10-Q/A 1 d10qa.txt AMENDMENT NO. 1 TO FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 --------------- FORM 10-Q/A (Amendment No. 1) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2001 - or - [_] 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 333-48014 ZIFF DAVIS MEDIA INC. (Exact Name of Registrant as Specified in Its Charter) DELAWARE 36-4336460 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 28 East 28/th/ Street, New York, New York 10016 (Address of principal executive offices) Registrants telephone number, including area code: (212) 503-3500 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 [_] As of November 14, 2001, 1,000 shares of common stock, par value $0.01 per share were issued and outstanding. TABLE OF CONTENTS (unaudited)

IMPORTANT NOTE This Amendment No. 1 to Form 10-Q/A amends and restates Item 2 originally included in the Quarterly Report on Form 10-Q for the quarter ended September 30, 2001 as filed with the Securities and Exchange Commission on November 14, 2001. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion in conjunction with our financial statements and our consolidated financial information, including the notes to those statements, that are included in our Form 10-K for the year ended March 31, 2001. The following discussion includes forward-looking statements that involve risks and uncertainties. See "Liquidity and Capital Resources." Overview We are a multimedia content company whose principal business is publishing. We publish and license magazines, provide editorial content about the technology industry and the Internet, in both print and online, and to a lesser extent provide custom testing services and software and produce conferences, seminars and webcasts. On April 5, 2000, we acquired certain publishing assets ("Ziff Davis Publishing" or "ZDP") from Ziff-Davis Inc. ("ZDI"), an unrelated company for $780.0 million plus expenses (the "Acquisition"). The Acquisition was accounted for under the purchase method of accounting. We had no operations prior to April 5, 2000. Our financial statements as of September 30, 2001 and 2000, and for the three-month and six-month periods then ended are prepared on a consolidated basis and include the accounts of the Company and its subsidiaries. Since April 5, 2000, we have formed two subsidiaries which are focused on developing and launching new products and businesses. These subsidiaries, Ziff Davis Development Inc. ("LaunchCo") and Ziff Davis Internet Inc. ("InternetCo"), are collectively referred to, and defined under our debt agreements, as "Unrestricted Subsidiaries" and together comprise one of our two reportable operating segments, the Developing Businesses Segment. (The remainder of our business is referred to as the Established Businesses Segment.) We are developing Internet-related ventures leveraged off our editorial expertise and relationships with our audience and advertisers through InternetCo and developing new publications and businesses through LaunchCo. Where appropriate in our discussion below, we have separately identified amounts associated with the Unrestricted Subsidiaries when comparing amounts to prior year periods, to enhance comparability of the segments and to meet reporting requirements separately under our credit agreements. Prior year balances have been restated to reflect the transfer of eTESTING LABS from the Established Businesses Segment to the Developing Businesses Segment. In connection with the Acquisition, we determined that ZDP's wholly-owned international operations (excluding international licensing operations and international joint ventures) did not meet our long-term strategic objectives. As a result, the operations were sold August 4, 2000. The results of these operations are excluded from our unaudited consolidated statement of operations for the period from April 5, 2000 to the sale date, August 4, 2000. (See Note 2 to the Unaudited Consolidated Financial Statements). Results of operations Comparison of the three months ended September 30, 2001 and September 30, 2000. Revenue, net Revenue was $65.5 million for the three months ended September 30, 2001, compared to $100.6 million in the comparable prior period, a decrease of $35.1 million, or 34.9%. Revenue from the Unrestricted Subsidiaries was $5.7 million for the three months ended September 30, 2001 compared to $1.7 million in the comparable prior period. The increase primarily relates to advertising revenue from new publications, The Net Economy, Expedia Travels and CIO Insight and increased revenue for services provided by eTESTING LABS. Excluding the Unrestricted Subsidiaries, revenue was $59.9 million compared to $98.9 million in the comparable prior year period, a decrease of $39.0 million or 39.4%. This decrease primarily relates to advertising revenue, which decreased by $30.4 million, or 41.8%, to $42.4 million. This decrease in advertising revenue was due to a 47.2% decline in advertising pages, partially offset by 4.7% increase in average revenue per page. Circulation revenue decreased $6.6 million, or 33.7% to $12.9 million, related to a 35.3% decline in single-copy revenue and a 32.7% decline in subscription revenue as compared to the same prior year period. Excluding the Unrestricted Subsidiaries, advertising, circulation and other revenue accounted for 70.7%, 21.6% and 7.7% of net 1 revenue during the three months ended September 30, 2001, as compared to 73.5%, 19.8% and 6.7% in the comparable prior year period. Cost of production Cost of production was $24.6 million for the three months ended September 30, 2001, compared to $29.1 million for the comparable prior year period. Cost of production related to the Unrestricted Subsidiaries was $1.6 million compared to $0.1 million in the prior year period. These costs were related to the new publications, The Net Economy, Expedia Travels and CIO Insight which were in early development stages during the prior period. Excluding the Unrestricted Subsidiaries, cost of production decreased $6.0 million, or 20.7% from $29.0 million to $23.0 million in the quarter ended September 30, 2001. This decrease was primarily due to a decline in total pages produced in our magazine portfolio and paper prices, partially offset by an increase in postage rates. In January 2001, the Governors of the U.S. Postal Service approved a 9.9% increase in postage rates for calendar year 2001. In addition, a 2.6% increase in postage rates was effective July 2001. Excluding the Unrestricted Subsidiaries cost of production as a percentage of revenue increased from 29.3% to 38.4% for the three months ended September 30, 2000 and 2001, respectively. This increase is primarily attributable to the overall revenue decline. Selling, general and administrative expenses Selling, general and administrative expenses excluding restructuring charges for the three months ended September 30, 2001 were $53.0 million compared to $58.4 million for the three months ended September 30, 2000. Selling, general and administrative expenses related to the Unrestricted Subsidiaries were $20.0 million and $9.9 million for the three months ended September 30, 2001 and 2000, respectively. The increase relates to our newly launched publications and Internet ventures which were in early development stages during the prior period. Excluding Unrestricted Subsidiaries, selling, general and administrative expenses decreased $15.7 million, or 32.3% from $48.6 million to $32.9 million. This decrease was primarily related to cost reductions realized in circulation acquisition, editorial, marketing and sales as well as bad debt expense. Excluding Unrestricted Subsidiaries, selling, general and administrative expenses as a percentage of revenue increased from 49.1% for three months ended September 30, 2000 to 55.0% for the three months ended September 30, 2001, primarily related to the revenue decline described above. Restructuring costs Current economic trends in the United States have had a negative impact on our business. These trends include consolidation among advertisers, increases in postage costs and a general decline in advertising spending. In anticipation of this decline, we began a restructuring program in the first quarter of fiscal 2002 under which we expect to consolidate operations and eliminate headcount to reduce costs. As of September 30, 2001, we have incurred a pre-tax charge of $25.5 million for this restructuring program. The charge includes non-cash asset impairment costs of $11.5 million, employee termination costs of $7.0 million and costs to exit activities of $7.0 million. The costs primarily relate to the closure of Family PC magazine and its related website, the restructuring of our sales, marketing and editorial functions across all platforms, the closure of Zcast.tv, a website, and the consolidation of the Company's facilities. Due to the timing of determinations made in regard to the plans, $1.1 million of the charge was recorded during the quarter ended June 30, 2001 and the remainder was recorded during the quarter ending September 30, 2001. As of September 30, 2001, we have approximately $7.7 million left of restructuring accrual on the balance sheet in accrued expenses and other liabilities. Remaining cash expenditures relating to workforce reductions and facilities consolidation will be substantially paid over the next twelve months. Implementation of our restructuring program continued into our third quarter when we discontinued the publication of Expedia Travels and Smart Partner and folded Interactive Week into eWeek. These further actions and associated cost estimates are being finalized, however, we expect to incur a pre-tax restructuring charge of at least $150.0 million, the majority of which will be non-cash in nature related to the write-off of intangible assets. 2 Depreciation and amortization expense Depreciation and amortization expenses were $21.7 million and $16.8 million for the quarters ended September 30, 2001 and 2000, respectively. The increase is principally attributable to higher depreciation expense related to additional capital spending in the latter portion of the prior fiscal year and intangible assets amortization resulting from the Acquisition. Interest expense, net Interest expense was $14.4 million for the three months ended September 30, 2001 compared to $14.8 for the three months ended September 30, 2000. Our weighted average debt outstanding was approximately $433.7 million and $542.0 million, and our weighted average interest rate was 10.48% and 11.04% for the three months ended September 30, 2001 and 2000, respectively. Interest expense in the prior year excludes $0.4 million, which was allocated to the asset held for sale related to the international operations and capitalized as part of such balance. Equity in income from joint ventures Our equity in income (loss) from joint ventures decreased $0.6 million from an income of $0.6 million in the three months ended September 30, 2000 to break even in the three months ended September 30, 2001, primarily due to a decrease in income from Mac Publishing LLC. In October 2001, we sold our 50% interest in Mac Publishing LLC (See Note 9 of the Consolidated Financial Statements). Income taxes The income tax provision of $0.3 million for the three months ended September 30, 2001 and the income tax benefit of $1.6 million in the three months ended September 30, 2000 represent effective rates of negative 0.4% and 8.9%, respectively. The negative effective rate for the three months ended September 30, 2001 results from certain minimum state and local taxes despite the consolidated entity estimating a full-year pre-tax loss position. Effective tax rates are estimated based on expectations of current year results. Net loss As a result of the factors described above, we have incurred a net loss of $70.5 million for the three months ended September 30, 2001, an adverse change of $54.1 million compared to net loss of $16.4 million for the three months ended September 30, 2000. EBITDA EBITDA is defined as income before provision for income taxes, interest expense, depreciation and amortization expense and other non-cash charges. EBITDA, as defined, is not a measure of performance under GAAP, and EBITDA should not be considered in isolation or as a substitute for net income, cash flows from operating activities and other income or cash flow statement data prepared in accordance with GAAP or as a measure of profitability or liquidity. EBITDA is presented because it is commonly used by certain investors and analysts to analyze a company's ability to service debt. EBITDA (subject to certain adjustments) is also a component of our debt compliance calculations. However, our method of computation may not be comparable to similarly titled measures of other companies. EBITDA for the three months ended September 30, 2001 and 2000 was as follows:

3 Comparison of the six months ended September 30, 2001 and September 30, 2000. Revenue, net Revenue was $150.7 million for the six months ended September 30, 2001, compared to $227.4 million in the comparable prior period, a decrease of $76.7 million, or 33.7%. Revenue from the Unrestricted Subsidiaries was $11.9 million for the six months ended September 30, 2001 compared to $2.9 million in the comparable prior period. The increase primarily relates to advertising revenue from new publications, The Net Economy, Expedia Travels and CIO Insight and increased revenue for services provided by eTESTING LABS. Excluding the Unrestricted Subsidiaries, revenue was $138.8 million compared to $224.5 million in the comparable prior year period, a decrease of $85.7 million or 38.2%. This decrease primarily relates to advertising revenue, which decreased by $72.0 million, or 42.4%, to $97.7 million. This decrease in advertising revenue was due to a 47.4% decline in advertising pages, partially offset by 7.5% increase in average revenue per page. Circulation revenue decreased $11.9 million, or 28.8% to $29.5 million, related to a 31.8% decline in single-copy revenue and a 26.7% decline in subscription revenue as compared to the same prior year period. Excluding the Unrestricted Subsidiaries, advertising, circulation and other revenue accounted for 70.4%, 21.3% and 8.3% of net revenue during the six months ended September 30, 2001, as compared to 75.6%, 18.5% and 5.9% in the comparable prior year period. Cost of production Cost of production was $55.2 million for the six months ended September 30, 2001, compared to $64.6 million for the comparable prior year period. Cost of production related to the Unrestricted Subsidiaries was $4.3 million compared to $0.1 million in the prior year period. The cost increase was related to the new publications, The Net Economy, Expedia Travels, CIO Insight and Internet ventures which were in early development stages during the prior period and thus had no cost of productions. Excluding the Unrestricted Subsidiaries, cost of production decreased $13.6 million, or 21.1% from $64.5 million to $50.9 million in the quarter ended September 30, 2001. This decrease was primarily due to a decline in total pages produced in our magazine portfolio and paper prices, partially offset by an increase in postage rates. In January 2001, the Governors of the U.S. Postal Service approved a 9.9% increase in postage rates for calendar year 2001. In addition, a 2.6% increase in postage rates was effective July 2001. Excluding the Unrestricted Subsidiaries cost of production as a percentage of revenue increased from 28.7% to 36.7% for the six months ended September 30, 2000 and 2001, respectively. This increase is primarily attributable to the overall revenue decline. Selling, general and administrative expenses Selling, general and administrative expenses excluding restructuring charges for the six months ended September 30, 2001 were $121.2 million compared to $121.2 million for the six months ended September 30, 2000. Selling, general and administrative expenses related to the Unrestricted Subsidiaries were $40.9 million and $14.3 million for the six months ended September 30, 2001 and 2000, respectively. The increase relates to our newly launched publications and Internet ventures which were in early development stages during the prior period. Excluding Unrestricted Subsidiaries, selling, general and administrative expenses decreased $26.6 million, or 24.9% from $106.9 million to $80.3 million. This decrease was primarily related to cost reductions realized in circulation acquisition, editorial, marketing and sales as well as bad debt expense. Excluding Unrestricted Subsidiaries, selling, general and administrative expenses as a percentage of revenue increased from 47.6% for six months ended September 30, 2000 to 57.8% for the six months ended September 30, 2001, primarily related to the revenue decline described above. Restructuring costs Current economic trends in the United States have had a negative impact on our business. These trends include consolidation among advertisers, increases in postage costs and a general decline in advertising spending. In anticipation of this decline, we began a restructuring program in the first quarter of fiscal 2002 under which we expect to consolidate operations and eliminate headcount to reduce costs. 4 As of September 30, 2001, we have incurred a pre-tax charge of $25.5 million for this restructuring program. The charge includes non-cash asset impairment costs of $11.5 million, employee termination costs of $7.0 million and costs to exit activities of $7.0 million. The costs primarily relate to the closure of Family PC magazine and its related website, the restructuring of our sales, marketing and editorial functions across all platforms, the closure of Zcast.tv, a website, and the consolidation of the Company's facilities. Due to the timing of determinations made in regard to the plans, $1.1 million of the charge was recorded during the quarter ended June 30, 2001 and the remainder was recorded during the quarter ending September 30, 2001. As of September 30, 2001, we have approximately $7.7 million left of restructuring accrual on the balance sheet in accrued expenses and other liabilities. Remaining cash expenditures relating to workforce reductions and facilities consolidation will be substantially paid in over the next twelve months. Implementation of our restructuring program continued into our third quarter when we discontinued the publication of Expedia Travels and Smart Partner and folded Interactive Week into eWeek. These further actions and associated cost estimates are being finalized, however, we expect to incur a pre-tax restructuring charge of at least $150.0 million, the majority of which will be non-cash in nature related to the write-off of intangible assets. Depreciation and amortization expense Depreciation and amortization expenses were $43.4 million and $28.7 million for the six months ended September 30, 2001 and 2000, respectively. The increase is principally attributable to higher depreciation expense related to additional capital spending in the second half of the prior fiscal year and intangible assets amortization resulting from the Acquisition. Unamortized goodwill and other intangible assets totaled $604.1 million as of September 30, 2001. The Company is evaluating SFAS 142 to determine the impact on the consolidated financial statements. Interest expense, net Interest expense was $24.5 million for the six months ended September 30, 2001 compared to $27.4 for the six months ended September 30, 2000. Our weighted average debt outstanding was approximately $446.3 million and $536.2 million, and our weighted average interest rate was 10.38% and 11.06% for the six months ended September 30, 2001 and 2000, respectively. Interest expense in the prior year excludes $1.3 million, which was allocated to the asset held for sale related to the international operations and capitalized as part of such balance. Equity in income (loss) from joint ventures Our equity in income (loss) from joint ventures decreased $1.4 million from an income of $1.2 million in the six months ended September 30, 2000 to a loss of $0.2 million in the six months ended September 30, 2001, primarily due to a decrease in income from Mac Publishing LLC. In October 2001, we sold our 50% interest in Mac Publishing LLC (See Note 9 of the Consolidated Financial Statements). Income taxes The income tax provision of $0.5 million for the six months ended September 30, 2001 and the income tax provision of $0.3 million in the six months ended September 30, 2000 represent effective rates of negative 0.4% and 2.5%, respectively. The negative effective rate for the six months ended September 30, 2001 results from certain minimum state and local taxes despite the consolidated entity estimating a full-year pre-tax loss position. Effective tax rates are estimated based on expectations of current year results. Net loss As a result of the factors described above, we incurred a net loss of $119.8 million for the six months ended September 30, 2001, an adverse change of $106.2 million compared to net loss of $13.6 million for the six months ended September 30, 2000. EBITDA EBITDA is defined as income before provision for income taxes, interest expense, depreciation and amortization expense and other non-cash charges. EBITDA, as defined, is not a measure of performance under GAAP, and EBITDA should not be considered in isolation or as a substitute for net income, cash flows from operating activities and other income 5 or cash flow statement data prepared in accordance with GAAP or as a measure of profitability or liquidity. EBITDA is presented because it is commonly used by certain investors and analysts to analyze a company's ability to service debt. EBITDA (subject to certain adjustments) is also a component of our debt compliance calculations. However, our method of computation may not be comparable to similarly titled measures of other companies. EBITDA for the six months ended September 30, 2001 and 2000 was as follows:

Liquidity and Capital Resources Total cash at September 30, 2001 was $17.5 million, of which $1.1 million is earmarked for the Unrestricted Subsidiaries. Under our senior credit facility, we have Restricted and Unrestricted Subsidiaries. As described above, the Unrestricted Subsidiaries are LaunchCo and InternetCo. The Restricted Subsidiaries represent our remaining subsidiaries and are generally comprised of businesses that were acquired from ZDI. The senior credit facility and indenture governing the $250.0 million 12% senior subordinated notes due 2010 place restrictions on funding from the Restricted Subsidiaries to the Unrestricted Subsidiaries. The Unrestricted Subsidiaries have historically been funded by equity contributions and loans from the Restricted Subsidiaries. We currently rely primarily upon cash flow from operating activities, borrowings under our revolving credit facility and additional investments to finance our operations. Details of changes in cash and cash equivalents during the six months ended September 30, 2001 and 2000 are discussed below. Operating Activities. Cash used by operating activities was $56.5 million for the six months ended September 30, 2001, compared to $34.7 million provided by operating activities for the six months ended September 30, 2000, a decrease of $91.2 million. The decrease was primarily attributable to an increase in net loss and working capital changes. Investing Activities. Cash used by investing activities was $10.8 million for the six months ended September 30, 2001. Capital expenditures of $18.9 million ($4.9 associated with the Restricted Subsidiaries) were partially offset by $8.0 million associated with the acceleration of international sale proceeds and $0.1 million of distributions from our MacWorld joint venture. Cash used by investing activities was $776.2 million in the six months ended September 30, 2000 and reflects cash used primarily for our purchase of ZDP at a total cost of approximately $798.3 million and $7.0 million in capital expenditures ($5.5 million associated with the Restricted Subsidiaries), partially offset by proceeds from sale of our international operations of $26.8 million and distributions of $2.6 million from our Macworld joint venture. We anticipate making additional capital investments in connection with the continued development of the businesses of the Unrestricted Subsidiaries, however, the amount and timing of such investments has not yet been determined and will vary depending upon the implementation of the related business plan. Financing Activities. Cash provided by financing activities was $59.9 million for the six months ended September 30, 2001. Cash was provided by capital contributions of $89.0 million, of which $35.0 million was used to prepay principal outstanding under senior credit facilities, $15.0 million was used for working capital purposes and $39.0 million was earmarked to fund the Unrestricted Subsidiaries. Additionally, we received an advance of $10.0 million from our revolving credit facility. These proceeds were partially offset by a $35.0 million prepayment and a $3.4 million scheduled principal payment under our senior credit facilities. Cash provided by financing activities was $857.6 million for the six months ended September 30, 2000 related to financing activities associated with the Acquisition. At September 30, 2001, $6.8 million of our bank debt was due within the next 12 months. Borrowings under the revolving credit facility are due December 31, 2006. Under the terms of our senior credit facility, the Unrestricted Subsidiaries and the Restricted Subsidiaries are largely to be funded through distinct sources. 6 As we continue to develop and launch products or businesses within LaunchCo and InternetCo, we may seek additional funding and the amount and timing of such funding needs will vary depending upon approval and implementation of the related business plans. Under the terms of our amended debt agreements, the Restricted Subsidiaries are generally not able to invest further in the Unrestricted Subsidiaries except that (1) equity specifically contributed to us and earmarked for use by the Unrestricted Subsidiaries and (2) proceeds from specified asset sales may both be used to fund the Unrestricted Subsidiaries. In May 2001, a capital contribution of $20.0 million was received and earmarked for funding of the Unrestricted Subsidiaries. In June 2001, $8.0 million was loaned from the Restricted Subsidiaries to the Unrestricted Subsidiaries. An additional $19.0 million from capital contributions received in July and August 2001 were also earmarked for funding the Unrestricted Subsidiaries. In July 2001, we entered an agreement to accelerate receipt of deferred payments due in respect of the sale of our international operations. As a result of this agreement, we will receive $10.5 million in settlement of the five $3.0 annual installments due under the original agreement. We received an $8.0 million payment on July 31, 2001 and a $2.5 million payment is due November 30, 2001. This transaction is one of the specified dispositions under our amended credit agreement which allows $5.0 million of the initial payment and $2.5 million of the November 30, 2001 payment to be used to fund the Unrestricted Subsidiaries. At September 30, 2001, $1.1 million of the earmarked contributions remained for use by the Unrestricted Subsidiaries. In October 2001, we sold our 50% interest in Mac Publishing LLC, a joint venture with International Data Group (IDG) for approximately $4.1 million. The cash proceeds from this sale qualify as proceeds from specified asset sales. In October 2001, we received a $9.5 million capital contribution earmarked for the Unrestricted Subsidiaries. We are currently seeking to raise additional funding for the Unrestricted Subsidiaries to meet anticipated requirements in our fiscal year. However, there can be no assurance that we will be successful in raising the needed funds. Should funding not be available, we would reduce or discontinue these operations as appropriate. Our Restricted Subsidiaries have historically been funded by cash provided by operations and the availability of funds under our revolving credit facility. However, due to a substantial decrease in the number of advertising pages published in our publications and the resulting decline in EBITDA, in the first half of 2002, we amended our senior credit facility. This amendment, among other things, amends the compliance covenants and adjusts required ratios for the period through September 30, 2002. In addition, the availability of the existing $50.0 million revolving credit facility was permanently reduced to $30.0 million, of which only $10.0 million is available during the amendment period. In consideration for amending the senior credit facility, Willis Stein & Partners contributed $50.0 million of equity to the Company to be used for the Restricted Subsidiaries, of which $35.0 million was used to repay senior indebtedness and $15.0 million was earmarked for working capital purposes. Under the amendment, net proceeds of up to $50.0 million from the sale of certain assets will not have to be used to repay indebtedness. In addition, interest rates under the credit facility were increased, and we paid a fee to our lenders totaling approximately $0.5 million. Since the July amendment of our senior credit facility, the U.S. economy has continued to decline and had a further negative impact on our operations. In view of this continuing decline, we began the previously described restructuring program to reduce costs. Under the terms of our senior credit facility, among the ways an event of default can exist is if our total leverage ratio (as defined in the agreement) exceeds the required level for two consecutive months. At September 30 and October 31, 2001, we exceeded the required ratio. Accordingly, an event of default has occurred under our senior credit facility. Upon an event of default, the lenders may elect to declare all outstanding borrowings, together with accrued and unpaid interest, to be immediately due and payable, to require us to use all available cash to repay such borrowings or prevent us from making debt service payments on our 12% senior subordinated notes, including the $15.0 million interest payment due January 15, 2002. An event of default under our senior credit facility would cause a default under our 12% senior subordinated notes in the event that our borrowings under the senior credit facility are accelerated and such acceleration has not been rescinded within 20 days of receipt of notice by us. As of December 14, 2001, we have not received notice of acceleration, nor do we have reason to believe that we will receive notice of acceleration. Interest rates under the senior credit facility have increased approximately 2.0% as a result of the event of default. Based on our current debt levels, this increase in interest rates will result in $3.6 million of additional interest per annum. Willis Stein & Partners has committed to fund up to $25.0 million subject to certain conditions, including that we (1) are unable to raise money from our other investors or third parties before January 31, 2002 and (2) that we have not suffered any change that has had material adverse effect upon (a) the business, operations, prospects, properties, assets or condition 7 (financial or otherwise) of the Company and its subsidiaries, on an individual basis or taken as a whole or (b) the ability of the Company to perform its obligations under the funding agreement. We do not believe that the event of default under the credit agreement itself, without further action on the part of the lenders, has or will have a material adverse effect on us; however, we are not able to reach any conclusion as to whether the underlying circumstances that caused the event of default has resulted in a material adverse effect pursuant to the Willis Stein & Partners commitment. The potential investment would be on terms to be negotiated by us and Willis Stein & Partners and subject to receipt of a fairness opinion. Our expectation is that the above described committed funding from Willis Stein & Partners combined with existing cash balances and future cash generated by the operations will not be sufficient to meet our cash needs for the next 12 months. If we are not successful in obtaining additional investments or additional borrowings under our senior credit facility, we will be forced to take actions such as reducing our operating and capital expenditures, selling assets or restructuring or refinancing our indebtedness. Cash required to service our interest and principal payments over the next 12 months will be approximately $53.0 million (assuming an average interest rate of 9.0% under the senior credit facility). In addition, our minimum amounts due under operating leases, primarily related to our facilities, over the next 12 months are approximately $10.5 million. Our cash balances currently on hand are not sufficient to meet these obligations. In order to meet these obligations and our other working capital needs, we will be dependent on a combination of some or all of the following: (1) existing cash balances, (2) cash flow from operations, (3) further investment in the Company from Willis Stein & Partners, our other investors and/or other third parties and (4) an amendment to our debt agreements. Such funding, if obtained, would likely be used for debt service and working capital purposes. Accordingly, we, along with Willis Stein & Partners have begun discussions with lead arrangers of our senior credit facility to address the default and the funding issues described above. We continuously evaluate potential acquisitions which complement our existing operations and strategy. Depending on various factors including, among others, the cash consideration required in such potential acquisitions, we may determine to finance any such transactions with existing sources of liquidity and may determine to consider such acquisitions as a component of either the Restricted or Unrestricted Subsidiaries. In addition, as our strategy evolves to address the current business environment, we may evaluate potential dispositions and closures of businesses. Cyclicality Revenue from advertising accounted for approximately 67.9% and 68.8% of our total revenue for the three and six months ended September 30, 2001, respectively. Cyclicality in advertising expenditures generally, or with respect to magazine-based advertising specifically, could therefore have a material effect on our business, financial condition or operating results. Further, economic trends could also significantly impact the growth of our revenue and operating results with respect to prior periods. Seasonality Historically, our business has been seasonal because we have earned a significant portion of our annual revenue in our third fiscal quarter. This is largely due to the general increase in publishing revenue in the third quarter as a result of increased consumer buying activity during the holiday season. Factors affecting the seasonality of our business are holiday spending, customer budgetary spending patterns, new product introductions and general economic trends. Quarterly results may also be affected by the timing and magnitude of acquisitions and related costs, variations in the number of magazines sold in any quarter, customer spending patterns, termination of existing agreements, costs incurred in connection with internal growth, changes in our mix of customers, contracts of our business, fluctuation in the costs of raw materials and other general economic conditions. Accordingly, our operating results in any particular quarter may not be indicative of the results that can be expected for any quarter or for the entire year. We cannot assure that our third quarter revenue for fiscal 2002 or any future year will be higher than revenue for our other quarters. We have not had significant overhead and other costs generally associated with large seasonal fluctuations. Recent accounting pronouncements In June 1998, the Financial Accounting Standards Board issued Statement of Accounting Standard (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133, as amended by SFAS Nos. 137 and 138, is effective for all fiscal years beginning after June 15, 2000. Effective April 1, 2001, we adopted SFAS No. 133. SFAS 133 requires that we record all derivatives on the balance sheet at fair value. We entered into an interest rate swap agreement to hedge cash flow exposure related to variable interest rates on its debt. Changes in the derivative fair values that are designated, effective and qualify as cash flow hedges will be deferred and recorded as a component of accumulated other 8 comprehensive loss ("AOCL") until the hedged transactions occur and are recognized in earnings. The ineffective portion, if any, of a hedging derivative's change in fair value will be immediately recognized in earnings. As a result of adopting SFAS 133 and in accordance with the transition provisions, we recorded the fair value of the interest rate swap as an other liability with an offsetting charge to AOCL. During the first quarter of fiscal 2002, we recorded the change in fair value of the interest rate swap agreement to AOCL for $1,187. We formally document all relationships between hedging instruments and hedged items, as well as its risk-management objectives and strategies for undertaking various hedge transactions. We link all hedges that are designated as cash flow hedges to be forecasted transactions. We also assess, both at the inception of the hedge and on an on-going basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. When it is determined that a derivative is not highly effective as a hedge, we discontinue hedge accounting prospectively. In June 2001, the Financial Accounting Standards issued EITF 00-25 "Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendors Products." EITF 00-25 defines statement of operation characterization of consideration from a vendor to an entity that purchases the vendor's products for resale. We intend to adopt this pronouncement for our fiscal year ending March 31, 2003. The impact of this pronouncement on our financial statements is currently being evaluated. In July 2001, the Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS 141 requires that the purchase method of accounting be used for all business combinations subsequent to June 30, 2001 and specifies criteria for recognizing intangible assets acquired in a business combination. SFAS 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually. Intangible assets with definite useful lives will continue to be amortized over their respective estimated useful lives. We plan to adopt SFAS Nos. 141 and 142 effective for its fiscal year ending March 31, 2003. We do not expect the implementation of SFAS No. 141 to have a material impact on its financial position, liquidity or results of operations. We are currently evaluating the impact of SFAS No. 142 on our financial statements. In August 2001, the Financial Accounting Standards Board issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. The statement supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", and provides guidance on classification and accounting for such asset when held for sale or abandonment. We intend to adopt this statement for our fiscal year ending March 31, 2003. We are currently evaluating the impact this pronouncement will have on our financial statements. Forward-Looking Statements and Risk Factors Certain statements in this Quarterly Report on Form 10-Q contain "forward-looking statements." Forward-looking statements are any statements other than statements of historical fact. Examples of forward-looking statements include projections of earnings, revenues or other financial items, statements of the plans and objectives of management for future operations, statements concerning proposed new products and services, and any statements of assumptions underlying any of the foregoing. In some cases, forward-looking statements can be identified by the use of words such as "may", "will", "expects", "should", "believes", "plans", "anticipates", "estimates", "predicts", "potential", or "continue", and any other words of similar meaning. 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 for the Unrestricted Subsidiaries and other future or expected performance are subject to the following risks: the acquisition of businesses or the launch of new lines of business, which could increase operating expenses and decrease operating margins; the inability to identify, develop and achieve success for new products, services and technologies; the inability to attract new customers for the company's publications and services; increased competition, which could lead to decreases in users or negative pressure on the company's pricing and the need for increased marketing; the inability to maintain, establish or renew relationships with suppliers and advertisers; a decrease in the growth of advertising spending in magazines or in general or on our businesses in particular; failure of advertisers to meet their commitments under their contracts to purchase advertising. For risks about our business, see our Registration Statement on Form S-4 dated January 24, 2001, including under the captions "Risk Factors" and "Management's Discussion and Analysis of Results of Operations." 9 Any or all of our forward-looking statements in this report and in any other public statements may turn out to be wrong. They can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties. Many factors mentioned in the discussion in this report will be important in determining future results. Consequently, no forward-looking statement can be guaranteed. Actual future results may vary materially. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosures we make on related subjects in our reports to the SEC. Also note that we provide the following cautionary discussion of risks, uncertainties and possibly inaccurate assumptions relevant to our businesses. These are factors that we think could cause our actual results to differ materially from expected and historical results. Other factors besides those listed here could also adversely affect us. This discussion is provided as permitted by the Private Securities Litigation Reform Act of 1995. 10 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Form 10-Q/A to be signed on its behalf by the undersigned thereunto duly authorized. Ziff Davis Media Inc. By: /s/ Bart W. Catalane ---------------------------- Bart W. Catalane Chief Operating Officer and Chief Financial Officer Date: March 20, 2002 11

ZIFF DAVIS MEDIA INC 10-Q/A