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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

Commission file number 333-99939

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

          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.

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

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ZIFF DAVIS HOLDINGS INC.
FORM 10-Q
INDEX

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PART I – FINANCIAL INFORMATION

ITEM 1.     CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

ZIFF DAVIS HOLDINGS INC.

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

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

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ZIFF DAVIS HOLDINGS INC.

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

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

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ZIFF DAVIS HOLDINGS INC.

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

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

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ZIFF DAVIS HOLDINGS INC.

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

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

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ZIFF DAVIS HOLDINGS INC.

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

NOTE 1 - THE COMPANY AND BASIS OF PRESENTATION

Basis of Presentation

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

Formation of Ziff Davis Holdings Inc.

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

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

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

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

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ZIFF DAVIS HOLDINGS INC.

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

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

Operations

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

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

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

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

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

Principles of Consolidation

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

Recent Accounting Pronouncements

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

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

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ZIFF DAVIS HOLDINGS INC.

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

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

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

Reclassifications

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

NOTE 2 - INTANGIBLE ASSETS, NET

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

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

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

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

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

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ZIFF DAVIS HOLDINGS INC.

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

NOTE 2 - INTANGIBLE ASSETS, NET – (continued)

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

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

NOTE 3 - COST REDUCTION PROGRAM AND RESTRUCTURING CHARGES

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

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

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

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

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

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ZIFF DAVIS HOLDINGS INC.

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

NOTE 4 - DEBT

General

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

Financial Restructuring Plan

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

          Key terms of the financial restructuring were as follows:

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ZIFF DAVIS HOLDINGS INC.

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

NOTE 4 - DEBT – (continued)

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

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

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

NOTE 5 - CAPITAL STRUCTURE

Redeemable Preferred Stock

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