** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

| **(Mark One)** |
|----------------|
|           |   |   |
| **ý**     | ** ** | **Quarterly Report Pursuant to Section 13 or  15(d) of The Securities Exchange  Act of 1934.** |
|           |   |   |
|           |   | **For the  quarterly period ended: September 30, 2005** |
|           |   | ** ** |
|           |   | **OR** |
|           |   |   |
| **o**          | ** ** | **Transition Report Pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934** |

 

**Commission File Number: 333-61386**

 

**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.)

 

**One Park Avenue, NewYork, NY**

(Address of principal executive offices)

 

**10016**

(Zip Code)

 

Registrant’sTelephone Number, Including Area Code:**(212) 951-6600**

 

Indicateby check mark whether the registrant: (1) has filed all reports requiredto be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes ýNo o

 

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

 

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

 

As of November 14,2005, 100 shares of the registrant’s common stock were outstanding.

 

 

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| **PART I       Financial Information**                            |                                                                                                                      |
|------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------|
|                                                                                                 |                                                                                                                      |   |
| **Item 1.****           *Financial  Statements:*** |                                                                                                                      |
|                                                                                                 |                                                                                                                      |   |
|                                                                                                 | Condensed Consolidated  Balance Sheets (unaudited) at September 30, 2005 and December 31,  2004                 |   |
|                                                                                                 |                                                                                                                      |   |
|                                                                                                 | Condensed  Consolidated Statements of Operations (unaudited) for the three months ended  September 30, 2005 and 2004 |   |
|                                                                                                 |                                                                                                                      |   |
|                                                                                                 | Condensed  Consolidated Statements of Operations (unaudited) for the nine months ended  September 30, 2005 and 2004  |   |
|                                                                                                 |                                                                                                                      |   |
|                                                                                                 | Condensed  Consolidated Statements of Cash Flows (unaudited) for the nine months ended  September 30, 2005 and 2004  |   |
|                                                                                                 |                                                                                                                      |   |
|                                                                                                 | Notes  to Condensed Consolidated Financial Statements (unaudited)                                                         |   |
|                                                                                                 |                                                                                                                      |   |
| **Item 2.**                                                                                          | ***Management’s  Discussion and Analysis of Financial Condition and Results of Operations***                         |   |
|                                                                                                 | *** ***                                                                                                              |   |
| **Item 3.**                                                                                          | ***Quantitative  and Qualitative Disclosures About Market Risk***                                                         |   |
|                                                                                                 | *** ***                                                                                                              |   |
| **Item 4.**                                                                                          | ***Controls and  Procedures***                                                                                            |   |
| ** **                                                                                           | *** ***                                                                                                              |   |
| **PART II   OTHER INFORMATION**                                                       |                                                                                                                      |
| ** **                                                                                           | *** ***                                                                                                              |   |
| **Item 6.**                                                                                          | ***Exhibits***                                                                                                            |   |
| ** **                                                                                           | *** ***                                                                                                              |   |
| **Signatures**                                                                                       | *** ***                                                                                                              |   |

 

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**PART I FINANCIAL INFORMATION**

 

**Advanstar, Inc.**

**Condensed Consolidated BalanceSheets (Unaudited)**

(In thousands, exceptshare and per share data)

 
| ** **                                                                                                                                        | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                                                                                                        |       |                         |       |                        |       |
| Current assets:                                                                                                                                   |       |                         |       |                        |       |
| Cash and cash  equivalents                                                                                                                        |       | $                            | 38,028     |                        | $          | 41,328 |   |
| Accounts  receivable, net of allowance of $798 and $785 at September 30, 2005 and  December 31, 2004                                    |       | 24,325                       |       | 27,047                      |       |
| Prepaid expenses                                                                                                                                  |       | 7,720                        |       | 6,417                       |       |
| Other                                                                                                                                             |       | 2,634                        |       | 2,450                       |       |
| Current assets  of discontinued operations                                                                                                        |       | —                       |       | 2,690                       |       |
| Total current  assets                                                                                                                             |       | 72,707                       |       | 79,932                      |       |
| Due from parent                                                                                                                                   |       | 357                          |       | 256                         |       |
| Property, plant  and equipment, net                                                                                                               |       | 18,701                       |       | 19,331                      |       |
| Intangible and  other assets:                                                                                                                     |       |                         |       |                        |       |
| Goodwill                                                                                                                                          |       | 595,217                      |       | 586,967                     |       |
| Intangibles and  other, net                                                                                                                       |       | 71,246                       |       | 92,587                      |       |
| Total intangible  and other assets, net                                                                                                           |       | 666,463                      |       | 679,554                     |       |
| Non current  assets of discontinued operations and assets held for sale                                                                           |       | 4,620                        |       | 135,837                     |       |
|                                                                                                                                              |       | $                            | 762,848    |                        | $          | 914,910 |   |
|                                                                                                                                              |       |                         |       |                        |       |
| **LIABILITIES AND STOCKHOLDER’S EQUITY**                                                                                                     |       |                         |       |                        |       |
| Current  liabilities:                                                                                                                             |       |                         |       |                        |       |
| Current  maturities of long-term debt                                                                                                             |       | $                            | 201        |                        | $          | 1,300 |   |
| Accounts payable                                                                                                                                  |       | 17,105                       |       | 13,578                      |       |
| Accrued  compensation                                                                                                                             |       | 3,831                        |       | 7,494                       |       |
| Other accrued  expenses                                                                                                                           |       | 30,094                       |       | 32,981                      |       |
| Deferred revenue                                                                                                                                  |       | 23,994                       |       | 39,323                      |       |
| Current  liabilities of discontinued operations                                                                                                   |       | —                       |       | 15,886                      |       |
| Total current  liabilities                                                                                                                        |       | 75,225                       |       | 110,562                     |       |
| Long-term debt,  net of current maturities                                                                                                        |       | 619,125                      |       | 752,019                     |       |
| Deferred income  taxes                                                                                                                            |       | 32,016                       |       | 18,250                      |       |
| Other long-term  liabilities                                                                                                                      |       | 4,270                        |       | 4,229                       |       |
| Long-term  liabilities of discontinued operations                                                                                                 |       | —                       |       | 3,627                       |       |
| Commitments and  contingencies                                                                                                                    |       |                         |       |                        |       |
| Stockholder’s  equity:                                                                                                                       |       |                         |       |                        |       |
| Common stock,  $.01 par value, 10,000 shares authorized; 100 shares issued and outstanding  at September 30, 2005 and December 31, 2004 |       | —                       |       | —                      |       |
| Capital in  excess of par value                                                                                                                   |       | 370,424                      |       | 370,424                     |       |
| Accumulated  deficit                                                                                                                              |       | (347,114                     | )          | (350,446                    | )          |
| Accumulated  other comprehensive income                                                                                                           |       | 8,902                        |       | 6,245                       |       |
| Total  stockholder’s equity                                                                                                                  |       | 32,212                       |       | 26,223                      |       |
|                                                                                                                                              |       | $                            | 762,848    |                        | $          | 914,910 |   |

 

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

 

2

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**Advanstar, Inc.**

**Condensed Consolidated Statementsof Operations (Unaudited)**

(In thousands)

 
| ** **                                                             | ** ** | **For the  Three Months Ended  September 30,** | ** ** |
|------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                             | ** ** | **2005**                                            | ** ** | **2004** | ** ** |
| ** **                                                             | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| Revenue                                                                |       | $                                                   | 85,691     |   | $ | 78,105 |   |
|                                                                   |       |                                                |       |   |   |
| Operating expenses:                                                    |       |                                                |       |   |   |
| Cost of  production (excluding depreciation)                           |       | 16,404                                              |       | 14,536 |   |
| Selling,  editorial and circulation (excluding depreciation)           |       | 28,582                                              |       | 27,460 |   |
| General and  administrative (excluding depreciation)                   |       | 9,130                                               |       | 9,367 |   |
| Restructuring  charge                                                  |       | 1,041                                               |       | — |   |
| Amortization of  intangibles                                           |       | 7,214                                               |       | 8,917 |   |
| Depreciation                                                           |       | 1,713                                               |       | 1,884 |   |
| Total operating  expenses                                              |       | 64,084                                              |       | 62,164 |   |
| Operating income                                                       |       | 21,607                                              |       | 15,941 |   |
| Other income (expense):                                                |       |                                                |       |   |   |
| Interest  expense, net                                                 |       | (19,917                                             | )          | (22,705 | ) |
| Other income  (expense), net                                           |       | (60                                                 | )          | (16 | ) |
| Income (loss) from continuing operations before  income taxes          |       | 1,630                                               |       | (6,780 | ) |
| Provision for income taxes                                             |       | 3,346                                               |       | 2,267 |   |
| Loss from continuing operations                                        |       | (1,716                                              | )          | (9,047 | ) |
| Discontinued operations (see Note 3):                                  |       |                                                |       |   |   |
| Income (loss) fom operations of discontinued  businesses, net of taxes |       | 406                                                 |       | (6,179 | ) |
| Net loss                                                               |       | $                                                   | (1,310     | ) | $ | (15,226 | ) |

 

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

 

3

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**Advanstar, Inc.**

**Condensed Consolidated Statementsof Operations (Unaudited)**

(In thousands)

 
| ** **                                                              | ** ** | **For the  Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                              | ** ** | **2005**                                           | ** ** | **2004** | ** ** |
| ** **                                                              | ** ** | ** **                                         | ** ** | ** ** | ** ** |
| Revenue                                                                 |       | $                                                  | 232,253    |   | $ | 220,142 |   |
|                                                                    |       |                                               |       |   |   |
| Operating expenses:                                                     |       |                                               |       |   |   |
| Cost of  production (excluding depreciation)                            |       | 43,923                                             |       | 39,521 |   |
| Selling,  editorial and circulation (excluding depreciation)            |       | 85,665                                             |       | 82,570 |   |
| General and  administrative (excluding depreciation)                    |       | 31,789                                             |       | 29,467 |   |
| Restructuring  charge                                                   |       | 3,056                                              |       | (3,895 | ) |
| Amortization of  intangibles                                            |       | 22,510                                             |       | 25,424 |   |
| Depreciation                                                            |       | 5,894                                              |       | 6,073 |   |
| Total operating  expenses                                               |       | 192,837                                            |       | 179,160 |   |
| Operating income                                                        |       | 39,416                                             |       | 40,982 |   |
| Other income (expense):                                                 |       |                                               |       |   |   |
| Interest  expense, net                                                  |       | (66,338                                            | )          | (68,477 | ) |
| Loss on  extinguishment of debt (see Note 6)                            |       | (12,581                                            | )          | — |   |
| Other (expense)  income, net                                            |       | (72                                                | )          | 1,014 |   |
| Loss from continuing operations before income taxes                     |       | (39,575                                            | )          | (26,481 | ) |
| (Benefit) provision for income taxes                                    |       | (589                                               | )          | 3,339 |   |
| Loss from continuing operations                                         |       | (38,986                                            | )          | (29,820 | ) |
| Discontinued operations (see Note 3):                                   |       |                                               |       |   |   |
| Income (loss) from operations of discontinued  businesses, net of taxes |       | 42,318                                             |       | (1,668 | ) |
| Net income (loss)                                                       |       | $                                                  | 3,332      |   | $ | (31,488 | ) |

 

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

 

4

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**Advanstar, Inc.**

**Condensed Consolidated Statementsof Cash Flows (Unaudited)**

(In thousands)

 
| ** **                                                                       | ** ** | **For the  Nine Months Ended  September 30,** | ** ** |
|----------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                                       | ** ** | **2005**                                           | ** ** | **2004** | ** ** |
| Operating activities:                                                            |       |                                               |       |   |   |
| Net income  (loss)                                                               |       | $                                                  | 3,332      |   | $ | (31,488 | ) |
| Adjustments to  reconcile net loss to net cash provided by operating activities: |       |                                               |       |   |   |
| Impairment of  intangible assets                                                 |       | 2,272                                              |       | — |   |
| Impairment of  goodwill                                                          |       | —                                             |       | 15,570 |   |
| Depreciation and  amortization                                                   |       | 31,356                                             |       | 37,173 |   |
| Restructuring  charge                                                            |       | —                                             |       | (3,895 | ) |
| Write-off of  deferred financing costs                                           |       | 3,517                                              |       | — |   |
| Gain on  derivative financial instruments                                        |       | (77                                                | )          | (1,300 | ) |
| Losses of  minority interest holders                                             |       | 566                                                |       | 704 |   |
| Noncash interest  expense                                                        |       | 20,552                                             |       | 17,958 |   |
| Gain on sale of  business and other assets                                       |       | (52,959                                            | )          | (1,006 | ) |
| Deferred income  taxes                                                           |       | 13,766                                             |       | 6,890 |   |
| Provision for  bad debts                                                         |       | 739                                                |       | 638 |   |
| Changes in  operating assets and liabilities                                     |       | (27,141                                            | )          | (29,215 | ) |
| Net cash (used  in) provided by operating activities                             |       | (4,077                                             | )          | 12,029 |   |
|                                                                             |       |                                               |       |   |   |
| Investing activities:                                                            |       |                                               |       |   |   |
| Additions to  property, plant and equipment                                      |       | (5,051                                             | )          | (6,764 | ) |
| Acquisitions of  publications and tradeshow businesses, net of cash acquired     |       | (15,503                                            | )          | (7,915 | ) |
| Proceeds from  sale of business and other assets                                 |       | 173,842                                            |       | 24,285 |   |
| Net cash  provided by investing activities                                       |       | 153,288                                            |       | 9,606 |   |
|                                                                             |       |                                               |       |   |   |
| Financing activities:                                                            |       |                                               |       |   |   |
| Proceeds from  revolving credit loan                                             |       | —                                             |       | 6,000 |   |
| Payments on  revolving credit loan                                               |       | —                                             |       | (14,000 | ) |
| Payments of  long-term debt                                                      |       | (152,142                                           | )          | (2,875 | ) |
| Deferred  financing costs                                                        |       | (129                                               | )          | (302 | ) |
| Dividends paid  to minority interest holders                                     |       | (900                                               | )          | — |   |
| Net cash used in  financing activities                                           |       | (153,171                                           | )          | (11,177 | ) |
| Effect of exchange rate changes on cash                                          |       | 660                                                |       | 661 |   |
| Net decrease in cash and cash equivalents                                        |       | (3,300                                             | )          | 11,119 |   |
| Cash and cash equivalents, beginning of period                                   |       | 41,328                                             |       | 29,721 |   |
| Cash and cash equivalents, end of period                                         |       | $                                                  | 38,028     |   | $ | 40,840 |   |

 

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

 

5

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**Advanstar, Inc.**

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

 

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

 

Theaccompanying unaudited condensed consolidated financial statements have beenprepared by Advanstar, Inc. (“Advanstar”), its wholly owned subsidiary,Advanstar Communications Inc. (“Communications”), and Communications’ majorityowned subsidiaries (collectively, the “Company”) in accordance with theinstructions to Form 10-Q and, therefore, do not include all theinformation and footnotes required by generally accepted accounting principlesfor complete financial statements. Management believes that all adjustments, consisting solely of normalrecurring items considered necessary for a fair statement of financial positionand results of operations, have been included. These condensed consolidated financial statements, however, should beread in conjunction with the audited financial statements and the related notesincluded in the Company’s annual report on Form 10-K for the year ended December 31,2004 filed with the Securities and Exchange Commission on March 29, 2005and the amendment to annual report on Form 10-K filed on Form 10-K/Aon June 28, 2005.  The results ofoperations for the three and nine months ended September 30, 2005 are notnecessarily indicative of the operating results that may be expected for theentire year ending December 31, 2005.

 

**2.**                          Summary of Significant Interim AccountingPolicies

 

**Stock-based compensation**

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

 

The following tablepresents unaudited pro forma net income (loss) as if the Company had elected torecognize compensation costs based on the fair value of the options granted asprescribed by SFAS No. 123 (in thousands):

 
| ** **                                        | ** ** | **For the  Three Months Ended  September 30,** | ** ** | **For the  Nine Months Ended  September 30,** | ** ** |
|---------------------------------------------------|------------|-----------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                        | ** ** | **2005**                                            | ** ** | **2004**                                           | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                              |       |                                                |       |                                               |       |   |   |   |   |
| Net (loss) income —as reported               |       | $                                                   | (1,310     | )                                                  | $          | (15,226 | ) | $ | 3,332 |   | $ | (31,488 | ) |
| Less: pro forma stock based employee compensation |       | (1,502                                              | )          | (521                                               | )          | (4,308 | ) | (1,903 | ) |
| Net loss —pro forma                          |       | $                                                   | (2,812     | )                                                  | $          | (15,747 | ) | $ | (976 | ) | $ | (33,391 | ) |

 

**Interim income tax expense**

The Company determinesits quarterly income tax provision based upon an estimated annual effectiveincome tax rate and discrete items as they occur.  In determining theeffective income tax rate applicable to interim periods, the Company excludestax jurisdictions where no tax expense or benefit is expected for the entireyear.

 

**Recently issued accounting standards**

In December 2004, the Financial AccountingStandards Board issued SFAS No. 123R, *Share-BasedPayment*, which revises SFAS 123 and supersedes APB 25.  This statement establishes

 

6

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standardsrelating to accounting for transactions in which equity instruments areexchanged for goods or services, such as the granting of employee stockoptions.  Under this statement, theCompany must measure the cost of employee services received in exchange for anaward of equity instruments based upon the fair value of the award.  This cost must be recognized over the periodduring which an employee is required to provide the service (usually thevesting period).  The Company is requiredto adopt the provisions of this standard effective January 1, 2006.  The adoption of this standard will result inan increase in compensation expense in future periods.

 

**3.**                          Acquisitions and Divestitures

 

**Acquisitions**

On August 19, 2005,the Company purchased Project Global Tradeshow, Inc. (‘‘Project”), aproducer of tradeshows serving the premium contemporary sector of the fashionindustry, for $9.9 million in cash, subject to a working capital adjustment,which will be completed in the fourth quarter of 2005.  In addition, the Company may pay additionalcontingent cash consideration to the former shareholders based on the 2007 and2008 operating results of the acquired assets and their continued employmentwith the Company.  Certain acquiredassets and assumed liabilities are recorded based on preliminary estimates oftheir respective fair values as of the date of the acquisition. The Companydoes not believe the final allocation of purchase price will be materiallydifferent from preliminary allocations.

 

On August 23, 2005,the Company purchased two fashion industry tradeshow businesses and relatedproducts from Pool Tradeshow (‘‘Pool’’) for $3.0 million in cash, subject to aworking capital adjustment, which will be completed in the fourth quarter of2005.  In addition, the Company may payadditional contingent cash consideration to the former shareholder based on the2007 and 2008 operating results from the acquired assets and their continuedemployment with the Company.  Certainacquired assets and assumed liabilities are recorded based on preliminaryestimates of their respective fair values as of the date of the acquisition. TheCompany does not believe the final allocation of purchase price will bematerially different from preliminary allocations.

 

On September 12,2005, the Company purchased an off-road consumer event business from PetersenEvents Corporation (“Off-Road Expo”) for $2.2 million in cash.  In addition, the Company may pay additionalcontingent cash consideration to the former shareholders based on the 2006operating revenue from the acquired assets. Certain acquired assets and assumed liabilities are recorded based onpreliminary estimates of their respective fair values as of the date of theacquisition. The Company does not believe the final allocation of purchaseprice will be materially different from preliminary allocations.

 

From January 1, 2005through September 30, 2005, the Company completed two other acquisitionsof consumer tradeshow businesses with an aggregate purchase price of $0.5million in cash.

 

On March 8, 2004,the Company purchased a portfolio of pharmaceutical industry conferences andmagazines from the Institute of Validation Technology, Inc. (‘‘IVT’’) for$7.9 million in cash.  The Company isrequired to pay additional contingent cash consideration to the formershareholder based on 2004 and 2005 operating results of the acquired assets andtheir continued employment with the Company. As of December 31, 2004, the Company had accrued $1.5 million ofcontingent consideration.  The Companyaccrued additional contingent consideration of $0.4 million and $1.0 million inthe three and nine months ended September 31, 2005, respectively.  These charges were recorded as compensationexpense in the condensed consolidated statement of operations in the

 

7

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periodsindicated.  In the first quarter of 2005,the Company paid contingent consideration of $0.9 million to the formershareholder.  As of September 31,2005, the balance of the accrual is $1.6 million and is included in otheraccrued liabilities in the accompanying consolidated balance sheet.

 

The pro forma operatingresults of the acquisitions discussed above are immaterial to the Company’sconsolidated results of operations.

 

**Divestitures and assets held for sale**

The results and any gainsor losses of the following divestitures (collectively, the “Disposed Businesses”)and assets held for sale have been reported in discontinued operations in theconsolidated statements of operations for the three and nine months ended September 30,2005 and 2004.  ****Interest expense wasnot allocated to any of the Company’s discontinued operations.****

 

The assets andliabilities of the following Disposed Businesses and assets held for sale arereported as assets and liabilities of discontinued operations and assets heldfor sale in the condensed consolidated balance sheet as of September 30,2005 and December 31, 2004.

 

*Art Group*

On March 12, 2004,the Company completed the sale of its art industry tradeshows and magazines(the “Art Group”) for a total selling price of $19.6 million in cash.  The Company recorded a gain after taxes onthe sale of $3.4 million.

 

Revenue of the Art Group,included in discontinued operations in the condensed consolidated statements ofoperations, was $8.5 million for the period from January 1, 2004 to March 12,2004.

 

*Post*

On July 2, 2004, theCompany completed the sale of its *Post*businesstrade publication ("Post") for $1.0 million in cash.  The Company recorded an after tax loss on thesale of $1.3 million.

 

Revenue of Post, includedin discontinued operations in the condensed consolidated statements ofoperations, was $0.7 million for the period from January 1, 2004 to July 2,2004.

 

*SeCA*

On August 5, 2004,the Company completed the sale of its 65% ownership in its French joint venture(“SeCA”), for a total selling price of $3.1 million in cash.  In connection with the sale, the Companyrecorded a goodwill impairment charge of $9.4 million, net of minority interesteffect of $5.1 million, in the second quarter of 2004.  The impairment charge relates to the Company’stradeshow reporting segment and was determined based upon the excess of thecarrying value of the Company’s interest in SeCA over the selling price, lessthe costs incurred by the Company to sell SeCA.

 

SeCA had $2.9 million inrevenue, included in discontinued operations in the condensed consolidatedstatements of operations, for the period from January 1, 2004 to August 5,2004.

 

8

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*DMS*

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

 

Revenue of DMS, includedin discontinued operations in the condensed consolidated statements ofoperations, was $0.1 million for the three and nine months ended September 30,2004.

 

*Portfolio Group*

On May 23, 2005, theCompany and certain affiliates (Communications, Advanstar Expositions CanadaLimited and Advanstar.com) completed the sale of virtually all business assetsand liabilities associated with its tradeshows and conferences, tradepublications and direct marketing products in the following primary industries:Information Technology & Communications, Travel/Hospitality, Beauty,Home Entertainment, Abilities and Portfolio, including the shares of theCompany’s Hong Kong subsidiaries.  Theshares of the Company’s Brazilian subsidiary were sold to the same buyer in July 2005after final regulatory approval. Collectively, all of the above properties arereferred to as “the Portfolio Group.” The sale price for these assets andshares was $173.8 million in cash, net of expenses.  The Company recorded a gain on the sale of$53.0 million.

 

Revenue of thePortfolio Group, included in discontinued operations in the condensedconsolidated statements of operations, was $49.0 million for the period from January 1,2005 to May 23, 2005, and $22.3 million and $80.1 million for the threeand nine months ended September 30, 2004.

 

*East Coast Fashion*

In the second quarter of2005, the Company discontinued its East Coast Fashion group (“East CoastFashion”) and recognized an impairment of the related intangibles at net bookvalue of $2.3 million. This charge is reported as a component of discontinuedoperations for the nine months ended September 30, 2005.

 

Revenue of the East Coast Fashion group included in discontinuedoperations in the condensed consolidated statements of operations was $0.9million and $5.1 million for the nine months ended September 30, 2005 and2004. East Coast Fashion had no revenue for the three months ended September 30,2005 and 2004.

 

*Other assets*

In the second quarter of2005, the Company committed to a plan to sell its Cleveland office building andland (“the Cleveland Office”) as a result of the sale of the Portfolio Group.As of September 30, 2005, the Company reported this building and land asassets held for sale and ceased depreciation of these assets, effective secondquarter of 2005.

 

9

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

 
| ** **                                                                                 | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                 | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                                       |       |                                       |       |                                      |       |   |   |   |   |
| (Loss) income  before income taxes (including goodwill impairment charge and gain on sale) |       | $                                          | (104       | )                                         | $          | (5,078 | ) | $ | 58,635 |   | $ | (1,447 | ) |
| Income tax (benefit) provision                                                             |       | (510                                       | )          | 840                                       |       | 15,751 |   | 4,343 |   |
| Minority interests                                                                         |       | —                                     |       | (261                                      | )          | (566 | ) | 4,122 |   |
|                                                                                       |       |                                       |       |                                      |       |   |   |   |   |
| Income (loss) from operations of discontinued  businesses                                  |       | $                                          | 406        |                                      | $          | (6,179 | ) | $ | 42,318 |   | $ | (1,668 | ) |

 

The Company allocatedgoodwill to the Disposed Businesses and included the allocated goodwill in itsdetermined gain or loss on disposal. Goodwill allocated to the Art Group, Post and the Portfolio Group is basedon the relative fair values of the Disposed Business to the entire reportingunit prior to disposal.  SeCA and DMS were never integrated into the Company’sbroader reporting units. Thus, the carrying amount of acquired goodwill forthose businesses was included in the calculation of any gain or loss ondisposal.

 

Goodwill allocated to thebusinesses disposed of and used in the calculation of the gain or loss on saleof the Disposed Businesses by reporting segment was as follows (in thousands):

 
| ** **                                 | ** ** | **Tradeshows  and  Conferences** | ** ** | **Trade  Publications** | ** ** | **Direct  Marketing  Products  and Other** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
|--------------------------------------------|------------|----------------------------------|------------|-------------------------|------------|--------------------------------------------|------------|---------------|------------|-----------|------------|
|                                       |       |                             |       |                    |       |                                       |       |          |       |      |       |
| Three months ended September 30, 2005 |       | $                                | —     |                    | $          | —                                     |       | $             | —     |      | $          | — |   | $ | — |   |
| Three months ended September 30, 2004 |       | 2,727                            |       | 900                     |       | —                                     |       | —        |       | 3,627     |       |
| Nine months ended September 30, 2005  |       | 62,857                           |       | 52,873                  |       | 6,082                                      |       | —        |       | 121,812   |       |
| Nine months ended September 30, 2004  |       | 19,287                           |       | 4,246                   |       | —                                     |       | —        |       | 23,533    |       |
|                                            |            |                                  |            |                         |            |                                            |            |               |            |           |            |  |  |  |  |  |

 

10

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The assets held for saleand discontinued operations of the Portfolio Group, East Coast Fashion and theCleveland Office included in the condensed consolidated balance sheets as of September 30,2005 and December 31, 2004 are as follows (in thousands):

 
| ** **                                                                       | ** ** | **September 30,  2005** | ** ** | **December 31, 2004** | ** ** |
|----------------------------------------------------------------------------------|------------|------------------------------|------------|----------------------------|------------|
| ** **                                                                       | ** ** | **Assets Held  For Sale**    | ** ** | **Assets  Held For  Sale** | ** ** | **Discontinued  Operations** | ** ** | **Total** | ** ** |
|                                                                             |       |                         |       |                       |       |   |   |   |   |
| Assets                                                                           |       |                         |       |                       |       |   |   |   |   |
| Accounts  receivable                                                             |       | $                            | —     |                       | $          | — |   | $ | 242 |   | $ | 242 |   |
| Prepaid expenses  and other                                                      |       | —                       |       | —                     |       | 2,448 |   | 2,448 |   |
| Total current  assets of discontinued operations and assets held for sale        |       | —                       |       | —                     |       | 2,690 |   | 2,690 |   |
| Property, plant  and equipment, net                                              |       | 4,620                        |       | 4,648                      |       | 1,174 |   | 5,822 |   |
| Goodwill                                                                         |       | —                       |       | —                     |       | 120,789 |   | 120,789 |   |
| Intangibles and  other, net                                                      |       | —                       |       | —                     |       | 9,226 |   | 9,226 |   |
| Total non  current assets of discontinued operations and assets held for sale    |       | 4,620                        |       | 4,648                      |       | 131,189 |   | 135,837 |   |
|                                                                             |       |                         |       |                       |       |   |   |   |   |
| Liabilities                                                                      |       |                         |       |                       |       |   |   |   |   |
| Accounts payable  and other accrued expenses                                     |       | —                       |       | —                     |       | 2,812 |   | 2,812 |   |
| Deferred revenue                                                                 |       | —                       |       | —                     |       | 13,074 |   | 13,074 |   |
| Total current  liabilities of discontinued operations and assets held for sale   |       | —                       |       | —                     |       | 15,886 |   | 15,886 |   |
| Other long term  liabilities                                                     |       |                         |       | —                     |       | 48 |   | 48 |   |
| Minority  interests                                                              |       | —                       |       | —                     |       | 3,579 |   | 3,579 |   |
| Total long term  liabilities of discontinued operations and assets held for sale |       | —                       |       | —                     |       | 3,627 |   | 3,627 |   |
| Net assets of  discontinued operations and assets held for sale                  |       | $                            | 4,620      |                       | $          | 4,648 |   | $ | 114,366 |   | $ | 119,014 |   |

 

The Portfolio Group, EastCoast Fashion and the Cleveland Office assets included in assets held for saleand discontinued operations in the Company’s reportable segments as of September 30,2005 and December 31, 2004 are as follows (in thousands):

 
| ** **                                | ** ** | **Tradeshows  and  Conferences** | ** ** | **Trade  Publications** | ** ** | **Direct  Marketing  Products  and Other** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
|-------------------------------------------|------------|----------------------------------|------------|-------------------------|------------|--------------------------------------------|------------|---------------|------------|-----------|------------|
|                                      |       |                             |       |                    |       |                                       |       |          |       |      |       |
| Segment assets at September 30, 2005 |       | $                                | —     |                    | $          | —                                     |       | $             | —     |      | $          | 4,620 |   | $ | 4,620 |   |
|                                      |       |                             |       |                    |       |                                       |       |          |       |      |       |
| Segment assets at December 31, 2004  |       | 71,997                           |       | 54,626                  |       | 6,082                                      |       | 5,822         |       | 138,527   |       |
|                                           |            |                                  |            |                         |            |                                            |            |               |            |           |            |  |  |  |  |  |

 

11

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**4.**                          Goodwill and OtherIntangible Assets

 

Thechanges in the carrying amount of goodwill by operating segment are as follows(in thousands):

 
| ** **                                                    | ** ** | **Tradeshows  and  Conferences** | ** ** | **Trade  Publications** | ** ** | **Direct  Marketing  Products  and Other** | ** ** | **Total** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------|------------|-------------------------|------------|--------------------------------------------|------------|-----------|------------|
|                                                          |       |                             |       |                    |       |                                       |       |      |       |
| Balance as of December 31, 2004                          |       | $                                | 398,582    |                    | $          | 163,595                                    |       | $         | 24,790     |   | $ | 586,967 |   |
| Goodwill  acquired or completion of purchase price allocation |       | 10,377                           |       | —                  |       | —                                     |       | 10,377    |       |
| Foreign currency translation                                  |       | (761                             | )          | (1,314                  | )          | (52                                        | )          | (2,127    | )          |
| Balance as of September 30, 2005                         |       | $                                | 408,198    |                    | $          | 162,281                                    |       | $         | 24,738     |   | $ | 595,217 |   |

 

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

 
| ** **                              | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|-----------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
|                                    |       |                         |       |                        |       |
| Trade exhibitor lists                   |       | $                            | 133,734    |                        | $          | 129,691 |   |
| Advertiser lists                        |       | 29,668                       |       | 46,712                      |       |
| Subscriber lists                        |       | 6,023                        |       | 15,238                      |       |
| Trade names and trademarks              |       | 19,088                       |       | 17,982                      |       |
| Other intangible assets                 |       | 19,974                       |       | 19,928                      |       |
| Deferred financing costs                |       | 19,750                       |       | 23,379                      |       |
|                                    |       | 228,237                      |       | 252,930                     |       |
| Accumulated amortization                |       | (156,991                     | )          | (160,343                    | )          |
| Total intangible  and other assets, net |       | $                            | 71,246     |                        | $          | 92,587 |   |

 

Estimated amortizationexpense of identified intangible and other assets for the remaining threemonths of 2005 and for the next five years is as follows (in thousands):

 
| 2005 |   | $      | 7,296  |   |
|------|--------|--------|--------|--------|
| 2006 |   | 21,270 |   |
| 2007 |   | 8,438  |   |
| 2008 |   | 5,309  |   |
| 2009 |   | 1,918  |   |
| 2010 |   | 1,591  |   |

 

12

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**5.**                          Financial Derivative Instruments

 

The Company periodicallyuses derivative instruments to manage exposure to interest rates.  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 debtinstruments are subject to interest rate risk. In 2001 the Company entered into an interest rate collar agreementexpiring February 2004 to manage its exposure to interest rate movementson a portion of its variable rate debt obligations.  The effective portion of the cumulative gainor loss on the interest rate collar agreement was reported as a component ofaccumulated other comprehensive income in stockholder’s equity and wasrecognized in earnings as the underlying interest expense is incurred.  The ineffective portion of the interest ratecollar and swap agreements was recognized in current earnings.  The Company used a portion of theseagreements as hedges of the Company’s second priority senior secured floatingrate notes described below.  Gains andlosses on the undesignated portion of these agreements at the end of eachfiscal quarter (which are calculated as the net amount payable upon terminationat the date of termination) were recognized in current earnings until expired.

 

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

 

The Company had noderivatives in the consolidated balance sheet as of September 30, 2005.

 

**Statement of operations**

The following tablesummarizes the effects of SFAS No. 133 on the Company’s statement ofoperations related to the ineffective portion of the Company’s interest ratecollar agreements and changes in the fair value of foreign exchange contractsnot designated as hedging instruments for the three and nine months ended September 30,2005 and 2004:

 
| ** **                                 | ** ** | **Interest Rate  Collar  Agreements** | ** ** | **Foreign  Exchange  Contracts** | ** ** | **Total** | ** ** |
|--------------------------------------------|------------|---------------------------------------|------------|----------------------------------|------------|-----------|------------|
|                                       |       |                                  |       |                             |       |      |       |
| Three months ended September 30, 2005 |       | $                                     | 26         |                             | $          | —    |       | $ | 26 |   |
|                                       |       |                                  |       |                             |       |      |       |
| Three months ended September 30, 2004 |       | —                                |       | 14                               |       | 14        |       |
|                                       |       |                                  |       |                             |       |      |       |
| Nine months ended September 30, 2005  |       | 77                                    |       | —                           |       | 77        |       |
|                                       |       |                                  |       |                             |       |      |       |
| Nine months ended September 30, 2004  |       | 1,294                                 |       | 5                                |       | 1,299     |       |
|                                            |            |                                       |            |                                  |            |           |            |  |  |  |

 

13

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**6.**                          Debt

 

**Credit facility**

Communications is partyto a credit facility (the “Credit Facility”) with a group of financialinstitutions acting as lenders.  Thecredit facility is collateralized by Communications’ domestic subsidiaries andthe Company and is collateralized by first priority liens on substantially allof the assets of the Company and the guarantors.  The Credit Facility contains restrictivecovenants, including limitations on certain asset dispositions, dividends,investments and other restricted payments. In addition, the Credit Facility requires a minimum fixed chargecoverage ratio (asdefined).  Failure to comply with thecovenants could cause an event of default under the Credit Facility.

 

Prior to the June 2005transaction described below, the Credit Facility consisted of (i) $25.0million of term B due October 11, 2008, and (ii) $60.0 million ofrevolving loan availability through April 11, 2007.

 

InJune 2005, Communications repaid the outstanding term B loans withproceeds from the sale of the Portfolio Group and amended the Credit Facilityto allow Communications to retain its revolving loan availability at $60million while allowing for repayment of second lien and junior debt withproceeds from the sale of the Portfolio Group (see Note 3).

 

**Senior secured notes**

Communications’ Senior Secured Notes consist of $130.0 million ofSecond Priority Senior Secured Floating Rate Notes due 2008, which will requirequarterly amortization equal to 0.25% of the principal amount thereof (the “floatingrate notes”), and $300.0 million of 10.75% Second Priority Senior Secured Notesdue 2010 (the “fixed rate notes”). Interest on the floating rate notes is payable at a rate equal tothree-month LIBOR, which is reset quarterly, plus 7.5%.  Each tranche of the notes is collateralizedby second priority liens on substantially all the collateral pledged againstborrowings under Communications’ Credit Facility (other than the capital stockof certain of its subsidiaries and assets of its parent companies, includingAdvanstar).  The notes containrestrictive covenants that, among other things, limit Communications’ abilityto incur debt, pay dividends and make investments.  Communications entered into a registrationrights agreement in connection with the private placement pursuant to which theCompany has registered substantially all of the notes under the Securities Actof 1933, as amended.

 

In June 2005, Communications repurchased $8.7 million of the fixedrate notes pursuant to an offer to purchase at an offer price of 100% ofprincipal amount tendered, plus accrued and unpaid interest to the date ofsettlement.  Communications alsorepurchased $117.8 million of the floating rate notes pursuant to a cash tenderoffer for $1,043 plus a consent payment of $30 per $1,000 principal amounttendered, plus accrued and unpaid interest to the date of settlement.

 

In the second quarter of 2005, Communications recognized $12.6 million in costs relatedto the purchase, including $8.6 million in tender offer premium and consentfees, write-off of $3.5 million in unamortized deferred financing costs, and$0.5 million in legal fees and expenses.

 

The Senior Secured Noteswere fully and unconditionally guaranteed on a senior basis, jointly andseverally, by Communications’ wholly owned domestic subsidiaries.  The financial covenants under the notesinclude limitations on certain asset dispositions, payments, debt incurrence,dividends and other restricted payments. After the completion of the repurchaseof the floating rate notes described below, the First Supplemental Indenturegoverning the fixed and floating rate notes

 

14

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becameeffective. The First Supplemental Indenture eliminates substantially all of therestrictive and reporting covenants, certain events of default and certainother provisions with respect to the floating rate notes.  The First Supplemental Indenture alsoreleases the floating rate notes’ security in the collateral under theindenture.  The fixed rate notes remainedcollateralized by the collateral and subject to the restrictive covenants inthe indenture.

 

**Senior subordinated debt and discountnotes**

Communications’$160.0 million unsecured, 12% senior subordinated notes due 2011 (the “SeniorSubordinated Notes”) bear interest payable semiannually on February 15 andAugust 15 of each year.  The SeniorSubordinated Notes are fully and unconditionally guaranteed on a seniorsubordinated basis, jointly and severally, by Communications’ wholly owneddomestic subsidiaries.  The financialcovenants under the Senior Subordinated Notes include limitations on certainasset dispositions, payments, debt incurrence, dividends and other restrictedpayments.

 

The Company’s seniordiscount notes due October 2011 (the “Discount Notes”) with a principalamount at maturity of $171.8 million bear interest at 15%, payablesemiannually beginning October 2005, and have an implied yield to maturityof approximately 17.2%.  The notes areredeemable at the Company’s option at specified premiums through 2007 and atpar thereafter.  The notes may also beredeemed at a premium upon a qualifying change of control of the Company.

 

The Discount Notes arenot guaranteed by the Company’s subsidiaries, do not require cash interestpayments until April 2006 and contain restrictive covenants that, amongother things, limit the Company’s ability and that of its subsidiaries to incurdebt, pay dividends and make investments. Since the Company is a holding company and its subsidiaries serve as itsonly source of cash flow, its ability to pay interest on these notes will bedependent upon the receipt of dividends from its subsidiaries.  The Credit Facility, the Senior Secured Notesand the Senior Subordinated Notes impose substantial restrictions on theCompany’s subsidiaries’ ability to pay dividends to the Company.

 

The restricted payments covenants in Communications’senior secured notes indenture and senior subordinated notes indenture providethat Communications can pay dividends only if its leverage ratio (as defined)is 6.0 to 1 or better and only from a basket equal to the amount by which itscumulative EBITDA (as defined) since January 1, 2001 exceeds 150% of itscumulative interest expense in that same period plus certain other items,including proceeds from equity offerings. As of September 30, 2005Communications’ leverage ratio under the most restrictive of theseindentures was 6.1 to 1.0.  Communications anticipates improvementsin its operating results that would improve its ratio prior to the time thatthe discount notes require payment of interest in cash. Communications’ resultsare subject to a variety of factors, including general economic conditions andconditions in its markets, and the Company cannot assure you Communications’results will allow it to make distributions in light of theserestrictions.  Failure to pay interest onthese notes will be a default under the notes and also result in a defaultunder Communications’ Credit Facility, which could have a material adverseeffect on the Company’s financial position, results of operations, and cashflows and/or could impact the Company’s ability to continue to operate withoutan amendment or restructuring of its credit facility and the notes.  Notwithstanding the leverage ratio limitationon restricted payments, Communications can make restricted payments in anaggregate amount of up to $20 million to us.

 

Accretion of the debtdiscount on the Discount Notes was $6.3 million and $4.5 million during thethree months ended September 30, 2005 and 2004 and $18.2 million and $15.4million during

 

15

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thenine months ended September 30, 2005 and 2004.  These amounts are included in interestexpense in the respective accompanying consolidated statements of operations.

 

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

 
| ** **                                                                                                                                                                                      | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
|                                                                                                                                                                                            |       |                         |       |                        |       |
| Term loan B,  interest at LIBOR plus 4.50%                                                                                                                                                      |       | $                            | —     |                        | $          | 25,000 |   |
| Revolving credit  loan, interest at LIBOR plus 3.75%; due April 11, 2007                                                                                                                   |       | —                       |       | —                      |       |
| Second priority  senior secured floating rate notes, interest at LIBOR plus 7.5%; 11.36% at  September 30, 2005, due 2008                                                                  |       | 9,898                        |       | 128,375                     |       |
| 10.75% Second  priority senior secured notes, due 2010, plus unamortized premium of $717 and  $844 at September 30, 2005 and December 31, 2004, respectively                          |       | 292,052                      |       | 300,844                     |       |
| 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 $14,516 and $32,692 at September 30, 2005 and  December 31, 2004, respectively |       | 157,276                      |       | 139,100                     |       |
| Acquisition note  payable, due June 2006                                                                                                                                                   |       | 100                          |       | —                      |       |
|                                                                                                                                                                                            |       | 619,326                      |       | 753,319                     |       |
| Less current  maturities                                                                                                                                                                        |       | (201                         | )          | (1,300                      | )          |
|                                                                                                                                                                                            |       | $                            | 619,125    |                        | $          | 752,019 |   |

 

**7.**                          Comprehensive Income

 

The table below presentscomprehensive income, defined as changes in the equity of the Company excludingchanges resulting from investments by and distributions to shareholders (inthousands):

 
| ** **                                                       | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                       | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net (loss) income                                                |       | $                                          | (1,310     | )                                         | $          | (15,226 | ) | $ | 3,332 |   | $ | (31,488 | ) |
| Change in cumulative translation adjustment                      |       | 2,657                                      |       | 1,551                                     |       | 2,734 |   | (3 | ) |
| Change in  unrealized losses on derivative financial instruments |       | (26                                        | )          | (22                                       | )          | (77 | ) | 170 |   |
| Comprehensive income (loss)                                      |       | $                                          | 1,321      |                                      | $          | (13,697 | ) | $ | 5,989 |   | $ | (31,321 | ) |

 

**8.**                          Segments

** **

The Company follows theprovisions of SFAS No. 131, “Disclosures about Segments of an Enterpriseand Related Information,” and has three reportable segments: tradeshows andconferences, trade publications and direct marketing products and other.

 

The Company evaluates theperformance of, and allocates resources to, its segments based on contributionmargin – defined as net revenue less cost of production and selling,editorial and

 

16

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circulationcosts.  The accounting policies of thereportable segments are the same as those described in the summary ofsignificant accounting policies.  Thereare no inter-segment sales or transfers. Segment assets are primarily intangible assets, prepaid expenses andaccounts receivable.  Revenue,contribution margins and segment assets of the Company’s reportable segmentsare as follows (in thousands):

 
| ** **                                 | ** ** | **Tradeshows  and  Conferences** | ** ** | **Trade  Publications** | ** ** | **Direct  Marketing  Products  and Other** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
|--------------------------------------------|------------|----------------------------------|------------|-------------------------|------------|--------------------------------------------|------------|---------------|------------|-----------|------------|
|                                       |       |                             |       |                    |       |                                       |       |          |       |      |       |
| Three months ended September 30, 2005 |       |                             |       |                    |       |                                       |       |          |       |      |       |
| Revenues                                   |       | $                                | 46,821     |                    | $          | 34,307                                     |       | $             | 4,563      |      | $          | — |   | $ | 85,691 |   |
| Contribution  margin (loss)                |       | 27,963                           |       | 10,361                  |       | 3,059                                      |       | (678          | )          |      |       |
| Segment assets  (at period end)            |       | 437,181                          |       | 226,586                 |       | 26,631                                     |       | 72,450        |       | 762,848   |       |
|                                       |       |                             |       |                    |       |                                       |       |          |       |      |       |
| Three months ended September 30, 2004 |       |                             |       |                    |       |                                       |       |          |       |      |       |
| Revenues                                   |       | $                                | 39,493     |                    | $          | 34,786                                     |       | $             | 3,826      |      | $          | — |   | $ | 78,105 |   |
| Contribution  margin (loss)                |       | 25,055                           |       | 9,820                   |       | 2,268                                      |       | (1,034        | )          |      |       |
| Segment assets  (at period end)            |       | 504,161                          |       | 302,815                 |       | 33,513                                     |       | 82,605        |       | 923,094   |       |
|                                       |       |                             |       |                    |       |                                       |       |          |       |      |       |
| Nine months ended September 30, 2005  |       |                             |       |                    |       |                                       |       |          |       |      |       |
| Revenues                                   |       | $                                | 111,022    |                    | $          | 107,951                                    |       | $             | 13,280     |      | $          | — |   | $ | 232,253 |   |
| Contribution  margin (loss)                |       | 64,875                           |       | 33,282                  |       | 8,368                                      |       | (3,860        | )          |      |       |
| Segment assets  (at period end)            |       | 437,181                          |       | 226,586                 |       | 26,631                                     |       | 72,450        |       | 762,848   |       |
|                                       |       |                             |       |                    |       |                                       |       |          |       |      |       |
| Nine months ended September 30, 2004  |       |                             |       |                    |       |                                       |       |          |       |      |       |
| Revenues                                   |       | $                                | 97,367     |                    | $          | 111,333                                    |       | $             | 11,442     |      | $          | — |   | $ | 220,142 |   |
| Contribution  margin (loss)                |       | 59,950                           |       | 34,989                  |       | 6,650                                      |       | (3,538        | )          |      |       |
| Segment assets  (at period end)            |       | 504,161                          |       | 302,815                 |       | 33,513                                     |       | 82,605        |       | 923,094   |       |

 

The reconciliation oftotal segment contribution margin to consolidated income from continuingoperations before income taxes is as follows (in thousands):

 
| ** **                                                    | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                    | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                          |       |                                       |       |                                      |       |   |   |   |   |
| Total segment contribution margin                             |       | $                                          | 40,705     |                                      | $          | 36,109 |   | $ | 102,665 |   | $ | 98,051 |   |
| General and administrative expense                            |       | (9,130                                     | )          | (9,367                                    | )          | (31,789 | ) | (29,467 | ) |
| Restructuring charge                                          |       | (1,041                                     | )          | —                                    |       | (3,056 | ) | 3,895 |   |
| Depreciation and amortization                                 |       | (8,927                                     | )          | (10,801                                   | )          | (28,404 | ) | (31,497 | ) |
| Other expense (primarily interest)                            |       | (19,977                                    | )          | (22,721                                   | )          | (78,991 | ) | (67,463 | ) |
| Income (loss)  from continuing operations before income taxes |       | $                                          | 1,630      |                                      | $          | (6,780 | ) | $ | (39,575 | ) | $ | (26,481 | ) |

 

17

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**9.**                          Related-Party Transactions

 

**Financial advisory fees**

The Company has agreed topay Credit Suisse First Boston Corporation (“CSFB”), an affiliate of the DLJMerchant Banking funds, an annual advisory fee of $0.5 million until theearlier of (i) an initial public offering of Advanstar Holdings, theCompany’s parent, (ii) the date when the DLJ Merchant Banking funds ownless than 16-2/3% of the shares of Holdings’ common stock held by them on theclosing date of the DLJ Acquisition or (iii) October 11, 2005.  This amount is expensed as incurred.

 

In May 2005,the Company paid CSFB fees of $1.5 million relating to the sale of thePortfolio Group.  See Note 3 for adiscussion on the sale of the Portfolio Group.

 

In June 2005,the Company alsorepurchased $7.1 million of Communications’ fixed rate notes at par, and $4.6million of Communications’ floating rate notes at a price equal to 107.3% ofprincipal, from CSFB pursuant to Communications’ tender offer.  See Note 6.

 

**10.**                   RestructuringActivity

 

Relatedto the sale of the Portfolio Group (see Note 3), in May 2005, the Companyceased use of certain leased office space in New York, NY, Milford, CT, andSanta Ana, CA. In the third quarter of 2005,the Company vacated additional leased office space in Milford, CT and Chicago,IL. These activities resulted in charges to the Company’s operations during the threeand nine months ended September 30, 2005. These charges consist of the discounted remaining future minimum leasepayments due under non-cancelable leases, net of estimated future subleaseincome. These lease commitments expire at various dates through 2010.

 

 In connection with the sale of the PortfolioGroup and the reorganization of our healthcare group management team during2005, the Company notified 122 employees that they would be severed from theCompany. The Company took a charge to operations during the three and nine months ended September 30,2005 for severance and other terminationcosts.  As of September 30, 2005, 91employees have been terminated, of which 54 employees were terminated in thequarter ending September 30, 2005. Severance payments will continue into2006.

 

TheCompany integrated many of the sales, marketing, technology and operatingfunctions of its wholly owned subsidiary Advanstar.com, Inc. (“Advanstar.com”)with Communications and its core activities in publishing, tradeshows anddirect marketing products.  Theserestructuring activities were completed by the end of 2001, except for facilitylease costs, which were to continue through June 2010, including leaseholdimprovements from the facility Advanstar.com vacated.  The facility lease obligation was settled in May 2004for less than amounts owed under the lease. A $3.9 million favorable settlement (net of fees and related expenses)of the lease obligation was recognized as an offset to operating expenses in2004.

 

18

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Restructuringcharges incurred are as follows (in thousands):

 
| ** **                                      | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                      | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                            |       |                                       |       |                                      |       |   |   |   |   |
| Facility exit costs                             |       | $                                          | 442        |                                      | $          | — |   | $ | 1,236 |   | $ | — |   |
| Advanstar.com lease settlement                  |       | —                                     |       | —                                    |       | — |   | (3,895 | ) |
| Employee  severance and other termination costs |       | 599                                        |       | —                                    |       | 1,820 |   | — |   |
| Restructuring charge (benefit)                  |       | $                                          | 1,041      |                                      | $          | — |   | $ | 3,056 |   | $ | (3,895 | ) |

 

Thesummary of the Company’s change in restructuring accruals is as follows (inthousands):

 
| ** **                             | ** ** | **Facility Exit  Costs** | ** ** | **Employee  Severance** | ** ** | **Total**  | ** ** |
|----------------------------------------|------------|--------------------------|------------|-------------------------|------------|------------|------------|
| ** **                             | ** ** | ** **               | ** ** | ** **              | ** ** | ** ** | ** ** |
| **Balance at December 31, 2004**  |       | $                        | 1,827      |                    | $          | —     |       | $ | 1,827 |   |
| Restructuring charge                   |       | 1,236                    |       | 1,820                   |       | 3,056      |       |
| Utilized-cash                          |       | (660                     | )          | (882                    | )          | (1,542     | )          |
| Utilized-non-cash                      |       | —                   |       | —                  |       | —     |       |
| **Balance at September 31, 2005** |       | $                        | 2,403      |                    | $          | 938        |       | $ | 3,341 |   |

 

Therestructuring accrual balance is $3.3 million and $1.8 million at September 30,2005, and December 31, 2004 of which $1.9 million and $0.5 million is inother accrued expenses and $1.4 million and $1.3 million is in other long termliabilities at September 30, 2005 and December 31, 2004,respectively, in the accompanying condensed consolidated balance sheet.

 

19

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

 

This quarterly report on Form 10-Q contains forward-lookingstatements made pursuant to the safe harbor provisions of the PrivateSecurities Litigation Reform Act of 1995. Investors are cautioned not to place undue reliance on theseforward-looking statements, including statements about plans and objectives ofmanagement, potential acquisitions, market growth and opportunity.  These forward-looking statements are neitherpromises nor guarantees and involve risks and uncertainties that could causeactual results to differ materially from those indicated by suchforward-looking statements.  You shouldnot expect that these forward-looking statements will be updated orsupplemented as a result of changing circumstances or otherwise, and we disavowand disclaim any obligation to do so. Important cautionary statements and risk factors that would affectactual results are discussed in the our periodic reports and registrationstatements filed with the Securities and Exchange Commission, including thoseunder the caption entitled “Factors Which May Affect Future Results” inour 2004 annual report on Form 10-K filed with the Securities and ExchangeCommission on March 29, 2005.

 

**Overview**

 

We are a worldwide provider of integratedmarketing communications products and services for targeted industry sectors,principally through trade and consumer shows, conferences, and throughcontrolled circulation trade, business and professional magazines.  We also provide a broad range of other directmarketing products, including classified advertising, direct mail services,reprints, database marketing, guides, and reference books.

 

We report our business in three segments:

 

•                  showsand conferences, which consists primarily of the management of trade andconsumer shows and seminars held in convention and conference centers;

 

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

 

•                  directmarketing products and other, which consists primarily of sales of a variety ofdirect mail and database products, magazine editorial reprints and classifiedadvertising.

 

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

 

Shows and conferences accounted forapproximately 48% and 44% of total revenue for the nine months ended September 30,2005 and 2004, respectively.  Tradepublications accounted for approximately 46% and 51% of total revenue for thenine months ended September 30, 2005 and 2004, respectively, while directmarketing products and other accounted for approximately 6% and 5% of totalrevenue for the nine months ended September 30, 2005 and 2004,respectively.  Our revenue reaches itshighest levels during the first and third quarters of the year due to thetiming of the MAGIC tradeshows and our other large tradeshows andconferences.  Because tradeshow andconference revenue is recognized when a particular event is held, we mayexperience fluctuations in quarterly revenue based on the movement of tradeshowdates from one quarter to another.

 

20

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**Recent Developments**

 

On May 23,2005, we and certain affiliates (Communications, Advanstar Expositions CanadaLimited and Advanstar.com)  completed thesale of business assets and liabilities associated with our tradeshows andconferences, trade publications and direct marketing products in our:Information Technology & Communications, Travel/Hospitality, Beauty,Home Entertainment, Abilities and Portfolio groups, including the shares of ourHong Kong subsidiaries (the “Sold Portfolio Group”).  The shares of our Brazilian subsidiary weresold in July 2005 after receipt of final regulatory approval. Collectively,the Sold Portfolio Group and Brazilian subsidiary are referred to as the “PortfolioGroup.” The sale price for these assets and shares was $173.8 million in cash,net of expenses.  We recorded a gain onthe sale of $53.0 million.

 

Revenue of the Portfolio Group, included indiscontinued operations, was $49.0 million for the period from January 1,2005 through May 23, 2005, and $22.3 million and $80.1 million for thethree and nine months ended September 30, 2004.

 

In connection with the sale of the Portfolio Group,Communications repaid all outstanding term debt under Communications’ creditfacility and amended the credit facility to retain revolving loan availabilityat $60.0 million while allowing for repayment of second lien and juniordebt with a portion of the proceeds from the sale of the Portfolio Group.  The amendment also revised the fixed chargecoverage ratio to exclude from the calculation any interest expense related todebt repaid prior to July 31, 2005 with the proceeds from the sale of thePortfolio Group.

 

As a result of the sale of the Portfolio Group,Communications’ second priority senior secured notes indenture required thatCommunications either use the remaining net proceeds (after repayment of theCredit Facility borrowings) to invest in Communications’ business or to offerto purchase Communications’ second priority senior secured notes at par plusaccrued interest.  In June 2005,Communications offered to purchase up to $140.0 million of the second liennotes.  Holders of $8,665,000 principalamount of the 10.75% Second Priority Senior Secured Notes (the “fixed ratenotes”) tendered their notes for purchase, and Communications purchased allsuch notes.

 

Also in June 2005, Communications completed acash tender offer for any and all of Communications’ outstanding SecondPriority Senior Secured Floating Rate Notes due 2008 (the “floating rate notes”).  Holders of $117,801,750 aggregate outstandingprincipal amount of the floating rate notes tendered their notes for purchase,and Communications purchased all such notes at a price equal to 107.3%(including a 3% consent fee) of outstanding principal plus accruedinterest.  In connection with the tenderoffer, Communications received consents to proposed amendments to the indenturegoverning the notes, resulting in the elimination of substantially all of therestrictive covenants and certain default provisions with respect to thefloating rate notes.

 

Under Communications’ indentures, any net proceedsfrom the sale of the Portfolio Group not used to reinvest in the business or topurchase second lien notes within one year after closing of the sale will berequired to be used to offer to repurchase the subordinated notes and then thediscount notes.  After application of thenet proceeds of the sale of the Portfolio Group to repay the Credit Facilityborrowings and finance the tender offers, Communications had net proceeds ofapproximately $13.4 million remaining, all of which was used in the thirdquarter of 2005 for acquisitions.

 

21

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## **Trendsand Developments**

##  

Our first nine months of 2005 results wereimpacted by the sale of the Portfolio Group to Questex Media Group in thesecond quarter and related $3.1 million restructuring charge, $12.6 million incosts related to the repayment of a portion of our debt, new product launches,investments in our Life Sciences and Powersports operating groups, and theimpact of our restructuring on current sales in our healthcare special projectsgroup.

 

Net income in the first nine months of 2005includes the results for approximately five months of the groups sold toQuestex Media Group in May 2005, a $53.0 million gain on the sale of theseassets and a $2.3 million intangible asset impairment charge related to theclosing of our East Coast Fashion events. All of these are reported asdiscontinued operations.

 

The sale of the Portfolio Group allows us toconcentrate our resources on three markets in which we have our strongestproduct and market positions, which are the fashion and licensing, lifesciences, and the motorcycle and automotive aftermarket markets.  In the first nine months of 2005, we investedin these core markets through existing product development, launching of newevents and conferences and development of continuing education capabilities inour healthcare, dental and veterinary markets.

 

Our tradeshows and conferences continued toperform well in 2005.  Revenue in thefirst nine months of 2005 from our three largest events, MAGIC, Dealer Expo andLicensing International, increased $8.0 million, or 9.6%, compared to the firstnine months of 2004. ** **We also launched the Off-RoadImpact tradeshow and conference, complementing our 2004 launches of *Dirt Sports* and *Off-Road Business* magazines, 15 new IVT and pharmaceuticalconferences, a dental conference – Digital Radiography Congress, and alicensing conference.

 

The decline in revenue in our publishingsegment in the first nine months of 2005 is the result of a decline in sales inour healthcare custom projects as we restructured our operations, and acontraction in advertising and subscriptions in our nursing publications.

 

We have identifiednew opportunities and initiatives that we will be pursuing through the balanceof 2005 and into 2006, including opportunities to expand customer relationshipsand our market position in our MAGIC events and the development of a standalone continuing medical education business and other diversified customerofferings in our healthcare sector.  Wealso anticipate our fourth quarter launch of our Arenacross ChampionshipMotorcycle Racing series in conjunction with our existing InternationalMotorcycle Show series.

 

## **Presentationof Financial Information**

##  

*Acquisitions and divestitures*

 

On September 12, 2005, we purchased an off-road consumer eventbusiness from Petersen Events Corporation (“Off-Road Expo”) for $2.2 million incash.  In addition, we may pay additionalcontingent cash consideration to the former shareholders based on the 2006operating revenue from the acquired assets. Certain acquired assets and assumed liabilities are recorded based onpreliminary estimates of their respective fair values as of the date of theacquisition. We do not believe the final allocation of purchase price will bematerially different from preliminary allocations.

 

On August 23, 2005, we purchased two fashion industry tradeshowbusinesses and related products from Pool Tradeshow (‘‘Pool’’) for $3.0 millionin cash, subject to a working capital adjustment, which will be completed inthe fourth quarter of 2005.  In addition,we may pay additional

 

22

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contingent cash consideration to the former shareholder based on the2007 and 2008 operating results from the acquired assets and their continuedemployment with us.  Certain acquiredassets and assumed liabilities are recorded based on preliminary estimates oftheir respective fair values as of the date of the acquisition. We do notbelieve the final allocation of purchase price will be materially differentfrom preliminary allocations.

 

On August 19, 2005, we purchased Project Global Tradeshow, Inc.(‘‘Project”), a producer of tradeshows for the premium contemporary sector ofthe fashion industry, for $9.9 million in cash, subject to a working capitaladjustment, which will be completed in the fourth quarter of 2005.  In addition, we may pay additional contingentcash consideration to the former shareholders based on the 2007 and 2008operating results of the acquired assets and their continued employment withus.  Certain acquired assets and assumedliabilities are recorded based on preliminary estimates of their respectivefair values as of the date of the acquisition. We do not believe the final allocationof purchase price will be materially different from preliminary allocations.

 

From January 1,2005 through September 30, 2005, we completed two other acquisitions ofconsumer shows with an aggregate purchase price of $0.5 million in cash.

 

On March 8, 2004, we purchased a portfolio of pharmaceuticalindustry specific magazines and conferences from the Institute of ValidationTechnology, Inc. (“IVT”) for $7.9 million in cash.  In addition, we may pay additional contingentcash consideration to the prior owners based upon 2004 and 2005 operatingresults generated from the acquired assets and their continued employment withus.  Operating results for the three andnine months ended September 30, 2005 include $0.4 million and $1.0 millionin compensation expense, respectively, to reflect the accrual of the 2005component of the expected contingent payment.

 

We have accounted for these acquisitionsunder the purchase method of accounting. Accordingly, our results of operations include the effect of theacquisition from the date of purchase.

 

In May 2005,we sold our Portfolio Group.  See “–RecentDevelopments” for additional information regarding this sale.

 

In the secondquarter of 2005, we closed the last remaining East Coast Fashion event (the “EastCoast Fashion Group”) as part of our ongoing strategy and evaluation of ourproduct portfolio.  Revenue of the EastCoast Fashion Group included in discontinued operations was $0.9 million and$5.2 million for the first nine months of 2005 and 2004. East Coast FashionGroup had no revenue in the third quarter of 2005 and 2004.  We recorded a $2.3 million impairment chargefor the remaining intangible assets of this business in the second quarter of2005.

 

In the third quarter of 2004, we sold ourGerman tradeshow business (“DMS”) for $1.7 million in cash.  As a result of the sale of DMS we recorded agoodwill impairment charge of $6.2 million. Total DMS revenue in the three and nine months ended September 30,2004 were not material.

 

In the third quarter of 2004, we sold our 65% ownership in our Frenchjoint venture (“SeCA”), which consisted of one tradeshow, for $3.1 million incash.  In conjunction with our sale ofSeCA we recorded a goodwill impairment charge of $9.4 million, net of minorityinterest.  SeCA had $2.9 million inrevenue, included in discontinued operations for the nine months ended September 30,2004.  SeCA had no revenue in the thirdquarter of 2004.

 

In thethird quarter of 2004, we sold our *Post*business trade publication (“Post”) for $1.0 million in cash. We recorded aloss after taxes on the sale of $1.3 million. Revenue in the first nine months of 2004

 

23

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was $0.7 million.  Post had no revenue in the third quarter of2004.

 

In the first quarter of 2004, we sold our artindustry tradeshows and magazines for a total sales price of $19.6 million in cash (“Art Group”).  Total revenue for the Art Group in the ninemonths ended September 30, 2004, included in discontinued operations, was$8.5 million.  We recorded a gainafter taxes on the sale of $3.4 million.

 

Thefinancial results of the businesses included in discontinued operations in theaccompanying condensed consolidated statements of operations are as follows (inthousands):

 
| ** **                                                                                 | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                 | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                                       |       |                                       |       |                                      |       |   |   |   |   |
| (Loss) income before income taxes  (including goodwill impairment charge and gain on sale) |       | $                                          | (104       | )                                         | $          | (5,078 | ) | $ | 58,635 |   | $ | (1,447 | ) |
| Income tax (benefit) provision                                                             |       | (510                                       | )          | 840                                       |       | 15,751 |   | 4,343 |   |
| Minority interests                                                                         |       | —                                     |       | (261                                      | )          | (566 | ) | 4,122 |   |
|                                                                                       |       |                                       |       |                                      |       |   |   |   |   |
| Income (loss) from operations of  discontinued businesses                                  |       | $                                          | 406        |                                      | $          | (6,179 | ) | $ | 42,318 |   | $ | (1,668 | ) |

 

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**Selected Financial Data**

 

The following table sets forth selectedstatements of operations and other financial data.

 
| ** **                                                              | ** ** | **For the  Three Months Ended  September 30,** | ** ** | **For the  Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                              | ** ** | **2005**                                            | ** ** | **2004**                                           | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                              | ** ** | **(in thousands)**                                  | ** ** | **(in thousands)**                                 | ** ** |
| **Income  Statement Data:**                                             |       |                                                |       |                                               |       |   |   |   |   |
| Revenue                                                                 |       |                                                |       |                                               |       |   |   |   |   |
| Tradeshows and conferences                                              |       | $                                                   | 46,821     |                                               | $          | 39,493 |   | $ | 111,022 |   | $ | 97,367 |   |
| Publications                                                            |       | 34,307                                              |       | 34,786                                             |       | 107,951 |   | 111,333 |   |
| Direct marketing products and other                                     |       | 4,563                                               |       | 3,826                                              |       | 13,280 |   | 11,442 |   |
| Total revenue                                                           |       | 85,691                                              |       | 78,105                                             |       | 232,253 |   | 220,142 |   |
|                                                                    |       |                                                |       |                                               |       |   |   |   |   |
| Cost of  production and selling                                         |       |                                                |       |                                               |       |   |   |   |   |
| Tradeshows and conferences                                              |       | 18,858                                              |       | 14,438                                             |       | 46,147 |   | 37,417 |   |
| Publications                                                            |       | 23,946                                              |       | 24,966                                             |       | 74,669 |   | 76,344 |   |
| Direct marketing products and other                                     |       | 2,182                                               |       | 2,592                                              |       | 8,772 |   | 8,330 |   |
| Total cost of production and selling                                    |       | 44,986                                              |       | 41,996                                             |       | 129,588 |   | 122,091 |   |
|                                                                    |       |                                                |       |                                               |       |   |   |   |   |
| General and  administrative expenses                                    |       | 9,130                                               |       | 9,367                                              |       | 31,789 |   | 29,467 |   |
| Restructuring  charge                                                   |       | 1,041                                               |       | —                                             |       | 3,056 |   | (3,895 | ) |
| Depreciation  and amortization                                          |       | 8,927                                               |       | 10,801                                             |       | 28,404 |   | 31,497 |   |
| Operating  income                                                       |       | 21,607                                              |       | 15,941                                             |       | 39,416 |   | 40,982 |   |
| Other income  (expense):                                                |       |                                                |       |                                               |       |   |   |   |   |
| Interest expense                                                        |       | (19,917                                             | )          | (22,705                                            | )          | (66,338 | ) | (68,477 | ) |
| Loss on extinguishment of debt                                          |       | —                                              |       | —                                             |       | (12,581 | ) | — |   |
| Other (expense) income, net                                             |       | (60                                                 | )          | (16                                                | )          | (72 | ) | 1,014 |   |
| Income (loss) from continuing operations  before income taxes           |       | 1,630                                               |       | (6,780                                             | )          | (39,575 | ) | (26,481 | ) |
| Provision  (benefit) for income taxes                                   |       | 3,346                                               |       | 2,267                                              |       | (589 | ) | 3,339 |   |
| Loss from  continuing operations                                        |       | (1,716                                              | )          | (9,047                                             | )          | (38,986 | ) | (29,820 | ) |
|                                                                    |       |                                                |       |                                               |       |   |   |   |   |
| Discontinued  operations (see Note 3):                                  |       |                                                |       |                                               |       |   |   |   |   |
| Income (loss) from operations of  discontinued businesses, net of taxes |       | 406                                                 |       | (6,179                                             | )          | 42,318 |   | (1,668 | ) |
| Net (loss)  income                                                      |       | $                                                   | (1,310     | )                                                  | $          | (15,226 | ) | $ | 3,332 |   | $ | (31,488 | ) |
|                                                                         |            |                                                     |            |                                                    |            |  |  |  |  |  |  |  |  |  |

 

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# **Results of Operations**

 

# **THREE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED TO THE THREE MONTHSENDED SEPTEMBER 30, 2004**

 

# ***Revenue***

 

Revenue in the third quarter of 2005increased 9.7% to $85.7 million from $78.1 million in the third quarter of2004.

 

Revenue from tradeshows and conferencesincreased 18.6%, or $7.3 million, to $46.8 million from $39.5 million in thethird quarter of 2004. Our fall 2005 MAGIC event increased revenue over third quarter2004 by $3.1 million or 8.6% with exhibit space reaching 946,000 square feetand increased yield by 3.5%. The acquisitions of Pool and Project, whichexpanded our presence in the contemporary and boutique fashion markets,contributed $3.3 million of revenue in third quarter of 2005. The third quarterlaunch of four new conferences, including three IVT and pharmaceuticalconferences and a licensing conference, contributed a combined $0.7 million inrevenue growth in third quarter 2005.

 

Revenue from publications in the thirdquarter of 2005 declined 1.4%, or $0.5 million, to $34.3 million from $34.8million in the third quarter of 2004. Revenue from Life Sciences custom projects declined $1.2 million in thequarter due to the continuedimpact from the restructuring of the Life Sciences operating group and itseffect on the 2005 sales cycle. Additionally, primary healthcare andpharmaceutical publications’ revenue declined $0.6 million and $0.4 millionrespectively in the third quarter.  Ourflagship primary care publication, *MedicalEconomics*, increased revenue in the quarter by 9.4%.  In specialty care, while softer revenues weregenerated from our nursing publications, revenue from our other six specialtytitles increased revenue 13.5% over the third quarter of last year.  Revenue from the dental and veterinarypublications increased $0.3 million or 6.6% and $0.2 million or 6.7%respectively over the third quarter in 2004. New publication launches, including those in Powersports/Automotive with*Dirt Sports* and *Off-Road Business*and in Life Scienceswith *Locum Life*, *Firstline*, *Ophthalmology Times Europe* and *Contract Services Europe,* generated $1.1 million in revenuein the third quarter.

 

In the third quarter of 2005, revenue from the direct marketing productsand other segment increased 19.3%, or $0.7 million, to $4.6 million from $3.8million in the third quarter of 2004. This increase is primarily due to web initiatives in our Life Sciencesgroup.

 

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

# ** **

Cost of production and selling expenses inthe third quarter of 2005 increased 7.1% to $45.0 million from $42.0 million inthe third quarter of 2004.

 

Expenses of tradeshows and conferences in thethird quarter of 2005 increased 30.6%, or $4.4 million, to $18.9 million from $14.4million in the third quarter of 2004. The increase is primarily due to increased investment in our fall 2005MAGIC event, the Pool and Project acquisitions, growth in our LicensingInternational event, and staffing and other direct costs to support: 1) ourfirst quarter launch of the Off-Road Impact tradeshow, 2) our newly launchedLife Sciences conferences and 3) our Arenacross championship series to belaunched in fourth quarter 2005.

 

Expenses of trade publications in the third quarter of 2005 declined4.1%, or $1.0 million, to $23.9 million from $25.0 million in the third quarterof 2004.  The decline is primarily due tothe decline in healthcare custom projects and primary care markets as discussedabove, partially offset by an increase in

 

26

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paper costs of$0.3 million, and $0.5 million of costs associated with the launch investmentsin *Dirt Sports* and *Off-Road Business* as discussed above.

 

Expenses of direct marketing products andother declined 15.8% to $2.2 million in the third quarter of 2005 from $2.6million in the third quarter of 2004. This decline is principally the result ofsavings in our operating support departments.

 

# ***General and administrative expenses***

 

General and administrative costs declined2.5%, or $0.2 million, to $9.1 million in the third quarter of 2005 from $9.4million in the third quarter of 2004 primarily due to $0.7 million of savingsassociated with the restructuring of our leased office space (as discussedbelow), which was partially offset by $0.4 million of contingent employeecompensation related to the IVT acquisition earn-out.

 

# ***Restructuring charge***

 

Related to the sale of thePortfolio Group (see –”Recent Developments”), in May 2005, we ceased useof certain leased office space in New York, NY, Milford, CT, and Santa Ana, CA. In the third quarter of 2005, we also vacated additional leased officespace in Milford, CT and Chicago, IL. These activities resulted in charges to our operations during thethree and nine months ended September 30, 2005. These charges consist of the discounted future minimum lease payments,net of estimated future sublease income. These lease commitments expire atvarious dates through 2010.

 

In connection with the sale of the Portfolio Group andthe reorganization of our healthcare group management team during 2005, wenotified 122 employees that they would be severed from the Company. We took acharge to operations duringthe three and nine months ended September 30, 2005 for severance and other termination costs.  As of September 30, 2005, 91 employeeshave been terminated, of which 54 employees were terminated in the quarterending September 30, 2005. Severance payments will continue into 2006.

 

Pre-tax restructuring charges incurred are as follows(in thousands):

 
| ** **                                      | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                      | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                      | ** ** | ** **                                 | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Facility  exit costs                            |       | $                                          | 442        |                                      | $          | — |   | $ | 1,236 |   | $ | — |   |
| Advanstar.com  lease settlement                 |       | —                                     |       | —                                    |       | — |   | (3,895 | ) |
| Employee severance and other termination  costs |       | 599                                        |       | —                                    |       | 1,820 |   | — |   |
| Restructuring  charge (benefit)                 |       | $                                          | 1,041      |                                      | $          | — |   | $ | 3,056 |   | $ | (3,895 | ) |

 

We expect anadditional $1.2 million charge to be taken in the next six months as we vacateadditional office space and terminate employees pursuant to our restructuringplan.

 

# ***Interest expense***

 

Interest expense in the third quarter of 2005declined $2.8 million, or 12.3%, to $19.9 million from $22.7 million in thethird quarter of 2004 primarily due to the repayment of $20.4 million ofCommunications’ term loans, $8.7 million of Communications’ fixed rate notes,and $117.8 million of

 

27

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Communications’ floating ratenotes in the second quarter of 2005 with the proceeds from the sale of thePortfolio Group.

 

In June 2005, Communications repurchased $8.7million of its fixed rate notes pursuant to an offer to purchase at an offerprice of 100% of principal amount tendered, plus accrued and unpaid interest tothe date of settlement.  Communicationsalso repurchased $117.8 million of its floating rate notes pursuant to a cashtender offer for $1,043 plus a consent payment of $30 per $1,000 principalamount tendered, plus accrued and unpaid interest to the date of settlement.  See “–Recent Developments” for additionalinformation.

 

At September 30, 2005, $609.4 million,or 98%, of our total debt is at a fixed rate with the balance subject tointerest rate fluctuations.

 

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

 

The provision for income taxes beforediscontinued operations was a provision of $3.3 million in the third quarter of2005 compared to a provision of $2.3 million in the third quarter of 2004.  The provision for the third quarter of 2005 and 2004 includes atax provision representing the elimination of a portion of the secondquarter tax benefit provided by losses from continuing operations to the extentthat such losses offset the income from discontinued operations.  The tax provision is offset by a tax benefitincluded in discontinued operations. Additionally, a deferred tax provision related to the basis ofgoodwill for tax purposes being less than the carrying value of goodwill forfinancial reporting purposes was recorded. We recorded no income tax benefit related to the net operating losses wegenerated during 2005 or 2004 because we have established a valuation allowanceto offset any related tax benefits due to uncertainty about realization ofthese benefits.

 

# ***Discontinued operations***

 

In the third quarter of 2004, we sold Post, SeCA and DMS for anaggregate of $5.8 million in cash. The total loss on sale the of thesebusinesses was $1.3 million, after tax effect. The aggregate goodwillimpairment charge recorded in the third quarter of 2004 relating to theseassets was $6.2 million.

 

See further informationregarding discontinued operations in “–Presentation of FinancialInformation–Acquisitions and Divestitures.”

 

# **NINE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED TO THE NINE MONTHSENDED SEPTEMBER 30, 2004**

 

# ***Revenue***

 

Revenue in the first nine months of 2005increased 5.5% to $232.3 million from $220.1 million in the first nine monthsof 2004.

 

Revenue from tradeshows and conferencesincreased 14.0%, or $13.7 million, to $111.0 million from $97.4 million in thefirst nine months of 2004.  Revenue fromour three largest events, MAGIC, Dealer Expo, and Licensing International,increased $8.0 million, or 9.6%, compared to the first nine months of 2004. ** **The exhibit space atthe MAGIC spring and fall 2005 events grew by a combined 2.3% over 2004 to1,833,300 square feet, Licensing International increased 6.7% to 194,400 squarefeet and Dealer Expo increased 1.7% to 328,300 square feet.  Yield increased 4.8% for MAGIC spring andfall 2005 events, 4.2% for Licensing International and 5.2% for Dealer Expocontributing to an increase in revenue over

 

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the first nine months of2004.  The acquisitions of Pool andProject, which expand our presence in the contemporary and boutique fashionmarkets, contributed $3.3 million of revenue from the events held in Las Vegasin August 2005 in coordination with the August 2005 MAGIC tradeshow.We also launched the Off-Road Impact tradeshow and conference complementing our2004 launches of *Dirt Sports* and *Off-Road Business*magazines, 15 new IVTand pharmaceutical conferences, a dental conference- Digital RadiographyCongress, and a licensing conference. These launches generated revenue of $3.6 million in the first ninemonths of 2005.  The increased revenuegenerated from these tradeshows and conferences was partially offset by holdingone less IMS motorcycle event in the first nine months of 2005 as compared tothe first nine months of 2004.

 

Revenue from publications in the first ninemonths of 2005 declined 3.0%, or $3.4 million, to $108.0 million from $111.3million in the first nine months of 2004. Revenue from healthcare custom projects declined $4.2 million in thefirst nine months of 2005, attributable in part to the restructuring of the Life Sciences operatinggroup and its effect on the 2005 sales cycle. In specialty care, revenuefrom the nursing publications declined $1.6 million or 20.7% as nursingadvertising and subscription continue to contract.  The other six publications in specialty careincreased revenue 5.8% over the first nine months of 2004.  Primary healthcare publication revenuedeclined 4.0% in the first nine months of the year.  Revenue from dental publications increased9.7% and automotive publications increased revenue 12.1% over the same periodlast year.  New publication launches,including those in Powersports/Automotive with *DirtSports* and *Off-Road Business*andin Life Sciences with *Locum Life*,*Firstline*, *Ophthalmology Times Europe* and *Contract Services Europe,* generated $1.8million in revenue in the first nine months of 2005.

 

In the first nine months of 2005, revenuefrom our direct marketing products and other segment increased 16.1%, or $1.8million, to $13.3 million from $11.4 million in the first nine months of2004.  This increase is due to webinitiatives in our Life Sciences group.

 

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

 

Cost of production and selling expenses inthe first nine months of 2005 increased $7.5 million to $129.6 million from$122.1 million in the first nine months of 2004.

 

Expenses of tradeshows and conferences in thefirst nine months of 2005 increased 23.3%, or $8.7 million, to $46.1 millionfrom $37.4 million in the first nine months of 2004.  Staffing and other direct costs to supportour first quarter launch of the Off-Road Impact tradeshow and conference, ournewly launched IVT and dental conferences, and our Arenacross championshipseries to be launched in fourth quarter 2005 contributed approximately $3.3million to this increase.  We alsoincurred an additional $3.0 million of expenses to support the growth in ourMAGIC and Licensing International events. The acquisitions of Pool and Project,along with continued investment in our IMS series also contributed to theincrease in 2005 over 2004.

 

Expenses of trade publications in the first nine months of 2005declined 2.2%, or $1.7 million, to $74.7 million from $76.3 million in thefirst nine months of 2004.  The declineis primarily due to the decline in healthcare custom projects and primary caremarkets as discussed above, partially offset by an increase in paper costs of$0.7 million and $1.6 million of costs associated with the launch investmentsin *Dirt Sports* and *Off-Road Business* as discussed above.

 

Expenses of direct marketing products andother in the first nine months of 2005 increased 5.3%, or $0.4 million, to $8.8million from $8.3 million in the first nine months of 2004.  We also incurred additional staffing andconsulting costs related to a realignment of our healthcare project businessand the launches of publications and tradeshows serving thePowersports/Automotive markets, which was offset by cost savings efforts in ouroperating and support departments.

 

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# ***General and administrative expenses***

 

General and administrative costs increased7.9%, or $2.3 million, to $31.8 million in the first nine months of 2005 from$29.5 million in the first nine months of 2004 due primarily to $0.9 million ofadditional investments in our group management team and staff, primarilyrelated to our Life Sciences group, $0.6 million of costs related to strategicconsulting and marketing initiatives, $1.0 million of contingent employeecompensation related to the IVT acquisition earn-out, and an increase of $0.2million for audit, tax, legal and Sarbanes-Oxley consulting services, offset bysavings associated with our restructuring activities.

 

# ***Restructuring charge***

 

See information regarding restructuringactivities in “–Results of Operations-Three Months Ended September 30, 2005compared to the three months ended September 30, 2004-Restructuring charge.”

 

# ***Interest expense***

 

Interest expense in the first nine months of2005 declined $2.1 million, or 3.1%, to $66.3 million from $68.5 million in thefirst nine months of 2004 primarily due to the repayment of $20.4 million ofCommunications’ term loans, $8.7 million of Communications’ fixed rate notes,and $117.8 million of Communications’ floating rate notes in the second quarterof 2005 with the proceeds from the sale of the Portfolio Group. The reductionwas also impacted by a reduction in cash payments on our interest rate collaragreement in the first quarter of 2004. We made payments of $0.9 million onthis agreement, which expired in February 2004.  We currently have no plans to hedge ourremaining floating rate debt.

 

In June 2005, Communications repurchased $8.7million of its fixed rate notes pursuant to an offer to purchase at an offerprice of 100% of principal amount tendered, plus accrued and unpaid interest tothe date of settlement.  Communicationsalso repurchased $117.8 million of its floating rate notes pursuant to a cashtender offer for $1,043 per $1,000 principal amount tendered, plus a consentpayment of $30 per $1,000 principal amount tendered, plus accrued and unpaidinterest to the date of settlement.  Ourinterest expense will be lower in future periods as a result of theseactivities.  See “–Recent Developments”for additional information.

 

Communications incurred $12.6 million incosts related to the repurchase.  Thesecosts include $8.6 million in tender offer premium and consent fees, $3.5million in unamortized deferred financing costs, and $0.5 million in legal feesand expenses.

 

At September 30, 2005, $609.4 million,or 98%, of our total debt is at a fixed rate with the balance subject tointerest rate fluctuations.

 

*Other income (expense), net*

 

Other income in the first nine months of 2004includes a gain of $1.3 million related to our interest rate protectionagreements, which expired in February 2004.

 

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

 

The provision for income taxes was a benefitof $0.6 million in the first nine months of 2005 compared to a provision of$3.3 million in the first nine months of 2004. Theprovision for the first nine months of 2005 includes a tax benefit representingthe tax benefit provided by losses from continuing

 

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operations to the extent that such lossesoffset the income from discontinued operations. This tax benefit is offset by atax provision included in discontinued operations.  This benefit was partially offset by adeferred tax provision related to the basis of goodwill for tax purposes beingless than the carrying value of goodwill for financial reporting purposes.  We recorded no income tax benefit related tothe net operating losses we generated during 2005 or 2004 because we haveestablished a valuation allowance to offset any related tax benefits due touncertainty about realization of these benefits.

 

# ***Discontinued operations***

 

In the second quarter of 2005, the last remaining East Coast Fashionevent was closed and a $2.3 million impairment charge for the remainingcarrying value of the intangible assets of this business was recorded.

 

In May and July 2005, Advanstar sold certain businesses toQuestex for net cash of $173.8 million. A gain of $53.0 million on the sale of these assets was recorded in thesecond quarter of 2005.

 

Properties sold in 2004 included Art, Post, SeCA, and DMS for anaggregate of $24.3 million in cash. Total gain on sale of these businesses was$2.1 million, after tax effect. The aggregate goodwill impairment chargerecorded in 2004 relating to these assets was $15.6 million.

 

See further informationregarding discontinued operations in “–Presentation of FinancialInformation–Acquisitions and Divestitures.”

 

**Liquidity and Capital Resources**

 

The following discussion presents ourliquidity and capital resources on a consolidated basis, including oursubsidiaries.

 

We are a holding company and have no direct materialoperations.  Our principal assets are ourownership of Communications and Advanstar.com, and our only materialliabilities are the senior discount notes and our guarantee of theCommunications Credit Facility.  Ourprincipal liquidity needs are for debt service on the senior discount notes.

 

Communications’ principal cash needs are fordebt service, capital expenditures and strategic acquisitions, as well as toprovide us with cash to finance our cash needs. Its principal sources of liquidity will be cash flow from operations andborrowings under its credit facility.

 

*Sources and uses of funds*

 

We generally operate with negative workingcapital, excluding cash and current maturities of long-term debt, due to theimpact of deferred revenue from tradeshows, which is billed and collected asdeposits up to one year in advance of the respective tradeshow.  Consequently, our existing operations areexpected to maintain very low or negative working capital balances, excludingcash and current maturities of long-term debt.

 

Operating cash flows may be significantlyaffected by the working capital fluctuations of our business, in particular thetradeshows and conferences business. Deferred revenue increases on the balance sheet in the quarters immediatelypreceding our busy first quarter tradeshow season as we collect deposits forbooth space several months in advance of the tradeshows.  Revenue and contribution margin arerecognized in the quarter that the events are held, releasing the deferred revenuefrom the balance sheet, which results in a reduction to our operating cashflow.

 

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We anticipate that our operating cash flow,together with borrowings under the credit facility (assuming continued compliancewith the covenants contained therein or a modification thereof) and otherfuture financings and refinancings, will be sufficient to fund our anticipatedfuture operating expenses, capital expenditures, debt service and otherobligations as they become due.  However,our ability to make scheduled payments of principal, to pay interest on or torefinance our indebtedness and to satisfy our other debt obligations willdepend upon our future operating performance, which will be affected by generaleconomic, financial, competitive, legislative, regulatory, business and otherfactors beyond our control.

 

As of September 30,2005, we had cash and cash equivalents of $38.0 million.  The following table shows our cash flowactivity for the first nine months of 2005 and 2004, and should be read inconjunction with the condensed consolidated statements of cash flows (inthousands):

 
| ** **                                                | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                | ** ** | **2005**                                  | ** ** | **2004** | ** ** |
| ** **                                                | ** ** | ** **                                | ** ** | ** ** | ** ** |
| Net cash  (used in) provided by operating activities |       | $                                         | (4,077     | ) | $ | 12,029 |   |
| Net cash  provided by investing activities                |       | 153,288                                   |       | 9,606 |   |
| Net cash  used in financing activities                    |       | (153,171                                  | )          | (11,177 | ) |
| Effect of  exchange rate changes on cash                  |       | 660                                       |       | 661 |   |
| Net (decrease) increase in cash and cash  equivalents     |       | $                                         | (3,300     | ) | $ | 11,119 |   |

 

The $16.1million increase in cash used in operating activities in the first nine monthsof 2005 as compared to the first nine months of 2004 was due primarily to $9.1million of cash fees and expenses related to our repurchase of a portion of ouroutstanding debt in June 2005 and a decline in customer advances receivedin 2005 compared to 2004, due to a delay in when these advances arereceived.  Cash provided by operatingactivities in the first nine months of 2005 was negatively impacted by a declinein net income less non-cash expenses.  We paid cash interest of $44.5 million in the first nine months of2005.  Cash provided by operatingactivities in the first nine months of 2004 was negatively impacted bytradeshow timing as cash for events held in the first nine months of 2004 wascollected in the fourth quarter of 2003.

 

Net cash provided by investing activitiesincreased $143.7 million to $153.3million in the first nine months of 2005, from $9.6 million in the firstnine months of 2004.  This increase wasprincipally due to the proceeds received in the second quarter of 2005from the sale of the Portfolio Group.  Inthe first quarter of 2004, we sold our Art Group for $19.5 million in cash, andacquired IVT for $8.0 million in cash.  Our business strategy includes theconsummation of strategic acquisitions. In 2005, we used $15.5 million in cash for business acquisitions. Inconnection with any future acquisitions, we may require additional funding,which may be provided in the form of additional debt or equity financing or acombination thereof.  There can be noassurance that any additional financing will be available to us on acceptableterms or in a manner that complies with the restrictive covenants in our debtinstruments.  Consistent with ourlongstanding strategy, we continue to pursue potential acquisitions ofcomplementary businesses.

 

We incurred capital expenditures of $5.1million and $6.8 million in the first nine months of 2005 and 2004,respectively.  We anticipate that we willspend less than $8.0 million on capital expenditures in 2005, which willbe funded by cash flows from operations. The majority of these expenditures are related to expansions andenhancements to our IT and communications infrastructure and management and operatinggroup information systems.  We believethat this amount of capital expenditure will be adequate to grow our businessaccording to our business strategy and to maintain the key tradeshows,publications and business that remain following the sale of the PortfolioGroup.

 

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Cash used in financing activities in thefirst nine months of 2005 was$153.2 million compared to $11.2 million in the first nine months of2004.  In the first quarter of 2005,Communications repaid $4.6 million of its outstanding Term Loan B with theproceeds from the sale in the first quarter of 2004 of the Art Group.  In the second quarter of 2005, Communicationsrepaid its outstanding $20.4 million of Term Loan B and repurchased $126.5million of its floating and fixed rate notes, using the proceeds from the saleof the Portfolio Group.  During the firstnine months of 2004, Communications paid $10.8 million of outstandingprincipal, including $8.0 million on its revolving credit facility.

 

*Debt service*

 

As of September 30, 2005, we had totalindebtedness of $619.3 million and $58.8 million of borrowings available underCommunications’ Credit Facility, subject to customary conditions.

 

Our principal debtobligations are described below.

 

*Credit facility*

 

Communications’ Credit Facility consists of a$60.0 million revolving credit facility, which will terminate in April 2007.  Borrowings under the Credit Facilitygenerally bear interest based on a margin over, at Communications’ option, thebase rate or LIBOR.  The applicablemargin for revolving credit loans varies based upon Communications’ ratio ofconsolidated debt to EBITDA (as defined) and is currently 3.75% over LIBOR and2.50% over the base rate.  Communications’obligations under the credit facility are guaranteed by Advanstar HoldingsCorp. (“Advanstar Holdings”), our parent company, us and all Communications’existing and future domestic subsidiaries and are collateralized bysubstantially all of the assets of Communications’ and the subsidiaryguarantors, including a pledge of the capital stock of all Communications’existing and future domestic subsidiaries, a pledge of no more than 65% of thevoting stock of any foreign subsidiary directly owned by Communications or anydomestic subsidiary, a pledge of all intercompany indebtedness in favor ofCommunications and our domestic subsidiaries, a pledge of Communications’ andAdvanstar IH, Inc.’s capital stock held by us, and a pledge of our capitalstock by Advanstar Holdings.  The CreditFacility contains restrictive covenants, which require Communications to, amongother things, maintain a minimum fixed charge coverage ratio.

 

*Second priority senior secured notes*

 

Communications’ $9.9 million of floatingrate notes mature in 2008.  The floatingrate notes bear interest at an annual rate equal to the three-month LIBOR,which is reset quarterly, plus 7.50%. Interest on the floating rate notes, along with amortization of 0.25% ofthe principal of such floating rate notes, is payable quarterly in cash.  In June 2005, holders of $117,801,750 aggregate outstandingprincipal amount of the floating rate notes tendered their notes for purchase,and Communications purchased all such notes at a price equal to 107.3%(including a 3% consent fee) of principal plus accrued interest.  In connection with the tender offer,Communications and the trustee entered into a supplemental indenture thateliminated substantially all of the restrictive and reporting covenants,certain events of default and certain other provisions with respect to thefloating rate notes and released the floating rate notes’ lien on thecollateral under the indenture.  Thefixed rate notes remain secured by the collateral and subject to therestrictive covenants in the indenture. See “–Recent Developments” for additional information.

 

Communications’ $292.1 million of fixedrate notes mature in 2010.  The notes areguaranteed by each of Communications’ existing and future domestic restrictedsubsidiaries and collateralized by second-priority liens on the assetscollateralizing Communications’ credit facility (other than certain subsidiarystock and assets of its parent companies). The fixed rate notes bear interest at an annual rate of

 

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10.75%, which is payablesemi-annually in cash.  The notes containrestrictive covenants that, among other things, limit Communications’ abilityto incur debt, pay dividends and make investments.  In June 2005,holders of $8,665,000 principal amount of the fixed rate notes tendered theirnotes for purchase, and Communications purchased all such notes.  See “–Recent Developments” for additionalinformation.

 

*Senior subordinated notes*

 

Communications’ $160 million 12% seniorsubordinated notes mature in 2011 and are guaranteed by each of Communications’existing and future domestic restricted subsidiaries.  Interest on the notes is payablesemi-annually in cash.  The notes containrestrictive covenants that, among other things, limit Communications’ abilityto incur debt, pay dividends and make investments.

 

*Senior discount notes*

 

As part of the financing for the acquisitionof substantially all of the common stock of Holdings, our parent company, bycertain DLJ Merchant Banking funds in October 2000, we issued seniordiscount notes due October 2011 with a principal amount at maturity of$103.2 million.  Concurrently withthe closing of the offering of Communications’ 12% senior subordinated notes,we sold additional senior discount notes due October 2011 with anadditional aggregate principal amount at maturity of $68.6 million.  These notes do not require cash interestpayments until April 2006 and contain restrictive covenants that, amongother things, limit our ability and that of our subsidiaries to incur debt, paydividends and make investments.  However,we are a holding company and our ability to pay interest on these notes will bedependent upon the receipt of dividends from our subsidiaries.  Communications’ credit facility, the seniorsubordinated notes and second priority senior secured notes impose substantialrestrictions on our subsidiaries’ ability to pay dividends.

 

The restricted payments covenants inCommunications’ senior secured notes indenture and senior subordinated notesindenture provide that Communications can pay dividends only if its leverageratio (as defined) is 6.0 to 1.0 or better and only from a basket equal to theamount by which its cumulative EBITDA (as defined) since January 1, 2001exceeds 150% of its cumulative interest expense in that same period plus otheritems, including proceeds from equity offerings. As of September 30, 2005Communications’ leverage ratio under the most restrictive of theseindentures was 6.1 to 1.0.  Communications anticipates improvements in its operating results thatwould improve its ratio prior to the time that the discount notes requirepayment of interest in cash.  However,Communications’ results are subject to a variety of factors, including generaleconomic conditions and conditions in its markets, and we cannot assure youCommunications’ results will in fact improve to a point where Communicationscan make distributions under these restrictions.  In that case, unless Communications were torepay additional indebtedness or invest in a business that generates additionalEBITDA (as defined), Communications’ leverage ratio would not meet therequirements for it to be permitted to pay dividends, which could have amaterial adverse effect on our financial position, results of operations, andcash flows and/or could impact our ability to continue to operate without anamendment or restructuring of its credit facility and the notes.Notwithstanding the leverage ratio limitation on restricted payments,Communications can make restricted payments in an aggregate amount ofup to $20 million to us.

 

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*Contractual and contingent obligations*

 

Our contractual obligations (excludingaccounts payable and accrued expenses), as of September 30, 2005 are asset forth below (in millions):

 
| ** **                         | ** ** | **Payments  Due By Period** | ** ** |
|------------------------------------|------------|-----------------------------|------------|
| ** **                         | ** ** | **2005 (1)**                | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **After  2010** | ** ** | **Total** | ** ** |
|                               |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Indebtedness                       |       | $                           | —     |   | $ | 0.2 |   | $ | 0.1 |   | $ | 9.7 |   | $ | — |   | $ | 292.1 |   | $ | 331.8 |   | $ | 633.9 |   |
| Interest on  indebtedness (2)      |       | 16.2                        |       | 78.3 |   | 78.3 |   | 77.4 |   | 76.4 |   | 78.8 |   | 49.2 |   | 454.6 |   |
| Operating  lease obligations       |       | 1.6                         |       | 6.6 |   | 5.7 |   | 5.4 |   | 3.8 |   | 1.9 |   | 4.9 |   | 29.9 |   |
|                               |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total contractual cash obligations |       | $                           | 17.8       |   | $ | 85.1 |   | $ | 84.1 |   | $ | 92.5 |   | $ | 80.2 |   | $ | 372.8 |   | $ | 385.9 |   | $ | 1,118.4 |   |

 

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(1)                                  Forthe period from October 1, 2005 through December 31, 2005.

 

(2)                                  Intereston our variable rate debt is calculated using LIBOR of 3.86%, the rate in effect on October 1, 2005.  Because our variable rate debt bears interestat a variable rate, actual payments could differ.

 

We have no material capital lease obligations orpurchase obligations.  Our contingentobligations are primarily composed of $1.2 million of letters of credit.

 

*Off-balance sheet arrangements*

 

We have no material off-balance sheet arrangements.

 

**Recently Issued Accounting Standards**

 

In December 2004, the FinancialAccounting Standards Board issued SFAS No. 123R, “Share-Based Payment”which revises SFAS 123 and supersedes APB 25. This statement establishes standards relating to accounting fortransactions in which equity instruments are exchanged for goods orservices.  Under this statement, theCompany must measure the cost of employee services received in exchange for anaward of equity instruments based upon the fair value of the award on the dateof grant.  This cost must be recognizedover the period during which an employee is required to provide the service(usually the vesting period).  We arerequired to adopt the provisions of this standard effective January 1,2006.  The adoption of this standard willresult in an increase in compensation expense.

 

# **Item 3.*  Quantitative and QualitativeDisclosures about******Market Risk*

 

We are exposed to various market risks, whichare the potential losses arising from adverse changes in market rates andprices, such as foreign currency exchange and interest rates.  We do not enter into derivatives or otherfinancial instruments for trading or speculative purposes.  However, we do enter into financialinstruments to manage and reduce the impact of changes in interest rates andforeign currency exchange rates.

 

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# **Interest Rates**

 

At September 30, 2005, we had fixed ratedebt of $609.4 million and variable rate debt of $9.9 million.  A change in interest rates of 1% would not bematerial to us.

 

# **Currencies**

 

Outside of the United States, we maintainassets and operations in Europe.  Theseassets and operations, and our exposure to any currency gains or losses, arenot material to us.

 

# **Item** 4.  *Controls and Procedures*

 

*Evaluation ofdisclosure controls and procedures.*  Advanstar’sChief Executive Officer and Chief Financial Officer, after evaluating theeffectiveness of the Company’s disclosure controls and procedures (as definedin Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Actof 1934, as amended (the “Exchange Act”)) as of the end of the period coveredby this report (the “Evaluation Date”), have concluded that as of theEvaluation Date, our disclosure controls and procedures were effective anddesigned to ensure that information required to be disclosed by us in thereports that we file or submit under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in the Securities andExchange Commission’s rules and forms.

 

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

 

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# **PART II**                                                   OTHER INFORMATION

 
| **Item 6.** |   | **Exhibits**                                                                                                                                                                                                                          |
|-------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.3.5      |   | Fifth amendment to Credit Agreement, dated as of August, 19 2005  (Filed as an exhibit to Advanstar Communications, Inc.’s Quarterly Report on  Form 10-Q for the third quarter 2005 and incorporated by reference  herein) |
|        |   |                                                                                                                                                                                                                                  |
| 31.1        |   | Certification of principal executive officer  required by Rule 13a-14(a) or 15d-14(a) of the Exchange Act                                                                                                              |
|        |   |                                                                                                                                                                                                                                  |
| 31.2        |   | Certification of principal financial officer required by  Rule 13a-14(a) or 15d-14(a) of the Exchange Act                                                                                                              |
|        |   |                                                                                                                                                                                                                                  |
| 32.1        |   | Certification of principal executive officer required by  Rule 13a-14(b) or 15d-14(b) of the Exchange Act                                                                                                              |
|        |   |                                                                                                                                                                                                                                  |
| 32.2        |   | Certification of principal financial officer required by  Rule 13a-14(b) or 15d-14(b) of the Exchange Act                                                                                                              |

 

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**SIGNATURES**

 

Pursuant tothe 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. |
|------------------------|------------------------|
|                   |                   |
|                   |                   |
| November 14, 2005 | /s/                    | DAVID W. MONTGOMERY |   |
|                   |                   | David W. Montgomery |
|                   |                   | Vice President-Finance, Secretary and  Chief Financial Officer |
|                   |                   | (Principal Financial Officer and Authorized  Representative of the Registrant) |

 

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**Exhibit Index**

 
| **Exhibit No.** | ** ** | **Document**                                                                                                                                                                                                                          |
|----------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                                                                                  |
| 10.3.5               |       | Fifth amendment to Credit Agreement, dated as of  August, 19 2005 (Filed as an exhibit to Advanstar Communications, Inc.’s  Quarterly Report on Form 10-Q for the third quarter 2005 and  incorporated by reference herein) |
|                 |       |                                                                                                                                                                                                                                  |
| 31.1                 |       | Certification of principal executive officer  required by Rule 13a-14(a) or 15d-14(a) of the Exchange Act                                                                                                              |
|                 |       |                                                                                                                                                                                                                                  |
| 31.2                 |       | Certification of principal financial  officer required by Rule 13a-14(a) or 15d- 14(a) of the  Exchange Act                                                                                                            |
|                 |       |                                                                                                                                                                                                                                  |
| 32.1                 |       | Certification of principal executive  officer required by Rule 13a-14(b) or 15d-14(b) of the  Exchange Act                                                                                                             |
|                 |       |                                                                                                                                                                                                                                  |
| 32.2                 |       | Certification of principal financial  officer required by Rule 13a-14(b) or 15d-14(b) of the  Exchange Act                                                                                                             |

 

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