 2004:


	As of							As of
	December 31,					Adjustment		March 31,
	2003		Payments			to Accrual		2004

Employee severance costs	$	1,974	$	(417	)	$	—	$	1,557
Facility consolidation and other costs		21,418		(2,016	)		683		20,085

Total	$	23,392	$	(2,433	)	$	683	$	21,642

The $683 adjustment to the accrual was due primarily to interest on the net present value of restructured leases.

NOTE 4 — DEBT

As of March 31, 2004, the Company was in compliance with all of its debt covenants, and total indebtedness was $312,472, consisting of the following:

• $189,188 under the Senior Credit Facility, including $8,200 outstanding under the revolving portion of the Senior Credit Facility,

• $12,280 of 12% Senior Subordinated Notes due 2010 (the “12% Notes”) and

• $111,004 of Senior Subordinated Compounding Notes due 2009 (the “Compounding Notes”).

At March 31, 2004, there was approximately $500 borrowing capacity available under the Senior Credit Facility and existing borrowings bore interest at rates ranging from 5.37% to 5.87%.

The Company was required to make an “excess cash flow” payment, as defined in its Senior Credit Facility, of $6.4 million on or before April 14, 2004. This represented a mandatory repayment of its loans under the Senior Credit Facility. This amount, along with the Company’s scheduled principal repayments of $13.0 payable within one year, has been classified as Current portion of long-term debt on the Condensed Consolidated Balance Sheet as of March 31, 2004.

In connection with the Senior Credit Facility, the Company entered into an interest rate swap agreement on September 27, 2000 for the notional amount of $25,000 and a maturity date of October 11, 2003. Under this swap agreement, the Company received a floating rate of interest based on the three-month LIBOR,

ZIFF DAVIS HOLDINGS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (continued)

(dollars in thousands, except per share data)

NOTE 4 — DEBT — (continued)

which reset quarterly, and paid a fixed rate of interest each quarter for the term of the agreement. This swap was accounted for as a cash flow hedge and any change in the fair market value of the swap was recognized as other comprehensive income or loss within Accumulated other comprehensive loss in the Company’s condensed consolidated Balance Sheet and condensed consolidated Statement of Stockholders’ Deficit. The mark-to-market adjustment for the three months ended March 31, 2003 was an unrealized gain of $311. The interest rate swap agreement ended on October 11, 2003 and was not renewed.

The Compounding Notes, issued in August 2002, accrue interest in semi-annual periods at rates of 12.0% to 14.0%. For the first four years, interest may be paid, at the Company’s option and subject to certain restrictions under the Senior Credit Facility, either in cash or by compounding such interest on the Compounding Notes. During the three months ended March 31, 2004, the Company compounded interest in the amount of $3,441. The compounded interest accounts for the increase in total debt from $309,031 at December 31, 2003 to $312,472 at March 31, 2004.

The issuance of the Compounding Notes is being accounted for in accordance with the provisions of SFAS No. 15, and, accordingly, a liability representing accrued interest on the Compounding Notes was recorded at the date of issuance. This liability represents the difference in estimated cash payments under the new note agreements as compared to the previous note agreements. The March 31, 2004 balance of $86,445 is included within long-term liabilities in the Company’s condensed consolidated Balance Sheet as Accrued interest — compounding notes and is being amortized as a reduction of interest expense over the remaining term of the Compounding Notes. During the three months ended March 31, 2004 and 2003, the Company amortized $3,087 and $2,691 as a reduction of interest expense, respectively.


NOTE 5 —	MANDATORILY REDEEMABLE PREFERRED STOCK

The following table details activity in the Redeemable Preferred Stock account for the three months ended March 31, 2004:



		Redeemable Preferred Stock

		Series A		Series B		Series C		Series D		Series E		Total

Balance at December 31, 2003		$	464,288	$	129,460	$	5,173	$	107,966	$	32,715	$	739,602
	Dividends payable		7,524		3,502		—		5,923		815		17,764

Balance at March 31, 2004		$	471,812	$	132,962	$	5,173	$	113,889	$	33,530	$	757,366

As previously discussed, under SFAS 150 the Company, effective January 1, 2004, has recorded the accrued dividends on the Redeemable Preferred Stock as interest expense and classified the Redeemable Preferred Stock as a long-term liability on the Condensed Consolidated Balance Sheet. The carrying value of the Redeemable Preferred Stock equals the fair value, therefore there was not a cumulative effect of an accounting change related to the adoption of SFAS 150.

NOTE 6 — CONTINGENCIES

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

ZIFF DAVIS HOLDINGS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (continued)

(dollars in thousands, except per share data)

NOTE 7 — GUARANTOR AND OTHER FINANCIAL INFORMATION


	*Guarantor Financial Information*

Ziff Davis Holdings and Ziff Davis Media are holding companies and their only assets are the ownership of the capital stock of their subsidiaries and cash balances. All of the Company’s consolidated subsidiaries have guaranteed Ziff Davis Media’s debt on a full, unconditional, joint and several basis. There are no restrictions which limit the ability of the Company’s subsidiaries to transfer funds to Ziff Davis Media in the form of cash dividends, loans or advances. No separate financial information for Ziff Davis Media has been provided herein because Ziff Davis Holdings’ financial information is materially the same as Ziff Davis Media’s financial information as a result of the fact that: (1) Ziff Davis Holdings does not itself conduct any business but rather all of its operations are conducted by Ziff Davis Media and its direct and indirect subsidiaries; (2) Ziff Davis Holdings has no material assets other than its equity interest in Ziff Davis Media; and (3) Ziff Davis Holdings has unconditionally guaranteed the 12% Notes and the Compounding Notes.

ZIFF DAVIS HOLDINGS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (continued)

(dollars in thousands, except per share data)

NOTE 7 — GUARANTOR AND OTHER FINANCIAL INFORMATION — (continued)

The following tables present combining financial data detailing Ziff Davis Holdings, Ziff Davis Media, the guarantor subsidiaries and related elimination entries.



			At March 31, 2004

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

ASSETS
Current assets:
	Cash and cash equivalents		$	—		$	—		$	45,432		$	—		$	45,432
	Accounts receivable, net			—			—			29,087			—			29,087
	Inventories			—			—			307			—			307
	Prepaid expenses and other current assets			—			—			7,129			—			7,129
	Due from (to) affiliates			1			(156,677	)		156,676			—			—

		Total current assets					(156,677	)		238,631			—			81,955
Property and equipment, net				—			—			14,756			—			14,756
Investments in subsidiaries, equity method				(130,692	)		(69,193	)		—			199,885			—
Intangible assets, net				—			—			216,738			—			216,738
Goodwill, net				—			—			38,139			—			38,139
Notes receivable — affiliate				—			481,713			—			(481,713	)		—
Other assets, net				—			12,172			3,281			—			15,453

		Total assets	$	(130,691	)	$	268,015		$	511,545		$	(281,828	)	$	367,041


LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
	Accounts payable		$	—		$	—		$	16,610		$	—		$	16,610
	Accrued expenses and other current liabilities			—			646			24,382			—			25,028
	Current portion of long-term debt			—			19,373			—			—			19,373
	Unexpired subscriptions and deferred revenue, net			—			—			26,659			—			26,659

		Total current liabilities		—			20,019			67,651			—			87,670
Long-term debt				—			293,099			—			—			293,099
Accrued interest — compounding notes				—			86,445			—			—			86,445
Notes payable — affiliate				—			—			481,713			(481,713	)		—
Accrued expenses — long-term				—			—			12,938			—			12,938
Mandatorily redeemable preferred stock				757,366			—			—			—			757,366
Other non-current liabilities				—			—			17,580			—			17,580

		Total liabilities		757,366			399,563			579,882			(481,713	)		1,255,098

Stockholders’ equity (deficit):
	Preferred stock			—			—			1,234			(1,234	)		—
	Common stock			17,332			—			28			(28	)		17,332
	Stock subscription loans			(3	)		—			—			—			(3	)
	Additional paid-in capital			8,468			566,631			652,203			(1,218,834	)		8,468
	Accumulated deficit			(913,854	)		(698,179	)		(721,802	)		1,419,981			(913,854	)
	Accumulated other comprehensive loss			—			—			—			—			—

	Total stockholders’ equity (deficit)			(888,057	)		(131,548	)		(68,337	)		199,885			(888,057	)

		Total liabilities and stockholders’ equity (deficit)	$	(130,691	)	$	268,015		$	511,545		$	(281,828	)	$	367,041

ZIFF DAVIS HOLDINGS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (continued)

(dollars in thousands, except per share data)

NOTE 7 — GUARANTOR AND OTHER FINANCIAL INFORMATION — (continued)



			At December 31, 2003

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

ASSETS
Current assets:
	Cash and cash equivalents		$	—		$	—		$	47,308		$	—		$	47,308
	Accounts receivable, net			—			—			32,836			—			32,836
	Inventories			—			—			321			—			321
	Prepaid expenses and other current assets			—			—			7,010			—			7,010
	Due from (to) affiliates			1			(151,939	)		151,938			—			—

		Total current assets		1			(151,939	)		239,413			—			87,475
Property and equipment, net				—			—			15,206			—			15,206
Investments in subsidiaries, equity method				(123,750	)		(71,876	)		—			195,626			—
Intangible assets, net				—			—			220,544			—			220,544
Goodwill, net				—			—			38,139			—			38,139
Notes receivable — affiliate				—			486,100			—			(486,100	)		—
Other assets, net				—			12,712			2,832			—			15,544

		Total assets	$	(123,749	)	$	274,997		$	516,134		$	(290,474	)	$	376,908


LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
	Accounts payable		$	—		$	—		$	13,938		$	—		$	13,938
	Accrued expenses and other current liabilities			—			1,040			30,666			—			31,706
	Current portion of long-term debt			—			15,766			—			—			15,766
	Unexpired subscriptions and deferred revenue, net			—			—			25,170			—			25,170

		Total current liabilities		—			16,806			69,774			—			86,580
Long-term debt				—			293,265			—			—			293,265
Accrued interest — compounding notes				—			89,532			—			—			89,532
Notes payable — affiliate				—			—			486,100			(486,100	)		—
Accrued expenses — long-term				—			—			14,027			—			14,027
Other non-current liabilities				—			—			17,253			—			17,253

		Total liabilities		—			399,603			587,154			(486,100	)		500,657

Mandatorily redeemable preferred stock				739,602			—			—			—			739,602

Stockholders’ equity (deficit):
	Preferred stock			—			—			1,234			(1,234	)		—
	Common stock			17,343			—			28			(28	)		17,343
	Stock subscription loans			(14	)		—			—			—			(14	)
	Additional paid-in capital			8,468			566,631			632,378			(1,199,009	)		8,468
	Accumulated (deficit) equity			(889,148	)		(691,237	)		(704,660	)		1,395,897			(889,148	)

	Total stockholders’ equity (deficit)			(863,351	)		(124,606	)		(71,020	)		195,626			(863,351	)

		Total liabilities and stockholders’ equity (deficit)	$	(123,749	)	$	274,997		$	516,134		$	(290,474	)	$	376,908

ZIFF DAVIS HOLDINGS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (continued)

(dollars in thousands, except per share data)

NOTE 7 — GUARANTOR AND OTHER FINANCIAL INFORMATION — (continued)



			Three Months Ended March 31, 2004

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

Revenue, net			$	—		$	—		$	41,968		$	—	$	41,968

Operating expenses:
	Cost of production			—			—			12,933			—		12,933
	Selling, general and administrative expenses			—			—			26,026			—		26,026
	Depreciation and amortization of property and equipment			—			—			1,793			—		1,793
	Amortization of intangible assets			—			—			3,806			—		3,806

		Total operating expenses		—			—			44,558			—		44,558

Loss from operations				—			—			(2,590	)		—		(2,590	)
Equity in income (loss) from subsidiaries				(6,942	)		(17,142	)		—			24,084		—
Intercompany interest income (expense)				—			14,583			(14,583	)		—		—
Interest income (expense), net				(17,764	)		(4,383	)		120			—		(22,027	)

	Loss before income taxes			(24,706	)		(6,942	)		(17,053	)		24,084		(24,617	)
Income tax provision				—			—			89			—		89

	Net loss		$	(24,706	)	$	(6,942	)	$	(17,142	)	$	24,084	$	(24,706	)



			Three Months Ended March 31, 2003

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

Revenue, net			$	—		$	—		$	42,091		$	—	$	42,091

Operating expenses:
	Cost of production			—			—			15,206			—		15,206
	Selling, general and administrative expenses			—			—			25,302			—		25,302
	Depreciation and amortization of property and equipment			—			—			2,901			—		2,901
	Amortization of intangible assets			—			—			4,212			—		4,212

		Total operating expenses		—			—			47,621			—		47,621

Loss from operations				—			—			(5,530	)		—		(5,530	)
Gain on sale of assets, net				—			—			65			—		65
Equity in income (loss) from subsidiaries				(10,726	)		(20,717	)		—			31,443		—
Intercompany interest income (expense)				—			15,091			(15,091	)		—		—
Interest income (expense), net				—			(5,100	)		89			—		(5,011	)

	Loss before income taxes			(10,726	)		(10,726	)		(20,467	)		31,443		(10,476	)
Income tax provision				—			—			250			—		250

	Net loss		$	(10,726	)	$	(10,726	)	$	(20,717	)	$	31,443	$	(10,726	)

ZIFF DAVIS HOLDINGS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (continued)

(dollars in thousands, except per share data)

NOTE 7 — GUARANTOR AND OTHER FINANCIAL INFORMATION — (continued)



		Three Months Ended March 31, 2004

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

Cash flows from operating activities:
Net loss		$	(24,706	)	$	(6,942	)	$	(17,142	)	$	24,084		$	(24,706	)
Adjustments to reconcile net loss to net cash provided (used) by operating activities:
	Depreciation and amortization		—			—			5,599			—			5,599
	Non-cash rent expense		—			—			179			—			179
	Amortization of accrued interest on compounding notes, net		—			354			—			—			354
	Amortization of debt issuance costs		—			540			—			—			540
	Accrued dividends on mandatorily redeemable preferred stock		17,764			—			—			—			17,764
	Equity in loss (income) from subsidiaries		6,942			17,142			—			(24,084	)		—
Changes in operating assets and liabilities:
	Accounts receivable		—			—			3,749			—			3,749
	Inventories		—			—			14			—			14
	Accounts payable and accrued expenses		—			(394	)		(4,903	)		—			(5,297	)
	Unexpired subscriptions and deferred revenue, net		—			—			1,489			—			1,489
	Due to (from) affiliates		—			5,750			(5,750	)		—			—
	Prepaid expenses and other, net		—			—			(219	)		—			(219	)

Net cash provided (used) by operating activities			—			16,450			(16,984	)		—			(534	)

Cash flows from investing activities:
	Capital expenditures		—			—			(1,342	)		—			(1,342	)
	Investments in subsidiaries		—			(20,837	)		—			20,837			—

Net cash provided (used) by investing activities			—			(20,837	)		(1,342	)		20,837			(1,342	)

Cash flows from financing activities:
	Proceeds from capital contributions		—			—			20,837			(20,837	)		—
	Proceeds from collection of intercompany notes receivable		—			4,387			—			(4,387	)		—
	Repayment of intercompany notes payable		—			—			(4,387	)		4,387			—

Net cash provided (used) by financing activities			—			4,387			16,450			(20,837	)		—

Net decrease in cash and cash equivalents			—			—			(1,876	)		—			(1,876	)
Cash and cash equivalents at beginning of period			—			—			47,308			—			47,308

Cash and cash equivalents at end of period		$	—		$	—		$	45,432		$	—		$	45,432

ZIFF DAVIS HOLDINGS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (continued)

(dollars in thousands, except per share data)

NOTE 7 — GUARANTOR AND OTHER FINANCIAL INFORMATION — (continued)



		Three Months Ended March 31, 2003

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

Cash flows from operating activities:
Net loss		$	(10,726	)	$	(10,726	)	$	(20,717	)	$	31,443		$	(10,726	)
Adjustments to reconcile net loss to net cash provided (used) by operating activities:
	Depreciation and amortization		—			—			7,113			—			7,113
	Non-cash rent expense		—			—			595			—			595
	Amortization of accrued interest on compounding notes, net		—			304			—			—			304
	Amortization of debt issuance costs and non-cash interest expense		—			1,072			—			—			1,072
	Equity in loss from subsidiaries		10,726			20,717			—			(31,443	)		—
Changes in operating assets and liabilities:
	Accounts receivable		—			—			3,512			—			3,512
	Inventories		—			—			77			—			77
	Accounts payable and accrued expenses		—			(804	)		(6,576	)		—			(7,380	)
	Unexpired subscriptions and deferred revenue, net		—			—			(216	)		—			(216	)
	Due to (from) affiliate		—			(20,142	)		20,142			—			—
	Prepaid expenses and other, net		—			311			1,083			—			1,394

Net cash provided (used) by operating activities			—			(9,268	)		5,013			—			(4,255	)

Cash flows from investing activities:
	Capital expenditures		—			—			(504	)		—			(504	)

Net cash used by investing activities			—			—			(504	)		—			(504	)

Cash flows from financing activities:
	Proceeds from collection of intercompany notes receivable		—			5,654			—			(5,654	)		—
	Repayment of intercompany notes payable		—			—			(5,654	)		5,654			—

Net cash provided (used) by financing activities			—			5,654			(5,654	)		—			—

Net decrease in cash and cash equivalents			—			(3,614	)		(1,145	)		—			(4,759	)
Cash and cash equivalents at beginning of period			1			28,267			13,022			—			41,290

Cash and cash equivalents at end of period		$	1		$	24,653		$	11,877		$	—		$	36,531

ZIFF DAVIS HOLDINGS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (continued)

(dollars in thousands, except per share data)

NOTE 7 — GUARANTOR AND OTHER FINANCIAL INFORMATION — (continued)


	*Restricted and Unrestricted Subsidiaries Financial Data*

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



			At March 31, 2004

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

ASSETS
Current assets:
	Cash and cash equivalents		$	—		$	45,432		$	—		$	—		$	45,432
	Accounts receivable, net			—			22,838			6,249			—			29,087
	Inventories			—			307			—			—			307
	Prepaid expenses and other current assets			—			6,375			754			—			7,129
	Due from (to) affiliates			1			7,949			(7,950	)		—			—

		Total current assets		1			82,901			(947	)		—			81,955
Property and equipment, net				—			13,493			1,263			—			14,756
Investments in subsidiaries, cost method				564,131			166,266			—			(730,397	)		—
Intangible assets, net				—			216,738			—			—			216,738
Goodwill, net				—			38,139			—			—			38,139
Other assets, net				—			15,453			—			—			15,453

		Total assets	$	564,132		$	532,990		$	316		$	(730,397	)	$	367,041


LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
	Accounts payable		$	—		$	14,470		$	2,140		$	—		$	16,610
	Accrued expenses and other current liabilities			—			22,621			2,407			—			25,028
	Current portion of long-term debt			—			19,373			—			—			19,373
	Unexpired subscriptions and deferred revenue, net			—			25,982			677			—			26,659

		Total current liabilities		—			82,446			5,224			—			87,670
Long-term debt				—			293,099			—			—			293,099
Accrued interest — compounding notes				—			86,445			—			—			86,445
Accrued expenses — long-term				—			12,938			—			—			12,938
Mandatorily redeemable preferred stock				757,366			—			—			—			757,366
Other non-current liabilities				—			17,580			—			—			17,580

		Total liabilities		757,366			492,508			5,224			—			1,255,098

Stockholders’ equity (deficit):
	Preferred stock			—			—			1,234			(1,234	)		—
	Common stock			17,332			—			28			(28	)		17,332
	Stock subscription loans			(3	)		—			—			—			(3	)
	Additional paid-in capital			8,468			564,131			165,004			(729,135	)		8,468
	Accumulated deficit			(219,031	)		(523,649	)		(171,174	)		—			(913,854	)

		Total stockholders’ equity (deficit)		(193,234	)		40,482			(4,908	)		(730,397	)		(888,057	)

		Total liabilities and stockholders’ equity (deficit)	$	564,132		$	532,990		$	316		$	(730,397	)	$	367,041

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

ZIFF DAVIS HOLDINGS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (continued)

(dollars in thousands, except per share data)

NOTE 7 — GUARANTOR AND OTHER FINANCIAL INFORMATION — (continued)



			At December 31, 2003

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

ASSETS
Current assets:
	Cash and cash equivalents		$	—		$	47,308		$	—		$	—		$	47,308
	Accounts receivable, net			—			25,095			7,741			—			32,836
	Inventories			—			321			—			—			321
	Prepaid expenses and other current assets			—			6,701			309			—			7,010
	Due from (to) affiliates			1			7,949			(7,950	)		—			—

		Total current assets		1			87,374			100			—			87,475

Property and equipment, net				—			14,779			427			—			15,206
Investments in subsidiaries, cost method				564,131			164,400			—			(728,531	)		—
Intangible assets, net				—			220,544			—			—			220,544
Goodwill, net				—			38,139			—			—			38,139
Other assets, net				—			15,544			—			—			15,544

		Total assets	$	564,132		$	540,780		$	527		$	(728,531	)	$	376,908


LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
	Accounts payable		$	—		$	13,151		$	787		$	—		$	13,938
	Accrued expenses and other current liabilities			—			28,188			3,518			—			31,706
	Current portion of long-term debt			—			15,766			—			—			15,766
	Unexpired subscriptions and deferred revenue, net			—			24,437			733			—			25,170

		Total current liabilities		—			81,542			5,038			—			86,580
Long-term debt				—			293,265			—			—			293,265
Accrued interest — compounding notes				—			89,532			—			—			89,532
Accrued expenses — long-term				—			14,027			—			—			14,027
Other non-current liabilities				—			17,253			—			—			17,253

		Total liabilities		—			495,619			5,038			—			500,657

Mandatorily redeemable preferred stock				739,602			—			—			—			739,602

Stockholder’s equity (deficit):
	Preferred stock			—			—			1,234			(1,234	)		—
	Common stock			17,343			—			28			(28	)		17,343
	Stock subscription loans			(14	)		—			—			—			(14	)
	Additional paid-in capital			8,468			564,131			163,138			(727,269	)		8,468
	Accumulated deficit			(201,267	)		(518,970	)		(168,911	)		—			(889,148	)

		Total stockholder’s equity (deficit)		(175,470	)		45,161			(4,511	)		(728,531	)		(863,351	)

		Total liabilities and stockholder’s equity (deficit)	$	564,132		$	540,780		$	527		$	(728,531	)	$	376,908

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

ZIFF DAVIS HOLDINGS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (continued)

(dollars in thousands, except per share data)

NOTE 7 — GUARANTOR AND OTHER FINANCIAL INFORMATION — (continued)



		Three Months Ended March 31, 2004

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

Revenue, net		$	—		$	32,657		$	9,311		$	41,968

Operating expenses:
	Cost of production		—			12,298			635			12,933
	Selling, general and administrative expenses		—			15,305			10,721			26,026
	Depreciation and amortization of property and equipment		—			1,576			217			1,793
	Amortization of intangible assets		—			3,806			—			3,806

	Total operating expenses		—			32,985			11,573			44,558

Loss from operations			—			(328	)		(2,262	)		(2,590	)
Interest expense, net			(17,764	)		(4,263	)		—			(22,027	)

	Loss before income taxes		(17,764	)		(4,591	)		(2,262	)		(24,617	)
Income tax provision			—			88			1			89

	Net loss	$	(17,764	)	$	(4,679	)	$	(2,263	)	$	(24,706	)



		Three Months Ended March 31, 2003

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

Revenue, net		$	—	$	36,128		$	5,963		$	42,091

Operating expenses:
	Cost of production		—		14,542			664			15,206
	Selling, general and administrative expenses		—		16,907			8,395			25,302
	Depreciation and amortization of property and equipment		—		2,355			546			2,901
	Amortization of intangible assets		—		4,212			—			4,212

	Total operating expenses		—		38,016			9,605			47,621

Loss from operations			—		(1,888	)		(3,642	)		(5,530	)
Gain on sale of assets, net			—		—			65			65
Interest expense, net			—		(5,011	)		—			(5,011	)

	Loss before income taxes		—		(6,899	)		(3,577	)		(10,476	)
Income tax provision			—		250			—			250

	Net loss	$	—	$	(7,149	)	$	(3,577	)	$	(10,726	)

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

ZIFF DAVIS HOLDINGS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (continued)

(dollars in thousands, except per share data)

NOTE 8 — SEGMENT INFORMATION

Segment information is presented in accordance with SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information.” This standard is based on a management approach that designates the internal organization that is used by management for making operating decisions and assessing performance as the sources of the Company’s reportable segments. Operating segments are defined as components of an enterprise about which financial information is available that is evaluated on a regular basis by the chief operating decision-maker, or decision-making groups, in deciding how to allocate resources to an individual segment and in assessing performance of the segment.

The Company has two reportable segments as detailed below:

• Established Businesses — primarily comprised of the Ziff Davis Publishing Inc. subsidiary, which includes the publishing assets that were acquired when the Company was formed in April 2000 and are collectively referred to and defined under the Senior Credit Facility as the “Restricted Subsidiaries.” This segment is engaged in publishing and licensing magazines and providing editorial content about technology, videogames and the Internet. This segment also licenses its content and brands in 41 countries and 20 languages worldwide.

• Developing Businesses — comprised of the LaunchCo and InternetCo subsidiaries, which are collectively referred to and defined under the 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, the Company’s new consumer lifestyle magazine; (2) Internet-related properties which leverage editorial content, expertise and relationships with the Company’s audience and advertisers in the Established Businesses segment; and (3) events, including those developed by the Company’s new Event Marketing Group which is building targeted events for the business and consumer technology communities.

The reportable segments are aligned with the reporting requirements set forth in the Company’s Senior Credit Facility and indenture agreements which mandate certain restrictions on the source of funding provided to the Restricted Subsidiaries and Unrestricted Subsidiaries, as defined in the debt agreements. As such, management is required to make decisions regarding the allocation of resources and assessment of performance based on the bank reporting requirements.

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

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



			Three Months
			Ended March 31,

			2004		2003

*Revenue, net:*
	Established Businesses		$	32,657	$	36,128
	Developing Businesses			9,311		5,963

		Total	$	41,968	$	42,091

ZIFF DAVIS HOLDINGS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (continued)

(dollars in thousands, except per share data)

NOTE 8 — SEGMENT INFORMATION — (continued)



			Three Months
			Ended March 31,

			2004			2003

*EBITDA:*
	Established Businesses		$	5,054		$	4,679
	Developing Businesses			(2,045	)		(3,096	)

		Total	$	3,009		$	1,583


			March 31,		December 31,
			2004		2003

*Total assets:*
	Established Businesses		$	366,725	$	376,381
	Developing Businesses			316		527

		Total	$	367,041	$	376,908

It should be noted that the Company excludes only non-recurring and certain non-cash charges from EBITDA as presented in this report. No such charges were incurred for the quarters ended March 31, 2004 and 2003. EBITDA, as defined, is not a measure of performance under generally accepted accounting principles (“GAAP”), and EBITDA should not be considered in isolation or as a substitute for net income, cash flows from operating activities or other income or cash flow statement data prepared in accordance with GAAP or as a measure of profitability or liquidity. The Company believes EBITDA may be commonly used by certain investors and analysts to analyze a company’s ability to service debt. EBITDA (subject to certain adjustments) is also a component of the Company’s debt compliance calculations. However, the Company’s method of computation may not be comparable to similarly titled measures of other companies. The most directly comparable financial measure under GAAP to EBITDA is Loss from operations. Reconciliations between EBITDA and Loss from operations are provided below.



		Three Months
		Ended March 31,

		2004			2003

Reconciliation of segment EBITDA to consolidated Loss from operations:
Total segment EBITDA		$	3,009		$	1,583
	Depreciation and amortization		(5,599	)		(7,113	)

Loss from operations		$	(2,590	)	$	(5,530	)


ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2003, as well as the unaudited condensed consolidated financial statements and notes thereto included herein. Historical results and percentage relationships set forth in these unaudited condensed consolidated financial statements, including trends that might appear, should not be taken as indicative of results for 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 Inc. (“Ziff Davis Holdings” or, collectively with its subsidiaries, the “Company”) is majority owned by various investment funds managed by Willis Stein & Partners Management III, L.L.C. (“Willis Stein” 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 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. (“ZDI”), an unrelated company. The Company’s major operating subsidiaries are Ziff Davis Publishing Inc., Ziff Davis Development Inc. (“LaunchCo”) and Ziff Davis Internet Inc. (“InternetCo”).

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 41 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, the Company’s new consumer lifestyle magazine; (2) Internet-related properties which leverage the Company’s editorial content, expertise and relationships with the Company’s 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.

For further segment information, see Note 8 to our unaudited Condensed Consolidated Financial Statements included herein.

Ziff Davis Holdings’ financial statements as of March 31, 2004 and for the three months ended March 31, 2004 and 2003, and as of December 31, 2003, are prepared on a consolidated basis and include the accounts of Ziff Davis Holdings and its subsidiaries. Ziff Davis Holdings’ financial statements as of March 31, 2004 and for the three month period then ended are unaudited.

Technology Sector and Economic Trends

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

Our revenue and profitability are also influenced by internal factors such as product mix and the timing and frequency of our new product launches. New publications generally require several years to achieve profitability and upon achieving initial profitability, often have lower operating margins than more established publications. Accordingly, our total 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 discontinued unprofitable publications, consolidated operations and reduced our workforce.

Results of Operations — Three Months Ended March 31, 2004 Compared to Three Months Ended March 31, 2003

Revenue

Revenue was $42.0 million for the three months ended March 31, 2004 compared to $42.1 million in the comparable prior period, a decrease of $0.1 million or 0.2%.

Revenue from the Restricted Subsidiaries was $32.7 million for the three months ended March 31, 2004, a decrease of $3.4 million or 9.4% compared to $36.1 million in the same period last year. The decrease was primarily due to the continued softness in the videogame and consumer technology magazine advertising markets which resulted in advertising page and average revenue per page declines for some of our publications. In addition, single copy circulation revenues in these two areas also continued to decline as consumer traffic and spending for mainline newsstands has remained sluggish for the past year or more. Lastly, the Company continues to see some further shifting of customer marketing budgets towards additional advertising on its publication-affiliated websites, and those advertising dollars are captured in the Unrestricted Subsidiaries.

Revenue from the Unrestricted Subsidiaries was $9.3 million for the three months ended March 31, 2004, an increase of $3.3 million or 55.0% compared to $6.0 million in the same period last year. The increase is primarily related to higher advertising revenue for the Company’s Internet operations and CIO Insight and substantially increased event revenues for Baseline and CIO Insight. The Internet Group’s revenues increased by $2.1 million or 69.9% for the first quarter of 2004 versus the prior year period due to its continued strong growth in consumer traffic, page views and new advertisers.

Cost of production

Cost of production was $12.9 million for the three months ended March 31, 2004 compared to $15.2 million for the comparable prior year period, a $2.3 million or 15.1% decrease.

Cost of production related to the Restricted Subsidiaries was $12.3 million for the three months ended March 31, 2004, compared to $14.5 million for the comparable prior year period, a $2.2 million or 15.2% decrease. The decrease primarily relates to manufacturing, paper and distribution cost savings achieved through the implementation of a number of new production and distribution initiatives across all of the Company’s publications, the impact of more favorable third-party supplier contracts and certain revenue-variable cost savings. Cost of production in the Restricted Subsidiaries as a percentage of revenue decreased from 40.2% to 37.6% for the three months ended March 31, 2003 and 2004, respectively.

Cost of production related to the Unrestricted Subsidiaries was $0.6 million for the three months ended March 31, 2004 compared to $0.7 million for the comparable prior year period, a $0.1 million decrease. The decrease was primarily due to reduced Internet infrastructure and operating costs resulting from the Company’s ongoing cost management initiatives and the impact of more favorable third-party supplier contracts. Cost of production in the Unrestricted Subsidiaries as a percentage of revenue decreased from 11.7% to 6.5% for the three months ended March 31, 2003 and 2004, respectively.

Selling, general and administrative expenses

Selling, general and administrative expenses for the three months ended March 31, 2004 were $26.0 million compared to $25.3 million for the comparable prior year period, a $0.7 million or 2.8% increase.

Selling, general and administrative expenses related to the Restricted Subsidiaries decreased $1.6 million or 9.5% from $16.9 million to $15.3 million for the three months ended March 31, 2003 and 2004, respectively. This decline was due to the Company’s ongoing cost containment efforts and a change in the timing of certain magazine promotion and renewal campaigns which were executed during the first quarter of 2003 but will occur in different quarterly periods in 2004. Selling, general and administrative expenses in the Restricted Subsidiaries as a percentage of revenue remained the same at 46.8% for the three months ended March 31, 2003 and 2004.

Selling, general and administrative expenses related to the Unrestricted Subsidiaries increased $2.3 million or 27.4% from $8.4 million to $10.7 million for the three months ended March 31, 2003 and 2004, respectively. The increase was primarily due to incremental costs associated with the Company’s new business initiatives — Sync magazine, 1UP.com and the Event Marketing Group — but also included increased Internet promotion, content and sales costs and higher Baseline and CIO Insight event costs due to higher sales volume in these areas. Selling, general and administrative expenses in the Unrestricted Subsidiaries as a percentage of revenue decreased from 140.0% to 115.1% for the three months ended March 31, 2003 and 2004, respectively.

Depreciation and amortization expense

Depreciation and amortization expenses were $5.6 million and $7.1 million for the three months ended March 31, 2004 and 2003, respectively. The decrease is primarily attributable to a greater portion of assets being fully depreciated as of March 31, 2004 as compared to March 31, 2003.

Interest expense, net

Interest expense was $22.0 million for the three months ended March 31, 2004 compared to $5.0 million for the three months ended March 31, 2003. Interest expense for the quarter ended March 31, 2004 included the following non-cash items: (1) $17.8 million related to the accrued dividends on the mandatorily redeemable preferred stock (“Redeemable Preferred Stock”) (previously recorded in Accumulated deficit on the Condensed Consolidated Balance Sheet), (2) $0.4 million related to long-term real estate leases recorded in prior periods at their net present value, (3) $0.5 million of amortization of debt issuance costs and (4) $0.4 million of net interest expense related to the Compounding Notes. Our weighted average debt outstanding was approximately $311.3 million and $303.2 million, and our weighted average interest rate was 8.6% and 8.2%, for the three months ended March 31, 2004 and 2003, respectively. As a result of the accretion from the Compounding Notes, a greater portion of our debt is at the higher fixed rate of interest (13.0%) and accounts for the increase in our weighted average interest rate.

Income taxes

Any tax benefit resulting from the Company’s loss before income taxes for the quarters ended March 31, 2004 and 2003 are offset in full by a valuation allowance. The income tax provision of $89,000 and $250,000 represent effective rates of (0.4)% and (3.9)% for the three months ended March 31, 2004 and 2003, respectively. The negative effective rates for the three months ended March 31, 2004 and 2003 result from our provision for certain minimum state and local taxes despite the consolidated entity estimating a full-year pre-tax loss position. Effective tax rates are estimated based on expectations of current year results.

Net loss

Net loss of $24.7 million for the three months ended March 31, 2004 increased $14.0 million compared to net loss of $10.7 million for the three months ended March 31, 2003. The increased loss is due to the adoption of SFAS 150, the result of which the Company, effective January 1, 2004, recorded the accrued dividends on the Redeemable Preferred Stock as interest expense. Prior to the adoption of SFAS 150, the accrued dividends were recorded directly as Accumulated deficit on the Condensed Consolidated Balance Sheet. Excluding the $17.8 million in interest expense related to the Redeemable Preferred Stock for the three months ended March 31, 2004, net loss decreased $3.8 million or 35.5% to $6.9 million.

Liquidity and Capital Resources

Total cash at March 31, 2004 was $45.4 million. We have historically relied upon cash flow from operating activities, borrowings under our Senior Credit Facility and additional investments to finance our operations.

Under our Senior Credit Facility, we have Restricted and Unrestricted Subsidiaries. As described above, the Unrestricted Subsidiaries are our Developing Businesses represented by LaunchCo and InternetCo. The Restricted Subsidiaries represent our Established Businesses segment and are generally comprised of businesses that were acquired from ZDI in April 2000. The Senior Credit Facility and indentures governing the 12% Notes and Compounding Notes place restrictions on funding from the Restricted Subsidiaries to the Unrestricted Subsidiaries and generally require them to be funded through separate and distinct sources. The Unrestricted Subsidiaries have historically been funded primarily by equity contributions and loans from the Restricted Subsidiaries. At March 31, 2004, $14.6 million of our cash balance is available to fund the Unrestricted Subsidiaries.

As of March 31, 2004, we were in compliance with all of our debt covenants. Total indebtedness at March 31, 2004 was $312.5 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, $12.3 million under the 12% Notes and $111.0 million under the Compounding Notes.

At March 31, 2004, borrowings under the Senior Credit Facility bore interest rates ranging from 5.37% to 5.87% and approximately $0.5 million of borrowing capacity was available under the revolving portion of such facility. The Company is required to make an annual “excess cash flow” payment, as defined in our Senior Credit Facility, not later than 105 days after fiscal year-end. The payment for 2003, made on April 14, 2004, was $6.4 million and represented a mandatory repayment of our loans under the Senior Credit Facility. The $6.4 million payment along with our other scheduled principal payments of approximately $13.0 million payable within one year is classified as Current portion of long-term debt on our Condensed Consolidated Balance Sheet at March 31, 2004.

The Compounding Notes, issued in August 2002, accrue interest in semi-annual periods at rates of 12.0% to 14.0%. Through August 13, 2006, interest may be paid, at our option and subject to certain restrictions under the Senior Credit Facility, either in cash or by compounding such interest on the Compounding Notes. During the three months ended March 31, 2004, we compounded interest in the amount of $3.4 million. The compounded interest accounts for the increase in long-term debt from $309.0 million at December 31, 2003 to $312.5 million at March 31, 2004.

We believe that our cash on hand, coupled with future cash generated from operations, will be sufficient to meet our liquidity, working capital and capital spending needs for 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 financial covenants which we will also be able to meet in 2004.

Sources and Uses of Cash — Three Months Ended March 31, 2004 and 2003

Details of changes in cash and cash equivalents during the three months ended March 31, 2004 and 2003 are discussed below.

Operating Activities. Cash used by operating activities was $0.5 million for the three months ended March 31, 2004 compared to $4.3 million used by operating activities for the three months ended March 31, 2003, representing an improvement of $3.8 million. The change was primarily attributable to increased operating results and working capital improvements. Additionally, we paid $2.4 million and $3.1 million for the three months ended March 31, 2004 and 2003, respectively, related to accrued restructuring costs.

Investing Activities. Cash used by investing activities was $1.3 million and $0.5 million for the three months ended March 31, 2004 and 2003, respectively, and represented capital expenditures in both periods.

Financing Activities. There was no cash provided or used by financing activities for the three months ended March 31, 2004 and 2003.

Off-Balance-Sheet Arrangements

At March 31, 2004, 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 $1.3 million at March 31, 2004, and are not recorded on the Condensed Consolidated Balance Sheet as of March 31, 2004.

We have entered into certain agreements with several executives that include earn-out payments that are calculated based on the achievement of future revenue and other financial thresholds on measurement dates beginning with the close of our 2006 fiscal year. As of March 31, 2004, 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 obligation as of March 31, 2004.

Cyclicality

Revenue from print advertising accounted for approximately 53.8% and 58.5% of our total revenue for the three months ended March 31, 2004 and 2003, respectively. Cyclicality in advertising expenditures generally, or with respect to magazine-based advertising specifically, could therefore have a material effect on our business, financial condition or operating results with respect to prior periods.

Seasonality

Historically, our business has been seasonal because 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.

Effect of Recently Issued Accounting Standards

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. In December 2003, the FASB issued Interpretation 46 R, “Consolidation of Variable Interest Entities (revised December 2003)”, (“FIN 46 R”) which further clarified the provisions of FIN 46 and delayed the effective date for applying the provisions of FIN 46 until the end of the first quarter of 2004 for interests held by public entities in variable interest entities or potential variable interest entities created before February 1, 2003. As we had no material exposures to variable interest entities or other off-balance sheet arrangements, the effects of adopting FIN 46 and FIN 46 R were not material to our results of operations or financial condition.

nonpublic entities with mandatorily redeemable financial instruments until fiscal periods beginning after December 15, 2003. The Company believes that under SFAS 150, it is defined as a nonpublic entity and has outstanding preferred stock that is mandatorily redeemable. Therefore, effective January 1, 2004, we have recorded the accrued dividends on the redeemable preferred stock as interest expense and classified the redeemable preferred stock as a long-term liability on our Condensed Consolidated Balance Sheet. The adoption of this statement increased the Company’s total liabilities by $757.4 million as of March 31, 2004 and increased the Company’s consolidated interest expense by $17.8 million for the quarter ended March 31, 2004. This will have no impact on the Company’s cash flow, its Senior Credit Facility financial covenants or its ability to service its debt payments under the Senior Credit Facility in 2004.

Forward-Looking Statements and Risk Factors

All statements in this Form 10-Q 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”, “anticipates”, “estimates”, “predicts”, “projects”, “should”, “potential” or “continue”, and any other words of similar meaning.

Any or all of our forward-looking statements in this Form 10-Q 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-Q 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-Q. 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 SEC.

Statements regarding the Company’s future financial performance or results of operations, including expected revenue growth; future paper, postage, printing or other expenses; future operating margins; anticipated capital spending; our ability to obtain funding; our ability to service our debt and meet our financial covenants; and other future or expected performance are subject to risk factors. For additional information about certain risks concerning our business, see our Annual Report on Form 10-K and specifically the headings “Certain Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”


ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

The fixed interest rate on our 12% Notes and our Compounding Notes results in $123.3 million, or 39.5%, of our funded debt being effectively set at a fixed rate of interest as of March 31, 2004. Accordingly, a 1.00% fluctuation in interest rates would cause a $1.9 million fluctuation in annual 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 remained essentially unchanged for 2003. In addition, during 2001 we outsourced the majority of our paper buying to our printers. We expect that our paper prices will also remain stable in 2004 due to price protection contracts we entered into with some of our suppliers.

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.


ITEM 4.	CONTROLS AND PROCEDURES

a) Evaluation of disclosure controls and procedures. Our Chief Executive Officer and our Chief Financial Officer have evaluated the effectiveness of our “disclosure controls and procedures” as defined in the Securities Exchange Act of 1934 Rules 13a-14(c) and 15d-14(c) as of March 31, 2004 (the “Evaluation Date”). Based on this evaluation, such officers have concluded that, as of the Evaluation Date, our disclosure controls and procedures were adequate and designed to ensure that material information relating to the Company and its consolidated subsidiaries would be made known to them by others within those entities.

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

PART II — OTHER INFORMATION


ITEM 1.	LEGAL PROCEEDINGS

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.

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


ITEM 2.	CHANGES IN SECURITIES AND USE OF PROCEEDS

None.


ITEM 3.	DEFAULTS UPON SENIOR SECURITIES

None.


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

None.


ITEM 5.	OTHER INFORMATION

None.


ITEM 6.	EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibit Index


31.1		Certification for Robert F. Callahan pursuant to Securities Exchange Act Rules 13a-15(e) and 15d-15(e), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification for Derek Irwin pursuant to Securities Exchange Act Rules 13a-15(e) and 15d-15(e), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification for Robert F. Callahan pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certification for Derek Irwin pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(b) Reports on Form 8-K

On February 26, 2004, the Registrant filed a Form 8-K related to its issuance of a press release describing its financial results for the year ended December 31, 2003.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

ZIFF DAVIS HOLDINGS INC.

By: /s/ DEREK IRWIN

Derek Irwin

CHIEF FINANCIAL OFFICER

Date: May 5, 2004

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	•	$189,188 under the Senior Credit Facility, including $8,200 outstanding under the revolving portion of the Senior Credit Facility,

	•	$12,280 of 12% Senior Subordinated Notes due 2010 (the “12% Notes”) and

	•	$111,004 of Senior Subordinated Compounding Notes due 2009 (the “Compounding Notes”).


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


	•	Established Businesses — primarily comprised of the Ziff Davis Publishing Inc. subsidiary, which includes the publishing assets that were acquired when the Company was formed in April 2000 and are collectively referred to and defined under the Senior Credit Facility as the “Restricted Subsidiaries.” This segment is engaged in publishing and licensing magazines and providing editorial content about technology, videogames and the Internet. This segment also licenses its content and brands in 41 countries and 20 languages worldwide.

	•	Developing Businesses — comprised of the LaunchCo and InternetCo subsidiaries, which are collectively referred to and defined under the 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, the Company’s new consumer lifestyle magazine; (2) Internet-related properties which leverage editorial content, expertise and relationships with the Company’s audience and advertisers in the Established Businesses segment; and (3) events, including those developed by the Company’s new Event Marketing Group which is building targeted events for the business and consumer technology communities.