**UNITED STATES****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: June 30, 2005**

 

**OR**

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

 

**Commission File Number: 333-57201**

 

**Advanstar Communications Inc.**

(Exact name of registrant as specified in its charter)

 

##### **New York**

(State or other jurisdiction of

incorporation or organization)

 

**59-2757389**

(I.R.S. Employer

Identification No.)

 

**One Park Avenue, New York, NY**

(Address of principal executive offices)

 

**10016**

(Zip Code)

 

  Registrant’s Telephone Number, IncludingArea Code: **(212) 951-6600**

 

Indicateby check mark whether the registrant: (1) has filed all reports requiredto be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes  ý    No  o

 

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

 

As of August 15,2005, 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 June 30, 2005 (unaudited) and  December 31, 2004.                     |   |
| ** **                                                                                                                                                                                                                    |                                                                                                                      |   |
| ** **                                                                                                                                                                                                                    | Condensed  Consolidated Statements of Operations (unaudited) for the three months ended  June 30, 2005 and 2004 |   |
| ** **                                                                                                                                                                                                                    |                                                                                                                      |   |
| ** **                                                                                                                                                                                                                    | Condensed  Consolidated Statements of Operations (unaudited) for the six months ended  June 30, 2005 and 2004   |   |
| ** **                                                                                                                                                                                                                    |                                                                                                                      |   |
| ** **                                                                                                                                                                                                                    | Condensed  Consolidated Statements of Cash Flows (unaudited) for the six months ended  June 30, 2005 and 2004   |   |
| ** **                                                                                                                                                                                                                    |                                                                                                                      |   |
| ** **                                                                                                                                                                                                                    | Notes  to Condensed Consolidated Financial Statements (unaudited)                                                         |   |
| ** **                                                                                                                                                                                                                    |                                                                                                                      |   |
| **Item 2.**                                                                                                                                                                                                                   | ***Management’s Discussion and Analysis of  Financial Condition and Results of Operations***                         |   |
| ** **                                                                                                                                                                                                                    | *** ***                                                                                                              |   |
| **Item 3.**                                                                                                                                                                                                                   | ***Quantitative and Qualitative  Disclosures About Market Risk***                                                         |   |
| ** **                                                                                                                                                                                                                    | *** ***                                                                                                              |   |
| **Item 4.**                                                                                                                                                                                                                   | ***Controls and Procedures***                                                                                             |   |
| ** **                                                                                                                                                                                                                    | *** ***                                                                                                              |   |
| **PART II****                           OTHER INFORMATION**                            | ** **                                                                                                                |
|                                                                                                                                                                                                                          |                                                                                                                      |   |
| **Item 6.**                                                                                                                                                                                                                   | **EXHIBITS**                                                                                                              |   |
|                                                                                                                                                                                                                          |                                                                                                                      |   |
| **Signatures**                                                                                                                                                                                                                |                                                                                                                      |   |

 

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**PART I FINANCIAL INFORMATION**

 

**AdvanstarCommunications Inc.**

**CondensedConsolidated Balance Sheets**

(Inthousands, except share and per share data)

 
| ** **                                                                                                                                            | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                                            | ** ** | **2005**          | ** ** | **2004**              | ** ** |
| ** **                                                                                                                                            | ** ** | **(unaudited)**   | ** ** | ** **            | ** ** |
| **ASSETS**                                                                                                                                            |       |              |       |                  |       |
|                                                                                                                                                  |       |              |       |                  |       |
| Current assets:                                                                                                                                       |       |              |       |                  |       |
| Cash and cash  equivalents                                                                                                                            |       | $                 | 38,361     |                  | $          | 41,223 |   |
| Accounts  receivable, net of allowance of $741 and $675 at June 30, 2005 and December 31, 2004                                         |       | 28,170            |       | 26,699                |       |
| Prepaid expenses                                                                                                                                      |       | 7,129             |       | 6,406                 |       |
| Other                                                                                                                                                 |       | 2,778             |       | 2,450                 |       |
| Current assets  of discontinued operations and assets held for sale                                                                                   |       | 694               |       | 2,690                 |       |
| Total current  assets                                                                                                                                 |       | 77,132            |       | 79,468                |       |
|                                                                                                                                                  |       |              |       |                  |       |
| Due from parent                                                                                                                                       |       | 1,281             |       | —                |       |
|                                                                                                                                                  |       |              |       |                  |       |
| Property, plant  and equipment, net                                                                                                                   |       | 17,788            |       | 18,717                |       |
|                                                                                                                                                  |       |              |       |                  |       |
| Intangible and  other assets:                                                                                                                         |       |              |       |                  |       |
| Goodwill                                                                                                                                              |       | 585,553           |       | 586,967               |       |
| Intangibles and  other, net                                                                                                                           |       | 71,933            |       | 91,948                |       |
| Total intangible  and other assets, net                                                                                                               |       | 657,486           |       | 678,915               |       |
| Non current  assets of discontinued operations and assets held for sale                                                                               |       | 8,794             |       | 135,837               |       |
|                                                                                                                                                  |       | $                 | 762,481    |                  | $          | 912,937 |   |
| **LIABILITIES  AND STOCKHOLDER’S EQUITY**                                                                                                        |       |              |       |                  |       |
|                                                                                                                                                  |       |              |       |                  |       |
| Current  liabilities:                                                                                                                                 |       |              |       |                  |       |
| Current  maturities of long-term debt                                                                                                                 |       | $                 | 201        |                  | $          | 1,300 |   |
| Accounts payable                                                                                                                                      |       | 14,354            |       | 13,451                |       |
| Accrued  compensation                                                                                                                                 |       | 3,893             |       | 7,451                 |       |
| Other accrued  expenses                                                                                                                               |       | 28,412            |       | 32,979                |       |
| Deferred revenue                                                                                                                                      |       | 37,453            |       | 39,282                |       |
| Current  liabilities of discontinued operations and assets held for sale                                                                              |       | 870               |       | 15,886                |       |
| Total current liabilities                                                                                                                             |       | 85,183            |       | 110,349               |       |
|                                                                                                                                                  |       |              |       |                  |       |
| Long-term debt,  net of current maturities                                                                                                            |       | 461,911           |       | 612,919               |       |
| Deferred income  taxes                                                                                                                                |       | 29,190            |       | 8,506                 |       |
| Other long-term  liabilities                                                                                                                          |       | 3,652             |       | 4,229                 |       |
| Due to parent                                                                                                                                         |       | —            |       | 2,698                 |       |
| Long term  liabilities of discontinued operations and assets held for sale                                                                            |       | —            |       | 13,371                |       |
|                                                                                                                                                  |       |              |       |                  |       |
| Commitments and  contingencies                                                                                                                        |       |              |       |                  |       |
|                                                                                                                                                  |       |              |       |                  |       |
| Stockholder’s  equity:                                                                                                                           |       |              |       |                  |       |
| Common stock,  $.01 par value, 3,500,000 shares authorized; 1,000,000 shares issued and  outstanding at June 30, 2005 and December 31, 2004 |       | 10                |       | 10                    |       |
| Capital in  excess of par value                                                                                                                       |       | 447,367           |       | 447,367               |       |
| Accumulated  deficit                                                                                                                                  |       | (271,103          | )          | (292,757              | )          |
| Accumulated  other comprehensive income                                                                                                               |       | 6,271             |       | 6,245                 |       |
| Total  stockholder’s equity                                                                                                                      |       | 182,545           |       | 160,865               |       |
|                                                                                                                                                  |       | $                 | 762,481    |                  | $          | 912,937 |   |

 

The accompanying notes are an integral part of these condensedconsolidated financial statements.

 

2

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**AdvanstarCommunications Inc.**

**CondensedConsolidated Statements of Operations**

(Inthousands)

 
| ** **                                                              | ** ** | **Three Months Ended  June 30,** | ** ** |
|-------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                              | ** ** | **2005**                              | ** ** | **2004** | ** ** |
| ** **                                                              | ** ** | **(unaudited)**                       | ** ** |
|                                                                    |       |                                  |       |   |   |
| Revenue                                                                 |       | $                                     | 55,990     |   | $ | 56,229 |   |
|                                                                    |       |                                  |       |   |   |
| Operating  expenses:                                                    |       |                                  |       |   |   |
| Cost of  production (excluding depreciation)                            |       | 11,293                                |       | 9,918 |   |
| Selling,  editorial and circulation (excluding depreciation)            |       | 26,912                                |       | 27,694 |   |
| General and  administrative (excluding depreciation)                    |       | 9,712                                 |       | 9,103 |   |
| Restructuring  charge                                                   |       | 2,015                                 |       | — |   |
| Funding of  affiliated dot.com company operations (see Note 9)          |       | —                                |       | 2,225 |   |
| Amortization of  intangibles                                            |       | 7,627                                 |       | 8,754 |   |
| Depreciation                                                            |       | 1,893                                 |       | 2,049 |   |
| Total operating  expenses                                               |       | 59,452                                |       | 59,743 |   |
|                                                                    |       |                                  |       |   |   |
| Operating loss                                                          |       | (3,462                                | )          | (3,514 | ) |
| Other income  (expense):                                                |       |                                  |       |   |   |
| Interest  expense, net                                                  |       | (16,942                               | )          | (17,348 | ) |
| Loss on  extinguishment of debt (see Note 6)                            |       | (12,581                               | )          | — |   |
| Other expense,  net                                                     |       | (38                                   | )          | (85 | ) |
|                                                                    |       |                                  |       |   |   |
| Loss from  continuing operations before income taxes                    |       | (33,023                               | )          | (20,947 | ) |
|                                                                    |       |                                  |       |   |   |
| Benefit for  income taxes                                               |       | (3,680                                | )          | (975 | ) |
| Loss from  continuing operations                                        |       | (29,343                               | )          | (19,972 | ) |
| Discontinued  operations (see Note 3):                                  |       |                                  |       |   |   |
| Income (loss)  from operations of discontinued businesses, net of taxes |       | 44,852                                |       | (7,809 | ) |
| Net income  (loss)                                                      |       | $                                     | 15,509     |   | $ | (27,781 | ) |

 

The accompanying notesare an integral part of these condensed consolidated financial statements.

 

3

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**AdvanstarCommunications Inc.**

**CondensedConsolidated Statements of Operations**

(Inthousands)

 
| ** **                                                                                        | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                                        | ** ** | **2005**                            | ** ** | **2004** | ** ** |
| ** **                                                                                        | ** ** | **(unaudited)**                     | ** ** |
|                                                                                              |       |                                |       |   |   |
| Revenue                                                                                           |       | $                                   | 146,562    |   | $ | 141,718 |   |
| Operating  expenses:                                                                              |       |                                |       |   |   |
| Cost of  production (excluding depreciation)                                                      |       | 27,519                              |       | 25,085 |   |
| Selling,  editorial and circulation (excluding depreciation)                                      |       | 57,103                              |       | 54,786 |   |
| General and  administrative (excluding depreciation)                                              |       | 22,254                              |       | 19,074 |   |
| Restructuring  charge                                                                             |       | 2,015                               |       | — |   |
| Funding of  affiliated dot.com company operations (see Note 9)                                    |       | —                              |       | 2,763 |   |
| Amortization of  intangibles                                                                      |       | 15,296                              |       | 16,549 |   |
| Depreciation                                                                                      |       | 4,181                               |       | 3,942 |   |
| Total operating  expenses                                                                         |       | 128,368                             |       | 122,199 |   |
|                                                                                              |       |                                |       |   |   |
| Operating income                                                                                  |       | 18,194                              |       | 19,519 |   |
| Other income  (expense):                                                                          |       |                                |       |   |   |
| Interest  expense, net                                                                            |       | (34,429                             | )          | (35,576 | ) |
| Loss on  extinguishment of debt (see Note 6)                                                      |       | (12,581                             | )          | — |   |
| Other expense,  net                                                                               |       | (21                                 | )          | 1,212 |   |
| Loss from  continuing operations before income taxes, and cumulative effect of  accounting change |       | (28,837                             | )          | (14,845 | ) |
| (Benefit)  provision for income taxes                                                        |       | (1,885                              | )          | 896 |   |
| Loss from  continuing operations before cumulative effect of accounting change                    |       | (26,952                             | )          | (15,741 | ) |
| Discontinued  operations (see Note 3):                                                            |       |                                |       |   |   |
| Income from  operations of discontinued businesses, net of taxes                                  |       | 43,988                              |       | 4,060 |   |
| Income (loss)  before cumulative effect of accounting change                                      |       | 17,036                              |       | (11,681 | ) |
| Cumulative  effect of accounting change (see Note 9)                                              |       | 4,618                               |       | — |   |
| Net income  (loss)                                                                                |       | $                                   | 21,654     |   | $ | (11,681 | ) |

 

The accompanying notesare an integral part of these condensed consolidated financial statements.

 

4

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**Advanstar Communications Inc.**

**Condensed Consolidated Statementsof Cash Flows**

(Inthousands)

 
| ** **                                                                   | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                   | ** ** | **2005**                            | ** ** | **2004** | ** ** |
| ** **                                                                   | ** ** | **(unaudited)**                     | ** ** |
| Operating  activities:                                                       |       |                                |       |   |   |
| Net income  (loss)                                                           |       | $                                   | 21,654     |   | $ | (11,681 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities: |       |                                |       |   |   |
| Cumulative  effect of accounting change                                      |       | (4,618                              | )          | — |   |
| Impairment of  intangible assets                                             |       | 2,272                               |       | — |   |
| Impairment of  goodwill                                                      |       | —                              |       | 9,420 |   |
| Depreciation and  amortization                                               |       | 22,431                              |       | 24,308 |   |
| Write-off of  deferred financing costs                                       |       | 3,517                               |       | — |   |
| Gain on  derivative financial instruments                                    |       | (52                                 | )          | (1,264 | ) |
| Losses of  minority interest holders                                         |       | 566                                 |       | 689 |   |
| Non-cash  interest expense                                                   |       | 1,587                               |       | 1,631 |   |
| Gain on sale of  business and other assets                                   |       | (53,053                             | )          | (1,070 | ) |
| Deferred income  taxes                                                       |       | 10,940                              |       | 3,740 |   |
| Provision for  bad debts                                                     |       | 471                                 |       | 804 |   |
| Changes in  operating assets and liabilities                                 |       | (19,338                             | )          | (30,294 | ) |
| Net used in  operating activities                                       |       | (13,623                             | )          | (3,717 | ) |
|                                                                         |       |                                |       |   |   |
| Investing  activities:                                                       |       |                                |       |   |   |
| Additions to  property, plant and equipment                                  |       | (2,740                              | )          | (3,648 | ) |
| Acquisitions of  publications and trade shows, net of cash acquired          |       | (476                                | )          | (8,088 | ) |
| Proceeds from  sale of business and other assets                             |       | 166,739                             |       | 19,511 |   |
| Net cash  provided by investing activities                                   |       | 163,523                             |       | 7,775 |   |
|                                                                         |       |                                |       |   |   |
| Financing  activities:                                                       |       |                                |       |   |   |
| Payments on  revolving credit loan                                           |       | —                              |       | (14,000 | ) |
| Proceeds from  revolving credit loan                                         |       | —                              |       | 6,000 |   |
| Payments of  long-term debt                                                  |       | (152,117                            | )          | (2,050 | ) |
| Deferred  financing costs                                                    |       | (129                                | )          | (302 | ) |
| Dividends paid  to minority interest holders                                 |       | (900                                | )          | — |   |
| Net cash used in  financing activities                                       |       | (153,146                            | )          | (10,352 | ) |
| Effect of  exchange rate changes on cash                                     |       | 384                                 |       | (545 | ) |
| Net decrease in  cash and cash equivalents                                   |       | (2,862                              | )          | (6,839 | ) |
| Cash and cash  equivalents, beginning of period                              |       | 41,223                              |       | 29,274 |   |
| Cash and cash  equivalents, end of period                                    |       | $                                   | 38,361     |   | $ | 22,435 |   |

 

The accompanying notesare an integral part of these condensed consolidated financial statements.

 

5

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**AdvanstarCommunications Inc.**

**Notes to Condensed ConsolidatedFinancial Statements (Unaudited)**

 

**1.****                          Basisof Presentation**

 

Theaccompanying unaudited condensed consolidated financial statements have beenprepared by Advanstar Communications Inc. (“Communications,” or the “Company”)in accordance with the instructions to Form 10-Q and, therefore, do notinclude all the information and footnotes required by generally acceptedaccounting principles for complete financial statements.  Management believes that all adjustments,consisting solely of normal recurring items, considered necessary for a fair statementof financial position and results of operations, have been included.  These condensed consolidated financialstatements, however, should be read in conjunction with the audited financialstatements and the related notes included in the Company’s annual report on Form 10-Kfor the year ended December 31, 2004, filed with the Securities andExchange Commission on March 29, 2005 and the amendment to annual reporton Form 10-K filed on Form 10-K/A on June 28, 2005.  The results of operations for the three andsix months ended June 30, 2005 are not necessarily indicative of theoperating results that may be expected for the entire year ending December 31,2005.

 

**2.**                          Summary of Significant Interim AccountingPolicies

** **

**Stock-basedcompensation**

Aspermitted by Statement of Financial Accounting Standards (“SFAS”) No. 123,*Accounting for Stock-Based Compensation*,the Company has elected to account for stock options and awards to employeesunder the provisions of Accounting Principles Board (“APB”) Opinion No. 25,*Accounting for Stock Issued to Employees,*and related interpretations.

 

If theCompany had elected to recognize compensation costs based on the fair value ofthe options granted as prescribed by SFAS No. 123, net income (loss) wouldhave been decreased (increased) to the unaudited pro forma amounts indicated inthe table below (in thousands):

 
| ** **                                         | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                         | ** ** | **2005**                              | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                         | ** ** | ** **                            | ** ** | ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income  (loss) —as reported               |       | $                                     | 15,509     |                                | $          | (27,781 | ) | $ | 21,654 |   | $ | (11,681 | ) |
|                                               |       |                                  |       |                                |       |   |   |   |   |   |   |   |   |
| Less: pro forma  stock-based employee compensation |       | (1,970                                | )          | (705                                | )          | (2,806 | ) | (1,382 | ) |
| Net income  (loss) —pro forma                 |       | $                                     | 13,539     |                                | $          | (28,486 | ) | $ | 18,848 |   | $ | (13,063 | ) |

 

**Interim income tax expense**

TheCompany determines its quarterly income tax provision based upon an estimatedannual effective income tax rate.  In determining the effective income taxrate applicable to interim periods, the Company excludes tax jurisdictionswhere no tax expense or benefit is expected for the entire year.

 

**Recentlyissued accounting standards**

In December 2004, the Financial AccountingStandards Board issued SFAS No. 123R, *Share-BasedPayment*, which revises SFAS 123 and supersedes APB 25.  This statement establishes standards relatingto accounting for transactions in which equity instruments are exchanged for

 

6

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goodsor services, such as the granting of employee stock options.  Under this statement, the Company mustmeasure the cost of employee services received in exchange for an award of equityinstruments based upon the fair value of the award on the date of grant.  This cost must be recognized over the periodduring which an employee is required to provide the service (usually thevesting period).  The Company is requiredto adopt the provisions of this standard effective January 1, 2006.  The adoption of this standard will result inan increase in compensation expense in future periods.

 

**3.**                          Acquisitions and Divestitures

** **

**Acquisitions**

On March 8,2004, the Company purchased a portfolio of pharmaceutical industry conferencesand magazines from the Institute of Validation Technology, Inc. (‘‘IVT’’)for $7.9 million in cash.  In addition,the Company may pay additional contingent cash consideration to the formershareholder based on 2004 and 2005 operating results of the acquired assets andtheir continued employment with the Company. As of June 30, 2005, the Company has accrued $1.2 million ofcompensation expense payable to these former shareholders, of which $0.3million and $0.6 million was expensed in the three and six months ended June 30,2005. The payable is included in other accrued liabilities in the accompanyingconsolidated balance sheet as of June 30, 2005.

 

**Divestituresand assets held for sale**

Theresults and any gains or losses of the following divestitures (collectively,the “Disposed Businesses”) and assets held for sale have been reported indiscontinued operations in the consolidated statements of operations for thethree and six months ended June 30, 2005 and 2004.

 

Theassets and liabilities of the following Disposed Businesses and assets held forsale are reported as assets and liabilities of discontinued operations andassets held for sale in the condensed consolidated balance sheet as of June 30,2005 and December 31, 2004.

 

*ArtGroup*

On March 12,2004, the Company completed the sale of its art industry tradeshows andmagazines (the “Art Group”) for a total selling price of $19.6 million incash.  The portfolio included threetradeshows and two publications.  TheCompany recorded a gain on the sale of $1.0 million.

 

Revenuesof the Art Group, included in discontinued operations in the condensedconsolidated statements of operations, were $8.5 million for the period from January 1,2004 to March 12, 2004.

 

*SeCA*

On August 5,2004, the Company completed the sale of its 65% ownership in its French jointventure (“SeCA”), which consisted of the operation of one tradeshow, for atotal selling price of $3.1 million in cash. In connection with the sale, the Company recorded a goodwill impairmentcharge of $14.5 million, before minority interest effect of $5.1 million ($9.4million, net of minority interest), in the second quarter of 2004.  The impairment charge relates to the Company’strade show reporting segment and was determined based upon the excess of thecarrying value of the Company’s interest in SeCA over the selling price, lessthe costs incurred by the Company to sell SeCA. This charge is reported separately as a component of discontinuedoperations for the three and six months ended June 30, 2004.

 

7

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SeCAhad $2.9 million in revenues, included in discontinued operations in thecondensed consolidated statements of operations, for the three and six monthsended June 30, 2004.

 

*DMS*

On September 8,2004, the Company sold its German tradeshow business (“DMS”) for $1.7 millionin cash.  In connection with the sale,the Company recorded a goodwill impairment charge of $6.2 million in the thirdquarter of 2004.  The amount of the impairmentcharge was determined based upon the excess of the carrying value of DMS overthe selling price, less the costs incurred by the Company to sell DMS.  The Company is continuing to incur accountingand legal fees in connection with the closure of its DMS office. These costswill be reported in income (loss) from discontinued operations.

 

Revenuesof DMS, included in discontinued operations in the condensed consolidatedstatements of operations, was $0.1 million for the six months ended June 30,2004. DMS had no revenues for the three months ended June 30, 2004.

 

*PortfolioGroup*

On May 23,2005, the Company, its parent company and certain affiliates (AdvanstarExpositions Canada Limited and Advanstar.com) completed the sale of virtuallyall business assets and liabilities associated with its tradeshows andconferences, trade publications and direct marketing products in the followingprimary industries: Information Technology & Communications,Travel/Hospitality, Beauty, Home Entertainment, Abilities and Portfolio,including the shares of the Company’s Hong Kong subsidiaries (“the SoldPortfolio Group”).  The shares of theCompany’s Brazilian subsidiary were sold to the same buyer in July 2005after final regulatory approval. Collectively, the Sold Portfolio Group andBrazilian subsidiary are referred to as “the Portfolio Group.” The Companyrecorded a gain on the sale of $53.0 million.

 

Thesale price for these assets and shares was $185 million in cash, plus theassumption by the purchaser of certain liabilities (including, withoutlimitation, deferred revenue liabilities), less a $7 million working capitaladjustment payable to the purchaser plus a post-closing distribution to theCompany from its Brazilian subsidiary, subject to regulatory approval.  Approximately $7.8 million of the purchaseprice was held in escrow until the completion of the sale of the Company’sBrazilian subsidiary.  The Companyreceived the $7.8 million from escrow in August 2005.

 

Revenues of thePortfolio Group, included in discontinued operations in the condensedconsolidated statements of operations, were $25.5 million and $49.0 million forthe three and six months ended June 30, 2005, and $26.1 million and $57.0million for three and six months ended June 30, 2004.

 

*EastCoast Fashion*

In thesecond quarter of 2005, the Company discontinued its East Coast Fashion group (“EastCoast Fashion”) and recognized an impairment of the related intangibles at netbook value of $2.3 million. This charge is reported separately as a componentof discontinued operations for the three and six months ended June 30,2005.

 

Revenues of the East Coast Fashion group included in discontinuedoperations in the condensed consolidated statements of operations were $0.9million for the three and six months ended June 30, 2005 and $2.0 millionand $5.2 million for three and six months ended June 30, 2004.

 

8

----

 

*Otherassets*

In thesecond quarter of 2005, the Company committed to a plan to sell its Clevelandoffice building and land (“the Cleveland Office”) as a result of the sale ofthe Portfolio Group. At June 30, 2005, the Company reported this buildingand land as assets held for sale and ceased depreciation of these assets,effective second quarter of 2005.

 

Thefinancial results of the Disposed Businesses included in discontinuedoperations in the accompanying condensed consolidated statements of operationsare as follows:

 
| ** **                                                                                 | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                                 | ** ** | **2005**                              | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                                       |       |                                  |       |                                |       |   |   |   |   |
| Income (loss)  before income taxes (including goodwill impairment charge and gain on sale) |       | $                                     | 57,329     |                                | $          | (7,851 | ) | $ | 58,765 |   | $ | 3,361 |   |
| Income tax  provision                                                                      |       | 12,557                                |       | 4,834                               |       | 14,211 |   | 3,684 |   |
| Minority  interests                                                                        |       | 80                                    |       | 4,876                               |       | (566 | ) | 4,383 |   |
|                                                                                       |       |                                  |       |                                |       |   |   |   |   |
| Income (loss)  from operations of discontinued businesses                                  |       | $                                     | 44,852     |                                | $          | (7,809 | ) | $ | 43,988 |   | $ | 4,060 |   |

 

TheCompany allocated goodwill to the Disposed Businesses and included theallocated goodwill in its determined gain or loss on disposal.  Goodwill allocated to the Art Group and thePortfolio Group is based on the relative fair values of the disposed business tothe entire reporting unit prior to disposal.  SeCA and DMS were neverintegrated into the Company’s broader reporting units. Thus, the carryingamount of acquired goodwill for those businesses were included in thecalculation of any gain or loss on disposal.

 

Goodwillallocated to the businesses disposed of and used in the calculation of the gainor loss on sale of the Disposed Businesses by reporting segment was as follows(in thousands):

 
| ** **                             | ** ** | **Tradeshows  and  Conferences** | ** ** | **Trade  Publications** | ** ** | **Direct  Marketing  Products  and Other** | ** ** | **Corporate** | ** ** | **Total**  | ** ** |
|----------------------------------------|------------|----------------------------------|------------|-------------------------|------------|--------------------------------------------|------------|---------------|------------|------------|------------|
| ** **                             | ** ** | ** **                       | ** ** | ** **              | ** ** | ** **                                 | ** ** | ** **    | ** ** | ** ** | ** ** |
| Three months  ended June 30, 2005 |       | $                                | 62,857     |                    | $          | 52,873                                     |       | $             | 6,082      |       | $          | — |   | $ | 121,812 |   |
|                                   |       |                             |       |                    |       |                                       |       |          |       |       |       |   |   |   |   |   |
| Three months  ended June 30, 2004 |       |                             | 3,296      |                    |       | —                                     |       |          | —     |       |       | — |   |   | 3,296 |   |
|                                   |       |                             |       |                    |       |                                       |       |          |       |       |       |   |   |   |   |   |
| Six months ended  June 30, 2005   |       |                             | 62,857     |                    |       | 52,873                                     |       |          | 6,082      |       |       | — |   |   | 121,812 |   |
|                                   |       |                             |       |                    |       |                                       |       |          |       |       |       |   |   |   |   |   |
| Six months ended  June 30, 2004   |       |                             | 16,560     |                    |       | 3,346                                      |       |          | —     |       |       | — |   |   | 19,906 |   |

 

9

----

 

Theassets held for sale and discontinued operations of the Portfolio Group, EastCoast Fashion and the Cleveland Office included in the condensed consolidatedbalance sheets as of June 30, 2005 and December 31, 2004 are asfollows (in thousands):

 
| ** **                                                                       | ** ** | **June 30, 2005**    | ** ** | **December 31, 2004** | ** ** |
|----------------------------------------------------------------------------------|------------|---------------------------|------------|----------------------------|------------|
| ** **                                                                       | ** ** | **Assets Held  For Sale** | ** ** | **Assets Held  For Sale**  | ** ** | **Discontinued  Operations** | ** ** | **Total** | ** ** |
| ** **                                                                       | ** ** | ** **                | ** ** | ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Assets                                                                           |       |                      |       |                       |       |   |   |   |   |
| Accounts  receivable                                                             |       | $                         | 45         |                       | $          | 23 |   | $ | 219 |   | $ | 242 |   |
| Prepaid expenses  and other                                                      |       | 649                       |       | 980                        |       | 1,468 |   | 2,448 |   |
| Total current  assets of discontinued operations and assets held for sale        |       | 694                       |       | 1,003                      |       | 1,687 |   | 2,690 |   |
| Property, plant  and equipment, net                                              |       | 4,746                     |       | 4,791                      |       | 1,031 |   | 5,822 |   |
| Goodwill                                                                         |       | 3,484                     |       | 2,462                      |       | 118,327 |   | 120,789 |   |
| Intangibles and  other, net                                                      |       | 564                       |       | 710                        |       | 8,516 |   | 9,226 |   |
| Total non  current assets of discontinued operations and assets held for sale    |       | 8,794                     |       | 7,963                      |       | 127,874 |   | 135,837 |   |
| Liabilities                                                                      |       |                      |       |                       |       |   |   |   |   |
| Accounts payable  and other accrued expenses                                     |       | 391                       |       | 438                        |       | 2,374 |   | 2,812 |   |
| Deferred revenue                                                                 |       | 479                       |       | 1,677                      |       | 11,397 |   | 13,074 |   |
| Total current  liabilities of discontinued operations and assets held for sale   |       | 870                       |       | 2,115                      |       | 13,771 |   | 15,886 |   |
| Deferred income  taxes                                                           |       | —                    |       | —                     |       | 9,744 |   | 9,744 |   |
| Other long term  liabilities                                                     |       |                      |       | —                     |       | 48 |   | 48 |   |
| Minority  interests                                                              |       | —                    |       | —                     |       | 3,579 |   | 3,579 |   |
| Total long term  liabilities of discontinued operations and assets held for sale |       | —                    |       | —                     |       | 13,371 |   | 13,371 |   |
| Net assets of  discontinued operations and assets held for sale                  |       | $                         | 8,618      |                       | $          | 6,851 |   | $ | 102,419 |   | $ | 109,270 |   |

 

ThePortfolio Group, East Coast Fashion and the Cleveland Office assets included inassets held for sale and discontinued operations in the Company’s reportablesegments as of June 30, 2005 and December 31, 2004 are as follows (inthousands):

 
| ** **                                | ** ** | ** **      | ** ** | ** **       | ** ** | **Direct**    | ** ** | ** **    | ** ** | ** ** | ** ** |
|-------------------------------------------|------------|-----------------|------------|------------------|------------|---------------|------------|---------------|------------|------------|------------|
| ** **                                | ** ** | **Tradeshows**  | ** ** | ** **       | ** ** | **Marketing** | ** ** | ** **    | ** ** | ** ** | ** ** |
| ** **                                | ** ** | **and**         | ** ** | **Trade**        | ** ** | **Products**  | ** ** | ** **    | ** ** | ** ** | ** ** |
| ** **                                | ** ** | **Conferences** | ** ** | **Publications** | ** ** | **and Other** | ** ** | **Corporate** | ** ** | **Total**  | ** ** |
|                                      |       |            |       |             |       |          |       |          |       |       |       |
| Segment assets  at June 30, 2005     |       | $               | 4,742      |             | $          | —        |       | $             | —     |       | $          | 4,746 |   | $ | 9,488 |   |
|                                      |       |            |       |             |       |          |       |          |       |       |       |
| Segment assets  at December 31, 2004 |       |            | 71,997     |             |       | 54,626        |       |          | 6,082      |       |       | 5,822 |   |   | 138,527 |   |

 

10

----

 

 

**4.**                          Goodwill and OtherIntangible Assets

** **

The changes in the carrying amount of goodwill byoperating segment are as follows (in thousands):

 
| ** **                                                    | ** ** | ** **      | ** ** | ** **       | ** ** | **Direct**    | ** ** | ** ** | ** ** |
|---------------------------------------------------------------|------------|-----------------|------------|------------------|------------|---------------|------------|------------|------------|
| ** **                                                    | ** ** | **Tradeshows**  | ** ** | ** **       | ** ** | **Marketing** | ** ** | ** ** | ** ** |
| ** **                                                    | ** ** | **and**         | ** ** | **Trade**        | ** ** | **Products**  | ** ** | ** ** | ** ** |
| ** **                                                    | ** ** | **Conferences** | ** ** | **Publications** | ** ** | **and Other** | ** ** | **Total**  | ** ** |
|                                                          |       |            |       |             |       |          |       |       |       |
| Balance as of  December 31, 2004                         |       | $               | 398,582    |             | $          | 163,595       |       | $          | 24,790     |   | $ | 586,967 |   |
| Goodwill  acquired or completion of purchase price allocation |       | 169             |       | —           |       | —        |       | 169        |       |
| Foreign currency  translation                                 |       | (566            | )          | (978             | )          | (39           | )          | (1,583     | )          |
| Balance as of  June 30, 2005                             |       | $               | 398,185    |             | $          | 162,617       |       | $          | 24,751     |   | $ | 585,553 |   |

 

Trade exhibitor and advertiser lists are amortized on adouble-declining balance method over six years and five years, respectively,subscriber lists and other intangible assets are amortized on a straight-linebasis over three to ten years, and trademarks and trade names are amortized ona straight-line basis over twenty years. These intangible assets consist of the following (in thousands):

 
| ** **                              | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                              | ** ** | **2005**          | ** ** | **2004**              | ** ** |
|                                    |       |              |       |                  |       |
| Trade exhibitor  lists                  |       | $                 | 129,349    |                  | $          | 129,691 |   |
| Advertiser lists                        |       | 46,783            |       | 46,712                |       |
| Subscriber lists                        |       | 15,230            |       | 15,238                |       |
| Trade names and  trademarks             |       | 17,982            |       | 17,982                |       |
| Other intangible  assets                |       | 20,258            |       | 19,928                |       |
| Deferred  financing costs               |       | 18,629            |       | 22,258                |       |
|                                    |       | 248,231           |       | 251,809               |       |
| Accumulated  amortization               |       | (176,298          | )          | (159,861              | )          |
| Total intangible  and other assets, net |       | $                 | 71,933     |                  | $          | 91,948 |   |

 

11

----

 

Estimatedamortization expense of identified intangible and other assets for theremaining six months of 2005 and for the next five years is as follows (inthousands):

 
| 2005 |   | $      | 16,147 |   |
|------|--------|--------|--------|--------|
| 2006 |   | 23,849 |   |
| 2007 |   | 9,843  |   |
| 2008 |   | 6,386  |   |
| 2009 |   | 2,644  |   |
| 2010 |   | 1,724  |   |

 

**5.**                          Financial Derivative Instruments

** **

TheCompany periodically uses derivative instruments to manage exposure to interestrates.  The Company’s objectives forholding derivatives are to minimize the risks using the most effective methodsto eliminate or reduce the impact of these exposures.

 

**Interestrate risk**

Variablerate debt instruments are subject to interest rate risk.  In 2001 the Company entered into an interestrate collar agreement expiring February 2004 to manage its exposure tointerest rate movements on a portion of its variable rate debtobligations.  The effective portion ofthe cumulative gain or loss on the interest rate collar agreement was reportedas a component of accumulated other comprehensive income in stockholder’sequity and was recognized in earnings as the underlying interest expense isincurred.  The ineffective portion of theinterest rate collar and swap agreements is recognized in currentearnings.  The Company used a portion ofthese agreements as hedges of the Company’s second priority senior securedfloating rate notes described below. Gains and losses on the undesignated portion of these agreements at theend of each fiscal quarter (which are calculated as the net amount payable upontermination at the date of termination) were recognized in current earningsuntil expired.

 

In May 2003,the Company entered into an interest rate swap agreement expiring November 2005,and subsequently terminated the agreement in December 2003.  The net gain at termination of approximately$0.2 million will continue to be reported in accumulated other comprehensiveincome and amortized into earnings over the original contract term.

 

TheCompany had no derivatives in the consolidated balance sheet as of June 30,2005.

 

12

----

 

**Statementof operations**

Thefollowing table summarizes the effects of SFAS No. 133 on the Company’sstatement of operations related to the ineffective portion of the Company’sinterest rate collar agreements and changes in the fair value of foreignexchange contracts not designated as hedging instruments for the three and sixmonths ended June 30, 2005 and 2004:

 
| ** **                             | ** ** | **Interest Rate** | ** ** | **Foreign**   | ** ** | ** ** | ** ** |
|----------------------------------------|------------|-------------------|------------|---------------|------------|------------|------------|
| ** **                             | ** ** | **Collar**        | ** ** | **Exchange**  | ** ** | ** ** | ** ** |
| ** **                             | ** ** | **Agreements**    | ** ** | **Contracts** | ** ** | **Total**  | ** ** |
|                                   |       |              |       |          |       |       |       |
| Three months  ended June 30, 2005 |       | $                 | 25         |          | $          | —     |       | $ | 25 |   |
|                                   |       |              |       |          |       |       |       |
| Three months  ended June 30, 2004 |       |              | —     |          |       | (16        | )          |   | (16 | ) |
|                                   |       |              |       |          |       |       |       |
| Six months ended  June 30, 2005   |       |              | 51         |          |       | —     |       |   | 51 |   |
|                                   |       |              |       |          |       |       |       |
| Six months ended  June 30, 2004   |       |              | 1,273      |          |       | (9         | )          |   | 1,264 |   |

 

**6.**                          Debt

** **

**Creditfacility**

 

TheCompany is party to a credit facility (the “Credit Facility”) with a group offinancial institutions acting as lenders. The Credit Facility is guaranteed by the Company’s domestic subsidiariesand by the Company’s parent company, Advanstar, Inc., and iscollateralized by first priority liens on substantially all of the assets ofthe Company and the guarantors.  The CreditFacility contains restrictive covenants, including limitations on certain assetdispositions, dividends, investments and other restricted payments.  In addition, the Credit Facility requires aminimum quarterly fixed charge coverage ratio (as defined).  Failure tocomply with the covenants could cause an event of default under the CreditFacility.

 

Priorto the June 2005 transaction described below, the Credit Facilityconsisted of (i) $25.0 million of term B loans due October 11, 2008,and (ii) $60.0 million of revolving loan availability through April 11,2007.

 

In June 2005, the Company repaid theoutstanding term B loans with proceeds from the sale of the Portfolio Group andamended the Credit Facility to allow the Company to retain its revolving loanavailability at $60 million while allowing for repayment of second lien andjunior debt with proceeds from the sale of the Portfolio Group (see Note3).  The amendment also revised the fixedcharge coverage ratio to exclude from the calculation any interest expenserelated to debt repaid prior to July 31, 2005 with the proceeds from thesale of the Portfolio Group.

 

**Seniorsecured notes**

 

The Senior Secured Notes consist of: $130.0 million ofSecond Priority Senior Secured Floating Rate Notes due 2008 (the “floating ratenotes”), which require quarterly amortization equal to 0.25% of the principalamount thereof, and $300.0 million of 10.75% Second Priority Senior

 

13

----

 

Secured Notes due 2010 (the “fixed rate notes”). Interest on thefloating rate notes is payable at a rate equal to three-month LIBOR, which isreset quarterly, plus 7.5%.

 

Thefixed rate notes are fully and unconditionally guaranteed on a senior basis,jointly and severally, by the Company’s wholly owned domestic subsidiaries andcollateralizedby second priority liens on substantially all the collateral pledged againstborrowings under the Company’s Credit Facility (other than the capital stock ofcertain of its subsidiaries and assets of its parent companies, includingAdvanstar).  The covenantsunder the notes include limitations on certain asset dispositions, liens, debtincurrence, dividends, investments and other restricted payments.

 

The Company was required under the Senior SecuredNotes indenture to use a portion of the proceeds from the Portfolio Group saleto offer to purchase Senior Secured Notes at a price equal to 100% of theprincipal amount plus accrued interest. In June 2005, the Company consummated that offer and repurchased$8.7 million of the fixed rate notes.

 

Separately, the Company also consummated a tenderoffer in June 2005 for the floating rate notes and repurchased $117.8million of the floating rate notes at a price equal to $1,043 plus a consentpayment of $30 per $1,000 principal amount tendered, and accrued and unpaidinterest to the date of settlement.  Inconnection with the tender offer, the Company and the trustee entered into asupplemental indenture that eliminated substantially all of the restrictive andreporting covenants, certain events of default and certain other provisionswith respect to the floating rate notes and released the floating rate notes’lien on the collateral under the indenture. The fixed rate notes remain collateralized by the collateral and subjectto the restrictive covenants in the indenture.

 

The Company recognized $12.6 million in expense related to thepurchase, including $8.6 million in tender offer premium and consent fees,write-off of $3.5 million in unamortized deferred financing costs, and $0.5million in legal fees and expenses.

 

**Seniorsubordinated notes**

 

TheCompany’s $160.0 million unsecured, 12% senior subordinated notes due 2011(the “Senior Subordinated Notes”) bear interest payable semiannually on February 15and August 15 of each year.  TheSenior Subordinated Notes are fully and unconditionally guaranteed on a seniorsubordinated basis, jointly and severally, by the Company’s wholly owneddomestic subsidiaries.  The covenantsunder the Senior Subordinated Notes include limitations on certain assetdispositions, liens, debt incurrence, dividends, investments and otherrestricted payments.

 

14

----

 

Long-termdebt consists of the following (in thousands):

 
| ** **                                                                                                                                                        | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                        | ** ** | **2005**          | ** ** | **2004**              | ** ** |
|                                                                                                                                                              |       |              |       |                  |       |
| Term loan B,  interest at LIBOR plus 4.50%                                                                                                                        |       | $                 | —     |                  | $          | 25,000 |   |
| Revolving credit  loan, interest at LIBOR plus 3.75%; due April 11, 2007                                                                                     |       | —            |       | —                |       |
| Second priority  senior secured floating rate notes, interest at LIBOR plus 7.5%; 10.84% at  June 30, 2005, due 2008                                         |       | 9,923             |       | 128,375               |       |
| 10.75% Second  priority senior secured notes, due 2010, plus unamortized premium of $753 and  $844 at June 30, 2005 and December 31, 2004, respectively |       | 292,089           |       | 300,844               |       |
| Senior  subordinated notes, interest at 12.00%, due 2011                                                                                                          |       | 160,000           |       | 160,000               |       |
| Acquisition  notes payable, due June 2006                                                                                                                    |       | 100               |       | —                |       |
|                                                                                                                                                              |       | 462,112           |       | 614,219               |       |
| Less current  maturities                                                                                                                                          |       | (201              | )          | (1,300                | )          |
|                                                                                                                                                              |       | $                 | 461,911    |                  | $          | 612,919 |   |

 

**7.**                          Comprehensive Income

** **

Thetable below presents comprehensive income, defined as changes in the equity ofthe Company excluding changes resulting from investments by and distributionsto shareholders (in thousands):

 
| ** **                                                       | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                                       | ** ** | **2005**                              | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net income  (loss)                                               |       | $                                     | 15,509     |                                | $          | (27,781 | ) | $ | 21,654 |   | $ | (11,681 | ) |
| Change in  cumulative translation adjustment                     |       | 535                                   |       | (1,402                              | )          | 77 |   | (1,554 | ) |
| Change in  unrealized losses on derivative financial instruments |       | (25                                   | )          | —                              |       | (51 | ) | 192 |   |
| Comprehensive  income (loss)                                     |       | $                                     | 16,019     |                                | $          | (29,183 | ) | $ | 21,680 |   | $ | (13,043 | ) |

 

**8.**                          Segments

** **

TheCompany follows the provisions of SFAS No. 131, “Disclosures aboutSegments of an Enterprise and Related Information,” and has three reportablesegments: tradeshows and conferences, trade publications and direct marketingproducts and other.

 

15

----

 

TheCompany evaluates the performance of, and allocates resources to, its segmentsbased on contribution margin – defined as net revenue less cost ofproduction and selling, editorial and circulation costs.  The accounting policies of the reportablesegments are the same as those described in the summary of significantaccounting policies.  There are nointer-segment sales or transfers. Segment assets are primarily intangible assets, prepaid expenses andaccounts receivable.  Revenues,contribution margins and segment assets of the Company’s reportable segmentsare as follows (in thousands):

 
| ** **                             | ** ** | ** **      | ** ** | ** **       | ** ** | **Direct**    | ** ** | ** **    | ** ** | ** ** | ** ** |
|----------------------------------------|------------|-----------------|------------|------------------|------------|---------------|------------|---------------|------------|------------|------------|
| ** **                             | ** ** | **Tradeshows**  | ** ** | ** **       | ** ** | **Marketing** | ** ** | ** **    | ** ** | ** ** | ** ** |
| ** **                             | ** ** | **and**         | ** ** | **Trade**        | ** ** | **Products**  | ** ** | ** **    | ** ** | ** ** | ** ** |
| ** **                             | ** ** | **Conferences** | ** ** | **Publications** | ** ** | **and Other** | ** ** | **Corporate** | ** ** | **Total**  | ** ** |
| Three months  ended June 30, 2005 |       |            |       |             |       |          |       |          |       |       |       |
| Revenues                               |       | $               | 11,886     |             | $          | 39,545        |       | $             | 4,559      |       | $          | — |   | $ | 55,990 |   |
| Contribution  margin (loss)            |       | 3,607           |       | 13,193           |       | 2,905         |       | (1,920        | )          |       |       |
| Segment assets  (at period end)        |       | 427,498         |       | 234,074          |       | 26,768        |       | 74,141        |       | 762,481    |       |
| Three months  ended June 30, 2004 |       |            |       |             |       |          |       |          |       |       |       |
| Revenues                               |       | $               | 10,282     |             | $          | 42,057        |       | $             | 3,890      |       | $          | — |   | $ | 56,229 |   |
| Contribution  margin (loss)            |       | 3,999           |       | 14,307           |       | 2,107         |       | (1,796        | )          |       |       |
| Segment assets  (at period end)        |       | 524,786         |       | 305,752          |       | 33,283        |       | 65,307        |       | 929,128    |       |
|                                   |       |            |       |             |       |          |       |          |       |       |       |
| Six months ended  June 30, 2005   |       |            |       |             |       |          |       |          |       |       |       |
| Revenues                               |       | $               | 64,201     |             | $          | 73,645        |       | $             | 8,716      |       | $          | — |   | $ | 146,562 |   |
| Contribution  margin (loss)            |       | 36,911          |       | 22,958           |       | 5,290         |       | (3,219        | )          |       |       |
| Segment assets  (at period end)        |       | 427,498         |       | 234,074          |       | 26,768        |       | 74,141        |       | 762,481    |       |
| Six months ended  June 30, 2004   |       |            |       |             |       |          |       |          |       |       |       |
| Revenues                               |       | $               | 57,875     |             | $          | 76,547        |       | $             | 7,296      |       | $          | — |   | $ | 141,718 |   |
| Contribution  margin (loss)            |       | 34,894          |       | 25,173           |       | 4,149         |       | (2,369        | )          |       |       |
| Segment assets  (at period end)        |       | 524,786         |       | 305,752          |       | 33,283        |       | 65,307        |       | 929,128    |       |

 

16

----

 

Thereconciliation of total segment contribution margin to consolidated income fromcontinuing operations before income taxes and cumulative effect of accountingchange is as follows (in thousands):

 
| ** **                                                                                        | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                                        | ** ** | **2005**                              | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| Total segment  contribution margin                                                                |       | $                                     | 17,785     |                                | $          | 18,617 |   | $ | 61,940 |   | $ | 61,847 |   |
| General and  administrative expense                                                          |       | (9,712                                | )          | (9,103                              | )          | (22,254 | ) | (19,074 | ) |
| Restructuring  charge                                                                             |       | (2,015                                | )          | —                              |       | (2,015 | ) | — |   |
| Funding of  affiliated dot.com company operations                                                 |       | —                                |       | (2,225                              | )          | — |   | (2,763 | ) |
| Depreciation and  amortization                                                                    |       | (9,520                                | )          | (10,803                             | )          | (19,477 | ) | (20,491 | ) |
| Other expense  (primarily interest)                                                               |       | (29,561                               | )          | (17,433                             | )          | (47,031 | ) | (34,364 | ) |
|                                                                                              |       |                                  |       |                                |       |   |   |   |   |
| Loss from  continuing operations before income taxes, and cumulative effect of  accounting change |       | $                                     | (33,023    | )                                   | $          | (20,947 | ) | $ | (28,837 | ) | $ | (14,845 | ) |

 

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

** **

EffectiveJanuary 1, 2005, the Company began consolidating the operations ofAdvanstar.com with its operations upon the adoption of FASB Interpretation No. 46R,“Consolidation of Variable Interest Entities.” As a result of the adoption of FASB Interpretation No. 46R, theCompany recorded a $4.6 million gain, which was recorded as a cumulative effectof accounting change in the first quarter of 2005.

 

Priorto January 1, 2005, the Company recorded advances and notes issued insupport of Advanstar.com operations as an operating expense in the Company’sconsolidated statement of operations, as a reflection of the ongoing nature ofthe operations of Advanstar.com in support of the Company’s operations.  Net advances and notes charged to the Company’soperations during the three and six months ended June 30, 2004 were $2.8million and $0.6 million. In May 2004, the Company made a $1.9 millionadvance to Advanstar.com to fund the settlement of Advanstar.com’s outstandingNew York lease obligations. The Company expects to legally merge the operationsof Advanstar.com with those of the Company by the end of 2005.

 

**10.**                   Parent CompanyNotes

** **

As a part of the financing for the acquisition of theCompany by the DLJ Merchant Banking Funds in October 2000 and concurrentlywith the closing of the offering of the Senior Subordinated Notes in February 2001,the Company’s parent, Advanstar, Inc., issued discount notes bearinginterest at 15% (the “Discount Notes”) with an aggregate principal amount at maturityof $171.8 million.  These notes do notrequire cash interest payments until 2006. Neither the Company nor any of its subsidiaries guarantee the DiscountNotes.

 

Advanstar, Inc. is a holding company and itsability to pay interest on the Discount Notes will be dependent upon thereceipt of dividends from its subsidiaries, including the Company.  The

 

17

----

 

Credit Facility, SeniorSecured Notes and the Senior Subordinated Notes impose substantial restrictionson the Company’s and its subsidiaries’ ability to pay dividends.

 

Therestricted payments covenants in the Company’s senior secured notes indentureand senior subordinated notes indenture, provide that it can pay dividends onlyif its leverage ratio (as defined) is 6.00 to 1 or better and only from theamount by which its cumulative EBITDA (as defined) since January 1, 2001exceeds 150% of its cumulative interest expense in that same period. As of June 30,2005 the Company’s leverage ratio under the most restrictive of theseindentures was 6.6 to 1.00.   TheCompany’s results are subject to a variety of factors, including generaleconomic conditions and conditions in its markets, and cannot assure you itsresults will allow it to make distributions in light of theserestrictions.  Failure to pay theinterest on these notes will result in a default under the Company’s CreditFacility, which could have a material adverse effect on the Company's financialposition, results of operations, and cash flows and/or could impact theCompany’s ability to continue to operate without an amendment or restructuringof its credit facility.  Notwithstandingthe leverage ratio limitation on restricted payments, the Company can makerestricted payments in an aggregate amount of up to $20 million toAdvanstar, Inc .

 

**11.**                   RestructuringActivity

** **

Related to the sale of the Portfolio Group (see Note 3),in May 2005, the Company ceased use of certain leased office space in NewYork, NY, Milford, CT, and Santa Ana, CA, resulting in a second quarter 2005charge of $0.8 million. This charge consists of the discounted future minimumlease payments, net of estimated future sublease income. These leasecommitments expire at various dates through 2010.

 

In connection with the sale of the Portfolio Group andthe reorganization of our healthcare group management team during the secondquarter of 2005, the Company notified 89 employees that they will be severedfrom the Company. The Company took a charge to operations in the second quarterof $1.2 million for severance and other termination costs.  As of June 30, 2005, 37 employees havebeen terminated. The remaining employees are expected to be terminated by thefourth quarter of 2005, with severance payments continuing into 2006.

 

The balance of the accrual for these costs and for therestructuring charges previously incurred in 2003 is $3.3 million at June 30,2005, of which $1.9 million is included in other accrued expenses and $1.4million in other long term liabilities in the accompanying condensedconsolidated balance sheet.

 

**12.**                   Related-PartyTransactions

** **

In May 2005,the Company paid a consulting fee of $1.5 million to CSFB, an affiliate,related to the sale of the Portfolio Group. See Note 3.

 

In June 2005, the Company also repurchased $7.1 million of its fixedrate notes at par, and $4.6 million of its floating rate notes at a price equalto 107.3% of principal, from CSFB pursuant to Communications’ tenderoffer.  See Note 6.

 

18

----

 

**13.**                   Unaudited Supplemental Guarantor CondensedConsolidating Financial Statements

** **

**Basisof presentation**

TheCompany’s Senior Subordinated Notes and Senior Secured Notes are fully andunconditionally guaranteed on a senior subordinated basis and senior basis, respectively,jointly and severally, by the Company and its wholly owned domesticsubsidiaries.  The subsidiary guarantorsare MAGIC, Applied Business teleCommunications and CME2, Inc.  The unaudited condensed consolidatingfinancial statements of the guarantors are presented below and should be readin conjunction with the consolidated financial statements of the Company.  Separate financial statements of theguarantors are not presented because the guarantors are jointly, severally,fully and unconditionally liable under the guarantees and the Company believesthe condensed consolidating financial statements presented are sufficientlymeaningful in understanding the financial position and results of theguarantors.  There are no significantrestrictions on the ability of the subsidiary guarantors to make distributionsto the Company.  

 

19

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**Advanstar Communications Inc.**

**Condensed Consolidating BalanceSheets (Unaudited)**

**At June 30, 2005**

(In thousands)

 
| ** **                                                                 | ** ** | **Communications** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Nonguarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated  Total** | ** ** |
|----------------------------------------------------------------------------|------------|--------------------|------------|-----------------------------|------------|--------------------------------|------------|------------------|------------|-------------------------|------------|
| **ASSETS**                                                                 |       |               |       |                        |       |                           |       |             |       |                    |       |
|                                                                       |       |               |       |                        |       |                           |       |             |       |                    |       |
| Current assets:                                                            |       |               |       |                        |       |                           |       |             |       |                    |       |
| Cash and cash  equivalents                                                 |       | $                  | 30,387     |                        | $          | —                         |       | $                | 7,974      |                    | $          | — |   | $ | 38,361 |   |
| Accounts  receivable, net                                                  |       | 27,206             |       | 49                          |       | 915                            |       | —           |       | 28,170                  |       |
| Prepaid expenses                                                           |       | 4,947              |       | 1,672                       |       | 510                            |       | —           |       | 7,129                   |       |
| Other                                                                      |       | 2,753              |       | —                      |       | 25                             |       | —           |       | 2,778                   |       |
| Current assets  of discontinued operations and assets held for sale        |       | —             |       | —                      |       | 694                            |       | —           |       | 694                     |       |
| Total current  assets                                                      |       | 65,293             |       | 1,721                       |       | 10,118                         |       | —           |       | 77,132                  |       |
|                                                                       |       |               |       |                        |       |                           |       |             |       |                    |       |
| Noncurrent  assets:                                                        |       |               |       |                        |       |                           |       |             |       |                    |       |
| Property, plant  and equipment, net                                        |       | 15,714             |       | 1,865                       |       | 209                            |       | —           |       | 17,788                  |       |
| Deferred tax  asset                                                        |       | 8,438              |       | 292                         |       | —                         |       | (8,730           | )          | —                  |       |
| Intangible and  other assets, net                                          |       | 370,736            |       | 262,669                     |       | 24,081                         |       | —           |       | 657,486                 |       |
| Investments in  subsidiaries                                               |       | 508,126            |       | —                      |       | 14,460                         |       | (522,586         | )          | —                  |       |
| Intercompany  receivable                                                   |       | 1,281              |       | 245,432                     |       | (5,581                         | )          | (239,851         | )          | 1,281                   |       |
| Non-current  assets of discontinued operations and assets held for sale    |       | 4,605              |       | —                      |       | 4,189                          |       | —           |       | 8,794                   |       |
|                                                                       |       | $                  | 974,193    |                        | $          | 511,979                        |       | $                | 47,476     |                    | $          | (771,167 | ) | $ | 762,481 |   |
| **LIABILITIES  AND  STOCKHOLDER’S EQUITY**                            |       |               |       |                        |       |                           |       |             |       |                    |       |
|                                                                       |       |               |       |                        |       |                           |       |             |       |                    |       |
| Current  liabilities:                                                      |       |               |       |                        |       |                           |       |             |       |                    |       |
| Current  maturities of long-term debt                                      |       | $                  | 201        |                        | $          | —                         |       | $                | —     |                    | $          | — |   | $ | 201 |   |
| Accounts payable                                                           |       | 13,347             |       | 376                         |       | 631                            |       | —           |       | 14,354                  |       |
| Accrued  liabilities                                                       |       | 24,582             |       | 7,083                       |       | 640                            |       | —           |       | 32,305                  |       |
| Deferred revenue                                                           |       | 19,123             |       | 17,477                      |       | 853                            |       | —           |       | 37,453                  |       |
| Current  liabilities of discontinued operations and assets held for sale   |       | —             |       | —                      |       | 870                            |       | —           |       | 870                     |       |
| Total current  liabilities                                                 |       | 57,253             |       | 24,936                      |       | 2,994                          |       | —           |       | 85,183                  |       |
|                                                                       |       |               |       |                        |       |                           |       |             |       |                    |       |
| Long-term debt,  net of current maturities                                 |       | 461,911            |       | —                      |       | —                         |       | —           |       | 461,911                 |       |
| Deferred income  taxes and other long-term liabilities                     |       | 32,633             |       | 8,730                       |       | 209                            |       | (8,730           | )          | 32,842                  |       |
| Intercompany  payable                                                      |       | 239,851            |       | —                      |       | —                         |       | (239,851         | )          | —                  |       |
| Long-term  liabilities of discontinued operations and assets held for sale |       | —             |       |                        |       | —                         |       | —           |       | —                  |       |
| Stockholder’s  equity:                                                |       |               |       |                        |       |                           |       |             |       |                    |       |
| Common stock                                                               |       | 10                 |       | 3                           |       | 896                            |       | (899             | )          | 10                      |       |
| Capital in  excess of par value                                            |       | 447,367            |       | 438,128                     |       | 60,084                         |       | (498,212         | )          | 447,367                 |       |
| (Accumulated  deficit) retained earnings                                   |       | (271,103           | )          | 40,182                      |       | (22,927                        | )          | (17,255          | )          | (271,103                | )          |
| Accumulated  other comprehensive income                                    |       | 6,271              |       | —                      |       | 6,220                          |       | (6,220           | )          | 6,271                   |       |
| Total  stockholder’s equity                                           |       | 182,545            |       | 478,313                     |       | 44,273                         |       | (522,586         | )          | 182,545                 |       |
|                                                                       |       | $                  | 974,193    |                        | $          | 511,979                        |       | $                | 47,476     |                    | $          | (771,167 | ) | $ | 762,481 |   |

 

20

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**Advanstar Communications Inc.**

**Condensed Consolidating Statements of Operations(Unaudited)**

**For the three months ended June 30, 2005**

(In thousands)

 
| ** **                                                              | ** ** | **Communications** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Nonguarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated  Total** | ** ** |
|-------------------------------------------------------------------------|------------|--------------------|------------|-----------------------------|------------|--------------------------------|------------|------------------|------------|-------------------------|------------|
| ** **                                                              | ** ** | ** **         | ** ** | ** **                  | ** ** | ** **                     | ** ** | ** **       | ** ** | ** **              | ** ** |
| Revenue                                                                 |       | $                  | 54,478     |                        | $          | (188                           | )          | $                | 1,700      |                    | $          | — |   | $ | 55,990 |   |
|                                                                    |       |               |       |                        |       |                           |       |             |       |                    |       |
| Operating  expenses:                                                    |       |               |       |                        |       |                           |       |             |       |                    |       |
| Cost of  production and selling, editorial and circulation              |       | 35,609             |       | 1,233                       |       | 1,363                          |       | —           |       | 38,205                  |       |
| General and  administrative                                             |       | 8,712              |       | 376                         |       | 624                            |       | —           |       | 9,712                   |       |
| Restructuring  charge                                                   |       | 2,015              |       | —                      |       | —                         |       | —           |       | 2,015                   |       |
| Depreciation and  amortization                                          |       | 5,723              |       | 3,617                       |       | 180                            |       | —           |       | 9,520                   |       |
| Total operating  expenses                                               |       | 52,059             |       | 5,226                       |       | 2,167                          |       | —           |       | 59,452                  |       |
| Operating income  (loss)                                                |       | 2,419              |       | (5,414                      | )          | (467                           | )          | —           |       | (3,462                  | )          |
|                                                                    |       |               |       |                        |       |                           |       |             |       |                    |       |
| Other income  (expense):                                                |       |               |       |                        |       |                           |       |             |       |                    |       |
| Interest  expense, net                                                  |       | (16,949            | )          | —                      |       | 7                              |       | —           |       | (16,942                 | )          |
| Loss on  extinguishment of debt                                         |       | (12,581            | )          | —                      |       | —                         |       | —           |       | (12,581                 | )          |
| Other income,  net                                                      |       | 141                |       | (38                         | )          | (141                           | )          | —           |       | (38                     | )          |
| Loss from  continuing operations before income taxes                    |       | (26,970            | )          | (5,452                      | )          | (601                           | )          | —           |       | (33,023                 | )          |
| (Benefit)  provision for income taxes                              |       | (1,795             | )          | (1,886                      | )          | 1                              |       | —           |       | (3,680                  | )          |
| Equity in  earnings of subsidiaries                                     |       | (4,168             | )          | —                      |       | —                         |       | 4,168            |       | —                  |       |
| (Loss) income  from continuing operations                               |       | (29,343            | )          | (3,566                      | )          | (602                           | )          | 4,168            |       | (29,343                 | )          |
|                                                                    |       |               |       |                        |       |                           |       |             |       |                    |       |
| Discontinued  operations:                                               |       |               |       |                        |       |                           |       |             |       |                    |       |
| Income (loss)  from operations of discontinued businesses, net of taxes |       | 44,852             |       | —                      |       | (902                           | )          | 902              |       | 44,852                  |       |
| Net income  (loss)                                                      |       | $                  | 15,509     |                        | $          | (3,566                         | )          | $                | (1,504     | )                       | $          | 5,070 |   | $ | 15,509 |   |

 

21

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**Advanstar Communications Inc.**

**Condensed Consolidating Statements of Operations(Unaudited)**

**For the six months ended June 30, 2005**

(In thousands)

 
| ** **                                                                                                | ** ** | **Communications** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Nonguarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated  Total** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------------|------------|--------------------------------|------------|------------------|------------|-------------------------|------------|
| ** **                                                                                                | ** ** | ** **         | ** ** | ** **                  | ** ** | ** **                     | ** ** | ** **       | ** ** | ** **              | ** ** |
| Revenue                                                                                                   |       | $                  | 107,182    |                        | $          | 36,475                         |       | $                | 2,905      |                    | $          | — |   | $ | 146,562 |   |
|                                                                                                      |       |               |       |                        |       |                           |       |             |       |                    |       |
| Operating  expenses:                                                                                      |       |               |       |                        |       |                           |       |             |       |                    |       |
| Cost of  production and selling, editorial and circulation                                                |       | 68,270             |       | 13,692                      |       | 2,660                          |       | —           |       | 84,622                  |       |
| General and  administrative                                                                               |       | 20,269             |       | 716                         |       | 1,269                          |       | —           |       | 22,254                  |       |
| Restructuring  charge                                                                                     |       | 2,015              |       | —                      |       | —                         |       | —           |       | 2,015                   |       |
| Depreciation and  amortization                                                                            |       | 11,890             |       | 7,220                       |       | 367                            |       | —           |       | 19,477                  |       |
| Total operating  expenses                                                                                 |       | 102,444            |       | 21,628                      |       | 4,296                          |       | —           |       | 128,368                 |       |
| Operating income  (loss)                                                                                  |       | 4,738              |       | 14,847                      |       | (1,391                         | )          | —           |       | 18,194                  |       |
|                                                                                                      |       |               |       |                        |       |                           |       |             |       |                    |       |
| Other income  (expense):                                                                                  |       |               |       |                        |       |                           |       |             |       |                    |       |
| Interest  expense, net                                                                                    |       | (34,445            | )          | —                      |       | 16                             |       | —           |       | (34,429                 | )          |
| Loss on  extinguishment of debt                                                                           |       | (12,581            | )          | —                      |       | —                         |       | —           |       | (12,581                 | )          |
| Other income,  net                                                                                        |       | 271                |       | (38                         | )          | (254                           | )          | —           |       | (21                     | )          |
| (Loss) income  from continuing operations before income taxes and cumulative effect of  accounting change |       | (42,017            | )          | 14,809                      |       | (1,629                         | )          | —           |       | (28,837                 | )          |
| (Benefit)  provision for income taxes                                                                |       | (7,592             | )          | 5,698                       |       | 9                              |       | —           |       | (1,885                  | )          |
| Equity in  earnings of subsidiaries                                                                       |       | 7,473              |       | —                      |       | —                         |       | (7,473           | )          | —                  |       |
| (Loss) income  from continuing operations before cumulative effect of accounting change                   |       | (26,952            | )          | 9,111                       |       | (1,638                         | )          | (7,473           | )          | (26,952                 | )          |
|                                                                                                      |       |               |       |                        |       |                           |       |             |       |                    |       |
| Discontinued  operations:                                                                                 |       |               |       |                        |       |                           |       |             |       |                    |       |
| Income (loss)  from operations of discontinued businesses, net of taxes                                   |       | 43,988             |       | —                      |       | 14,051                         |       | (14,051          | )          | 43,988                  |       |
| Income (loss)  before cumulative effect of accounting change                                              |       | 17,036             |       | 9,111                       |       | 12,413                         |       | (21,524          | )          | 17,036                  |       |
| Cumulative  effect of accounting change                                                                   |       | 4,618              |       | —                      |       | —                         |       | —           |       | 4,618                   |       |
| Net income  (loss)                                                                                        |       | $                  | 21,654     |                        | $          | 9,111                          |       | $                | 12,413     |                    | $          | (21,524 | ) | $ | 21,654 |   |

 

22

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**Advanstar Communications Inc.**

**Condensed Consolidating Statements of Cash Flows(Unaudited)**

**For the six months ended June 30, 2005**

(In thousands)

 
| ** **                                                                                | ** ** | **Communications** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Nonguarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated  Total** | ** ** |
|-------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------------|------------|--------------------------------|------------|------------------|------------|-------------------------|------------|
| ** **                                                                                | ** ** | ** **         | ** ** | ** **                  | ** ** | ** **                     | ** ** | ** **       | ** ** | ** **              | ** ** |
| Operating  activities:                                                                    |       |               |       |                        |       |                           |       |             |       |                    |       |
| Net income  (loss)                                                                        |       | $                  | 21,654     |                        | $          | 9,111                          |       | $                | 12,413     |                    | $          | (21,524 | ) | $ | 21,654 |   |
| Adjustments to  reconcile net income (loss) to net cash provided by operating activities: |       |               |       |                        |       |                           |       |             |       |                    |       |
| Equity in  earnings of subsidiaries                                                       |       | (21,524            | )          | —                      |       | —                         |       | 21,524           |       | —                  |       |
| Gain on  derivative financial instruments                                                 |       | (52                | )          | —                      |       | —                         |       | —           |       | (52                     | )          |
| Impairment loss  on intangible assets                                                     |       | 2,272              |       | —                      |       | —                         |       | —           |       | 2,272                   |       |
| Write-off of  deferred financing costs                                                    |       | 3,517              |       | —                      |       | —                         |       | —           |       | 3,517                   |       |
| Depreciation and  amortization                                                            |       | 14,572             |       | 7,220                       |       | 639                            |       | —           |       | 22,431                  |       |
| Other noncash  items                                                                      |       | (31,660            | )          | 24                          |       | (12,471                        | )          | —           |       | (44,107                 | )          |
| Change in  working capital items                                                          |       | (2,332             | )          | (15,665                     | )          | (1,341                         | )          | —           |       | (19,338                 | )          |
|                                                                                      |       |               |       |                        |       |                           |       |             |       |                    |       |
| Net cash (used  in) provided by operating activities                                      |       | (13,553            | )          | 690                         |       | (760                           | )          | —           |       | (13,623                 | )          |
|                                                                                      |       |               |       |                        |       |                           |       |             |       |                    |       |
| Investing  activities:                                                                    |       |               |       |                        |       |                           |       |             |       |                    |       |
| Additions to  property, plant and equipment                                               |       | (2,033             | )          | (690                        | )          | (17                            | )          | —           |       | (2,740                  | )          |
| Acquisitions of  publications and trade shows, net of proceeds                            |       | (476               | )          | —                      |       | —                         |       | —           |       | (476                    | )          |
| Proceeds from  sale of business and other assets                                          |       | 165,639            |       | —                      |       | 1,100                          |       | —           |       | 166,739                 |       |
|                                                                                      |       |               |       |                        |       |                           |       |             |       |                    |       |
| Net cash  provided by (used in) investing activities                                      |       | 163,130            |       | (690                        | )          | 1,083                          |       | —           |       | 163,523                 |       |
|                                                                                      |       |               |       |                        |       |                           |       |             |       |                    |       |
| Financing  activities:                                                                    |       |               |       |                        |       |                           |       |             |       |                    |       |
| Payments of  long-term debt                                                               |       | (152,117           | )          | —                      |       | —                         |       | —           |       | (152,117                | )          |
| Deferred  financing costs                                                                 |       | (129               | )          |                        |       |                           |       |             |       | (129                    | )          |
| Dividends paid  to minority interest holders                                              |       | (900               | )          | —                      |       | —                         |       | —           |       | (900                    | )          |
|                                                                                      |       |               |       |                        |       |                           |       |             |       |                    |       |
| Net cash used in  financing activities                                                    |       | (153,146           | )          | —                      |       | —                         |       | —           |       | (153,146                | )          |
|                                                                                      |       |               |       |                        |       |                           |       |             |       |                    |       |
| Effect of  exchange rate changes on cash                                                  |       | —             |       | —                      |       | 384                            |       | —           |       | 384                     |       |
|                                                                                      |       |               |       |                        |       |                           |       |             |       |                    |       |
| Net (decrease)  increase in cash and cash equivalents                                     |       | (3,569             | )          | —                      |       | 707                            |       | —           |       | (2,862                  | )          |
|                                                                                      |       |               |       |                        |       |                           |       |             |       |                    |       |
| Cash and cash  equivalents, beginning of year                                             |       | 33,956             |       | —                      |       | 7,267                          |       | —           |       | 41,223                  |       |
|                                                                                      |       |               |       |                        |       |                           |       |             |       |                    |       |
| Cash and cash  equivalents, end of year                                                   |       | $                  | 30,387     |                        | $          | —                         |       | $                | 7,974      |                    | $          | — |   | $ | 38,361 |   |

 

23

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**Advanstar Communications Inc.**

**Condensed Consolidating Balance Sheets**

**At December 31, 2004**

(In thousands)

 
| ** **                                                                 | ** ** | **Communications** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Nonguarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated  Total** | ** ** |
|----------------------------------------------------------------------------|------------|--------------------|------------|-----------------------------|------------|--------------------------------|------------|------------------|------------|-------------------------|------------|
| ** **                                                                 | ** ** | ** **         | ** ** | ** **                  | ** ** | ** **                     | ** ** | ** **       | ** ** | ** **              | ** ** |
| **Assets**                                                                 | ** ** | ** **         | ** ** | ** **                  | ** ** | ** **                     | ** ** | ** **       | ** ** | ** **              | ** ** |
| Current assets                                                             |       |               |       |                        |       |                           |       |             |       |                    |       |
| Cash and cash  equivalents                                                 |       | $                  | 33,956     |                        | $          | —                         |       | $                | 7,267      |                    | $          | — |   | $ | 41,223 |   |
| Accounts  receivable, net                                                  |       | 25,685             |       | —                      |       | 1,014                          |       | —           |       | 26,699                  |       |
| Prepaid expenses                                                           |       | 4,859              |       | 1,265                       |       | 282                            |       | —           |       | 6,406                   |       |
| Other                                                                      |       | 2,374              |       | —                      |       | 76                             |       | —           |       | 2,450                   |       |
| Current assets of  discontinued operations and assets held for sale        |       | 813                |       | —                      |       | 1,877                          |       | —           |       | 2,690                   |       |
| Total current  assets                                                      |       | 67,687             |       | 1,265                       |       | 10,516                         |       | —           |       | 79,468                  |       |
|                                                                       |       |               |       |                        |       |                           |       |             |       |                    |       |
| Noncurrent  assets                                                         |       |               |       |                        |       |                           |       |             |       |                    |       |
| Property, plant  and equipment, net                                        |       | 16,816             |       | 1,624                       |       | 277                            |       | —           |       | 18,717                  |       |
| Deferred tax  asset                                                        |       | 8,438              |       | 292                         |       | —                         |       | (8,730           | )          | —                  |       |
| Intangible and  other assets, net                                          |       | 374,357            |       | 269,500                     |       | 35,058                         |       | —           |       | 678,915                 |       |
| Investments in  subsidiaries                                               |       | 514,479            |       | —                      |       | 10,421                         |       | (524,900         | )          | —                  |       |
| Intercompany  receivable                                                   |       | —             |       | 228,779                     |       | (4,274                         | )          | (224,505         | )          | —                  |       |
| Non-current  assets of discontinued operations and assets held for sale    |       | 124,773            |       | —                      |       | 11,064                         |       | —           |       | 135,837                 |       |
|                                                                       |       | $                  | 1,106,550  |                        | $          | 501,460                        |       | $                | 63,062     |                    | $          | (758,135 | ) | $ | 912,937 |   |
| **Liabilities  and Stockholder’s Equity**                             |       |               |       |                        |       |                           |       |             |       |                    |       |
| Current liabilities                                                        |       |               |       |                        |       |                           |       |             |       |                    |       |
| Current  maturities of long-term debt                                      |       | $                  | 1,300      |                        | $          | —                         |       | $                | —     |                    | $          | — |   | $ | 1,300 |   |
| Accounts payable                                                           |       | 11,580             |       | 699                         |       | 1,172                          |       | —           |       | 13,451                  |       |
| Accrued  liabilities                                                       |       | 32,429             |       | 7,275                       |       | 726                            |       | —           |       | 40,430                  |       |
| Deferred revenue                                                           |       | 23,683             |       | 15,554                      |       | 45                             |       | —           |       | 39,282                  |       |
| Current  liabilities of discontinued operations and assets held for sale   |       | 10,768             |       | —                      |       | 5,118                          |       | —           |       | 15,886                  |       |
| Total current  liabilities                                                 |       | 79,760             |       | 23,528                      |       | 7,061                          |       | —           |       | 110,349                 |       |
| Long-term debt,  net of current maturities                                 |       | 612,919            |       | —                      |       | —                         |       | —           |       | 612,919                 |       |
| Deferred income  taxes and other long-term liabilities                     |       | 12,480             |       | 8,730                       |       | 255                            |       | (8,730           | )          | 12,735                  |       |
| Intercompany  payable                                                      |       | 224,505            |       | —                      |       | —                         |       | (224,505         | )          | —                  |       |
| Due to parent                                                              |       | 2,698              |       | —                      |       | —                         |       | —           |       | 2,698                   |       |
| Long-term  liabilities of discontinued operations and assets held for sale |       | 13,323             |       | —                      |       | 48                             |       | —           |       | 13,371                  |       |
| Stockholder’s  equity                                                 |       |               |       |                        |       |                           |       |             |       |                    |       |
| Common stock                                                               |       | 10                 |       | 3                           |       | 959                            |       | (962             | )          | 10                      |       |
| Capital in  excess of par value                                            |       | 447,367            |       | 438,117                     |       | 86,882                         |       | (524,999         | )          | 447,367                 |       |
| (Accumulated  deficit) retained earnings                                   |       | (292,757           | )          | 31,082                      |       | (38,286                        | )          | 7,204            |       | (292,757                | )          |
| Accumulated  other comprehensive income (loss)                             |       | 6,245              |       | —                      |       | 6,143                          |       | (6,143           | )          | 6,245                   |       |
| Total  stockholder’s equity                                           |       | 160,865            |       | 469,202                     |       | 55,698                         |       | (524,900         | )          | 160,865                 |       |
|                                                                       |       | $                  | 1,106,550  |                        | $          | 501,460                        |       | $                | 63,062     |                    | $          | (758,135 | ) | $ | 912,937 |   |

 

24

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**Advanstar Communications Inc.**

**Condensed Consolidating Statements of Operations(Unaudited)**

**For the three months ended June 30, 2004**

(In thousands)

 
| ** **                                                 | ** ** | **Communications** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Nonguarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated  Total** | ** ** |
|------------------------------------------------------------|------------|--------------------|------------|-----------------------------|------------|--------------------------------|------------|------------------|------------|-------------------------|------------|
| ** **                                                 | ** ** | ** **         | ** ** | ** **                  | ** ** | ** **                     | ** ** | ** **       | ** ** | ** **              | ** ** |
| Revenue                                                    |       | $                  | 54,530     |                        | $          | 11                             |       | $                | 1,688      |                    | $          | — |   | $ | 56,229 |   |
|                                                       |       |               |       |                        |       |                           |       |             |       |                    |       |
| Operating  expenses:                                       |       |               |       |                        |       |                           |       |             |       |                    |       |
| Cost of  production and selling, editorial and circulation |       | 35,201             |       | 1,218                       |       | 1,193                          |       | —           |       | 37,612                  |       |
| General and  administrative                                |       | 8,189              |       | 436                         |       | 478                            |       | —           |       | 9,103                   |       |
| Funding of  affiliated company operations                  |       | 2,225              |       | —                      |       | —                         |       | —           |       | 2,225                   |       |
| Depreciation and  amortization                             |       | 7,140              |       | 3,468                       |       | 195                            |       | —           |       | 10,803                  |       |
|                                                       |       |               |       |                        |       |                           |       |             |       |                    |       |
| Total operating  expenses                                  |       | 52,755             |       | 5,122                       |       | 1,866                          |       | —           |       | 59,743                  |       |
|                                                       |       |               |       |                        |       |                           |       |             |       |                    |       |
| Operating (loss)  income                                   |       | 1,775              |       | (5,111                      | )          | (178                           | )          | —           |       | (3,514                  | )          |
|                                                       |       |               |       |                        |       |                           |       |             |       |                    |       |
| Other income  (expense):                                   |       |               |       |                        |       |                           |       |             |       |                    |       |
| Interest  expense, net                                     |       | (16,808            | )          | —                      |       | (540                           | )          | —           |       | (17,348                 | )          |
| Other income,  net                                         |       | (461               | )          | —                      |       | 376                            |       | —           |       | (85                     | )          |
|                                                       |       |               |       |                        |       |                           |       |             |       |                    |       |
| (Loss) from  continuing operations before income taxes     |       | (15,494            | )          | (5,111                      | )          | (342                           | )          | —           |       | (20,947                 | )          |
|                                                       |       |               |       |                        |       |                           |       |             |       |                    |       |
| Provision  (benefit) for income taxes                 |       | 933                |       | (1,908                      | )          | —                         |       | —           |       | (975                    | )          |
|                                                       |       |               |       |                        |       |                           |       |             |       |                    |       |
| Equity in  earnings of subsidiaries                        |       | (3,545             | )          | —                      |       | —                         |       | 3,545            |       | —                  |       |
|                                                       |       |               |       |                        |       |                           |       |             |       |                    |       |
| Net (loss)  income from continuing operations              |       | (19,972            | )          | (3,203                      | )          | (342                           | )          | 3,545            |       | (19,972                 | )          |
|                                                       |       |               |       |                        |       |                           |       |             |       |                    |       |
| Discontinued  operations:                                  |       |               |       |                        |       |                           |       |             |       |                    |       |
| (Loss) income  from operations of discontinued businesses  |       | (7,809             | )          | —                      |       | (9,690                         | )          | 9,690            |       | (7,809                  | )          |
|                                                       |       |               |       |                        |       |                           |       |             |       |                    |       |
| Net (loss)  income                                         |       | $                  | (27,781    | )                           | $          | (3,203                         | )          | $                | (10,032    | )                       | $          | 13,235 |   | $ | (27,781 | ) |

 

25

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**Advanstar Communications Inc.**

**Condensed Consolidating Statements of Operations(Unaudited)**

**For the six months ended June 30, 2004**

(In thousands)

 
| ** **                                                    | ** ** | **Communications** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Nonguarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated  Total** | ** ** |
|---------------------------------------------------------------|------------|--------------------|------------|-----------------------------|------------|--------------------------------|------------|------------------|------------|-------------------------|------------|
| ** **                                                    | ** ** | ** **         | ** ** | ** **                  | ** ** | ** **                     | ** ** | ** **       | ** ** | ** **              | ** ** |
| Revenue                                                       |       | $                  | 106,007    |                        | $          | 32,773                         |       | $                | 2,938      |                    | $          | — |   | $ | 141,718 |   |
|                                                          |       |               |       |                        |       |                           |       |             |       |                    |       |
| Operating  expenses:                                          |       |               |       |                        |       |                           |       |             |       |                    |       |
| Cost of  production and selling, editorial and circulation    |       | 65,028             |       | 12,417                      |       | 2,426                          |       | —           |       | 79,871                  |       |
| General and  administrative                                   |       | 17,303             |       | 790                         |       | 981                            |       | —           |       | 19,074                  |       |
| Funding of  affiliated company operations                     |       | 2,763              |       | —                      |       | —                         |       | —           |       | 2,763                   |       |
| Depreciation and  amortization                                |       | 13,163             |       | 6,938                       |       | 390                            |       | —           |       | 20,491                  |       |
|                                                          |       |               |       |                        |       |                           |       |             |       |                    |       |
| Total operating  expenses                                     |       | 98,257             |       | 20,145                      |       | 3,797                          |       | —           |       | 122,199                 |       |
|                                                          |       |               |       |                        |       |                           |       |             |       |                    |       |
| Operating income  (loss)                                      |       | 7,750              |       | 12,628                      |       | (859                           | )          | —           |       | 19,519                  |       |
|                                                          |       |               |       |                        |       |                           |       |             |       |                    |       |
| Other income  (expense):                                      |       |               |       |                        |       |                           |       |             |       |                    |       |
| Interest  expense, net                                        |       | (34,568            | )          | —                      |       | (1,008                         | )          | —           |       | (35,576                 | )          |
| Other income,  net                                            |       | 480                |       | —                      |       | 732                            |       | —           |       | 1,212                   |       |
|                                                          |       |               |       |                        |       |                           |       |             |       |                    |       |
| (Loss) income  from continuing operations before income taxes |       | (26,338            | )          | 12,628                      |       | (1,135                         | )          | —           |       | (14,845                 | )          |
|                                                          |       |               |       |                        |       |                           |       |             |       |                    |       |
| (Benefit)  provision for income taxes                    |       | (3,852             | )          | 4,748                       |       | —                         |       | —           |       | 896                     |       |
|                                                          |       |               |       |                        |       |                           |       |             |       |                    |       |
| Equity in  earnings of subsidiaries                           |       | 6,745              |       | —                      |       | —                         |       | (6,745           | )          | —                  |       |
|                                                          |       |               |       |                        |       |                           |       |             |       |                    |       |
| Net (loss)  income from continuing operations                 |       | (15,741            | )          | 7,880                       |       | (1,135                         | )          | (6,745           | )          | (15,741                 | )          |
|                                                          |       |               |       |                        |       |                           |       |             |       |                    |       |
| Discontinued  operations:                                     |       |               |       |                        |       |                           |       |             |       |                    |       |
| Income (loss)  from operations of discontinued businesses     |       | 4,060              |       | —                      |       | (7,129                         | )          | 7,129            |       | 4,060                   |       |
|                                                          |       |               |       |                        |       |                           |       |             |       |                    |       |
| Net (loss)  income                                            |       | $                  | (11,681    | )                           | $          | 7,880                          |       | $                | (8,264     | )                       | $          | 384 |   | $ | (11,681 | ) |

 

26

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**Advanstar Communications Inc.**

**Condensed Consolidating Statements of Cash Flows(Unaudited)**

**For the six months ended June 30, 2004**

(In thousands)

 
| ** **                                                                                | ** ** | **Communications** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Nonguarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated  Total** | ** ** |
|-------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------------|------------|--------------------------------|------------|------------------|------------|-------------------------|------------|
| ** **                                                                                | ** ** | ** **         | ** ** | ** **                  | ** ** | ** **                     | ** ** | ** **       | ** ** | ** **              | ** ** |
| Operating  activities:                                                                    |       |               |       |                        |       |                           |       |             |       |                    |       |
| Net (loss)  income                                                                        |       | $                  | (11,681    | )                           | $          | 7,880                          |       | $                | (8,264     | )                       | $          | 384 |   | $ | (11,681 | ) |
| Adjustments to  reconcile net income (loss) to net cash provided by operating activities: |       |               |       |                        |       |                           |       |             |       |                    |       |
| Equity in  earnings of subsidiaries                                                       |       | 384                |       | —                      |       | —                         |       | (384             | )          | —                  |       |
| Gain on  derivative financial instruments                                                 |       | (1,264             | )          | —                      |       | —                         |       | —           |       | (1,264                  | )          |
| Impairment of  goodwill                                                                   |       | —             |       | —                      |       | 9,420                          |       | —           |       | 9,420                   |       |
| Depreciation and  amortization                                                            |       | 16,525             |       | 6,938                       |       | 845                            |       | —           |       | 24,308                  |       |
| Other noncash  items                                                                      |       | 5,482              |       | 14                          |       | 298                            |       | —           |       | 5,794                   |       |
| Change in  working capital items                                                          |       | (15,635            | )          | (14,730                     | )          | 71                             |       | —           |       | (30,294                 | )          |
| Net cash (used  in) provided by operating activities                                 |       | (6,189             | )          | 102                         |       | 2,370                          |       | —           |       | (3,717                  | )          |
|                                                                                      |       |               |       |                        |       |                           |       |             |       |                    |       |
| Investing  activities:                                                                    |       |               |       |                        |       |                           |       |             |       |                    |       |
| Additions to  property, plant and equipment                                               |       | (3,467             | )          | (102                        | )          | (79                            | )          | —           |       | (3,648                  | )          |
| Acquisitions of  publications and trade shows, net of proceeds                            |       | (8,088             | )          | —                      |       | —                         |       | —           |       | (8,088                  | )          |
| Proceeds from  sale of business and other assets                                          |       | 19,511             |       | —                      |       | —                         |       | —           |       | 19,511                  |       |
| Net cash  provided by (used in) investing activities                                      |       | 7,956              |       | (102                        | )          | (79                            | )          | —           |       | 7,775                   |       |
|                                                                                      |       |               |       |                        |       |                           |       |             |       |                    |       |
| Financing  activities:                                                                    |       |               |       |                        |       |                           |       |             |       |                    |       |
| Borrowings of  long term debt, net                                                        |       | (10,050            | )          | —                      |       | —                         |       | —           |       | (10,050                 | )          |
| Deferred  financing costs                                                                 |       | (302               | )          | —                      |       | —                         |       | —           |       | (302                    | )          |
| Dividends paid  to minority interest holders                                              |       | —             |       | —                      |       | —                         |       | —           |       | —                  |       |
|                                                                                      |       |               |       |                        |       |                           |       |             |       |                    |       |
| Net cash used in  financing activities                                                    |       | (10,352            | )          | —                      |       | —                         |       | —           |       | (10,352                 | )          |
|                                                                                      |       |               |       |                        |       |                           |       |             |       |                    |       |
| Effect of  exchange rate changes on cash                                                  |       | 1                  |       | —                      |       | (546                           | )          | —           |       | (545                    | )          |
|                                                                                      |       |               |       |                        |       |                           |       |             |       |                    |       |
| Net (decrease)  increase in cash and cash equivalents                                     |       | (8,584             | )          | —                      |       | 1,745                          |       | —           |       | (6,839                  | )          |
|                                                                                      |       |               |       |                        |       |                           |       |             |       |                    |       |
| Cash and cash  equivalents, beginning of year                                             |       | 21,568             |       | —                      |       | 7,706                          |       | —           |       | 29,274                  |       |
|                                                                                      |       |               |       |                        |       |                           |       |             |       |                    |       |
| Cash and cash  equivalents, end of year                                                   |       | $                  | 12,984     |                        | $          | —                         |       | $                | 9,451      |                    | $          | — |   | $ | 22,435 |   |

 

27

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**Item2.   *Management’s Discussionand Analysis of Financial Condition and Results of Operations:***

 

This quarterly report onForm 10-Q contains forward-looking statements made pursuant to the safe harborprovisions of the Private Securities Litigation Reform Act of 1995.  Investors are cautioned not to place unduereliance on these forward-looking statements, including statements about plansand objectives of management, potential acquisitions, market growth andopportunity.  These forward-lookingstatements are neither promises nor guarantees and involve risks anduncertainties that could cause actual results to differ materially from thoseindicated by such forward-looking statements. You should not expect that these forward-looking statements will beupdated or supplemented as a result of changing circumstances or otherwise, andwe disavow and disclaim any obligation to do so.  Important cautionary statements and riskfactors that would affect actual results are discussed in the our periodicreports and registration statements filed with the Securities and ExchangeCommission, including those under the caption entitled “Factors Which MayAffect Future Results” in our 2004 annual report on Form 10-K filed with theSecurities and Exchange Commission on March 29, 2005.

 

**Overview**

 

Weare a worldwide provider of integrated marketing communications products andservices for targeted industry sectors, principally through trade and consumershows, conferences, and through controlled circulation trade, business andprofessional magazines.  We also providea broad range of other direct marketing products, including classifiedadvertising, direct mail services, reprints, database marketing, guides, andreference books.

 

Wereport our business in three segments:

 

•                  shows and conferences, which consists primarily ofthe management of trade and consumer shows and seminars held in convention andconference centers;

 

•                  trade publications, which consists primarily ofthe creation and distribution of controlled circulation trade, business andprofessional magazines; and

 

•                  direct marketing products and other, whichconsists primarily of sales of a variety of direct mail and database products,magazine editorial reprints and classified advertising.

 

In addition to our shows, trade publications anddirect marketing products, we deliver our integrated B-to-B marketingcommunications products and services to our customers using the internet.  For discussion purposes, we have included ourinternet activity in our direct marketing products and other segment.

 

Shows and conferences accounted for approximately 44%and 41% of total revenue for the six months ended June 30, 2005 and 2004,respectively.  Trade publicationsaccounted for approximately 50% and 54% of total revenue for the six monthsended June 30, 2005 and 2004, respectively, while direct marketing products andother accounted for approximately 6% and 5% of total revenue for the six monthsended June 30, 2005 and 2004, respectively. Our revenue reaches its highest levels during the first and thirdquarters of the year due to the timing of the MAGIC tradeshows and our otherlarge tradeshows and conferences. Because tradeshow and conference revenue is recognized when a particularevent is held, we may experience fluctuations in quarterly revenue based on themovement of tradeshow dates from one quarter to another.

 

28

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**Recent Developments**

 

On May 23, 2005, we, our parent company and certainaffiliates (Advanstar Expositions Canada Limited and Advanstar.com) completedthe sale of business assets and liabilities associated with our tradeshows andconferences, trade publications and direct marketing products in our:Information Technology & Communications, Travel/Hospitality, Beauty, HomeEntertainment, Abilities and Portfolio groups, including the shares of our HongKong subsidiaries (the “Sold Portfolio Group”). The shares of our Brazilian subsidiary were sold in July 2005 afterreceipt of final regulatory approval. Collectively, the Sold Portfolio Groupand Brazilian subsidiary are referred to as the “Portfolio Group.” We recordeda gain on the sale of $53.0 million.

 

The sale price for theseassets and shares was $185 million in cash, plus the assumption by the purchaserof certain liabilities (including, without limitation, deferred revenueliabilities), less a $7 million working capital adjustment payable to thepurchaser plus a post-closing distribution to us from our Brazilian subsidiary,subject to regulatory approval.  $7.8million of the sale price was held in escrow until the completion of the saleof our Brazilian subsidiary.  In August2005, we received the $7.8 million from escrow.

 

Revenues of the PortfolioGroup, included in discontinued operations, were $25.5 million and $49.0million for the three and six months ended June 30, 2005 and $26.1 million and$57.0 million for the three and six months ended June 30, 2004.

 

In connection with the saleof the Portfolio Group we repaid all outstanding term debt under our creditfacility and amended the credit facility to retain revolving loan availabilityat $60 million while allowing for repayment of second lien and junior debt witha portion of the proceeds from the sale of the Portfolio Group.  The amendment also revised the fixed chargecoverage ratio to exclude from the calculation any interest expense related todebt repaid prior to July 31, 2005 with the proceeds from the sale of thePortfolio Group.

 

Asa result of the sale of the Portfolio Group, our second priority senior securednotes indenture required that we either use the remaining net proceeds (afterrepayment of the Credit Facility borrowings) to invest in our business or tooffer to purchase our second priority senior secured notes at par plus accruedinterest.  In June 2005, we offered topurchase up to $140 million of the second lien notes.  Holders of $8,665,000 principal amount of the10.75% Second Priority Senior Secured Notes (the “fixed rate notes”) tenderedtheir notes for purchase, and we purchased all such notes.

 

Alsoin June 2005, we completed a cash tender offer for any and all of ouroutstanding Second Priority Senior Secured Floating Rate Notes due 2008 (the “floatingrate notes”).  Holders of $117,801,750aggregate outstanding principal amount of the floating rate notes tenderedtheir notes for purchase, and we purchased all such notes at a price equal to107.3% (including a 3% consent fee) of outstanding principal plus accruedinterest.  In connection with the tenderoffer, we received consents to proposed amendments to the indenture governingthe notes, resulting in the elimination of substantially all of the restrictivecovenants and certain default provisions with respect to the floating ratenotes.

 

Underour indentures, any net proceeds from the sale of the Portfolio Group not usedto reinvest in the business or to purchase second lien notes within one yearafter closing of the sale will be required to be used to offer to repurchasethe subordinated notes and then the discount notes.  After application of the net proceeds of thesale of the Portfolio Group to repay the Credit Facility borrowings and financethe tender offers, we have net proceeds of approximately $13.4 millionremaining.

 

29

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**Trends and Developments**

 

Our first half 2005 results from continuing operationswere impacted by the sale of the Portfolio Group to Questex Media Group in thesecond quarter and related  $2.0 millionrestructuring charge, $12.6 million in costs related to the repayment of aportion of our debt, new product launches, investments in our Life Sciences andPowersports operating groups, and softer than expected sales in our healthcarespecial projects group as we restructured our operations.

 

Net income in the firsthalf of 2005 includes theresults for approximately five months of the groups sold to Questex Media Groupin May 2005, a $53.0 million gain on the sale of these assets and a $2.3million intangible asset impairment charge related to the closing of our EastCoast Fashion events, all of which are reported as discontinued operations.

 

Thesale of the Portfolio Group allows us to concentrate our resources on threemarkets in which we have our strongest product and market positions, includingfashion and licensing, healthcare, and the motorcycle and automotiveaftermarket markets.  In the first sixmonths of 2005 we invested in these core markets through existing productdevelopment, launching of new events and conferences and development ofcontinuing education capabilities in our healthcare, dental and veterinarymarkets.

 

Our tradeshows and conferences continued to performwell in 2005.  Revenue in the first halfof 2005 from our three largest events, MAGIC, Dealer Expo and LicensingInternational, increased $4.9 million, or 10.5%, compared to the first half of2004.  We also launched the Off-RoadImpact tradeshow and conference, complementing our 2004 launches of *Dirt Sports* and *Off-Road Business*magazines, 11 new IVT pharmaceutical conferences and a dental conference.

 

The decline in revenue in our publishing segment inthe first half of 2005 is the result of softer than expected sales in ourhealthcare custom projects as we restructured our operations.

 

We have identified newopportunities and initiatives that we will be pursuing through the balanceof  2005 and into 2006, includingopportunities to expand customer relationships and our market position in ourMAGIC events and the development of a stand alone continuing medical educationbusiness and other diversified customer offerings in our healthcaresector.  We also recently announced thelaunch of our Arenacross Championship Motorcycle Racing series in conjunctionwith our existing international motorcycle show series.

 

**Presentation of Financial Information**

 

*Acquisitions and divestitures*

 

On March 8, 2004, wepurchased a portfolio of pharmaceutical industry specific magazines andconferences from the Institute of Validation Technology, Inc. (“IVT”) for $7.9million in cash.  In addition, we may payadditional contingent cash consideration to the prior owners based upon 2004and 2005 operating results generated from the acquired assets and theircontinued employment with us.  Operatingresults for the three and six months ended June 30, 2005 include $0.3 millionand $0.6 million in compensation expense, respectively, to reflect the accrualof the 2005 component of the expected contingent payment.

 

We have accounted for thisacquisition under the purchase method of accounting.  Accordingly, our results of operationsinclude the effect of the acquisition from the date of purchase.

 

30

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In May 2005, we sold our Portfolio Group.  See “–Recent Developments” for additionalinformation regarding this sale.

 

In the second quarter of 2005, we closed the lastremaining East Coast Fashion events (the “East Coast Fashion Group”) as part ofour ongoing strategy and evaluation of the fashion market.  Revenue of the East Coast Fashion Groupincluded in discontinued operations was $0.9 million and $2.0 million for thesecond quarter of 2005 and 2004, respectively, and $0.9 million and $5.2million for the first half of 2005 and 2004, respectively.  We also recorded a $2.3 million impairmentcharge for the remaining intangible assets of this business.

 

In the third quarter of 2004, we sold our Germantradeshow business (“DMS”) for $1.7 million in cash.  As a result of the sale of DMS we recorded agoodwill impairment of $6.2 million. Total revenue in the three and six months ended June 30, 2004 were notmaterial.

 

In the second quarter of2004, we sold our 65% ownership in our French joint venture (“SeCA”), whichconsisted of one tradeshow, for $3.1 million in cash.  In conjunction with our sale of SeCA werecorded a goodwill impairment charge of $9.4 million, net of minorityinterest.  SeCA had $2.9 million inrevenues, included in discontinued operations for the three and six monthsended June 30, 2004.

 

In the first quarter of 2004, we sold our art industrytradeshows and magazinesfor a total sales price of $19.6 million in cash (“Art Group”).  Total revenue for the Art Group in the sixmonths ended June 30, 2004, included in discontinued operations, was $8.5million.  We recorded a gain onthe sale of $1.0 million.

 

The financial results ofthe businesses included in discontinued operations in the accompanyingcondensed consolidated statements of operations are as follows:

 

| ** **                                                                                 | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                                 | ** ** | **2005**                         | ** ** | **2004**                       | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                                       |       |                             |       |                           |       |   |   |   |   |   |   |   |   |
| Income (loss)  before income taxes (including goodwill impairment charge and gain on sale) |       | $                                | 57,329     |                           | $          | (7,851 | ) | $ | 58,765 |   | $ | 3,361 |   |
| Income tax  provision                                                                      |       | 12,557                           |       | 4,834                          |       | 14,211 |   | 3,684 |   |
| Minority  interests                                                                        |       | 80                               |       | 4,876                          |       | (566 | ) | 4,383 |   |
|                                                                                       |       |                             |       |                           |       |   |   |   |   |   |   |   |   |
| Income (loss)  from operations of discontinued businesses                                  |       | $                                | 44,852     |                           | $          | (7,809 | ) | $ | 43,988 |   | $ | 4,060 |   |

 

31

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**Selected Financial Data**

 

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

 
| ** **                                                                                        | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                                        | ** ** | **2005**                         | ** ** | **2004**                       | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                                        | ** ** | **(in thousands)**               | ** ** | ** **                     | ** ** | ** ** | ** ** |
| **Income  Statement Data:**                                                                       |       |                             |       |                           |       |   |   |   |   |
| Revenue                                                                                           |       |                             |       |                           |       |   |   |   |   |
| Tradeshows and  conferences                                                                       |       | $                                | 11,886     |                           | $          | 10,282 |   | $ | 64,201 |   | $ | 57,875 |   |
| Publications                                                                                      |       | 39,545                           |       | 42,057                         |       | 73,645 |   | 76,547 |   |
| Direct marketing  products and other                                                              |       | 4,559                            |       | 3,890                          |       | 8,716 |   | 7,296 |   |
| Total revenue                                                                                     |       | 55,990                           |       | 56,229                         |       | 146,562 |   | 141,718 |   |
|                                                                                              |       |                             |       |                           |       |   |   |   |   |
| Cost of  production and selling                                                                   |       |                             |       |                           |       |   |   |   |   |
| Tradeshows and conferences                                                                        |       | 8,279                            |       | 6,283                          |       | 27,290 |   | 22,981 |   |
| Publications                                                                                      |       | 26,352                           |       | 27,750                         |       | 50,687 |   | 51,374 |   |
| Direct marketing  products and other                                                              |       | 3,574                            |       | 3,579                          |       | 6,645 |   | 5,516 |   |
| Total cost of  production and selling                                                             |       | 38,205                           |       | 37,612                         |       | 84,622 |   | 79,871 |   |
|                                                                                              |       |                             |       |                           |       |   |   |   |   |
| General and  administrative expenses                                                              |       | 9,712                            |       | 9,103                          |       | 22,254 |   | 19,074 |   |
| Restructuring  charge                                                                             |       | 2,015                            |       | —                         |       | 2,015 |   | — |   |
| Funding of  affiliated dot.com company operations                                                 |       | —                           |       | 2,225                          |       | — |   | 2,763 |   |
| Depreciation and  amortization                                                                    |       | 9,520                            |       | 10,803                         |       | 19,477 |   | 20,491 |   |
| Operating (loss)  income                                                                          |       | (3,462                           | )          | (3,514                         | )          | 18,194 |   | 19,519 |   |
| Other income  (expense):                                                                          |       |                             |       |                           |       |   |   |   |   |
| Interest expense                                                                                  |       | (16,942                          | )          | (17,348                        | )          | (34,429 | ) | (35,576 | ) |
| Loss on  extinguishment of debt                                                                   |       | (12,581                          | )          | —                         |       | (12,581 | ) | — |   |
| Other expense,  net                                                                               |       | (38                              | )          | (85                            | )          | (21 | ) | 1,212 |   |
| Loss from  continuing operations before income taxes, and cumulative effect of  accounting change |       | (33,023                          | )          | (20,947                        | )          | (28,837 | ) | (14,845 | ) |
| (Benefit)  provision for income taxes                                                             |       | (3,680                           | )          | (975                           | )          | (1,885 | ) | 896 |   |
| Loss from  continuing operations before cumulative effect of accounting change                    |       | (29,343                          | )          | (19,972                        | )          | (26,952 | ) | (15,741 | ) |
| Income (loss)  from operations of discontinued businesses, net of taxes                           |       | 44,852                           |       | (7,809                         | )          | 43,988 |   | 4,060 |   |
| Income (loss)  before cumulative effect of accounting change                                      |       | 15,509                           |       | (27,781                        | )          | 17,036 |   | (11,681 | ) |
| Cumulative  effect of accounting change                                                           |       | —                           |       | —                         |       | 4,618 |   | — |   |
| Net income  (loss)                                                                                |       | $                                | 15,509     |                           | $          | (27,781 | ) | $ | 21,654 |   | $ | (11,681 | ) |

 

32

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**Results of Operations**

 

THREE MONTHS ENDED JUNE 30, 2005 COMPARED TO THE THREE MONTHS ENDEDJUNE 30, 2004

 

# ***Revenue***

 

Revenue in the second quarter of 2005 declined 0.4% to$56.0 million from $56.2 million in the second quarter of 2004.

 

Revenue from trade shows and conferences increased15.6%, or $1.6 million, to $11.9 million from $10.3 million in the secondquarter of 2004 primarily due to our Licensing International trade show andconferences in our Life Sciences group. Licensing International revenue increased $1.0 million, or 13.7% on a6.7% increase in square footage to 194,385 sq ft with strong conferenceprograms and sponsorship support.  Welaunched nine new IVT pharmaceutical conferences and our first dentalconference, Digital Radiography Congress, adding to our growing portfolio ofconferences.  These launches contributed$2.0 million to revenue in the second quarter of 2005.  The increased revenue generated from thesetradeshows and conferences was partially offset by the shift of fourconferences from the second quarter of 2004 to the last half of 2005.

 

Revenue from publications in the second quarter of2005 declined 6.0%, or $2.5 million, to $39.5 million from $42.1 million in thesecond quarter of 2004.  Revenue fromhealthcare custom projects declined $3.1 million in the quarter due to a continued commercial impact from therestructuring of our Life Sciences operating group.  Wealso saw a softening of market spending in the veterinary and specialtyhealthcare markets in the first half of 2005. These revenue declines were partially offset by a $1.6 millionincrease in revenue from our publications serving the automotive,pharmaceutical and dental markets, and $0.4 million from the launch inSeptember 2004 of *Dirt Sports* and*Off-Road Business*magazines.

 

In the second quarter of2005, revenue from the direct marketing products and other segment increased17.2%, or $0.7 million, to $4.6 million from $3.9 million in the second quarterof 2004.  This increase is primarily dueto the adoption of FASB Interpretation No. 46R, “Consolidation of VariableInterest Entities,” which required us to consolidate the results of ouraffiliate, Advanstar.com.

 

*Cost of production and selling*

 

Cost of production and selling expenses in the secondquarter of 2005 increased 1.6% to $38.2 million from $37.6 million in thesecond quarter of 2004.

 

Expenses of tradeshows and conferences in the secondquarter of 2005 increased 31.8%, or $2.0 million, to $8.3 million from $6.3million in the second quarter of 2004.  Staffing and other direct costs to supportour first quarter launch of the Off Road Impact tradeshow and conferenceand our newly launched IVT and dental conferences contributed approximately$1.4 million to this increase.  We alsoincurred an additional $0.5 million of expenses to support the growth in ourLicensing International event.

 

Expenses of tradepublications in the second quarter of 2005 declined 5.0%, or $1.4 million, to$26.4 million from $27.8 million in the second quarter of 2004.  The decline is primarily due to the declinein healthcare custom projects as discussed above, partially offset by aincreases in paper costs and $0.5 million of costs associated with the launchof *Dirt Sports* and *Off-Road Business* as discussed above.

 

33

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Expenses of direct marketing products and other were$3.6 million in the second quarter of 2005 and 2004, respectively.  Results in the second quarter of 2005 includeapproximately $0.2 million of increased costs due to the consolidation of theresults of Advanstar.com upon the adoption of FASB Interpretation No. 46R, asdiscussed above.  We also incurred anadditional $0.2 million in staffing and consulting costs related to arealignment of our project business and the launches of publications andtradeshows serving the powersports markets. These increases were offset by savings in our operating supportdepartments.

 

*General and administrative expenses*

 

General andadministrative costs increased 6.7%, or $0.6 million, to $9.7 million in thesecond quarter of 2005 from $9.1 million in the second quarter of 2004 primarilydue to $0.3 million of contingent employee compensation related to the IVTacquisition earn-out and $0.3 million of increased costs due to theconsolidation of the results of Advanstar.com upon the adoption of FASBInterpretation No. 46R, as discussed above.

 

*Restructuring charge*

 

Relatedto the sale of the Portfolio Group in May 2005, we ceased use of certain leasedoffice space in New York, NY, Milford, CT, and Santa Ana, CA, resulting in a secondquarter 2005 charge of $0.8 million. This charge consists of the discountedfuture minimum lease payments, net of estimated future sublease income. Theselease commitments expire at various dates through 2010.

 

 In connection with the sale of the PortfolioGroup and the reorganization of our healthcare group management team wenotified 89 employees that they will be severed from the Company. We accruedthe resulting severance payments, resulting in a second quarter 2005 charge tooperations of $1.2 million.  As of June30, 2005, 37 employees have been terminated. The remaining employees areexpected to be terminated by the fourth quarter of 2005, with severancepayments continuing into 2006.

 

Weexpect an additional $0.7 million charge to be taken in the last half of 2005as we vacate additional office space and terminate the remaining identifiedemployees pursuant to our restructuring plan.

 

*Funding of affiliated dot.com company operations*

 

As described above, on January 1, 2005 we beganconsolidating the operations of Advanstar.com with our operations upon adoptionof FASB Interpretation No. 46R and therefore we are no longer recording aseparate operating expense related to our funding of Advanstar.com.  Expense associated with our funding ofAdvanstar.com in the second quarter of 2004 was $2.2 million.

 

*Interest expense*

 

Interest expense in the second quarter of 2005declined $0.4 million, or 2.3%, to $16.9 million from $17.3 million in thesecond quarter of 2004 primarily due to the repayment of $20.4 million of ourterm loans in May 2005 with the proceeds from the sale of the Portfolio Group.

 

In June 2005, we repurchased $8.7 million ofour fixed rate notes pursuant to an offer to purchase at an offer price of 100%of principal amount tendered, plus accrued and unpaid interest to the date ofsettlement.  We also repurchased $117.8million of our floating rate notes pursuant to a cash tender offer for $1,043plus a consent payment of $30 per $1,000 principal amount tendered, plusaccrued and unpaid interest to the date of settlement.  Our interest expense will be lower in futureperiods as a result of these activities. See “–Recent Developments” for further information.

 

34

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The Company incurred $12.6 million in costs related tothe repurchase.  These costs include $8.6million in tender offer premium and consent fees, $3.5 million in unamortizeddeferred financing costs, and $0.5 million in legal fees and expenses.

 

At June 30, 2005, $452.2 million, or 98%, of our totaldebt is at a fixed rate with the balance subject to interest rate fluctuations.

 

*Provision (benefit) for income taxes*

 

The provision for income taxes before discontinuedoperations was a benefit of $3.7 million in the second quarter of 2005 comparedto a benefit of $1.0 million in the second quarter of 2004.  The provision for the second quarter of 2005 and 2004 includes atax benefit representing the tax benefit provided by losses fromcontinuing operations to the extent that such losses offset the income from discontinuedoperations. This tax benefit is offset by a tax provision included indiscontinued operations.  This benefitwas partially offset by a deferred tax provision related to the basis ofgoodwill for tax purposes being less than the carrying value of goodwill forfinancial reporting purposes.  Werecorded no income tax benefit related to the net operating losses we generatedduring 2005 or 2004 because we have established a valuation allowance to offsetany related tax benefits due to uncertainty about realization of thesebenefits.

 

*Discontinued operations*

 

InAugust 2004, we sold SeCA for $3.1 million in cash.

 

InSeptember 2004, we sold DMS for $1.7 million in cash.

 

In May2005, we sold the Portfolio Group for $185 million in cash, of which $7.8million was held in escrow until the completion of the sale of our Braziliansubsidiary, plus the assumption by the purchaser of certain liabilities(including, without limitation, deferred revenue liabilities), less a $7million working capital adjustment payable to the purchaser, and a post-closingdistribution to us from our Brazilian subsidiary, subject to regulatoryapproval.  We recorded a gain on the saleof $53.0 million.

 

In May2005 we closed our East Coast Fashion Group as part of our ongoing strategy andevaluation of the fashion market.

 

Seefurther information regarding discontinued operations in “–Presentation ofFinancial Information–Acquisitions and Divestitures.”

 

# **SIX MONTHSENDED JUNE 30, 2005 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2004**

##  

# ***Revenue***

 

Revenue in the first halfof 2005 increased 3.4% to $146.6 million from $141.7 million in the first halfof 2004.

 

Revenue from trade shows and conferences increased10.9%, or $6.3 million, to $64.2 million from $57.9 million in the first halfof 2004.  Revenue from our three largestevents, MAGIC, Dealer Expo, and Licensing International, increased $4.9million, or 10.5%, compared to the first half of 2004.   Square footage of our MAGIC event grew by3.8% over the spring of 2004 to 897,400 sq ft, Licensing

 

35

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International increased 6.7% to 194,400 sq ft and Dealer Expo increased1.7% to 328,300 sq ft.  We also launchedthe Off-Road Impact tradeshow and conference complementing our 2004 launches of*Dirt Sports* and *Off-Road Business* magazines, 11 new IVTpharmaceutical conferences and a dental conference, Digital RadiographyCongress.  These launches generatedrevenue of $2.8 million in the first half of 2005.  The increased revenue generated from thesetrade shows and conferences was partially offset by the shift of threeconferences from the second quarter of 2004 to the last half of 2005 andholding one less IMS motorcycle event in the first half of 2005.

 

Revenue from publications in the first half of 2005declined 3.8%, or $2.9 million, to $73.6 million from $76.5 million in thefirst half of 2004.  Advertising pagesdeclined by 58 pages or 0.5% in the first half. Revenue from healthcare custom projects declined $3.6 million in thefirst half, caused by a decline in healthcare custom projects due to acontinued commercial impact from the restructuring of our Life Sciencesoperating group.  We also saw a softeningin the pace of market spending in the veterinary and healthcare specialtymarkets.  These revenue declines werepartially offset by a $2.7 million or 11.7% increase in revenue from ourpublications serving the automotive, dental and pharmaceutical markets, and$0.6 million from *Dirt Sports* and *Off-Road Business*magazines, which were launched inSeptember 2004.

 

 

In the first half of2005, revenue from our direct marketing products and other segment increased19.5%, or $1.4 million, to $8.7 million from $7.3 million in the first half of2004.  This increase is primarily due tothe adoption of FASB Interpretation No. 46R, “Consolidation of VariableInterest Entities,” which required us to consolidate the results of ouraffiliate, Advanstar.com, effective January 1, 2005.

 

# ***Cost ofproduction and selling***

 

Cost of production andselling expenses in the first half of 2005 increased 5.9% to $84.6 million from$79.9 million in the first half of 2004.

 

Expenses of tradeshowsand conferences in the first half of 2005 increased 18.8%, or $4.3 million, to$27.3 million from $23.0 million in the first half of 2004.  Staffing and other direct costs to support our first quarter launch of theOff-Road Impact tradeshow and conference and our newly launched IVT and dentalconferences contributed approximately $2.7 million to this increase.  We also incurred an additional $1.6 millionof expenses to support the growth in our MAGIC and Licensing Internationalevents.

 

Expenses of tradepublications in the first half of 2005 declined 1.3%, or $0.7 million, to $50.7million from $51.4 million in the first half of 2004.  The decline is primarily due to the declinein healthcare custom projects as discussed further above, partially offset byan increase in paper costs and $1.1 million of costs associated with the launchof *Dirt Sports* and *Off-Road Business* as discussed above.

 

Expenses of directmarketing products and other in the first half of 2005 increased 20.5%, or $1.1million, to $6.6 million from $5.5 million in the first half of 2004.  Results in the first half of 2005 includeapproximately $0.3 million of increased costs due to the consolidation of theresults of Advanstar.com upon the adoption of FASB Interpretation No. 46R, asdiscussed above.  We also incurred anadditional $0.8 million in staffing and consulting costs related to a realignmentof our healthcare project business and the launches of publications andtradeshows serving the powersports markets.

 

# ***Generaland administrative expenses***

 

General andadministrative costs increased 16.7%, or $3.2 million, to $22.3 million in thefirst half of 2005 from $19.1 million in the first half of 2004 due primarilyto $0.7 million of additional investments

 

36

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in our groupmanagement team and staff, primarily related to our Life Sciences group, $0.8million of costs related to strategic consulting and marketing initiatives,$0.6 million of contingent employee compensation related to the IVT acquisitionearn-out, an increase of $0.4 million for audit, tax, legal and Sarbanes-Oxleyconsulting services and $0.7 million of increased costs due to theconsolidation of the results of Advanstar.com upon the adoption of FASBInterpretation No. 46R, as discussed above.

 

# ***Restructuringcharge***

 

Related to the sale of the Portfolio Group in May 2005,we ceased use of certain leased office space in New York, NY, Milford, CT, andSanta Ana, CA, resulting in a second quarter 2005 charge of $0.8 million. Thischarge consists of the discounted future minimum lease payments, net ofestimated future sublease income. These lease commitments expire at variousdates through 2010.

 

 In connection with the sale of thePortfolio Group and reorganization of our healthcare group management teamduring the second quarter of 2005, we notified 89 employees that they will besevered from the Company. We accrued the resulting severance payments,resulting in a second quarter 2005 charge to operations of $1.2 million.  As of June 30, 2005, 37 employees have beenterminated. The remaining employees are expected to be terminated by the fourthquarter of 2005, with severance payments continuing into 2006.

 

Weexpect an additional $0.7 million charge to be taken in the last half of 2005as we vacate additional office space and terminate the remaining identifiedemployees pursuant to our restructuring plan.

 

# ***Fundingof affiliated dot.com company operations***

 

As described above, onJanuary 1, 2005 we began consolidating the operations of Advanstar.com with ouroperations upon adoption of FASB Interpretation No. 46R and therefore we are nolonger recording a separate operating expense related to our funding ofAdvanstar.com.  Expense associated withour funding of Advanstar.com in the first half of 2004 was $2.8 million.

 

# ***Interestexpense***

 

Interest expense in thefirst half of 2005 declined $1.1 million, or 3.2%, to $34.4 million from $35.6million in the first half of 2004 due to a reduction in cash payments on ourinterest rate collar agreement and the repayment of $20.4 million of our termloans in May 2005 with the proceeds from the sale of the Portfolio Group.  In the first quarter of 2004, we madepayments of $0.9 million on this agreement, which expired in February2004.  We currently have no plans tohedge our remaining floating rate debt.

 

In June 2005, we repurchased $8.7 million ofour fixed rate notes pursuant to an offer to purchase at an offer price of 100%of principal amount tendered, plus accrued and unpaid interest to the date ofsettlement.  We also repurchased $117.8million of our floating rate notes pursuant to a cash tender offer for $1,043per $1,000 principal amount tendered, plus a consent payment of $30 per $1,000principal amount tendered, plus accrued and unpaid interest to the date ofsettlement.  Our interest expense will belower in future periods as a result of these activities.  See “–Recent Developments” for furtherinformation.

 

The Company incurred$12.6 million in costs related to the repurchase.  These costs include $8.6 million in tenderoffer premium and consent fees, $3.5 million in unamortized deferred financingcosts, and $0.5 million in legal fees and expenses.

 

37

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At June 30, 2005, $452.2million, or 98%, of our total debt is at a fixed rate with the balance subjectto interest rate fluctuations.

 

*Other income (expense), net*

 

Other income in the firsthalf of 2004 includes a gain of $1.3 million related to our interest rateprotection agreements, which expired in February 2004.

 

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

 

The benefit for incometaxes was $1.9 million in the first half of 2005 compared to a provision of $0.9million in the first half of 2004.  The provision for the first half of 2005includes a tax benefit representing the tax benefit provided by losses fromcontinuing operations to the extent that such losses offset the income from discontinuedoperations.  This tax benefit is offsetby a tax provision included in discontinued operations.  This benefit was partially offset by adeferred tax provision related to the basis of goodwill for tax purposes beingless than the carrying value of goodwill for financial reporting purposes.  We recorded no income tax benefit related tothe net operating losses we generated during 2005 or 2004 because we haveestablished a valuation allowance to offset any related tax benefits due touncertainty about realization of these benefits.

 

# ***Discontinuedoperations***

 

In March 2004, we sold the Art Group for $19.6 millionin cash and recorded a gain on the sale of $1.0 million.

 

In August 2004, we sold SeCA for $3.1 million in cash.

 

In September 2004, we sold DMS for $1.7 million incash.

 

In May 2005, we sold the Portfolio Group for $185million in cash, of which $7.8 million was held in escrow until the completionof the sale of our Brazilian subsidiary, plus the assumption by the purchaserof certain liabilities (including, without limitation, deferred revenueliabilities), less a $7 million working capital adjustment payable to thepurchaser, and a post-closing distribution to us from our Brazilian subsidiary,subject to regulatory approval.  Werecorded a gain on the sale of $53.0 million.

 

In May 2005 we closed our East Coast Fashion Group aspart of our ongoing strategy and evaluation of the fashion market.

 

See further information regarding discontinuedoperations in “–Presentation of Financial Information–Acquisitions andDivestitures.”

 

**Liquidity and Capital Resources**

 

Ourprincipal sources of liquidity have been, and are expected to be, cash flowsfrom operations and borrowings under our credit facility.  Our principal uses of cash have been, and areexpected to be, the debt service requirements of our indebtedness describedbelow, capital expenditures, investments in our publications and tradeshows andstrategic acquisitions.

 

38

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*Sources and uses of funds*

 

Wegenerally operate with negative working capital, excluding cash and currentmaturities of long-term debt, due to the impact of deferred revenue fromtradeshows, which is billed and collected as deposits up to one year in advanceof the respective tradeshow. Consequently, our existing operations are expected to maintain very lowor negative working capital balances, excluding cash and current maturities oflong-term debt.

 

Operatingcash flows may be significantly affected by the working capital fluctuations ofour business, in particular the tradeshows and conferences business.  Deferred revenue increases on the balancesheet in the quarters immediately preceding our busy first quarter tradeshowseason as we collect deposits for booth space several months in advance of thetradeshows.  Revenue and contributionmargin are recognized in the quarter that the events are held, releasing thedeferred revenue from the balance sheet, which results in a reduction to ouroperating cash flow.

 

Weanticipate that our operating cash flow, together with borrowings under thecredit facility (assuming continued compliance with the covenants containedtherein or a modification thereof) and other future financings andrefinancings, will be sufficient to fund our anticipated future operatingexpenses, capital expenditures, debt service and other obligations as theybecome 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.

 

Asof June 30, 2005, we had cash and cash equivalents of $38.4 million.  The following table shows our cash flowactivity for the first half of 2005 and 2004, and should be read in conjunctionwith the condensed consolidated statements of cash flows (in thousands):

 
| ** **                                  | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------------------------------|------------|--------------------------------|------------|
| ** **                                  | ** ** | **2005**                       | ** ** | **2004** | ** ** |
|                                        |       |                           |       |   |   |
| Net  cash used in operating activities |       | $                              | (13,623    | ) | $ | (3,717 | ) |
| Net  cash provided by investing activities  |       | 163,523                        |       | 7,775 |   |
| Net  cash used in financing activities      |       | (153,146                       | )          | (10,352 | ) |
| Effect  of exchange rate changes on cash    |       | 384                            |       | (545 | ) |
| Net  decrease in cash and cash equivalents  |       | $                              | (2,862     | ) | $ | (6,839 | ) |

 

The $9.9 million increase in cash used in operatingactivities in the first half of 2005 as compared to the first half of 2004 wasdue primarily to $9.1 million of cash fees and expenses related to ourrepurchase of a portion of our outstanding debt in June 2005.  Cash provided by operating activities in thefirst half of 2005 was negatively impacted by a decline in net income lessnon-cash expenses.  Cash inflowsgenerated by operating income, trade show receipts and deposits and proceedsfrom the sale of the Portfolio Group in the first half of 2005 less non-cashexpenses and accruals were used primarily to pay cash interest of $43.4million, debt principal of $152.1 million and to fund capital purchases of $2.7million.  Cash provided by operatingactivities in the first half of 2004 was negatively impacted by tradeshowtiming as cash for events held in the first half of 2004 was collected in thefourth quarter of 2003.

 

Net cash provided by investing activities increased$155.7 million to $163.5 million in the first half of 2005, from $7.8 millionin the first half of 2004.  This increasewas principally due to the proceeds received in the second quarter of 2005 fromthe sale of the Portfolio Group.  In thefirst quarter of 2004, we sold our Art Group for $19.5 million in cash, andacquired IVT for $8.0 million in cash. Our business strategy

 

39

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includes the consummation of strategic acquisitions.  In connection with any future acquisitions,we may require additional funding, which may be provided in the form ofadditional debt or equity financing or a combination thereof.  There can be no assurance that any additionalfinancing will be available to us on acceptable terms or in a manner thatcomplies with the restrictive covenants in our debt instruments.  Consistent with our longstanding strategy, wecontinue to pursue potential acquisitions of complementary businesses.

 

Weincurred capital expenditures of $2.7 million and $3.6 million in the firsthalf of 2005 and 2004, respectively.  Weanticipate that we will spend less than $10.0 million on capitalexpenditures in 2005, which will be funded by cash flows from operations.  The majority of these expenditures arerelated to expansions and enhancements to our IT and communicationsinfrastructure and management and operating group information systems.  We believe that this amount of capitalexpenditure will be adequate to grow our business according to our businessstrategy and to maintain the key tradeshows, publications and business thatremain following the sale of the Portfolio Group.

 

Cashused in financing activities in the first half of 2005 was $153.1 million compared to $10.4 million in thefirst half of 2004.  In the first quarterof 2005, we repaid $4.6 million of our outstanding Term Loan B with theproceeds from the sale in the first quarter of 2004 of the Art Group.  In the second quarter of 2005, we repaid ouroutstanding Term Loan B and repurchased $126.5 million of our floating andfixed rate notes, using the proceeds from the sale of the Portfolio Group.  During the first half of 2004, we paid $10.1million of outstanding principal, including $8.0 million on our revolvingcredit facility.

 

*Debt service*

 

Asof June 30, 2005, we had total indebtedness of $462.1 million and $59.2 million of borrowings availableunder our revolving credit facility.  Ourprincipal debt obligations are described below.

 

*Credit facility*

 

Our credit facility consists of a $60.0 millionrevolving credit facility which will terminate in April 2007.  Borrowings under the credit facilitygenerally bear interest based on a margin over, at our option, the base rate orLIBOR.  The applicable margin forrevolving credit loans varies based upon our ratio of consolidated debt toEBITDA (as defined) and is currently 3.75% over LIBOR and 2.50% over the baserate.  Our obligations under the creditfacility are guaranteed by Advanstar Holdings Corp. (“Advanstar Holdings”), ourultimate parent company, Advanstar, Inc., our direct parent company, and all ofour existing and future domestic subsidiaries. Our obligations under the credit facility are collateralized bysubstantially all of the assets of our company and the subsidiary guarantors,including a pledge of the capital stock of all our existing and future domesticsubsidiaries, a pledge of no more than 65% of the voting stock of any foreignsubsidiary directly owned by our company or any domestic subsidiary, a pledgeof all intercompany indebtedness in favor of our company and our domesticsubsidiaries, a pledge of our Company’s and Advanstar IH, Inc.’s capital stockheld by our direct parent company, and a pledge of our direct parent company’scapital stock held by Advanstar Holdings. Our credit facility contains restrictive covenants, which require us to,among other things, maintain a minimum fixed charge coverage ratio.

 

*Second priority senior secured notes*

 

Our $9.9 million offloating rate notes mature in 2008.  Thefloating rate notes bear interest at an annual rate equal to the three-monthLIBOR, which is reset quarterly, plus 7.50%. Interest on the floating rate notes, along with amortization of 0.25% ofthe principal of such floating rate notes, is payable quarterly in cash.  In June 2005, holders of $117,801,750 aggregate outstanding principalamount of the floating rate notes tendered their notes for purchase, and wepurchased all such notes at a price equal to

 

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107.3% (including a 3% consent fee) of principal plus accruedinterest.  In connection with the tenderoffer, we and the trustee entered into a supplemental indenture that eliminatedsubstantially all of the restrictive and reporting covenants, certain events ofdefault and certain other provisions with respect to the floating rate notesand released the floating rate notes’ lien on the collateral under theindenture.  The fixed rate notes remainsecured by the collateral and subject to the restrictive covenants in theindenture.  See “–Recent Developments”for additional information.

 

Our$292.1 million of fixed rate notes mature in 2010.  The notes are guaranteed by each of ourexisting and future domestic restricted subsidiaries and collateralized bysecond-priority liens on the assets collateralizing our credit facility(other than certain subsidiary stock and assets of our parent companies).  The fixed rate notes bear interest at anannual rate of 10.75%, which is payable semi-annually in cash.  The notes contain restrictive covenants that,among other things, limit our ability to incur debt, pay dividends and makeinvestments.  In June 2005, holders of $8,665,000 principalamount of the fixed rate notes tendered their notes for purchase, and wepurchased all such notes.  See “–RecentDevelopments” for additional information.

 

*Senior subordinated notes*

 

Our$160 million 12% senior subordinated notes mature in 2011 and areguaranteed by each of our existing and future domestic restrictedsubsidiaries.  Interest on the notes ispayable semi-annually in cash.  The notescontain restrictive covenants that, among other things, limit our ability toincur debt, pay dividends and make investments.

 

*Parent company notes*

 

Ourparent, Advanstar, Inc., issued 15% senior discount notes dueOctober 2011 with a principal amount at maturity of$171.8 million.  These discountnotes do not require cash interest payments until April, 2006 and containrestrictive covenants that, among other things, limit the ability ofAdvanstar, Inc. and its subsidiaries (including us) to incur debt, paydividends and make investments.  Neitherwe nor any of our subsidiaries have guaranteed the discount notes.  Advanstar, Inc., however, is a holdingcompany and its ability to pay interest on these discount notes will bedependent upon the receipt of dividends from its direct and indirectsubsidiaries, principally dividends from us. However, the terms of our borrowing arrangements significantly restrictour ability to pay dividends to Advanstar, Inc. and Advanstar, Inc.’sfailure to pay these notes would be a default under our credit facility.

 

The restricted paymentscovenants in our senior secured notes indenture and our senior subordinatednotes indenture, provide that we can pay dividends only if our leverage ratio(as defined) is 6.00 to 1 or better and only from the amount by which ourcumulative EBITDA (as defined) since January 1, 2001 exceeds 150% of ourcumulative interest expense in that same period. As of June 30, 2005 our leverage ratio under the most restrictiveof these indentures was 6.6 to 1.00.   We anticipate improvements in our operatingresults that would improve our ratio prior to the time that the discount notesrequire payment of interest in cash. However, our results are subject to a variety of factors, includinggeneral economic conditions and conditions in our markets, and we cannot assureyou our results will in fact improve to a point where we can make distributionsunder these restrictions.  In that case,unless we were to repay additional indebtedness or invest in abusiness that generates additional EBITDA (as defined), our leverage ratiowould not   meet the requirements for us to be permitted to paydividends, which could have a material adverse effect on the Company'sfinancial position, results of operations, and cash flows and/or could impactthe Company's ability to continue to operate without an amendment orrestructuring of its credit facility.  Notwithstanding the leverage ratio limitationon restricted payments, we can make restricted payments in an aggregateamount of up to $20 million to Advanstar, Inc.

 

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*Contractual and contingent obligations*

 

Our contractualobligations (excluding accounts payable and accrued expenses), as of June 30,2005 are as set forth below (in millions):

 
| ** **                          | ** ** | **Payments Due By Period** | ** ** |
|-------------------------------------|------------|----------------------------|------------|
| ** **                          | ** ** | **2005 (1)**               | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **After  2010** | ** ** | **Total** | ** ** |
|                                |       |                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Indebtedness                        |       | $                          | —     |   | $ | 0.2 |   | $ | 0.1 |   | $ | 9.7 |   | $ | — |   | $ | 292.1 |   | $ | 160.0 |   | $ | 462.1 |   |
| Interest  on indebtedness (2)       |       | 42.0                       |       | 52.4 |   | 52.4 |   | 51.6 |   | 50.6 |   | 53.0 |   | 28.8 |   | 330.8 |   |
| Operating  lease obligations        |       | 5.2                        |       | 6.3 |   | 5.1 |   | 4.6 |   | 3.0 |   | 1.2 |   | 0.5 |   | 25.9 |   |
| Total  contractual cash obligations |       | $                          | 47.2       |   | $ | 58.9 |   | $ | 57.6 |   | $ | 65.9 |   | $ | 53.6 |   | $ | 346.3 |   | $ | 189.3 |   | $ | 818.8 |   |

 

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(1)                                  For the period from July 1, 2005 throughDecember 31, 2005.

 

(2)                                  Interest on our variable rate debt is calculatedusing LIBOR of 3.34%, the ratein effect on July 1, 2005.  Because ourvariable rate debt bears interest at a variable rate, actual payments coulddiffer.

 

We have no materialcapital lease obligations or purchase obligations.  Our contingent obligations are primarilycomposed of $0.8 million of letters of credit.

 

*Off-balancesheet arrangements*

 

We have no materialoff-balance sheet arrangements.

 

**RecentlyIssued Accounting Standards**

 

In December 2004,the Financial Accounting Standards Board issued SFAS No. 123R, “Share-BasedPayment” which revises SFAS 123 and supersedes APB 25.  This statement establishes standards relatingto accounting for transactions in which equity instruments are exchanged forgoods or services.  Under this statement,the Company must measure the cost of employee services received in exchange foran award of equity instruments based upon the fair value of the award on thedate of grant.  This cost must berecognized over the period during which an employee is required to provide theservice (usually the vesting period).  Weare required to adopt the provisions of this standard effective January 1,2006.  The adoption of this standard willresult in an increase in compensation expense.

 

# **Item 3.*  Quantitativeand Qualitative Disclosures about******MarketRisk*

 

Weare exposed to various market risks, which is the potential loss arising fromadverse changes in market rates and prices, such as foreign currency exchangeand interest rates.  We do not enter intoderivatives or other financial instruments for trading or speculativepurposes.  However, we do enter intofinancial instruments to manage and reduce the impact of changes in interestrates and foreign currency exchange rates.

 

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# **Interest Rates**

 

AtJune 30, 2005, we had fixed rate debt of $452.2 million and variable ratedebt of $9.9 million.  A change ininterest rates of 1% would not be material to us.

 

# **Currencies**

 

Outsideof the United States, we maintain assets and operations in Europe.  The results of operations and financialposition of our foreign operations are principally measured in their respectivecurrency and translated into U.S. dollars. As a result, exposure to foreign currency gains and losses exists.  The reported income of these subsidiarieswill be higher or lower depending on a weakening or strengthening of the U.S.dollar against the respective foreign currency. Our subsidiaries and affiliates also purchase and sell products andservices in various currencies.  As aresult, we may be exposed to cost increases relative to the local currencies inthe markets in which we sell.

 

Aportion of our assets are based in our foreign locations and are translatedinto U.S. dollars at foreign currency exchange rates in effect as of the end ofeach period, with the effect of such translation reflected in othercomprehensive income (loss). Accordingly, our consolidated stockholder’s equity will fluctuatedepending upon the weakening or strengthening of the U.S. dollar against therespective foreign currency.

 

Ourstrategy for management of currency risk relies primarily on conducting ouroperations in a country’s respective currency and may, from time to time,involve currency derivatives, primarily forward exchange contracts, to reduceour exposure to currency fluctuations. As of June 30, 2005, we had no open foreign exchange derivativecontracts.

 

# **Item** 4.  *Controlsand Procedures*

 

*Evaluationof disclosure controls and procedures*.  Advanstar’sChief Executive Officer and Chief Financial Officer, after evaluating theeffectiveness of the Company’s disclosure controls and procedures (as definedin Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, asamended (the “Exchange Act”)) as of the end of the period covered by thisreport (the “Evaluation Date”), have concluded that as of the Evaluation Date,our disclosure controls and procedures were effective and designed to ensurethat information required to be disclosed by us in the reports that we file orsubmit under the Exchange Act is recorded, processed, summarized and reported withinthe time periods specified in the Securities and Exchange Commission’s rulesand forms.

 

*Changesin internal controls*.  There were no changes during the second fiscal quarter in our internalcontrols over financial reporting that have materially affected or arereasonably likely to materially affect the Company’s internal controls overfinancial reporting.

 

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# **PART II**                                                   OTHER INFORMATION

 

 

**Item 6.****                                                           Exhibits**

31.1                 Certification of principal executive officer requiredby Rule 13a-14(a) or 15d-14(a) of the Exchange Act

 

31.2               Certification of principal financial officer requiredby Rule 13a-14(a) or 15d-14(a) of the Exchange Act

 

32.1                 Certification of principal executive officer requiredby Rule 13a-14(b) or 15d-14(b) of the Exchange Act

 

32.2                 Certification of principal financial officer requiredby Rule 13a-14(b) or 15d-14(b) of the Exchange Act

 

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**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 

** **
|   |  ADVANSTAR  COMMUNICATIONS INC. |
|--------|--------------------------------------|
|   | ** **                           |
|   | ** **                           |
|   | August 15, 2005                      | /s/ DAVID W. MONTGOMERY | ** ** |
|   | ** **                           | David W.  Montgomery |
|   | ** **                           | Vice President-Finance,  Secretary and  Chief Financial Officer |
|   | ** **                           | (Principal  Financial Officer and Authorized  Representative of the Registrant) |
|        |                                      |  |  |  |

 

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**ExhibitIndex**

 

 
| **Exhibit No.** | ** ** | **Document**                                                                                                |
|-----------------|------------|-------------------------------------------------------------------------------------------------------------|
|            |       |                                                                                                        |
| 31.1            |       | Certification  of principal executive officer required by Rule 13a-14(a) or 15d-14(a) of the  Exchange Act  |
|            |       |                                                                                                        |
| 31.2            |       | Certification of  principal financial officer required by Rule 13a-14(a) or 15d- 14(a) of the  Exchange Act |
|            |       |                                                                                                        |
| 32.1            |       | Certification of  principal executive officer required by Rule 13a-14(b) or 15d-14(b) of the  Exchange Act  |
|            |       |                                                                                                        |
| 32.2            |       | Certification of  principal financial officer required by Rule 13a-14(b) or 15d-14(b) of the  Exchange Act  |

 

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