**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

** **

**FORM 10-Q**
| **(Mark One)** |
|----------------|
|           |
| **þ**     | **Quarterly Report Pursuant to Section 13 or  15(d) of The Securities Exchange Act of 1934.** |
| ** **     | ** ** |
| ** **     | **For the quarterly period ended: September 30,  2004** |
| ** **     | ** ** |
| ** **     | **OR** |
| ** **     | ** ** |
| **o**          | **Transition Report Pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934** |

 

**Commission FileNumber: 333-57201**

**Advanstar, Inc.**

**(Exact name of registrant as specified in itscharter)**

**Delaware**

**(State orother jurisdiction of**

**incorporation or organization)**

**94-3243499**

**(I.R.S.Employer**

**Identification No.)**

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

**(Address of principal executive offices)**

**10016**

**(Zip Code)**
|  | Registrant’s Telephone Number, Including Area Code:**(212) 951-6600** |
|--|----------------------------------------------------------------------------|

 

Indicate by check mark whether the registrant: (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days. Yes *   *þ*  * No o

Indicate by check mark whether the registrant is anaccelerated filer (as defined in Rule 12b-2 of the Exchange Act).Yes * *o *  * No   þ

Asof November 15, 2004, 100 shares of the registrant’s common stock wereoutstanding.

 

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|                                                                     |  

**       **                                                                    | ** **   | **Page in this  QuarterlyReport** |
|---------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------|--------------|----------------------------------------|
| **PART I     FINANCIAL  INFORMATION** | ** **                                                                                                                | ** **   |
| **Item 1.**                                                         | ***Financial Statements:***                                                                                               |         |                                   |
|                                                                | Condensed  Consolidated Balance Sheets at September 30, 2004 (unaudited) and  December 31, 2003                 |         | 2                                      |
|                                                                | Condensed  Consolidated Statements of Operations (unaudited) for the three months ended  September 30, 2004 and 2003 |         | 3                                      |
|                                                                | Condensed  Consolidated Statements of Operations (unaudited) for the nine months ended  September 30, 2004 and 2003  |         | 4                                      |
|                                                                | Condensed  Consolidated Statements of Cash Flows (unaudited) for the nine months ended  September 30, 2004 and 2003  |         | 5                                      |
|                                                                | Notes to Condensed  Consolidated Financial Statements (unaudited)                                                         |         | 6                                      |
| **Item  2.**                                                        | ***Management’s  Discussion and Analysis of Financial Condition and Results of Operations***                         | *** *** | 17                                     |
| **Item  3.**                                                        | ***Quantitative  and Qualitative Disclosures About Market Risk***                                                         | *** *** | 33                                     |
| **Item 4.**                                                         | ***Controls and  Procedures***                                                                                            | *** *** | 33                                     |
| **PART II     OTHER  INFORMATION**    | *** ***                                                                                                              |         |
| **Item  6.**                                                        | Exhibits                                                                                                                  | *** *** | 35                                     |
| Signatures                                                          | *** ***                                                                                                              | 36           |

** **

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**PART I   FINANCIAL INFORMATION**

**Advanstar, Inc.Condensed Consolidated BalanceSheets(In thousands, except share and per share data)**
| ** **                                                                                                                                        | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                        | ** ** | **2004**               | ** ** | **2003**              | ** ** |
| ** **                                                                                                                                        | ** ** | **(unaudited)**        | ** ** |
| **ASSETS**                                                                                                                                        |       |                   |       |                  |       |   |   |   |   |
| Current assets:                                                                                                                                   |       |                   |       |                  |       |   |   |   |   |
| Cash and cash equivalents                                                                                                                         |       |                   | $          | 40,840                |       |   |   | $ | 29,721 |   |   |
| Accounts  receivable, net of allowance of $1,110 and $1,006 at September 30, 2004  and December 31, 2003                                |       |                   | 31,175     |                  |       |   | 34,064 |   |   |
| Prepaid expenses                                                                                                                                  |       |                   | 7,379      |                  |       |   | 7,980 |   |   |
| Other                                                                                                                                             |       |                   | 1,851      |                  |       |   | 2,021 |   |   |
| Current assets of  discontinued operations                                                                                                        |       |                   | —     |                  |       |   | 3,316 |   |   |
| Total current assets                                                                                                                              |       |                   | 81,245     |                  |       |   | 77,102 |   |   |
| Due from parent                                                                                                                                   |       |                   | 230        |                  |       |   | 166 |   |   |
| Property, plant  and equipment, net                                                                                                               |       |                   | 24,688     |                  |       |   | 24,406 |   |   |
| Intangible and other  assets:                                                                                                                     |       |                   |       |                  |       |   |   |   |   |
| Goodwill                                                                                                                                          |       |                   | 704,984    |                  |       |   | 699,221 |   |   |
| Intangibles and other,  net                                                                                                                       |       |                   | 111,947    |                  |       |   | 142,391 |   |   |
| Total intangible and  other assets, net                                                                                                           |       |                   | 816,931    |                  |       |   | 841,612 |   |   |
| Non current  assets of discontinued operations                                                                                                    |       |                   | —     |                  |       |   | 45,887 |   |   |
|                                                                                                                                              |       |                   | $          | 923,094               |       |   |   | $ | 989,173 |   |   |
| **LIABILITIES AND STOCKHOLDER’S EQUITY**                                                                                                     |       |                   |       |                  |       |   |   |   |   |
| Current liabilities:                                                                                                                              |       |                   |       |                  |       |   |   |   |   |
| Current maturities of  long-term debt                                                                                                             |       |                   | $          | 1,800                 |       |   |   | $ | 3,700 |   |   |
| Accounts payable                                                                                                                                  |       |                   | 21,809     |                  |       |   | 29,350 |   |   |
| Accrued compensation                                                                                                                              |       |                   | 7,778      |                  |       |   | 7,011 |   |   |
| Other accrued expenses                                                                                                                            |       |                   | 29,369     |                  |       |   | 28,587 |   |   |
| Deferred revenue                                                                                                                                  |       |                   | 34,245     |                  |       |   | 56,553 |   |   |
| Current liabilities of  discontinued operations                                                                                                   |       |                   | —     |                  |       |   | 4,947 |   |   |
| Total current  liabilities                                                                                                                        |       |                   | 95,001     |                  |       |   | 130,148 |   |   |
| Long-term debt,  net of current maturities                                                                                                        |       |                   | 746,700    |                  |       |   | 740,371 |   |   |
| Deferred income  taxes                                                                                                                            |       |                   | 13,880     |                  |       |   | 6,990 |   |   |
| Other long-term  liabilities                                                                                                                      |       |                   | 3,996      |                  |       |   | 10,957 |   |   |
| Minority  interests                                                                                                                               |       |                   | 4,220      |                  |       |   | 3,516 |   |   |
| Long term  liabilities of discontinued operations                                                                                                 |       |                   | —     |                  |       |   | 6,573 |   |   |
| Commitments and  contingencies                                                                                                                    |       |                   |       |                  |       |   |   |   |   |
| Stockholder’s equity:                                                                                                                        |       |                   |       |                  |       |   |   |   |   |
| Common stock,  $.01 par value, 10,000 shares authorized; 100 shares issued and outstanding at  September 30, 2004 and December 31, 2003 |       |                   | —     |                  |       |   | — |   |   |
| Capital in excess  of par value                                                                                                                   |       |                   | 370,424    |                  |       |   | 370,424 |   |   |
| Accumulated  deficit                                                                                                                              |       |                   | (314,807   | )                     |       |   | (283,319 | ) |   |
| Accumulated other  comprehensive income                                                                                                           |       |                   | 3,680      |                  |       |   | 3,513 |   |   |
| Total  stockholder’s equity                                                                                                                  |       |                   | 59,297     |                  |       |   | 90,618 |   |   |
|                                                                                                                                              |       |                   | $          | 923,094               |       |   |   | $ | 989,173 |   |   |

 

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

2

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**Advanstar, Inc.Condensed Consolidated Statementsof Operations(In thousands)**
| ** **                                                                                                                                              | ** ** | **For the**                 | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                                                              | ** ** | **Three Months Ended** | ** ** |
| ** **                                                                                                                                              | ** ** | **September 30,**           | ** ** |
| ** **                                                                                                                                              | ** ** | **2004**                         | ** ** | **2003** | ** ** |
| ** **                                                                                                                                              | ** ** | **(unaudited)**                  | ** ** |
| Revenue                                                                                                                                                 |       | $                                | 100,396    |   | $ | 74,332 |   |
| Operating  expenses:                                                                                                                                    |       |                             |       |   |   |
| Cost of production                                                                                                                                      |       | 19,217                           |       | 13,861 |   |
| Selling, editorial and circulation                                                                                                                      |       | 40,207                           |       | 27,703 |   |
| General and administrative                                                                                                                              |       | 10,645                           |       | 8,788 |   |
| Restructuring (see Note 5)                                                                                                                              |       | —                           |       | 2,051 |   |
| Amortization of intangibles                                                                                                                             |       | 10,574                           |       | 10,882 |   |
| Depreciation                                                                                                                                            |       | 1,957                            |       | 1,992 |   |
| Total operating expenses                                                                                                                                |       | 82,600                           |       | 65,277 |   |
| Operating income                                                                                                                                        |       | 17,796                           |       | 9,055 |   |
| Other income  (expense):                                                                                                                                |       |                             |       |   |   |
| Interest expense, net                                                                                                                                   |       | (22,611                          | )          | (20,217 | ) |
| Write-off of deferred financing costs                                                                                                                   |       | —                           |       | (11,324 | ) |
| Other income (expense), net                                                                                                                             |       | (427                             | )          | (733 | ) |
| Loss from  continuing operations before income taxes and minority interests                                                                             |       | (5,242                           | )          | (23,219 | ) |
| Provision (benefit) for income taxes                                                                                                               |       | 3,113                            |       | (177 | ) |
| Minority interests                                                                                                                                      |       | (267                             | )          | (141 | ) |
| Loss from  continuing operations                                                                                                                        |       | (8,622                           | )          | (23,183 | ) |
| Discontinued  operations (see Note 3):                                                                                                                  |       |                             |       |   |   |
| Loss from  operations of discontinued businesses (including a goodwill impairment charge  of $6,150 for the three months ended September 30, 2004) |       | (6,604                           | )          | (352 | ) |
| Net loss                                                                                                                                                |       | $                                | (15,226    | ) | $ | (23,535 | ) |

 

The accompanying notes are an integral part of these condensed consolidated financial statements

3

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**Advanstar, Inc.Condensed ConsolidatedStatements of Operations(In thousands)**
| ** **                                                                                                                                                                                           | ** ** | **For the**                | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                                                                                                           | ** ** | **Nine Months Ended** | ** ** |
| ** **                                                                                                                                                                                           | ** ** | **September 30,**          | ** ** |
| ** **                                                                                                                                                                                           | ** ** | **2004**                        | ** ** | **2003** | ** ** |
| ** **                                                                                                                                                                                           | ** ** | **(unaudited)**                 | ** ** |
| Revenue                                                                                                                                                                                              |       | $                               | 306,032    |   | $ | 234,794 |   |
| Operating  expenses:                                                                                                                                                                                 |       |                            |       |   |   |
| Cost of production                                                                                                                                                                                   |       | 58,987                          |       | 45,665 |   |
| Selling, editorial and circulation                                                                                                                                                                   |       | 125,078                         |       | 88,896 |   |
| General and administrative                                                                                                                                                                           |       | 33,218                          |       | 27,462 |   |
| Restructuring (see Note 5)                                                                                                                                                                           |       | (3,895                          | )          | 2,051 |   |
| Amortization of intangibles                                                                                                                                                                          |       | 30,569                          |       | 32,314 |   |
| Depreciation                                                                                                                                                                                         |       | 6,293                           |       | 7,561 |   |
| Total operating expenses                                                                                                                                                                             |       | 250,250                         |       | 203,949 |   |
| Operating income                                                                                                                                                                                     |       | 55,782                          |       | 30,845 |   |
| Other income  (expense):                                                                                                                                                                             |       |                            |       |   |   |
| Interest expense, net                                                                                                                                                                                |       | (68,177                         | )          | (53,364 | ) |
| Write-off of deferred financing costs                                                                                                                                                                |       | —                          |       | (11,324 | ) |
| Other income (expense), net                                                                                                                                                                          |       | 924                             |       | (610 | ) |
| Loss from  continuing operations before income taxes and minority interests                                                                                                                          |       | (11,471                         | )          | (34,453 | ) |
| Provision for income taxes                                                                                                                                                                      |       | 9,671                           |       | 119 |   |
| Minority interests                                                                                                                                                                                   |       | (704                            | )          | (334 | ) |
| Loss from  continuing operations                                                                                                                                                                     |       | (21,846                         | )          | (34,906 | ) |
| Discontinued  operations (see Note 3):                                                                                                                                                               |       |                            |       |   |   |
| (Loss) income  from operations of discontinued businesses (including a goodwill impairment  charge of $15,570 net of minority interest of $5,072 for the nine months  ended September 30, 2004) |       | (9,642                          | )          | 2,969 |   |
| Net loss                                                                                                                                                                                             |       | $                               | (31,488    | ) | $ | (31,937 | ) |

 

The accompanying notes are an integral part of these condensed consolidated financial statements

4

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**Advanstar, Inc.Condensed Consolidated Statementsof Cash Flows(In thousands)**
| ** **                                                                                 | ** ** | **For the**                | ** ** |
|--------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                 | ** ** | **Nine Months Ended** | ** ** |
| ** **                                                                                 | ** ** | **September 30,**          | ** ** |
| ** **                                                                                 | ** ** | **2004**                        | ** ** | **2003** | ** ** |
| ** **                                                                                 | ** ** | **(unaudited)**                 | ** ** |
| Operating activities:                                                                      |       |                            |       |   |   |
| Net loss                                                                                   |       | $                               | (31,488    | ) | $ | (31,937 | ) |
| Adjustments to  reconcile net loss to net cash provided by (used in) operating activities: |       |                            |       |   |   |
| Depreciation and amortization                                                              |       | 37,173                          |       | 41,035 |   |
| Write-off of deferred financing costs                                                      |       | —                          |       | 11,324 |   |
| Restructuring charge                                                                       |       | (3,895                          | )          | 2,051 |   |
| Goodwill impairment                                                                        |       | 15,570                          |       | — |   |
| Gain on derivative financial instruments                                                   |       | (1,300                          | )          | 135 |   |
| Undistributed earnings of minority interest holders                                        |       | 704                             |       | 560 |   |
| Noncash interest expense                                                                   |       | 17,958                          |       | 15,460 |   |
| (Gain) loss on sale of business and other assets                                           |       | (1,006                          | )          | (33 | ) |
| Deferred income taxes                                                                      |       | 6,890                           |       | 660 |   |
| Provision for bad debts                                                                    |       | 638                             |       | 421 |   |
| Changes in operating assets and liabilities                                                |       | (29,215                         | )          | (18,624 | ) |
| Net cash provided by operating activities                                             |       | 12,029                          |       | 21,052 |   |
| Investing activities:                                                                      |       |                            |       |   |   |
| Additions to property, plant and equipment                                                 |       | (6,764                          | )          | (4,456 | ) |
| Acquisitions of publications and trade shows, net of  cash acquired                        |       | (7,915                          | )          | (216 | ) |
| Proceeds from sale of business and other assets                                            |       | 24,285                          |       | 3 |   |
| Net cash provided by (used in) investing activities                                        |       | 9,606                           |       | (4,669 | ) |
| Financing  activities:                                                                     |       |                            |       |   |   |
| Proceeds from revolving credit loan                                                        |       | 6,000                           |       | 21,000 |   |
| Payments on revolving credit loan                                                          |       | (14,000                         | )          | (45,100 | ) |
| Proceeds from issuance of long-term debt                                                   |       | —                          |       | 431,050 |   |
| Payments of long-term debt                                                                 |       | (2,875                          | )          | (332,700 | ) |
| Contribution of capital from parent                                                        |       | —                          |       | 50,000 |   |
| Dividends paid to minority interest holders                                                |       | —                          |       | (227 | ) |
| Deferred financing costs                                                                   |       | (302                            | )          | (16,207 | ) |
| Net cash (used in) provided by financing activities                                        |       | (11,177                         | )          | 107,816 |   |
| Effect of  exchange rate changes on cash                                                   |       | 661                             |       | 453 |   |
| Net increase in  cash and cash equivalents                                                 |       | 11,119                          |       | 124,652 |   |
| Cash and cash equivalents, beginning of period                                             |       | 29,721                          |       | 19,022 |   |
| Cash and cash  equivalents, end of period                                                  |       | $                               | 40,840     |   | $ | 143,674 |   |

 

The accompanying notes are an integral part of these condensed consolidated financial statements

5

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**Advanstar, Inc. Notes to Condensed Consolidated Financial Statements**

**1.   Basisof Presentation**

The accompanying unauditedcondensed consolidated financial statements have been prepared by Advanstar, Inc.(“Advanstar”), its wholly owned subsidiary, Advanstar Communications Inc. (“Communications”),and Communications’ majority owned subsidiaries (collectively, the “Company”)in accordance with the instructions to Form 10-Q and, therefore, do notinclude all the information and footnotes required by generally acceptedaccounting principles for complete financial statements. Management believesthat all adjustments, consisting solely of normal recurring items considerednecessary for a fair presentation have been included. These condensedconsolidated financial statements, however, should be read in conjunction withthe audited financial statements and the related notes included in the Company’sannual report on Form 10-K filed with the Securities and ExchangeCommission on March 29, 2004. The results of operations for the three andnine month periods ended September 30, 2004 are not necessarily indicativeof the operating results that may be expected for the entire year ending December 31,2004.

**2.   Summary of Significant Interim AccountingPolicies**

***Stock-Based Compensation***

As permitted by Statement of Financial AccountingStandards (“SFAS”)  No. 123, “Accountingfor Stock-Based Compensation,” the Company has elected to account for stockoptions and awards to employees under the provisions of Accounting PrinciplesBoard (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,”and related interpretations.

If theCompany had elected to recognize compensation costs based on the fair value ofthe options granted as prescribed by SFAS No. 123, results would have beenadjusted to the pro forma amounts indicated in the table below (in thousands):
| ** **                                         | ** ** | **For the**                 | ** ** | **For the**                | ** ** |
|----------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                         | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
| ** **                                         | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                         | ** ** | **2004**                         | ** ** | **2003**                        | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net loss—as  reported                         |       | $                                | (15,226    | )                               | $          | (23,535 | ) | $ | (31,488 | ) | $ | (31,937 | ) |
| Less: pro forma  stock based employee compensation |       | (521                             | )          | (592                            | )          | (1,903 | ) | (1,776 | ) |
| Net loss—pro forma                            |       | $                                | (15,747    | )                               | $          | (24,127 | ) | $ | (33,391 | ) | $ | (33,713 | ) |

 

***Interim Income TaxExpense***

The Company determines itsquarterly income tax provision based upon an estimated annual effective incometax rate. In determining the effective income tax rate applicable to interimperiods, the Company excludes tax jurisdictions where no tax expense or benefitis expected for the entire year.

***Recently Issued Accounting Standards***

In December 2003, theFinancial Accounting Standards Board (“FASB”) issued Interpretation No. 46R,*Consolidation of Variable Interest Entities*,which addresses accounting for special-purpose and variable interest entitiesand which superseded Interpretation No. 46.  The provisions of Interpretation No. 46Rare effective for the Company in the first quarter of 2005. Based upon theCompany’s preliminary 

6

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**Advanstar, Inc. Notes to Condensed Consolidated Financial Statements (Continued)**

analysis,the Company does not expect its adoption of Interpretation No. 46R to havea material effect on its financial position, results of operations or cashflows.

**3.   Acquisitionsand Divestitures**

***Acquisitions***

On October 1, 2003, the Company purchased aportfolio of healthcare industry magazines and related custom projects businessfrom the Thomson Corporation and its subsidiaries (“Thomson”) for $150.7 million,including $136.5 million in cash (including related fees and expenses) and$14.1 million of assumed liabilities.

On March 8, 2004, the Company purchased aportfolio of pharmaceutical industry conferences and magazines from theInstitute of Validation Technology, Inc. (“IVT”) for $7.9million in cash plus assumed liabilities. In addition, the Company agreed topay additional contingent cash consideration based on 2004 and 2005 operatingresults of the acquired assets. Certain of the acquired assets and assumedliabilities are recorded based upon preliminary estimates of their respectivefair values as of the date of the acquisition. The Company does not believe thefinal allocation of purchase price will be materially different frompreliminary allocations.

Thefollowing table provides the unaudited pro forma operating results of theCompany for the three and nine month periods ended September 30, 2003 asif the Thomson acquisition had taken place at January 1, 2003. The proforma operating results do not include the effect of the IVT acquisitiondescribed above because the acquisition is not material (in thousands):
| ** **                       | ** ** | **For the**                 | ** ** | **For the**                | ** ** |
|----------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                       | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
| ** **                       | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                       | ** ** | **2003**                         | ** ** | **2003**                        | ** ** |
| Revenue                          |       |                             | $          | 96,910                          |       |   |   | $ | 298,193 |   |   |
| Loss from  continuing operations |       |                             | (43,158    | )                               |       |   | (48,259 | ) |   |
| Net loss                         |       |                             | (43,510    | )                               |       |   | (45,290 | ) |   |

 

The unaudited pro formaoperating results do not purport to represent what the Company’s results ofoperations actually would have been if the acquisition had occurred as of thedate indicated or what such results will be for any future periods.

***Divestitures***

*Art Group*

On March 12, 2004, the Company completed the saleof its art industry trade shows and magazines (the “Art Group”) for a totalselling price of $19.6 million in cash. The portfolio included three tradeshows and two publications. The Company recorded a gain on the sale of $1.0million plus a tax benefit of $2.4 million.

The results of the Art Group have been reported indiscontinued operations in the condensed consolidated statements of operationsfor the nine months ended September 30, 2004 and the three and nine monthsended September 30, 2003. In addition, the assets and liabilities of theArt Group are reported in discontinued operations in the condensed consolidatedbalance sheet at December 31, 2003. 

7

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**Advanstar, Inc. Notes to Condensed Consolidated Financial Statements (Continued)**

Prior year consolidatedfinancial statements have been restated to present the Art Group indiscontinued operations.

Revenues of the Art Group,included in discontinued operations in the condensed consolidated statements ofoperations, were $8.5 million for the period from January 1, 2004 to March 12,2004.  For the three and nine monthsended September 30, 2003, Art Group revenues were  $0.5 million and $10.2 million,respectively. Income (loss) before income taxes of the Art Group reported indiscontinued operations in the condensed consolidated statements of operations,which excludes the gain on sale, was $3.4 million for the period from January 1,2004 to March 12, 2004, a loss of $0.4 million for the three monthsended September 30, 2003 and a profit of $2.5 million for the nine monthsended September 30, 2003.

*SeCA*

On August 5, 2004, the Company completed thesale, for a total selling price of $3.1 million in cash, of its 65% ownershipin its French joint venture (“SeCA”), which consisted of one trade show. Inconnection with the sale, the Company recorded a goodwill impairment charge of$9.4 million in the second quarter of 2004. The amount of the impairment chargewas determined based upon the excess of the carrying value of the Company’sinterest in SeCA over the selling price, less the costs incurred by the Companyto sell SeCA. This charge is reported separately as a component of discontinuedoperations for the nine months ended September 30, 2004.

The results of SeCA have been reported as a componentof discontinued operations in the condensed consolidated statements ofoperations for the three and nine months ended September 30, 2004 and 2003.Prior year consolidated financial statements have been restated to present SeCAin discontinued operations. In addition, the assets and liabilities of SeCA arereported as assets and liabilities of discontinued operations in the condensedconsolidated balance sheet at December 31, 2003.

Revenues of SeCA were $2.9million from January 1, 2004 to June 30, 2004. There were no revenuesfor the three months ended September 30, 2004. Revenues of SeCA were $0.1million and $3.8 million for the three and nine months ended September 30,2003. Income (loss) before income taxes of SeCA, net of minority interest, reported in discontinuedoperations in the condensed consolidated statements of operations for the ninemonths ended September 30, 2004 was a loss of $8.5 million. This loss included a goodwill impairment charge of$9.4 million.  SeCAhad no income (loss) before income taxes for the three months ended September 30,2004.  SeCA generated a loss beforeincome taxes of $0.3 million and income before income taxes of $0.9 million forthe three and nine months ended September 30, 2003.

*DMS*

On September 8, 2004, the Company sold its Germantrade show business (“DMS”) for $1.7 million in cash. In connection with thesale, the Company recorded a goodwill impairment charge of $6.2 million in thethird quarter of 2004. The amount of the impairment charge was determined basedupon the excess of the carrying value of DMS over the selling price, less thecosts incurred by the Company to sell DMS. This charge is reported as acomponent of discontinued operations for the three and nine months ended September 30,2004.

Revenues of DMS were $0.1 million for the three andnine months ended September 30, 2004. DMS revenues were $1.7 million and$1.8 million for the three and nine months ended September 30, 2003. 

8

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**Advanstar, Inc. Notes to Condensed Consolidated Financial Statements (Continued)**

Income (loss) beforeincome taxes, reported in discontinued operations inthe condensed consolidated statements of operations were a loss of $6.5 million and $7.5 million forthe three and nine months ended September 30, 2004,  respectively. The loss in each of these periodsincluded a goodwill impairment charge of $6.2 million. DMS’income (loss) before income taxes were a profit of $0.3 million and $0.1million for the three and nine months ended September 30, 2003, respectively.

Thediscontinued operations of the Art Group, SeCA and DMS included in thecondensed consolidated Balance Sheets as of December 31, 2003 are asfollows (in thousands):
| ** **                                                                                 | ** ** | **December 31, 2003** | ** ** |
|--------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| Assets                                                                                     |       |                            |       |   |   |
| Accounts receivable                                                                        |       |                            | $          | 2,221 |   |   |
| Prepaid expenses                                                                           |       |                            | 1,095      |   |   |
| Total current assets of discontinued operations and  assets held for sale                  |       |                            | 3,316      |   |   |
| Property, plant and equipment, net                                                         |       |                            | 128        |   |   |
| Goodwill                                                                                   |       |                            | 43,275     |   |   |
| Intangibles and other, net                                                                 |       |                            | 2,484      |   |   |
| Total non current assets of discontinued operations and assets held for sale          |       |                            | 45,887     |   |   |
| Liabilities                                                                                |       |                            |       |   |   |
| Accounts payable and other accrued expenses                                                |       |                            | 519        |   |   |
| Deferred revenue                                                                           |       |                            | 4,428      |   |   |
| Total current liabilities of discontinued operations and assets held for sale         |       |                            | 4,947      |   |   |
| Minority interests                                                                         |       |                            | 6,573      |   |   |
| Total long term liabilities of discontinued operations and assets held for sale  |       |                            | 6,573      |   |   |
| Net assets of  discontinued operations  and assets held for sale                      |       |                            | $          | 37,683 |   |   |

 

The ArtGroup, SeCA and DMS assets included in discontinued operations in the Company’sreportable segments at December 31, 2003 (in thousands) are as follows:
| ** **     | ** ** | **Trade Shows** | ** ** | ** **       | ** ** | ** **      | ** ** | ** **    | ** ** | ** ** | ** ** |
|----------------|------------|----------------------|------------|------------------|------------|-----------------|------------|---------------|------------|------------|------------|
| ** **     | ** ** | **and**              | ** ** | **Trade**        | ** ** | **Market**      | ** ** | ** **    | ** ** | ** ** | ** ** |
| ** **     | ** ** | **Conferences**      | ** ** | **Publications** | ** ** | **Development** | ** ** | **Corporate** | ** ** | **Total**  | ** ** |
| Segment assets |       |                 | 45,167     |             |       |            | 3,908      |          |       |       | —     |   |   |   | 128 |   |   | 49,203 |   |
|                |            |                      |            |                  |            |                 |            |               |            |            |            |  |  |  |  |  |  |  |  |

 

9

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**Advanstar, Inc. Notes to Condensed Consolidated Financial Statements  (Continued)**

**4.   Goodwill and Other Intangible Assets**

The changes in the carrying amount of goodwill for thenine months ended September 30,2004, by operating segment, are as follows (in thousands):
| ** **                                                | ** ** | **Trade Shows** | ** ** | ** **       | ** ** | ** **      | ** ** | ** ** | ** ** |
|-----------------------------------------------------------|------------|----------------------|------------|------------------|------------|-----------------|------------|------------|------------|
| ** **                                                | ** ** | **and**              | ** ** | **Trade**        | ** ** | **Market**      | ** ** | ** ** | ** ** |
| ** **                                                | ** ** | **Conferences**      | ** ** | **Publications** | ** ** | **Development** | ** ** | **Totals** | ** ** |
| Balance as of  December 31, 2003                     |       |                 | $          | 457,700          |       |            |       | $          | 210,443    |   |   |   | $ | 31,078 |   |   | $ | 699,221 |   |
| Goodwill acquired  or finally allocated during the period |       |                 | —     |             |       |            | 6,268      |       |       |   | — |   |   | 6,268 |   |
| Goodwill  allocated to business disposition               |       |                 | —     |             |       |            | (900       | )          |       |   | — |   |   | (900 | ) |
| Foreign currency  translation                             |       |                 | 300        |             |       |            | 101        |       |       |   | (6 | ) |   | 395 |   |
| Balance as of  September 30, 2004                    |       |                 | $          | 458,000          |       |            |       | $          | 215,912    |   |   |   | $ | 31,072 |   |   | $ | 704,984 |   |

 

Tradeexhibitor and advertiser lists are amortized on a double-declining balancemethod over six years and five years, respectively, subscriber lists and otherintangible assets are amortized on a straight-line basis over three to tenyears, trademarks and trade names are amortized on a straight-line basis overtwenty years. These intangible assets consist of the following as of September 30,2004 and December 31, 2003 (in thousands):
| ** **                              | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                              | ** ** | **2004**               | ** ** | **2003**              | ** ** |
| Trade exhibitor  lists                  |       |                   | $          | 155,227               |       |   |   | $ | 155,043 |   |   |
| Advertiser lists                        |       |                   | 61,507     |                  |       |   | 62,303 |   |   |
| Subscriber lists                        |       |                   | 29,188     |                  |       |   | 28,577 |   |   |
| Trade names and  trademarks             |       |                   | 18,108     |                  |       |   | 18,008 |   |   |
| Other intangible  assets                |       |                   | 22,803     |                  |       |   | 21,323 |   |   |
| Deferred  financing costs               |       |                   | 23,365     |                  |       |   | 23,063 |   |   |
|                                    |       |                   | 310,198    |                  |       |   | 308,317 |   |   |
| Accumulated  amortization               |       |                   | (198,251   | )                     |       |   | (165,926 | ) |   |
| Total intangible  and other assets, net |       |                   | $          | 111,947               |       |   |   | $ | 142,391 |   |   |

 

Estimatedamortization expense of identified intangible assets and other for theremaining three months of 2004 and for the next five years is as follows: (inthousands):
| 2004 |   | $      | 11,097 |   |
|------|--------|--------|--------|--------|
| 2005 |   | 37,504 |   |
| 2006 |   | 27,017 |   |
| 2007 |   | 11,245 |   |
| 2008 |   | 7,779  |   |
| 2009 |   | 3,696  |   |

 

**5.   Restructuring**

In March 2001, the Company more closelyintegrated certain activities of its wholly owned subsidiary Advanstar.com, Inc(Advanstar.com) with Communications. As a result of the integration,restructuring 

10

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**Advanstar, Inc. Notes to Condensed Consolidated Financial Statements  (Continued)**

charges were incurred. Allrestructuring charges were finalized by the end of 2001 other than facilitylease costs. The restructuring charge accrual relating to the facility leasecosts was $6.2 million at December 31, 

2003. The facility leaseobligation was settled in May 2004 for less than amounts owed under thelease. The $3.9 million favorable settlement (net of fees and related expenses)of the lease obligation was recognized as an offset to operating expense forthe nine months ended September 30, 2004. As of September 30, 2004,no liability exists on the Company’s balance sheet relating to thisrestructuring. 

In September 2003,the Company consolidated its midtown New York leased office space from twofloors to one. These actions resulted in a 2003 third quarter charge ofapproximately $2.1 million. In December 2003, the Company consolidated itsChester U.K. leased office space, resulting in a fourth quarter charge ofapproximately $0.6 million. The balance of the accrual for these costs at September 30,2004 and December 31, 2003 was $1.8 million and $2.4 million, whichprincipally represents remaining facility lease costs of which $0.4 million and$0.5 million is included in accrued liabilities, respectively, and $1.4 millionand $1.9 million is included in other long term liabilities, respectively, inthe accompanying condensed consolidated balance sheet at September 30,2004 and December 31, 2003.

**6.   FinancialDerivative Instruments**

The Company usesderivative instruments to manage exposure to interest rate and foreign currencyrisks. The Company’s objectives for holding derivatives are to minimize theserisks using the most effective methods to eliminate or reduce the impact ofthese exposures.

***Interest Rate Risk***

In 2001, the Company entered into an interest ratecollar agreement expiring February 2004 to manage its exposure to interestrate movements on a portion of its variable rate debt obligations. Theeffective portion of the cumulative gain or loss on the interest rate collaragreement was reported as a component of accumulated other comprehensive incomein stockholder’s equity and recognized in earnings as the underlying interestexpense was incurred. The ineffective portion of the interest rate collaragreement was recognized in current earnings. Gains and losses on theundesignated portion of this agreement were recognized in current earningsuntil expiration.

In May 2003, theCompany entered into an interest rate swap agreement expiring November 2005.The Company terminated this agreement in December 2003. The net gain attermination of approximately $0.2 million will continue to be reported inaccumulated other comprehensive income and will be amortized into earnings overthe original contract term.

***Foreign Currency Risk***

The Company uses forward contracts to manage itsexposure associated with forecasted international revenue and expensetransactions for up to 15 months in the future. Foreign currencies hedged arethe euro, British Pound Sterling and the Brazilian Real. Changes in the fairvalue of these instruments are reported as a component of accumulated othercomprehensive income in stockholder’s equity and are recognized in earnings asthe underlying revenue is recognized. Forward contracts not designated ashedging instruments under SFAS No. 133 are also used to manage theimpact of the variability in exchange rates. Changes in the fair value of theseforeign exchange contracts are recognized in current earnings.

11

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**Advanstar, Inc. Notes to Condensed Consolidated Financial Statements  (Continued)**

At September 30,2004, the Company had foreign exchange derivative contracts to sell with anotional amount totaling $1.9 million and to buy totaling $0.5 million. Theestimated fair value of the foreign exchange contracts based upon market quoteswas a net liability of $0.1 million.

***Accumulated Other Comprehensive Income (Loss)***

Thefollowing table summarizes the effects of SFAS 133 on the Company’s accumulatedother comprehensive income (loss) as of September 30, 2004 and 2003 (in thousands):
| ** **                                                                        | ** ** | **Interest Rate** | ** ** | **Foreign**   | ** ** | ** ** | ** ** |
|-----------------------------------------------------------------------------------|------------|------------------------|------------|---------------|------------|------------|------------|
| ** **                                                                        | ** ** | **Collar**             | ** ** | **Exchange**  | ** ** | ** ** | ** ** |
| ** **                                                                        | ** ** | **Agreements**         | ** ** | **Contracts** | ** ** | **Total**  | ** ** |
| Accumulated other  comprehensive income (loss) balance at December 31, 2003  |       |                   | $          | (42           | )          |       |       | $ | — |   |   | $ | (42 | ) |
| Unwound from  accumulated other comprehensive income (loss) during the period     |       |                   | (74        | )             |       |       | —     |   |   | (74 | ) |
| Mark to market  hedge contracts                                                   |       |                   | 244        |          |       |       | —     |   |   | 244 |   |
| Accumulated other  comprehensive income (loss) balance at September 30, 2004 |       |                   | $          | 128           |       |       |       | — |   |   | $ | 128 |   |
| Accumulated other  comprehensive income (loss) balance at December 31, 2002  |       |                   | $          | (4,350        | )          |       |       | $ | — |   |   | $ | (4,350 | ) |
| Unwound from  accumulated other comprehensive income (loss) during the period     |       |                   | 4,057      |          |       |       | —     |   |   | 4,057 |   |
| Mark to market  hedge contracts                                                   |       |                   | (1,017     | )             |       |       | (22        | ) |   | (1,039 | ) |
| Accumulated other  comprehensive income (loss) balance at September 30, 2003 |       |                   | $          | (1,310        | )          |       |       | $ | (22 | ) |   | $ | (1,332 | ) |

 

At September 30,2004, the Company estimates that it will reclassify out of accumulated othercomprehensive income approximately $0.1 million of deferred gains into earningswithin the next 12 months. The fair value of the Company’s derivatives was anet liability position of $0.1 million and $1.5 million at September 30,2004 and December 31, 2003, respectively, which is included in otheraccrued expenses in the accompanying condensed consolidated balance sheets.

***Statement of Operations***

Thefollowing tables summarize the effects of SFAS No. 133 included in otherincome (expense) in the Company’s statement of operations related to theineffective portion of the Company’s interest rate protection agreements andforeign exchange contracts not designated as hedging instruments for the threeand nine months ended September 30, 2004 and 2003 (in thousands):
| ** **                                  | ** ** | **Interest Rate** | ** ** | **Foreign**   | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|------------------------|------------|---------------|------------|------------|------------|
| ** **                                  | ** ** | **Collar**             | ** ** | **Exchange**  | ** ** | ** ** | ** ** |
| ** **                                  | ** ** | **Agreements**         | ** ** | **Contracts** | ** ** | **Total**  | ** ** |
| Three months  ended September 30, 2004 |       |                   | $          | —        |       |       |       | $ | 14 |   |   | $ | 14 |   |
| Three months  ended September 30, 2003 |       |                   | (774       | )             |       |       | (71        | ) |   | (845 | ) |
| Nine months ended  September 30, 2004  |       |                   | 1,294      |          |       |       | 5          |   |   | 1,299 |   |
| Nine months ended  September 30, 2003  |       |                   | 368        |          |       |       | 599        |   |   | 967 |   |
|                                             |            |                        |            |               |            |            |            |  |  |  |  |  |  |  |

 

12

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**Advanstar, Inc. Notes to Condensed Consolidated Financial Statements  (Continued)**

**7.   Debt**

***Credit Facility***

The credit facility (the “CreditFacility”) consists of (i) $415.0 million of term loans B payable inquarterly installments through October 11, 2008, and (ii) $60.0million of revolving loan availability through April 11, 2007. The CreditFacility contains restrictive covenants which requires Communications to, amongother things, maintain a minimum fixed charge ratio (as defined). Failure ofCommunications to comply with the current covenants may cause an event ofdefault under the Credit Facility. Borrowings under the Credit Facility arecollateralized by substantially all of the Company’s assets.

***Senior SecuredNotes***

On August 18, 2003,Communications issued $360.0 million of second priority senior secured notes(the “August senior secured notes”). On September 25, 2003,Communications issued an additional $70.0 million of second priority seniorsecured notes (the “September senior secured notes”), which were issued ata premium (together with the August senior secured notes, the “SeniorSecured Notes”). The Senior Secured Notes were issued in two tranches: $130.0million of Second Priority Senior Secured Floating Rate Notes due 2008, whichwill require quarterly amortization equal to 0.25% of the principal amountthereof (the “floating rate notes”), and $300.0 million of 10.75% SecondPriority Senior Secured Notes due 2010. Interest on the floating rate notes ispayable at a rate equal to three-month LIBOR, which is reset quarterly, plus7.5%. Each tranche of the notes is collateralized by second priority liens onsubstantially all of the collateral pledged against borrowings underCommunications’ Credit Facility (other than the capital stock of certain of itssubsidiaries and assets of its parent companies, including Advanstar). Thenotes contain restrictive covenants that, among other things, limitCommunications’ ability to incur debt, pay dividends and make investments. Communicationsentered into a registration rights agreement in connection with the privateplacement pursuant to which the Company has registered substantially all of thenotes under the Securities Act of 1933, as amended.

Communications used thenet proceeds from the August senior secured notes offering to repay andterminate all outstanding term A loans under its Credit Facility and all but$25.0 million of the outstanding term B loans and a portion of its revolvingcredit borrowings under its Credit Facility. Communications used the netproceeds of the September senior secured notes offering to reduce revolverborrowings and acquire a portfolio of healthcare industry magazines and relatedcustom projects business from the Thomson Corporation (Note 3).

The Senior Secured Notesare fully and unconditionally guaranteed on a senior basis, jointly andseverally, by Communications’ wholly owned domestic subsidiaries. The financialcovenants under the notes include limitations on certain asset dispositions,payments, debt incurrence, dividends and other restricted payments.

***Senior SubordinatedDebt and Discount Notes***

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 Senior Subordinated Notes are fully andunconditionally guaranteed on a senior subordinated basis, jointly andseverally, by Communications’ wholly owned domestic subsidiaries. The financialcovenants under the Senior Subordinated Notes include limitations on certainasset dispositions, payments, debt incurrence, dividends and other restrictedpayments.

13

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**Advanstar, Inc. Notes to Condensed Consolidated Financial Statements (Continued)**

The Company’s senior discount notes due October 2011(the “Discount Notes”) with a principal amount at maturity of$171.8 million bear interest at 15%, payable semiannually beginning October 2005,and have an implied yield to maturity of approximately 17.2%. The notes areredeemable at the Company’s option at specified premiums through 2007 and atpar thereafter. The notes may also be redeemed at a premium upon a qualifyingchange of control of the Company.

The Discount Notes do not require cash interest paymentsuntil 2006 and contain restrictive covenants that, among other things, limitthe Company’s ability and that of its subsidiaries to incur debt, pay dividendsand make investments. Since the Company is a holding company and itssubsidiaries serve as its only source of cash flow, its ability to pay intereston these notes will be dependent upon the receipt of dividends from itssubsidiaries. The Credit Facility, the Senior Secured Notes and the SeniorSubordinated Notes impose substantial restrictions on the Company’ssubsidiaries’ ability to pay dividends to the Company. Additionally, theDiscount Notes are not guaranteed by the Company’s subsidiaries.

Accretion of the debt discount on the Discount Noteswas $5.3 million and $4.5 million during the three months ended September 30,2004 and 2003 and $15.4 million and $13.1 million in the nine months ended September 30,2004 and 2003, respectively. These amounts are included in interest expense inthe respective accompanying consolidated statements of operations.

Long-termdebt consists of the following (in thousands):
| ** **                                                                                                                                                                                      | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                      | ** ** | **2004**               | ** ** | **2003**              | ** ** |
| Term loan B,  interest at LIBOR plus 4.50%; 6.34% at September 30, 2004, due quarterly  through October 11, 2008                                                                 |       |                   | $          | 25,000                |       |   |   | $ | 25,000 |   |   |
| Revolving credit  loan, interest at LIBOR plus 3.75%; due April 11, 2007                                                                                                                        |       |                   | —     |                  |       |   | 8,000 |   |   |
| Second priority  senior secured floating rate notes, interest at LIBOR plus 7.5%, 9.21% at  September 30, 2004, due 2008                                                                   |       |                   | 128,700    |                  |       |   | 129,675 |   |   |
| 10.75% Second  priority senior secured notes, due 2010, plus unamortized premium of $881 and  $994 at September 30, 2004 and December 31, 2003, respectively                          |       |                   | 300,881    |                  |       |   | 300,994 |   |   |
| 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 $38,373 and $53,790 at September 30, 2004 and  December 31, 2003, respectively |       |                   | 133,419    |                  |       |   | 118,002 |   |   |
| Acquisition note  payable, interest at 5.50%, due monthly through 2004                                                                                                                          |       |                   | 500        |                  |       |   | 2,000 |   |   |
| Acquisition note  payable, interest at 6.00%, due April 1, 2004                                                                                                                            |       |                   | —     |                  |       |   | 400 |   |   |
|                                                                                                                                                                                            |       |                   | 748,500    |                  |       |   | 744,071 |   |   |
| Less current  maturities                                                                                                                                                                        |       |                   | (1,800     | )                     |       |   | (3,700 | ) |   |
|                                                                                                                                                                                            |       |                   | $          | 746,700               |       |   |   | $ | 740,371 |   |   |

 

14

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**Advanstar, Inc. Notes to Condensed Consolidated Financial Statements (Continued)**

**8.   Comprehensive Income**

Thetable below presents comprehensive loss, defined as changes in the equity ofthe Company excluding changes resulting from investments by and distributionsto shareholders (in thousands):
| ** **                                                       | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                       | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                                       | ** ** | **2004**                         | ** ** | **2003**                        | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net loss                                                         |       | $                                | (15,226    | )                               | $          | (23,535 | ) | $ | (31,488 | ) | $ | (31,937 | ) |
| Change in  cumulative translation adjustment                     |       | (1,551                           | )          | 61                              |       | (3 | ) | 5,560 |   |
| Change in  unrealized losses on derivative financial instruments |       | 22                               |       | 2,516                           |       | 170 |   | 3,018 |   |
| Comprehensive loss                                               |       | $                                | (16,755    | )                               | $          | (20,958 | ) | $ | (31,321 | ) | $ | (23,359 | ) |

 

**9.   Segments**

The Company follows the provisions of SFAS No. 131,“Disclosures about Segments of an Enterprise and Related Information,” and hasthree reportable segments: trade shows and conferences, trade publications, andmarket development.

TheCompany evaluates the performance of, and allocates resources to, its segmentsbased on contribution margin—defined as net revenue less cost of production andselling, editorial, and circulation costs. The accounting policies of thereportable segments are the same as those described in the summary ofsignificant accounting policies. There are no inter-segment sales or transfers.Segment assets are primarily intangible assets, prepaid expenses and accountsreceivable. Revenues, contribution margins and segment assets of the Company’sreportable segments are as follows (in thousands):
| ** **                                  | ** ** | **Trade Shows** | ** ** | ** **       | ** ** | ** **      | ** ** | ** **    | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|----------------------|------------|------------------|------------|-----------------|------------|---------------|------------|------------|------------|
| ** **                                  | ** ** | **and**              | ** ** | **Trade**        | ** ** | **Market**      | ** ** | ** **    | ** ** | ** ** | ** ** |
| ** **                                  | ** ** | **Conferences**      | ** ** | **Publications** | ** ** | **Development** | ** ** | **Corporate** | ** ** | **Total**  | ** ** |
| Three months  ended September 30, 2004 |       |                 |       |             |       |            |       |          |       |       |       |   |   |   |   |   |   |
| Revenues                                    |       |                 | $          | 45,864           |       |            |       | $             | 49,095     |       |       |   | $ | 5,437 |   |   | $ | — |   | $ | 100,396 |   |
| Contribution margin (loss)                  |       |                 | 25,615     |             |       |            | 13,932     |          |       |       | 2,913      |   |   | (1,488 | ) | 40,972 |   |
| Segment assets (at period end)              |       |                 | 504,161    |             |       |            | 302,815    |          |       |       | 33,513     |   |   | 82,605 |   | 923,094 |   |
| Three months  ended September 30, 2003 |       |                 |       |             |       |            |       |          |       |       |       |   |   |   |   |   |   |
| Revenues                                    |       |                 | $          | 39,923           |       |            |       | $             | 30,057     |       |       |   | $ | 4,352 |   |   | $ | — |   | 74,332 |   |
| Contribution margin (loss)                  |       |                 | 22,571     |             |       |            | 9,054      |          |       |       | 1,974      |   |   | (831 | ) | 32,768 |   |
| Segment assets (at period end)              |       |                 | 568,818    |             |       |            | 171,760    |          |       |       | 32,766     |   |   | 191,714 |   | 965,058 |   |
| Nine months ended  September 30, 2004  |       |                 |       |             |       |            |       |          |       |       |       |   |   |   |   |   |   |
| Revenues                                    |       |                 | $          | 135,662          |       |            |       | $             | 153,999    |       |       |   | $ | 16,371 |   |   | $ | — |   | $ | 306,032 |   |
| Contribution margin (loss)                  |       |                 | 72,741     |             |       |            | 45,367     |          |       |       | 8,698      |   |   | (4,839 | ) | 121,967 |   |
| Segment assets (at period end)              |       |                 | 504,161    |             |       |            | 302,815    |          |       |       | 33,513     |   |   | 82,605 |   | 923,094 |   |
| Nine months ended  September 30, 2003  |       |                 |       |             |       |            |       |          |       |       |       |   |   |   |   |   |   |
| Revenues                                    |       |                 | $          | 126,021          |       |            |       | $             | 95,576     |       |       |   | $ | 13,197 |   |   | $ | — |   | 234,794 |   |
| Contribution margin (loss)                  |       |                 | 67,634     |             |       |            | 29,903     |          |       |       | 5,495      |   |   | (2,799 | ) | 100,233 |   |
| Segment assets  (at period end)             |       |                 | 568,818    |             |       |            | 171,760    |          |       |       | 32,766     |   |   | 191,714 |   | 965,058 |   |

 

15

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**Advanstar, Inc. Notes to Condensed Consolidated Financial Statements (Continued)**

 

Thereconciliation of total segment contribution margin to consolidated loss fromcontinuing operations before income taxes, and minority interests is as follows(in thousands):
| ** **                                                                  | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                  | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                                                  | ** ** | **2004**                         | ** ** | **2003**                        | ** ** | **2004** | ** ** | **2003** | ** ** |
| Total segment  contribution margin                                          |       | $                                | 40,972     |                            | $          | 32,768 |   | $ | 121,967 |   | $ | 100,233 |   |
| Restructuring  charge                                                       |       | —                           |       | (2,051                          | )          | 3,895 |   | (2,051 | ) |
| General and  administrative expense                                    |       | (10,645                          | )          | (8,788                          | )          | (33,218 | ) | (27,462 | ) |
| Depreciation and  amortization                                              |       | (12,531                          | )          | (12,874                         | )          | (36,862 | ) | (39,875 | ) |
| Other expense  (primarily interest)                                         |       | (23,038                          | )          | (32,274                         | )          | (67,253 | ) | (65,298 | ) |
| Loss from  continuing operations before income taxes and minority interests |       | $                                | (5,242     | )                               | $          | (23,219 | ) | $ | (11,471 | ) | $ | (34,453 | ) |

 

**10.   Related-Party Transactions**

***Financial Advisory Fees***

The Company has agreed to pay Credit Suisse First Boston LLC (“CSFB”), an affiliate of the DLJ MerchantBanking funds, the holders of substantially all of Holdings’ commonstock, an annual advisory fee of $0.5 million until the earlier of (i) aninitial public offering of Holdings, (ii) the date when the DLJ MerchantBanking funds own less than 162¤3  percentof the shares of Holdings’ common stock held by them on the closing date of theacquisition of substantially all our common stock in October 2000 or (iii) October 11,2005.

16

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

This quarterly report on Form 10-Qcontains forward-looking statements made pursuant to the safe harbor provisionsof the Private Securities Litigation Reform Act of 1995. Investors arecautioned not to place undue reliance on these forward-looking statements,including statements about plans and objectives of management, potentialacquisitions, market growth and opportunity. These forward-looking statementsare neither promises nor guarantees and involve risks and uncertainties thatcould cause actual results to differ materially from those indicated by suchforward-looking statements. You should not expect that these forward-lookingstatements will be updated or supplemented as a result of changingcircumstances or otherwise, and we disavow and disclaim any obligation to do so.Important cautionary statements and risk factors that would affect actualresults are discussed in the our periodic reports and registration statementsfiled with the Securities and Exchange Commission, including those under thecaption entitled “Risk Factors” in the our Post-effective amendment No. 8to Registration Statement on Form S-1 (File No. 333-61386)filed with the Securities and Exchange Commission on May 6, 2004.

**Overview**

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

We report ourbusiness in three segments:

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

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

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

In addition to our trade shows, trade publications andmarket development, we deliver our integrated B-to-B marketing communicationsproducts and services to our customers using the internet, which we conductthrough our separate subsidiary, Advanstar.com. For discussion purposes, wehave included our internet activity in our market development segment.

Trade shows andconferences accounted for 44% and 54% of total revenue in the nine months endedSeptember 30, 2004 and 2003, respectively. Trade publications accountedfor 50% and 41% of total revenue in the nine months ended September 30,2004 and 2003, respectively, while market development and other accounted for5% and 6% of total revenue in the nine months ended September 30, 2004 and2003, respectively. We expect that publications will constitute slightly morethan 50% of our full year 2004 revenue as a result of the October 2003acquisition of the Thomson healthcare publications. Our revenue reaches itshighest levels during the first and third quarters of the year due to thetiming of the MAGIC trade shows and our other large trade shows andconferences. Because trade shows and conferences revenue is recognized when aparticular event is held, we may experience fluctuations in quarterly revenuebased on the movement of trade show dates from one quarter to another.

**Industry Trends and Developments**

The rebound in marketing and advertising spendingremains variable across the twenty industry sectors served by our trade showsand publications.

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Our trade shows and conferencescontinued to perform well in the first nine months. Our MAGIC, Licenseand Home Entertainment events posted gains in square footage and revenue overthe first nine months of 2003. Our Powersports motorcycle events also increasedrevenue significantly over the first nine months last year. Our trade showsserving technology markets continue to struggle but our *Sensors* event in the system design andengineering markets began to stabilize after three years of technology marketdeclines. Our recently acquired IVT conferences, which address FDA validationand compliance issues for the pharmaceutical industry, have performed ahead ofour expectations.

The primary driver in the growth of our publishingsegment to date 2004 came from the acquisition of the Thomson healthcareproperties. Our legacy healthcare and pharmaceutical publications arecontinuing their strong growth trend from 2003 in the first nine months of 2004and many of the flagship healthcare publications we recently acquired fromThomson are performing to our acquisition expectations. Trade advertising in aggregateacross our other market sectors in the first nine months of 2004 continues toshow reasonable growth over the first nine months of 2003 with the exception ofour technology and travel sectors, which continue to struggle. We do notanticipate significant near term recovery in either our technology or travelbased publications.

We have identified newopportunities and initiatives that we will be pursuing throughout the year,including opportunities to expand customer relationships and our marketposition in our MAGIC events and the healthcare sector. We are also investingin a significant new product development initiative in our Powersports groupwith the launch of several new publications and tradeshows in the off-roadtruck market.

**Presentation of Financial Information**

*Acquisitions andDivestitures*

On October 1, 2003, we purchased a portfolio ofhealthcare industry magazines and related custom projects business from TheThomson Corporation and its subsidiaries for $136.5 million in cash(including $1 million of related fees and expenses) (“the Thomsonacquisition”).

On March 8, 2004, we purchased a portfolio ofpharmaceutical industry specific magazines and conferences from the Instituteof Validation Technology, Inc. (“IVT”) for $7.9 million in cash. Inaddition, we agreed to pay additional contingent cash consideration based upon2004 and 2005 operating results of the acquired assets.

We have accounted for our acquisitions under thepurchase method of accounting. Accordingly, our results of operations includethe effect of these acquisitions from the date of purchase.

On March 12, 2004, we completed the sale of ourart industry trade shows and magazines (the “Art Group”) for a total sellingprice of $19.6 million in cash. The portfolio included three trade shows andtwo publications. We recorded a gain on the sale of $1.0 million plus a taxbenefit of $2.4 million.

The results of the Art Group have been reported indiscontinued operations in the condensed consolidated statements of operationsfor the nine months ended September 30, 2004 and the three and nine monthsended September 30, 2003. In addition, the assets and liabilities of theArt Group are reported in discontinued operations in the condensed consolidatedbalance sheet at December 31, 2003. Prior year consolidated financialstatements have been restated to present the Art Group in discontinuedoperations.

Revenues of the Art Group, included in discontinuedoperations in the condensed consolidated statements of operations, were $8.5million for the period from January 1, 2004 to March 12, 2004.  For the three and nine months ended September 30,2003, Art Group revenues were  $0.5million and $10.2 million, respectively. Income (loss) before income taxes ofthe Art Group reported in discontinued 

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operations in thecondensed consolidated statements of operations, which excludes the gain onsale, was $3.4 million for the period from January 1, 2004 to March 12,2004, a loss of $0.4 million for the three months ended September 30, 2003and a profit of $2.5 million for the nine months ended September 30, 2003.

On August 5, 2004, we completed the sale, for atotal selling price of $3.1 million in cash, of our 65% ownership in its Frenchjoint venture (“SeCA”), which consisted of one trade show. In connection withthe sale, we recorded a goodwill impairment charge of $9.4 million in thesecond quarter of 2004. The amount of the impairment charge was determinedbased upon the excess of the carrying value of our interest in SeCA over theselling price, less the costs incurred by us to sell SeCA. This charge isreported separately as a component of discontinued operations for the ninemonths ended September 30, 2004.

The results of SeCA have been reported as a componentof discontinued operations in the condensed consolidated statements ofoperations for the three and nine months ended September 30, 2004 and 2003.Prior year consolidated financial statements have been restated to present SeCAin discontinued operations. In addition, the assets and liabilities of SeCA arereported as assets and liabilities of discontinued operations in the condensedconsolidated balance sheet at December 31, 2003.

Revenues of SeCA were $2.9 million from January 1,2004 to June 30, 2004. There were no revenues for the three months ended September 30,2004. Revenues of SeCA were $0.1 million and $3.8 million for the three andnine months ended September 30, 2003. Income (loss) before income taxes ofSeCA, including the goodwill impairment charge of $9.4 million and net ofminority interest, reported in discontinued operations in the condensedconsolidated statements of operations for the nine months ended September 30,2004 was a loss of $8.5 million. SeCA had no income (loss) before income taxes forthe three months ended September 30, 2004. SeCA generated a loss beforeincome taxes of $0.3 million and income before income taxes of $0.9 million forthe three and nine months ended September 30, 2003.

On September 8, 2004, we sold our German trade showbusiness (“DMS”) for $1.7 million in cash. In connection with the sale, werecorded a goodwill impairment charge of $6.2 million in the third quarter of2004. The amount of the impairment charge was determined based upon the excessof the carrying value of DMS over the selling price, less the costs incurred byus to sell DMS. This charge is reported as a component of discontinuedoperations for the three and nine months ended September 30, 2004. Prioryear consolidated financial statements have been restated to present DMS indiscontinued operations.

Revenues of DMS were $0.1 million for the three andnine months ended September 30, 2004. DMS revenues were $1.7 million and$1.8 million for the three and nine months ended September 30, 2003. Income(loss) before income taxes, including the goodwill impairment charge of $6.2million, reported in discontinued operations in the condensed consolidatedstatements of operations for the three and nine months ended September 30,2004 were a loss of $6.5 million and $7.5 million. DMS’ income (loss) beforeincome taxes were a profit of $0.3 million and $0.1 million for the three andnine months ended September 30, 2003, respectively.

*Private Placementof Second Priority Senior Secured Notes and Refinancing of Credit Facility*

In August 2003, Communications amended the CreditFacility to permit the issuance of $360.0 million of second prioritysenior secured notes and the use of the proceeds thereof, eliminate theleverage ratio covenant and amend certain other covenants contained in theCredit Facility and reduce the revolving loan commitments thereunder from$80 million to $60 million. Communications recorded an expense of$11.3 million in the third quarter of 2003 to reflect the write-off ofdeferred financing costs related to the term loans, which were repaid with theproceeds of the offering. Communications’ interest expense and cash interest ishigher as a result of this refinancing. In addition, Communicationsreclassified $1.8 million of deferred losses related to their interestrate collar and swap agreements previously reported as a component ofaccumulated other comprehensive income into other expenses in the third quarterof 2003. 

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Gains and losses on theportion of these agreements not designated as hedges of the second prioritysenior secured floating rate notes at the end of each fiscal quarter (which arecalculated as the net amount payable upon termination at the date ofdetermination) are recognized in current earnings.

In September 2003,Communications issued $70 million of second priority senior secured notesand used the net proceeds to repay $12 million of outstanding borrowingsunder their revolving Credit Facility and to purchase short-terminvestments pending completion of the Thomson acquisition. On October 1,2003, Communications used $136.5 million in cash, including $56 million ofthe net proceeds of the September offering to finance the Thomsonacquisition.

**Sourcesof Revenue**

*Trade Shows andConferences*

The trade shows andconferences segment derives revenue principally from the sale of exhibit spaceand conference attendance fees generated at our events. In 2003, 82% of our trade show and conferencerevenue was from the sale of exhibit space. Events are generally held on anannual basis in major metropolitan or convention areas such as New York Cityand Las Vegas. At many of our trade shows, a portion of exhibit space isreserved as much as a year in advance. The sale of exhibit space is generallyimpacted by the ongoing quality and quantity of attendance, venue selection andavailability, industry life cycle and general market conditions. Revenue andrelated direct event expenses are recognized in the month in which the event isheld. Cash is collected in advance of an event and is recorded on our consolidatedbalance sheet as deferred revenue.

*Trade Publications*

The trade publicationssegment derives revenue principally from the sale of advertising in our B-to-Bmagazines. Additionally, certain publications derive revenue from paidsubscriptions and custom publishing and projects. Paid subscriptions compriseless than 5% of total publishingrevenue. Most publications are produced monthly with advertising sold both on ascheduled and a single insertion basis. The sale of advertising is generallyimpacted by circulation and editorial quality, readership, new productreleases, and general market conditions. Advertising revenue is recognized onthe publication issue date, and subscription revenue, if any, is recognizedover the subscription period, typically one year.

*Market developmentand other*

The market development andother segment derives its revenue from the sale of value-added marketingproducts such as print and internet based classified advertising, direct mailservices, reprints, database marketing, directories, guides and referencebooks. These products complement and utilize the content or databases generatedby our trade shows, conferences and publications. The sale of these products isgenerally impacted by the success of the event or publication from which theseproducts are derived, the quality of the sales team and general marketconditions. Revenue is generally recognized when the applicable product isshipped or otherwise delivered.

**Components of Expenses**

*Trade Shows andConferences*

Costs incurred by thetrade shows and conferences segment include facility rent, attendee andexhibitor promotion and on-site services such as registration, security andset-up. Exhibitors generally contract directly with third parties for on-siteservices such as electrical and booth set-up. Staff salaries and relatedpayroll expenses are treated as monthly period expenses. All other direct costsare expensed in the month the event occurs.

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*Trade Publications*

Costs incurred by thetrade publications segment include printing, paper and postage; selling andpromotion; editorial and prepress; and circulation acquisition and fulfillment.Additionally, publisher and sales staff costs, and production, editorial andcirculation staff costs, with related payroll taxes and benefits, are chargedto the publications segment. We outsource the actual printing of ourpublications. Printing, paper and postage costs are charged to operations atthe time of publication issuance. All other direct costs are charged tooperations in the month incurred.

*Market developmentand other*

Costs of the marketdevelopment and other segment include printing and distribution costs, databaseadministration fees and selling and product development salaries and relatedpayroll taxes and benefits. All direct costs are expensed in the monthincurred.

**Significant Accounting Policies and Estimates**

The discussion and analysis of our financial conditionand results of operations is based upon our consolidated financial statements,which have been prepared in accordance with accounting principles generallyaccepted in the United States of America. The preparation of these financialstatements requires management to make estimates and judgments that affect thereported amounts of assets, liabilities, revenues and expenses. We evaluatethese estimates on an ongoing basis, including those related to bad debts,intangible assets and income taxes. We base these estimates on historicalexperience and on various other assumptions that we believe to be reasonable underthe circumstances. These estimates form the basis for making judgments aboutthe carrying values of assets and liabilities that are not readily apparentfrom other sources. Actual results may differ from these estimates underdifferent assumptions or conditions.

We apply the followingcritical accounting policies in the preparation of our consolidated financialstatements:

*Revenue Recognition*

We recognize revenue asdiscussed in the “Sources of Revenue” section above. The balance of deferredrevenue was $34.2 million at September 30, 2004; $12.2 million fortrade publications and $22.0 million for trade shows. On a relative basis,deferred revenue reaches its highest levels during the second and fourthquarters of the year largely due to the timing of the *MAGIC*trade shows and our other large trade shows and conferences.

*Allowance forDoubtful Accounts*

We maintain an allowance for doubtful accounts forestimated losses resulting from the inability of our customers to make requiredpayments. The balance of the allowance for doubtful accounts at September 30,2004 and December 31, 2003 was $1.1 millionand $1.0 million, respectively. If the financial condition of ourcustomers were to deteriorate, resulting in an impairment of their ability tomake payments, additional allowances may be required.

The allowance for doubtfulaccounts is an estimate based on specifically identified accounts as well asgeneral reserves. We evaluate specific accounts where we have information thatthe customer may have an inability to meet its financial obligations. In thesecases, management uses its judgment, based on the best available facts andcircumstances, to determine if a specific reserve for that customer’sreceivable is warranted. These specific reserves are reevaluated and adjustedas additional information is received that impacts the amount reserved. We alsoestablish a general reserve for all customers based on percentages 

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appliedto customer balances depending on the age of the amount due. This percentage isbased on historical collection and write-off experience and varies bygeographic region. If circumstances change, our estimates of the recoverabilityof amounts due us could be reduced or increased by a material amount. Such achange in estimated recoverability would be accounted for in the period inwhich the facts that give rise to the change become known.

*Deferred Taxes*

Pursuant to therequirements of SFAS No. 109, we record a valuation allowance to reduceour deferred tax assets to the amount that we determine is more likely than notto be realized. At September 30, 2004, we have recorded a valuationallowance to offset the deferred tax benefit associated with all of our U.S.and foreign net operating loss carryforwards because the realization of thesebenefits is not considered likely. We have considered future taxable income andongoing prudent and feasible tax planning strategies in assessing the need forthe valuation allowance. In the event we were to subsequently determine that wewould be able to realize our deferred tax assets in the future in excess of ournet recorded amount, a reduction in the valuation allowance would result in anincome tax benefit and would increase net income or reduce net loss in theperiod such determination was made.

*Amortization ofIntangible Assets*

Intangible assets relatedto trade exhibitor and advertiser lists are amortized using a double-decliningbalance method over 6 years and 5 years, respectively. Intangibleassets related to tradenames and trade marks are amortized using astraight-line method over 20 years. Intangible assets related to subscriberlists and other intangible assets are amortized using a straight-line methodover 3 to 10 years. We amortize intangible assets on a basis, whichcorresponds to our projections of future cash flows directly related to theseintangible assets. A change in circumstances could result in a determinationthat asset lives should be changed or that the related assets are impaired andimpairment charges to reduce the carrying value of intangible assets may benecessary. The effect of any changes in useful lives or a determination thatthe carrying value of an intangible asset is impaired would be accounted for inthe period that such determination was made. In addition to the deferred taxassets, which are fully reserved, we have established a deferred tax liabilityequal to the excess of the carrying value of our goodwill for financialreporting purposes over the tax basis of this goodwill. We establish thisliability because we do not amortize goodwill for financial reporting purposesbut we do amortize goodwill for tax reporting purposes.

*Impairment ofLong-Lived Assets*

We evaluate the carrying value of long-lived assets,including identifiable intangibles, for impairment when events or changes incircumstances indicate that the carrying amount of an asset may not berecoverable. If impairment indicators are present and the estimated futureundiscounted cash flows are less than the carrying value of the assets, thecarrying value is reduced to the estimated fair value as measured by theassociated discounted cash flows.

In accordance with theprovisions of SFAS No. 142, we evaluate goodwill for impairment using atwo-step test based upon a fair value approach. The first step is used to identifya potential impairment by comparing the carrying value of the net assets ofeach reporting unit to an estimate of the fair value of each of our reportingunits (as defined by SFAS No. 142), while the second step calculates theamount of impairment, if any. Additionally, goodwill will be tested forimpairment between annual tests if an event occurs or circumstances change thatwould more likely than not reduce the fair value of an entity below itscarrying value. We determine the fair value of our reporting units byapplication of a discounted cash flow analysis. If circumstances change, ourestimates of fair value will also change and could result in a determinationthat additional impairment charges to reduce the carrying value of goodwill arenecessary. We engaged an appraiser to assist us in completing the first step ofour annual goodwill impairment test 

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for eachof our three reporting units as of July 1, 2003. Based on this first steptest, which utilized a discounted cash flow method, there was no impairment ofgoodwill indicated.

**Selected Financial Data**

Thefollowing table sets forth selected statements of operations and otherfinancial data.
| ** **                                                                                                                                                                                                                       | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                                                                                                                                       | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                                                                                                                                                                                                       | ** ** | **2004**                         | ** ** | **2003**                        | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                                                                                                                                                                       | ** ** | **(in thousands)**          | ** ** |
| **Income Statement Data:**                                                                                                                                                                                                       |       |                             |       |                            |       |   |   |   |   |
| Revenue                                                                                                                                                                                                                          |       |                             |       |                            |       |   |   |   |   |
| Trade shows and conferences                                                                                                                                                                                                      |       | $                                | 45,864     |                            | $          | 39,923 |   | $ | 135,662 |   | $ | 126,021 |   |
| Publications                                                                                                                                                                                                                     |       | 49,095                           |       | 30,057                          |       | 153,999 |   | 95,576 |   |
| Market development and  other                                                                                                                                                                                                    |       | 5,437                            |       | 4,352                           |       | 16,371 |   | 13,197 |   |
| Total revenue                                                                                                                                                                                                                    |       | 100,396                          |       | 74,332                          |       | 306,032 |   | 234,794 |   |
| Cost of  production and selling                                                                                                                                                                                                  |       |                             |       |                            |       |   |   |   |   |
| Trade shows and conferences                                                                                                                                                                                                      |       | 20,249                           |       | 17,352                          |       | 62,921 |   | 58,387 |   |
| Publications                                                                                                                                                                                                                     |       | 35,163                           |       | 21,003                          |       | 108,632 |   | 65,673 |   |
| Market development and  other                                                                                                                                                                                                    |       | 2,524                            |       | 2,378                           |       | 7,673 |   | 7,702 |   |
| Department and support costs                                                                                                                                                                                                     |       | 1,488                            |       | 831                             |       | 4,839 |   | 2,799 |   |
| Total cost of production and selling                                                                                                                                                                                             |       | 59,424                           |       | 41,564                          |       | 184,065 |   | 134,561 |   |
| General and administrative expenses                                                                                                                                                                                              |       | 10,645                           |       | 8,788                           |       | 33,218 |   | 27,462 |   |
| Restructuring  (see Note 5)                                                                                                                                                                                                      |       | —                           |       | 2,051                           |       | (3,895 | ) | 2,051 |   |
| Depreciation and  amortization                                                                                                                                                                                                   |       | 12,531                           |       | 12,874                          |       | 36,862 |   | 39,875 |   |
| Operating income                                                                                                                                                                                                                 |       | 17,796                           |       | 9,055                           |       | 55,782 |   | 30,845 |   |
| Other income (expense):                                                                                                                                                                                                          |       |                             |       |                            |       |   |   |   |   |
| Interest expense                                                                                                                                                                                                                 |       | (22,611                          | )          | (20,217                         | )          | (68,177 | ) | (53,364 | ) |
| Write-off of deferred financing costs                                                                                                                                                                                            |       | —                           |       | (11,324                         | )          | — |   | (11,324 | ) |
| Other income (expense), net                                                                                                                                                                                                      |       | (427                             | )          | (733                            | )          | 924 |   | (610 | ) |
| Loss from  continuing operations before income taxes and minority interests                                                                                                                                                      |       | (5,242                           | )          | (23,219                         | )          | (11,471 | ) | (34,453 | ) |
| Provision for  income taxes                                                                                                                                                                                                      |       | 3,113                            |       | (177                            | )          | 9,671 |   | 119 |   |
| Minority  interests                                                                                                                                                                                                              |       | (267                             | )          | (141                            | )          | (704 | ) | (334 | ) |
| Loss from  continuing operations                                                                                                                                                                                                 |       | (8,622                           | )          | (23,183                         | )          | (21,846 | ) | (34,906 | ) |
| Discontinued  operations (see Note 3):                                                                                                                                                                                           |       |                             |       |                            |       |   |   |   |   |
| (Loss) income  from operations of discontinued businesses (including a goodwill impairment  charge of $6,150 and $15,570 net of minority interest of $0 and $5,072 for  the three and nine months ended September 30, 2004) |       | (6,604                           | )          | (352                            | )          | (9,642 | ) | 2,969 |   |
| Net loss                                                                                                                                                                                                                         |       | $                                | (15,226    | )                               | $          | (23,535 | ) | $ | (31,488 | ) | $ | (31,937 | ) |

 

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**Results of Operations**

**THREEMONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER30, 2003**

*Revenue*

Revenue in the third quarter of 2004 increased 35.1%to $100.4 million from $74.3 million in the third quarter of 2003.

Revenue from trade shows and conferences increased$5.9 million, or 14.9%, to $45.9 million in the third quarter of 2004 due tothe strong performance of the fall 2004 MAGIC event, which increased totalsquare feet and revenue approximately 12% compared to the fall 2003 event. OurIVT pharmaceutical conferences acquired in March 2004, and the CentralVeterinary Conference acquired in October 2003, contributed $3.5 millionof revenue in the quarter. These revenue gains were partially offset by poorperformance in technology events held during the quarter.

Revenue from publications increased $19.0 million, or63.3%, to $49.1 million in the third quarter of 2004 from $30.1 million in thethird quarter of 2003. The Company’s healthcare and pharmaceutical publicationscontributed approximately $18.7 million in revenue to this increase, whichincluded $16.6 million from the Thomson healthcare properties acquired in October 2003.Revenue increases are also attributable to strong performances by *American Spa*; *Video Store*; *Hotel &Motel Management*; *Golfdom*;*Pest Control* and *Motor Age* as well as the launch of two newpublications, *Off Road Retailer*and *Dirt Sports*, in the off roadtruck and dirt sports markets. The positive performance of these publicationswas partially offset by revenue reductions attributable to the sale of certainUK publications in December 2003 and declines in our technology and travelpublications. Overall advertising pages for the third quarter of 2004 increased36.3% compared to the third quarter of 2003, principally due to our healthcareand pharmaceutical properties.

Revenue from marketdevelopment and other in the third quarter of 2004 increased 24.9% to$5.4 million from $4.4 million in the third quarter of 2003, reflectingpositive results in classified and recruitment advertising, list sales andpermissions, which were principally the result of the Thomson acquisition.

*Cost of productionand selling*

Cost of production and selling expenses in the thirdquarter of 2004 increased 43.0% to $59.4 million from $41.6 million in thethird quarter of 2003 primarily due to the acquisition of the healthcareproperties in October 2003.

Expenses of trade shows and conferences in the thirdquarter of 2004 increased 16.7% to $20.2 million from $17.4 million in thethird quarter of 2003. The increase is principally due to our investment in thefall MAGIC event, including the addition of new exhibit areas and showfeatures, and our IVT and Veterinary conferences acquired in late 2003 andearly 2004, as further discussed above.

Expenses of trade publications in the third quarter of2004 increased 67.4% to $35.2 million from $21.0 million in the third quarterof 2003. Trade publication expenses were impacted by $14.4 million ofadditional costs associated with our healthcare publications, principallyrelated to our acquisition of the Thomson healthcare publications in October 2003and IVT in March 2004. Expenses also increased due to new investments insales resources to support our healthcare publications. These cost increaseswere partially offset by cost savings of $1.6 million attributable to the saleof certain of our U.K. based properties at the end of 2003. Prices for paperand postage have increased slightly in the third quarter of 2004 compared tothe third quarter of 2003. We have indications that paper prices will increase5% to 8% by the end of the first quarter of 2005.

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Expenses of market development and other remainedstable at $2.5 million in the third quarter of 2004 compared to $2.4 million inthe third quarter of 2003.

Department and supportcosts increased $0.7 million to $1.5 million compared to the third quarter of2003 due to higher departmental production staff costs related to support ofthe publications acquired in the Thomson acquisition and additional staffrelated to a pending launch of publications serving the Powersports market.

*General andadministrative expenses*

General and administrativeexpenses increased $1.9 million to $10.6 million in the third quarter off 2004from $8.8 million in the third quarter of 2003. The increase includes higheroffice and administrative costs attributable to the acquisition of the Thomsonhealthcare properties which resulted in the addition of three offices andapproximately 300 employees.

*Restructuring*

In the third quarter of 2003 Advanstar recorded arestructuring charge of $2.1 million related to the consolidation of theCompany’s midtown New York leased office space from two floors to one floor**.**The charge principally representsremaining facility lease costs.

**

*Depreciation andamortization*

Depreciation andamortization expense in the third quarter of 2004 declined $0.4 million to$12.5 million from $12.9 million in the third quarter of 2003 primarily due tothe effect of the declining balance method of accelerated amortization on ourexhibitor and advertiser lists, partially offset by additional amortizationrelated to the Thomson and IVT acquisitions.

*Interest expense*

Interest expense in the third quarter of 2004increased $2.4 million, or 11.8%, to $22.6 million from $20.2 million in thethird quarter of 2003 due to an increase in our weighted-average debtoutstanding of approximately $77.2 million as a result of Communicationsissuance of $360 million of Senior Secured Notes in August 2003 and $70million Senior Secured Notes in September 2003, offset by a decrease inour debt outstanding under the Credit Facility due to the repayment, in August 2003of all but $25 million of the outstanding term B loans and a portion of ourrevolving credit borrowings under their Credit Facility. See “Presentation ofFinancial Information—PrivatePlacement of Second Priority Senior Secured Notes and Refinancing of CreditFacility”.

At September 30,2004, $594.8 million, or 79% of our total debt is at a fixed rate with thebalance subject to interest rate fluctuations. A 100 basis point increase ininterest rates on our current variable rate debt would result in an increase inannual interest expense of $1.5 million. We previously entered into an interest rate collaragreement to hedge our interest rate risk on these variable rate borrowings.The agreement expired in February 2004 and we currently have no plans to renew this interest rate collar agreement orotherwise hedge our remaining floating rate debt.

*Other income(expense), net*

Other expense for thethird quarter of 2004 declined $0.3 million to $0.4 million from $0.7 millionin the third quarter of 2003, principally due to a decline in losses on foreigncurrency translation adjustments and interest rate protection agreements.

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*Provision (benefit)for income taxes*

The provision for incometaxes was $3.1 million in the third quarter of 2004 compared to a benefit of$0.2 million in the third quarter of 2003. The third quarter 2004 provisionrelates to income taxes in certain foreign jurisdictions and a deferred taxprovision related to the basis of goodwill for tax purposes being less than thecarrying value of goodwill for financial reporting purposes. We recorded noincome tax benefit related to the net operating losses we generated during 2003or 2004 because we have established a valuation allowance to offset any relatedtax benefits due to uncertainty about realization of these benefits. Our thirdquarter 2003 provision relates to income tax benefits in certain foreignjurisdictions.

*Discontinuedoperations*

On September 8, 2004, as a result of the sale ofDMS we recorded a goodwill impairment as a component of discontinued operationsfor the three months ended September 30, 2004. Income (loss) before incometaxes, including the goodwill impairment charge of $6.2 million, reported indiscontinued operations in the condensed consolidated statements of operationsfor the three  months ended September 30,2004 were a loss of $6.4 million. DMS’ income (loss)before income taxes were a profit of $0.3 million for the three months ended September 30,2003.

See further informationregarding discontinued operations of DMS in “—Presentation of FinancialInformation”.

**NINEMONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30,2003**

*Revenue*

Revenue in the first nine months of 2004 increased30.3% to $306.0 million from $234.8 million in the first nine months of 2003.

Revenue from trade shows and conferences increased$9.6 million, or 7.7%, to $135.7 million in the first nine months of 2004 from$126.0 million in the first nine months of 2003. The increase reflects strongperformances from MAGIC, as well as the Powersports motorcycle, License andHome Entertainment events. MAGIC revenue and square footage for the 2004 eventsincreased approximately 8.8% and 8.4%, respectively, over 2003. Revenue for thefirst nine months of 2004 from the Powersports events, including the DealerExpo trade show and the International Motorcycle Show tour, increased 14.7%over the first nine months of last year, while revenue from our License and HomeEntertainment events increased 24.4% and 33.4%, respectively, over the firstnine months of last year. Our acquisitions in October 2003 of a veterinaryconference from Thomson, and in March 2004 of pharmaceutical conferencesfrom IVT, combined with new product launches, contributed additional revenue of$6.8 million in first nine months of 2004 compared to 2003. These revenue gainswere partially offset by our decision to hold three fewer events in thetechnology and beauty markets, revenue reductions attributable to the sale ofcertain UK events in December 2003, the cancellation of our *Industry 212* event which was held during2003, and declining performance at our technology events.

Revenue from publications increased $58.4 million, or61.1%, to $154.0 million in the first nine months of 2004 from $95.6 million inthe first nine months of 2003. The Thomson healthcare publications and specialprojects acquired in October 2003 contributed $55.6 million in revenue.Revenue was also driven by strong performances from our specialty carehealthcare publications; our pharmaceutical and science publications; *DVM; American Spa; Pharm Tech Europe; Video Store;**Motor Age* and several productlaunches. These increases were partially offset by continued declines in the performanceof our travel publications and revenue reductions attributable to the sale ofcertain UK publications in December 2003. 

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Overall advertising pages increased31.5%, principally due to our healthcare and pharmaceutical properties.

Revenue from marketdevelopment and other in the first nine months of 2004 increased $3.2 million,or 24.1% to $16.4 million from $13.2 million in the first nine months of 2003,due to positive results in classified and recruitment advertising, list salesand reprints, which principally resulted from the Thomson acquisition.

*Cost of productionand selling*

Cost of production and selling expenses in the firstnine months of 2004 increased 36.8% to $184.1 million from $134.6 millionin the first nine months of 2003 primarily due to the acquisition of thehealthcare properties in October 2003.

Expenses of trade shows and conferences in the firstnine months of 2004 increased 7.8% to $62.9 million from $58.4 million inthe first nine months of 2003. This increase was due primarily to the impact ofinvestments made in our MAGIC and Powersports events to pursue future revenuegrowth opportunities, several launches of new events in the United States andEurope and our IVT and Veterinary conferences acquired in late 2003 and early 2004.These increases in costs were partially offset by cost savings associated withour decision to hold three fewer events serving our technology and beautymarkets in 2004 and cost reductions related to our sale of certain of our U.K.based properties at the end of 2003.

Expenses of trade publications in the first ninemonths of 2004 increased 65.4% to $108.6 million from $65.7 million in thefirst nine months of 2003. Operating costs were impacted by $45.3 million ofadditional costs associated with our healthcare publications, principally ouracquisition of the Thomson healthcare publications in October 2003 and IVTin March 2004. These cost increases were partially offset by cost savingsof $4.0 million attributable to the sale of certain of our U.K. basedproperties at the end of 2003. Prices for paper and postage have increasedslightly in the first nine months of 2004 compared to the first nine months of2003. We have indications that paper prices will increase 5% to 8% by the endof the first quarter of 2005.

Expenses of market development and other in the firstnine months remained unchanged at $7.7 million compared to the first ninemonths of 2003.

Department and supportcosts in the first nine months of 2004 increased $2.0 million to $4.8 million,due to increased staffing as a result of the Thomson acquisition.

*General andadministrative expenses*

General and administrativeexpenses increased $5.8 million, or 21.0% to $33.2 million in the first ninemonths of 2004 from $27.5 million in the first nine months 2003, due in part toincreased office and administrative costs attributable to the addition of threeoffices and approximately 300 employees as a result of acquisition of theThomson healthcare properties.

*Restructuring*

In the third quarter of 2003 Advanstar recorded arestructuring charge of $2.1 million related to the consolidation of theCompany’s midtown New York leased office space from two floors to one floor****and principally represents remainingfacility lease costs.

In March 2001,we announced plans to more tightly focus the activities of our wholly ownedsubsidiary Advanstar.com, Inc. (Advanstar.com). These plans had the effectof more closely integrating many of the sales, marketing, technology andoperating functions of Advanstar.com with Communications and its core 

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activities in publishing, tradeshows and marketdevelopment. The restructuring activities were completed by the end of 2001,except for facility lease costs, were to continue through June 2010. In April 2004,we settled the remaining facility lease commitment for a total of $1.9 million,resulting in second half of 2004 offset to operating expense of $3.9 million aswe released the remaining accrual.

*Depreciation andamortization*

Depreciation andamortization expense in the first nine months of 2004 declined $3.0 million to$36.9 million from $39.9 million in the first nine months of 2003primarily due to the effect of the declining balance method of acceleratedamortization on our exhibitor and advertiser lists, partially offset byadditional amortization related to the assets purchased in the Thomsonacquisition.

*Interest expense*

Interest expense in thefirst nine months of 2004 increased $14.8 million, or 27.8%, to $68.2 millionfrom $53.4 million in the first nine months of 2003 due to an increase in ourweighted-average interest rate of approximately 220 basis points and anincrease in our weighted-average debt outstanding of approximately $81.9million as a result of our financings in August and September 2003. See“Presentation of Financial Information—Private Placement of Second PrioritySenior Secured Notes and Refinancing of Credit Facility”.

*Other income(expense), net*

Other income in the first nine months of 2004increased $1.5 million to $0.9 million from expense of $0.6 million in thefirst nine months of 2003. This increase is attributable to gains associatedwith our interest rate protection agreement, which expired in February 2004,and foreign currency translation gains.

*Provision (benefit)for income taxes*

The provision for incometaxes was $9.7 million in the first nine months of 2004 compared to $0.1 millionin the first nine months of 2003. Our income tax provision for the first ninemonths 2004 relates to income taxes in certain foreign jurisdictions and adeferred tax provision related to the basis of goodwill for tax purposes beingless than the carrying value of goodwill for financial reporting purposes. Werecorded no income tax benefit related to the net operating losses we generatedduring 2003 because we have established a valuation allowance to offset anyrelated tax benefits due to uncertainty about realization of these benefits. Ourfirst nine months 2003 provision relates to income taxes in certain foreignjurisdictions.

*Discontinuedoperations*

In conjunction with the saleof the Art Group in the first quarter of 2004, we recorded a gain on thesale of $1.0 million plus a tax benefit of $2.4 million. Pretax profit of the Art Groupreported was $3.4 million for the period from January 1, 2004 to March 12,2004 and $2.5 million for the nine months ended September 30, 2003.

In the second quarter 2004, in conjunction with oursale of SeCA we recorded a goodwill impairment charge of $9.4 million. Pretaxresults of SeCA, net of minority interest, were a loss of $8.5 million andincome of $1.1 million for the nine months ended September 30, 2004 and2003.

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In the third quarter 2004, as a result of the sale ofDMS we recorded a goodwill impairment as a component of discontinued operationsfor the three months ended September 30, 2004. Pretax results, includingthe goodwill impairment charge of $6.2 million, reported in discontinuedoperations in the condensed consolidated statements of operations for the ninemonths ended September 30, 2004 were a loss of $7.5 million. Pretaxresults were a profit of $0.1 million for the nine months ended September 30,2003.

See further information regarding discontinuedoperations of the Art Group, SeCA and DMS in “—Presentation of FinancialInformation”.

**Liquidity and Capital Resources**

The following discussion presents our liquidity andcapital resources on a consolidated basis, including our subsidiaries.

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

Our principal source of cash is dividends from Communications.The credit facility and senior subordinated notes described below areobligations of Communications and impose limitations on its ability to paydividends to us. We believe that Communications’ debt instruments will permitit to supply us with sufficient cash to meet the cash needs referred to abovefor the next several years. However, if that is not the case, we would not beable to satisfy those needs, because we have no other source of cash other thandividends from Advanstar Communications. We would then be required to securealternate financing, which may not be available on acceptable terms, or at all.

Communications’ principalcash needs are for debt service, capital expenditures and strategicacquisitions, as well as to provide us with cash to finance our cash needs. Itsprincipal sources of liquidity will be cash flow from operations and borrowingsunder its credit facility.

*Sources and Uses ofFunds*

We generally operate with negative working capital,excluding cash and current maturities of long-term debt, due to the impact ofdeferred revenue from trade shows, which is billed and collected as deposits upto one year in advance of the respective trade show. Consequently, our existingoperations are expected to maintain very low or negative working capitalbalances, excluding cash and current maturities of long-term debt.

On a relative basis, our revenue reaches its highestlevels during the first and third quarters of the year largely due to thetiming of the *MAGIC* trade shows and our otherlarge trade shows and conferences. This seasonality, when combined with theshift in the timing of when events take place from year to year, may have asignificant effect on our quarterly deferred revenue and working capitalbalances.

We anticipate that our operating cash flow, togetherwith borrowings under the credit facility (assuming continued compliance withthe covenants contained therein or a modification thereof) and other futurefinancings and refinancings, will be sufficient to meet our anticipated futureoperating expenses, capital expenditures, debt service and other obligations asthey become due. However, our ability to make scheduled payments of principal,to pay interest on or to refinance our indebtedness and to satisfy our otherdebt obligations will depend upon our future operating performance, which willbe affected by general economic, financial, competitive, legislative,regulatory, business and other factors beyond our control.

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Historically, our financing requirements have beenfunded primarily through cash generated by operating activities and borrowingsunder our revolving credit facility. From time to time, we have also raisedadditional funds through sales of common stock, high yield offerings and termborrowings under our credit facility for purposes of completing strategicacquisitions.

Operating cash flows may be significantly affected bythe working capital characteristics of our business, in particular the tradeshows and conferences business. Deferred revenue increases on the balance sheetin the quarters immediately preceding our busy first quarter trade show seasonas we collect deposits for booth space several months in advance of the tradeshows. Revenue and contribution margin are recognized in the quarter as theevents are held, releasing the deferred revenue from the balance sheetresulting in a use of cash from the increase in net operating assets.

*Cashflows from operating activities.**  *Netcash provided by operations in the first nine months of 2004 declined$9.1 million to $12.0 million compared to $21.1 million in the firstnine months of 2003. This decline was principally due to an increase ininterest expense, net of non cash accretion, of $12.5 million and a reductionin our negative working capital due to the release of deferred revenue in thefirst nine months of 2004 attributable to advertising programs for ourhealthcare publications which were prepaid in the fourth quarter of 2003, soldand discontinued trade shows and to changes in the timing of our payments ofaccounts payable in the first nine months of 2004. These declines werepartially offset by an increase in operating income of $24.9 million in thefirst nine months of 2004 compared to the first nine months of 2003.

*Cashflows provided by (used in) investing activities.**  *Net cash provided by investing activities in thefirst nine months of 2004 was$9.6 million compared to net cash used of $4.7 million in the first ninemonths of 2003. This change was principally due to the sale in 2004 ofour art shows and magazines and our call center and document management showsfor a total sales price of $24.3 million in cash, partially offset by $7.9million in cash used for the acquisition of the pharmaceutical publications andconferences as further discussed below.

We made capital expenditures of $6.8 million and $4.5million in the first nine months of 2004 and 2003, respectively. We anticipatethat we will spend approximately $7.6 millionon capital expenditures in 2004. The majority of these expenditures are relatedto expansions and enhancements to our IT and communications infrastructure andmanagement and operating group information systems. We believe that this amountof capital expenditure will be adequate to meet the needs of our businessaccording to our business strategy and to maintain the key trade shows,publications and business of our continuing operations.

Cash used for acquisitions in the first nine months of2004 increased $7.7 million compared to the first nine months of 2003 dueto the acquisition in March 2004 of IVT conferences and magazines for$7.9 million in cash. Ourbusiness strategy includes the consummation of strategic 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 no assurance that any additional financingwill be available to us on acceptable terms or in a manner that complies withthe restrictive covenants in our debt instruments.

*Cash flows used infinancing activities.**  *Cashflows used in financing activities in the first nine months of 2004 were $11.2 million compared tocash provided by financing activities in the first nine months of 2003 of$107.8 million. We paid down $10.9 million in debt during the first ninemonths of 2004, including $8.0 million on our revolving credit facility. Duringthe third quarter of 2003 Communications issued $430 million principalamount of the Senior Secured Notes and received $50.0 million in equitycontributions from our parent company. Communications used the proceeds fromthese issuances to repay and terminate all outstanding term A loans and $12.0million of outstanding borrowings under Communications’ revolving CreditFacility, and pay fees of $12.3 million in connection with the offering. 

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Fees paid toCommunications’ senior lenders for an amendment to Communications’ CreditFacility in April 2003 were $3.9 million.

*Debt service.*

As of September 30,2004, we had total indebtedness of $748.5 million and $59.1 million ofborrowings available under Communications’ Credit Facility, subject tocustomary conditions.

*Credit Facility*

Communications’ CreditFacility consists of a $60.0 million revolving credit facility and$25.0 million outstanding under the Term Loan B facility. The revolvingcredit facility will terminate in April 2007 and the Term Loan B maturesin October 2008. Borrowings under the Credit Facility generally bearinterest based on a margin over, at Communications’ option, the base rate orLIBOR. The applicable margin for revolving credit loans varies based uponCommunications’ ratio of consolidated debt to EBITDA, as defined in the CreditFacility, and is currently 3.75% over LIBOR and 2.50% over the base rate. Theapplicable margin for the Term Loan B varies based upon the ratingassigned by S&P and Moody’s to our Credit Facility and is currently 4.50%over LIBOR and 3.25% over the base rate. Communications’ obligations under thecredit facility are guaranteed by Advanstar Holdings Corp. (“Advanstar Holdings”),our parent company, and all Communications’ existing and future domesticsubsidiaries and are collateralized by substantially all of the assets ofCommunications’ and the subsidiary guarantors, including a pledge of thecapital stock of all Communications’ existing and future domestic subsidiaries,a pledge of no more than 65% of the voting stock of any foreign subsidiarydirectly owned by Communications or any domestic subsidiary, a pledge of allintercompany indebtedness in favor of Communications and our domesticsubsidiaries, a pledge of Communications’ and Advanstar IH, Inc.’s capitalstock by us, and a pledge of our capital stock by Advanstar Holdings. TheCredit Facility contains restrictive covenants, which require Communicationsto, among other things, maintain a minimum fixed charge coverage ratio (asdefined in the credit facility documents) as of the end of each fiscal quarter.Although there can be no assurance, we believe, based on our anticipatedperformance and expected economic conditions, that Communications will be ableto comply with the amended financial covenant contained in the Credit Facilityin 2004.

*Second PrioritySenior Secured Notes*

Communications’ $129 millionof floating rate notes mature in 2008 and the $300 million of fixed ratenotes mature in 2010. The notes of each series are guaranteed by each ofCommunications’ existing and future domestic restricted subsidiaries andcollateralized by second-priority liens on the assets collateralizingCommunications’ credit facility (other than certain subsidiary stock and assetsof its parent companies). The fixed rate notes bear interest at an annual rateof 10.75% and the floating rate notes bear interest at an annual rate equal tothe three-month LIBOR, which is reset quarterly, plus 7.50%. Interest onthe fixed rate notes is payable semi-annually in cash and interest on thefloating rate notes, along with amortization of 0.25% of the principal of suchfloating rate notes, is payable quarterly in cash. The notes contain restrictivecovenants that, among other things, limit Communications’ ability to incurdebt, pay dividends and make investments.

*Senior SubordinatedNotes*

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

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*Senior discountnotes*

As part of the financingfor the acquisition of substantially all of the common stock of Holdings, ourparent company, by certain DLJ Merchant Banking funds in October 2000, weissued senior discount notes due October 2011 with a principal amount atmaturity of $103.2 million. Concurrently with the closing of the offeringof Communications’ 12% senior subordinated notes, we sold additional seniordiscount notes due October 2011 with an additional aggregate principalamount at maturity of $68.6 million. These notes do not require cashinterest payments until 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 ourability to pay interest on these notes will be dependent upon the receipt ofdividends from our subsidiaries. Communications’ credit facility, the seniorsubordinated notes and second priority senior secured notes impose substantialrestrictions on our subsidiaries’ ability to pay dividends.

*Contractual andcontingent obligations*

Our contractualobligations (excluding accounts payable and accrued expenses), as of September 30,2004 are as set forth below (in millions):
| ** **                          | ** ** | **Payments Due By Period** | ** ** |
|-------------------------------------|------------|-------------------------------------------|------------|
| ** **                          | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **After** | ** ** | ** ** | ** ** |
| ** **                          | ** ** | **2004(1)**                               | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2009** | ** ** | **Total** | ** ** |
| Indebtedness                        |       |                                      | $          | 0.8 |   |   | $ | 1.3 |   | $ | 1.3 |   | $ | 1.3 |   | $ | 149.8 |   | $ | — |   | $ | 631.8 |   | $ | 786.3 |   |
| Interest on  indebtedness(2)        |       |                                      | 19.6       |   |   | 65.2 |   | 90.9 |   | 90.7 |   | 87.1 |   | 77.2 |   | 99.2 |   | 529.9 |   |
| Operating lease  obligations        |       |                                      | 1.6        |   |   | 7.1 |   | 6.4 |   | 5.2 |   | 4.6 |   | 3.1 |   | 1.7 |   | 29.7 |   |
| Total Contractual  Cash Obligations |       |                                      | $          | 22.0 |   |   | $ | 73.6 |   | $ | 98.6 |   | $ | 97.2 |   | $ | 241.5 |   | $ | 80.3 |   | $ | 732.7 |   | $ | 1,345.9 |   |

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(1)          For the period from October 1,2004 through December 31, 2004.

(2)          Interest on the secondpriority floating rate notes, revolving credit facility and Term Loan B iscalculated using LIBOR of 1.84%,the rate in effect on September 30, 2004. Because the floating rate notes,revolving credit facility and Term Loan B bear interest at a variable rate,actual payments could differ.

We have no materialcapital lease obligations or purchase obligations. Our contingent obligationsare primarily composed of $0.9 million of letters of credit and ourinterest rate and foreign currency derivatives discussed more fully below inItem 3. “Quantitative and Qualitative Disclosure About Market Risk.”

*Off-Balance SheetArrangements.*

We have no materialoff-balance sheet arrangements.

**Recently Issued Accounting Standards**

In December 2003, theFASB issued Interpretation No. 46R, *Consolidationof Variable Interest Entities*, which addresses accounting forspecial-purpose and variable interest entities and which supersededInterpretation No. 46. The provisions of Interpretation No. 46R areeffective for us in the first quarter of 2005. Based upon our preliminaryanalysis, we do not expect adoption to have a material effect on its financialposition, results of operations or cash flows.

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**Item 3.   *Quantitative and Qualitative Disclosures about**Market Risk***

We are exposed to variousmarket risks, which is the potential loss arising from adverse changes inmarket rates and prices, such as foreign currency exchange and interest rates.We do not enter into derivatives or other financial instruments for trading orspeculative purposes. We enter into financial instruments to manage and reducethe impact of changes in interest rates and foreign currency exchange rates.

*Interest Rates*

At September 30, 2004, we had fixed rate debt of$594.8 million and variablerate debt of $153.7 million. The annual pre-tax earnings and cash flowsimpact resulting from a 100 basis point increase in interest rates on variablerate debt, holding other variables constant and excluding the impact of thehedging agreements described below, would be approximately $1.5 millionper year.

The term loan B under ourCredit Facility bears interest at a variable rate. We previously entered intoan interest rate collar agreement to hedge our interest rate risk on theseborrowings. This interest rate collar agreement expired in February 2004. Changesin fair value of the undesignated portion of this instrument were recognized incurrent earnings. We currently have no plans to renew this interest rate protectionagreement or otherwise hedge our remaining floating rate debt.

*Currencies*

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

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

Our strategy formanagement of currency risk relies primarily on conducting our operations in acountry’s respective currency and may, from time to time, involve currencyderivatives, primarily forward exchange contracts, to reduce our exposure tocurrency fluctuations. As of September 30, 2004, we had open foreignexchange derivative contracts to sell with a notional amount totaling$1.9 million, and to buy with a notional amount totaling$0.5 million. The estimated fair value of the foreign exchange contractsbased upon market quotes was a net liability of approximately$0.1 million. The potential loss in fair value resulting from ahypothetical 10% adverse change in quoted foreign currency exchange ratesamounts to an additional loss of approximately $0.2 million. Actualresults may differ.

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

*Evaluationof Disclosure Controls and Procedures.*   Advanstar’sChief Executive Officer and Chief Financial Officer, after evaluating theeffectiveness of the Company’s disclosure controls and procedures (as definedin Rules 13a-15(e) and 15d-15(e) of the Securities ExchangeAct of 1934, as amended (the “Exchange Act”)) as of the end of the periodcovered by this report (the “Evaluation Date”), have concluded that as of theEvaluation Date, our disclosure controls and procedures were effective and 

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designed to ensure thatinformation required to be disclosed by us in the reports that we file orsubmit under the Exchange Act is recorded, processed, summarized and reportedwithin the time periods specified in the Securities and Exchange Commission’s rules andforms.

*Changesin Internal Controls.*   There were no changesduring the third fiscal quarter in our internal controls over financialreporting that have materially affected or are reasonably likely to materiallyaffect the Company’s internal controls over financial reporting.

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**PART II**   OTHERINFORMATION

Item 6.   Exhibits
|        |   | 31.1 | Certification of  principal executive officer required by Rule 13a-14(a) or  Rule 15d-14(a) of the Exchange Act |
|--------|--------|------|--------------------------------------------------------------------------------------------------------------------------------|
|   |   | 31.2 | Certification of  principal financial officer required by Rule 13a-14(a) or  Rule 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 to the requirements of the SecuritiesExchange Act of 1934, the Registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.**
|                        | ADVANSTAR, INC. |
|------------------------|----------------------|
| November 15, 2004 | By:                  |   | /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**                                                                                                                         |
|------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------|
| **31.1**         |       | Certification of  principal executive officer required by Rule 13a-14(a) or  Rule 15d-14(a) of the Exchange Act  |
| **31.2**         |       | Certification of  principal financial officer required by Rule 13a-14(a) or  Rule 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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