**SECURITIESAND 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: March 31,  2003** |
|                                  |
| **OR**                                |
|                                  |
|                                  |   | **Transition Report Pursuant to Section 13 or 15(d) of the  Securities Exchange Act of 1934** |
|                                  |
| **Commission File Number: 333-57201** |

 

| **Advanstar,  Inc.**                                                        |
|-----------------------------------------------------------------------------|
| (Exact name of registrant as  specified in its charter)                     |
|                                                                        |
| **Delaware**                                                                |
| (State or other jurisdiction of  incorporation or organization)             |
|                                                                        |
| **94-3243499**                                                              |
| (I.R.S. Employer  Identification No.)                                       |
|                                                                        |
| **545 Boylston Street, Boston, Massachusetts**                              |
| (Address of principal executive  offices)                                   |
|                                                                        |
| **02116**                                                                   |
| (Zip Code)                                                                  |
|                                                                        |
| **Registrant’s Telephone Number, Including Area Code:**(617)  267-6500 |

 

Indicate by check mark whether theregistrant: (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past 90 days. Yes  ý No  o

 

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

 

As of May 13, 2003,  100 sharesof the Registrant’s common stock were outstanding.

 

 

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# **PARTI     FINANCIAL INFORMATION**

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

 

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**Advanstar,Inc.**

**Condensed Consolidated BalanceSheets**

(In thousands, except share andper share data)

 
|                                                                                                                                          |   | **March 31,  2003** |       | **December 31,  2002** |       |
|-----------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|------------|------------------------|------------|
| **ASSETS**                                                                                                                                    |   |                | ** ** |                   | ** ** |
|                                                                                                                                          |   |                |       |                   |       |
| Current assets:                                                                                                                               |   |                |       |                   |       |
| Cash and cash equivalents                                                                                                                     |   | $                   | 12,317     |                   | $          | 19,022 |   |
| Accounts receivable, net of allowance of  $1,224 and $1,049 at March 31, 2003 and December 31, 2002                                           |   | 23,934              |       | 23,213                 |       |
| Prepaid expenses                                                                                                                              |   | 9,602               |       | 9,892                  |       |
| Other                                                                                                                                         |   | 1,354               |       | 1,483                  |       |
|                                                                                                                                          |   |                |       |                   |       |
| Total current assets                                                                                                                          |   | 47,207              |       | 53,610                 |       |
|                                                                                                                                          |   |                |       |                   |       |
| Due from parent                                                                                                                               |   | 85                  |       | 53                     |       |
| Property, plant and equipment, net                                                                                                            |   | 25,636              |       | 26,402                 |       |
|                                                                                                                                          |   |                |       |                   |       |
| Intangible and other assets:                                                                                                                  |   |                |       |                   |       |
| Goodwill, net                                                                                                                                 |   | 661,632             |       | 660,808                |       |
| Intangibles and other, net                                                                                                                    |   | 117,502             |       | 129,689                |       |
|                                                                                                                                          |   |                |       |                   |       |
| Total intangible and other assets, net                                                                                                        |   | 779,134             |       | 790,497                |       |
|                                                                                                                                          |   |                |       |                   |       |
|                                                                                                                                          |   | $                   | 852,062    |                   | $          | 870,562 |   |
|                                                                                                                                          |   |                |       |                   |       |
| **LIABILITIES AND STOCKHOLDER’S EQUITY**                                                                                                 |   |                |       |                   |       |
|                                                                                                                                          |   |                |       |                   |       |
| Current liabilities:                                                                                                                          |   |                |       |                   |       |
| Current maturities of long-term debt                                                                                                          |   | $                   | 17,936     |                   | $          | 17,400 |   |
| Accounts payable                                                                                                                              |   | 26,794              |       | 19,636                 |       |
| Accrued compensation                                                                                                                          |   | 3,898               |       | 6,408                  |       |
| Other accrued expenses                                                                                                                        |   | 20,902              |       | 25,353                 |       |
| Deferred revenue                                                                                                                              |   | 26,439              |       | 53,253                 |       |
|                                                                                                                                          |   |                |       |                   |       |
| Total current liabilities                                                                                                                     |   | 95,969              |       | 122,050                |       |
|                                                                                                                                          |   |                |       |                   |       |
| Long-term debt, net of current maturities                                                                                                     |   | 636,760             |       | 640,404                |       |
| Other long-term liabilities                                                                                                                   |   | 8,384               |       | 10,155                 |       |
| Minority interests                                                                                                                            |   | 10,080              |       | 9,782                  |       |
|                                                                                                                                          |   |                |       |                   |       |
| Commitments and contingencies                                                                                                                 |   |                |       |                   |       |
|                                                                                                                                          |   |                |       |                   |       |
| Stockholder’s equity:                                                                                                                    |   |                |       |                   |       |
| Common stock, $.01 par value,  10,000 shares authorized; 100 shares issued and outstanding at  March 31, 2003 and December 31, 2002 |   | —              |       | —                 |       |
| Capital in excess of par value                                                                                                                |   | 310,424             |       | 310,424                |       |
| Accumulated deficit                                                                                                                           |   | (202,331            | )          | (213,175               | )          |
| Accumulated other comprehensive loss                                                                                                          |   | (7,224              | )          | (9,078                 | )          |
|                                                                                                                                          |   |                |       |                   |       |
| Total stockholder’s equity                                                                                                               |   | 100,869             |       | 88,171                 |       |
|                                                                                                                                          |   |                |       |                   |       |
|                                                                                                                                          |   | $                   | 852,062    |                   | $          | 870,562 |   |

 

The accompanying notes are an integral partof these consolidated financial statements.

 

2

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**Advanstar,Inc.**

**Condensed Consolidated Statements of Operations**

(Inthousands)

 
|                                                                                       |   | **For theThree Months EndedMarch 31,** |    |
|--------------------------------------------------------------------------------------------|--------|----------------------------------------|---------|
|                                                                                       |   | **2003**                               |    | **2002** |   |
|                                                                                       |   |                                   |    |   |   |
| Net revenue                                                                                |   | $                                      | 109,984 |   | $ | 109,910 |   |
|                                                                                       |   |                                   |    |   |   |
| Operating expenses:                                                                        |   |                                   |    |   |   |
| Cost of production                                                                         |   | 23,296                                 |    | 23,231 |   |
| Selling, editorial and circulation                                                         |   | 35,330                                 |    | 36,663 |   |
| General and administrative                                                                 |   | 10,385                                 |    | 10,532 |   |
| Amortization of other intangibles                                                     |   | 10,965                                 |    | 14,426 |   |
| Depreciation                                                                               |   | 2,818                                  |    | 2,481 |   |
|                                                                                       |   |                                   |    |   |   |
| Total operating expenses                                                                   |   | 82,794                                 |    | 87,333 |   |
|                                                                                       |   |                                   |    |   |   |
| Operating income (loss)                                                                    |   | 27,190                                 |    | 22,577 |   |
|                                                                                       |   |                                   |    |   |   |
| Other income (expense):                                                                    |   |                                   |    |   |   |
| Interest expense, net                                                                      |   | (16,289                                | )       | (16,222 | ) |
| Other income (expense), net                                                                |   | 375                                    |    | 1,042 |   |
|                                                                                       |   |                                   |    |   |   |
| Income before income taxes, minority  interests and cumulative effect of accounting change |   | 11,276                                 |    | 7,397 |   |
|                                                                                       |   |                                   |    |   |   |
| Provision for income taxes                                                            |   | 304                                    |    | 168 |   |
|                                                                                       |   |                                   |    |   |   |
| Minority interests                                                                         |   | (128                                   | )       | (90 | ) |
|                                                                                       |   |                                   |    |   |   |
| Income before cumulative effect of  accounting change                                      |   | 10,844                                 |    | 7,139 |   |
|                                                                                       |   |                                   |    |   |   |
| Cumulative effect of accounting change, net  of tax and minority interest                  |   | —                                 |    | (66,817 | ) |
|                                                                                       |   |                                   |    |   |   |
| Net income (loss)                                                                          |   | $                                      | 10,844  |   | $ | (59,678 | ) |

 

The accompanying notes are an integral partof these consolidated financial statements.

 

3

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**Advanstar,Inc.**

**Condensed Consolidated Statements of Cash Flows**

(Inthousands)

 
|                                                                                       |   | **For theThree Months Ended  March 31,** |   |
|--------------------------------------------------------------------------------------------|--------|------------------------------------------|--------|
|                                                                                       |   | **2003**                                 |   | **2002** |   |
| Operating activities:                                                                      |   |                                     |   |   |   |
| Net loss                                                                                   |   | $                                        | 10,844 |   | $ | (59,678 | ) |
| Adjustments to reconcile net loss to net  cash provided by (used in) operating activities: |   |                                     |   |   |   |
| Transition goodwill impairment                                                             |   | —                                   |   | 66,817 |   |
| Depreciation and amortization                                                              |   | 13,783                                   |   | 16,907 |   |
| (Gain) loss on derivative financial  instruments                                           |   | (440                                     | )      | (902 | ) |
| Undistributed earnings of minority interest  holders                                       |   | 128                                      |   | 90 |   |
| Noncash interest                                                                           |   | 4,859                                    |   | 4,156 |   |
| Loss (gain) on sales of assets and other                                                   |   | 37                                       |   | (1,043 | ) |
| Provision for bad debts                                                                    |   | 416                                      |   | 1,021 |   |
| Changes in operating assets and liabilities                                                |   | (27,329                                  | )      | (37,584 | ) |
| Net cash provided by (used in)  operating activities                                  |   | 2,298                                    |   | (10,216 | ) |
|                                                                                       |   |                                     |   |   |   |
| Investing activities:                                                                      |   |                                     |   |   |   |
| Additions to property, plant and equipment                                                 |   | (2,043                                   | )      | (1,394 | ) |
| Acquisitions of publications and trade  shows, net of cash acquired                        |   | (1                                       | )      | (11,736 | ) |
| Net cash used in investing activities                                                      |   | (2,044                                   | )      | (13,130 | ) |
|                                                                                       |   |                                     |   |   |   |
| Financing activities:                                                                      |   |                                     |   |   |   |
| Proceeds from revolving credit loan                                                        |   | 3,000                                    |   | — |   |
| Payments on revolving credit loan                                                          |   | (6,000                                   | )      | — |   |
| Payments of long-term debt                                                                 |   | (4,250                                   | )      | (3,450 | ) |
| Deferred financing costs                                                                   |   | (27                                      | )      | (1,988 | ) |
| Net cash (used in) provided by financing  activities                                       |   | (7,277                                   | )      | (5,438 | ) |
| Effect of exchange rate changes on cash                                                    |   | 318                                      |   | 255 |   |
| Net (decrease) increase in cash and cash  equivalents                                      |   | (6,705                                   | )      | (28,529 | ) |
| Cash and cash equivalents, beginning of  period                                            |   | 19,022                                   |   | 44,797 |   |
| Cash and cash equivalents, end of period                                                   |   | $                                        | 12,317 |   | $ | 16,268 |   |

 

The accompanying notes are an integral partof these consolidated financial statements.

 

4

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**Advanstar,Inc.**

**Notes to Condensed****Consolidated Financial Statements**

 

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

 

The accompanying unaudited condensed consolidated financial statementshave been prepared by Advanstar, Inc., its wholly owned subsidiary, AdvanstarCommunications Inc. (Communications), and Communications’ majority ownedsubsidiaries (collectively, Advanstar or the Company) in accordance with theinstructions to Form 10-Q and, therefore, do not include all the informationand footnotes required by generally accepted accounting principles for completefinancial statements. Management believes that all adjustments (except for thecumulative effect of an accounting change recorded in the first quarter of 2002as discussed in Note 3), consisting solely of normal recurring items,considered necessary for a fair presentation have been included, and that thedisclosures are adequate to make the information presented not misleading.  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 onForm 10-K filed with the Securities and Exchange Commission on March 28, 2003.  The results of operations for the threemonth periods ended March 31, 2003 are not necessarily indicative of theoperating results that may be expected for the entire year ending December 31,2003.

 

**2.****              Summary ofSignificant Accounting Policies**

 

**Stock-Based Compensation**

As permitted by Statement of Financial Accounting Standards (SFAS)No. 123, “Accounting for Stock-Based Compensation,” the Company haselected to account for stock options and awards to employees under theprovisions of Accounting Principles Board (APB) Opinion No. 25,“Accounting for Stock Issued to Employees,” and related interpretations.

 

If the Company had elected to recognize compensation cost based on thefair value of the options granted as prescribed by SFAS No. 123, net losswould have been increased to the pro forma amounts indicated in the table below(in thousands):

 
|                                              |   | **For the  Three Months Ended  March 31,** |   |
|---------------------------------------------------|--------|--------------------------------------------|--------|
|                                              |   | **2003**                                   |   | **2002** |   |
| Net income (loss)—as reported                |   | $                                          | 10,844 |   | $ | (59,678 | ) |
|                                              |   |                                       |   |   |   |
| Less: pro forma stock based employee compensation |   | (583                                       | )      | (483 | ) |
|                                              |   |                                       |   |   |   |
| Net income (loss)—pro forma                  |   | $                                          | 10,261 |   | $ | (60,161 | ) |

 

**Interim Income Tax Expense**

The Company determines its quarterly income tax provision based upon anestimated annual effective income tax rate.  In determining the effectiveincome tax rate applicable to interim periods, the Company excludes taxjurisdicitons where no tax expense or benefit is expected for the entire year.

 

**Reclassifications**

Certain reclassifications have been made to amounts reported in priorperiods in order to conform to the current period presentation.  These reclassifications did not changepreviously reported operating (loss) income, net loss, cash flows orstockholder’s equity.

 

5

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**Recently Issued Accounting Standards**

In June 2001, the Financial AccountingStandards Board (FASB) issued SFAS No. 143, “Accounting for Asset RetirementObligations.”  The provisions of SFASNo. 143 are effective for the Company in 2003.  The Company has determined that it has no material assetretirement obligations.  Accordingly,the adoption of SFAS No. 143 had no impact on the Company’s financial position,results of operations or cash flows.

 

In May 2002, the FASB issued SFAS No. 145, “Rescission of FASB StatementsNo. 4, 44, and 64, Amendment of FASB Statement No. 13, and TechnicalCorrections.”  SFAS No. 145 is effectivefor fiscal years beginning after May 15, 2002. The adoption of SFAS No. 145 did not have a significant impact of theresults of operations or financial position of the Company, but in accordancewith the transition provisions, resulted in reclassification of a $2.6 millionextraordinary item into the Company’s 2001 income before income taxes, minorityinterests and cumulative effect of accounting change.

 

In June 2002, the FASB issued SFAS No. 146,“Accounting for Costs Associated with Exit or Disposal Activities.”  The provisions of SFAS No. 146 areeffective for exit or disposal activities that are initiated after December 31,2002.  The Company had no exit or disposalactivities as defined by SFAS No. 146 in the first quarter of 2003.  Accordingly, the adoption of SFAS No. 146had no impact on the Company’s results of operations, financial position, orcash flows.

 

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

 

In November 2002, the FASB issued Interpretation No. 45, “Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others.” The recognition provisions of the interpretation are effective for theCompany in 2003 and are applicable only to guarantees issued or modified afterDecember 31, 2002.  The adoption of Interpretation No. 45 did nothave a significant impact of the results of operations or financial position ofthe Company.

 

**3.**  **Goodwilland Other Intangible Assets**

 

Effective January 1, 2002, the Company adopted SFAS No. 142, “Goodwill and Other IntangibleAssets,” which established new standards related to how acquired goodwill andindefinite-lived intangible assets are to be recorded upon their acquisition aswell as how they are to be accounted for after they have been initiallyrecognized in the financial statements.

 

Effective with the adoption of this standard,the Company no longer amortizes goodwill. Instead, SFAS No. 142 requires acquired goodwill to be periodicallyevaluated for impairment.  Upon adoptionof the standard, the Company completed a transitional impairment test for itsacquired goodwill using a discounted cash flow model.  As a result of the impairment analysis, the Company recorded, agoodwill impairment charge of $70.9 million in the first quarter of2002.  After minority interest effect of$4.1 million, the net charge was $66.8 million.  This charge was attributable primarily to an impairment of thecarrying value of goodwill in our tradeshow operating

 

6

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segment which management believes resultedfrom a slow-down in the economy and its associated impact on the tradeshowbusiness.  The net charge of $66.8million was reported as a cumulative effect of a change in accountingprinciple.  There was no income tax effectassociated with this impairment charge.

 

The changes in the carrying amount ofgoodwill for the three months ended March 31, 2003, by operating segment, areas follows (in thousands):

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

 

Trade exhibitor and advertiser lists are amortized on an acceleratedbasis over six and five years, respectively, while subscriber lists and otherintangible assets are amortized on a straight-line basis over three to 10 yearsand consist of the following as of March 31, 2003 and December 31, 2002(in thousands):

 
|                                   |   | **March 31,  2003** |    | **December 31,  2002** |   |
|----------------------------------------|--------|---------------------|---------|------------------------|--------|
|                                   |   |                |    |                   |   |
| Trade exhibitor lists                  |   | $                   | 161,596 |                   | $      | 161,492 |   |
| Advertiser lists                       |   | 39,321              |    | 39,673                 |   |
| Subscriber lists                       |   | 23,978              |    | 23,978                 |   |
| Other intangible assets                |   | 7,919               |    | 8,097                  |   |
| Deferred loan costs                    |   | 23,518              |    | 23,488                 |   |
|                                   |   | 256,332             |    | 256,728                |   |
| Accumulated amortization               |   | (138,830            | )       | (127,039               | )      |
| Total intangible and other assets, net |   | $                   | 117,502 |                   | $      | 129,689 |   |

 

Estimated amortization expense of identified intangible assets andother for the remaining nine months of 2003 and for the next five years is asfollows: (in thousands):

 
| 2003 |   | $      | 33,551 |   |
|------|--------|--------|--------|--------|
| 2004 |   | 32,852 |   |
| 2005 |   | 28,542 |   |
| 2006 |   | 14,822 |   |
| 2007 |   | 3,420  |   |
| 2008 |   | 2,090  |   |

 

7

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**4.****              Restructuring Charge and Other**

 

In March 2001, the Company announced plans to more tightly focus the activities of itswholly owned subsidiary Advanstar.com, Inc. (Advanstar.com).  These plans had the effect of more closelyintegrating many of the sales, marketing, technology and operating functions ofAdvanstar.com with Communications and its core activities in publishing,tradeshows and marketing services.  Therestructuring activities were completed by the end of 2001, except for facilitylease costs, which continue through June 2010. The balance of the accrual at March 31, 2003 and December 31,2002  was $6.3 million and $6.3million, respectively, which principally represents remaining facility closurecosts.

 

**5.****              Acquisitions**

 

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

 

On October 3, 2002 the Company acquired *HT—the Magazine for Healthcare Travel Professionals*for approximately $11.1 million in cash andassumed liabilities.

 

From January 1, 2002 through December 31,2002, the Company completed two other acquisitions of publishing propertieswith a cumulative purchase price of $1.0 million

 

The acquisitions discussed above have been accounted for using thepurchase method of accounting and, accordingly, the assets acquired andliabilities assumed have been recorded at their fair values as of the dates ofthe acquisitions.  The excess of thepurchase price over the fair value of the assets acquired and liabilitiesassumed has been recorded as goodwill. Certain of the assets and liabilities acquired in connection with these2002 acquisitions were recorded based upon preliminary estimates as of thedates of acquisition.  The Company doesnot believe the final allocation of purchase price will be materially differentfrom preliminary allocations.  Anychanges to the preliminary estimates during the allocation period will bereflected as an adjustment to goodwill. Results of operations for these acquisitions have been included in theaccompanying consolidated financial statements since their respective dates ofacquisition.  The pro forma operatingresults related to the acquisitions are immaterial.

 

**6.****              Financial DerivativeInstruments**

 

The Company uses derivative instrumentsto manage exposure to interest rate and foreign currency risks.  The Company’s objectives for holdingderivatives are to minimize the risks using the most effective methods toeliminate or reduce the impact of these exposures.

 

**Interest Rate Risk**

Variable rate debt instruments are subject to interest rate risk.  The Company has entered into interest ratecollar agreements with remaining maturities of 11 months to manage its exposureto interest rate movements on a portion of its variable rate debtobligations.  The effective portion ofthe cumulative gain or loss on these derivative instruments is reported as acomponent of accumulated other comprehensive income in stockholder’s equity andis recognized in earnings as the underlying interest expense is incurred.  The ineffective portion of the interest ratecollar agreements is recognized in current earnings.

 

8

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**Foreign Currency Risk**

Certain forecasted transactions are exposed to foreign currencyrisk.  Foreign currencies hedged are theEuro, British Pound Sterling and the Brazilian Real.  Forward contracts are used to manage the exposure associated withforecasted international revenue transactions for up to nine months in thefuture and are designated as cash flow hedging instruments.  Changes in fair value of these instrumentsare reported as a component of accumulated other comprehensive income instockholder’s equity and are recognized in earnings as the underlying revenueis recognized.  Forward contracts notdesignated as hedging instruments under SFAS No. 133 are also used tomanage the impact of the variability in exchange rates.  Changes in the fair value of these foreignexchange contracts are recognized in current earnings.

 

At March 31, 2003, the Company had foreign exchange derivativecontracts to sell with a notional amount totaling $9.2 million and to buytotaling $3.3 million.  The estimatedfair value of the foreign exchange contracts based upon market quotes was a netliability of $0.1 million at March 31, 2003.

 

**Accumulated Other Comprehensive Income (Loss)**

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

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

 

9

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At March 31, 2003, the Company estimates that it will reclassifyout of accumulated other comprehensive income approximately $3.5 million ofdeferred losses into earnings within the next 12 months.

 

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

 

**Statement of Operations**

The following tables summarize the effects of SFAS No. 133 on theCompany’s statement of operations related to the ineffective portion of theCompany’s interest rate collar agreements and changes in the fair value offoreign exchange contracts not designated as hedging instruments for the threemonths ended March 31, 2003 and 2002 (in thousands):

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

 

**7.****              Debt**

 

**Credit Facility**

The credit facility (the Credit Facility) consists of (i)$415 million of term loans A and B payable in quarterly installmentsthrough April 11, 2007 and October 11, 2008, respectively and(ii) $80.0 million of revolving loan availability throughApril 11, 2007.  The CreditFacility contains restrictive covenants which require us to, among otherthings, maintain a maximum quarterly leverage ratio  and a minimum fixed charge ratio (as defined).  As a result of the economic slowdowncontinuing into 2003, we did not anticipate that we would meet the leverageratio requirement as of the first quarter of 2004.  Accordingly, the Company sought and obtained an amendment to theCredit Facility in April 2003 which provided for certain revisions to ourmaximum leverage ratio in 2003 and 2004. The amendment provides for a maximum leverage ratio of 6.50:1 for thesecond quarter of  2003, increasing to6.75:1 for the third quarter of 2003 through the second quarter of 2004 andthen declining on a quarterly basis to 6.25:1 in the fourth quarter of2004.  Thereafter, the maximum ratio is4.00:1.  The amendment also increasesthe applicable margin (as defined) on amounts borrowed by 50 basis points.  Although there can be no assurance, webelieve that we will be able to comply with the amended financial covenantscontained in the Credit Facility in 2003 and 2004.

 

10

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Borrowings under the Credit Facility are collateralized by substantiallyall of the Company’s assets.  Inaddition, as of March 31, 2003, the Company has interest rate protectionagreements for a notional amount of $150 million that effectivelyguarantee that the Company’s interest rate on $150 million of the Company’sCredit Facility will not exceed 10.17 percent, nor be less than9.00 percent.  The Company includesnet amounts paid or received under the interest rate protection agreements as acomponent of interest expense.  AtMarch 31, 2003, the Company had approximately $43.3 million ofborrowings available under the Credit Facility, subject to terms and conditionsspecified therein.

 

**Senior Subordinated Debt and Discount Notes**

 

The $160.0 million unsecured, 12 percent senior subordinatednotes due 2011 (the Notes) bear interest payable semiannually onFebruary 15 and August 15 of each year.  The Notes are fully and unconditionally guaranteed on a seniorsubordinated basis, jointly and severally, by Communications and its whollyowned domestic subsidiaries.  The financialcovenants under the Notes include ratio limitations on certain assetdispositions, payments, debt incurrence, dividends and other restrictedpayments.

 

The senior discount notes due October 2011 (the Discount Notes)with a principal amount at maturity of $171.8 million bear interest at15 percent, payable semiannually beginning October 2005, and have animplied yield to maturity of approximately 17.2 percent.  The notes are redeemable at Advanstar,Inc.’s option at specified premiums through 2007 and at par thereafter.  The notes may also be redeemed at a premiumupon a qualifying change of control of Advanstar, Inc.

 

The Discount Notes do not require cash interest payments until 2006 andcontain restrictive covenants that, among other things, limit Advanstar, Inc.’sability and that of its subsidiaries to incur debt, pay dividends and makeinvestments.  However, since Advanstar,Inc. is a holding company and its subsidiaries serve as its only source of cashflow, it’s ability to pay interest on these notes will be dependent upon thereceipt of dividends from its subsidiaries. The Credit Facility and the Notes impose substantial restrictions onAdvanstar, Inc.’s subsidiaries’ ability to pay dividends to Advanstar,Inc.  Additionally, the Discount Notesare not guaranteed by Advanstar, Inc.’s subsidiaries.

 

Accretion of the debt discount on the Discount Notes was approximately$4.1 million and $3.5 million during the three months ended March 31, 2003and 2002, respectively.  These amountsare included in interest expense in the respective accompanying condensedconsolidated statements of operations.

 

11

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Long-term debt consists of the following (in thousands):

 
|                                                                                                                                                                             |   | **March 31,  2003** |    | **December 31,  2002** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|---------|------------------------|--------|
|                                                                                                                                                                             |   |                |    |                   |   |
| Term loan A, interest at LIBOR plus 3.25%; 4.54% at  March 31, 2003, due quarterly through April 11, 2007                                                         |   | $                   | 71,250  |                   | $      | 75,000 |   |
| Term loan B, interest at LIBOR plus 4.00%; 5.43% at  March 31, 2003, due quarterly through October 11, 2008                                                       |   | 280,800             |    | 280,800                |   |
| Revolving credit loan, interest at LIBOR plus 3.25%; 4.59% at  March 31, 2003, due April 11, 2007                                                                 |   | 34,100              |    | 37,100                 |   |
| Senior subordinated notes, interest at 12.00%, due 2011                                                                                                                          |   | 160,000             |    | 160,000                |   |
| Senior discount notes, interest at 15.00%, due October 11, 2011,  net of unamortized discount of $67,546 and $71,688 at  March 31, 2003 and December 31, 2002, respectively |   | 104,246             |    | 100,104                |   |
| Acquisition note payable, interest at 5.50%, due monthly through 2004                                                                                                            |   | 3,500               |    | 4,000                  |   |
| Acquisition note payable, interest at 6.00%, due April 1, 2004                                                                                                                   |   | 800                 |    | 800                    |   |
|                                                                                                                                                                             |   |                |    |                   |   |
|                                                                                                                                                                             |   | 654,696             |    | 657,804                |   |
| Less current maturities                                                                                                                                                          |   | (17,936             | )       | (17,400                | )      |
|                                                                                                                                                                             |   |                |    |                   |   |
|                                                                                                                                                                             |   | $                   | 636,760 |                   | $      | 640,404 |   |

 

**8.****              Comprehensive Income**

 

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

 
|                                                             |   | **Three Months Ended  March 31,** |   |
|------------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                             |   | **2003**                          |   | **2002** |   |
|                                                             |   |                              |   |   |   |
| Net income  (loss)                                               |   | $                                 | 10,844 |   | $ | (59,678 | ) |
| Change in  cumulative translation Adjustment                     |   | 1,011                             |   | (574 | ) |
| Change in  unrealized losses on derivative financial instruments |   | 843                               |   | 2,311 |   |
|                                                             |   |                              |   |   |   |
| Comprehensive  income (loss)                                     |   | $                                 | 12,698 |   | $ | (57,941 | ) |

 

**9.****              Segments**

 

The Company follows the provisions of SFAS No. 131, “Disclosuresabout Segments of an Enterprise and Related Information,” and has threereportable segments: trade shows and conferences, trade publications andmarketing services.

 

The Company evaluates the performance of, and allocates resources to,its segments based on contribution margin – defined as net revenue lesscost of production and selling, editorial, and

 

12

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circulation costs.  Theaccounting policies of the reportable segments are the same as those describedin the summary of significant accounting policies.  There are no intersegment sales or transfers.  Segment assets are primarily intangibleassets, prepaid expenses and accounts receivable.  Revenues, contribution margins and segment assets of theCompany’s reportable segments are as follows (in thousands):

 
|                              |   | **Trade  Shows  and  Conferences** |   | **Trade  Publications** |   | **Marketing  Services** |   | **Corporate  and Other** |   | **Total** |   |
|-----------------------------------|--------|------------------------------------|--------|-------------------------|--------|-------------------------|--------|--------------------------|--------|-----------|--------|
| Three months ended March 31, 2003 |   |                               |   |                    |   |                    |   |                     |   |      |   |
| Revenues                          |   | $                                  | 74,086 |                    | $      | 31,515                  |   | $                        | 3,491  |      | $      | 892 |   | $ | 109,984 |   |
| Contribution margin (loss)        |   | 41,414                             |   | 8,970                   |   | 1,170                   |   | (196                     | )      | 51,358    |   |
| Segment assets                    |   | 580,304                            |   | 180,263                 |   | 32,361                  |   | 59,134                   |   | 852,062   |   |
|                              |   |                               |   |                    |   |                    |   |                     |   |      |   |
| Three months ended March 31, 2002 |   |                               |   |                    |   |                    |   |                     |   |      |   |
| Revenues                          |   | 76,465                             |   | 28,674                  |   | 3,576                   |   | 1,195                    |   | 109,910   |   |
| Contribution margin (loss)        |   | 42,745                             |   | 5,741                   |   | 1,589                   |   | (59                      | )      | 50,016    |   |
| Segment assets                    |   | 617,542                            |   | 185,730                 |   | 31,638                  |   | 78,540                   |   | 913,450   |   |
|                                   |        |                                    |        |                         |        |                         |        |                          |        |           |        |  |  |  |  |  |

 

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

 
|                                                                                                      |   | **Three Months Ended  March 31,** |   |
|-----------------------------------------------------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                                                                      |   | **2003**                          |   | **2002** |   |
| Total segment contribution margin                                                                         |   | $                                 | 51,358 |   | $ | 50,016 |   |
| General and administrative expense                                                                   |   | (10,385                           | )      | (10,532 | ) |
| Depreciation and amortization                                                                             |   | (13,783                           | )      | (16,907 | ) |
| Other expense (primarily interest)                                                                        |   | (15,914                           | )      | (15,180 | ) |
|                                                                                                      |   |                              |   |   |   |
| Consolidated income before taxes, minority  interest and cumulative effect of effect of accounting change |   | $                                 | 11,276 |   | $ | 7,397 |   |

 

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

 

**Financial Advisory Fees**

 

The Company has agreed to pay CSFB an annual advisory fee of$0.5 million until the earlier of (i) an initial public offering ofHoldings, (ii) the date when the DLJ Merchant Banking funds own less than16 2/3 percent of the shares of Holdings’ common stock held by them on theclosing date of the DLJ Acquisition or (iii) October 11, 2005.

 

13

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**Item 2.  *Management’sDiscussion and Analysis of Financial Condition and Results of Operations***

 

This quarterly report on Form 10-Q contains forward-looking statementsmade pursuant to the safe harbor provisions of the Private SecuritiesLitigation Reform Act of 1995. Investors are cautioned not to place undue reliance on theseforward-looking statements, including statements about plans and objectives ofmanagement and market growth and opportunity. These forward-looking statements are neither promises or guarantees andinvolve risks and uncertainties that could cause actual results to differmaterially from those indicated by such forward-looking statements.  You should not expect that theseforward-looking statements will be updated or supplemented as a result ofchanging circumstances or otherwise, and we disavow and disclaim any obligationto do so.  Important cautionarystatements and risk factors that would affect actual results are discussed inthe Company’s periodic reports and registration statements filed with the Securitiesand Exchange Commission, including those under the caption entitled “CertainFactors Which May Affect Future Results” in the Company’s annual report on Form10-K filed with the Securities and Exchange Commission on March 28, 2003.

 

**Overview**

 

We are a worldwide provider of integrated,B-to-B marketing communications products and services for targeted industrysectors, principally through trade shows and conferences and through controlledcirculation trade, business and professional magazines. We also provide a broadrange of other marketing services products, including classified advertising,direct mail services, reprints, database marketing, guides, and referencebooks.

 

We report our business in three segments:

 

•                  trade shows and conferences, which consistsprimarily of the management of trade 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

 

•                  marketing services, which consists primarily ofsales of a variety of direct mail and database products, magazine editorialreprints, and classified advertising.

 

In addition to our trade shows, tradepublications and marketing services, we deliver our integrated B-to-B marketingcommunications products and services to our customers using the internet, whichwe conduct through our separate subsidiary, Advanstar.com. For discussionpurposes, we have included our internet activity in our marketing servicessegment.

 

Trade shows and conferences accounted forapproximately 67% and 70% of total revenue in the three months ended March 31,2003 and 2002, respectively. Trade publications accounted for approximately 29%and 26% of total revenue in the three months ended March 31, 2003 and 2002, respectively,while marketing services accounted for approximately 4% and 4% of total revenuein the three months ended March 31, 2003 and 2002, respectively. Our revenuereaches its highest levels during the first and third quarters of the year dueto the timing of the MAGIC trade shows and our other large trade shows andconferences. Because trade shows and conferences revenue is recognized when aparticular event is held, we may experience fluctuations in quarterly revenuebased on the movement of annual trade show dates from one quarter to another.

 

14

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## **Recent Developments**

 

Our businessand results of operations in the three months ended March 31, 2003 continue tobe significantly impacted by the recession in the U.S. economy, particularly inour Information Technology & Communications trade shows and publicationsand our Travel & Hospitality publications.

 

We continue tosee early indications of stabilization in advertising in many of our markets,except for continuing downward pressure in our technology and travelmarkets.  Advertising pages grewapproximately 5.6% and revenue per page increased approximately 2.8% across ourportfolio in the first quarter of 2003 compared with the first quarter of2002.  Advertising pages increased 15.9%in the first quarter of 2003 across all sectors other than technology andtravel, due in part to market share gains resulting in a 17.4% revenue increasein these other sectors and in part to the acquisition in the fourth quarter of2002 of *HT – theMagazine for Healthcare Travel Professionals*. While we see thispositive trend continuing in 2003, the economic outlook in the publishingsector continues to be challenging, and forward visibility on our advertisingrevenue and pages is limited, due to the concerns of our customers related tothe overall business environment.  Ourtravel publications remain highly sensitive to cutbacks in destination andvacation travel advertising in response to concern over terrorism and possiblefurther unrest in the Middle East and in other regions of the world and theimpact on travel due to the recent SARS outbreak.

 

Our trade showsegment continues to be negatively impacted by the economic recession.  Our trade shows directed to the technology sectorcontinue to suffer from the overall curtailment of spending in technologymarkets, which impacts marketing spending by our customers.  We expect any improvement in the performanceof our trade show segment to lag behind any general economic recovery, just asit lagged the downturn in the economy going into recession beginning in late2000. Our trade shows remain sensitive to cutbacks in travel in response toconcern over terrorism and possible further conflict in the Middle East and inother regions of the world and the impact on travel due to the recent SARSoutbreak.

 

Thepersistence of the general economic slowdown in the U.S. will likely result incontinued weakness in overall marketing and advertising expenditures by ourcustomers into 2003.  As a result, weexpect our revenues, operating income and EBITDA to reflect this overallweakness.  However, we believe that ourbalanced portfolio between trade shows and publications and our diversificationof these products across many industry sectors may mitigate the overall impactfrom continued weakness in general economic conditions and reduce the potentialimpact from the volatility of any one sector.

 

Our CreditFacility contains restrictive covenants which require us to, among otherthings, maintain a maximum quarterly leverage ratio and a minimum fixed chargeratio (as defined).  As a result of theeconomic slowdown continuing into 2003, we did not anticipate that we wouldmeet the leverage ratio requirement as of the first quarter of 2004.  Accordingly, we sought and obtained anamendment to the Credit Facility in April 2003 which provided for certainrevisions to our maximum leverage ratio in 2003 and 2004.  The amendment provides for a maximumleverage ratio of 6.50:1 for the second quarter of  2003, increasing to 6.75:1 for the third quarter of 2003 throughthe second quarter of 2004 and then declining on a quarterly basis to 6.25:1 inthe fourth quarter of 2004.  Thereafter,the maximum ratio is 4.00:1.  Theamendment also increases the applicable margin (as defined) on amounts borrowedby 50 basis points.  Although there canbe no assurance, we believe that we will be able to comply with the amendedfinancial covenants contained in the Credit Facility in 2003 and 2004.

 

15

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## **Presentation of Financial Information**

 

*Acquisitions and Joint Ventures*

 

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

 

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

 

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

 

 *Goodwill Impairment*

 

In connection with the adoption of FAS 142, we recorded a goodwillimpairment charge of $66.8 million, net of minority interest effect of$4.1 million, in the first quarter of 2002, attributable primarily to animpairment of the carrying value of goodwill. The charge is reported as acumulative effect of a change in accounting principle.  There is no impairment of goodwill recordedin the first quarter of 2003.

 

***Sourcesof Revenue***

 

*Trade Shows and Conferences*

 

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

 

*Trade Publications*

 

The trade publications segment derives revenue principally from thesale of advertising in its business-to-business magazines. Additionally,certain publications derive revenue from paid subscriptions and custompublishing. Paid subscriptions comprise less than 5% of total publishingrevenue. Most publications are produced monthly with advertising sold both onan annual schedule and single insertion basis. The sale of advertising isgenerally impacted by new product releases, circulation quality, readership andgeneral market conditions. Advertising revenue is recognized on the publicationissue date, and subscription revenue, if any, is recognized over thesubscription period, typically one year.

 

16

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

 

*Marketing Services*

 

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

 

***Componentsof Expenses***

 

*Trade Shows and Conferences*

 

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

 

*Trade Publications*

 

Costs incurred by the trade publications segment include printing,paper and postage; selling and promotion; editorial and prepress; andcirculation acquisition and fulfillment. Additionally, publisher and salesstaff costs, and production, editorial and circulation staff costs, withrelated payroll taxes and benefits, are charged to the publications. Weoutsource the actual printing of our publications. Printing, paper and postagecosts are charged to operations at the time of publication issuance.  All other direct costs are charged tooperations in the month incurred.

 

*Marketing Services*

 

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

 

17

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**SignificantAccounting Policies and Estimates**

 

The discussionand analysis of our financial condition and results of operations are basedupon our consolidated financial statements, which have been prepared inaccordance with accounting principles generally accepted in the United States.The preparation of these financial statements requires management to makeestimates and judgments that affect the reported amounts of assets, liabilities,revenues and expenses.  On an on-goingbasis, we evaluate these estimates, including those related to bad debts,intangible assets and income taxes. We base these estimates on historicalexperience and on various other assumptions that are believed to be reasonableunder the circumstances, the results of which form the basis for makingjudgments about the carrying values of assets and liabilities that are notreadily apparent from other sources. Actual results may differ from theseestimates under different assumptions or conditions.

 

We apply thefollowing critical accounting policies in the preparation of our consolidatedfinancial statements:

 

*Revenue Recognition*.We recognize revenue as discussed in the “—Sources of Revenue” sectionabove.  The balance of deferred revenueat March 31, 2003 was $21.0 million and $5.3 million for trade shows and tradepublications, respectively.  On a relative basis, our deferred revenue reachesits highest levels during the second and fourth quarters of the year largely dueto the timing of the *MAGIC* tradeshows and our other large trade shows and conferences.

 

*Allowance for Doubtful Accounts*.We maintain an allowance for doubtful accounts for estimated losses resultingfrom the inability of our customers to make required payments. The balance ofthe allowance for doubtful accounts at March 31, 2003 and December 31, 2002 was$1.2 million and $1.0 million, respectively. If the financial condition of our customers were to deteriorate, resultingin an impairment of their ability to make payments, additional allowances maybe required.

 

The allowance for doubtful accounts is anestimate based on specifically identified accounts as well as general reserves.We evaluate specific accounts where we have information that the customer mayhave an inability to meet its financial obligations. In these cases, managementuses its judgment, based on the best available facts and circumstances, andrecords a specific reserve for that customer against amounts due to reduce thereceivable to the amount that is expected to be collected. These specificreserves are reevaluated and adjusted as additional information is receivedthat impacts the amount reserved. We also establish a general reserve for allcustomers based on percentages applied to the aging balance. This percentage isbased on historical collection and write-off experience and varies bygeographic region. If circumstances change, our estimates of the recoverabilityof amounts due us could be reduced or increased by a material amount. Such achange in estimated recoverability would be accounted for in the period inwhich the facts that give rise to the change become known.

 

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*Deferred Taxes*. We record a valuationallowance to reduce our deferred tax assets to the amount that is more likelythan not to be realized.  At March 31,2003 we have recorded a valuation allowance to offset the deferred tax benefitassociated with net operating loss carryforwards in foreign tax jurisdictionsand to offset the net deferred tax assets of the Company because we believe realization of these benefits is not morelikely than not. While we have considered future taxable income and ongoingprudent and feasible tax planning strategies in assessing the need for thevaluation allowance, in the event we were to subsequently determine that wewould be able to realize our deferred tax assets in the future in excess of ournet recorded amount, a reduction in the net valuation allowance would result inan income tax benefit and would increase income in the period suchdetermination was made.

 

*Amortization of Intangible Assets*.  Trade exhibitor and advertiser lists areamortized on a double-declining balance method over 6 years and 5 years,respectively.  Subscriber lists andother intangible assets are being amortized on a straight-line method over 3 to10 years.  We amortize intangible assetson a basis which corresponds to our projections of future cash flows directlyrelated to these intangible assets.  Theestimates that are included in our projections of future cash flow are basedupon the best available information at the time we determine useful life andamortization methods.  A change incircumstances could result in a determination that the related assets areimpaired and impairment charges to reduce the carrying value of intangibleassets may be necessary.

 

*Impairment of Long-Lived Assets*. We evaluatethe carrying value of long-lived assets, including identifiable intangibles,for impairment when events or changes in circumstances indicate that thecarrying amount of an asset may not be recoverable.  If impairment indicators are present and theestimated future undiscounted cash flows are less than the carrying value ofthe assets, the carrying value is reduced to the estimated fair value asmeasured by the associated discounted cash flows.

 

Under SFAS No. 142, we evaluate goodwill forimpairment using a two-step test based upon a fair value approach.  The first step is used to identify apotential impairment through an estimate of the fair value of certain of ourreporting units (as defined by SFAS No. 142), while the second step calculatesthe amount of impairment, if any. Additionally, goodwill will be tested for impairment between annualtests if an event occurs or circumstances change that would more likely thannot reduce the fair value of an entity below its carrying value.  We determine the fair value of our reportingunits by application of a discounted cash flow analysis.  We make estimates that are included in ourdiscounted cash flow analyses based upon the best available information at thetime that the determinations of fair value are made.  If circumstanceschange, our estimates of fair value will also change and could result in adetermination that additional impairment charges to reduce the carrying valueof goodwill are necessary.

 

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**Selected FinancialData**

 

The following table sets forth selected statements of operations andother financial data.

 
|                                                  |   | **Three Months Ended  March 31,** |       |
|-------------------------------------------------------|--------|-----------------------------------|------------|
|                                                  |   | **2003**                          |       | **2002** |   |
|                                                  |   | **(in thousands)**                | ** ** |
| **Income Statement Data:**                            |   |                              |       |   |   |
| Net Revenue                                           |   |                              |       |   |   |
| Trade Shows and conferences                           |   | $                                 | 74,086     |   | $ | 76,465 |   |
| Publications                                          |   | 31,515                            |       | 28,674 |   |
| Marketing services and other                          |   | 4,383                             |       | 4,771 |   |
|                                                  |   |                              |       |   |   |
| Total net revenues                                    |   | 109,984                           |       | 109,910 |   |
|                                                  |   |                              |       |   |   |
| Cost of production and selling                        |   |                              |       |   |   |
| Trade Shows and conferences                           |   | 32,672                            |       | 33,720 |   |
| Publications                                          |   | 22,545                            |       | 22,933 |   |
| Marketing services and other                          |   | 3,409                             |       | 3,241 |   |
|                                                  |   |                              |       |   |   |
| Total cost of production and selling                  |   | 58,626                            |       | 59,894 |   |
|                                                  |   |                              |       |   |   |
| General and administrative expenses                   |   | 10,385                            |       | 10,532 |   |
| Depreciation and amortization                         |   | 13,783                            |       | 16,907 |   |
|                                                  |   |                              |       |   |   |
| Operating income                                      |   | 27,190                            |       | 22,577 |   |
| Other income (expense):                               |   |                              |       |   |   |
| Interest expense                                      |   | (16,289                           | )          | (16,222 | ) |
| Other income (expense), net                           |   | 375                               |       | 1,042 |   |
|                                                  |   |                              |       |   |   |
| Income before income taxes and minority  interests    |   | 11,276                            |       | 7,397 |   |
| Provision for income taxes                            |   | 304                               |       | 168 |   |
| Minority interests                                    |   | (128                              | )          | (90 | ) |
|                                                  |   |                              |       |   |   |
| Income before cumulative effect of accounting  change |   | $                                 | 10,844     |   | $ | 7,139 |   |
|                                                  |   |                              |       |   |   |
| **Cash flows provided by (used in):**                 |   |                              |       |   |   |
| Operating activities                                  |   | $                                 | 2,298      |   | $ | (10,216 | ) |
| Investing activities                                  |   | (2,044                            | )          | (13,130 | ) |
| Financing activities                                  |   | (7,277                            | )          | (5,438 | ) |
|                                                  |   |                              |       |   |   |
| **Other Data:**                                       |   |                              |       |   |   |
| EBITDA                                                |   | $                                 | 40,858     |   | $ | 39,383 |   |
| Capital expenditures                                  |   | (2,043                            | )          | (1,394 | ) |

 

We define “EBITDA” as operating income plus amortization anddepreciation less amounts attributable to minority interest.  EBITDA is a key liquidity measure but shouldnot be construed as an alternative to cash flows from operating activities oroperating income (as determined in accordance with generally acceptedaccounting principles (GAAP)) or as a measure of our profitability orperformance. We provide information about EBITDA because we believe it is auseful way for us and our investors to measure our ability to satisfy cashneeds, including interest payments on our debt, taxes and capital

 

20

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expenditures.  GAAP requires us to provide informationabout cash flow generated from operations. However, GAAP cash flow from operations is reduced by the amount ofinterest and tax payments and also takes into account changes in net currentliabilities (e.g., changes in working capital) that do not impact netincome.  Because changes in workingcapital can reverse in subsequent periods, and because we want to provideinformation about cash available to satisfy interest and income tax expense (byshowing our cash flows before deducting interest and income tax expense), weare also presenting EBITDA information. Our definition of EBITDA does not take into account our working capitalrequirements, debt service requirements or other commitments.  Accordingly, EBITDA is not necessarilyindicative of amounts that may be available to us for discretionarypurposes.  Our method of computation maynot be comparable to other similarly titled measures of other companies.  Our management uses EBITDA to determine ourcompliance with key financial covenants under our existing Credit Facility,which impact the amount of indebtedness we are permitted to incur.  The definition of EBITDA in our existingCredit Facility is based, in part, on our EBITDA and includes other adjustmentsdescribed in our credit agreement.

 

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

 
|                                                                      |   | **Three Months Ended  March 31,** |   |
|---------------------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                                      |   | **2003**                          |   | **2002** |   |
|                                                                      |   | **(in thousands)**                |   |
| EBITDA                                                                    |   | $                                 | 40,858 |   | $ | 39,383 |   |
| Depreciation and amortization                                             |   | (13,783                           | )      | (16,907 | ) |
| Minority interests (excluding depreciation  and amortization)             |   | 115                               |   | 101 |   |
|                                                                      |   |                              |   |   |   |
| Operating income                                                          |   | 27,190                            |   | 22,577 |   |
|                                                                      |   |                              |   |   |   |
| Interest expense                                                          |   | (16,289                           | )      | (16,222 | ) |
| Other income (expense), net                                               |   | 375                               |   | 1,042 |   |
| Benefit (provision) for income taxes                                      |   | (304                              | )      | (168 | ) |
| Minority interests                                                        |   | (128                              | )      | (90 | ) |
| Cumulative effect of accounting change, net  of tax and monority interest |   | —                            |   | (66,817 | ) |
|                                                                      |   |                              |   |   |   |
| Net income (loss)                                                         |   | 10,844                            |   | (59,678 | ) |
|                                                                      |   |                              |   |   |   |
| Transition goodwill impairment                                            |   | —                            |   | 66,817 |   |
| Depreciation and amortization                                             |   | 13,783                            |   | 16,907 |   |
| Other non cash items                                                      |   | 5,000                             |   | 2,301 |   |
| Changes in operating assets and liabilities                               |   | (27,329                           | )      | (36,563 | ) |
|                                                                      |   |                              |   |   |   |
| Net cash provided by (used in) operating  activities                      |   | $                                 | 2,298  |   | $ | (10,216 | ) |

 

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**Results of Operations**

 

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

##  

# ***Net Revenue***

 

Total net revenue increased $0.1 million, or 0.1%, to $110.0 millionfor the quarter ended March 31, 2003 from $109.9 million for the comparableperiod in 2002.

 

Revenue from trade shows and conferences declined $2.4 million, or3.1%, to $74.1 million in the first quarter of 2003 from $76.5 million in thefirst quarter of 2002.  This decreasewas primarily attributable to a shift in the timing of four events, declines inour events that serve the technology market, and one less event held in ourgroup serving the beauty market.  In thefirst quarter of 2002 we held two events which were moved to the second quarterof 2003 and one event which has been moved to the fourth quarter of 2003.  We also held one event in the first quarterof 2003 which was last held in 2001. The decline was partially offset by several trade show launches duringthe quarter.  Revenue for our springMAGIC events increased approximately $1.5 million, or 5.1%, compared to thespring 2002 events, primarily due to an increase in the price per square footcharged to exhibitors.  Attendance at ourspring MAGIC events increased 2.9% while square feet declined 3.8% over thespring 2002 events.  Our trade showsserving the technology market continue to suffer from the overall curtailmentof spending in technology, which impacts marketing spending by ourcustomers.  Revenue from our eventsserving the technology market declined $3.2 million, or 34.8%, from the firstquarter 2002 events.  Total tradeshowsquare feet increased approximately 4.3% across all markets other thantechnology.

 

Revenue from trade publications and related marketing servicesincreased $2.5 million, or 7.3%, to $35.9 million for the first quarter of 2003from $33.4 million for the first quarter last year.  Advertising pages increased approximately 5.6% and revenue perpage increased approximately 2.8% across much of our portfolio, most heavilyconcentrated in publications serving the pharmaceutical, healthcare andautomotive markets.  Our acquisitionlate in 2002 of *Healthcare Traveler*also contributed to this increase.  Ourmagazines serving the technology and travel markets continue to suffer from theoverall economic environment as advertising pages continued to decline in thesemarkets.  Advertising pages increased15.9% across all markets other than technology and travel, primarily due tomarket share gains, resulting in a 17.4% revenue increase in these othermarkets.

 

# ***Cost of production and selling***

 

Cost of production and selling expenses declined $1.3 million, or 2.1%,to $58.6 million for the first quarter of 2003 from $59.9 million in thecorresponding period of 2002.

 

Expenses of trade shows and conferences declined $1.0 million, or 3.1%,to $32.7 million for the first quarter of 2003 from $33.7 million for the firstquarter of 2002.  This decrease wasprimarily due to a shift in the timing of four events discussed above and waspartially offset by the launch of several trade shows during the quarter.

 

Expenses of trade publications and marketing services declined $0.2million, to $26.0 million for the first quarter of 2003 from $26.2 million forthe first quarter of 2002.  Operatingcosts increased as a result of our acquisition of *Healthcare Traveler,*in October 2002, and increases in salesstaff resources dedicated to developing our small space advertiser pageopportunities.  These additional costswere offset by savings attributable to our ongoing cost reduction programs.

 

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# ***General and administrative expenses***

 

General and administrative expenses declined $0.1 million, to $10.4million for the first quarter of 2003 from $10.5 million for the first quarterof 2002.  The full period effect of ourcost reduction programs undertaken in 2001 and 2002, including reductions intravel and other operating costs, and reorganization of certain supportfunctions and processes is reflected in both the first quarter of 2002 and 2003operating results.

 

# ***Depreciation and amortization***

 

Depreciation and amortization expense declined approximately $3.1million to $13.8 million for the first quarter of 2003 from $16.9 million in2002 primarily due to the effect of the declining balance method of acceleratedamortization on our exhibitor and advertiser lists, partially offset byadditional amortization related to acquisitions and fixed asset additions.

 

# ***Interest expense***

 

Interest expense increased $0.1 million, to $16.3 million for the firstquarter of 2003 from $16.2 million in the comparable period of 2002 due toincreased accretion of our Discount Notes, partially offset by a decrease inour weighted-average debt outstanding of approximately $17.6 million and adecrease in our weighted average interest rate of approximately 30 basispoints.

 

Effective April 15, 2003 we amended our Credit Facility in order togain covenant relief in 2004.  Theamendment provides for a 50 basis point increase in the applicable margin (asdefined), effectively increasing  theinterest rate on our Credit Facility. Approximately $164.3 million of our total debt is at a fixed ratethrough coupon rates on our senior subordinated notes with an additional $150.0million covered by our interest rate protection agreements, which expire in2004.  A 100 basis point increase ininterest rates on variable rate debt would result in an increase in annualinterest expense of $3.9 million.

 

*Other income(expense), net*

 

Other income decreased $0.6 million to $0.4 million for the firstquarter of 2003 from $1.0 million in 2002. This decrease was primarily a result of a decrease in non-cash gainsrelated to our foreign currency and interest rate hedging activities.

 

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

 

Our tax provision in the first quarter of 2003 relates to income taxesin certain foreign jurisdictions.  We recorded no income tax benefitrelated to the net operating loss we expect to generate during 2003 because wewill establish a valuation allowance to offset any related tax benefits, due touncertainty about realization of these benefits.  Our tax benefit in thefirst quarter of 2002 was recorded at a rate less than the applicable statutoryrates primarily because we recorded a valuation allowance to offset the portionof the benefits associated with net operating losses we generated in 2002, forwhich realization was not likely.

 

# ***Cumulative effect of accountingchange***

 

In connection with the adoption of FAS 142, “Goodwill and OtherIntangible Assets”, we recorded a goodwill impairment charge of$66.8 million, net of minority interest effect of $4.1 million,  in the first

 

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quarter of 2002, attributableprimarily to an impairment of the carrying value of goodwill related to theAcquisition.

 

**Liquidity and CapitalResources**

 

The following discussion presents our liquidity and capital resourceson a consolidated basis, including our subsidiaries.

 

Our cash flow provided by operatingactivities and EBITDA for the first quarter of 2003 was approximately $2.3million and $40.9 million, respectively. EBITDA increased approximately $1.5 million from $39.4 million for thefirst quarter of 2002, due primarily to the increase in operating income asdiscussed above.

 

We are a holding company and have no direct material operations. Ourprincipal assets are our ownership of Advanstar Communications Inc., andAdvanstar.com, and our only material liabilities are the senior discount notesand our guarantee of the Advanstar Communications Inc. Credit Facility. Ourprincipal liquidity needs are for debt service on the senior discount notes andinvestments in Advanstar.com, which currently does not generate positive cashflow.

 

Our principal source of cash is dividends from Advanstar CommunicationsInc. The Credit Facility and senior subordinated notes described below areobligations of Advanstar Communications Inc. and impose limitations on itsability to pay dividends to us. We believe that Advanstar Communications’ debtinstruments will permit it to supply us with sufficient cash to meet the cashneeds referred to above for the next several years. However, if that is not thecase, we would not be able to satisfy those needs, because we have no othersource of cash other than dividends from Advanstar Communications. We wouldthen be required to secure alternate financing, which may not be available onacceptable terms, or at all.

 

Advanstar Communications principal cash needs are for debt service,capital expenditures and strategic acquisitions, as well as to provide us withcash to finance our cash needs. Its principal sources of liquidity will be cashflow from operations and borrowings under its Credit Facility.

 

*Debt service. *As of March 31, 2003, we had total indebtednessof $654.7 million and approximately $43.3 million of borrowings available underour Credit Facility, subject to customary conditions. During the quarter endedMarch 31, 2003 we made net principal payments on our term loan A and revolvingcredit facility of $4.3 million and $3.0 million, respectively.  We also made interest payments of $16.2million.

 

*Credit Facility.*The term loan facility under the Credit Facilityconsists of a $100.0 million amortizing term loan A maturing April 11, 2006 and a $315.0 millionamortizing term loan B maturing October 11, 2008. The Credit Facility alsoincludes an $80.0 million revolving credit facility. The revolving creditfacility will terminate in April, 2007. The Credit Facility may be increased byup to $50.0 million at our request, with the formal prior consent of thelenders or other financial institutions providing the increase. However, therecan be no assurance that this consent would be obtained if requested.  The balances outstanding on our term loans Aand B and our revolving credit facility at March 31, 2003 were $71.3 million,$280.8 million and $34.1 million, respectively.

 

Borrowings under the Credit Facility generally bear interest based on amargin over, at our option, the base rate or the reserve-adjustedLondon-interbank offered rate (LIBOR). The applicable margin for revolvingcredit loans and term loan A will vary based upon our ratio of consolidateddebt to EBITDA, as defined in the Credit Facility and, after giving effect tothe amendment discussed below, is currently 3.75% over LIBOR and 2.50% over thebase rate.  The applicable margin forterm loan B varies based

 

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upon ourcredit ratings and is currently 4.50% over LIBOR and 3.25% over the base rate.Our obligations under the Credit Facility are guaranteed by Advanstar HoldingsCorp., our ultimate parent company, and all our existing and future domesticsubsidiaries and are collateralized by substantially all of the assets of ourcompany and the subsidiary guarantors, including a pledge of the capital stockof all our existing and future domestic subsidiaries, a pledge of no more than65% of the voting stock of any foreign subsidiary directly owned by our companyor any domestic subsidiary, a pledge of all intercompany indebtedness in favorof Advanstar, Inc., our company and our domestic subsidiaries, a pledge of ourcompany’s and Advanstar IH, Inc.’s capital stock by our parent company, and apledge of our parent company’s capital stock by Advanstar Holdings Corp.

 

Our Credit Facility contains restrictive covenants which require us to,among other things, maintain a maximum quarterly leverage ratio and a minimumfixed charge ratio (as defined).  As ofMarch 31, 2003, we were in compliance with these covenants.

 

As a result of the economic slowdown continuing into 2003, we did notanticipate that we would meet the leverage ratio requirement as of the firstquarter of 2004.  Accordingly, we soughtand obtained an amendment to the Credit Facility in April 2003 which providedfor certain revisions to our maximum leverage ratio in 2003 and 2004.  The amendment provides for a maximumleverage ratio of 6.50:1 for the second quarter of  2003, increasing to 6.75:1 for the third quarter of 2003 throughthe second quarter of 2004 and then declining on a quarterly basis to 6.25:1 inthe fourth quarter of 2004.  Thereafter,the maximum ratio is 4.00:1.  Theamendment also increases the applicable margin (as defined) on amounts borrowedby 50 basis points.  Additionally, inthe second quarter of 2003 we paid an amendment fee of 75 basis points, paid toconsenting lenders on their proportionate share of the total facility, plusother customary fees and expenses, totaling approximately $3.9 million.  Although there can be no assurance, webelieve, based on our anticipated performance and expected economic conditions,that we will be able to comply with the amended financial covenants containedin the Credit Facility in 2003 and 2004.

 

*Senior subordinated notes.*  AdvanstarCommunications’ 12.00% senior subordinated notes mature in 2011 and areguaranteed by each of Advanstar Communications’ existing and future domesticrestricted subsidiaries. Interest on the notes is payable semi-annually incash. The notes contain covenants and events of default that, among otherthings, limit Advanstar Communications and its subsidiaries’ ability to incurdebt, pay dividends and make investments.

 

*Senior discountnotes.*  We issued senior discount notes dueOctober 2011 with a principal amount at maturity of $103.2 million.These notes do not require cash interest payments until 2006 and containrestrictive covenants that, among other things, limit our ability and that ofour subsidiaries to incur debt, pay dividends and make investments. However, weare a holding company and our ability to pay interest on these notes will bedependent upon the receipt of dividends from our subsidiaries. The CreditFacility and the senior subordinated notes impose substantial restrictions onour subsidiaries’ ability to pay dividends.

 

***Sources and Uses of Funds***

 

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

 

On a relative basis, our revenue reaches its highest levels during thefirst and third quarters of the year largely due to the timing of the *MAGIC* trade shows and our other largetrade shows and conferences.  This

 

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seasonality, when combined withthe shift in the timing of when events take place from year to year, may have asignificant effect on our quarterly deferred revenue and working capitalbalances.

 

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

 

Historically, our financing requirements havebeen funded primarily through cash generated by operating activities and borrowingsunder our revolving credit facility. From time to time, we have also raised additional funds through sales ofcommon stock, high yield offerings and term borrowings under our CreditFacility for purposes of completing strategic acquisitions.

 

*Cash flows from operating activities.*Net cash provided by operations was $2.3 millionfor the first quarter of 2003, derived primarily from our net income of $10.8million adjusted for amortization and depreciation of $13.8 million, othernon-cash items totaling approximately $5.0 million, partially offset by ause of cash caused by movements in our working capital of $27.3 million.

 

Net cash provided by operations increased$12.5 million to $2.3 million for the first quarter of 2003. Operating incomeincreased $4.6 million from the first quarter of 2002 to the first quarter of2003.  This increase was offset bycertain non-cash charges included in operating income, primarilydepreciation and amortization, ofapproximately $3.1 million.  Cashgenerated from our working capital increased $11.0 million during the quarterfrom the first quarter of 2002 due largely to the timing of payments onaccounts payable and cash collections related to future events.

 

*Cash flows used in investing activities.*Net cash used in investing activities declined$11.1 million to $2.0 million for the first quarter of 2003, from $13.1 millionfor the first quarter of 2002.  Thisdecline was principally due to significantly decreased acquisition activity,partially offset by increased capital expenditures.

 

Capital expenditures increased $0.7 millionduring the period to $2.0 million compared to $1.3 million in 2002.  We anticipate that we will spendapproximately $6.1 million on capital expenditures in 2003, primarily forexpenditures related to our desktop computers and management informationsystems. We believe that this amount of capital expenditures will be adequateto grow our business according to our business strategy and to maintain the keytrade shows, publications and business of our continuing operations.

 

Cash used for acquisitions for the firstquarter of 2003 decreased $11.7 million relative to the same period of 2002because we had no acquisitions in the first quarter of 2003.  Our business strategy includes the consummationof strategic acquisitions. In connection with any future acquisitions, we mayrequire additional funding, which may be provided in the form of additionaldebt or equity financing or a combination thereof. There can be no assurancethat any additional financing will be available to us on acceptable terms or ina manner that complies with the restrictive covenants in our debt instruments.Consistent with our longstanding strategy, we continue to pursue potentialacquisitions of complementary businesses.

 

*Cash flows from financing activities.*Cash flows used in financing activities increased$1.8 million to $7.3 million for the first quarter of 2003 from the firstquarter of 2002. Scheduled debt repayments on our

 

26

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term Anotes increased $0.8 million over 2002 levels. We also repaid a net $3.0 million on our revolving credit facilityduring the quarter.  These increaseswere partially offset by $2.0 million of fees paid to our senior lenders forour Credit Facility amendment in March 2002.

 

***Recently IssuedAccounting Standards***

 

In June 2001, the Financial AccountingStandards Board (FASB) issued SFAS No. 143, “Accounting for Asset RetirementObligations.”  The provisions of SFASNo. 143 are effective for the Company in 2003.  The Company has determined that it has no material assetretirement obligations.  Accordingly,the adoption of SFAS No. 143 had no impact on the Company’s financial position,results of operations or cash flows.

 

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

 

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

 

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

 

In November 2002, the FASB issued Interpretation No. 45, “Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others.” The recognition provisions of the interpretation are effective for theCompany in 2003 and are applicable only to guarantees issued or modified afterDecember 31, 2002.  The adoption of Interpretation No. 45 did nothave a significant impact of the results of operations or financial position ofthe Company.

 

# **Item 3.*  Qualitative and Quantitative Disclosureabout******Market Risk*

 

We are exposed to various market risks, which is the potential lossarising from adverse changes in market rates and prices, such as foreigncurrency exchange and interest rates. We do not enter into derivatives or otherfinancial instruments for trading or speculative purposes.  We enter into financial instruments tomanage and reduce the impact of changes in interest rates and foreign currencyexchange rates.

 

*Interest Rates. *Werely significantly on variable rate and fixed rate debt in our capitalstructure.  At March 31, 2003, we hadfixed rate debt of $164.3 million and variable rate debt of $386.2million.  The

 

27

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pre-tax earnings and cash flowsimpact for the next year resulting from a 100 basis point increase in interestrates on variable rate debt would be areduction of pre-tax earnings of $1.0 million for the three months ended March31, 2003, holding other variables constant and excluding the impact of ourinterest rate protection agreements. Under the Credit Facility, we are requiredto enter into interest rate protection agreements that have the effect ofcausing at least half of the outstanding term loan borrowings and Notes to befixed-rate borrowings. We have entered into agreements, expiring in the firstquarter of 2004, to cap the interest rate on $150.0 million of borrowings underour Credit Facility, which would have the effect of reducing the impact ofinterest rate increases on our earnings and cash flows.

 

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

 

A portion of our assets are based in ourforeign locations and are translated into U.S. dollars at foreign currencyexchange rates in effect as of the end of each period, with the effect of suchtranslation reflected in other comprehensive income (loss). Accordingly, ourconsolidated stockholder’s equity will fluctuate depending upon the weakeningor strengthening of the U.S. dollar against the respective foreign currency.

 

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

 

# **ITEM 4.  *Controls and Procedures***

 

(a)   Evaluation of disclosurecontrols and procedures.

 

The Company’sprincipal executive officer and principal financial officer have evaluated theCompany’s disclosure controls and procedures as of a date within 90 days beforethe filing date of this quarterly report. Based on this evaluation, they concluded that, as of the evaluationdate, the disclosure controls and procedures were adequate and effective anddesigned to ensure that material information relating to theregistrant, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which thisquarterly report is being prepared.

 

(b)   Changes in internalcontrols.

 

There have been no significant changes in our internal controls or, toour knowledge, in other factors that could significantly affect these controlssubsequent to the evaluation of the internal controls, including any correctiveactions with regard to significant deficiencies and material weaknesses.

 

28

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| **PART II**        | **OTHER  INFORMATION**                                                                  |
|--------------------|-----------------------------------------------------------------------------------------|
|               |                                                                                    |
| **Item 5.**        | Submissions of Matters to a Vote of Security Holders.                                   |
|               |                                                                                    |
|               | None                                                                                    |
|               |                                                                                    |
| **Item 6.**        | Exhibits and Reports on Form 8-K                                                        |
|               |                                                                                    |
| **Item 6(a)****.** | Exhibits                                                                                |
|               | 99.1 - CEO’s Certificate Pursuant to §906 of the Sarbanes-Oxley Act  of 2002. |
|               | 99.2 - CFO’s Certificate Pursuant to §906 of the Sarbanes-Oxley Act  of 2002. |
|               |                                                                                    |
| **Item 6(b).**     | Reports on Form 8-K                                                                     |
|               |                                                                                    |
|               | None.                                                                                   |

 

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

 

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**CERTIFICATION**

 

I, Robert L. Krakoff, certify that:

 

(1)          I havereviewed this quarterly report on Form 10-Q of Advanstar, Inc.;

 

(2)          Based onmy knowledge, this quarterly report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

 

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

 

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

 

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

 

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

 

(c)          Presented in this quarterlyreport our conclusions about the effectiveness of the disclosure controls andprocedures based on our evaluation as of the Evaluation Date;

 

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

 

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

 

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

 

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

 

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

 

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**CERTIFICATION**

 

I, David W. Montgomery, certify that:

 

(1)          I havereviewed this quarterly report on Form 10-Q of Advanstar, Inc.;

 

(2)          Based onmy knowledge, this quarterly report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

 

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

 

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

 

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

 

(b)         Evaluated the effectiveness of theregistrant’s disclosure controls and procedures as of a date within 90 daysprior to the filing date of this quarterly report (the “Evaluation Date”); and

 

(c)          Presented in this quarterly report ourconclusions about the effectiveness of the disclosure controls and proceduresbased on our evaluation as of the Evaluation Date;

 

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

 

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

 

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

 

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

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

 

32

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**Exhibit Index**

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

 

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