**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

**(Mark One)**

 
| **ý** | **Quarterly Report Pursuant to Section 13 or 15(d) of The  Securities Exchange Act of 1934.** |
|------------|-----------------------------------------------------------------------------------------------|

 

**For the quarterly period ended: March31, 2003**

 

**OR**

 
|   | **Transition Report Pursuant to Section 13 or 15(d) of the  Securities Exchange Act of 1934** |
|--------|-----------------------------------------------------------------------------------------------|

 

**Commission File Number: 333-57201**

 

**Advanstar Communications Inc.**

(Exactname of registrant as specified in its charter)

 

**New York**

(Stateor other jurisdiction of

incorporationor organization)

 

**59-2757389**

(I.R.S.Employer

IdentificationNo.)

 

**545 Boylston Street, Boston, Massachusetts**

(Addressof principal executive offices)

 

**02116**

(ZipCode)

 
|   | Registrant’s Telephone Number, Including Area Code: **(617) 267-6500** |
|--------|-----------------------------------------------------------------------------|

 

Indicate by checkmark whether the registrant: (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days. Yes  ý    No  o

 

Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2of the Exchange Act). Yes  o   No  ý

 

As of May 13, 2003, 1,000,000 shares of the Registrant’s common stock were outstanding.

 

 

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| **PART  I     FINANCIAL INFORMATION** |
|----------------------------------------------------------------|
|                                                           |   |
| **Item  1.   *Financial Statements:***          |
|                                                           |   |
|                                                           | Condensed  Consolidated Balance Sheets at March 31, 2003 (unaudited) and December 31,  2002. |
|                                                           |   |
|                                                           | Condensed  Consolidated Statements of Operations (unaudited) for the three months ended  March 31, 2003 and 2002 |
|                                                           |   |
|                                                           | Condensed  Consolidated Statements of Cash Flows (unaudited) for the three months ended  March 31, 2003 and 2002 |
|                                                           |   |
|                                                           | Notes  to Condensed Consolidated Financial Statements (unaudited) |
|                                                           |   |
| **Item  2.**                                                   | ***Management’s  Discussion and Analysis of Financial Condition and Results of Operations*** |
|                                                           |   |
| **Item  3.**                                                   | ***Qualitative  and Quantitative Disclosure about Market Risk*** |
|                                                           |   |
| **Item 4.**                                                    | ***Controls and  Procedures*** |
|                                                           |   |
| **PART II     OTHER  INFORMATION**    |
|                                                           |   |
| **Item 5.**                                                    | Submissions  of Matters to a Vote of Security Holders |
|                                                           |   |
| **Item 6(a).**                                                 | Exhibits |
|                                                           |   |
| **Item 6(b).**                                                 | Reports  on Form 8-K |
|                                                           |   |
|                                                           | Signature |
|                                                                |  |  |

 

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**AdvanstarCommunications Inc.**

**CondensedConsolidated Balance Sheets**

(In thousands, except share and per sharedata)

 
|                                                                                                                                          |   | **March 31,  2003** |       | **December 31,  2002** |       |
|-----------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|------------|------------------------|------------|
| **ASSETS**                                                                                                                                    |   |                | ** ** |                   | ** ** |
|                                                                                                                                          |   |                |       |                   |       |
| Current assets:                                                                                                                               |   |                |       |                   |       |
| Cash and cash  equivalents                                                                                                                    |   | $                   | 12,256     |                   | $          | 18,930 |   |
| Accounts  receivable, net of allowance of $1,244 and $1,049 at March 31, 2003 and  December 31, 2002                                          |   | 23,770              |       | 23,024                 |       |
| Prepaid expenses                                                                                                                              |   | 9,472               |       | 9,757                  |       |
| Other                                                                                                                                         |   | 1,104               |       | 1,208                  |       |
|                                                                                                                                          |   |                |       |                   |       |
| Total current  assets                                                                                                                         |   | 46,602              |       | 52,919                 |       |
|                                                                                                                                          |   |                |       |                   |       |
| Property, plant  and equipment, net                                                                                                           |   | 23,297              |       | 23,499                 |       |
|                                                                                                                                          |   |                |       |                   |       |
| Intangible and  other assets:                                                                                                                 |   |                |       |                   |       |
| Goodwill, net                                                                                                                                 |   | 661,632             |       | 660,808                |       |
| Intangibles and  other, net                                                                                                                   |   | 116,644             |       | 128,800                |       |
|                                                                                                                                          |   |                |       |                   |       |
| Total intangible  and other assets, net                                                                                                       |   | 778,276             |       | 789,608                |       |
|                                                                                                                                          |   |                |       |                   |       |
|                                                                                                                                          |   | $                   | 848,175    |                   | $          | 866,026 |   |
|                                                                                                                                          |   |                |       |                   |       |
| **LIABILITIES AND STOCKHOLDER’S  EQUITY**                                                                                                |   |                |       |                   |       |
|                                                                                                                                          |   |                |       |                   |       |
| Current  liabilities:                                                                                                                         |   |                |       |                   |       |
| Current  maturities of long-term debt                                                                                                         |   | $                   | 17,936     |                   | $          | 17,400 |   |
| Accounts payable                                                                                                                              |   | 26,331              |       | 19,372                 |       |
| Accrued  compensation                                                                                                                         |   | 3,844               |       | 6,320                  |       |
| Other accrued  expenses                                                                                                                       |   | 20,344              |       | 24,794                 |       |
| Deferred revenue                                                                                                                              |   | 26,360              |       | 53,039                 |       |
|                                                                                                                                          |   |                |       |                   |       |
| Total current  liabilities                                                                                                                    |   | 94,815              |       | 120,925                |       |
|                                                                                                                                          |   |                |       |                   |       |
| Long-term debt,  net of current maturities                                                                                                    |   | 532,514             |       | 540,300                |       |
| Other long-term  liabilities                                                                                                                  |   | 2,636               |       | 4,374                  |       |
| Due to parent                                                                                                                                 |   | 4,437               |       | 4,492                  |       |
| Minority  interests                                                                                                                           |   | 10,080              |       | 9,782                  |       |
|                                                                                                                                          |   |                |       |                   |       |
| Commitments and  contingencies                                                                                                                |   |                |       |                   |       |
|                                                                                                                                          |   |                |       |                   |       |
| Stockholder’s  equity:                                                                                                                   |   |                |       |                   |       |
| Common stock,  $.01 par value, 40,000,000 shares authorized; 1,000,000 shares issued and  outstanding at March 31, 2003 and December 31, 2002 |   | 10                  |       | 10                     |       |
| Capital in  excess of par value                                                                                                               |   | 387,367             |       | 387,367                |       |
| Accumulated  deficit                                                                                                                          |   | (176,460            | )          | (192,146               | )          |
| Accumulated  other comprehensive loss                                                                                                         |   | (7,224              | )          | (9,078                 | )          |
|                                                                                                                                          |   |                |       |                   |       |
| Total  stockholder’s equity                                                                                                              |   | 203,693             |       | 186,153                |       |
|                                                                                                                                          |   |                |       |                   |       |
|                                                                                                                                          |   | $                   | 848,175    |                   | $          | 866,026 |   |

 

The accompanying notes are an integral part of thesecondensed consolidated financial statements.

 

2

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**AdvanstarCommunications Inc.**

**CondensedConsolidated Statements of Operations**

(In thousands)

 
|                                                                                               |   | **For the  Three Months Ended  March 31,** |    |
|----------------------------------------------------------------------------------------------------|--------|--------------------------------------------|---------|
|                                                                                               |   | **2003**                                   |    | **2002** |   |
|                                                                                               |   |                                       |    |   |   |
| Net revenue                                                                                        |   | $                                          | 109,355 |   | $ | 109,427 |   |
|                                                                                               |   |                                       |    |   |   |
| Operating  expenses:                                                                               |   |                                       |    |   |   |
| Cost of  production                                                                                |   | 23,252                                     |    | 23,190 |   |
| Selling,  editorial and circulation                                                                |   | 35,065                                     |    | 36,156 |   |
| General and  administrative                                                                        |   | 9,868                                      |    | 9,878 |   |
| Funding of  affiliated dot.com company operations (see Note 9)                                     |   | 210                                        |    | 38,079 |   |
| Amortization of intangibles                                                                        |   | 10,965                                     |    | 14,426 |   |
| Depreciation                                                                                       |   | 2,190                                      |    | 2,222 |   |
|                                                                                               |   |                                       |    |   |   |
| Total operating  expenses                                                                          |   | 81,550                                     |    | 123,951 |   |
|                                                                                               |   |                                       |    |   |   |
| Operating income  (loss)                                                                           |   | 27,805                                     |    | (14,524 | ) |
|                                                                                               |   |                                       |    |   |   |
| Other income  (expense):                                                                           |   |                                       |    |   |   |
| Interest  expense, net                                                                             |   | (12,086                                    | )       | (12,674 | ) |
| Other income  (expense), net                                                                       |   | 399                                        |    | 1,042 |   |
|                                                                                               |   |                                       |    |   |   |
| Income (loss)  before income taxes, minority interests and cumulative effect of accounting  change |   | 16,118                                     |    | (26,156 | ) |
|                                                                                               |   |                                       |    |   |   |
| Provision  (benefit) for income taxes                                                         |   | 304                                        |    | (4,776 | ) |
|                                                                                               |   |                                       |    |   |   |
| Minority interests                                                                                 |   | (128                                       | )       | (90 | ) |
|                                                                                               |   |                                       |    |   |   |
| Income (loss)  before cumulative effect of accounting change                                       |   | 15,686                                     |    | (21,470 | ) |
|                                                                                               |   |                                       |    |   |   |
| Cumulative  effect of accounting change, net of tax and minority interest                          |   | —                                     |    | (66,817 | ) |
|                                                                                               |   |                                       |    |   |   |
| Net income  (loss)                                                                                 |   | $                                          | 15,686  |   | $ | (88,287 | ) |

 

The accompanying notes are an integral part of thesecondensed consolidated financial statements.

 

3

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**AdvanstarCommunications Inc.**

**CondensedConsolidated Statements of Cash Flows**

(In thousands)

 
|                                                                                       |   | **For the  Three Months Ended  March 31,** |   |
|--------------------------------------------------------------------------------------------|--------|--------------------------------------------|--------|
|                                                                                       |   | **2003**                                   |   | **2002** |   |
| Operating activities:                                                                      |   |                                       |   |   |   |
| Net income (loss)                                                                          |   | $                                          | 15,686 |   | $ | (88,287 | ) |
| Adjustments to reconcile net loss to net cash provided by (used in)  operating activities: |   |                                       |   |   |   |
| Provision for notes and advances from affiliated dot.com company (see  Note 9)             |   | —                                     |   | 37,192 |   |
| Transition goodwill impairment                                                             |   | —                                     |   | 66,817 |   |
| Depreciation and amortization                                                              |   | 13,155                                     |   | 16,648 |   |
| (Gain) loss on derivative financial instruments                                            |   | (443                                       | )      | (902 | ) |
| Undistributed earnings of minority interest holders                                        |   | 128                                        |   | 90 |   |
| Noncash interest                                                                           |   | 686                                        |   | 616 |   |
| Loss (gain) on sales of assets and other                                                   |   | 15                                         |   | (3 | ) |
| Deferred income taxes                                                                      |   | —                                     |   | (5,627 | ) |
| Provision for bad debts                                                                    |   | 412                                        |   | 1,017 |   |
| Changes in operating assets and liabilities                                                |   | (27,374                                    | )      | (38,040 | ) |
| Net cash provided by (used in) operating activities                                   |   | 2,265                                      |   | (10,479 | ) |
|                                                                                       |   |                                       |   |   |   |
| Investing activities:                                                                      |   |                                       |   |   |   |
| Additions to property, plant and equipment                                                 |   | (1,979                                     | )      | (1,289 | ) |
| Acquisitions of publications and trade shows, net of cash acquired                         |   | (1                                         | )      | (11,736 | ) |
| Net cash used in investing activities                                                      |   | (1,980                                     | )      | (13,025 | ) |
|                                                                                       |   |                                       |   |   |   |
| Financing activities:                                                                      |   |                                       |   |   |   |
| Proceeds from revolving credit loan                                                        |   | 3,000                                      |   | — |   |
| Payments on revolving credit loan                                                          |   | (6,000                                     | )      | — |   |
| Payments of long-term debt                                                                 |   | (4,250                                     | )      | (3,450 | ) |
| Deferred financing costs                                                                   |   | (27                                        | )      | (1,755 | ) |
| Net cash used in financing activities                                                      |   | (7,277                                     | )      | (5,205 | ) |
| Effect of exchange rate changes on cash                                                    |   | 318                                        |   | 255 |   |
| Net decrease in cash and cash equivalents                                                  |   | (6,674                                     | )      | (28,454 | ) |
| Cash and cash equivalents, beginning of period                                             |   | 18,930                                     |   | 44,636 |   |
| Cash and cash equivalents, end of period                                                   |   | $                                          | 12,256 |   | $ | 16,182 |   |

 

The accompanying notes are an integral part of thesecondensed consolidated financial statements.

 

4

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**AdvanstarCommunications Inc.**

**Notesto Condensed Consolidated Financial Statements**

 

**1.**                                      **Basis ofPresentation**

 

The accompanying unaudited condensed consolidatedfinancial statements have been prepared by Advanstar Communications Inc.(Communications, or the Company) in accordance with the instructions to Form10-Q and, therefore, do not include all the information and footnotes requiredby generally accepted accounting principles for complete financial statements.Management believes that all adjustments, consisting solely of normal recurringitems (except for the cumulative effect of an accounting change recorded in thefirst quarter of 2002 as discussed in Note 3), considered necessary for a fairpresentation have been included, and that the disclosures are adequate to makethe information presented not misleading. These condensed consolidated financial statements, however, should beread in conjunction with the audited financial statements and the relatednotes, included in the Company’s annual report on Form 10-K filed with theSecurities and Exchange Commission on March 31, 2003.  The results of operations for the three month periods ended March31, 2003 are not necessarily indicative of the operating results that may beexpected for the entire year ending December 31, 2003.

 

**2.**                                      **Summary of Significant Accounting Policies**

 

**Stock-BasedCompensation**

As permitted by Statement of Financial AccountingStandards (SFAS)  No. 123,“Accounting for Stock-Based Compensation,” the Company has elected to accountfor stock options and awards to employees under the provisions of AccountingPrinciples Board (APB) Opinion No. 25, “Accounting for Stock Issued toEmployees,” and related interpretations.

 

If the Company had elected to recognize compensationcost based on the fair value of the options granted as prescribed by SFASNo. 123, net loss would have been increased to the pro forma amountsindicated in the table below (in thousands):

 
|                                              |   | **For the  Three Months Ended  March 31,** |       |
|---------------------------------------------------|--------|--------------------------------------------|------------|
|                                              |   | **2003**                                   |       | **2002** |   |
|                                              |   |                                       | ** ** |   | ** ** |
| Net income (loss)—as reported                |   | $                                          | 15,686     |   | $ | (88,287 | ) |
|                                              |   |                                       |       |   |   |
| Less: pro forma stock based employee compensation |   | (583                                       | )          | (483 | ) |
| Net income (loss)—pro forma                  |   | $                                          | 15,103     |   | $ | (88,770 | ) |

 

**InterimIncome Tax Expense**

The Company determines its quarterly income taxprovision based upon an estimated annual effective income tax rate.  Indetermining the effective income tax rate applicable to interim periods, theCompany excludes tax jurisdicitons where no tax expense or benefit is expectedfor the entire year.

 

**Reclassifications**

Certain reclassifications have been made to amountsreported in prior periods in order to conform to the current periodpresentation.  These reclassificationsdid not change previously reported operating (loss) income, net loss, cashflows or stockholder’s equity.

 

5

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**RecentlyIssued Accounting Standards**

In June 2001, the FinancialAccounting Standards Board (FASB) issued SFAS No. 143, “Accounting for AssetRetirement Obligations.”  The provisionsof SFAS No. 143 are effective for the Company in 2003.  The Company has determined that it has nomaterial asset retirement obligations. Accordingly, the adoption of SFAS No. 143 had no impact on the Company’sfinancial position, results of operations or cash flows.

 

In May 2002, the FASB issuedSFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendmentof FASB Statement No. 13, and Technical Corrections.”  SFAS No. 145 is effective for fiscal years beginning after May15, 2002.  The adoption of SFAS No. 145did not have a significant impact of the results of operations or financialposition of the Company, but in accordance with the transition provisions,resulted in reclassification of a $2.6 million extraordinary item into theCompany’s 2001 income before income taxes, minority interests and cumulativeeffect of accounting change.

 

In June 2002, the FASB issuedSFAS No. 146, “Accounting for Costs Associated with Exit or DisposalActivities.”  The provisions of SFASNo. 146 are effective for exit or disposal activities that are initiatedafter December 31, 2002.  The Companyhad no exit or disposal activities as defined by SFAS No. 146 in the firstquarter of 2003.  Accordingly, theadoption of SFAS No. 146 had no impact on the Company’s results of operations,financial position, or cash flows.

 

In December 2002, the FASB issued SFAS No. 148,“Accounting for Stock-Based Compensation - Transition Disclosure - anamendment of SFAS No. 123.*”*  The provisions of SFAS No. 148 areeffective for financial statements for fiscal years ending afterDecember 15, 2002, and disclosure requirements shall be effective forinterim periods beginning after December 15, 2002.  The Company has no immediate plans to changeto the fair value based method of accounting for stock-based compensation.  The Company has made certain interimstock-based employee compensation disclosures required by SFAS No. 148beginning in the quarter ended March 31, 2003.

 

In November 2002, the FASB issued Interpretation No.45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees,Including Indirect Guarantees of Indebtedness of Others.”  The recognition provisions of theinterpretation are effective for the Company in 2003 and are applicable only toguarantees issued or modified after December 31, 2002.  The adoptionof Interpretation No. 45 did not have a significant impact of the results ofoperations or financial position of the Company.

 

**3.**                                      **Goodwill and Other IntangibleAssets**

 

Effective January 1, 2002, theCompany adopted SFAS No. 142, “Goodwill and Other Intangible Assets,” whichestablished new standards related to how acquired goodwill and indefinite-livedintangible assets are to be recorded upon their acquisition as well as how theyare to be accounted for after they have been initially recognized in thefinancial statements.

 

Effective with the adoption ofthis standard, the Company no longer amortizes goodwill.  Instead, SFAS No. 142 requires acquiredgoodwill to be periodically evaluated for impairment.  Upon adoption of the standard, the Company completed atransitional impairment test for its acquired goodwill using a discounted cashflow model.  As a result of theimpairment analysis, the Company recorded, a goodwill impairment charge of$70.9 million in the first quarter of 2002.  After minority interest effect of $4.1 million, the net chargewas $66.8 million.  This charge wasattributable primarily to an impairment of the carrying value of goodwill inour tradeshow operating

 

6

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segment which managementbelieves resulted from a slow-down in the economy and its associated impact onthe tradeshow business.  The net chargeof $66.8 million was reported as a cumulative effect of a change in accountingprinciple.  There was no income taxeffect associated with this impairment charge.

 

The changes in the carryingamount of goodwill for the three months ended March 31, 2003, by operatingsegment, are as follows (in thousands):

 
|                                             |   | **Trade Shows  and  Conferences** |    | **Trade  Publications** |   | **Marketing  Services** |   | **Totals** |   |
|--------------------------------------------------|--------|-----------------------------------|---------|-------------------------|--------|-------------------------|--------|------------|--------|
|                                             |   |                              |    |                    |   |                    |   |       |   |
| Balance as of December 31, 2002                  |   | $                                 | 492,554 |                    | $      | 137,414                 |   | $          | 30,840 |   | $ | 660,808 |   |
| Goodwill acquired or allocated during the period |   | —                            |    | 28                      |   | —                  |   | 28         |   |
| Foreign currency translation                     |   | 1,086                             |    | (298                    | )      | 8                       |   | 796        |   |
| Balance as of March 31, 2003                     |   | $                                 | 493,640 |                    | $      | 137,144                 |   | $          | 30,848 |   | $ | 661,632 |   |

 

Trade exhibitor and advertiser lists are amortized onan accelerated basis over six and five years, respectively, while subscriberlists and other intangible assets are amortized on a straight-line basis overthree to 10 years and consist of the following as of March 31, 2003 andDecember 31, 2002 (in thousands):

 
|                                   |   | **March 31,  2003** |    | **December 31,  2002** |   |
|----------------------------------------|--------|---------------------|---------|------------------------|--------|
|                                   |   |                |    |                   |   |
| Trade exhibitor lists                  |   | $                   | 161,596 |                   | $      | 161,492 |   |
| Advertiser lists                       |   | 39,321              |    | 39,673                 |   |
| Subscriber lists                       |   | 23,978              |    | 23,978                 |   |
| Other intangible assets                |   | 7,919               |    | 8,097                  |   |
| Deferred loan costs                    |   | 22,397              |    | 22,367                 |   |
|                                   |   | 255,211             |    | 255,607                |   |
| Accumulated amortization               |   | (138,567            | )       | (126,807               | )      |
| Total intangible and other assets, net |   | $                   | 116,644 |                   | $      | 128,800 |   |

 

Estimated amortization expense of identifiedintangible assets and other for the remaining nine months of 2003 and for thenext five years is as follows: (in thousands):

 
| 2003 |   | $      | 33,457 |   |
|------|--------|--------|--------|--------|
| 2004 |   | 32,727 |   |
| 2005 |   | 28,417 |   |
| 2006 |   | 14,697 |   |
| 2007 |   | 3,299  |   |
| 2008 |   | 1,994  |   |

 

7

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**4.**                                      **Acquisitions**

 

On January 9, 2002 the Company acquired *AIIM International Exposition and Conference*for approximately $11.9 million in cash and assumed liabilities.

 

On October 3, 2002 the Company acquired *HT—the Magazine for HealthcareTravel Professionals*forapproximately $11.1 million in cash and assumed liabilities.

 

From January 1, 2002 throughDecember 31, 2002, the Company completed two other acquisitions of publishingproperties with a cumulative purchase price of $1.0 million

 

The acquisitions discussed above have been accountedfor using the purchase method of accounting and, accordingly, the assetsacquired and liabilities assumed have been recorded at their fair values as ofthe dates of the acquisitions.  Theexcess of the purchase price over the fair value of the assets acquired andliabilities assumed has been recorded as goodwill.  Certain of the assets and liabilities acquired in connection withthese 2002 acquisitions were recorded based upon preliminary estimates as ofthe dates of acquisition.  The Companydoes not believe the final allocation of purchase price will be materiallydifferent from preliminary allocations. Any changes to the preliminary estimates during the allocation periodwill be reflected as an adjustment to goodwill.  Results of operations for these acquisitions have been includedin the accompanying consolidated financial statements since their respectivedates of acquisition.  The pro formaoperating results related to the acquisitions are immaterial.

 

**5.**                                      **Financial Derivative Instruments**

 

The Company uses derivative instruments to manageexposure to interest rate and foreign currency risks.  The Company’s objectives for holding derivatives are to minimizethe risks using the most effective methods to eliminate or reduce the impact ofthese exposures.

 

**InterestRate Risk**

Variable rate debt instruments are subject to interestrate risk.  The Company has entered intointerest rate collar agreements with remaining maturities of 11 months tomanage its exposure to interest rate movements on a portion of its variablerate debt obligations.  The effectiveportion of the cumulative gain or loss on these derivative instruments isreported as a component of accumulated other comprehensive income instockholder’s equity and is recognized in earnings as the underlying interestexpense is incurred.  The ineffectiveportion of the interest rate collar agreements is recognized in currentearnings.

 

**ForeignCurrency Risk**

Certain forecasted transactions are exposed to foreigncurrency risk.  Foreign currencieshedged are the Euro, British Pound Sterling and the Brazilian Real.  Forward contracts are used to manage the exposureassociated with forecasted international revenue transactions for up to ninemonths in the future and are designated as cash flow hedging instruments.  Changes in fair value of these instrumentsare reported as a component of accumulated other comprehensive income instockholder’s equity and are recognized in earnings as the underlying revenueis recognized.  Forward contracts notdesignated as hedging instruments under SFAS No. 133 are also used tomanage the impact of the variability in exchange rates.  Changes in the fair value of these foreignexchange contracts are recognized in current earnings.

 

8

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At March 31, 2003, the Company had foreign exchangederivative contracts to sell with a notional amount totaling $9.2 million andto buy totaling $3.3 million.  Theestimated fair value of the foreign exchange contracts based upon market quoteswas a net liability of $0.1 million at March 31, 2003.

 

**AccumulatedOther Comprehensive Income (Loss)**

The following table summarizes the effects of FAS 133on the Company’s accumulated other comprehensive income as of March 31, 2003and 2002 (in thousands):

 
|                                                                          |   | **Interest Rate  Collar  Agreements** |   | **Foreign  Exchange  Contracts** |   | **Total** |   |
|-------------------------------------------------------------------------------|--------|---------------------------------------|--------|----------------------------------|--------|-----------|--------|
|                                                                          |   |                                  |   |                             |   |      |   |
| Accumulated other comprehensive income (loss) balance at December 31,  2002   |   | $                                     | (4,350 | )                                | $      | —    |   | $ | (4,350 | ) |
|                                                                          |   |                                  |   |                             |   |      |   |
| Unwound from accumulated other comprehensive income (loss) during the  period |   | 1,363                                 |   | —                           |   | 1,363     |   |
|                                                                          |   |                                  |   |                             |   |      |   |
| Mark to market hedge contracts                                                |   | (451                                  | )      | (69                              | )      | (520      | )      |
|                                                                          |   |                                  |   |                             |   |      |   |
| Accumulated other comprehensive income (loss) balance at March 31,  2003      |   | (3,438                                | )      | (69                              | )      | (3,507    | )      |
|                                                                          |   |                                  |   |                             |   |      |   |
| Accumulated other comprehensive income (loss) balance at December 31,  2001   |   | $                                     | (4,189 | )                                | $      | 5         |   | $ | (4,184 | ) |
|                                                                          |   |                                  |   |                             |   |      |   |
| Unwound from accumulated other comprehensive income (loss) during the  period |   | 1,218                                 |   | (5                               | )      | 1,213     |   |
|                                                                          |   |                                  |   |                             |   |      |   |
| Mark to market hedge contracts                                                |   | 1,098                                 |   | —                           |   | 1,098     |   |
|                                                                          |   |                                  |   |                             |   |      |   |
| Accumulated other comprehensive income (loss) balance at March 31,  2002      |   | $                                     | (1,873 | )                                | $      | —    |   | $ | (1,873 | ) |

 

At March 31, 2003, the Company estimates that itwill reclassify out of accumulated other comprehensive income approximately$3.5 million of deferred losses into earnings within the next 12 months.

 

The fair value of the Company’s derivatives was a netliability position of $5.3 million and $6.6 million at March 31, 2003 and December31, 2002, respectively, of which $5.3 million and $5.8 million is included inaccrued liabilities at March 31, 2003 and December 31, 2002, respectively, and$0.8 million is included in other long-term liabilities at December 31, 2002,in the accompanying condensed consolidated balance sheets.

 

**Statementof Operations**

The following tables summarize the effects of SFASNo. 133 on the Company’s statement of operations related to theineffective portion of the Company’s interest rate collar agreements andchanges in the fair value of foreign exchange contracts not designated ashedging instruments for the three months ended March 31, 2003 and 2002 (inthousands):

 

9

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|                                              |   | **Interest Rate  Collar  Agreements** |   | **Foreign  Exchange  Contracts** |   | **Total** |   |
|---------------------------------------------------|--------|---------------------------------------|--------|----------------------------------|--------|-----------|--------|
|                                              |   |                                  |   |                             |   |      |   |
| Three months ended March 31, 2003                 |   |                                  |   |                             |   |      |   |
| Other income (expense)                            |   | $                                     | 532    |                             | $      | (89       | )      | $ | 443 |   |
| Total statement of operations impact before taxes |   | $                                     | 532    |                             | $      | (89       | )      | $ | 443 |   |
|                                              |   |                                  |   |                             |   |      |   |
| Three months ended March 31, 2002                 |   |                                  |   |                             |   |      |   |
| Other income (expense)                            |   | $                                     | 126    |                             | $      | 776       |   | $ | 902 |   |
| Total statement of operations impact before taxes |   | $                                     | 126    |                             | $      | 776       |   | $ | 902 |   |

 

**6.**                                      **Debt**

 

**CreditFacility**

The credit facility (the Credit Facility) consists of(i) $415 million of term loans A and B payable in quarterly installmentsthrough April 11, 2007 and October 11, 2008, respectively and(ii) $80.0 million of revolving loan availability throughApril 11, 2007.  The CreditFacility contains restrictive covenants which require us to, among otherthings, maintain a maximum quarterly leverage ratio  and a minimum fixed charge ratio (as defined).  As a result of the economic slowdowncontinuing into 2003, we did not anticipate that we would meet the leverageratio requirement as of the first quarter of 2004.  Accordingly, the Company sought and obtained an amendment to theCredit Facility in April 2003 which provided for certain revisions to ourmaximum leverage ratio in 2003 and 2004. The amendment provides for a maximum leverage ratio of 6.50:1 for thesecond quarter of  2003, increasing to6.75:1 for the third quarter of 2003 through the second quarter of 2004 andthen declining on a quarterly basis to 6.25:1 in the fourth quarter of 2004.  Thereafter, the maximum ratio is4.00:1.  The amendment also increasesthe applicable margin (as defined) on amounts borrowed by 50 basis points.  Although there can be no assurance, webelieve that we will be able to comply with the amended financial covenantscontained in the Credit Facility in 2003 and 2004.

 

Borrowings under the Credit Facility arecollateralized by substantially all of the Company’s assets.  In addition, as of March 31, 2003, theCompany has interest rate protection agreements for a notional amount of$150 million that effectively guarantee that the Company’s interest rateon $150 million of the Company’s Credit Facility will not exceed10.17 percent, nor be less than 9.00 percent.  The Company includes net amounts paid orreceived under the interest rate protection agreements as a component ofinterest expense.  At March 31,2003, the Company had approximately $43.3 million of borrowings availableunder the Credit Facility, subject to terms and conditions specified therein.

 

**SeniorSubordinated Notes**

 

The $160.0 million unsecured, 12 percentsenior subordinated notes due 2011 (the Notes) bear interest payablesemiannually on February 15 and August 15 of each year.  The Notes are fully and unconditionallyguaranteed on a senior subordinated basis, jointly and severally, by theCompany and its wholly owned domestic subsidiaries.  The financial covenants under the Notes include ratio

 

10

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limitations on certain asset dispositions, payments,debt incurrence, dividends and other restricted payments.

 

Long-term debt consists of the following (inthousands):

 
|                                                                                                                  |   | **March 31,  2003** |       | **December 31,  2002** |       |
|-----------------------------------------------------------------------------------------------------------------------|--------|---------------------|------------|------------------------|------------|
|                                                                                                                  |   |                | ** ** |                   | ** ** |
| Term loan A, interest at LIBOR plus 3.25%; 4.54% at March 31, 2003,  due quarterly through April 11, 2007   |   | $                   | 71,250     |                   | $          | 75,000 |   |
| Term loan B, interest at LIBOR plus 4.00%; 5.43% at March 31, 2003,  due quarterly through October 11, 2008 |   | 280,800             |       | 280,800                |       |
| Revolving credit loan, interest at LIBOR plus 3.25%; 4.59% at March  31, 2003, due April 11, 2007           |   | 34,100              |       | 37,100                 |       |
| Senior subordinated notes, interest at 12.00%, due 2011                                                               |   | 160,000             |       | 160,000                |       |
| Acquisition note payable, interest at 5.50%, due monthly through 2004                                                 |   | 3,500               |       | 4,000                  |       |
| Acquisition note payable, interest at 6.00%, due April 1, 2004                                                        |   | 800                 |       | 800                    |       |
|                                                                                                                  |   | 550,450             |       | 557,700                |       |
| Less current maturities                                                                                               |   | (17,936             | )          | (17,400                | )          |
|                                                                                                                  |   | $                   | 532,514    |                   | $          | 540,300 |   |

 

**7.**                                      **Comprehensive Income**

 

The table below presents comprehensive income (loss),defined as changes in the equity of the Company excluding changes resultingfrom investments by and distributions to shareholders (in thousands):

 
|                                                            |   | **Three Months Ended  March 31,** |   |
|-----------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                            |   | **2003**                          |   | **2002** |   |
|                                                            |   |                              |   |   |   |
| Net income (loss)                                               |   | $                                 | 15,686 |   | $ | (88,287 | ) |
| Change in cumulative translation Adjustment                     |   | 1,011                             |   | (574 | ) |
| Change in unrealized losses on derivative financial instruments |   | 843                               |   | 2,311 |   |
| Comprehensive income (loss)                                     |   | $                                 | 17,540 |   | $ | (86,550 | ) |

 

**8.**                                      **Segments**

 

The Company follows the provisions of SFASNo. 131, “Disclosures about Segments of an Enterprise and RelatedInformation,” and has three reportable segments: trade shows and conferences,trade publications and marketing services.

 

11

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The Company evaluates the performance of, andallocates resources to, its segments based on contribution margin –defined as net revenue less cost of production and selling, editorial, andcirculation costs.  The accountingpolicies of the reportable segments are the same as those described in thesummary of significant accounting policies. There are no intersegment sales or transfers.  Segment assets are primarily intangible assets, prepaid expensesand accounts receivable.  Revenues,contribution margins and segment assets of the Company’s reportable segmentsare as follows (in thousands):

 
|                               |   | **Trade Shows  and  Conferences** |   | **Trade  Publications** |   | **Marketing  Services** |   | **Corporate  and Other** |   | **Total** |   |
|------------------------------------|--------|-----------------------------------|--------|-------------------------|--------|-------------------------|--------|--------------------------|--------|-----------|--------|
|                               |   |                              |   |                    |   |                    |   |                     |   |      |   |
| Three months  ended March 31, 2003 |   |                              |   |                    |   |                    |   |                     |   |      |   |
| Revenues                           |   | $                                 | 74,086 |                    | $      | 31,515                  |   | $                        | 3,491  |      | $      | 263 |   | $ | 109,355 |   |
| Contribution  margin (loss)        |   | 41,414                            |   | 8,970                   |   | 1,170                   |   | (516                     | )      | 51,038    |   |
| Segment assets                     |   | 580,304                           |   | 180,263                 |   | 32,361                  |   | 55,247                   |   | 848,175   |   |
|                               |   |                              |   |                    |   |                    |   |                     |   |      |   |
| Three months  ended March 31, 2002 |   |                              |   |                    |   |                    |   |                     |   |      |   |
| Revenues                           |   | 76,465                            |   | 28,674                  |   | 3,576                   |   | 712                      |   | 109,427   |   |
| Contribution  margin (loss)        |   | 42,745                            |   | 5,741                   |   | 1,589                   |   | 6                        |   | 50,081    |   |
| Segment assets                     |   | 617,542                           |   | 185,730                 |   | 31,638                  |   | 62,497                   |   | 897,407   |   |
|                                    |        |                                   |        |                         |        |                         |        |                          |        |           |        |  |  |  |  |  |

 

The reconciliation of total segment contributionmargin to consolidated (loss) income before taxes, minority interests andcumulative effect of accounting change is as follows (in thousands):

 
|                                                                                                   |   | **Three Months Ended  March 31,** |   |
|--------------------------------------------------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                                                                   |   | **2003**                          |   | **2002** |   |
|                                                                                                   |   |                              |   |   |   |
| Total segment contribution margin                                                                      |   | $                                 | 51,038 |   | $ | 50,081 |   |
| General and administrative expense                                                                |   | (9,868                            | )      | (9,878 | ) |
| Funding of affiliated dot.com company operations                                                       |   | (210                              | )      | (38,079 | ) |
| Depreciation and amortization                                                                          |   | (13,155                           | )      | (16,648 | ) |
| Other expense (primarily interest)                                                                     |   | (11,687                           | )      | (11,632 | ) |
| Consolidated income (loss) before taxes, minority interest and  cumulative effect of accounting change |   | $                                 | 16,118 |   | $ | (26,156 | ) |

 

**9.**                                      **Relationship with Advanstar.com, Inc.**

 

Advanstar.com, Inc. (Advanstar.com), an affiliate ofthe Company, operates the Company’s event and publication-related web sites anddevelops certain enhanced web opportunities to serve the Company’s customers inselected industries.  The Companyprovides Advanstar.com with certain administrative support services and chargesfor these services based on a general overhead charge.  In addition, selected sales, editorial,marketing and production staff of the Company are shared withAdvanstar.com.  The Company also providesAdvanstar.com with marketing and promotional support through advertising pagesin its trade publications and exhibit space in its trade shows.  In

 

12

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return, Advanstar.com provides support on its web sitesfor the Company’s trade publications and trade shows.

 

In the first quarter of 2002, management of Advanstar,Inc. expanded its efforts to consolidate the activities of Advanstar.com withthe Company.  Consequently, in responseto the changing business environment and continuing operating losses ofAdvanstar.com, the Company recorded a first quarter 2002 non-cash charge tooperations of $37.2 million related to a provision against the outstandingadvances and notes due to the Company from Advanstar.com as ofDecember 31, 2001.

 

In 2002 the Company began recording the advances andnotes issued to Advanstar.com during the current year as an operating expenseon the Company’s consolidated statement of operations, to reflect the ongoingnature of the operations of Advanstar.com in support of the Company’soperations.  Net advances and notescharged to the Company’s operations during the quarter ended March 31, 2003 and2002 were approximately $0.2 and $0.9 million, respectively.

 

**10.**                               **Related-Party Transactions**

 

**Parent Company Notes**

As part of the financing for theacquisition of the Company by the DLJ Merchant Banking Fund in October 2000(the Acquisition), our parent, Advanstar, Inc., issued discount notes (theDiscount Notes) with a principal amount at maturity of $103.2 million.  Concurrently with the closing of theoffering of the Notes, Advanstar, Inc. sold additional Discount Notes dueOctober 2011 with an additional aggregate principal amount at maturity of $68.6million.  These notes do not requirecash interest payments until 2006. Neither the Company nor any of its subsidiaries guaranteed the DiscountNotes.  Advanstar, Inc., however, is aholding company and its ability to pay interest on these Discount Notes will bedependent upon the receipt of dividends from its subsidiaries, including theCompany.  The Credit Facility and the Notes impose substantial restrictions on theCompany’s and its subsidiaries’ ability to pay dividends.

 

**11.**                               **Supplemental Guarantor Condensed ConsolidatingFinancial Statements**

 

**Basis ofPresentation**

The Notes are fully and unconditionally guaranteed ona senior subordinated basis, jointly and severally, by the Company and itswholly owned domestic subsidiaries.  Thesubsidiary guarantors are Art Expositions International, Inc., MAGIC andApplied Business TeleCommunications. The condensed consolidating financial statements of the guarantors arepresented below and should be read in conjunction with the consolidatedfinancial statements of the Company. Separate financial statements of the guarantors are not presentedbecause the guarantors are jointly, severally, fully, and unconditionallyliable under the guarantees and the Company believes the condensedconsolidating financial statements presented are sufficiently meaningful inunderstanding the financial position and results of the guarantors.

 

There are no significant restrictions on the abilityof the subsidiary guarantors to make distributions to the Company.

 

13

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**AdvanstarCommunications Inc.**

**CondensedConsolidating Balance Sheets**

**At March31, 2003**

(In thousands)

 
|                                                   |   | **Communications** |       | **Guarantor  Subsidiaries** |       | **Nonguarantor  Subsidiaries** |       | **Eliminations** |       | **Consolidated  Total** |       |
|--------------------------------------------------------|--------|--------------------|------------|-----------------------------|------------|--------------------------------|------------|------------------|------------|-------------------------|------------|
| **ASSETS**                                             |   |               | ** ** |                        | ** ** |                           | ** ** |             | ** ** |                    | ** ** |
|                                                   |   |               |       |                        |       |                           |       |             |       |                    |       |
| Current assets:                                        |   |               |       |                        |       |                           |       |             |       |                    |       |
| Cash and cash  equivalents                             |   | $                  | 3,136      |                        | $          | —                         |       | $                | 9,120      |                    | $          | — |   | $ | 12,256 |   |
| Accounts  receivable, net                              |   | 21,991             |       | 38                          |       | 1,741                          |       | —           |       | 23,770                  |       |
| Prepaid expenses                                       |   | 5,958              |       | 2,153                       |       | 1,361                          |       | —           |       | 9,472                   |       |
| Other                                                  |   | 1,075              |       | —                      |       | 29                             |       | —           |       | 1,104                   |       |
|                                                   |   |               |       |                        |       |                           |       |             |       |                    |       |
| Total current  assets                                  |   | 32,160             |       | 2,191                       |       | 12,251                         |       | —           |       | 46,602                  |       |
|                                                   |   |               |       |                        |       |                           |       |             |       |                    |       |
| Noncurrent  assets:                                    |   |               |       |                        |       |                           |       |             |       |                    |       |
| Property, plant  and equipment, net                    |   | 21,342             |       | 1,085                       |       | 870                            |       | —           |       | 23,297                  |       |
| Deferred tax  asset                                    |   | 21,113             |       | —                      |       | —                         |       | (21,113          | )          | —                  |       |
| Intangible and  other assets, net                      |   | 415,020            |       | 296,636                     |       | 66,620                         |       | —           |       | 778,276                 |       |
| Investments in  subsidiaries                           |   | 551,386            |       | —                      |       | —                         |       | (551,386         | )          | —                  |       |
| Intercompany  receivable                               |   | —             |       | 186,831                     |       | 28,412                         |       | (215,243         | )          | —                  |       |
|                                                   |   |               |       |                        |       |                           |       |             |       |                    |       |
|                                                   |   | $                  | 1,041,021  |                        | $          | 486,743                        |       | $                | 108,153    |                    | $          | (787,742 | ) | $ | 848,175 |   |
|                                                   |   |               |       |                        |       |                           |       |             |       |                    |       |
| **LIABILITIES AND  STOCKHOLDER’S EQUITY**         |   |               |       |                        |       |                           |       |             |       |                    |       |
|                                                   |   |               |       |                        |       |                           |       |             |       |                    |       |
| Current  liabilities:                                  |   |               |       |                        |       |                           |       |             |       |                    |       |
| Current  maturities of long-term debt                  |   | $                  | 17,936     |                        | $          | —                         |       | $                | —     |                    | $          | — |   | $ | 17,936 |   |
| Accounts payable                                       |   | 17,398             |       | 5,317                       |       | 3,616                          |       | —           |       | 26,331                  |       |
| Accrued  liabilities                                   |   | 16,346             |       | 6,568                       |       | 1,274                          |       | —           |       | 24,188                  |       |
| Deferred revenue                                       |   | 21,607             |       | 1,914                       |       | 2,839                          |       | —           |       | 26,360                  |       |
|                                                   |   |               |       |                        |       |                           |       |             |       |                    |       |
| Total current  liabilities                             |   | 73,287             |       | 13,799                      |       | 7,729                          |       | —           |       | 94,815                  |       |
|                                                   |   |               |       |                        |       |                           |       |             |       |                    |       |
| Long-term debt,  net of current maturities             |   | 532,514            |       | —                      |       | —                         |       | —           |       | 532,514                 |       |
| Deferred income  taxes and other long-term liabilities |   | 2,388              |       | 21,113                      |       | 248                            |       | (21,113          | )          | 2,636                   |       |
| Intercompany  payable                                  |   | 215,243            |       | —                      |       | —                         |       | (215,243         | )          | —                  |       |
| Due to parent                                          |   | 4,437              |       | —                      |       | —                         |       | —           |       | 4,437                   |       |
| Minority  interests                                    |   | 9,459              |       | —                      |       | 621                            |       | —           |       | 10,080                  |       |
|                                                   |   |               |       |                        |       |                           |       |             |       |                    |       |
| Stockholder’s  equity:                            |   |               |       |                        |       |                           |       |             |       |                    |       |
| Common stock                                           |   | 10                 |       | 3                           |       | 972                            |       | (975             | )          | 10                      |       |
| Capital in  excess of par value                        |   | 387,367            |       | 438,117                     |       | 120,974                        |       | (559,091         | )          | 387,367                 |       |
| (Accumulated  deficit) retained earnings               |   | (176,460           | )          | 13,711                      |       | (18,674                        | )          | 4,963            |       | (176,460                | )          |
| Accumulated  other comprehensive loss                  |   | (7,224             | )          | —                      |       | (3,717                         | )          | 3,717            |       | (7,224                  | )          |
|                                                   |   |               |       |                        |       |                           |       |             |       |                    |       |
| Total  stockholder’s equity                       |   | 203,693            |       | 451,831                     |       | 99,555                         |       | (551,386         | )          | 203,693                 |       |
|                                                   |   |               |       |                        |       |                           |       |             |       |                    |       |
|                                                   |   | $                  | 1,041,021  |                        | $          | 486,743                        |       | $                | 108,153    |                    | $          | (787,742 | ) | $ | 848,175 |   |

 

14

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**AdvanstarCommunications Inc.**

**CondensedConsolidating Statements of Operations**

**For thethree months ended March 31, 2003**

(In thousands)

 
|                                                                  |   | **Communications** |       | **Guarantor  Subsidiaries** |       | **Nonguarantor  Subsidiaries** |       | **Eliminations** |       | **Consolidated  Total** |       |
|-----------------------------------------------------------------------|--------|--------------------|------------|-----------------------------|------------|--------------------------------|------------|------------------|------------|-------------------------|------------|
|                                                                  |   |               | ** ** |                        | ** ** |                           | ** ** |             | ** ** |                    | ** ** |
| Net revenue                                                           |   | $                  | 68,283     |                        | $          | 31,589                         |       | $                | 9,483      |                    | $          | — |   | $ | 109,355 |   |
|                                                                  |   |               |       |                        |       |                           |       |             |       |                    |       |
| Operating  expenses:                                                  |   |               |       |                        |       |                           |       |             |       |                    |       |
| Cost of  production and selling, editorial and circulation            |   | 42,169             |       | 9,287                       |       | 6,861                          |       | —           |       | 58,317                  |       |
| General and  administrative                                           |   | 8,282              |       | 327                         |       | 1,259                          |       | —           |       | 9,868                   |       |
| Funding of  affiliated company operations                             |   | 210                |       | —                      |       | —                         |       | —           |       | 210                     |       |
| Depreciation and  amortization                                        |   | 7,768              |       | 4,841                       |       | 546                            |       | —           |       | 13,155                  |       |
|                                                                  |   |               |       |                        |       |                           |       |             |       |                    |       |
| Total operating  expenses                                             |   | 58,429             |       | 14,455                      |       | 8,666                          |       | —           |       | 81,550                  |       |
|                                                                  |   |               |       |                        |       |                           |       |             |       |                    |       |
| Operating (loss)  income                                              |   | 9,854              |       | 17,134                      |       | 817                            |       | —           |       | 27,805                  |       |
|                                                                  |   |               |       |                        |       |                           |       |             |       |                    |       |
| Other income  (expense):                                              |   |               |       |                        |       |                           |       |             |       |                    |       |
| Interest  expense, net                                                |   | (12,191            | )          | —                      |       | 105                            |       | —           |       | (12,086                 | )          |
| Other income,  net                                                    |   | 623                |       | —                      |       | (224                           | )          | —           |       | 399                     |       |
|                                                                  |   |               |       |                        |       |                           |       |             |       |                    |       |
| Income (loss)  income before income taxes and minority interests |   | (1,714             | )          | 17,134                      |       | 698                            |       | —           |       | 16,118                  |       |
|                                                                  |   |               |       |                        |       |                           |       |             |       |                    |       |
| (Benefit) provision  for income taxes                            |   | (6,288             | )          | 6,288                       |       | 304                            |       | —           |       | 304                     |       |
|                                                                  |   |               |       |                        |       |                           |       |             |       |                    |       |
| Minority  interests                                                   |   | (242               | )          | —                      |       | 114                            |       | —           |       | (128                    | )          |
|                                                                  |   |               |       |                        |       |                           |       |             |       |                    |       |
| Equity in  earnings of subsidiaries                                   |   | 11,354             |       | —                      |       | —                         |       | (11,354          | )          | —                  |       |
|                                                                  |   |               |       |                        |       |                           |       |             |       |                    |       |
| Net income  (loss)                                                    |   | $                  | 15,686     |                        | $          | 10,846                         |       | $                | 508        |                    | $          | (11,354 | ) | $ | 15,686 |   |

 

15

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**AdvanstarCommunications Inc.**

**CondensedConsolidating Statements of Cash Flows**

**For thethree months ended March 31, 2003**

(In thousands)

 
|                                                                             |   | **Communications** |       | **Guarantor  Subsidiaries** |       | **Nonguarantor  Subsidiaries** |       | **Eliminations** |       | **Consolidated  Total** |       |
|----------------------------------------------------------------------------------|--------|--------------------|------------|-----------------------------|------------|--------------------------------|------------|------------------|------------|-------------------------|------------|
|                                                                             |   |               | ** ** |                        | ** ** |                           | ** ** |             | ** ** |                    | ** ** |
| Operating  activities:                                                           |   |               |       |                        |       |                           |       |             |       |                    |       |
| Net income  (loss)                                                               |   | $                  | 15,686     |                        | $          | 10,846                         |       | $                | 508        |                    | $          | (11,354 | ) | $ | 15,686 |   |
| Adjustments to  reconcile net loss to net cash provided by operating activities: |   |               |       |                        |       |                           |       |             |       |                    |       |
| Equity in  earnings of subsidiaries                                              |   | (11,354            | )          | —                      |       | —                         |       | 11,354           |       | —                  |       |
| Gain on  derivative financial instruments                                        |   | (443               | )          | —                      |       | —                         |       | —           |       | (443                    | )          |
| Depreciation and  amortization                                                   |   | 7,768              |       | 4,841                       |       | 546                            |       | —           |       | 13,155                  |       |
| Other noncash  items                                                             |   | 1,218              |       | 67                          |       | (44                            | )          | —           |       | 1,241                   |       |
| Change in  working capital items                                                 |   | (13,140            | )          | (15,458                     | )          | 1,224                          |       | —           |       | (27,374                 | )          |
|                                                                             |   |               |       |                        |       |                           |       |             |       |                    |       |
| Net cash  provided by operating activities                                  |   | (265               | )          | 296                         |       | 2,234                          |       | —           |       | 2,265                   |       |
|                                                                             |   |               |       |                        |       |                           |       |             |       |                    |       |
| Investing  activities:                                                           |   |               |       |                        |       |                           |       |             |       |                    |       |
| Additions to  property, plant and equipment                                      |   | (1,601             | )          | (296                        | )          | (82                            | )          | —           |       | (1,979                  | )          |
| Acquisitions of  publications and trade shows, net of proceeds                   |   | —             |       | —                      |       | (1                             | )          | —           |       | (1                      | )          |
|                                                                             |   |               |       |                        |       |                           |       |             |       |                    |       |
| Net cash used in  investing activities                                           |   | (1,601             | )          | (296                        | )          | (83                            | )          | —           |       | (1,980                  | )          |
|                                                                             |   |               |       |                        |       |                           |       |             |       |                    |       |
| Financing  activities:                                                           |   |               |       |                        |       |                           |       |             |       |                    |       |
| Borrowings of  long term debt, net                                               |   | (7,250             | )          | —                      |       | —                         |       | —           |       | (7,250                  | )          |
| Deferred financing costs                                                         |   | (27                | )          |                        |       |                           |       |             |       | (27                     | )          |
| Dividends paid  to minority interest holders                                     |   | —             |       | —                      |       | —                         |       | —           |       | —                  |       |
|                                                                             |   |               |       |                        |       |                           |       |             |       |                    |       |
| Net cash used in  financing activities                                           |   | (7,277             | )          | —                      |       | —                         |       | —           |       | (7,277                  | )          |
|                                                                             |   |               |       |                        |       |                           |       |             |       |                    |       |
| Effect of  exchange rate changes on cash                                         |   | (3                 | )          | —                      |       | 321                            |       | —           |       | 318                     |       |
|                                                                             |   |               |       |                        |       |                           |       |             |       |                    |       |
| Net decrease in  cash and cash equivalents                                       |   | (9,146             | )          | —                      |       | 2,472                          |       | —           |       | (6,674                  | )          |
|                                                                             |   |               |       |                        |       |                           |       |             |       |                    |       |
| Cash and cash  equivalents, beginning of year                                    |   | 12,282             |       | —                      |       | 6,648                          |       | —           |       | 18,930                  |       |
|                                                                             |   |               |       |                        |       |                           |       |             |       |                    |       |
| Cash and cash  equivalents, end of year                                          |   | $                  | 3,136      |                        | $          | —                         |       | $                | 9,120      |                    | $          | — |   | $ | 12,256 |   |

 

16

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**AdvanstarCommunications Inc.**

**CondensedConsolidating Balance Sheets**

**AtDecember 31, 2002**

(In thousands)

 
|                                                   |   | **Communications** |       | **Guarantor  Subsidiaries** |       | **Nonguarantor  Subsidiaries** |       | **Eliminations** |       | **Consolidated  Total** |       |
|--------------------------------------------------------|--------|--------------------|------------|-----------------------------|------------|--------------------------------|------------|------------------|------------|-------------------------|------------|
| **ASSETS**                                             |   |               | ** ** |                        | ** ** |                           | ** ** |             | ** ** |                    | ** ** |
|                                                   |   |               |       |                        |       |                           |       |             |       |                    |       |
| Current assets:                                        |   |               |       |                        |       |                           |       |             |       |                    |       |
| Cash and cash  equivalents                             |   | $                  | 12,282     |                        | $          | —                         |       | $                | 6,648      |                    | $          | — |   | $ | 18,930 |   |
| Accounts  receivable, net                              |   | 20,167             |       | 29                          |       | 2,828                          |       | —           |       | 23,024                  |       |
| Prepaid expenses                                       |   | 6,163              |       | 1,673                       |       | 1,921                          |       | —           |       | 9,757                   |       |
| Other                                                  |   | 1,159              |       | —                      |       | 49                             |       | —           |       | 1,208                   |       |
|                                                   |   |               |       |                        |       |                           |       |             |       |                    |       |
| Total current  assets                                  |   | 39,771             |       | 1,702                       |       | 11,446                         |       | —           |       | 52,919                  |       |
|                                                   |   |               |       |                        |       |                           |       |             |       |                    |       |
| Noncurrent  assets:                                    |   |               |       |                        |       |                           |       |             |       |                    |       |
| Property, plant  and equipment, net                    |   | 21,707             |       | 898                         |       | 894                            |       | —           |       | 23,499                  |       |
| Deferred tax  asset                                    |   | 21,113             |       | —                      |       | —                         |       | (21,113          | )          | —                  |       |
| Intangible and  other assets, net                      |   | 422,073            |       | 301,366                     |       | 66,169                         |       | —           |       | 789,608                 |       |
| Investments in  subsidiaries                           |   | 543,029            |       | —                      |       | —                         |       | (543,029         | )          | —                  |       |
| Intercompany  receivable                               |   | —             |       | 185,023                     |       | 29,120                         |       | (214,143         | )          | —                  |       |
|                                                   |   | $                  | 1,047,693  |                        | $          | 488,989                        |       | $                | 107,629    |                    | $          | (778,285 | ) | $ | 866,026 |   |
|                                                   |   |               |       |                        |       |                           |       |             |       |                    |       |
| **LIABILITIES AND  STOCKHOLDER’S EQUITY**         |   |               |       |                        |       |                           |       |             |       |                    |       |
|                                                   |   |               |       |                        |       |                           |       |             |       |                    |       |
| Current  liabilities:                                  |   |               |       |                        |       |                           |       |             |       |                    |       |
| Current  maturities of long-term debt                  |   | $                  | 17,400     |                        | $          | —                         |       | $                | —     |                    | $          | — |   | $ | 17,400 |   |
| Accounts payable                                       |   | 14,556             |       | 1,162                       |       | 3,654                          |       | —           |       | 19,372                  |       |
| Accrued  liabilities                                   |   | 23,385             |       | 6,516                       |       | 1,213                          |       | —           |       | 31,114                  |       |
| Deferred revenue                                       |   | 29,327             |       | 19,213                      |       | 4,499                          |       | —           |       | 53,039                  |       |
|                                                   |   |               |       |                        |       |                           |       |             |       |                    |       |
| Total current  liabilities                             |   | 84,668             |       | 26,891                      |       | 9,366                          |       | —           |       | 120,925                 |       |
|                                                   |   |               |       |                        |       |                           |       |             |       |                    |       |
| Long-term debt,  net of current maturities             |   | 540,300            |       | —                      |       | —                         |       | —           |       | 540,300                 |       |
| Deferred income  taxes and other long-term liabilities |   | 4,139              |       | 21,113                      |       | 235                            |       | (21,113          | )          | 4,374                   |       |
| Intercompany  payable                                  |   | 214,143            |       | —                      |       | —                         |       | (214,143         | )          | —                  |       |
| Due to parent                                          |   | 4,492              |       | —                      |       | —                         |       | —           |       | 4,492                   |       |
| Minority  interests                                    |   | 9,068              |       | —                      |       | 714                            |       | —           |       | 9,782                   |       |
|                                                   |   |               |       |                        |       |                           |       |             |       |                    |       |
| Stockholder’s  equity:                            |   |               |       |                        |       |                           |       |             |       |                    |       |
| Common stock                                           |   | 10                 |       | 3                           |       | 488                            |       | (491             | )          | 10                      |       |
| Capital in  excess of par value                        |   | 387,367            |       | 438,117                     |       | 120,738                        |       | (558,855         | )          | 387,367                 |       |
| (Accumulated  deficit) retained earnings               |   | (192,146           | )          | 2,865                       |       | (19,182                        | )          | 16,317           |       | (192,146                | )          |
| Accumulated  other comprehensive loss                  |   | (4,348             | )          | —                      |       | (4,730                         | )          | —           |       | (9,078                  | )          |
|                                                   |   |               |       |                        |       |                           |       |             |       |                    |       |
| Total  stockholder’s equity                       |   | 190,883            |       | 440,985                     |       | 97,314                         |       | (543,029         | )          | 186,153                 |       |
|                                                   |   |               |       |                        |       |                           |       |             |       |                    |       |
|                                                   |   | $                  | 1,047,693  |                        | $          | 488,989                        |       | $                | 107,629    |                    | $          | (778,285 | ) | $ | 866,026 |   |

 

17

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**AdvanstarCommunications Inc.**

**CondensedConsolidating Statements of Operations**

**For thethree months ended March 31, 2002**

(In thousands)

 
|                                                           |   | **Communications** |       | **Guarantor  Subsidiaries** |       | **Nonguarantor  Subsidiaries** |       | **Eliminations** |       | **Consolidated  Total** |       |
|----------------------------------------------------------------|--------|--------------------|------------|-----------------------------|------------|--------------------------------|------------|------------------|------------|-------------------------|------------|
|                                                           |   |               | ** ** |                        | ** ** |                           | ** ** |             | ** ** |                    | ** ** |
| Net revenue                                                    |   | $                  | 66,744     |                        | $          | 30,048                         |       | $                | 12,635     |                    | $          | — |   | $ | 109,427 |   |
|                                                           |   |               |       |                        |       |                           |       |             |       |                    |       |
| Operating  expenses:                                           |   |               |       |                        |       |                           |       |             |       |                    |       |
| Cost of  production and selling, editorial and circulation     |   | 42,537             |       | 8,641                       |       | 8,168                          |       | —           |       | 59,346                  |       |
| General and  administrative                                    |   | 8,169              |       | 329                         |       | 1,380                          |       | —           |       | 9,878                   |       |
| Funding of  affiliated company operations                      |   | 38,079             |       | —                      |       | —                         |       | —           |       | 38,079                  |       |
| Depreciation and  amortization                                 |   | 8,661              |       | 7,219                       |       | 768                            |       | —           |       | 16,648                  |       |
|                                                           |   |               |       |                        |       |                           |       |             |       |                    |       |
| Total operating  expenses                                      |   | 97,446             |       | 16,189                      |       | 10,316                         |       | —           |       | 123,951                 |       |
|                                                           |   |               |       |                        |       |                           |       |             |       |                    |       |
| Operating (loss)  income                                       |   | (30,702            | )          | 13,859                      |       | 2,319                          |       | —           |       | (14,524                 | )          |
|                                                           |   |               |       |                        |       |                           |       |             |       |                    |       |
| Other income  (expense):                                       |   |               |       |                        |       |                           |       |             |       |                    |       |
| Interest  expense, net                                         |   | (12,537            | )          | —                      |       | (137                           | )          | —           |       | (12,674                 | )          |
| Other income,  net                                             |   | 1,351              |       | —                      |       | (309                           | )          | —           |       | 1,042                   |       |
|                                                           |   |               |       |                        |       |                           |       |             |       |                    |       |
| (Loss) income  before income taxes and minority interests |   | (41,888            | )          | 13,859                      |       | 1,873                          |       | —           |       | (26,156                 | )          |
|                                                           |   |               |       |                        |       |                           |       |             |       |                    |       |
| (Benefit)  provision for income taxes                     |   | (10,833            | )          | 4,851                       |       | 1,206                          |       | —           |       | (4,776                  | )          |
|                                                           |   |               |       |                        |       |                           |       |             |       |                    |       |
| Minority  interests                                            |   | (57                | )          | —                      |       | (33                            | )          | —           |       | (90                     | )          |
|                                                           |   |               |       |                        |       |                           |       |             |       |                    |       |
| Equity in  earnings of subsidiaries                            |   | (4,947             | )          | —                      |       | —                         |       | 4,947            |       | —                  |       |
|                                                           |   |               |       |                        |       |                           |       |             |       |                    |       |
| (Loss) income  before extraordinary item and accounting change |   | (36,059            | )          | 9,008                       |       | 634                            |       | 4,947            |       | (21,470                 | )          |
|                                                           |   |               |       |                        |       |                           |       |             |       |                    |       |
| Cumulative  effect of accounting change                        |   | (52,228            | )          | (10,501                     | )          | (4,088                         | )          | —           |       | (66,817                 | )          |
|                                                           |   |               |       |                        |       |                           |       |             |       |                    |       |
| Net loss                                                       |   | $                  | (88,287    | )                           | $          | (1,493                         | )          | $                | (3,454     | )                       | $          | 4,947 |   | $ | (88,287 | ) |

 

18

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**AdvanstarCommunications Inc.**

**CondensedConsolidating Statements of Cash Flows**

**For thethree months ended March 31, 2002**

(In thousands)

 
|                                                                             |   | **Communications** |       | **Guarantor  Subsidiaries** |       | **Nonguarantor  Subsidiaries** |       | **Eliminations** |       | **Consolidated  Total** |       |
|----------------------------------------------------------------------------------|--------|--------------------|------------|-----------------------------|------------|--------------------------------|------------|------------------|------------|-------------------------|------------|
|                                                                             |   |               | ** ** |                        | ** ** |                           | ** ** |             | ** ** |                    | ** ** |
| Operating  activities:                                                           |   |               |       |                        |       |                           |       |             |       |                    |       |
| Net loss                                                                         |   | $                  | (88,287    | )                           | $          | (1,493                         | )          | $                | (3,454     | )                       | $          | 4,947 |   | $ | (88,287 | ) |
| Adjustments to  reconcile net loss to net cash provided by operating activities: |   |               |       |                        |       |                           |       |             |       |                    |       |
| Equity in  earnings of subsidiaries                                              |   | 4,947              |       | —                      |       | —                         |       | (4,947           | )          | —                  |       |
| Gain on  derivative financial instruments                                        |   | (905               | )          | —                      |       | —                         |       | —           |       | (905                    | )          |
| Provision for  notes and advances from affiliated dot.com company                |   | 37,192             |       | —                      |       | —                         |       | —           |       | 37,192                  |       |
| Transition  goodwill impairment                                                  |   | 52,228             |       | 10,501                      |       | 4,088                          |       | —           |       | 66,817                  |       |
| Depreciation and  amortization                                                   |   | 8,661              |       | 7,219                       |       | 768                            |       | —           |       | 16,648                  |       |
| Other noncash  items                                                             |   | (9,687             | )          | 5,174                       |       | 609                            |       | —           |       | (3,904                  | )          |
| Change in  working capital items                                                 |   | (16,742            | )          | (21,387                     | )          | 89                             |       | —           |       | (38,040                 | )          |
|                                                                             |   |               |       |                        |       |                           |       |             |       |                    |       |
| Net cash  provided by operating activities                                  |   | (12,593            | )          | 14                          |       | 2,100                          |       | —           |       | (10,479                 | )          |
|                                                                             |   |               |       |                        |       |                           |       |             |       |                    |       |
| Investing  activities:                                                           |   |               |       |                        |       |                           |       |             |       |                    |       |
| Additions to  property, plant and equipment                                      |   | (1,146             | )          | (14                         | )          | (129                           | )          | —           |       | (1,289                  | )          |
| Acquisitions of  publications and trade shows, net of proceeds                   |   | (9,581             | )          | —                      |       | (2,155                         | )          | —           |       | (11,736                 | )          |
|                                                                             |   |               |       |                        |       |                           |       |             |       |                    |       |
| Net cash used in  investing activities                                           |   | (10,727            | )          | (14                         | )          | (2,284                         | )          | —           |       | (13,025                 | )          |
|                                                                             |   |               |       |                        |       |                           |       |             |       |                    |       |
| Financing  activities:                                                           |   |               |       |                        |       |                           |       |             |       |                    |       |
| Payments of  long-term debt, net                                                 |   | (3,450             | )          | —                      |       | —                         |       | —           |       | (3,450                  | )          |
| Deferred  financing costs                                                        |   | (1,755             | )          | —                      |       | —                         |       | —           |       | (1,755                  | )          |
|                                                                             |   |               |       |                        |       |                           |       |             |       |                    |       |
| Net cash used in  financing activities                                           |   | (5,205             | )          | —                      |       | —                         |       | —           |       | (5,205                  | )          |
|                                                                             |   |               |       |                        |       |                           |       |             |       |                    |       |
| Effect of  exchange rate changes on cash                                         |   | (186               | )          | —                      |       | 441                            |       | —           |       | 255                     |       |
|                                                                             |   |               |       |                        |       |                           |       |             |       |                    |       |
| Net decrease in  cash and cash equivalents                                       |   | (28,711            | )          | —                      |       | 257                            |       | —           |       | (28,454                 | )          |
|                                                                             |   |               |       |                        |       |                           |       |             |       |                    |       |
| Cash and cash  equivalents, beginning of year                                    |   | 33,906             |       | —                      |       | 10,730                         |       | —           |       | 44,636                  |       |
|                                                                             |   |               |       |                        |       |                           |       |             |       |                    |       |
| Cash and cash  equivalents, end of year                                          |   | $                  | 5,195      |                        | $          | —                         |       | $                | 10,987     |                    | $          | — |   | $ | 16,182 |   |

 

19

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**Item2.   *Management’s Discussion and Analysis of FinancialCondition and Results of Operations:***

 

This quarterly report on Form 10-Q containsforward-looking statements made pursuant to the safe harbor provisions of thePrivate Securities Litigation Reform Act of 1995.  Investors are cautioned not to place undue reliance on theseforward-looking statements, including statements about plans and objectives ofmanagement and market growth and opportunity. These forward-looking statements are neither promises or guarantees andinvolve risks and uncertainties that could cause actual results to differmaterially from those indicated by such forward-looking statements.  You should not expect that theseforward-looking statements will be updated or supplemented as a result ofchanging circumstances or otherwise, and we disavow and disclaim any obligationto do so.  Important cautionary statementsand risk factors that would affect actual results are discussed in theCompany’s periodic reports and registration statements filed with theSecurities and Exchange Commission, including those under the caption entitled“Certain Factors Which May Affect Future Results” in the Company’s annualreport on Form 10-K filed with the Securities and Exchange Commission on March31, 2003.

 

**Overview**

 

We are a worldwide provider ofintegrated, B-to-B marketing communications products and services for targetedindustry sectors, principally through trade shows and conferences and throughcontrolled circulation trade, business and professional magazines. We alsoprovide a broad range of other marketing services products, includingclassified advertising, direct mail services, reprints, database marketing,guides, and reference books.

 

We report our business in threesegments:

 

•                  tradeshows and conferences, which consists primarily of the management of tradeshows and seminars held in convention and conference centers;

 

•                  tradepublications, which consists primarily of the creation and distribution ofcontrolled circulation trade, business and professional magazines; and

 

•                  marketingservices, which consists primarily of sales of a variety of direct mail anddatabase products, magazine editorial reprints, and classified advertising.

 

Trade shows and conferencesaccounted for approximately 68% and 70% of total revenue in the three monthsended March 31, 2003 and 2002, respectively. Trade publications accounted forapproximately 29% and 26% of total revenue in the three months ended March 31,2003 and 2002, respectively, while marketing services accounted forapproximately 3% and 4% of total revenue in the three months ended March 31,2003 and 2002, respectively. Our revenue reaches its highest levels during thefirst and third quarters of the year due to the timing of the MAGIC trade showsand our other large trade shows and conferences. Because trade shows andconferences revenue is recognized when a particular event is held, we mayexperience fluctuations in quarterly revenue based on the movement of annualtrade show dates from one quarter to another.

 

20

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**Recent Developments**

 

Our business and results of operations in the threemonths ended March 31, 2003 continue to be significantly impacted by therecession in the U.S. economy, particularly in our Information Technology &Communications trade shows and publications and our Travel & Hospitalitypublications.

 

We continue to see early indications of stabilizationin advertising in many of our markets, except for continuing downward pressurein our technology and travel markets. Advertising pages grew approximately 5.6% and revenue per page increasedapproximately 2.8% across our portfolio in the first quarter of 2003 comparedwith the first quarter of 2002. Advertising pages increased 15.9% in the first quarter of 2003 acrossall sectors other than technology and travel, due in part to market share gainsresulting in a 17.4% revenue increase in these other sectors and in part to theacquisition in the fourth quarter of 2002 of *HT – the Magazine for Healthcare Travel Professionals*.While we see this positive trend continuing in 2003, the economic outlook inthe publishing sector continues to be challenging, and forward visibility onour advertising revenue and pages is limited, due to the concerns of ourcustomers related to the overall business environment.  Our travel publications remain highlysensitive to cutbacks in destination and vacation travel advertising inresponse to concern over terrorism and possible further unrest in the MiddleEast and in other regions of the world and the impact on travel due to therecent SARS outbreak.

 

Our trade show segment continues to be negativelyimpacted by the economic recession.  Ourtrade shows directed to the technology sector continue to suffer from theoverall curtailment of spending in technology markets, which impacts marketingspending by our customers.  We expectany improvement in the performance of our trade show segment to lag behind anygeneral economic recovery, just as it lagged the downturn in the economy goinginto recession beginning in late 2000. Our trade shows remain sensitive tocutbacks in travel in response to concern over terrorism and possible furtherconflict in the Middle East and in other regions of the world and the impact ontravel due to the recent SARS outbreak.

 

The persistence of the general economic slowdown inthe U.S. will likely result in continued weakness in overall marketing andadvertising expenditures by our customers into 2003.  As a result, we expect our revenues, operating income and EBITDAto reflect this overall weakness. However, we believe that our balanced portfolio between trade shows andpublications and our diversification of these products across many industrysectors may mitigate the overall impact from continued weakness in generaleconomic conditions and reduce the potential impact from the volatility of anyone sector.

 

Our Credit Facility contains restrictive covenantswhich require us to, among other things, maintain a maximum quarterly leverageratio and a minimum fixed charge ratio (as defined).  As a result of the economic slowdown continuing into 2003, we didnot anticipate that we would meet the leverage ratio requirement as of thefirst quarter of 2004.  Accordingly, wesought and obtained an amendment to the Credit Facility in April 2003 whichprovided for certain revisions to our maximum leverage ratio in 2003 and2004.  The amendment provides for amaximum leverage ratio of 6.50:1 for the second quarter of  2003, increasing to 6.75:1 for the thirdquarter of 2003 through the second quarter of 2004 and then declining on aquarterly basis to 6.25:1 in the fourth quarter of 2004.  Thereafter, the maximum ratio is4.00:1.  The amendment also increasesthe applicable margin (as defined) on amounts borrowed by 50 basis points.  Although there can be no assurance, webelieve that we will be able to comply with the amended financial covenantscontained in the Credit Facility in 2003 and 2004.

 

21

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**Presentationof Financial Information**

 

*Acquisitionsand Joint Ventures*

 

Since May 31, 1996, we have completed 35 acquisitions and joint ventureagreements, four of which were completed in 2002. There have been noacquisitions completed during the three months ended March 31, 2003.

 

•                  From January 1, 2002 through December 31, 2002 wecompleted the acquisitions of *AIIMInternational Exposition and Conference*, *HT – the Magazine for Healthcare Travel Professionals* andseveral smaller publications for a cumulative purchase price totaling $24.0million in cash and assumed liabilities.

 

We have accounted for our acquisitions under the purchase method ofaccounting.  Accordingly, our results ofoperations include the effect of these acquisitions from the date ofpurchase.  The pro forma operatingresults of the acquisitions are not material relative to our operating results.

 

*GoodwillImpairment*

 

In connection with the adoption of FAS 142, werecorded a goodwill impairment charge of $66.8 million, net of minorityinterest effect of $4.1 million, in the first quarter of 2002, attributableprimarily to an impairment of the carrying value of goodwill. The charge isreported as a cumulative effect of a change in accounting principle.  There is no impairment of goodwill recordedin the first quarter of 2003.

 

***Sources of Revenue***

 

*Trade Shows andConferences*

 

The trade shows and conferences segment derives revenue principally fromthe sale of exhibit space and conference attendance fees generated at itsevents. In 2002, approximately 82% of our trade shows and conferences revenuewas from the sale of exhibit space. Events are generally held on an annualbasis in major metropolitan or convention areas such as New York City or LasVegas. At many of our trade shows, a portion of exhibit space is reserved andpartial payment is received as much as a year in advance. The sale of exhibitspace is generally impacted by the on-going quality and quantity of attendance,venue selection and availability, industry life cycle and general marketconditions. Revenue and related direct event expenses are recognized in themonth in which the event is held. Cash is collected in advance of an event andis recorded on our consolidated balance sheet as deferred revenue.

 

22

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*TradePublications*

 

The trade publications segment derives revenue principally from the saleof advertising in its business-to-business magazines. Additionally, certainpublications derive revenue from paid subscriptions and custom publishing. Paidsubscriptions comprise less than 5% of total publishing revenue. Mostpublications are produced monthly with advertising sold both on an annualschedule and single insertion basis. The sale of advertising is generallyimpacted by new product releases, circulation quality, readership and generalmarket conditions. Advertising revenue is recognized on the publication issue date,and subscription revenue, if any, is recognized over the subscription period,typically one year.

 

Our publishing properties operate in many different markets andindustries which are subject to economic conditions prevalent in thoseindustries. Accordingly, publishing revenues may fluctuate in connection withthe markets in which we operate.

 

*MarketingServices*

 

The marketing services segment derives its revenue from the sale ofvalue-added marketing products such as classified advertising, both print andinternet-based, direct mail services, reprints, database marketing,directories, guides and reference books. These products complement and, in manycases, utilize the content or databases generated by our trade shows,conferences and publications. The sale of these products is generally impactedby the success of the event or publication from which these products arederived, the quality of the sales team and general market conditions. Revenueis generally recognized when the applicable product is shipped.

 

***Components of Expenses***

 

*Trade Shows andConferences*

 

Costs incurred by the trade shows and conferences segment includefacility rent, outsourced services such as registration, security, decorator,and attendee and exhibitor promotion. Exhibitors generally contract directlywith third parties for on-site services such as electrical, booth set-up anddrayage. Staff salaries and related payroll expenses are treated as monthlyperiod expenses. All other direct costs are expensed in the month the event occurs.

 

*TradePublications*

 

Costs incurred by the trade publications segment include printing, paperand postage; selling and promotion; editorial and prepress; and circulationacquisition and fulfillment. Additionally, publisher and sales staff costs, andproduction, editorial and circulation staff costs, with related payroll taxesand benefits, are charged to the publications. We outsource the actual printingof our publications. Printing, paper and postage costs are charged tooperations at the time of publication issuance.  All other direct costs are charged to operations in the monthincurred.

 

*MarketingServices*

 

Costs of the marketing services segment include printing anddistribution costs, database administration fees and selling and productdevelopment salaries and related payroll taxes and benefits. All direct costsare expensed in the month incurred.

 

23

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**SignificantAccounting Policies and Estimates**

 

The discussion andanalysis of our financial condition and results of operations are based uponour consolidated financial statements, which have been prepared in accordancewith accounting principles generally accepted in the United States. Thepreparation of these financial statements requires management to make estimatesand judgments that affect the reported amounts of assets, liabilities, revenuesand expenses.  On an on-going basis, weevaluate these estimates, including those related to bad debts, intangible assetsand income taxes. We base these estimates on historical experience and onvarious other assumptions that are believed to be reasonable under thecircumstances, the results of which form the basis for making judgments aboutthe carrying values of assets and liabilities that are not readily apparentfrom other sources. Actual results may differ from these estimates underdifferent assumptions or conditions.

 

We apply the following critical accounting policies inthe preparation of our consolidated financial statements:

 

*RevenueRecognition*. We recognize revenue as discussed in the“—Sources of Revenue” section above. The balance of deferred revenue at March 31, 2003 was $21.0 million and$5.3 million for trade shows and trade publications, respectively.  On arelative basis, our deferred revenue reaches its highest levels during thesecond and fourth quarters of the year largely due to the timing of the *MAGIC* trade shows and our other largetrade shows and conferences.

 

*Allowancefor Doubtful Accounts*. We maintain an allowance for doubtfulaccounts for estimated losses resulting from the inability of our customers tomake required payments. The balance of the allowance for doubtful accounts atMarch 31, 2003 and December 31, 2002 was $1.2 million and $1.0 million,respectively.  If the financialcondition of our customers were to deteriorate, resulting in an impairment oftheir ability to make payments, additional allowances may be required.

 

The allowance fordoubtful accounts is an estimate based on specifically identified accounts aswell as general reserves. We evaluate specific accounts where we haveinformation that the customer may have an inability to meet its financialobligations. In these cases, management uses its judgment, based on the bestavailable facts and circumstances, and records a specific reserve for thatcustomer against amounts due to reduce the receivable to the amount that isexpected to be collected. These specific reserves are reevaluated and adjustedas additional information is received that impacts the amount reserved. We alsoestablish a general reserve for all customers based on percentages applied tothe aging balance. This percentage is based on historical collection andwrite-off experience and varies by geographic region. If circumstances change,our estimates of the recoverability of amounts due us could be reduced orincreased by a material amount. Such a change in estimated recoverability wouldbe accounted for in the period in which the facts that give rise to the changebecome known.

 

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*DeferredTaxes*. We record a valuation allowance to reduce our deferredtax assets to the amount that is more likely than not to be realized.  At March 31, 2003 we have recorded avaluation allowance to offset the deferred tax benefit associated with netoperating loss carryforwards in foreign tax jurisdictions and to offset the netdeferred tax assets of  the Companybecause we believe realization of these benefits is not more likely than not.While we have considered future taxable income and ongoing prudent and feasibletax planning strategies in assessing the need for the valuation allowance, inthe event we were to subsequently determine that we would be able to realizeour deferred tax assets in the future in excess of our net recorded amount, areduction in the net valuation allowance would result in an income tax benefitand would increase income in the period such determination was made.

 

*Amortizationof Intangible Assets*. Trade exhibitor and advertiser lists are amortized on a double-decliningbalance method over 6 years and 5 years, respectively.  Subscriber lists and other intangible assetsare being amortized on a straight-line method over 3 to 10 years.  We amortize intangible assets on a basiswhich corresponds to our projections of future cash flows directly related tothese intangible assets.  The estimatesthat are included in our projections of future cash flow are based upon thebest available information at the time we determine useful life andamortization methods.  A change incircumstances could result in a determination that the related assets areimpaired and impairment charges to reduce the carrying value of intangibleassets may be necessary.

 

*Impairmentof Long-Lived Assets*. We evaluate the carrying value oflong-lived assets, including identifiable intangibles, for impairment whenevents or changes in circumstances indicate that the carrying amount of anasset may not be recoverable.  Ifimpairment indicators are present and the estimated future undiscounted cashflows are less than the carrying value of the assets, the carrying value isreduced to the estimated fair value as measured by the associated discountedcash flows.

 

Under SFAS No. 142, weevaluate goodwill for impairment using a two-step test based upon a fair valueapproach.  The first step is used toidentify a potential impairment through an estimate of the fair value ofcertain of our reporting units (as defined by SFAS No. 142), while the secondstep calculates the amount of impairment, if any.  Additionally, goodwill will be tested for impairment betweenannual tests if an event occurs or circumstances change that would more likelythan not reduce the fair value of an entity below its carrying value.  We determine the fair value of our reportingunits by application of a discounted cash flow analysis.  We make estimates that are included in ourdiscounted cash flow analyses based upon the best available information at thetime that the determinations of fair value are made.  If circumstances change,our estimates of fair value will also change and could result in adetermination that additional impairment charges to reduce the carrying valueof goodwill are necessary.

 

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**SelectedFinancial Data**

 

The following table sets forth selected statements ofoperations and other financial data.

 
|                                                         |   | **Three Months Ended  March 31,** |   |
|--------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                         |   | **2003**                          |   | **2002** |   |
|                                                         |   | **(in thousands)**                |   |
| **Income  Statement Data:**                                  |   |                              |   |   |   |
| Net Revenue                                                  |   |                              |   |   |   |
| Trade Shows and  conferences                                 |   | $                                 | 74,086 |   | $ | 76,465 |   |
| Publications                                                 |   | 31,515                            |   | 28,674 |   |
| Marketing  services and other                                |   | 3,754                             |   | 4,288 |   |
|                                                         |   |                              |   |   |   |
| Total net  revenues                                          |   | 109,355                           |   | 109,427 |   |
|                                                         |   |                              |   |   |   |
| Cost of  production and selling                              |   |                              |   |   |   |
| Trade Shows and  conferences                                 |   | 32,672                            |   | 33,720 |   |
| Publications                                                 |   | 22,545                            |   | 22,933 |   |
| Marketing  services and other                                |   | 3,100                             |   | 2,693 |   |
|                                                         |   |                              |   |   |   |
| Total cost of  production and selling                        |   | 58,317                            |   | 59,346 |   |
|                                                         |   |                              |   |   |   |
| General and  administrative expenses                         |   | 9,868                             |   | 9,878 |   |
| Funding of  affiliated dot.com company operations            |   | 210                               |   | 38,079 |   |
| Depreciation and  amortization                               |   | 13,155                            |   | 16,648 |   |
| Operating income  (loss)                                     |   | 27,805                            |   | (14,524 | ) |
| Other income  (expense):                                     |   |                              |   |   |   |
| Interest expense                                             |   | (12,086                           | )      | (12,674 | ) |
| Other income  (expense), net                                 |   | 399                               |   | 1,042 |   |
| Income (loss)  before income taxes and minority interests    |   | 16,118                            |   | (26,156 | ) |
| Provision  (benefit) for income taxes                        |   | 304                               |   | (4,776 | ) |
| Minority  interests                                          |   | (128                              | )      | (90 | ) |
| Income (loss)  before cumulative effect of accounting change |   | $                                 | 15,686 |   | $ | (21,470 | ) |
|                                                         |   |                              |   |   |   |
| **Cash  flows provided by (used in):**                       |   |                              |   |   |   |
| Operating  activities                                        |   | $                                 | 2,265  |   | $ | (10,479 | ) |
| Investing  activities                                        |   | (1,980                            | )      | (13,025 | ) |
| Financing  activities                                        |   | (7,277                            | )      | (5,205 | ) |
|                                                         |   |                              |   |   |   |
| **Other  Data:**                                             |   |                              |   |   |   |
| EBITDA                                                       |   | $                                 | 40,845 |   | $ | 2,023 |   |
| Capital  expenditures                                        |   | (1,979                            | )      | (1,289 | ) |

 

We define “EBITDA” as operating income plusamortization and depreciation less amounts attributable to minorityinterest.  EBITDA is a key liquiditymeasure but should not be construed as an alternative to cash flows fromoperating activities or operating income (as determined in accordance withgenerally accepted accounting principles (GAAP)) or as a measure of ourprofitability or performance. We provide information about EBITDA because webelieve it is a useful way for us and our investors to measure our ability tosatisfy cash needs, including interest payments on our debt, taxes and capital

 

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expenditures.  GAAP requires usto provide information about cash flow generated from operations.  However, GAAP cash flow from operations isreduced by the amount of interest and tax payments and also takes into accountchanges in net current liabilities (e.g., changes in working capital) that donot impact net income.  Because changesin working capital can reverse in subsequent periods, and because we want toprovide information about cash available to satisfy interest and income taxexpense (by showing our cash flows before deducting interest and income taxexpense), we are also presenting EBITDA information.  Our definition of EBITDA does not take into account our workingcapital requirements, debt service requirements or other commitments.  Accordingly, EBITDA is not necessarilyindicative of amounts that may be available to us for discretionary purposes.  Our method of computation may not be comparableto other similarly titled measures of other companies.  Our management uses EBITDA to determine ourcompliance with key financial covenants under our existing Credit Facility,which impact the amount of indebtedness we are permitted to incur.  The definition of EBITDA in our existingCredit Facility is based, in part, on our EBITDA and includes other adjustmentsdescribed in our credit agreement.

 

The following table reconciles our EBITDA to cash flow provided byoperating activities for each period presented (in thousands):

 
|                                                                      |   | **Three Months Ended  March 31,** |   |
|---------------------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                                      |   | **2003**                          |   | **2002** |   |
|                                                                      |   | **(in thousands)**                |   |
| EBITDA                                                                    |   | $                                 | 40,845 |   | $ | 2,023 |   |
| Depreciation and  amortization                                            |   | (13,155                           | )      | (16,648 | ) |
| Minority  interests (excluding depreciation and amortization)             |   | 115                               |   | 101 |   |
| Operating income  (loss)                                                  |   | 27,805                            |   | (14,524 | ) |
|                                                                      |   |                              |   |   |   |
| Interest expense                                                          |   | (12,086                           | )      | (12,674 | ) |
| Other income  (expense),net                                               |   | 399                               |   | 1,042 |   |
| Benefit  (provision) for income taxes                                     |   | (304                              | )      | 4,776 |   |
| Minority  interests                                                       |   | (128                              | )      | (90 | ) |
| Cumulative  effect of accounting change, net of tax and monority interest |   | —                            |   | (66,817 | ) |
|                                                                      |   |                              |   |   |   |
| Net income  (loss)                                                        |   | 15,686                            |   | (88,287 | ) |
|                                                                      |   |                              |   |   |   |
| Provision for  notes and advances from affiliataed dot.com company        |   | —                            |   | 37,192 |   |
| Transition  goodwill impairment                                           |   | —                            |   | 66,817 |   |
| Depreciation and  amortization                                            |   | 13,155                            |   | 16,648 |   |
| Deferred income  taxes                                                    |   | —                            |   | (5,627 | ) |
| Other non cash  items                                                     |   | 798                               |   | 821 |   |
| Changes in  operating assets and liabilities                              |   | (27,374                           | )      | (38,040 | ) |
|                                                                      |   |                              |   |   |   |
| Net cash  provided by (used in) operating activities                      |   | $                                 | 2,265  |   | $ | (10,476 | ) |

 

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**Results ofOperations**

 

**THREE MONTHS ENDED MARCH 31, 2003COMPARED TO THE THREE MONTHS ENDED MARCH 31, 2002**

 

# ***Net Revenue***

 

Net revenue was $109.4 million for both the quarterended March 31, 2003 and 2002.

 

Revenue from trade shows and conferences declined $2.4million, or 3.1%, to $74.1 million in the first quarter of 2003 from $76.5million in the first quarter of 2002. This decrease was primarily attributable to a shift in the timing offour events, declines in our events that serve the technology market, and oneless event held in our group serving the beauty market.  In the first quarter of 2002 we held twoevents which were moved to the second quarter of 2003 and one event which hasbeen moved to the fourth quarter of 2003. We also held one event in the first quarter of 2003 which was last heldin 2001.  The decline was partiallyoffset by several trade show launches during the quarter.  Revenue for our spring MAGIC eventsincreased approximately $1.5 million, or 5.1%, compared to the spring 2002events, primarily due to an increase in the price per square foot charged toexhibitors.  Attendance at our springMAGIC events increased 2.9% while square feet declined 3.8% over the spring2002 events.  Our trade shows servingthe technology market continue to suffer from the overall curtailment ofspending in technology, which impacts marketing spending by our customers.  Revenue from our events serving thetechnology market declined $3.2 million, or 34.8%, from the first quarter 2002events.  Total tradeshow square feetincreased approximately 4.3% across all markets other than technology.

 

Revenue from trade publications and related marketingservices increased $2.3 million, or 7.0%, to $35.3 million for the firstquarter of 2003 from $33.0 million for the first quarter last year.  Advertising pages increased approximately5.6% and revenue per page increased approximately 2.8% across much of ourportfolio, most heavily concentrated in publications serving the pharmaceutical,healthcare and automotive markets.  Ouracquisition late in 2002 of *HealthcareTraveler* also contributed to this increase.  Our magazines serving the technology andtravel markets continue to suffer from the overall economic environment as advertisingpages continued to decline in these markets. Advertising pages increased 15.9% across all markets other thantechnology and travel, primarily due to market share gains, resulting in a17.4% revenue increase in these other markets.

 

# ***Costof production and selling***

 

Cost of production and selling expenses declined $1.0million, or 1.7%, to $58.3 million for the first quarter of 2003 from $59.3 million in the corresponding period of2002.

 

Expenses of trade shows and conferences declined $1.0million, or 3.1%, to $32.7 million for the first quarter of 2003 from $33.7million for the first quarter of 2002. This decrease was primarily due to a shift in the timing of four eventsdiscussed above and was partially offset by the launch of several trade showsduring the quarter.

 

Expenses of trade publications and marketing serviceswas $25.6 million for both the first quarter of 2003 and 2002.  Operating costs increased as a result of ouracquisition of *Healthcare Traveler,*inOctober 2002, and increases in sales staff resources dedicated to developingour small space advertiser page opportunities. These additional costs were offset by savings attributable to ourongoing cost reduction programs.

 

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# ***Generaland administrative expenses***

 

General andadministrative expenses were held flat at $9.9 million for the first quarter of2003 compared to the first quarter of 2002. The full period effect of our cost reduction programs undertaken in 2001and 2002, including reductions in travel and other operating costs, andreorganization of certain support functions and processes is reflected in boththe first quarter of 2002 and 2003 operating results.

# ** **

# ***Fundingof Affiliated dot.com Company Operations***

 

In the first quarterof 2002, we recorded a first quarter non-cash charge of $37.2 million relatedto a provision against the outstanding advances and notes due to us fromAdvanstar.com as of December 31, 2001.

 

We also beganrecording the advances and notes issued during the period as an operatingexpense on our condensed consolidated statement of operations, as a reflectionof the ongoing nature of the operations of Advanstar.com in support of our operations.  We funded approximately $0.2 million and $0.9 million in supportof those operations in the first quarter of 2003 and 2002, respectively.

 

# ***Depreciationand amortization***

 

Depreciation and amortization expense declinedapproximately $3.4 million to $13.2 million for the first quarter of 2003 from$16.6 million in 2002 primarily due to the effect of the declining balancemethod of accelerated amortization on our exhibitor and advertiser lists,partially offset by additional amortization related to acquisitions and fixedasset additions.

 

# ***Interestexpense***

 

Interest expense declined $0.6 million, or 4.6%, to$12.1 million for the first quarter of 2003 from $12.7 million in thecomparable period of 2002 due to a decrease in our weighted-average debtoutstanding of approximately $17.6 million and a decrease in our weightedaverage interest rate of approximately 30 basis points.

 

Effective April 15, 2003 we amended our creditfacility in order to gain covenant relief in 2004.  The amendment provides for a 50 basis point increase in theapplicable margin (as defined), effectively increasing  the interest rate on our creditfacility.  Approximately $164.3 millionof our total debt is at a fixed rate through coupon rates on our seniorsubordinated notes with an additional $150.0 million covered by our interestrate protection agreements, which expire in 2004.  A 100 basis point increase in interest rates on variable ratedebt would result in an increase in annual interest expense of $3.9 million.

 

*Otherincome (expense), net*

 

Other income decreased $0.6 million to $0.4 million forthe first quarter of 2003 from $1.0 million in 2002.  This decrease was primarily a result of a decrease in non-cashgains related to our foreign currency and interest rate hedging activities.

 

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# ***Provision(benefit) for income taxes***

 

Our tax provision in the first quarter of 2003 relatesto income taxes in certain foreign jurisdictions.  We recorded no incometax benefit related to the net operating loss we expect to generate during 2003because we will establish a valuation allowance to offset any related taxbenefits, due to uncertainty about realization of these benefits.  Our taxbenefit in the first quarter of 2002 was recorded at a rate less than theapplicable statutory rates primarily because we recorded a valuation allowanceto offset the portion of the benefits associated with net operating losses wegenerated in 2002, for which realization was not likely.

 

# ***Cumulativeeffect of accounting change***

 

In connection with the adoption of FAS 142, “Goodwilland Other Intangible Assets”, we recorded a goodwill impairment charge of$66.8 million, net of minority interest effect of $4.1 million,  in the first quarter of 2002, attributableprimarily to an impairment of the carrying value of goodwill related to theAcquisition.

 

 

**Liquidity andCapital Resources**

 

Our cash flow provided byoperating activities and EBITDA for the first quarter of 2003 was approximately$2.3 million and $40.8 million, respectively. EBITDA increased approximately $38.8 million from $2.0 million for thefirst quarter of 2002, due primarily to a first quarter 2002 non-cash charge of $37.2 million related to aprovision for notes and advances to Advanstar.com, our affiliated dot.comcompany and the increase inoperating income as discussed above.  If we were to add back this non-cash provision,our EBITDA for the first quarter of 2002 would have been $39.2 million.

 

Our principal sources ofliquidity have been cash flow from operations and borrowings under our CreditFacility and our principal uses of cash have been the debt service requirementsof our indebtedness described below, capital expenditures and strategicacquisitions.

 

*Debt Service*.  As of March 31, 2003, we hadtotal indebtedness of $550.5 million and approximately $43.3 million ofborrowings available under our revolving credit facility.   During the quarter ended March 31, 2003 wemade net principal payments on our term loan A and revolving credit facility of$4.3 million and $3.0 million, respectively. We also made interest payments of $16.2 million.

 

*Credit Facility.*The term loan facility under the Credit Facilityconsists of a $100.0 million amortizing term loan A maturing April 11, 2007 and a $315.0 millionamortizing term loan B maturing October 11, 2008. The Credit Facility alsoincludes an $80.0 million revolving credit facility. The revolving creditfacility will terminate in April 2007. The Credit Facility may be increased byup to $50.0 million at our request, with the formal prior consent of thelenders or other financial institutions providing the increase. However, therecan be no assurance that this consent would be obtained if requested.  The balances outstanding on our term loans Aand B and our revolving credit facility at March 31, 2003 were $71.3 million, $280.8million and $34.1 million, respectively.

 

Borrowings under the CreditFacility generally bear interest based on a margin over, at our option, thebase rate or the reserve-adjusted London-interbank offered rate (LIBOR). Theapplicable margin for revolving credit loans and term loan A will vary basedupon our ratio of consolidated debt to EBITDA, as defined in the CreditFacility and, after giving effect to the amendment discussed below, iscurrently 3.75% over LIBOR and 2.50% over the base rate.  The applicable margin for term loan B variesbased upon our credit ratings and is currently 4.50% over LIBOR and 3.25% overthe base rate. Our obligations

 

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under the Credit Facility are guaranteed byAdvanstar Holdings Corp., our ultimate parent company, and all our existing andfuture domestic subsidiaries and are collateralized by substantially all of theassets of our company and the subsidiary guarantors, including a pledge of thecapital stock of all our existing and future domestic subsidiaries, a pledge ofno more than 65% of the voting stock of any foreign subsidiary directly ownedby our company or any domestic subsidiary, a pledge of all intercompanyindebtedness in favor of Advanstar, Inc., our company and our domesticsubsidiaries, a pledge of our company’s and Advanstar IH, Inc.’s capital stockby our parent company, and a pledge of our parent company’s capital stock byAdvanstar Holdings Corp.

 

Our Credit Facility contains restrictive covenants whichrequire us to, among other things, maintain a maximum quarterly leverage ratioand a minimum fixed charge ratio (as defined). As of March 31, 2003, we were in compliance with these covenants.

 

As a result of the economic slowdown continuing into2003, we did not anticipate that we would meet the leverage ratio requirementas of the first quarter of 2004. Accordingly, we sought and obtained an amendment to the Credit Facilityin April 2003 which provided for certain revisions to our maximum leverage ratioin 2003 and 2004.  The amendmentprovides for a maximum leverage ratio of 6.50:1 for the second quarter of  2003, increasing to 6.75:1 for the thirdquarter of 2003 through the second quarter of 2004 and then declining on aquarterly basis to 6.25:1 in the fourth quarter of 2004.  Thereafter, the maximum ratio is4.00:1.  The amendment also increasesthe applicable margin (as defined) on amounts borrowed by 50 basis points.  Additionally, in the second quarter of 2003we paid an amendment fee of 75 basis points, paid to consenting lenders ontheir proportionate share of the total facility, plus other customary fees andexpenses, totaling approximately $3.9 million. Although there can be no assurance, we believe, based on our anticipatedperformance and expected economic conditions, that we will be able to complywith the amended financial covenants contained in the Credit Facility in 2003and 2004.

 

*Notes.*The $160 million 12% Series B senior subordinatednotes (Notes) mature in 2011 and are guaranteed by each of our existing andfuture domestic restricted subsidiaries. Interest on the Notes is payablesemi-annually in cash. The Notes contain restrictive covenants that, amongother things, limit our ability to incur debt, pay dividends and make investments.

 

*Parent company notes.*Our parent, Advanstar, Inc., issued seniordiscount notes due October 2011 (the Discount Notes) with a principal amount atmaturity of $103.2 million. These Discount Notes do not require cash interestpayments until 2006 and contain restrictive covenants that, among other things,limit the ability of Advanstar, Inc. and its subsidiaries (including theCompany) to incur debt, pay dividends and make investments. Neither we nor anyof our subsidiaries guaranteed the Discount Notes. Advanstar, Inc., however, isa holding company and its ability to pay interest on these Discount Notes willbe dependent upon the receipt of dividends from its subsidiaries, principallyincluding the Company and Advanstar.com. However, terms of our borrowing arrangementssignificantly restrict our ability to pay dividends to Advanstar, Inc.

 

***Sources and Uses ofFunds***

 

We generally operate with negative working capital, excluding cash andcurrent maturities of long-term debt, due to the impact of deferred revenuefrom trade shows, which is billed and collected as deposits up to one year inadvance of the respective trade show. Consequently, our existing operations areexpected to maintain very low or negative working capital balances, excludingcash and current maturities of long-term debt.

 

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On a relative basis, our revenue reaches its highest levels during thefirst and third quarters of the year largely due to the timing of the *MAGIC* trade shows and our other largetrade shows and conferences.  Thisseasonality, when combined with the shift in the timing of when events takeplace from year to year, may have a significant effect on our quarterlydeferred revenue and working capital balances.

 

We anticipate that our operating cash flow, together with borrowingsunder the Credit Facility (assuming continued compliance with the covenantscontained thereon or a modification thereof), will be sufficient to meet ouranticipated future operating expenses, capital expenditures and debt serviceand other obligations as they become due. However, our ability to makescheduled payments of principal, to pay interest on or to refinance ourindebtedness and to satisfy our other debt obligations will depend upon ourfuture operating performance, which will be affected by general economic,financial, competitive, legislative, regulatory, business and other factorsbeyond our control.

 

Historically, our financingrequirements have been funded primarily through cash generated by operatingactivities and borrowings under our revolving credit facility.  From time to time, we have also raisedadditional funds through sales of common stock, high yield offerings and termborrowings under our Credit Facility for purposes of completing strategicacquisitions.

 

*Cash flows from operating activities.*Net cash provided by operations was $2.3 millionfor the first quarter of 2003, derived primarily from our net income of $15.7million adjusted for amortization and depreciation of $13.2 million, othernon-cash items totaling approximately $0.8 million, partially offset by ause of cash caused by movements in our working capital of $27.4 million.

 

Net cash provided by operationsincreased $12.7 million to $2.3 million for the first quarter of 2003. Operatingincome increased $42.3 million from the first quarter of 2002 to the firstquarter of 2003.  This increase wasoffset by certain non-cash charges included in operating income, primarilythe provision for advances from our affiliated dot.com company and  depreciationand amortization, of approximately $41.8 million.  Cash generated from our working capital increased $12.2 millionduring the quarter from the first quarter of 2002 due largely to the timing ofpayments on accounts payable and cash collections related to future events.

 

*Cash flows used in investingactivities.*Net cash usedin investing activities declined $11.0 million to $2.0 million for the firstquarter of 2003, from $13.0 million for the first quarter of 2002.  This decline was principally due tosignificantly decreased acquisition activity, partially offset by increasedcapital expenditures.

 

Capital expenditures increased$0.7 million during the period to $2.0 million compared to $1.3 million in2002.  We anticipate that we will spendapproximately $5.8 million on capital expenditures in 2003, primarily forexpenditures related to our desktop computers and management informationsystems. We believe that this amount of capital expenditures will be adequateto grow our business according to our business strategy and to maintain the keytrade shows, publications and business of our continuing operations.

 

Cash used for acquisitions forthe first quarter of 2003 decreased $11.7 million relative to the same periodof 2002 because we had no acquisitions in the first quarter of 2003.  Our business strategy includes theconsummation of strategic acquisitions. In connection with any futureacquisitions, we may require additional funding, which may be provided in theform of additional debt or equity financing or a combination thereof. There canbe no assurance that any additional financing will be available to us onacceptable terms or in a manner that complies with the restrictive covenants inour debt instruments. Consistent with our longstanding strategy, we continue topursue potential acquisitions of complementary businesses.

 

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*Cash flows from financing activities.*Cash flows used in financing activities increased$2.1 million to $7.3 million for the first quarter of 2003 from the firstquarter of 2002.  Scheduled debtrepayments on our term A notes increased $0.8 million over 2002 levels.  We also repaid a net $3.0 million on ourrevolving credit facility during the quarter. These increases were partially offset by $1.8 million of fees paid toour senior lenders for our Credit Facility amendment in March 2002.

 

***Recently Issued Accounting Standards***

 

In June 2001, the FinancialAccounting Standards Board (FASB) issued SFAS No. 143, “Accounting for AssetRetirement Obligations.”  The provisionsof SFAS No. 143 are effective for the Company in 2003.  The Company has determined that it has nomaterial asset retirement obligations. Accordingly, the adoption of SFAS No. 143 had no impact on the Company’sfinancial position, results of operations or cash flows.

 

In May 2002, the FASB issuedSFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendmentof FASB Statement No. 13, and Technical Corrections.”  SFAS No. 145 is effective for fiscal years beginning after May15, 2002.  The adoption of SFAS No. 145did not have a significant impact of the results of operations or financialposition of the Company, but in accordance with the transition provisions,resulted in reclassification of a $2.6 million extraordinary item into theCompany’s 2001 income before income taxes, minority interests and cumulativeeffect of accounting change.

 

In June 2002, the FASB issuedSFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.”  The provisions of SFAS No. 146 areeffective for exit or disposal activities that are initiated after December 31,2002.  The Company had no exit ordisposal activities as defined by SFAS No. 146 in the first quarter of2003.  Accordingly, the adoption of SFASNo. 146 had no impact on the Company’s results of operations, financialposition, or cash flows.

 

In December 2002, the FASB issued SFAS No. 148,“Accounting for Stock-Based Compensation - Transition Disclosure - anamendment of SFAS No. 123.”  Theprovisions of SFAS No. 148 are effective for financial statements forfiscal years ending after December 15, 2002, and disclosure requirementsshall be effective for interim periods beginning after December 15, 2002.  The Company has no immediate plans to changeto the fair value based method of accounting for stock-based compensation.  The Company has made certain interimstock-based employee compensation disclosures required by SFAS No. 148beginning in the quarter ended March 31, 2003.

 

In November 2002, the FASB issued Interpretation No.45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees,Including Indirect Guarantees of Indebtedness of Others.”  The recognition provisions of the interpretationare effective for the Company in 2003 and are applicable only to guaranteesissued or modified after December 31, 2002.  The adoption ofInterpretation No. 45 did not have a significant impact of the results ofoperations or financial position of the Company.

 

**Item 3.  *Qualitativeand Quantitative Disclosure about**Market Risk***

 

We are exposed to various market risks, which is thepotential loss arising from adverse changes in market rates and prices, such asforeign currency exchange and interest rates. We do not enter into derivativesor other financial instruments for trading or speculative purposes.  We enter into financial instruments tomanage and reduce the impact of changes in interest rates and foreign currencyexchange rates.

 

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*Interest Rates. *Werely significantly on variable rate and fixed rate debt in our capitalstructure.  At March 31, 2003, we hadfixed rate debt of $164.3 million and variable rate debt of $386.2 million.  The pre-tax earnings and cash flows impactfor the next year resulting from a 100 basis point increase in interest rateson variable rate debt would be a reductionof pre-tax earnings of $1.0 million for the three months ended March 31, 2003,holding other variables constant and excluding the impact of our interest rateprotection agreements. Under the Credit Facility, we are required to enter intointerest rate protection agreements that have the effect of causing at leasthalf of the outstanding term loan borrowings and Notes to be fixed-rateborrowings. We have entered into agreements, expiring in the first quarter of2004, to cap the interest rate on $150.0 million of borrowings under our CreditFacility, which would have the effect of reducing the impact of interest rateincreases on our earnings and cash flows.

 

*Currencies. *Outside of the United States, we maintain assetsand operations in Europe, South America and Asia. The results of operations andfinancial position of our foreign operations are principally measured in theirrespective currency and translated into U.S. dollars. As a result, exposure toforeign currency gains and losses exists. The reported income of thesesubsidiaries will be higher or lower depending on a weakening or strengtheningof the U.S. dollar against the respective foreign currency.  Our subsidiaries and affiliates alsopurchase and sell products and services in various currencies. As a result, wemay be exposed to cost increases relative to the local currencies in themarkets in which we sell.

 

A portion of our assets are based in our foreign locations and aretranslated into U.S. dollars at foreign currency exchange rates in effect as ofthe end of each period, with the effect of such translation reflected in othercomprehensive income (loss). Accordingly, our consolidated stockholder’s equitywill fluctuate depending upon the weakening or strengthening of the U.S. dollaragainst the respective foreign currency.

 

Our strategy for management of currency risk relies primarily uponconducting our operations in a country’s respective currency and may, from timeto time, involve currency derivatives, primarily forward exchange contracts, toreduce our exposure to currency fluctuations. As of March 31, 2003, there wereopen foreign exchange derivative contracts to sell with a notional amounttotaling $9.2 million and to buy with a notional amount totaling$3.3 million. The estimated fair value of the foreign exchange contractsbased upon market quotes was a net liability of approximately$0.1 million.  The potential loss in fair value resulting from ahypothetical 10% adverse change in quoted foreign currency exchange ratesamounts to an additional loss of approximately $0.7 million. Actual results maydiffer.

 

**ITEM 4.  *Controlsand Procedures***

 

(a)          Evaluation of disclosure controls and procedures.

 

The Company’s principal executive officer and principal financial officerhave evaluated the Company’s disclosure controls and procedures as of a datewithin 90 days before the filing date of this quarterly report.  Based on this evaluation, they concludedthat, as of the evaluation date, the disclosure controls and procedures wereadequate and effective and designed to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this quarterly report is being prepared.

 

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(b)         Changes in internal controls.

 

There have been no significant changes in our internalcontrols or, to our knowledge, in other factors that could significantly affectthese controls subsequent to the evaluation of the internal controls, includingany corrective actions with regard to significant deficiencies and materialweaknesses.

 
| **PART  II**   | **OTHER INFORMATION**                                                                                                                                                                                                                                          |
|----------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|           |                                                                                                                                                                                                                                                           |
| **Item 5.**    | Submissions of Matters to a Vote of Security  Holders.                                                                                                                                                                                                         |
|           | None                                                                                                                                                                                                                                                           |
|           |                                                                                                                                                                                                                                                           |
| **Item  6.**   | Exhibits and Reports on Form 8-K                                                                                                                                                                                                                               |
|           |                                                                                                                                                                                                                                                           |
| **Item 6(a).** | Exhibits                                                                                                                                                                                                                                                       |
|           | 99.1 - CEO’s Certificate Pursuant to §906 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                        |
|           | 99.2 - CFO’s Certificate Pursuant to §906 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                        |
|           |                                                                                                                                                                                                                                                           |
| **Item 6(b).** | Reports on Form 8-K                                                                                                                                                                                                                                            |
|           |                                                                                                                                                                                                                                                           |
|           | The Company filed a report on Form 8-K on April 16,  2003 under Item 5 disclosing an amendment to its Credit Facility, and a  report on Form 8-K on May 8, 2003 to furnish, under Item 12, it's earnings  release for the fiscal quarter ended March 31, 2003. |

 

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**SIGNATURES**

 

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

 

 
|         |   ADVANSTAR COMMUNICATIONS INC. |
|--------------|-------------------------------------------|
|         |                                      |
|         |                                      |
| May 13, 2003 | /s/                                       | DAVID W. MONTGOMERY |   |
|         |                                      | David W. Montgomery  Vice President-Finance, Secretary and  Chief Financial Officer  (Principal Financial Officer and Authorized  Representative of the Registrant) |

 

36

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**CERTIFICATION**

 

I, Robert L. Krakoff, certify that:

 

(1)          I have reviewed this quarterly report on Form10-Q of Advanstar Communications Inc.;

 

(2)          Based on my knowledge, this quarterly report doesnot contain any untrue statement of a material fact or omit to state a materialfact necessary to make the statements made, in light of the circumstances underwhich such statements were made, not misleading with respect to the periodcovered by this quarterly report;

 

(3)          Based on my knowledge, the financial statements, and other financialinformation included in this quarterly report, fairly present in all materialrespects the financial condition, results of operations and cash flows of theregistrant as of, and for, the periods presented in this quarterly report;

 

(4)          The registrant’s othercertifying officers and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and15d-14) for the registrant and we have:

 

(a)          Designed such disclosurecontrols and procedures to ensure that material information relating to theregistrant, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which thisquarterly report is being prepared;

 

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

 

(c)          Presented in thisquarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

(5)          The registrant’s othercertifying officers and I have disclosed, based on our most recent evaluation,to the registrant’s auditors and the audit committee of registrant’s board ofdirectors (or persons performing the equivalent function):

 

(a)          All significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

(b)         Any fraud, whether or notmaterial, that involves management or other employees who have a significantrole in the registrant’s internal controls; and

 

(6)          The registrant’s othercertifying officers and I have indicated in this quarterly report whether ornot there were significant changes in internal controls or in other factorsthat could significantly affect internal controls subsequent to the date of ourmost recent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 

 
| By:    | /s/ Robert L. Krakoff   |   |
|--------|-------------------------|--------|
|   | Robert L. Krakoff       |
|   | Chief Executive Officer |
|   |                    |
|   | Date: May 13, 2003      |

 

37

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**CERTIFICATION**

 

I, David W. Montgomery, certify that:

 

(1)          I have reviewed this quarterly report on Form10-Q of Advanstar Communications Inc.;

 

(2)          Based on my knowledge, this quarterly report doesnot contain any untrue statement of a material fact or omit to state a materialfact necessary to make the statements made, in light of the circumstances underwhich such statements were made, not misleading with respect to the periodcovered by this quarterly report;

 

(3)          Based on my knowledge, the financial statements, and other financialinformation included in this quarterly report, fairly present in all materialrespects the financial condition, results of operations and cash flows of theregistrant as of, and for, the periods presented in this quarterly report;

 

(4)          The registrant’s othercertifying officers and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and15d-14) for the registrant and we have:

 

(a)          Designed such disclosurecontrols and procedures to ensure that material information relating to theregistrant, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which thisquarterly report is being prepared;

 

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

 

(c)          Presented in thisquarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

(5)          The registrant’s othercertifying officers and I have disclosed, based on our most recent evaluation,to the registrant’s auditors and the audit committee of registrant’s board ofdirectors (or persons performing the equivalent function):

 

(a)          All significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

(b)         Any fraud, whether or notmaterial, that involves management or other employees who have a significantrole in the registrant’s internal controls; and

 

(6)          The registrant’s othercertifying officers and I have indicated in this quarterly report whether ornot there were significant changes in internal controls or in other factorsthat could significantly affect internal controls subsequent to the date of ourmost recent evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

 

 
| By:    | /s/ David W. Montgomery |   |
|--------|-------------------------|--------|
|   | David W. Montgomery     |
|   | Chief Financial Officer |
|   |                    |
|   | Date: May 13, 2003      |

 

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**ExhibitIndex**

 

 
| **Exhibit  No.** |   | **Document**                                                                     |
|------------------|--------|----------------------------------------------------------------------------------|
|             |   |                                                                             |
| 99.1             |   | CEO’s Certificate Pursuant to §906 of the  Sarbanes-Oxley Act of 2002. |
| 99.2             |   | CFO’s Certificate Pursuant to §906 of the  Sarbanes-Oxley Act of 2002. |

 

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