AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 3, 1998
REGISTRATION NO. 333-57201
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
---------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
---------------
ADVANSTAR COMMUNICATIONS INC.
(Exact Name of Registrant as Specified in its Charter)
NEW YORK 7389 59-2757389
(State or Other (Primary Standard (I.R.S. Employer
Jurisdiction Industrial Identification Number)
of Incorporation or Classification Code
Organization) Number)
---------------
SEE TABLE OF ADDITIONAL REGISTRANTS
---------------
7500 OLD OAK BOULEVARD
CLEVELAND, OHIO 44130-3369
(440) 243-8100
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)
---------------
ROBERT L. KRAKOFF
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
7500 OLD OAK BOULEVARD
CLEVELAND, OHIO 44130-3369
(440) 243-8100
(Name, Address, Including Zip Code, and Telephone Number, Including Area
Code, of Agent For Service)
---------------
Copy to:
F. GEORGE DAVITT
TESTA, HURWITZ & THIBEAULT, LLP
HIGH STREET TOWER
125 HIGH STREET
BOSTON, MASSACHUSETTS 02110
(617) 248-7000
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this registration statement becomes effective.
If any of the securities being registered on this form are to be offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
---------------
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
PROPOSED PROPOSED
MAXIMUM MAXIMUM
OFFERING AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE PRICE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) PER NOTE PRICE(1) FEE
- -------------------------------------------------------------------------------
9-1/4% Senior Subordinated
Notes due 2008.............. $150,000,000 100% $150,000,000 $44,250(2)
- -------------------------------------------------------------------------------
Guarantees................... -- -- -- (3)
- -------------------------------------------------------------------------------
(1) Pursuant to Rule 457(f) under the Securities Act of 1933, as amended, the
registration fee has been calculated based on the market value of the 9-
1/4% Senior subordinated Notes due 2008 for which the securities
registered hereby will be exchanged, which is estimated to be the face
amount of such notes.
(2) Previously paid.
(3) Pursuant to Rule 457(n), no registration fee is payable with respect to
the guarantees.
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
TABLE OF ADDITIONAL REGISTRANTS
PRIMARY
STATE OR OTHER STANDARD I.R.S.
JURISDICTION OF INDUSTRIAL EMPLOYER
INCORPORATION OR CLASSIFICATION IDENTIFICATION
REGISTRANT ORGANIZATION NUMBER NUMBER
- ------------------------------- ---------------- -------------- --------------
Advanstar Holdings, Inc. Delaware 7389 94-3243499
Art Expositions International,
Inc. Delaware 7389 41-1612863
Expocon Management Associates,
Inc. Connecticut 7389 06-0984189
On Demand Marketing, Inc. Connecticut 7389 06-1382851
Men's Apparel Guild in Califor-
nia, Inc. California 7389 95-1588605
Magic Kids, Inc. California 7389 33-0753421
Technology Events Company, LLC Connecticut 7389 06-1432203
Applied Business teleCommunica-
tions California 7389 94-2896012
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF
ANY SUCH STATE.
Subject to Completion, [LOGO]
Dated , 1998
ADVANSTAR COMMUNICATIONS INC.
OFFER TO EXCHANGE ITS 9 1/4% SENIOR SUBORDINATED NOTES DUE 2008, WHICH HAVE
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, FOR ANY AND ALL
OF ITS OUTSTANDING 9 1/4% SENIOR SUBORDINATED NOTES DUE 2008, WHICH HAVE NOT
BEEN SO REGISTERED
----------
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS THEREUNDER WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON , 1998, UNLESS EXTENDED.
----------
Advanstar Communications Inc., a New York corporation ("Advanstar" or the
"Company"), a wholly-owned subsidiary of Advanstar Holdings, Inc., a Delaware
corporation ("Holdings"), hereby offers (the "Exchange Offer"), upon the terms
and conditions set forth in this Prospectus (the "Prospectus") and the
accompanying Letter of Transmittal (the "Letter of Transmittal"), to exchange
an aggregate principal amount of up to $150,000,000 of its 9 1/4% Senior
Subordinated Notes due 2008 (the "Exchange Notes"), which have been registered
under the Securities Act of 1933, as amended (the "Securities Act"), pursuant
to a Registration Statement of which this Prospectus is a part, for a like
principal amount of its outstanding 9 1/4% Senior Subordinated Notes due 2008
(the "Original Notes", and, together with the Exchange Notes, the "Notes"),
which have not been so registered, from the holders thereof. The form and terms
of the Exchange Notes are the same as the form and terms of the Original Notes
(which they replace), except that as of the date hereof the Exchange Notes have
been registered under the Securities Act and, therefore, will not bear legends
restricting their transfer and will not contain certain provisions included in
the terms of the Original Notes relating to an increase in the interest rate in
certain circumstances relating to the timing of the Exchange Offer. The
Exchange Notes will evidence the same debt as the Original Notes (which they
replace) and will be issued under and be entitled to the benefits of the
Indenture, dated as of April 30, 1998 (the "Indenture"), between the Company
and The Bank of New York, as trustee (the "Trustee"), which also governs the
Original Notes. See "The Exchange Offer" and "Description of Notes."
The Company will accept for exchange any and all Original Notes duly tendered
and not validly withdrawn prior to 5:00 p.m., New York City time, on ,
1998, unless extended by the Company in its sole discretion (the "Expiration
Date"). Tenders of Original Notes may be withdrawn at any time prior to 5:00
p.m., New York City time on the Expiration Date. The Exchange Offer is not
conditioned upon any minimum principal amount of Original Notes being tendered
for exchange pursuant to the Exchange Offer, but is subject to certain
customary conditions.
The Original Notes were sold by the Company on April 30, 1998 to Chase
Securities Inc. and Lehman Brothers Inc. (collectively, the "Initial
Purchasers") in connection with the acquisition (the "MAGIC Acquisition") by
Advanstar of Men's Apparel Guild in California, Inc. ("MAGIC") and certain
refinancing transactions. See "The Acquisitions and Refinancing." The Original
Notes were sold by the Company to the Initial Purchasers in transactions not
registered under the Securities Act in reliance upon an exemption from
registration under the Securities Act (the "Offering"). The Initial Purchasers
subsequently resold the Original Notes in the United States to qualified
institutional buyers in reliance upon Rule 144A under the Securities Act ("Rule
144A") and outside the United States in accordance with Regulation S under the
Securities Act. The Exchange Notes are being offered hereunder in order to
satisfy certain obligations of the Company contained in the Exchange and
Registration Rights Agreement dated April 30, 1998 among the Company and the
other signatories thereto (the "Registration Rights Agreement").
The Company believes that, based on interpretations by the staff of the
Securities and Exchange Commission (the "Commission"), Exchange Notes issued
pursuant to the Exchange Offer in exchange for Original Notes may be offered
for resale, resold and otherwise transferred by each holder thereof (other than
any such holder which is an "affiliate" of the Company within the meaning of
Rule 405 under the Securities Act) without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that such
Exchange Notes are acquired in the ordinary course of such holder's business
and such holder has no arrangement with any person to participate in the
distribution of such Exchange Notes. Each broker-dealer that receives Exchange
Notes for its own account pursuant to the Exchange Offer may be, depending on
facts and circumstances, a statutory underwriter and must acknowledge that it
will deliver a prospectus in connection with any resale of such Exchange Notes
that describes such resales in the plan of distribution. The Letter of
Transmittal states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within
the meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of Exchange Notes received in exchange for Original Notes where
such Original Notes were acquired as a result of market-making or other trading
activities; however, this Prospectus may not be used by the Initial Purchasers
for resales of Notes acquired by them directly from the Company. The Company
has agreed that, for a period of 180 days after the Expiration Date (as
defined), it will make this Prospectus available to any broker-dealer for use
in connection with certain resales. See "Plan of Distribution." All resales
must be made in compliance with applicable state securities or "blue sky" laws.
Such compliance may require that the Exchange Notes be registered or qualified
in a particular state or that the resales be made by or through a licensed
broker-dealer, unless exemptions from these requirements are available. The
Company assumes no responsibility with regard to compliance with such
requirements.
(Cover continued on following page)
SEE "RISK FACTORS" BEGINNING ON PAGE 19 HEREOF FOR A DISCUSSION OF MATERIAL
RISKS THAT SHOULD BE CONSIDERED BY HOLDERS WHO TENDER THEIR ORIGINAL NOTES IN
THE EXCHANGE OFFER.
----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE COMMISSION OR ANY
STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
----------
The date of this Prospectus is , 1998.
(Cover continued from previous page)
Interest on the Notes is payable semi-annually on May 1 and November 1 of
each year, commencing on November 1, 1998. The Notes will mature on May 1,
2008. Except as described below, the Company may not redeem the Notes prior to
May 1, 2003. On or after such date, the Company may redeem the Notes, in whole
or in part, at any time at the redemption prices set forth herein, plus
accrued and unpaid interest thereon, if any, to the date of redemption. In
addition, at any time and from time to time prior to May 1, 2001, the Company
may, subject to certain requirements, redeem up to 35% of the original
aggregate principal amount of the Notes with the net cash proceeds of one or
more Equity Offerings (as defined) at a redemption price equal to 109.250% of
the principal amount thereof, plus accrued and unpaid interest thereon, if
any, to the date of redemption; provided, however, that at least 65% of the
original aggregate principal amount of the Notes remains outstanding
immediately after each such redemption. The Notes will not be subject to any
sinking fund requirements. Upon the occurrence of a Change of Control (as
defined), the Company will have the option, at any time prior to May 1, 2003,
to redeem the Notes, in whole but not in part, at a redemption price equal to
100% of the principal amount thereof plus the Applicable Premium (as defined),
together with accrued and unpaid interest, if any, to the date of redemption.
Upon the occurrence of a Change of Control, if the Company does not so redeem
such Notes or if a Change of Control occurs after May 1, 2003, the Company
will be required to make an offer to purchase the Notes at a price equal to
101% of the original aggregate principal amount thereof, together with accrued
and unpaid interest, if any, to the date of purchase. Any such Change of
Control may also require the Company to repay all or a portion of its Senior
Indebtedness (as defined). There can be no assurance that the Company will
have sufficient funds available at the time of any Change of Control to make
any such repurchase of the Exchange Notes. See "Description of Notes."
The Notes will be unsecured and will be subordinated in right of payment to
all existing and future Senior Indebtedness (as defined) of the Company. The
Notes will rank pari passu with all future Senior Subordinated Indebtedness
(as defined) of the Company and will rank senior to all future Subordinated
Obligations (as defined) of the Company. The Notes will be fully and
unconditionally guaranteed (the "Note Guarantees") on an unsecured, senior
subordinated basis by each of the Company's direct and indirect domestic
Restricted Subsidiaries (as defined) and by Holdings (collectively, the
"Guarantors"). The Indenture governing the Notes permits the Company and its
subsidiaries to incur additional indebtedness, including Senior Indebtedness,
subject to certain restrictions.
The Exchange Offer is not being made to, nor will the Company accept
surrenders for exchange from, holders of Original Notes in any jurisdiction in
which such Exchange Offer or the acceptance thereof would not be in compliance
with the securities or blue sky laws of such jurisdiction. Holders of Original
Notes not tendered and accepted in the Exchange Offer will continue to hold
such Original Notes and will be entitled to all the rights and benefits and
will be subject to the limitations applicable thereto under the Indenture and
with respect to transfer under the Securities Act. Holders of Original Notes
not tendered in the Exchange Offer will not retain any rights under the
Registration Rights Agreement, except in limited circumstances. The Company
will pay all expenses incurred by it incident to the Exchange Offer. See "The
Exchange Offer."
There has not previously been any public market for the Exchange Notes. The
Company does not intend to list the Exchange Notes on any securities exchange
or to seek approval for quotation through any automated quotation system.
There can be no assurance that an active market for the Exchange Notes will
develop. The Initial Purchasers have informed the Company that they currently
intend to make a market in the Exchange Notes, but are not obligated to do so
and any such market making may be discontinued at any time without notice. The
Initial Purchasers may act as principal or as agent in such transactions. If a
market for the exchange Notes should develop, the Exchange Notes could trade
at a discount from their principal amount. See "Risk Factors -- Absence of
Public Market." Moreover, to the extent that Original Notes are tendered and
accepted in the Exchange Offer, the trading market for untendered and tendered
but unaccepted Original Notes could be adversely affected.
The Company will provide the holders of the Notes with the annual reports
and the information, documents and other reports (or copies of such portions
of any of the foregoing as the Commission may, by rules and regulations
prescribe), filed with the Commission pursuant to Sections 13 and 15(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). In the event
that the Company is not permitted to file such reports, documents and
information with the Commission pursuant to the Exchange Act, the Company will
nevertheless deliver such Exchange Act information to the holders of the Notes
as if the Company were subject to the reporting requirements of Section 13 or
15(d) of the Exchange Act.
The names of publications, events and services used in this Prospectus are
trademarks, tradenames and servicemarks of the Company, its subsidiaries or
joint ventures. Names of companies and associations used herein are trademarks
or tradenames of the respective organizations.
----------------
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
WHEN USED IN THIS PROSPECTUS, THE WORDS "EXPECTS," "ANTICIPATES,"
"ESTIMATES," "BELIEVES," "MAY," "WILL," "SHOULD" AND SIMILAR EXPRESSIONS, AND
THE NEGATIVE THEREOF, ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS.
SUCH STATEMENTS, WHICH INCLUDE STATEMENTS CONTAINED IN "RISK FACTORS,"
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" AND "BUSINESS" ARE SUBJECT TO RISKS AND UNCERTAINTIES THAT COULD
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED. THESE FORWARD-
LOOKING STATEMENTS SPEAK ONLY AS OF THE DATE OF THIS PROSPECTUS. THE COMPANY
EXPRESSLY DISCLAIMS ANY OBLIGATION OR UNDERTAKING TO RELEASE PUBLICLY ANY
UPDATES OR REVISIONS TO ANY FORWARD-LOOKING STATEMENT CONTAINED HEREIN TO
REFLECT ANY CHANGE IN THE COMPANY'S EXPECTATIONS WITH REGARD THERETO OR ANY
CHANGE IN EVENTS, CONDITIONS OR CIRCUMSTANCES ON WHICH ANY SUCH STATEMENT IS
BASED.
----------------
MARKET AND INDUSTRY DATA USED THROUGHOUT THIS PROSPECTUS WERE OBTAINED
THROUGH COMPANY RESEARCH, SURVEYS OR STUDIES CONDUCTED BY THIRD PARTIES AND
INDUSTRY OR GENERAL PUBLICATIONS. THE COMPANY HAS NOT INDEPENDENTLY VERIFIED
MARKET AND INDUSTRY DATA PROVIDED BY THIRD PARTIES OR INDUSTRY OR GENERAL
PUBLICATIONS. SIMILARLY, INTERNAL COMPANY SURVEYS, WHILE BELIEVED BY
MANAGEMENT OF THE COMPANY TO BE RELIABLE, HAVE NOT BEEN VERIFIED BY ANY
INDEPENDENT SOURCES.
i
SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the financial statements and notes thereto appearing elsewhere
in this Prospectus. As used herein, (i) "Advanstar" refers to Advanstar
Communications Inc. and its subsidiaries as of the date hereof; (ii) the
"Predecessor" refers to Advanstar prior to the consummation of the HFCP III
Acquisition (as defined) on May 31, 1996; (iii) "Holdings" refers to Advanstar
Holdings, Inc., the parent company of Advanstar; (iv) "HFCP III" refers
collectively to Hellman & Friedman Capital Partners III, L.P., H&F Orchard
Partners III, L.P. and H&F International Partners III, L.P.; (v) "MAGIC" refers
to Men's Apparel Guild in California, Inc.; (vi) the "MAGIC Acquisition" refers
to the acquisition of MAGIC by Advanstar; (vii) the "Other Acquisitions" refer
collectively to the acquisitions and joint ventures reflected in the Pro Forma
Adjustments (as defined), other than the MAGIC Acquisition; (viii) the
"Company" refers to Advanstar Communications Inc. and its subsidiaries after
the consummation of the Acquisitions; (ix) the "Refinancing" refers
collectively to the Offering, the Credit Facility Amendment (as defined) and
the HFCP III Equity Investment (as defined); (x) "Travel Agent" refers to the
travel related publication and trade show assets acquired by the Company from
Universal Media, Inc. on August 17, 1998, including Travel Agent Magazine; and
(xi) "Travel Agent Acquisition" means the acquisition of Travel Agent by the
Company.
----------------
THE COMPANY
OVERVIEW
The Company is a leading provider of integrated, business-to-business
marketing communications solutions, principally through controlled circulation
trade, business and professional magazines and trade shows, expositions and
conferences. The Company also provides a broad range of other marketing
services products, including direct mail and database products and services.
The Company publishes 72 specialized business magazines and professional
journals and 31 directories and other publications. Of Advanstar's 55 magazines
and journals for which competitive data is available, over 75% rank either #1
or #2 in their respective markets (based on number of advertising pages). The
Company owns and manages 72 expositions and trade shows, most of which are the
leading events in their respective national or regional markets (based on net
square feet of exhibition space), and 26 conferences for business, professional
and consumer audiences worldwide. After giving effect to the Pro Forma
Adjustments, the Company would have derived 53.9% of its 1997 revenues from
publishing, 40.9% from expositions and conferences and 5.2% from marketing
services. After giving effect to the Pro Forma Adjustments, (i) the Company's
1997 revenue, EBITDA (as defined) and EBITDA margin would have been $267.9
million, $60.2 million and 22.5%, respectively; and (ii) the Company's revenue,
EBITDA and EBITDA margin for the six months ended June 30, 1998 would have been
$160.1 million, $39.0 million and 24.4%, respectively. "EBITDA" is operating
income plus amortization and depreciation. EBITDA does not represent and should
not be considered an alternative to net income or cash flow from operations as
determined by GAAP, and the Company's calculation thereof may not be comparable
to that reported by other companies. The Company believes that EBITDA provides
useful information regarding the Company's ability to service and/or incur
indebtedness and is used by many other companies. The Company's lenders have
indicated that the amount of indebtedness of the Company will be permitted to
incur will be based, in part, on the Company's EBITDA. It is also the Company's
experience that the merit of potential acquisitions and divestitures in the
Company's industry are evaluated by the parties involved, in part, based on
EBITDA. EBITDA does not take into account the Company's working capital, debt
service and capital expenditure requirements or other commitments and,
accordingly, is not necessarily indicative of the amounts that may be awarded
for discretionary use.
1
The Company markets its broad range of products and services primarily
through four industry clusters in which it has developed critical mass and
expertise: (i) Retail, Hospitality & Fashion; (ii) Healthcare & Pharmaceutical;
(iii) Information Technology & Communications; and (iv) Manufacturing &
Processing. The Company believes its industry-focused cluster structure allows
it to cross-sell its products effectively, thereby capturing a larger share of
customer marketing expenditures. These four clusters are further divided into
20 industry sectors. The Company has expanded its product line within its
clusters through new product introductions and strategic acquisitions. These
actions have enhanced the Company's position as a leader in its industry. In
addition, these actions have increased the Company's EBITDA by leveraging its
existing marketing and customer service infrastructure and industry expertise.
On April 30, 1998, Advanstar acquired MAGIC. MAGIC, organized in 1933,
produces MAGIC, the world's largest trade show for the men's apparel industry
(based on net square feet of exhibition space); WWDMAGIC, the second largest
women's apparel show in the United States (based on net square feet of
exhibition space); and MAGICKids, a recently introduced children's apparel
show. The three shows are held concurrently in Las Vegas in February and August
each year. Based on registration records, the February 1998 MAGIC trade shows
attracted an audience of over 80,000 attendees from over 100 countries,
including retailers from department stores, sporting goods stores, general
merchandising stores and men's specialty and chain stores. Based on exhibitor
sales records, MAGIC's February 1998 trade shows included over 3,200 exhibitors
(such as Levi Strauss, Calvin Klein, Donna Karan and the Russell Corporation),
representing approximately 5,000 brand names. MAGIC's February 1997 and August
1997 trade shows ranked, respectively, as the 13th and 11th largest trade shows
in the United States (based on net square feet of exhibition space). MAGIC's
revenue, EBITDA and EBITDA margin for its fiscal year ended May 31, 1997 were
$31.2 million, $12.2 million and 39.3%, respectively. For the nine months ended
February 28, 1998, MAGIC's revenue, EBITDA and EBITDA margin were $38.7
million, $20.7 million and 53.5%, respectively, representing a revenue increase
of 24.8% and an EBITDA increase of 47.4% over the nine months ended February
28, 1997.
On August 17, 1998, the Company acquired Travel Agent. Travel Agent publishes
Travel Agent, the third largest U.S. trade magazine and #1 travel periodical
(based on number of advertising pages). Travel Agent will be integrated into
the Company's travel/hospitality industry sector of the Retail, Hospitality &
Fashion cluster, which includes Hotel & Motel MANAGEMENT and PREMIER HOTELS &
RESORTS.
COMPETITIVE ADVANTAGES
The Company believes that the following factors contribute to its strong
competitive position:
Market Leadership. The Company has achieved a strong market position within
each of its four industry clusters primarily as a result of its ability to
offer customers in each cluster comprehensive and integrated marketing
communications solutions, consisting of publications, expositions and marketing
services. The Company publishes 72 specialized business magazines and
professional journals and 31 directories and other publications. Of Advanstar's
55 magazines and journals for which competitive data is available, over 75%
rank either #1 or #2 in their respective markets (based on number of
advertising pages). The Company also owns and manages 72 trade shows and
expositions, most of which are the leading events in their respective national
or regional markets (based on net square feet of exhibition space) and 26
conferences.
Industry--Focused Integrated Marketing. In addition to offering a broad range
of products, the Company has developed a business model focused on industry
clusters to better serve its customers'
2
marketing communications needs. This model facilitates the development of long-
term relationships between customers and dedicated Advanstar teams. These teams
work with customers to design and to implement all aspects of customized,
business-to-business marketing and communications programs, increasing cross-
selling opportunities across product and service groups.
Diverse Customer Base. The Company's diverse customer base provides it with
stable and diverse sources of revenue and cash flow as well as an established
foundation from which to further penetrate existing markets and to develop new
markets. The Company's customer base is geographically diverse and crosses many
disparate industries, mitigating the Company's exposure to downturns in
particular geographic markets or industries. After giving effect to the Pro
Forma Adjustments, in 1997 the Company had over 14,000 advertisers and
exhibitors operating in 20 different industry sectors, with no customer or
industry sector representing more than 0.8% or 12.9% of revenue, respectively.
Attractive EBITDA Margins and Modest Ongoing Capital Requirements. Consistent
with other leaders in the controlled circulation publication and trade show
industries, the Company enjoys attractive EBITDA margins and modest ongoing
capital expenditure requirements. The modest ongoing capital requirements
result in part from the Company's outsourcing of the printing of its trade
publications and the physical operation of its expositions. After giving effect
to the Pro Forma Adjustments, in 1997 the Company's EBITDA would have been
$60.2 million, or 22.5% of revenue. In 1997, the Company's capital expenditures
were $2.3 million. After giving effect to the Pro Forma Adjustments, the
Company's EBTIDA for the six months ended June 30, 1998 would have been
$39.0 million, or 24.4% of revenue. The Company's capital expenditures for the
six months ended June 30, 1998 were $1.6 million.
Experienced and Incentivized Management Team. The members of Advanstar's
senior management team have an average of over 15 years of industry experience,
with established track records in delivering revenue and profit growth,
developing new products, penetrating new markets and integrating acquisitions.
The Company's management is led by Robert L. Krakoff, Chairman and Chief
Executive Officer and James M. Alic, Vice Chairman. Messrs. Krakoff and Alic
joined Advanstar in July 1996. Prior to joining Advanstar, Mr. Krakoff was
Chief Executive Officer of Cahners Publishing and a Director of its parent
company, Reed-Elsevier plc. During Mr. Krakoff's 23-year tenure, Reed-
Elsevier's exhibition business became one of the largest worldwide exhibition
management companies. Prior to joining Advanstar, Mr. Alic served as Vice
President and Controller of IBM Corporation, and prior thereto was the Chairman
of Reed Exhibition Companies. Messrs. Krakoff and Alic, collectively, have
invested $2.98 million in the business. Messrs. Krakoff and Alic and other
members of the Company's management, subject to vesting, have direct or
indirect interests in approximately 15% of Holdings' common stock (the "Common
Stock") on a fully diluted basis.
BUSINESS STRATEGY
The Company's business strategy is to increase its business while maintaining
or increasing its profitability. The Company plans to accomplish its strategy
by solidifying its position as a leading provider of integrated business-to-
business marketing communications solutions. The Company plans to achieve its
strategic objectives by (i) expanding its product and service offerings within
each of its industry sectors to obtain a larger share of its customers'
marketing expenditures, (ii) selectively entering new industry sectors and
(iii) benefitting to the maximum extent possible from the strengths of its
centralized administrative and production operations.
Expand Product Offerings. The Company plans to "fill-in" its product and
service offerings within its existing industry sectors through selective
acquisitions and joint ventures, strategic new product launches and
international expansion.
3
. Selective Acquisitions and Joint Ventures. The Company intends to
continue to engage in strategic acquisitions and joint ventures within
its existing industry sectors. The Company believes it can improve its
overall competitive position through such acquisitions by (i) applying
its extensive industry experience to enhancing the performance of newly
acquired businesses, (ii) integrating acquisitions and joint ventures
into its efficient infrastructure, (iii) cross-selling new products and
services with existing products and services and (iv) using new products
and services to increase visibility within its markets.
. Strategic New Product Launches. The Company has successfully developed
new products within its existing industry clusters and will continue to
make strategic new product introductions. In 1997, the Company launched
seven magazines and seven expositions and conferences in existing
industry sectors to fill-in its existing product offerings.
. International Expansion. The Company intends to enhance its position in
international markets by leveraging its widely recognized brands, its
experience in international operations and its current customers' demand
for increased global marketing. The Company currently has operations or
produces events in Canada, Europe, Asia and Brazil and intends to expand
further internationally through the extension of existing products into
new geographic markets, joint ventures with local operating partners and
selective acquisitions.
Selectively Enter New Industry Sectors. The Company will selectively enter
new industry sectors in which it believes it can become a leading participant
and achieve attractive margins. For example, the MAGIC Acquisition presented
Advanstar with an ideal opportunity to enter the U.S. men's apparel market with
critical mass and to increase revenue and reduce expenses by leveraging
Advanstar's extensive trade show experience.
Leverage Cost-Effective Centralized Administrative and Production
Facilities. The Company believes that its organizational structure (i) provides
continuing opportunities to produce attractive margins through centralized
functional cost management, (ii) provides a platform to easily introduce new
titles or expositions based on existing products and (iii) facilitates
integration and cost reductions with respect to acquired titles and
expositions. The Company has a long established and efficient centralized
publishing infrastructure in both the U.S. and Europe. The Company focuses on
continually improving its systems and processes to provide effective, low cost
operations in circulation, fulfillment, production and print and paper vendor
management. Similar central infrastructures are being established in Asia and
in Latin America. In 1997, a centrally managed exhibition operations function
was established in both the U.S. and Europe to provide consistency of business
process and cost effective delivery of these services. Centralized support also
exists in finance and accounting, information technology and communications,
human resources and strategic planning.
INDUSTRY OVERVIEW
Trade Publications. Trade publications provide key new product or educational
information to readers and a periodic medium for advertisers to reach highly
targeted and select business audiences throughout the year. Trade publications
are generally supported by advertising and are often circulated free-of-charge.
The most effective and profitable publications are those with readership that
includes a high proportion of the individuals who influence purchasing
decisions in a market niche, while avoiding the expense and inefficiency of
circulating to individuals who are not clearly within the target group.
According to a recent study, the U.S. trade publication industry is expected to
grow at a compound annual growth rate of 5.9% between 1995 and 2000, increasing
from a total market size of approximately $7.7 billion in 1995 (consisting of
approximately $5.9 billion in advertising and approximately $1.8 billion in
subscriptions) to approximately $10.2 billion in 2000 (consisting of
approximately $8.2 billion in advertising and approximately $2.0 billion in
subscriptions).
4
Expositions and Trade Shows. Expositions and trade shows allow exhibitors a
cost-effective means to showcase and sell products and services and to develop
business relationships with many potential customers in a short time period,
while providing attendees an opportunity to view a broad range of products as
well as to interact with numerous suppliers at once. A 1996 study noted that
the cost of closing a sale with a trade show prospect is 45% less than the cost
of closing a sale in the field. The number of U.S. expositions grew from
approximately 3,300 events in 1989 to approximately 4,400 events in 1996, a
33.8% increase. The amount of net square feet of U.S. expositions grew 65.9%
between 1989 and 1996, from approximately 270 million net square feet in 1989
to approximately 448 million net square feet in 1996. Attendance at U.S.
expositions has grown from approximately 60 million attendees in 1989 to
approximately 101 million attendees in 1996.
COMPETITION
Competition for the Company's products and services is highly fragmented,
both by product and geography, and exists at many levels. On a global level,
there are several much larger international firms--such as Reed Elsevier and
United News and Media--which operate in many geographic markets and have broad
product offerings in publishing, expositions and conferences and marketing
services. Within each particular industry sector, the Company generally has a
large number of direct and indirect competitors. In some cases, these
competitors operate in several geographic areas. In other cases, they operate
in only one geographic market. In most cases, these competitors are small to
medium-sized corporations. However, in several industries markets such as
information technology and healthcare, there are large competitors focused on a
single industry. In expositions and conferences in particular, there are many
not-for-profit association competitors and, in several countries, the
exposition hall owner and operator may also be a competitor.
OWNERSHIP
Advanstar was purchased on May 31, 1996 by HFCP III (the "HFCP III
Acquisition"). HFCP III is a private equity investment fund with committed
equity capital of approximately $1.5 billion. HFCP III, with its predecessor
partnerships, is an experienced investor in the media industry, with current or
former investments in companies including Young & Rubicam Inc., Western
Wireless Corporation, Eller Media Company (which has been sold to Clear Channel
Communications, Inc.) and Hoyts Cinemas Limited. To date, HFCP III has invested
$177.0 million of equity in the Company. See "Principal Stockholders."
THE ACQUISITIONS AND REFINANCING
On April 30, 1998, in connection with the Offering, Advanstar acquired MAGIC
for cash consideration of $230.2 million, subject to adjustment based on the
shareholders' equity of MAGIC on the closing date of the MAGIC Acquisition.
MAGIC is a wholly-owned subsidiary of Advanstar, serving as the core asset of
the Company's Retail, Hospitality & Fashion cluster. The Company's fashion
industry sector is managed by Joseph Loggia, MAGIC's former chief executive
officer and current president. Mr. Loggia has entered into a two year
employment agreement with Advanstar and has received options to purchase Common
Stock.
On August 17, 1998, the Company acquired Travel Agent for cash consideration
of $68.0 million.
In addition, since June 1, 1997 Advanstar has completed or signed definitive
agreements or letters of intent for 11 other acquisitions or joint ventures
(collectively, the "Other Acquisitions") with purchase prices ranging from
approximately $1.4 million to approximately $18.3 million and aggregating
approximately $147.5 million. The MAGIC Acquisition, the Travel Agent
Acquisition and the Other Acquisitions are collectively referred to herein as
the "Acquisitions." See "The Acquisitions and Refinancing."
5
In order to provide greater flexibility in pursuing its growth strategy, on
April 30, 1998 the Company amended (the "First Credit Facility Amendment") its
existing senior credit facility (the "Original Credit Facility" and, as so
amended, the "First Amended Credit Facility") with The Chase Manhattan Bank, an
affiliate of Chase Securities Inc., and a syndicate of banks, by increasing its
borrowing capacity thereunder from $215.0 million under the Original Credit
Facility to $270.0 million under the Amended Credit Facility. At the same time,
HFCP III also made an additional equity investment (the "HFCP III Equity
Investment") of approximately $70.0 million in the Company. Additionally, in
August 1998 in connection with the Travel Agent Acquisition, the Company
entered into a second amendment (the "Second Credit Facility Amendment") to the
First Amended Credit Facility (the "Second Amended Credit Facility"), thereby
increasing its borrowing capacity from $270.0 million under the First Amended
Credit Facility to $310.0 million under the Second Amended Credit Facility. The
First Credit Facility Amendment and the Second Credit Facility Amendment are
collectively referred to as the "Credit Facility Amendment" and the First
Amended Credit Facility and the Second Amended Credit Facility are collectively
referred to as the "Amended Credit Facility." See "Description of Amended
Credit Facility." As of June 30, 1998, the Company had $217.0 million of
indebtedness outstanding under the First Amended Credit Facility.
----------------
The Company was incorporated in New York on January 23, 1987 under the name
HBJ Publications, Inc. The Company's name was changed to Edgell Communications,
Inc. on January 12, 1988 and to Advanstar Communications Inc. on January 27,
1992. The Company's executive offices are located at 7500 Old Oak Boulevard,
Cleveland, Ohio 44130-3369. The Company's telephone number at such address is
(440) 243-8100.
6
THE OFFERING
Original Notes.................... The Original Notes were sold by the Company
on April 30, 1998 to the Initial Purchasers
pursuant to a Purchase Agreement dated
April 27, 1998 (the "Purchase Agreement").
The Initial Purchasers subsequently resold
the Original Notes in the United States to
qualified institutional buyers in reliance
upon Rule 144A and outside the United
States in accordance with Regulation S
under the Securities Act.
Registration Rights Agreement..... Pursuant to the Purchase Agreement, the
Company and the Initial Purchasers entered
into the Registration Rights Agreement,
which granted the holders of the Original
Notes certain exchange and registration
rights. The Exchange Offer is being made
pursuant to the Registration Rights
Agreement, and such exchange rights
terminate upon the consummation of the
Exchange Offer.
THE EXCHANGE OFFER
The Exchange Offer................ $1,000 principal amount of Exchange Notes
will be issued in exchange for each $1,000
principal amount of Original Notes validly
tendered pursuant to the Exchange Offer. As
of the date hereof, $150 million in
aggregate principal amount of Original
Notes are outstanding. The Company will
issue the Exchange Notes to tendering
holders of Original Notes promptly after
the Expiration Date.
Resales........................... Based on interpretations by the staff of
the Commission set forth in no-action
letters issued to third parties, the
Company believes that Exchange Notes issued
pursuant to the Exchange Offer in exchange
for Original Notes may be offered for
resale, resold and otherwise transferred by
any person receiving such Exchange Notes,
whether or not such person is the holder
(other than any such holder or other person
which is (i) a broker-dealer that receives
Exchange Notes for its own account in
exchange for Original Notes, where such
Original Notes were acquired by such
broker-dealer as a result of market-making
or other trading activities, or (ii) an
"affiliate" of the Company within the
meaning of Rule 405 under the Securities
Act (collectively, "Restricted Holders"))
without compliance with the registration
and prospectus delivery provisions of the
Securities Act, provided that (a) such
Exchange Notes are acquired in the ordinary
course of business of
7
such holder or other person (b) neither
such holder nor such other person is
engaged in or intends to engage in a
distribution of such Exchange Notes and (c)
neither such holder nor other person has
any arrangement or understanding with any
person to participate in the distribution
of such Exchange Notes. See Morgan Stanley
& Co. Incorporated, SEC No-Action Letter
(available June 5, 1991) and Exxon Capital
Holdings Corporation, SEC No-Action Letter
(available May 13, 1988). Each broker or
dealer that receives Exchange Notes for its
own account in exchange for Original Notes,
where such Original Notes were acquired by
such broker or dealer as a result of
market-making or other trading activities,
must acknowledge that it will deliver a
Prospectus in connection with any sale of
such Exchange Notes, which prospectus will
contain a plan of distribution section
describing such resales. See "Plan of
Distribution."
Expiration Date................... 5:00 p.m., New York City time, on , 1998,
unless the Exchange Offer is extended, in
which case the term "Expiration Date" means
the latest date and time to which the
Exchange Offer is extended.
Accrued Interest on the Exchange
Notes and Original Notes......... Interest on each Exchange Note will accrue
from the last date on which interest was
paid on the Original Note surrendered in
exchange therefor or, if no interest has
been paid on the Original Note, from the
date of original issuance of such Original
Note. No interest will be paid on the
Original Notes accepted for exchange, and
holders of Original Notes whose Original
Notes are accepted for exchange will be
deemed to have waived the right to receive
any payment in respect of interest on the
Original Notes accrued up to the date of
the issuance of the Exchange Notes. Holders
of Original Notes that are not exchanged
will receive the accrued interest payable
on November 1, 1998 in accordance with the
Indenture. See "The Exchange Offer -- Terms
of the Exchange Offer."
Conditions to the Exchange The Exchange Offer is subject to certain
Offer............................ customary conditions. The conditions are
limited and relate in general to
proceedings which have been instituted or
laws which have been adopted that might
impair the ability of the Company to
proceed with the Exchange Offer. As of the
date of this Prospectus, none of these
events had occurred, and the Company
believes their occurrence to be unlikely.
If any such conditions exist prior to the
Expiration Date, the Company may (a)
8
refuse to accept any Original Notes and
return all previously tendered Original
Notes, (b) extend the Exchange Offer or (c)
waive such conditions. See "The Exchange
Offer--Certain Conditions to the Exchange
Offer."
Procedures for Tendering Original Each holder of Original Notes wishing to
Notes............................ accept the Exchange Offer must complete,
sign and date the Letter of Transmittal, or
a facsimile thereof, in accordance with the
instructions contained herein and therein,
and mail or otherwise deliver such Letter
of Transmittal, or such facsimile, together
with the Old Notes to be exchanged and any
other required documentation to the
Exchange Agent (as defined) at the address
set forth herein and therein. Tendered
Original Notes, the Letter of Transmittal
and accompanying documents must be received
by the Exchange Agent by 5:00 p.m. New York
City time, on the Expiration Date. See "The
Exchange Offer-- Procedures for Tendering."
By executing the Letter of Transmittal,
each holder will represent to the Company
that, among other things, the Exchange
Notes acquired pursuant to the Exchange
Offer are being obtained in the ordinary
course of business of the person receiving
such Exchange Notes, whether or not such
person is the holder, that neither the
holder nor any such other person is engaged
in or intends to engage in a distribution
of the Exchange Notes or has an arrangement
or understanding with any person to
participate in the distribution of such
Exchange Notes, and that neither the holder
nor any such other person is an
"affiliate," as defined under Rule 405 of
the Securities Act, of the Company.
Special Procedures for Beneficial Any beneficial holder whose Original Notes
Holders.......................... are registered in the name of his broker,
dealer, commercial bank, trust company or
other nominee and who wishes to tender in
the Exchange Offer should contact such
registered holder promptly and instruct
such registered holder to tender on his
behalf. If such beneficial holder wishes to
tender on his own behalf, such beneficial
holder must, prior to completing and
executing the Letter of Transmittal and
delivering his Original Notes, either make
appropriate arrangements to register
ownership of the Original Notes in such
holder's name or obtain a properly
completed bond power from the registered
holder. The transfer of record ownership
may take considerable time. See "The
Exchange Offer--Procedures for Tendering."
9
Guaranteed Delivery Procedures.... Holders of Original Notes who wish to
tender their Old Notes and whose Original
Notes are not immediately available or who
cannot deliver their Original Notes and a
properly completed Letter of Transmittal or
any other documents required by the Letter
of Transmittal to the Exchange Agent prior
to the Expiration Date may tender their
Original Notes according to the guaranteed
delivery procedures set forth in "The
Exchange Offer--Guaranteed Delivery
Procedures."
Untendered Original Notes......... Following the consummation of the Exchange
Offer, Holders of Original Notes eligible
to participate but who do not tender their
Original notes will not have any further
registration rights and such Original Notes
will continue to be subject to certain
restrictions on transfer. Accordingly, the
liquidity of the market for such Original
Notes could be adversely affected.
Consequences of Failure to The Original Notes that are not exchanged
Exchange......................... pursuant to the Exchange Offer will remain
outstanding and continue to accrue interest
and will also remain restricted securities.
Accordingly, such Original Notes may be
resold only (i) to the Company, (ii)
pursuant to Rule 144A or Rule 144 under the
Securities Act or pursuant to some other
exemption from registration under the
Securities Act, (iii) outside the United
States to a foreign person pursuant to the
requirements of Regulation S under the
Securities Act, or (iv) pursuant to an
effective registration statement under the
Securities Act. See "The Exchange Offer --
Consequences of Failure to Exchange."
Shelf Registration Statement...... In the event that any changes in law or the
applicable interpretations of the staff of
the Commission do not permit the Company to
effect the Exchange Offer or if the
Exchange Offer is not consummated within
185 days following the original issue of
the Original Notes, or upon the request of
any of the Initial Purchasers under certain
circumstances or if any holder of the
Original Notes is not permitted by
applicable law to participate in the
Exchange Offer or elects to participate in
the Exchange Offer but does not receive
fully tradable Exchange Notes pursuant to
the Exchange Offer, the Company will file a
shelf registration statement with respect
to the resale of the Original Notes (the
"Shelf Registration Statement") and will
use reasonable best efforts to cause the
Shelf Registration Statement to become
effective as soon as practicable after
being filed and to keep the Shelf
Registration Statement effective for up to
two years
10
from the date the Shelf Registration
Statement is declared effective by the
Commission.
Withdrawal Rights................. Tenders may be withdrawn at any time prior
to 5:00 p.m., New York City time, on the
Expiration Date.
Acceptance of Original Notes and
Delivery of Exchange Notes....... Subject to certain conditions, the Company
will accept for exchange any and all
Original Notes which are properly tendered
in the Exchange Offer prior to 5:00 p.m.,
New York City time, on the Expiration Date.
The Exchange Notes issued pursuant to the
Exchange Offer will be delivered promptly
after the Expiration Date. See "The
Exchange Offer--Terms of the Exchange
Offer."
Certain United States Federal Tax
Consequences..................... The exchange of Original Notes for Exchange
Notes pursuant to the Exchange Offer should
not be a taxable event for federal income
tax purposes. A holder's holding period for
Exchange Notes should include the holding
period for Original Notes. See "Certain
United States Federal Tax Consequences."
Exchange Agent.................... The Bank of New York is serving as exchange
agent (the "Exchange Agent") in connection
with the Exchange Offer. The mailing
address of the Exchange Agent is The Bank
of New York, 101 Barclay Street, 7E, New
York, NY 10286 Attention: Reorganization
Section. Deliveries by hand or overnight
courier should be addressed to The Bank of
New York, 101 Barclay Street, Corporate
Trust Services Window, Ground Level, New
York, NY 10286 Attention: Reorganization
Section. The facsimile number (for eligible
institutions only) is (212) 571-3080. For
information with respect to the Exchange
Offer, call the Exchange Agent at (212)
815-6333.
Use of Proceeds................... The Company will not receive any proceeds
from the Exchange Offer. See "Use of
Proceeds." The Company has agreed to bear
the expenses of the Exchange Offer pursuant
to the Registration Rights Agreement. No
underwriter is being used in connection
with the Exchange Offer.
THE EXCHANGE NOTES
General........................... The Exchange Offer constitutes an offer to
exchange $1,000 principal amount of the
Exchange Notes for each $1,000 principal
amount of Original Notes. The Exchange
Notes will be obligations of the Company
11
evidencing the same indebtedness as the
Original Notes, and will be entitled to the
benefit of the same Indenture. The form and
terms of the Exchange Notes are
substantially the same as the form and
terms of the Original Notes except that (i)
the Exchange Notes have been registered
under the Securities Act and, therefore,
will not bear legends restricting the
transfer thereof, (ii) the Exchange Notes
do not include provisions providing for an
increase in the interest rate in certain
circumstances relating to the timing of the
Exchange Offer and (iii) the holders of
Exchange Notes will not be entitled to
certain rights under the Registration
Rights Agreement, which rights will
terminate when the Exchange Offer is
consummated. See "Description of Notes."
Issuer............................ Advanstar Communications Inc.
Securities Offered................ $150,000,000 principal amount of 9 1/4%
Senior Subordinated Notes due 2008.
Maturity.......................... May 1, 2008
Interest Payment Dates............ May 1 and November 1 of each year,
commencing November 1, 1998.
Freely Transferable............... The Exchange Notes will be freely
transferable under the Securities Act by
holders who are not Restricted Holders.
Restricted Holders are restricted from
transferring the Exchange Notes without
compliance with the registration and
prospectus delivery requirements of the
Securities Act. The Exchange Notes will be
identical in all material respects
(including interest rate, maturity and
restrictive covenants) to the Original
Notes, with the exception that the Exchange
Notes will be registered under the
Securities Act. See "The Exchange Offer--
Terms of the Exchange Offer."
Public Market..................... The Company does not intend to apply for
listing of the Exchange Notes on any
national securities exchange or for their
quotation on an automated dealer quotation
system. The Initial Purchasers have advised
the Company that they currently intend to
make a market for the Notes. However, they
are not obligated to do so, and any market
making with respect to the Notes may be
discontinued without notice.
Registration Rights............... The holders of Original Notes currently are
entitled to certain registration rights
pursuant to the Registration
12
Rights Agreement, including the right to
cause the Company to register the Original
Notes under the Securities Act if the
Exchange Offer is not consummated prior to
the Exchange Offer Termination Date (as
defined). See "The Exchange Offer--Certain
Conditions to the Exchange Offer." However,
pursuant to the Registration Rights
Agreement, such registration rights will
expire upon consummation of the Exchange
Offer. Accordingly, holders of Original
Notes who do not exchange their Original
Notes for Exchange Notes in the Exchange
Offer will not be able to reoffer, resell
or otherwise dispose of their Original
Notes unless such Original Notes are
subsequently registered under the
Securities Act or unless an exemption from
the registration requirements of the
Securities Act is available.
Sinking Fund...................... None.
Optional Redemption............... Except as described below, the Company may
not redeem the Notes prior to May 1, 2003.
On or after such date, the Company may
redeem the Notes, in whole or in part, at
any time at the redemption prices set forth
herein, together with accrued and unpaid
interest, if any, to the date of
redemption. In addition, at any time and
from time to time prior to May 1, 2001, the
Company may, subject to certain
requirements, redeem up to 35% of the
original aggregate principal amount of the
Notes with the net cash proceeds of one or
more Equity Offerings (as defined), at a
redemption price equal to 109.250% of the
principal amount thereof, together with
accrued and unpaid interest, if any, to the
date of redemption, provided that at least
65% of the original aggregate principal
amount of the Notes remains outstanding
immediately after each such redemption. See
"Description of Notes--Optional
Redemption."
Change of Control................. Upon the occurrence of a Change of Control,
the Company will have the option, at any
time prior to May 1, 2003, to redeem the
Notes, in whole but not in part, at a
redemption price equal to 100% of the
aggregate principal amount thereof plus the
Applicable Premium, together with accrued
and unpaid interest, if any, to the date of
redemption. Upon the occurrence of a Change
of Control, if the Company does not so
redeem the Notes or if a Change of Control
occurs after May 1, 2003, the Company will
be required to make an offer to
13
purchase the Notes at a price equal to 101%
of the principal amount thereof, together
with accrued and unpaid interest, if any,
to the date of repurchase. Any such Change
of Control may also require the Company to
repay all or a portion of its Senior
Indebtedness. There can be no assurance
that the Company will have sufficient funds
available at the time of any Change of
Control to make any such repurchase of the
Exchange Notes.
Guarantees........................ The Notes will be fully and unconditionally
guaranteed on an unsecured, senior
subordinated basis by all current and
future domestic Restricted Subsidiaries
(respectively, the "Subsidiary Guarantees"
and the "Subsidiary Guarantors"), and by
Holdings. The Guarantors will also
guarantee the Amended Credit Facility. In
addition, the Amended Credit Facility is
secured by pledges of all of the capital
stock of the Company and the Subsidiary
Guarantors and security interests in
substantially all other tangible and
intangible assets of the Company and the
Subsidiary Guarantors. See "Description of
Notes--Guarantees" and "Description of
Amended Credit Facility."
Ranking........................... The Notes will be unsecured and will be
subordinated in right of payment to all
existing and future Senior Indebtedness of
the Company. The Notes will rank pari passu
with all future Senior Subordinated
Indebtedness of the Company and will rank
senior to all future Subordinated
Obligations of the Company. The Note
Guarantees will be unsecured and will be
subordinated in right of payment to all
existing and future Subordinated
Obligations of the Guarantors. As of June
30, 1998, after giving effect to the Pro
Forma Adjustments, (i) the aggregate amount
of the Company's outstanding Senior
Indebtedness would have been approximately
$275.0 million (exclusive of unused
commitments), substantially all of which
would have been secured Indebtedness and
would have been guaranteed by all of the
Company's domestic subsidiaries and by
Holdings, (ii) the Company would have had
no Senior Subordinated Indebtedness (other
than the Notes) and no indebtedness that is
subordinate or junior in right of payment
to the Notes and (iii) the Company's
subsidiaries would have had no outstanding
Indebtedness (excluding guarantees of the
Company's indebtedness). See "Description
of Amended Credit Facility" and
"Description of Notes." Although the
Indenture contains limitations on the
amount of additional indebtedness that the
Company
14
may incur, under certain circumstances the
amount of such indebtedness could be
substantial and, in any case such
indebtedness may be Senior Indebtedness.
See "Description of Notes--Certain
Covenants--Limitation on Indebtedness."
Restrictive Covenants............. The Indenture will limit, among other
things; (i) the incurrence of additional
indebtedness by the Company and its
Restricted Subsidiaries; (ii) the payment
of dividends on, and redemption or
repurchase of, capital stock of the Company
and its Restricted Subsidiaries and the
redemption of certain Subordinated
Obligations of the Company and its
Restricted Securities; (iii) certain other
restricted payments, including investments;
(iv) sales of assets; (v) certain
transactions with affiliates; (vi) the
creation of liens; and (vii)
consolidations, mergers and transfers of
all or substantially all of the Company's
assets. The Indenture will also prohibit
certain restrictions on distributions from
Restricted Subsidiaries. However, all of
these limitations and prohibitions are
subject to a number of important
qualifications and exceptions. See
"Description of Notes--Certain Covenants."
RISK FACTORS
Prospective purchasers of the Notes should carefully consider all the
information set forth in this Prospectus and, in particular, should evaluate
the specific factors under "Risk Factors."
15
SUMMARY UNAUDITED PRO FORMA FINANCIAL DATA
The following table sets forth summary unaudited pro forma financial data as
of and for the six month period ended June 30, 1998 for Advanstar, MAGIC,
Travel Agent and the Other Acquisitions. The summary pro forma financial data
has been derived from, and should be read in conjunction with, the data
contained under the caption "Unaudited Pro Forma Combined Financial
Information" and the other financial information and notes thereto contained
herein. The unaudited pro forma combined information is not designed to
represent and does not represent what the Company's results of operations
actually would have been had the relevant transactions been completed as of the
dates indicated, or to project the Company's results of operations for any
future period.
OTHER PRO FORMA
ADVANSTAR(1) MAGIC(2) TRAVEL(3) ACQUISITIONS(4) ADJUSTMENTS PRO FORMA
------------ -------- --------- --------------- ----------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS
DATA:
Net revenue............. $ 121,212 $20,259 $ 14,507 $3,859 $ 300 (5) $ 160,137
========= ======= ======== ====== ======= =========
Gross profit............ $ 40,458 $13,973 $ 5,162 $ 817 $ 300 $ 60,710
General and administra-
tive
expenses.............. 17,164 2,277 2,637 1,585 (1,990)(6) 21,673
Depreciation and amor-
tization.............. 15,850 130 79 -- 5,309 (7) 21,368
--------- ------- -------- ------ ------- ---------
Operating income
(loss)................. 7,444 11,566 2,446 (768) (3,019) 17,669
Interest income (ex-
pense), net............ (10,491) 155 (102) -- (7,596)(8) (18,034)
Other, net.............. (1,894) -- -- -- (1,894)
--------- ------- -------- ------ ------- ---------
Income (loss) before in-
come taxes............. (4,941) 11,721 2,344 (768) (10,615) (2,259)
Provision for income
taxes.................. 229 4,390 78 -- (4,468)(9) 229
--------- ------- -------- ------ ------- ---------
Net income (loss)....... $ (5,170) $ 7,331 $ 2,266 $ (768) $(6,147) $ (2,488)
========= ======= ======== ====== ======= =========
Net income per share,
basic and
diluted................ $ (5.17) $ -- $ -- $ -- $ -- $ (2.49)
========= ======= ======== ====== ======= =========
Weighted average common
stock outstanding,
basic and diluted...... 1,000,000 -- 1,000,000
OTHER FINANCIAL DATA:
EBITDA(10).............. $ 23,294 $11,696 $ 2,525 $ (768) $ 2,290 (11) $ 39,037
EBITDA margin........... 19.2% 57.7% 17.4% (19.9)% 24.4%
Depreciation and amorti-
zation................. $ 15,850 $ 130 $ 79 $ -- $ 5,309 $ 21,368
Capital expenditures.... 1,678 65 53 -- 1,796
Ratio of EBITDA to in-
terest
expense(12)............ -- -- -- 2.2x
BALANCE SHEET DATA (AT
END OF PERIOD):
Total assets............ $ 599,458 $ 5,501 $59,334 (13) $ 664,293
Long-term debt,
including current
maturities............. 365,619 -- 59,000 (14) 424,619
Total shareholders' eq-
uity (deficit)......... 154,151 (334) 334 (15) 154,151
- --------
(1) Represents the results of operations for Advanstar for the six month period
ended June 30, 1998.
(2) Represent the results of operations for MAGIC for the four month period
ended April 30, 1998. The MAGIC Acquisition occurred on April 30, 1998.
(3) Represents the results of operations for Travel Agent for the six month
period ended June 30, 1998.
(4) Represents the aggregate results of operations for the six month period
ended June 30, 1998 for the Other Acquisitions, prior to their acquisition
by the Company. See "The Acquisitions and Refinancing--Other Acquisitions."
Also includes the elimination of operating results of a divestiture, for
consideration of approximately $4.0 million, of a trade publication. The
entity divested had contributed $0.3 million of revenue and no net income
for the six months ended June 30, 1998.
(5) Represents the elimination of related party pricing discounts that were
granted to certain former MAGIC shareholders/directors for their purchase
of trade show exhibition space. Such discounts will not recur following the
MAGIC Acquisition.
(6) Represents the elimination, in connection with the MAGIC Acquisition, of
director fees of $0.2 million and the elimination, in connection with the
Travel Agent Acquisition, of shareholder/director payments of $1.3 million
to certain shareholders of Universal Media, Inc. and certain other costs of
$0.5 million for the six months ended June 30, 1998 that will not recur
following the acquisitions.
(7) Represents incremental amortization of goodwill arising from the
Acquisitions (based on a preliminary allocation of aggregate purchase
price) and incremental amortization of intangibles resulting from deferred
financing costs. The incremental goodwill is being amortized on a straight
line basis over periods ranging from 20-30 years. The deferred financing
costs are amortized over the lives of the related debt instruments (5.5-10
years).
16
(8) Represents incremental interest expense arising from the Offering
(including amortization of original issue discount on the Notes) and
incremental interest expense on additional borrowings under the Amended
Credit Facility.
(9) A tax provision has not been reflected for income before income taxes due
to the Company's net operating loss carryforwards. The remaining income tax
provision represents taxes related to certain state taxes and the Company's
U.K. subsidiary.
(10) "EBITDA" is defined as operating income plus amortization and
depreciation. EBITDA does not represent and should not be considered an
alternative to net income or cash flow from operations as determined by
GAAP, and the Company's calculation thereof may not be comparable to that
reported by other companies. The Company believes that EBITDA provides
useful information regarding the Company's ability to service and/or incur
indebtedness and is used by many other companies. The Company's lenders
have indicated that the amount of indebtedness the Company will be
permitted to incur will be based, in part, on the Company's EBITDA. EBITDA
does not take into account the Company's working capital requirements,
debt service requirements and other commitments and, accordingly, is not
necessarily indicative of amounts that may be available for discretionary
uses. Set forth below is a reconciliation of the Company's operating
income, as reported, to EBITDA for the six months ended June 30, 1998:
TRAVEL OTHER PRO FORMA PRO
ADVANSTAR MAGIC AGENT ACQUISITIONS ADJUSTMENTS FORMA
--------- ------- ------ ------------ ----------- -------
(IN THOUSANDS)
Operating income
(loss)................. $ 7,444 $11,566 $2,446 $(768) $(3,019) $17,669
Depreciation and amorti-
zation................. 15,850 130 79 -- 5,309 21,368
------- ------- ------ ----- ------- -------
EBITDA.................. $23,294 $11,696 $2,525 $(768) $ 2,290 $39,037
======= ======= ====== ===== ======= =======
(11) Excludes a nonrecurring compensation expense of approximately $6.5 million
related to the MAGIC Acquisition.
(12) Calculated using pro forma interest expense of $17.9 million.
(13) Represents the pro forma impact on the Company's total assets of the
Travel Agent Acquisition.
(14) Includes the additional $40.0 million increase in borrowing capacity under
the Second Amended Credit Facility undertaken as part of the Second Credit
Facility Amendment related to the Travel Agent Acquisition.
(15) Represents the elimination of the capital in excess of par value of Travel
Agent of $600 and the elimination of historical accumulated earnings of
Travel Agent and amounts due from Affiliate of $(934).
17
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA OF ADVANSTAR AND THE
PREDECESSOR
The historical consolidated financial and other data for the year ended
December 31, 1995 and the five months ended May 31, 1996 are derived from the
audited consolidated financial statements and notes thereto of the Predecessor
for such periods. The consolidated financial and other data of Advanstar for
the seven months ended December 31, 1996 and the year ended December 31, 1997
are derived from the audited consolidated financial statements and notes
thereto of Advanstar included elsewhere herein. The financial and other data
for the combined year ended December 31, 1996 have been derived from the
audited consolidated financial statements of the Predecessor and Advanstar and
are unaudited. The financial and other data for the six month periods ended
June 30, 1997 and 1998 have been derived from the unaudited condensed
consolidated financial statements of the Company and are unaudited. Results of
operations for the six month periods ended June 30, 1997 and 1998 are not
necessarily indicative of the results that can be expected for future periods
or the entire year. The information presented below should be read in
conjunction with "Management's Discussion and Analysis of Financial Conditions
and Results of Operations," "Selected Historical Consolidated Financial and
Other Data of Advanstar and the Predecessor" and the consolidated financial
statements and notes thereto included elsewhere herein.
PREDECESSOR ADVANSTAR
------------------------- ------------------------------------------------------------
6 MONTHS ENDED
JUNE 30,
---------------------
5 MONTHS 7 MONTHS COMBINED
DECEMBER 31, ENDED ENDED DECEMBER 31, DECEMBER 31,
1995 MAY 31, 1996 DEC 31, 1996 1996(1) 1997 1997 1998
------------ ------------ ------------ ------------ ------------ --------- ----------
(UNAUDITED) (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS DATA:
Net revenue............. $ 145,300 $ 68,286 $ 82,720 $ 151,006 $ 187,656 $ 100,054 $ 121,212
========== ========= ========= ========== ========== ========= ==========
Gross profit............ $ 48,358 $ 24,459 $ 29,227 $ 53,686 $ 61,553 $ 34,365 $ 40,458
General and
administrative
expenses.............. 27,152 11,462 17,395 28,857 30,714 15,331 18,561
Amortization(2)........ 4,801 1,588 13,171 14,759 24,326 10,898 14,453
---------- --------- --------- ---------- ---------- --------- ----------
Operating income
(loss)................. 16,405 11,409 (1,339) 10,070 6,513 8,136 7,444
Interest expense, net.. 19,613 6,963 7,511 14,474 15,117 7,435 10,491
Other, net............. (2,230) (23) 488 465 (292) (38) 1,894
Provision for income
taxes................. 16 13 1,076 1,089 583 936 229
---------- --------- --------- ---------- ---------- --------- ----------
Net income (loss)....... $ (994) $ 4,456 $ (10,414) $ (5,958) $ (8,895) $ (197) $ (5,170)
========== ========= ========= ========== ========== ========= ==========
Net Income (loss) per
share, basic and dilut-
ed..................... $ (0.99) $ 4.46 $ (10.41) $ (5.96) $ (8.90) $ (0.20) $ (5.17)
========== ========= ========= ========== ========== ========= ==========
Weighted average common
stock outstanding, ba-
sic and diluted........ 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000
OTHER FINANCIAL DATA:
EBITDA(3)............... $ 24,611 $ 14,428 $ 13,781 $ 28,209 $ 34,039 $ 20,597 $ 23,294
EBITDA margin........... 16.9% 21.1% 16.7% 18.7% 18.1% 20.6% 19.2%
Depreciation and
amortization........... $ 8,206 $ 3,019 $ 15,120 $ 18,139 $ 27,526 $ 12,461 $ 15,850
Capital expenditures.... 1,451 385 780 1,145 2,260 1,118 1,678
BALANCE SHEET DATA (AT END
OF PERIOD):
Total assets............ $ 79,098 $ 277,173 $ 298,497 $ 305,123 $ 599,458
Working capital
(deficit)(4)........... (11,129) (11,572) (12,034) (7,338) (28,011)
Long-term debt,
including current
maturities............. 173,058 151,000 164,223 170,474 365,619
Total shareholder's
equity (deficit)....... (128,303) 86,839 89,734 98,627 154,151
SELECTED STATISTICAL DA-
TA:
Publications:
Number of
publications.......... 95 96 95 94 104
Number of advertising
pages................. 22,939 23,876 25,457 11,734 12,836
Total publishing
revenue............... $ 109,167 $ 114,587 $ 126,048 60,100 66,822
Expositions:
Number of expositions
and conferences....... 56 56 93 83 105
Square feet of
expositions and
conferences........... 1,508,900 1,513,500 1,823,400 1,394,875 1,822,285
Total exposition reve-
nue................... $ 36,133 $ 36,419 $ 61,608 $ 39,954 $ 54,390
18
- --------
(1) Combines the five months ended May 31, 1996 of the Predecessor with the
seven months ended December 31, 1996 of Advanstar. On May 31, 1996, the
HFCP III Acquisition was consummated. Accordingly, certain information
provided herein for the year ended December 31, 1995 and the five months
ended May 31, 1996 is not comparable to the statement of operations data of
Advanstar due to the effects of certain purchase accounting adjustments and
the financing of the HFCP III Acquisition. Operating and other financial
data for the Predecessor for the five months ended May 31, 1996 have been
combined for presentation purposes with the operating and other financial
data of Advanstar for the seven months ended December 31, 1996, without
giving effect to purchase accounting or the impact of the financing of the
HFCP III Acquisition and is not in accordance with GAAP.
(2) Includes identifiable intangibles such as advertiser, exhibitor and
circulation lists, assembled work force and other intangibles as well as
goodwill. Amortization increased for the seven months ended December 31,
1996 and the year ended December 31, 1997 as a result of the HFCP III
Acquisition completed in May 1996. Purchase prices in excess of fair market
value of tangible and intangible assets acquired is allocated to goodwill.
Intangibles are being amortized over lives ranging from 5 to 23 years.
(3) "EBITDA" is defined as operating income plus amortization and depreciation.
EBITDA does not represent and should not be considered an alternative to
net income or cash flow from operations as determined by GAAP, and the
Company's calculation thereof may not be comparable to that reported by
other companies. The Company believes that EBITDA provides useful
information regarding the Company's ability to service and/or incur
indebtedness and is used by many other companies. The Company's lenders
have indicated that the amount of indebtedness the Company will be
permitted to incur will be based, in part, on the Company's EBITDA. EBITDA
does not take into account the Company's working capital requirements, debt
service requirements and other commitments and, accordingly, is not
necessarily indicative of amounts that may be available for discretionary
uses. Set forth below is a reconciliation of the Company's operating
income, as reported, to EBITDA for the periods indicated:
PREDECESSOR ADVANSTAR
--------------------- ------------------------------------------------------
6 MONTHS ENDED
5 MONTHS 7 MONTHS JUNE 30
ENDED ENDED COMBINED ---------------
DECEMBER 31, MAY 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1996 1996 1996 1997 1997 1998
------------ -------- ------------ ------------ ------------ ------- -------
(UNAUDITED)
(IN THOUSANDS)
Operating income (loss)...................... $16,405 $11,409 $(1,339) $10,070 $ 6,513 $ 8,136 $ 7,444
Depreciation and amortization................ 8,206 3,019 15,120 18,139 27,526 12,461 15,850
------- ------- ------- ------- ------- ------- -------
EBITDA....................................... $24,611 $14,428 $13,781 $28,209 $34,039 $20,597 $23,294
======= ======= ======= ======= ======= ======= =======
(4) Working capital is comprised of total current assets, excluding cash and
cash equivalents, less total current liabilities and excluding current
maturities of long-term debt. Working capital for Advanstar is negative due
to the impact of deferred revenue from expositions which are billed and
collected as deposits up to six months in advance of the respective
exposition. Consequently, expositions carry little or no accounts
receivable.
19
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA OF MAGIC
The following table sets forth summary financial and other data of MAGIC for
the three years ended May 31, 1995, 1996 and 1997 and the nine months ended
February 28, 1998 which have been derived from MAGIC's audited financial
statements and notes thereto for those years and periods. Summary financial and
other data of MAGIC for the nine months ended February 28, 1997 is unaudited
and is provided for comparative purposes only. Results for the nine months
ended February 28, 1998 are not necessarily indicative of results that may be
expected for the entire year. The information presented below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Selected Historical Consolidated Financial and
Other Data of MAGIC" and the historical financial statements and notes thereto
and the other financial information appearing elsewhere herein.
NINE MONTHS
ENDED
FISCAL YEAR ENDED MAY 31, FEBRUARY 28,
---------------------------- -------------------
1995 1996 1997 1997 1998
-------- -------- -------- ----------- -------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS DA-
TA:
Net revenue................ $ 21,734 $ 26,608 $ 31,153 $31,004 $38,695
Direct costs............... 10,067 13,037 14,491 14,180 14,562
-------- -------- -------- ------- -------
Gross profit............... 11,667 13,571 16,662 16,824 24,133
General and administrative
expenses.................. 3,423 3,109 4,304 2,666 3,262
Profit participation....... 289 574 355 378 365
-------- -------- -------- ------- -------
Income from operations..... 7,955 9,888 12,003 13,780 20,506
Interest income............ 677 987 1,195 843 654
Income tax provision....... 3,089 3,965 4,806 5,301 7,697
-------- -------- -------- ------- -------
Net income................. $ 5,543 $ 6,910 $ 8,392 $ 9,322 $13,463
======== ======== ======== ======= =======
OTHER FINANCIAL DATA:
EBITDA(1).................. $ 8,414 $ 10,171 $ 12,247 $14,057 $20,718
EBITDA margin.............. 38.7% 38.2% 39.3% 45.3% 53.5%
Depreciation and amortiza-
tion...................... $ 459 $ 283 $ 244 $ 277 $ 212
Capital expenditures....... 336 120 386 444 93
BALANCE SHEET DATA (AT END
OF PERIOD):
Total assets............... $ 20,691 $25,014 $ 29,983 $28,316 $24,361
Working capital(2)......... (7,792) (5,066) (191) (5,321) (8,117)
Total debt................. -- -- -- -- --
Shareholders' equity....... 7,407 11,425 18,360 19,320 12,873
- --------
(1) "EBITDA" is defined as operating income plus amortization and depreciation.
EBITDA does not represent and should not be considered an alternative to
net income or cash flow from operations as determined by GAAP, and the
Company's calculation thereof may not be comparable to that reported by
other companies. The Company believes that EBITDA provides useful
information regarding the Company's ability to service and/or incur
indebtedness and is used by many other companies. The Company's lenders
have indicated that the amount of indebtedness the Company will be
permitted to incur will be based, in part, on the Company's EBITDA. EBITDA
does not take into account the Company's working capital requirements, debt
service requirements and other commitments and, accordingly, is not
necessarily indicative of amounts that may be available for discretionary
uses. Set forth below is a reconciliation of the Company's operating
income, as reported, to EBITDA for the periods indicated:
FISCAL YEAR ENDED NINE MONTHS
MAY 31, ENDED FEBRUARY 28,
---------------------- -------------------
1995 1996 1997 1997 1998
------ ------- ------- --------- ---------
(UNAUDITED)
(IN THOUSANDS)
Income from operations...... $7,955 $ 9,888 $12,003 $ 13,780 $ 20,506
Depreciation and amortiza-
tion....................... 459 283 244 277 212
------ ------- ------- --------- ---------
EBITDA...................... $8,414 $10,171 $12,247 $14,057 $20,718
====== ======= ======= ========= =========
(2) Working capital is comprised of total current assets, excluding cash and
cash equivalents, less total current liabilities and excluding current
maturities of long-term debt. Working capital for MAGIC is negative due to
the impact of deferred revenue from expositions which are billed and
collected as deposits up to six months in advance of the respective
exposition. Consequently, expositions carry little or no accounts
receivable.
20
RISK FACTORS
Prior to making an investment decision, prospective investors should
carefully consider, together with the other information included in this
Prospectus, the following risk factors. This Prospectus contains forward
looking statements. These statements are subject to a number of risks and
uncertainties, certain of which are beyond the Company's control.
SUBSTANTIAL LEVERAGE
As of June 30, 1998, after giving effect to the Pro Forma Adjustments, the
Company would have had approximately $424.6 million of outstanding
Indebtedness, which would have represented 73.4% of total capitalization. For
the year ended December 31, 1997, the Company's pro forma annual interest
payments due on such Indebtedness would have been approximately $35.9 million,
and the Company's pro forma ratio of EBITDA to interest expense would have
been 1.7x. In addition, as of June 30, 1998, after giving effect to the Pro
Forma Adjustments, the Company would have had $35.0 million available under
the Amended Credit Facility. Although the Company's cash flow from operations
has been sufficient to meet its debt service obligations in the past, there
can be no assurance that the Company's operating results will continue to be
sufficient for the Company to meet its obligations. See "Unaudited Pro Forma
Combined Financial Information," "Capitalization" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
The degree to which the Company is leveraged could have important
consequences to the holders of the Notes including the following:
. impairment of the Company's future ability to obtain additional
financing for acquisitions, capital expenditures, working capital or
general corporate purposes;
. the reduction of funds available to the Company for its operations
or other purposes due to the dedication of substantial portion of
the Company's cash flow from operations to the payment of principal
and interest on the Notes and the borrowings under the Amended
Credit Facility;
. increased exposure to interest rate risk due to the fact that
certain of the Company's borrowings are and will continue to be at
variable interest rates;
. the indebtedness outstanding under the Amended Credit Facility is
secured by the capital stock of the Company and its subsidiaries and
will mature prior to the Notes; and
. the Company may be substantially more leveraged than certain of its
competitors, which may place it at a relative disadvantage and make
it more vulnerable to changing market conditions and regulations.
See "Description of Amended Credit Facility" and "Description of Notes."
ABILITY TO SERVICE DEBT
The Company's ability to make scheduled payments or to refinance its
obligations with respect to its indebtedness will depend on its financial and
operating performance, which, in turn, is subject to prevailing economic
conditions and to certain financial, business and other factors beyond its
control. If the Company's cash flow and capital resources are insufficient to
fund its debt service obligations, the Company may be forced to sell assets,
obtain additional equity capital or restructure its debt. There can be no
assurance that the Company's cash flow and capital resources will be
sufficient for payment of its indebtedness in the future. In the absence of
such operating results and resources, the Company could face substantial
liquidity problems and might be required to dispose of material assets or
operations to meet its debt service and other obligations, and there can be no
assurance as to the
21
timing of such sales or the adequacy of the proceeds which the Company could
realize therefrom. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources" and
"Description of Amended Credit Facility."
RESTRICTIONS IMPOSED BY AMENDED CREDIT FACILITY
The Amended Credit Facility contains a number of covenants that, among other
things, restrict the ability of the Company to incur additional indebtedness,
pay dividends, prepay subordinated indebtedness such as the Notes, dispose of
certain assets, enter into sale and leaseback transactions, create liens, make
capital expenditures and make certain investments or acquisitions and
otherwise restrict corporate activities. In addition, under the Amended Credit
Facility, the Company is required to satisfy specified financial covenants,
including cash flow to total debt, interest coverage and consolidated tangible
net worth tests. The ability of the Company to comply with such provisions may
be affected by events beyond the Company's control. The breach of any of these
covenants could result in a default under the Amended Credit Facility. In the
event of any such default, depending on the actions taken by the lenders under
the Amended Credit Facility, the Company could be prohibited from making any
payments on the Notes. In addition, such lenders could elect to declare all
amounts borrowed under the Amended Credit Facility, together with accrued
interest, to be due and payable. The Amended Credit Facility is secured by,
among other things, the capital stock of the Company and its subsidiaries, and
if the Company were unable to repay such borrowings, the Banks could proceed
against their collateral. If the lenders or the holders of any other secured
indebtedness were to foreclose on the collateral securing the Company's
obligations to them, it is possible that there would be insufficient assets
remaining after satisfaction in full of all such indebtedness to satisfy in
full the claims of the holders of the Notes. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources," "Description of Amended Credit Facility" and "Description
of Notes."
SUBORDINATION; UNSECURED STATUS OF THE NOTES AND THE GUARANTEES
The payment of principal of and interest on, and any premium or other
amounts owing in respect of, the Notes will be subordinated to the prior
payment in full of all existing and future Senior Indebtedness of the Company,
including all amounts owing under the Amended Credit Facility. As of June 30,
1998, after giving effect to the Pro Forma Adjustments, the aggregate amount
of Senior Indebtedness of the Company would have been approximately $275.0
million (excluding unused commitments), all of which would have been secured.
Consequently, in the event of a bankruptcy, liquidation, dissolution,
reorganization or similar proceedings with respect to the Company, assets of
the Company will be available to pay obligations on the Notes only after
Senior Indebtedness has been paid in full, and there can be no assurance that
there will be sufficient assets to pay amounts due on all or any of the Notes.
The Notes will be unsecured and will be subordinated in right of payment to
all existing and future Senior Indebtedness of the Company. The Notes will
rank pari passu with any future Senior Subordinated Indebtedness of the
Company and will rank senior to all Subordinated Obligations of the Company.
The Note Guarantees will be unsecured, senior subordinated obligations of the
Guarantors, subordinated in right of payment to all existing and future Senior
Indebtedness of the Guarantors, including the guarantees of Indebtedness under
the Amended Credit Facility. As of June 30, 1998, after giving effect to the
Pro Forma Adjustments: (i) the outstanding Senior Indebtedness of the Company
would have been $275.0 million (exclusive of unused commitments), all of which
would have been secured; (ii) the Company would have had no Senior
Subordinated Indebtedness outstanding other than the Notes and no Subordinated
Obligations; (iii) the outstanding Senior Indebtedness of the Guarantors,
consisting entirely of guarantees of the Amended Credit Facility, would have
been $275.0 million, all of which would have been secured; and (iv) the
Guarantors would have had no outstanding Senior Subordinated Indebtedness
other than the Guarantees and no outstanding Subordinated Obligations. See
"Description of Notes--Ranking" and "--Guarantees."
22
The Indenture permits the Company and the Subsidiary Guarantors to incur
certain secured indebtedness, including indebtedness under the Amended Credit
Facility, which will be secured by a lien on substantially all of the assets
of the Company and the Guarantors. The Notes and the Guarantees are unsecured
and therefore do not have the benefit of such collateral. Accordingly, if an
event of default occurs under the Amended Credit Facility, the lenders
thereunder may foreclose upon such collateral to the exclusion of the holders
of the Notes, notwithstanding the existence of an event of default with
respect to the Notes. In such event, such assets would first be used to repay
in full amounts outstanding under the Amended Credit Facility, resulting in
all or a portion of the Company's assets being unavailable to satisfy the
claims of the holders of Notes and other unsecured Indebtedness.
FRAUDULENT TRANSFER CONSIDERATIONS
The incurrence of indebtedness (such as the Notes) is subject to review
under relevant federal and state fraudulent conveyance and similar statutes in
a bankruptcy or reorganization case or a lawsuit by or on behalf of creditors
of the Company. Under these statutes, if a court were to find that obligations
(such as the Notes) were incurred with the intent of hindering, delaying or
defrauding present or future creditors, that the Company received less than a
reasonably equivalent value or fair consideration for those obligations and,
at the time of the incurrence of the obligations the obligor either (i) was
insolvent or rendered insolvent by reason thereof, (ii) was engaged or was
about to engage in a business or transaction for which its remaining
unencumbered assets constituted unreasonably small capital or (iii) intended
to or believed that it would incur debts beyond its ability to pay such debts
as they matured or became due, such court could void or subordinate the
obligations in question.
The measure of insolvency for purposes of a fraudulent conveyance claim will
vary depending upon the law of the jurisdiction being applied. Generally,
however, a company will be considered insolvent a particular time if the sum
of its debts at that time is greater than the then fair saleable value of its
assets or if the fair saleable value of its assets at that time is less than
the amount that would be required to pay its probable liability on its
existing debts as they become absolute and mature. The Company believes that
it is (i) not insolvent, (ii) in possession of sufficient capital to run its
business effectively and (iii) incurring debts within its ability to pay as
the same mature or become due.
In addition, the Subsidiary Guarantees may be subject to review under
relevant federal and state fraudulent conveyance and similar statutes in a
bankruptcy or reorganization case or a lawsuit by or on behalf of creditors of
any of the Subsidiary Guarantors. In such a case, the analysis set forth above
would generally apply, except that the Subsidiary Guarantees could also be
subject to the claim that, since the Subsidiary Guarantees were incurred for
the benefit of the Company (and only indirectly for the benefit of the
Subsidiary Guarantors), the obligations of the Subsidiary Guarantors
thereunder were incurred for less than reasonably equivalent value of fair
consideration. A court could void any of the Subsidiary Guarantors'
obligations under the Subsidiary Guarantees, subordinate the Subsidiary
Guarantees to other indebtedness of a Subsidiary Guarantor or take other
action detrimental to the holders of the Notes.
POSSIBLE UNENFORCEABILITY OF SUBSIDIARY GUARANTEES
The Company derives certain of its operating income from its subsidiaries.
The holders of the Notes will have no direct claim against such subsidiaries
other than a claim created by one or more of the Note Guarantees, which may
themselves be subject to legal challenge in a bankruptcy or reorganization
case or a lawsuit by or on behalf of creditors of a Subsidiary Guarantor. See
"--Fraudulent Transfer Considerations." If such a challenge were upheld, such
Note Guarantees would be invalid and unenforceable. To the extent that any of
such Note Guarantees are not enforceable, the rights of the holders of the
Notes to participate in any distribution of assets of any
23
Subsidiary Guarantor upon liquidation, bankruptcy, reorganization or otherwise
will, as is the case with other unsecured creditors of the Company, be subject
to prior claims of creditors of that Subsidiary Guarantor. The Company must
rely in part upon distributions from its subsidiaries to generate the funds
necessary to meet its obligations, including the payment of principal of and
interest on the Notes. The Indenture contains covenants that restrict the
ability of the Company's subsidiaries to enter into any agreement limiting
distributions and transfers, including dividends. However, the ability of the
Company's subsidiaries to make distributions may be restricted by among other
things, applicable state corporate laws and other laws and regulations or by
terms of agreements to which they are or may become a party. In addition,
there can be no assurance that such distributions will be adequate to fund the
interest and principal payments on the Amended Credit Facility and the Notes
when due. See "Description of Notes."
CHANGE OF CONTROL
Upon a Change of Control, holders of the Notes will have the right to
require the Company to repurchase all or any part of such holders' Notes at a
price equal to 101% of the principal amount thereof, plus accrued and unpaid
interest, if any, to the date of repurchase. The events that constitute a
Change of Control under the Notes will also constitute a default under the
Amended Credit Facility, which will prohibit the purchase of the Notes by the
Company in the event of certain Change of Control events unless and until such
time as the Company's indebtedness under the Amended Credit Facility is repaid
in full. There can be no assurance that the Company would have sufficient
financial resources available to satisfy all of its obligations under the
Amended Credit Facility and the Notes in the event of a Change of Control. The
Company's failure to purchase the Notes would result in a default under the
Indenture and under the Amended Credit Facility, which could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Description of Amended Credit Facility" and "Description of
Notes--Change of Control."
DEPENDENCE ON DEMAND FOR ADVERTISING
After giving effect to the Pro Forma Adjustments, 50.0% of the Company's
total revenue in 1997 would have been derived from advertising sales. Should a
general economic downturn or a recession in the United States occur in the
future, the Company's advertisers may reduce their advertising budgets. Any
material decline in the demand for advertising could have an adverse effect on
the Company's business, financial condition and results of operations.
DEPENDENCE ON VENUES AND DATES FOR EXPOSITIONS AND CONFERENCES
The success of an exposition or a conference depends in part upon its date
and location. The market for desirable dates and locations is highly
competitive. The Company generally maintains multi-year reservations for its
exposition and conference venues and dates. However, consistent with industry
practice, the Company does not pay for these reservations and the reservations
are not binding on the facility owners until a contract is signed. Contracts
typically guarantee the right to certain venues or dates for only one year and
there can be no assurance that the Company's reservations will lead to signed,
binding contracts with facility owners. In the event that the Company loses
its rights to exposition/conference dates or locations, the profitability and
future prospects of the expositions or conferences affected, and the Company's
overall business, financial condition and results of operations could be
materially and adversely affected. No assurance can be given that the Company
can maintain the date or location of any of its expositions or conferences. In
addition, the fact that exhibitions and conferences are held on pre-scheduled
dates at specific locations could make them vulnerable to events outside of
the Company's control, such as natural catastrophes, labor strikes or
transportation shutdowns.
IMPORTANCE OF MAGIC
Historically, none of the Company's trade shows has individually represented
a significant portion of the Company's exposition revenue. The MAGIC trade
shows, however, would have represented an
24
aggregate of 29.7% of the Company's pro forma exposition revenue for the year
ended December 31, 1997 and 20.6% and 12.1% of the Company's pro forma EBITDA
and pro forma net revenue, respectively, for the same period. The Company
expects that the MAGIC trade shows will continue to represent a significant
portion of the Company's overall revenue in the future. Although the Company
believes it has a diversified portfolio of expositions, a significant decline
in the performance of one or both of the February or August MAGIC trade shows
could have a material adverse effect on the Company's business, financial
condition and results of operations.
EFFECT OF INCREASE IN PAPER AND POSTAGE COSTS
The price of paper is a significant expense of the Company relating to its
print products and direct mail solicitations. Although the Company has
implemented measures designed to substantially offset historical price
increases, such increases, despite such offsetting measures, could have a
material adverse effect on the Company's business, financial condition and
results of operations. Postage for product distribution and direct mail
solicitation is also a significant expense of the Company. The Company
generally uses the United States Postal Service. Postage costs increase
periodically and can be expected to increase in the future. No assurance can
be given that the Company can pass such cost increases through to its
customers.
EXPANSION RISKS AND IMPACT ON FUTURE OPERATING RESULTS
The Company's objective is to grow through, among other things, strategic
acquisitions. The Company's acquisition strategy entails risks inherent in
assessing the value, strengths, weaknesses, contingent and other liabilities
and potential profitability of acquisition candidates and in integrating the
operations of acquired businesses. There can be no assurance that acquisition
opportunities will be available, that the Company will have access to the
capital required to finance potential acquisitions or that any business
acquired will be integrated successfully or prove profitable. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." Additionally, the integration of acquisitions, in particular the
MAGIC Acquisition, requires and will require substantial attention from
management. The diversion of the attention of management, and any difficulties
encountered in the transition process, could have a material adverse impact on
the Company's revenue and operating results. In addition, the process of
integrating the various businesses could cause the interruption of, or a loss
of momentum in, the activities of some or all of these businesses, which could
have a material adverse effect on the Company's business, financial condition
or results of operations. There can be no assurance that the Company will
realize any of the anticipated benefits from the MAGIC Acquisition or any of
the other acquisitions it consummates.
DEPENDENCE ON KEY PERSONNEL
The Company has benefited substantially from the leadership and experience
of its senior management team, and is dependent on their continued services in
order to successfully implement its business strategy. Although the Company
has entered into employment agreements with Robert Krakoff and James Alic,
there can be no assurance that these and other key personnel will continue to
be employed by the Company or that the Company will be able to attract and
retain qualified personnel in the future. Although the Company believes that
it could replace key employees in an orderly fashion should the need arise,
the loss of such key personnel could have a material adverse affect on the
Company's business, financial condition or results of operations. The Company
does not currently maintain key-man life insurance policies on its executive
officers. See "Management."
COMPETITION
Competition for the Company's products and services is highly fragmented,
both by product and geography, and exists at many levels. On a global level,
there are several much larger international
25
firms--such as Reed Elsevier and United News and Media--which operate in many
geographic markets and have broad product offerings in publishing, expositions
and conferences and marketing services. Many of these competitors are better
capitalized and have substantially greater financial and other resources than
the Company. In a few cases, these firms operate in the same market as the
Company. In general, these large firms are organized and market their products
and services by product and geographic location, not on an integrated basis.
Within each particular industry sector, the Company generally has a large
number of direct and indirect competitors. In some cases, these competitors
operate in several geographic areas. In other cases, they operate in only one
geographic market. In most cases, these competitors are small to medium-sized
corporations. However, in several industries markets such as information
technology and healthcare, there are large competitors focused on a single
industry. In expositions and conferences in particular, there are many not-
for-profit association competitors and, in several countries, the exposition
hall owner and operator may also be a competitor. In any given publishing
marketplace in a particular country, there are typically two to five direct
competitors for both readers and advertisers. Additionally, there are usually
many indirect competitors who define market segments differently and thus may
be alternatives for either the reader or the advertiser. Exposition and
conference competition in each market and country occurs on many levels. There
is seldom any truly direct competitor for a particular event, given the
uniqueness of venue and date. However, given the availability of alternative
venues and the ability to define events for particular market segments and/or
with different strategic positioning, the range of competition for exposition
dollars, sponsorships and show attendees and conferees is extensive. Because
there are few barriers to entry, the Company anticipates that, as the trade
publications and expositions industries evolve, additional competitors with
greater resources than the Company may enter the markets, or particular
segments of the markets, thereby intensifying competition. See "Business--
Competition."
RISKS ASSOCIATED WITH INTERNATIONAL EXPANSION
The Company's growth strategy includes international expansion. There are
certain risks inherent in doing business in international markets, such as the
uncertainty of product acceptance by different cultures, the risks of
divergent business expectations or cultural incompatibility in establishing
joint ventures with foreign partners, difficulties in staffing and managing
multinational operations, currency fluctuations, changing economic conditions,
state-imposed restrictions on the repatriation of funds and potentially
adverse tax consequences. There can be no assurance that one or more of such
factors will not have a material adverse effect on the Company's future
international operations and, consequently, on the Company's business,
financial condition and results of operations.
ABSENCE OF PUBLIC MARKET
Prior to the Offering, there was no public market for the Notes and there
can be no assurance that such a market for the Notes or the Exchange Notes
will develop or, if such a market develops, as to the liquidity of such
market. The Company does not intend to apply for listing of the Notes or the
Exchange Notes on any securities exchange; however, the Notes are eligible for
trading in the PORTAL market. If the Notes or the Exchange Notes are traded
after their initial issuance, they may trade at a discount from their initial
offering price, depending upon prevailing interest rates, the market for
similar securities, the performance of the Company and certain other factors.
The Company has been advised by the Initial Purchasers that they intend to
make a market in the Notes and the Exchange Notes as permitted by applicable
laws and regulations; however, the Initial Purchasers are not obligated to do
so and any such market making activities may be discontinued at any time
without notice. In addition, such market making activities may be limited
during the Exchange Offer. Until the Company performs its obligations under
the Registration Rights Agreement, the Notes may only be offered or sold
pursuant to an exemption from the registration requirements of the Securities
Act and applicable state securities laws or pursuant to an effective
registration statement under the Securities Act and applicable state
securities laws. See "Transfer Restrictions," "Exchange and Registration
Rights Agreement" and "Plan of Distribution."
26
CONTROL BY HFCP III
HFCP III owns, directly or indirectly, substantially all of the outstanding
capital stock of Holdings, the parent company of the Company, and can
effectively control the affairs and policies of the Company. There can be no
assurance that the interests of HFCP III will not conflict with the interests
of the holders of the Notes. See "Principal Stockholders."
PROCEDURES FOR TENDER OF ORIGINAL NOTES
The Exchange Notes will be issued in exchange for Original Notes only after
timely receipt by the Exchange Agent of such Original Notes, a properly
completed and duly executed Letter of Transmittal and all other required
documents. Therefore, holders of Original Notes desiring to tender such
Original Notes in exchange for Exchange Notes should allow sufficient time to
ensure timely delivery. Neither the Exchange Agent nor the Company is under
any duty to give notification of defects or irregularities with respect to
tenders of Original Notes for exchange. Any holder of Original Notes who
tenders in the Exchange Offer for the purpose of participating in a
distribution of the Exchange Notes will be required to comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction. Each broker-dealer that receives
Exchange Notes for its own account in exchange for Notes, where such Original
Notes were acquired by such broker-dealer as a result of market-making
activities or any other trading activities, must acknowledge that it will
deliver a prospectus in connection with any resale of such Exchange Notes. See
"Plan of Distribution."
CONSEQUENCES OF FAILURE TO EXCHANGE ORIGINAL NOTES
The Original Notes have not been registered under the Securities Act and are
subject to substantial restrictions on transfer. Original Notes that are not
tendered in exchange for Exchange Notes or are tendered but not accepted will,
following consummation of the Exchange Offer, continue to be subject to the
existing restrictions upon transfer thereof. The Company does not currently
anticipate that it will register the Original Notes under the Securities Act.
To the extent that Original Notes are tendered and accepted in the Exchange
Offer, the trading market for untendered and tendered but unaccepted Original
Notes could be adversely affected. See "The Exchange Offer -- Consequences of
Failure to Exchange."
27
THE ACQUISITIONS AND REFINANCING
The MAGIC Acquisition. On April 30, 1998, Advanstar acquired MAGIC for cash
consideration of $230.2 million, subject to adjustment based on the
shareholders' equity of MAGIC on the closing date of the MAGIC Acquisition,
and MAGIC became a wholly-owned subsidiary of Advanstar, serving as the core
asset of the Company's Retail, Hospitality & Fashion cluster. The Company's
fashion industry sector is managed by Joseph Loggia, MAGIC's former chief
executive officer and current president. Mr. Loggia has entered into a two
year employment agreement with Advanstar and has received options to purchase
Common Stock.
The Travel Agent Acquisition. On August 17, 1998, the Company acquired
certain travel related publication and trade show assets of Universal Media,
Inc., including Travel Agent, the leading magazine, based on number of
advertising pages, in the United States travel agency market. The Company paid
$68.0 million in cash to acquire Travel Agent.
The Other Acquisitions. In addition, since June 1, 1997 Advanstar has
completed or signed definitive agreements or letters of intent for 11 other
acquisitions or joint ventures (collectively, the "Other Acquisitions") with
purchase prices ranging from approximately $1.4 million to approximately $18.3
million and aggregating approximately $147.5 million. The Other Acquisitions
include: (i) the acquisition in June 1997 of Telepress, a Brazilian trade
publication and conference business focused on the Latin American
telecommunications market; (ii) the buyout in November 1997 of a minority
partner, CCI, in Hong Kong, thus creating a wholly-owned publishing platform
in Asia; (iii) the acquisition in February 1998 of Telexpo, a Brazilian
telecommunications exposition; (iv) the joint venture in February 1998 with
the Video Software Dealers Association (the "VSDA") whereby Advanstar became a
50% owner of the VSDA annual convention and trade show, North America's
largest trade event for the home video industry, and the VSDA became a 50%
partner in the Company's East Coast Video Show; (v) the joint venture in
February 1998 with Wideband, Inc., a publisher in the consumer electronics
market that recently launched Li(C)ense!, a magazine targeting the same
industry as the Company's leading licensing exposition and conference; (vi)
the acquisition in March 1998 of TelEvolution, a call center exposition and
conference in Canada; (vii) the acquisition in March 1998 of Teleprofessional,
a U.S. trade publisher in the call center market; (viii) the acquisition in
May 1998 of SCANTECH, the leading U.S. exposition in the automatic data
capture market; (ix) the acquisition in May 1998 of Applied Business
teleCommunications, producer of the leading expositions and conferences for
the video conferencing and long distance learning industries; (x) the
acquisition in May 1998 of POST, a magazine servicing the post production
activities of the film and television industries; and (xi) the acquisition in
June 1998 of full ownership rights in, and execution of a long-term
sponsorship agreement with LIMA (the Licensing International Merchandisers
Association) for, the licensing exposition and conference.
The Refinancing. In order to provide greater flexibility in pursuing its
growth strategy, and in connection with the MAGIC Acquisition, the Company
entered into the First Credit Facility Amendment on April 30, 1998, thereby
increasing its borrowing capacity from $215.0 million under the Original
Credit Facility to $270.0 million under the First Amended Credit Facility.
HFCP III also made the HFCP III Equity Investment of approximately $70.0
million on April 30, 1998. Additionally, in August 1998 in connection with the
Travel Agent Acquisition, the Company entered into the Second Credit Facility
Amendment to increase its borrowing capacity under the First Amended Credit
Facility from $270.0 million to $310.0 million under the Second Amended Credit
Facility. See "Description of Amended Credit Facility." As of June 30, 1998,
the Company had $217.0 million of indebtedness outstanding under the First
Amended Credit Facility.
28
USE OF PROCEEDS
The Company will not receive any proceeds from the Exchange Offer. The
Company has agreed to bear the expenses of the Exchange Offer pursuant to the
Registration Rights Agreement. No underwriter is being used in connection with
the Exchange Offer.
29
CAPITALIZATION
The following table sets forth, as of June 30, 1998, (i) the historical cash
and cash equivalents and capitalization of Advanstar and (ii) the cash and
cash equivalents and capitalization of the Company after giving effect to the
Pro Forma Adjustments. This table should be read in conjunction with the
financial statements and notes thereto and other financial information
appearing elsewhere herein.
JUNE 30, 1998
-------------------------
ACTUAL PRO FORMA
----------- ------------
(DOLLARS IN THOUSANDS)
Cash and cash equivalents............................ $ 21,974 $ 12,399
=========== ===========
Long-term debt (including current portion)
Revolving Credit Facility.......................... $ 6,000 $ 25,000
Term loan facility................................. 210,000 250,000
9 1/4% Senior Subordinated Notes (net of discounts)
.................................................. 149,619 149,619
----------- -----------
Total long-term debt............................. 365,619 424,619
----------- -----------
Shareholder's equity:
Common Stock, $.01 par value; 1,500,000 shares
authorized, 1,000,000 shares issued and outstand-
ing.............................................. 10 10
Translation adjustment............................. (370) (370)
Capital in excess of par value..................... 178,990 178,990
Accumulated deficit................................ (24,479) (24,479)
----------- -----------
Total shareholders' equity....................... 154,151 154,151
----------- -----------
Total capitalization............................. $ 519,770 $ 578,770
=========== ===========
30
UNAUDITED PRO FORMA COMBINED
FINANCIAL INFORMATION
The unaudited pro forma combined balance sheet as of June 30, 1998 includes
the historical accounts of Advanstar and gives effect to the Acquisitions and
Refinancing and the divestiture of a trade publication as if they had occurred
as of June 30, 1998. The unaudited pro forma combined statements of operations
for the fiscal year ended December 31, 1997 and the three month period ended
June 30, 1998 include the historical operations of Advanstar and gives effect
to the Acquisitions and Refinancing and the divestiture of a trade publication
as if they had occurred on January 1, 1997 and January 1, 1998, respectively.
The pro forma adjustments relating to the Acquisitions and Refinancing,
together with the elimination of operating results of a divestiture, for
consideration of approximately $4.0 million, of a trade publication,
constitute the "Pro Forma Adjustments."
The unaudited pro forma combined financial information, which has been
prepared by the Company's management, has been derived from the historical
statements of operations and balance sheets of Advanstar, MAGIC, Travel Agent
and the Other Acquisitions. The Acquisitions will be accounted for under the
purchase method of accounting using the assumptions and adjustments disclosed
in the notes to the unaudited pro forma combined financial information. A
preliminary allocation of the aggregate purchase price has been made based on
available information.
The unaudited pro forma combined financial information is not designed to
represent and does not represent what the Company's results of operations
actually would have been had the aforementioned transactions been completed as
of the dates indicated, or to project the Company's results of operations for
any future period. Results of operations for the six month period ended June,
1998 are not necessarily indicative of the results that can be expected for
future periods or the entire year, principally due to the timing of certain
exposition events. The Pro Forma Adjustments are based on available historical
financial information and should be read in conjunction with "Capitalization,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and notes thereto and other financial
information appearing elsewhere herein.
31
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF JUNE 30, 1998
TRAVEL PRO FORMA
ADVANSTAR AGENT ADJUSTMENTS PRO FORMA
--------- ------ ----------- ---------
(DOLLARS IN THOUSANDS)
ASSETS:
Current assets:
Cash and cash equivalents....... $ 21,974 $ 425 $(10,000)(1) $ 12,399
Receivables, net................ 22,679 3,871 26,550
Deferred income taxes, prepaid
expenses and other............. 13,756 467 14,223
--------- ------ -------- --------
Total current assets.......... 58,409 4,763 (10,000) 53,172
Property and equipment, net of
accumulated depreciation......... 13,031 219 13,250
Goodwill, net of accumulated
amortization..................... 458,083 458 69,334 (2) 527,875
Intangible assets, net of
accumulated amortization......... 69,935 -- -- 69,935
Other assets...................... -- 61 61
--------- ------ -------- --------
Total assets.................. $ 599,458 $5,501 $59,334 $664,293
========= ====== ======== ========
LIABILITIES AND SHAREHOLDERS' EQ-
UITY:
Current liabilities:
Current portion of long-term
debt........................... $ 3,000 $ -- $ -- $ 3,000
Accounts payable................ 12,888 3,067 15,955
Unearned revenue................ 36,109 23 36,132
Other accrued liabilities....... 15,449 607 16,056
--------- ------ -------- --------
Total current liabilities..... 67,446 3,697 -- 71,143
Long-term debt, net of current
maturities....................... 213,000 -- 59,000 (3) 272,000
9 1/4% Senior Subordinated Notes
................................. 149,619 -- 149,619
Other noncurrent liabilities...... 1,478 2,138 3,616
Minority Interest................. 13,764 -- 13,764
--------- ------ -------- --------
Total liabilities............. 445,307 5,835 59,000 510,142
--------- ------ -------- --------
Shareholders' equity:
Common stock.................... 10 -- 10
Capital in excess of par value.. 178,990 600 (600) 178,990
Translation adjustment.......... (370) -- (370)
Accumulated earnings (deficit).. (24,479) (934) (45) (24,479)
--------- ------ -------- --------
Total shareholders' equity
(deficit).................... 154,151 (334) 334 (4) 154,151
--------- ------ -------- --------
Total liabilities and
shareholders' equity......... $ 599,458 $5,501 $ 59,334 $664,293
========= ====== ======== ========
32
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET
(DOLLARS IN THOUSANDS)
(1) Represents the net cash effect of the Travel Agent Acquisition.
(2) The following table sets forth the preliminary allocation of the
aggregate purchase price of the Travel Agent Acquisition:
Historical net book value of assets acquired.................... $ (334)
-------
Excess purchase prices over net assets acquired (allocated to
goodwill and intangible assets)................................ 69,334
Aggregate purchase price........................................ $69,000
=======
Goodwill and intangible assets will be amortized on a straight line basis
over 20-30 years.
(3) Represents incremental borrowings under the Second Amended Credit Facility
to finance the Travel Agent Acquisition.
(4) Reflects the elimination of the historical capital in excess of par value
of $600 and the historical accumulated earnings of Travel Agent and
amounts due from Affiliate of $(934).
33
UNAUDITED PRO FORMA COMBINED
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
TRAVEL OTHER PRO FORMA
ADVANSTAR(1) MAGIC(2) AGENT(3) ACQUISITIONS(4) ADJUSTMENTS PRO FORMA
------------ -------- -------- --------------- ----------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS:
Net revenue............. $ 187,656 $32,542 $24,152 $22,977 $ 600 (5) $ 267,927
========= ======= ======= ======= ======== =========
Gross profit............ $ 61,553 $17,205 $ 7,257 $11,834 $ 600 $ 98,449
General and
administrative
expenses............. 27,514 4,832 6,919 4,543 (5,579)(6) 38,229
Depreciation and
amortization......... 27,526 292 600 26 13,768 (7) 42,212
--------- ------- ------- ------- -------- ---------
Operating income
(loss)................. 6,513 12,081 (262) 7,265 (7,589) 18,008
Interest income
(expense), net......... (15,117) 1,397 (206) (129) (20,438)(8) (34,493)
Other, net.............. 292 3,179 -- 49 -- 3,520
--------- ------- ------- ------- -------- ---------
Income (loss) before
income taxes........... (8,312) 16,657 (468) 7,185 (28,027) (12,965)
Provision for income
taxes.................. 583 5,638 60 425 (6,123)(9) 583
--------- ------- ------- ------- -------- ---------
Net income (loss)....... $ (8,895) $11,019 $ (528) $ 6,760 $(21,904) $ (13,548)
========= ======= ======= ======= ======== =========
Net income (loss) per
share, basic and
diluted................ $ (8.90) $ -- $ -- $ -- $ $ (13.55)
========= ======= ======= ======= ======== =========
Weighted average common
stock outstanding,
basic and diluted...... 1,000,000 -- -- 1,000,000
OTHER FINANCIAL DATA:
EBITDA(10).............. $ 34,039 $12,373 $ 338 $ 7,291 $ 6,179(11) $ 60,220
EBITDA margin........... 18.1% 38.0% 1.4% 31.7% 22.5%
Depreciation and
amortization........... $ 27,526 $ 292 $ 600 $ 26 $ 13,768 42,212
Capital expenditures.... 2,260 318 105 -- 2,683
Ratio of EBITDA to
interest expense(12)... -- -- -- -- 1.7x
34
UNAUDITED PRO FORMA COMBINED
STATEMENT OF OPERATIONS
FOR THE SIX MONTH PERIOD ENDED JUNE 30, 1998
TRAVEL OTHER PRO FORMA
ADVANSTAR(1) MAGIC(2) AGENT(3) ACQUISITIONS(4) ADJUSTMENTS PRO FORMA
------------ -------- -------- --------------- ----------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS:
Net revenue............. $ 121,212 $20,259 $14,507 $3,859 $ 300 (5) $ 160,137
========== ======= ======= ====== ======= ==========
Gross profit............ $ 40,458 $13,973 $ 5,162 $ 817 $ 300 $ 60,710
General and
administrative
expenses............. 17,164 2,277 2,637 1,585 (1,990)(6) 21,673
Depreciation and
amortization......... 15,850 130 79 -- 5,309 (7) 21,368
---------- ------- ------- ------ ------- ----------
Operating income
(loss)................. 7,444 11,566 2,446 (768) (3,019) 17,669
Interest income (ex-
pense), net............ (10,491) 155 (102) -- (7,596)(8) (18,034)
Other, net.............. (1,894) -- -- -- -- (1,894)
---------- ------- ------- ------ ------- ----------
Income (loss) before
income taxes........... (4,941) 11,721 2,344 (768) (10,615) (2,259)
Provision for income
taxes.................. 229 4,390 78 -- (4,468)(9) 229
---------- ------- ------- ------ ------- ----------
Net income (loss)....... $ (5,170) $ 7,331 $ 2,266 $ (768) $(6,147) $ (2,488)
========== ======= ======= ====== ======= ==========
Net income (loss) per
share, basic and
diluted................ $ (5.17) $ -- $ -- $ -- $ $ (2.49)
========== ======= ======= ====== ======= ==========
Weighted average common
stock outstanding, ba-
sic and diluted........ 1,000,000 1,000,000
OTHER FINANCIAL DATA:
EBITDA(10).............. $ 23,294 $11,696 $ 2,525 $ (768) $ 2,290 (11) $ 39,037
EBITDA margin........... 19.2% 57.7% 17.4% (19.9)% 24.4%
Depreciation and amorti-
zation................. $ 15,850 $ 130 79 $ -- $ 5,309 $ 21,368
Capital expenditures.... 1,678 65 53 -- 1,796
Ratio of EBITDA to
interest expense(12)... -- -- -- 2.2
35
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS)
(1) Represents the results of operations for Advanstar for the year ended
December 31, 1997 and the six month period ended June 30, 1998, as
applicable.
(2) Represent the results of operations for MAGIC for the twelve month period
ended December 31, 1997 and the four month period ended April 30, 1998, as
applicable. The MAGIC Acquisition occured on April 30, 1998.
(3) Represents the results of operations for Travel Agent for the year ended
December 31, 1997 and the six month period ended June 30, 1998, as
applicable.
(4) Represents the aggregate results of operations for the Other Acquisitions
for the twelve month periods ended December 31, 1997 and the aggregate
results of their operations prior to their acquisition by the Company
during the six month period ended June 30, 1998, as applicable. See "The
Acquisitions and Refinancing--Other Acquisitions." Also includes the
elimination of operating results of a divestiture, for consideration of
approximately $4.0 million, of a trade publication. The entity divested
had contributed $1.3 million of revenue and $0.4 million of net income for
1997 and $0.3 million of revenue and no net income for the six months
ended June 30, 1998.
(5) Represents the elimination of related party pricing discounts that were
granted to certain former MAGIC shareholders/directors for their purchase
of trade show exhibition space. Such discounts will not recur following
the MAGIC Acquisition.
(6) Represents the elimination of director fees of $0.5 million and $0.2
million for the year ended December 31, 1997 and the six months ended June
30, 1998, respectively that will not recur following the MAGIC Acquisition
and the elimination, in connection with the Travel Agent Acquisition, of
shareholder/director payments of $4.3 million and $1.3 million,
respectively, to certain shareholders of Universal Media, Inc. and certain
other costs of $0.8 million and $0.5 million for the year ended December
31, 1997 and the six months ended June 30, 1998, respectively.
(7) Represents incremental amortization of goodwill arising from the
Acquisitions (based on preliminary allocations of aggregate purchase
price) and incremental amortization of intangibles resulting from deferred
financing costs. The incremental goodwill is being amortized on a straight
line basis over periods ranging from 20-30 years. The deferred financing
costs are amortized over the lives of the related debt instruments (5.5-10
years).
(8) Represents incremental interest expense arising from the Offering
(including amortization of original issue discount on the Notes) and
incremental interest expense on borrowings under the Amended Credit
Facility. Adjustments to interest expense have been calculated as follows:
Senior Subordinated Notes................................ 9.25%
Amended Credit Facility
Revolving Credit Facility.............................. LIBOR plus 2.25%
Tranche A.............................................. LIBOR plus 2.25%
Tranche B.............................................. LIBOR plus 2.50%
For the purpose of calculating pro forma interest expense, the Company
used LIBOR as of December 31, 1997 and June 30, 1998, respectively.
(9) A tax provision has not been reflected for income before income taxes due
to the Company's net operating loss carryforwards. The remaining income
tax provision represents taxes related to certain state taxes and the
Company's U.K. subsidiary.
(10) "EBITDA" is defined as operating income plus amortization and
depreciation. EBITDA does not represent and should not be considered an
alternative to net income or cash flow from operations as determined by
GAAP, and the Company's calculation thereof may not be comparable to that
reported by other companies. The Company believes that EBITDA provides
useful information regarding the Company's ability to service and/or
incur indebtedness and is used by many other companies. The Company's
lenders have indicated that the amount of indebtedness the
36
Company will be permitted to incur will be based, in part, on the Company's
EBITDA. EBITDA does not take into account the Company's working capital
requirements, debt service requirements and other commitments and,
accordingly, is not necessarily indicative of amounts that may be available
for discretionary uses. Set forth below is a reconciliation of the
Company's operating income, as reported, to EBITDA for the periods
indicated:
FOR THE YEAR ENDED DECEMBER 31, 1997
TRAVEL OTHER PRO FORMA PRO
ADVANSTAR MAGIC AGENT ACQUISITIONS ADJUSTMENTS FORMA
--------- ------- ------ ------------ ----------- -------
(IN THOUSANDS)
Operating income
(loss)................. $ 6,513 $12,081 $(262) $7,265 $(7,589) $18,008
Depreciation and amorti-
zation................. 27,526 292 600 26 13,768 42,212
------- ------- ----- ------ ------- -------
EBITDA.................. $34,039 $12,373 $ 338 $7,291 $ 6,179 $60,220
======= ======= ===== ====== ======= =======
SIX MONTHS ENDED JUNE 30, 1998
TRAVEL OTHER PRO FORMA PRO
ADVANSTAR MAGIC AGENT ACQUISITIONS ADJUSTMENTS FORMA
--------- ------- ------ ------------ ----------- -------
(IN THOUSANDS)
Operating income
(loss)................. $ 7,444 $11,566 $2,446 $(768) $(3,019) $17,669
Depreciation and amorti-
zation................. 15,850 130 79 -- 5,309 21,368
------- ------- ------ ----- ------- -------
EBITDA.................. $23,294 $11,696 $2,525 $(768) $ 2,290 $39,037
======= ======= ====== ===== ======= =======
(11) Excludes a nonrecurring compensation expense of $6.5 million related to
the MAGIC Acquisition.
(12) Calculated using pro forma interest expense of $35.9 million for the
twelve month period ended December 31, 1997 and $17.9 million for the six
month period ended June 30, 1998.
37
SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND
OTHER DATA OF ADVANSTAR AND THE PREDECESSOR
The selected historical consolidated financial and other data for the years
ended December 31, 1993, 1994 and 1995 and the five months ended May 31, 1996
are derived from the audited consolidated financial statements and notes
thereto of the Predecessor for such periods. The consolidated financial and
other data of Advanstar for the seven months ended December 31, 1996 and the
year ended December 31, 1997 are derived from the audited consolidated
financial statements and notes thereto of Advanstar included elsewhere herein.
The financial and other data for the combined year ended December 31, 1996
have been derived from the audited consolidated financial statements and notes
thereto of the Predecessor and Advanstar and are unaudited. The financial and
other data for the six month periods ended June 30, 1997 and 1998 have been
derived from the unaudited condensed consolidated financial statements of the
Company and are unaudited. Results of operations for the three month periods
ended June 30, 1997 and 1998 are not necessarily indicative of the results
that can be expected for future periods or the entire year. The information
presented below should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
historical consolidated financial statements and notes thereto and the other
financial information appearing elsewhere herein.
PREDECESSOR ADVANSTAR
--------------------------------------------------- ----------------------------------------
5 MONTHS 7 MONTHS COMBINED
DECEMBER 31, DECEMBER 31, DECEMBER 31, ENDED ENDED DECEMBER 31, DECEMBER 31,
1993 1994 1995 MAY 31, 1996 DEC 31, 1996 1996(1) 1997
------------ ------------ ------------ ------------ ------------ ------------ ------------
(UNAUDITED)
6 MONTHS ENDED
JUNE 30,
---------------------
1997 1998
---------- ----------
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF
OPERATIONS DATA:
Net revenue...... $140,082 $141,721 $145,300 $68,286 $ 82,720 $ 151,006 $ 187,656
Production,
selling and
other direct
expenses....... 96,849 107,906 96,942 43,827 53,493 97,320 126,103
-------- -------- -------- ------- --------- --------- ---------
Gross profit..... 43,233 33,815 48,358 24,459 29,227 53,686 61,553
General and
administrative
expenses....... 26,375 27,511 27,152 11,462 17,395 28,857 30,714
Amortization(2).. 44,005 42,808 4,801 1,588 13,171(3) 14,759 24,326
-------- -------- -------- ------- --------- --------- ---------
Operating income
(loss).......... (27,147) (36,504) 16,405 11,409 (1,339) 10,070 6,513
Interest ex-
pense, net..... 17,080 18,034 19,613 6,963 7,511 14,474 15,117
Other, net...... 532 4,363 (2,230) (23) 488 465 (292)
Provision for
income taxes... 14 21 16 13 1,076 1,089 583
-------- -------- -------- ------- --------- --------- ---------
Net income
(loss).......... $(44,773) $(58,922) $ (994) $ 4,456 $ (10,414) $ (5,958) $ (8,895)
======== ======== ======== ======= ========= ========= =========
Net income (loss)
per share, basic
and diluted..... $ (10.41) $ (5.96) $ (8.90)
========= ========= =========
Weighted average
common stock
outstanding, ba-
sic and dilut-
ed.............. 1,000,000 1,000,000 1,000,000
OTHER FINANCIAL
DATA:
Gross profit mar-
gin............. 30.9% 23.9% 33.3% 35.8% 35.3% 35.6% 32.8%
EBITDA(4)........ $ 19,330 $ 9,573 $ 24,611 $14,428 $ 13,781 $ 28,209 $ 34,039
EBITDA margin.... 13.8% 6.75% 16.9% 21.1% 16.7% 18.7% 18.1%
Depreciation and
amortization.... $ 46,477 $ 46,077 $ 8,206 $ 3,019 $ 15,120 $ 18,139 $ 27,526
Capital expendi-
tures........... 4,610 2,530 1,451 365 780 1,145 2,260
Ratio of EBITDA
to interest
expense......... 2.3x
BALANCE SHEET
DATA (AT END OF
PERIOD):
Total assets..... $142,530 $ 95,593 $ 79,098 $ 277,173 $ 298,497
Working capital
(deficit)(5).... (11,477) (15,783) (11,129) (11,572) (12,034)
Long-term debt,
including
current
maturities...... 177,409 185,099 173,058 151,000 164,223
Total
shareholder's
equity
(deficit)....... (68,642) (127,420) (128,303) 86,839 89,734
STATEMENT OF
OPERATIONS DATA:
Net revenue...... $ 100,054 $ 121,212
Production,
selling and
other direct
expenses....... 65,689 80,754
---------- ----------
Gross profit..... 34,365 40,458
General and
administrative
expenses....... 15,331 18,561
Amortization(2).. 10,898 14,453
---------- ----------
Operating income
(loss).......... 8,136 7,444
Interest ex-
pense, net..... 7,435 10,491
Other, net...... (38) 1,894
Provision for
income taxes... 936 229
---------- ----------
Net income
(loss).......... $ (197) $ (5,170)
========== ==========
Net income (loss)
per share, basic
and diluted..... $ (0.20) $ (5.17)
========== ==========
Weighted average
common stock
outstanding, ba-
sic and dilut-
ed.............. 1,000,000 1,000,000
OTHER FINANCIAL
DATA:
Gross profit mar-
gin............. 34.3% 33.4%
EBITDA(4)........ $ 20,597 $ 23,294
EBITDA margin.... 20.6% 19.2%
Depreciation and
amortization.... $ 12,461 $ 15,850
Capital expendi-
tures........... 1,118 1,678
Ratio of EBITDA
to interest
expense......... 2.8x 2.2x
BALANCE SHEET
DATA (AT END OF
PERIOD):
Total assets..... $305,123 $ 559,458
Working capital
(deficit)(5).... (7,338) (28,011)
Long-term debt,
including
current
maturities...... 170,474 365,619
Total
shareholder's
equity
(deficit)....... 98,627 154,151
- -------
(1) Combines the five months ended May 31, 1996 of the Predecessor with the
seven months ended December 31, 1996 of Advanstar. On May 31, 1996, the
HFCP III Acquisition was consummated. Accordingly, certain information
provided herein for the year ended December 31, 1995 and the five months
ended May 31, 1996 is not comparable to the statement of operations data
of Advanstar due to the effects of certain purchase accounting adjustments
and the financing of the HFCP III Acquisition. Operating and other
financial data for the Predecessor for the
38
five months ended May 31, 1996 have been combined for presentation purposes
with the operating and other financial data of Advanstar for the seven
months ended December 31, 1996, without giving effect to purchase accounting
or the impact of the financing of the HFCP III Acquisition and is not in
accordance with GAAP.
(2) Amortized assets include identifiable intangibles such as advertiser,
exhibitor and circulation lists, assembled work force and other intangibles
as well as goodwill. Amortization for 1993 and 1994 reflects the
amortization of reorganization value in excess of identifiable assets as
required as a result of the Predecessor's emergence on January 23, 1992 from
its prepackaged Chapter 11 filing. The Predecessor recorded $94.4 million of
reorganization value in excess of identifiable tangible and intangible
assets and amortized it over three years.
(3) Includes identifiable intangibles such as advertiser, exhibitor and
circulation lists, assembled work force and other intangibles as well as
goodwill. Amortization increased for the seven months ended December 31,
1996 and the year ended December 31, 1997 as a result of the HFCP III
Acquisition completed in May 1996. Purchase prices in excess of fair
market value of tangible and intangible assets acquired is allocated to
goodwill. Intangibles are being amortized over lives ranging from 5 to 23
years.
(4) "EBITDA" is defined as operating income plus amortization and depreciation.
EBITDA does not represent and should not be considered an alternative to net
income or cash flow from operations as determined by GAAP, and the Company's
calculation thereof may not be comparable to that reported by other
companies. The Company believes that EBITDA provides useful information
regarding the Company's ability to serve and/or incur indebtedness and is
used by many other companies. The Company's lenders have indicated that the
amount of indebtedness the Company will be permitted to incur will be based,
in part, on the Company's EBITDA. EBITDA does not take into account the
Company's working capital requirements, debt service requirements and other
commitments and, accordingly, is not necessarily indicative of amounts that
may be available for discretionary uses. Set forth below is a reconciliation
of the Company's operating income, as reported, to EBITDA for the periods
indicative:
PREDECESSOR
------------------------------------------------
5 MONTHS
ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, MAY 31,
1993 1994 1995 1996
------------ ------------ ------------ --------
(IN THOUSANDS)
Operating income
(loss).............. $(27,147) $(36,504) $16,405 $11,409
Depreciation and
amortization........ 46,477 46,077 8,206 3,019
-------- -------- ------- -------
EBITDA............... $ 19,330 $ 9,573 $24,611 $14,428
======== ======== ======= =======
ADVANSTAR
---------------------------------------------------
7 MONTHS 6 MONTHS ENDED
ENDED COMBINED JUNE 30,
DEC 31, DECEMBER 31, DECEMBER 31, ---------------
1996 1996 1997 1997 1998
--------- ------------ ------------ ------- -------
(UNAUDITED) (UNAUDITED)
Operating income
(loss).............. $(1,339) $10,070 $ 6,513 $ 8,136 $ 7,444
Depreciation and
amortization........ 15,120 18,139 27,526 12,461 15,850
------- ------------ ------------ ------- -------
EBITDA............... $13,781 $28,209 $34,039 $20,597 $23,294
======= ============ ============ ======= =======
(5) Working capital is comprised of total current assets, excluding cash and
cash equivalents, less total current liabilities and excludes current
maturities of long-term debt. Working capital for Advanstar is negative
due to the impact of deferred revenue from expositions which are billed
and collected as deposits up to six months in advance of the respective
exposition. Consequently, expositions carry little or no accounts
receivable.
39
SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA OF MAGIC
The following table sets forth selected financial and other data of MAGIC
for the three years ended May 31, 1995, 1996 and 1997 and the nine months
ended February 28, 1998, which have been derived from MAGIC's audited
financial statements and notes thereto for those years and periods. Summary
financial and other data of MAGIC for the nine months ended February 28, 1997
is unaudited and is provided for comparative purposes only. Results for the
nine months ended February 28, 1998 are not necessarily indicative of results
that may be expected for the entire year. The information presented below
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the historical financial
statements and notes thereto and the other financial information appearing
elsewhere herein.
NINE MONTHS ENDED
FISCAL YEAR ENDED MAY 31, FEBRUARY 28,
---------------------------- -------------------
1995 1996 1997 1997 1998
-------- -------- -------- ----------- -------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS DA-
TA:
Net revenue................ $ 21,734 $26,608 $ 31,153 $31,004 $38,695
Direct costs............... 10,067 13,037 14,491 14,180 14,562
-------- -------- -------- ------- -------
Gross profit............... 11,667 13,571 16,662 16,824 24,133
General and administrative
expenses.................. 3,423 3,109 4,304 2,666 3,262
Profit participation....... 289 574 355 378 365
-------- -------- -------- ------- -------
Income from operations... 7,955 9,888 12,003 13,780 20,506
Interest income............ 677 987 1,195 843 654
Income tax provision....... 3,089 3,965 4,806 5,301 7,697
-------- -------- -------- ------- -------
Net income............... $ 5,543 $ 6,910 $ 8,392 $ 9,322 $13,463
======== ======== ======== ======= =======
OTHER FINANCIAL DATA:
EBITDA(1).................. $ 8,414 $ 10,171 $ 12,247 $14,057 $20,718
EBITDA margin.............. 38.7% 38.2% 39.3% 45.3% 53.5%
Depreciation and amortiza-
tion...................... $ 459 $ 283 $ 244 $ 277 $ 212
Capital expenditures....... 336 120 386 444 93
BALANCE SHEET DATA (AT END
OF PERIOD):
Total assets............... $ 20,691 $25,014 $ 29,983 $28,316 $24,361
Working capital(2)......... (7,792) (5,066) (191) (5,321) (8,117)
Total debt................. -- -- -- -- --
Shareholders' equity....... 7,407 11,425 18,360 19,320 12,873
- --------
(1) "EBITDA" is defined as operating income plus amortization and
depreciation. EBITDA does not represent and should not be considered an
alternative to net income or cash flow from operations as determined by
GAAP, and the Company's calculation thereof may not be comparable to that
reported by other companies. The Company believes that EBITDA provides
useful information regarding the Company's ability to service and/or incur
indebtedness and is used by many other companies in similar situations.
The Company's lenders have indicated that the amount of indebtedness the
Company will be permitted to incur will be based, in part, on the
Company's EBITDA. EBITDA does not take into account the Company's working
capital requirements, debt service requirements and other commitments and,
accordingly, is not necessarily indicative of amounts that may be
available for discretionary uses. Set forth below is a reconciliation of
the Company's operating income, as reported, to EBITDA for the periods
indicated:
FISCAL YEAR ENDED NINE MONTHS
MAY 31, ENDED FEBRUARY 28,
---------------------- -------------------
1995 1996 1997 1997 1998
------ ------- ------- ----------- -------
(UNAUDITED)
(IN THOUSANDS)
Income from operations........... $7,955 $ 9,888 $12,003 $13,780 $20,506
Depreciation and amortization.... 459 283 244 277 212
------ ------- ------- ------- -------
EBITDA........................... $8,414 $10,171 $12,247 $14,057 $20,718
====== ======= ======= ======= =======
(2) Working capital is comprised of total current assets, excluding cash and
cash equivalents, less total current liabilities and excludes current
maturities of long-term debt. Working capital for MAGIC is negative due to
the impact of deferred revenue from expositions which are billed and
collected as deposits up to six months in advance of the respective
exposition. Consequently, expositions carry little or no accounts
receivable.
40
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW--ADVANSTAR
Advanstar is a leading provider of integrated business-to-business marketing
communications services, principally through controlled circulation trade,
business and professional magazines and trade shows, expositions and
conferences. Advanstar also provides a broad range of other marketing services
products, including direct mail and database products and services.
On May 31, 1996, the HFCP III Acquisition was consummated. See Note 1 to
Advanstar's Consolidated Financial Statements.
During 1996 and 1997, Advanstar embarked on a strategic acquisition program
designed to fill in existing markets served by Advanstar's industry clusters
or to establish dominant positions in new markets with attractive operating
and growth characteristics. Advanstar completed nine acquisitions during 1996
and 1997 for aggregate purchase prices of approximately $58 million. Advanstar
has continued this program in early 1998, completing, in addition to the MAGIC
Acquisition and the Travel Agent Acquisition, an additional nine acquisitions
or joint ventures for aggregate purchase prices of approximately $74.1
million.
Advanstar recognizes revenue from its publishing activities throughout the
year based on the issue dates of its publications. With respect to expositions
and trade shows, revenue and related direct event expenses are recognized in
the month a show or conference is held. Consequently, during the year,
Advanstar will reflect on its balance sheet the deferred revenue collected and
prepaid expenses incurred for a given event's next scheduled show. A portion
of booth revenues are collected up to a year in advance for Advanstar's
expositions. These balance sheet deferrals are recognized and released to the
income statement in the month the event is held.
Advanstar's principal sources of revenue are derived from advertising and
subscriptions in its publications, booth rentals, attendee revenue, and
seminar and conference registrations from its expositions and trade shows, and
sales of its marketing services products. The Company's publishing products
are predominantly business-to-business controlled circulation trade
publications that derive substantially all of their revenue from advertising,
as opposed to consumer publications that derive significant revenue from
subscription fees. For the year ended December 31, 1997 the Company derived
59.8% of its revenue from publishing, 32.8% from expositions and conferences
and 7.4% from marketing services products. In 1997, 92.2% of the Company's
publishing revenue was derived from advertising and 4.5% was derived from
subscriptions. During 1997, Advanstar realigned its internal operational
structure into four industry or market focused clusters. These four clusters,
Retail, Hospitality & Fashion; Healthcare & Pharmaceutical; Information
Technology & Communications; and Manufacturing & Processing, each contain all
of Advanstar's products and services directed toward its respective industry
or market. For 1997, the Retail, Hospitality & Fashion cluster represented
31.2% of Advanstar's total revenue; Healthcare & Pharmaceuticals represented
20.6%; Information Technology & Communications represented 22.8%; and
Manufacturing & Processing represented 17.3%. Additionally, Advanstar
established a Market Development cluster, accounting for 7.9% of total revenue
in 1997, to focus on developing properties in markets where Advanstar looks to
expand its selection of products and services. See "Business--Products and
Services--Market Development."
The 1996 combined financial data were accumulated from the historical
financial statements of the Predecessor for the period from January 1, 1996 to
May 31, 1996 and of Advanstar for the period from June 1, 1996 to December 31,
1996. See "Selected Historical Consolidated Financial and Other Data of
Advanstar and the Predecessor." The combined financial data is presented for
comparative purposes only and does not purport to reflect the operating
results of Advanstar if Advanstar had been controlled by HFCP III for the full
year.
41
RESULTS OF OPERATIONS--ADVANSTAR
The following table sets forth certain consolidated financial data as a
percentage of total revenue for the three years ended December 31, 1995, 1996
and 1997 and the six month periods ended June 30, 1997 and 1998.
PERCENT OF REVENUE
-------------------------------------------
YEAR ENDED SIX MONTH PERIOD
DECEMBER 31, ENDED JUNE 30,
--------------------- -------------------
1995 1996 1997 1997 1998
----- ----- ----- -------- --------
STATEMENT OF OPERATIONS DATA:
Net revenue...................... 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
Production, selling and other
direct
expenses...................... 66.7 64.4 67.2 65.7 66.6
----- ----- ----- -------- --------
Gross profit..................... 33.3 35.6 32.8 34.3 33.4
General and administrative ex-
penses........................ 18.7 19.1 16.4 15.3 15.3
Amortization................... 3.3 9.8 12.9 10.9 11.9
----- ----- ----- -------- --------
Operating income (loss).......... 11.3 6.7 3.5 8.1 6.1
Interest expense, net.......... 13.5 9.6 8.0 7.4 8.7
Other, net..................... (1.5) 0.3 (0.1) 0.0 (1.6)
Provision for income taxes..... 0.0 0.7 0.3 0.9 0.2
----- ----- ----- -------- --------
Net income (loss)................ (0.7) (3.9) (4.7) (0.2) (4.3)
===== ===== ===== ======== ========
EBITDA........................... 16.9 % 18.7 % 18.1 % 20.6 % 19.2 %
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
Net revenue. Net revenue for the first six months of 1998 increased $21.1
million, or 21.1%, to $121.2 million from $100.1 million for the first six
months of 1997. Revenue growth for the first six months of 1998 was due to
growth in publishing, marketing services and exposition revenue. Publishing
revenue for the first six months of 1998 increased $5.9 million, or 11.0%, to
$59.5 million from $53.6 million for the first six months of 1997 due to
aggregate improved performance in the Information Technology & Communications,
Retail, Hospitality & Fashion, and Market Development clusters, partially
offset by decreased revenue from certain properties in the Manufacturing &
Processing cluster and certain healthcare properties. Exposition revenue
increased $14.6 million, or 36.5%, to $54.6 million from $40.0 million in the
first six months of 1997, due primarily to improved performance in art and
motor vehicle exhibitions, plastics fair events and telecommunications and
call center shows, partially offset by decreased revenue from Market
Development and application technology events and the discontinuation of an
information technology event. Marketing Services revenue for the first six
months of 1998 increased $0.6 million, or 10.5%, to $7.1 million from $6.5
million in the first six months of 1997.
Of the overall revenue increase in the first six months of 1998, growth in
the base business (excluding properties acquired in 1998) was $11.8 million,
or 13%, increasing to $111.9 from $100.1 million in the first six months of
1997, due to improved performance in the Information Technology &
Communications, Retail, Hospitality & Fashion and the Manufacturing &
Processing clusters, partially offset by decreased revenue from the Market
Development cluster and certain properties in the Manufacturing & Processing
and Information Technology & Communication clusters. Of the overall growth in
the base business, $2.8 million was attributable to timing differences in
certain expostion events in the first six months of 1998 compared to the same
period in 1997. Exposition events are often held over different dates from one
year to the next which will occasionally result in reported exposition results
moving from one quarter to another between years. Revenue from properties
acquired in the first six months of 1998 was $9.3 million, primarily from
those acquired in the Telexpo acquisition.
42
Production, selling and other direct expenses. Production, selling and other
direct expenses for the first six months of 1998 increased $15.1 million, or
23.0%, to $80.8 million from 65.7 million in 1997, of which $6.3 million was
attributable to production, selling and other expenses of properties acquired
in the first half of 1998. Production, selling and other direct expenses for
the base business for the first six months of 1998 increased $8.8 million, or
13.4%, to $74.5 million from $65.7 million in the first six months of 1997.
Selling and promotional expenses in the first six months of 1998 increased
$5.1 million, or 19.9%, to $30.7 million from $25.6 million in the first six
months of 1997, due to investments made in properties in the Healthcare &
Pharmaceutical cluster, for sales resources across the new market-focused
cluster groups, and for exposition promotion in support of growth in existing
shows. Exposition facility costs in the first six months of 1998 increased
$1.9 million, or 8%, to $9.2 million from $7.3 million in the first six months
of 1997, due primarily to growth in the size of several events and expansion
into new venues for certain shows. Publication production costs for printing,
paper and postage for the first six months of 1998 increased $0.9 million, or
7.4%, to $13.0 million from $12.1 million from the first six months of 1997,
due to a 5.4% growth in the number of advertising pages and increases in
postage rates and paper costs.
General and administrative expenses. General and administrative expenses for
the first six months of 1998 increased $3.2 million, or 21.1%, to $18.5
million from $15.3 million in the first six months of 1997, of which $1.3
million was attributable to acquisitions in 1998. General and administrative
expenses for the base business increased $1.9 million, or 12.4%, to $17.2
million from $15.3 million in the first six months of 1997, largely due to
incremental expenses of $0.9 million relating to the establishment of the
Company's Latin American operations, and $1.0 million relating to an expansion
of infrastructure to support the new market focused organization and
anticipated future growth.
Operating income. For the first six months of 1998, operating income
decreased $0.7 million, or 8.5%, to $7.4 million from $8.1 million in the
first six months of 1997 due primarily to a $3.6 million increase in
amortization as a result of the Company's recent acquisition activity, offset
by improved operating performance.
Interest expense. Net interest expense for the first six months of 1998
increased $3.1 million, or 41.1%, to $10.5 million from $7.4 million in the
first six months of 1997, due to the incurrence of additional indebtedness
necessary to fund acquisitions completed in the first six months of 1997 and
the first half of 1998. In April 1998, the Company issued the Notes in the
amount of $150.0 million at a fixed rate of 9.25% to fund the MAGIC
Acquisition. Interest is payable semi-annually with the first payment due on
November 1, 1998. Interest expense in the first half of 1998 includes $2.3
million of accrued interest on the Notes.
Net income. Net income for the first six months of 1998 decreased $5.0
million to a loss of $5.2 million from a loss of $0.2 million in the first six
months of 1997. The decrease was due primarily to the increase in
amortization and interest expense and the write-off of $4.1 million of certain
unamortized intangibles relating to the Company's credit facilities as part of
the MAGIC Acquisition, offset by a gain on the disposition of certain
publishing assets of $2.2 million and a reduction of $0.7 million in income
tax expense.
EBITDA. EBITDA for the first six months of 1998 increased $2.7 million, or
13.1%, to $23.3 million in 1998 from $20.6 million in the first six months of
1997. The increase was due primarily to the increase in revenue and resulting
increase in operating performance. "EBITDA" is operating income plus
amortization and depreciation. EBITDA does not represent and should not be
considered an alternative to net income or cash flow from operations as
determined by GAAP, and the Company's calculation thereof may not be
comparable to that reported by other companies. The Company believes that
EBITDA provides useful information regarding the Company's ability to service
and/or incur indebtedness and is used by many other companies. The Company's
lenders have indicated that the amount of indebtedness the Company will be
permitted to incur will be based, in part, on the
43
Company's EBITDA. It is also the Company's experience that the merit of
potential acquisitions and divestitures in the Company's industry are
evaluated by the parties involved in part, based on EBITDA. EBITDA does not
take into account the Company's working capital, debt service and capital
expenditure requirements or other commitments and, accordingly, is not
necessarily indicative of the amounts that may be available for discretionary
uses.
1997 COMPARED TO COMBINED 1996
Net revenue. Total net revenue for 1997 increased $36.7 million, or 24.3%,
to $187.7 million from $151.0 million in 1996. Net revenue growth from the
base business contributed $6.9 million, or 19.0%, of the increase and
acquisitions contributed $29.8 million, or 81.0%, of new net revenue. The
Expocon and Telepress acquisitions together accounted for approximately two-
thirds of such new net revenue. The increase in base business revenue was
primarily due to a $5.6 million increase in publishing revenue due to improved
operating performance of TELECOM ASIA and other telecommunications and
information technology publications, a $3.2 million increase in exposition
revenue due to growth in U.S. and European call center events and an increase
in direct mail and database marketing product revenue, partially offset by a
$3.1 million decline in revenue resulting from the absence of three plastic
exhibition events in 1997 in the Manufacturing & Processing cluster and a $0.2
million decline in revenue resulting from the discontinuance of a small
publication in 1996. These events are held on a two years on and one year off
cycle tied to industry event schedules.
Production, selling and other direct expenses. Production, selling and other
direct expenses for 1997 increased $28.8 million, or 29.6%, to $126.1 million
from $97.3 million in 1996, primarily as a result of increased expenses
relating to the operations of businesses acquired during late 1996 and 1997.
Base business, production, selling and other direct expenses for 1997
increased approximately 9% over the prior year due to increased investment in
circulation, sales staffing and promotion and marketing.
General and administrative expenses. General and administrative expenses for
1997 increased $1.8 million, or 6.2% to $30.7 million from $28.9 million in
1996. $0.7 million of such increase was incremental general and administrative
expenses relating to the operations of acquired businesses and related
expansion of infrastructure, primarily in Brazil and Hong Kong.
Operating income. For 1997, operating income decreased $3.6 million, or
35.3%, from 1996, primarily due to the $6.8 million increase in non-cash
amortization resulting from the HFCP III Acquisition. Operating income before
amortization increased $6.0 million, or 24.2%, to $30.8 million in 1997 from
$24.8 million in 1996. See Note 1 to Advanstar's Consolidated Financial
Statements.
Interest expense. Interest expense for 1997 increased $0.6 million, or 4.1%,
to $15.1 million from $14.5 million in 1996, due to the incurrence of
additional indebtedness necessary to partially fund acquisitions completed in
late 1996 and early 1997. See Notes 1 and 8 to Advanstar's Consolidated
Financial Statements.
Net loss. Net loss for 1997 increased $2.9 million, or 48.3%, to $8.9
million from $6.0 million in 1996, primarily due to increased amortization
resulting from the HFCP III Acquisition, partially offset by improvements in
operating income before amortization.
EBITDA. EBITDA for 1997 increased $5.8 million, or 20.6%, to $34.0 million
from $28.2 million in 1996. This increase was primarily due to a $6.0 million
increase in operating income before amortization, partially offset by a
decrease of $0.2 million in depreciation.
44
COMBINED 1996 COMPARED TO 1995
Net revenue. Total net revenue for 1996 increased $5.7 million, or 3.9%, to
$151.0 million from $145.3 million in 1995. The growth in net revenue was
primarily due to growth in advertising revenue, and was impacted by the
discontinuance of the neurology magazine and the sale of Showbiz Expo in
December 1995. Excluding these dispositions, revenue would have increased
$11.4 million, or 8.1%.
Production, selling and other direct expenses. Production, selling and other
direct expenses increased by $0.4 million, or 0.4%, to $97.3 million in 1996
from $96.9 million in 1995, due to the revenue growth in continuing properties
and management's efforts to increase investment in existing properties,
partially offset by the elimination of expenses associated with the
discontinued neurology magazine and Showbiz Expo.
General and administrative expenses. General and administrative expenses for
1996 increased $1.7 million, or 6.3% to $28.9 million from $27.2 million in
1995, primarily as a result of increased investment in acquisition development
staff and other strategic planning and marketing staff following the HFCP III
Acquisition.
Operating income. Operating income in 1996 decreased $6.3 million, or 38.4%,
to $10.1 million from $16.4 million in 1995, primarily due to the $8.4 million
increase in non-cash amortization resulting from the HFCP III Acquisition.
Operating income before amortization increased $3.6 million, or 17.0%, to
$24.8 million in 1996 from $21.2 million in 1995, due to the publishing
related revenue growth, offset by the discontinuance of the neurology magazine
and Showbiz Expo discussed above. See Note 1 to Advanstar's Consolidated
Financial Statements.
Interest expense, net. Interest expense for 1996 decreased $5.1 million, or
26.0%, to $14.5 million from $19.6 million in 1995, due to the changes in
Advanstar's capital structure and the replacement of the existing credit
facility with an amended credit facility in conjunction with the HFCP III
Acquisition.
Amortization. For 1996, amortization expense increased $10.0 million, or
208.3%, to $14.8 million from $4.8 million in 1995 as a result of the HFCP III
Acquisition, which was accounted for using the purchase method of accounting.
See Note 1 to Advanstar's Consolidated Financial Statements.
Net loss. Net loss for 1996 increased $5.0 million to $6.0 million from $1.0
million in 1995, primarily due to increased amortization resulting from the
HFCP III Acquisition, partially offset by improvements in operating income
before amortization and the decrease in interest expense.
EBITDA. EBITDA for 1996 increased $3.6 million, or 14.6%, to $28.2 million
from $24.6 million in 1995. This increase was primarily due to a $6.0 million
increase in operating income before amortization, partially offset by a
decrease in other income.
LIQUIDITY AND CAPITAL RESOURCES--ADVANSTAR
Cash flows from operating activities. Net cash provided by operations in the
first six months of 1998 increased $4.1 million, or 74.5%, to $9.6 million
from $5.5 million in the first six months of 1997. The increase was due to the
decrease in net income of $5.0 million, adjustment for the gain on sale of
assets of $2.2 million, offset by a $3.4 million increase in depreciation and
amortization and a decrease in working capital items of $8.5 million relating
primarily to increases in deferred revenue from MAGIC and other recent
acquisitions.
Cash flows from investing activities. Net cash used in investing activities
in the first six months of 1998 increased $238.3 million to $270.5 million
from $32.2 million in the first six months of 1997.
45
The increase is primarily due to uses for the MAGIC Acquisition and other
acquisitions in 1998, net of acquired working capital, offset by proceeds of
$4.0 million from the sale of certain publishing properties in April 1998, and
an increase of $0.6 million in capital expenditures for additional exposition
wall and lighting systems for use in the Artexpo show group required to meet
the growth in exhibitors as well as upgrades and expansion of certain of the
Company's computer networks and servers. Management anticipates that capital
expenditures for all of 1998 will be between $3.0 million and $3.5 million,
primarily for additional upgrades and expansions of the Company's desktop
environment and strategic information systems.
Cash flows from financing activities. Net cash provided from financing
activitites for the first six months of 1998 increased $244.4 million to
$275.9 million from $31.5 million in 1997, due primarily to the refinancing of
the Company's credit facility by the First Amended Credit Facility, issuance
of the Notes, and receipt of an additional equity infusion from HFCP III to
finance the MAGIC Acquisition and other acquisitions in the first six months
of 1998. This refinancing consisted of $250.0 million in senior term loans
replacing outstanding senior term and revolver loans of $187.0 million,
issuance of $150.0 million in Notes, and receipt of $70.0 million in an
additional equity capital contribution from HFCP III.
Interest payments on the Notes and interest and principal payments under the
Amended Credit Facility will represent significant liquidity requirements for
the Company. The senior term debt under the First Amended Credit Facility
consists of two tranches, (i) $100.0 million of Tranche A Senior Term loans
amortizing over 5.5 years and maturing September 30, 2003, and (ii) $150.0
million of Tranche B Senior Term loans with modest amortization over the
initial 5.5 years of its term maturing with balloon payments in 2004 and 2005.
Payment of the Revolving Credit Facility is due September 30, 2003. Interest
under the Amended Credit Facility is at 30, 60, 90 or 180 day LIBOR plus
applicable margins ranging from 2.25% to 2.50%. Future significant increases
in the LIBOR interest rate may adversely impact the Company's liquidity. In
order to mitigate such risk, the Company has hedged is interest rate exposure
by fixing interest rates on approximately $225.0 million of its total long-
term debt by the issuance of the Notes and the purchase of interest rate cap
agreements setting caps ranging from 8.0% to 8.5%.
Capital expenditures. The Company's other liquidity needs will be primarily
for capital expenditures and working capital. The Company's operations are not
capital intensive. Capital expenditures were $2.3 million, $1.1 million, $1.5
million and $1.6 million for 1997, 1996, 1995 and the six months ended
June 30, 1998, respectively. Annual capital expenditures have historically
included approximately $1.5 million for routine replacement or maintenance
level requirements primarily for expendiutres related to the Company's desktop
and management information systems. Management believes these levels will
increase beginning in 1998 and reach levels of approximately $4.0 million
annually after 1999 as a consequence of its recent acquisition program and and
resultant increase in the size of the Company's overall business and
information system requirements. Expenditures include additions to the
Company's desktop environment, various software upgrades and enhancements, and
expansions of its communication networks and systems. Capital expenditures
have been financed by the Company's cash flows from operations and management
believes the Company's operating cash flows will be sufficient to fund
anticipated levels of capital expenditures.
Management expects the Company's primary source of liquidity will be cash
flow from operations. The Company also has a $60.0 million revolving line of
credit available for funding capital expenditures, working capital needs,
acquisitions, or for other general corporate purposes. As of June 30, 1998,
the Company had $217.0 million of indebtedness outstanding under the First
Amended Credit Facility. The Company generally operates with negative working
capital, excluding cash and current maturities of long-term debt, due to the
impact of deferred revenue from expositions which are billed and collected as
deposits up to six months in advance of the respective exposition.
Consequently, expositions carry little or not accounts receivable.
46
The ability of the Company to fund its operations, make planned capital
expenditures, acquisitions and scheduled payments on its indebtedness depends
on its future operating performance subject to future economic conditions and
to financial, business and other factors, many of which are beyond the
Company's control. See "Risk Factors". Management believes that cash flow from
operations and available borrowings under the Revolving Credit Facility will
provide adequate funds for its working capital needs, planned capital
expenditures, debt service obligations (including the Notes) and other needs.
Management believes such liquidity also will enable the Company to make
selective acquisitions to the extent of available free cash flow and remaining
availability under the Revolving Credit Facility. There can be no assurance
that the Company's business will generate sufficient revenue growth, or that
future borrowings will be available to enable the Company to service its
indebtedness, including the Notes, or to fund its other liquidity needs.
OVERVIEW--MAGIC
MAGIC is a leading producer of trade shows for men's, women's and children's
apparel manufacturers, importers and wholesale distributors.
In fiscal 1994, MAGIC became a "for profit" entity and initiated long-term
programs to introduce new events, products and services as well as to improve
customer service. For example, MAGIC introduced WWDMAGIC in February 1995 and
MAGICKids in August 1997. In addition, MAGIC introduced new products including
show directories and guides, on-site advertising and internet services. During
this period, the addition of customer service staff improved customer
responsiveness, while the development of a client sales force supplemented the
customer referral and trade advertising efforts. As a result of these
initiatives, EBITDA for 1997 increased $9.4 million, or 335.7%, to $12.2
million from $2.8 million in fiscal 1994.
Trade shows constitute substantially all of MAGIC's business. Net revenue is
comprised of booth revenue and other show revenue. Booth revenue consists of
trade show booth rentals and other show revenue including on-site advertising,
program sponsorship, hotel and meeting rooms setup and registration fees.
Booth revenue is billed and collected from exhibitors in advance of each show
and deferred on the balance sheet until the period in which the applicable
event is held. Direct show expenses are recognized in the period in which the
services are rendered.
47
RESULTS OF OPERATIONS--MAGIC
The following table sets forth certain financial data as a percentage of
total revenue for the three years ended May 31, 1995, 1996 and 1997 and for
the nine months ended February 28, 1997 and 1998.
PERCENT OF REVENUE
-----------------------------------
NINE MONTHS
FISCAL YEAR ENDED ENDED
MAY 31, FEBRUARY 28,
------------------- --------------
1995 1996 1997 1997 1998
----- ----- ----- ------ ------
STATEMENT OF OPERATIONS DATA:
Total revenue.............................. 100.0% 100.0% 100.0% 100.0% 100.0%
Direct costs............................. 46.3 49.0 46.5 45.7 37.6
----- ----- ----- ------ ------
Gross profit............................... 53.7 51.0 53.5 54.3 62.4
General & administrative expenses........ 17.1 13.8 15.0 9.9 9.4
----- ----- ----- ------ ------
Operating income........................... 36.6 37.2 38.5 44.4 53.0
Interest income.......................... 3.1 3.7 3.8 2.8 1.7
Provision for income taxes............... 14.2 14.9 15.4 17.1 19.9
----- ----- ----- ------ ------
Net income................................. 25.5% 26.0% 26.9% 30.1% 34.8%
===== ===== ===== ====== ======
EBITDA..................................... 38.7% 38.2% 39.3% 45.3% 53.5%
NINE MONTHS ENDED FEBRUARY 28, 1998 COMPARED TO NINE MONTHS ENDED FEBRUARY 28,
1997
Total revenue. MAGIC's revenue for the nine months ended February 28, 1998
increased $7.7 million, or 24.8%, to $38.7 million from $31.0 million for the
nine months ended February 28, 1997. This increase was due primarily to an
increase in the net square footage of exposition show space, consisting
principally of temporary floor space sold to fill a portion of MAGIC's
exhibitor backlog and an increase in the price per square foot charged to
exhibitors and revenue of $2.5 million from the introduction of MAGICKids.
Direct costs. Direct costs for the nine months ended February 28, 1998
increased $0.4 million, or 2.8%, to $14.6 million from $14.2 million for the
nine months ended February 28, 1997. The increase was due to costs associated
with the increased revenue from MAGICKids.
General and administrative expenses. General and administrative expenses for
the nine months ended February 28, 1998 increased $0.6 million, or 22.2%, to
$3.3 million from $2.7 million for the nine months ended February 28, 1997,
primarily due to increased salary and benefit costs related to an increase in
customer service and sales staff.
Operating income. MAGIC's operating income for the nine months ended
February 28, 1998 increased $6.7 million, or 48.6%, to $20.5 million from
$13.8 million for the nine months ended February 28, 1997, due to growth in
revenue exceeding growth in expenses.
Interest income. Interest income for the nine months ended February 28, 1998
decreased $0.1 million, or 12.5%, to $0.7 million from $0.8 million for the
nine months ended February 28, 1997, due to the reallocation of investments
from long-term investments to short-term liquid investments.
Net income. Net income for the nine months ended February 28, 1998 increased
$4.2 million, or 45.2%, to $13.5 million from $9.3 million for the nine months
ended February 28, 1997, due to the increase in operating income, partially
offset by the related increase in income tax expense.
48
EBITDA. EBITDA for the nine months ended February 28, 1998 increased $6.7
million, or 47.5%, to $20.7 million from $14.1 million for the nine months
ended February 28, 1997. This increase was primarily due to increases in
operating income as a result of increases in the net square footage of
exposition space sold and to the introduction of MAGICKids.
FISCAL 1997 COMPARED TO FISCAL 1996
Total revenue. MAGIC's revenue for fiscal 1997 increased $4.6 million, or
17.3%, to $31.2 million from $26.6 million in fiscal 1996. This increase was
due primarily to an increase in the net square footage of exposition floor
space, consisting principally of temporary floor space sold to fill a portion
of MAGIC's exhibitor backlog and an increase in the price per square foot
charged to exhibitors, a $0.4 million increase in revenue pursuant to the
acquisition of the Children's Trade Expo, and the introduction of new
advertising and promotional services.
Direct costs. Direct costs for fiscal 1997 increased $1.5 million, or 11.5%,
to $14.5 million from $13.0 million for fiscal 1996. The increase was due to
higher rental and other expenses associated with temporary floor space (which
is substantially more expensive than permanent floor space) utilized by MAGIC
for its February 1997 events, partially offset by a reduction in certain other
facilities costs, including third party production costs.
General and administrative expenses. General and administrative expenses for
fiscal 1997 increased $1.2 million, or 38.7%, to $4.3 million from $3.1
million for fiscal 1996. The increase was primarily due to increased general
and administrative expenses necessary to support MAGIC's increased revenue.
Operating income. MAGIC's operating income for fiscal 1997 increased $2.1
million, or 21.2%, to $12.0 million from $9.9 million in fiscal 1996, due to
growth in revenue exceeding growth in expenses.
Interest income. Interest income for fiscal 1997 increased $0.2 million, or
20.0%, to $1.2 million from $1.0 million in fiscal 1996, due to higher average
cash balances.
Net income. Net income for fiscal 1997 increased $1.5 million, or 21.7%, to
$8.4 million from $6.9 million in fiscal 1996, due to the increase in
operating income partially offset by the related increase in income tax
expense.
EBITDA. EBITDA for fiscal 1997 increased $2.0 million, or 19.6%, to $12.2
million from $10.2 million in fiscal 1996. This increase was primarily due to
increases in operating income.
FISCAL 1996 COMPARED TO FISCAL 1995
Total revenue. Total revenue for fiscal 1996 increased $4.9 million, or
22.6%, to $26.6 million from $21.7 million in fiscal 1995. This increase was
due primarily to an increase in the net square footage of exhibition show
space, consisting principally of temporary floor space sold to fill a portion
of MAGIC's exhibitor backlog, an increase in the price per square foot paid by
exhibitors and increased revenue from exhibitor services and to fees related
to the Women's Wear Daily arrangement.
Direct costs. Direct costs for fiscal 1996 increased $2.9 million, or 28.7%,
to $13.0 million from $10.1 million for fiscal 1995. The increase in direct
costs was primarily due to MAGIC's utilization of more expensive temporary
floor space to fill a portion of MAGIC's exhibitor backlog.
General and administrative expenses. General and administrative expenses for
fiscal 1996 decreased $0.3 million, or 8.8%, to $3.1 million from $3.4 million
in fiscal 1995, primarily as the result of increased operating efficiencies.
49
Operating income. MAGIC's operating income for fiscal 1996 increased $1.9
million, or 23.8%, to $9.9 million from $8.0 million in fiscal 1995, primarily
as a result of growth in revenue exceeding growth in expenses.
Interest income. Interest income for fiscal 1996 increased $0.3 million, or
42.9%, to $1.0 million from $0.7 million in fiscal 1995.
Net income. Net income for fiscal 1996 increased $1.4 million, or 25.5%, to
$6.9 million from $5.5 million in fiscal 1995, primarily due to the increase
in operating income, partially offset by an increase of $0.9 million in
MAGIC's income tax provision and a charge of $0.3 million for a loss on a
leasehold termination arising from MAGIC's administrative office relocation.
EBITDA. EBITDA for fiscal 1996 increased $1.8 million, or 21.4%, to
$10.2 million from $8.4 million in fiscal 1995. The increase was primarily due
to a $1.9 million increase in operating income.
LIQUIDITY AND CAPITAL RESOURCES--MAGIC
Cash flows from operating activities. Net cash provided by operations for
fiscal 1997 increased $2.4 million, or 33.8%, to $9.5 million from $7.1
million in fiscal 1996, primarily as a result of an increase in net income of
$1.5 million and an increase in accounts payable and accrued expenses of $0.9
million.
Cash flows from investing activities. Net cash used in investing activities
in fiscal 1997 increased $1.2 million, or 35.3%, to $4.6 million from $3.4
million in fiscal 1996, primarily due to the acquisition of Children's Trade
Expo for $0.9 million and a $0.3 million increase in capital expenditures.
Cash flows from financing activities. Net cash used in financing activities
for fiscal 1997 increased $1.5 million, or 53.6%, to $4.3 million from $2.8
million in fiscal 1996, primarily due to the repurchase of MAGIC's common
stock under a stock repurchase plan.
Capital expenditures. Capital expenditures in fiscal 1997, fiscal 1996 and
fiscal 1995 totaled $0.4 million, $0.1 million and $0.3 million, respectively.
TAXES
As of December 31, 1997, Advanstar had net operating loss carryforwards for
federal income tax purposes of approximately $12.0 million due primarily to
the increase in amortization of goodwill and other intangibles arising out of
the HFCP III Acquisition. The Acquisitions will not give rise to significant
additional amortization of intangibles for tax purposes. Consequently,
Advanstar expects the net operating loss carryforwards will begin to be
utilized in 1998 and fully utilized in 1999 or 2000 and its effective tax rate
will rise in 1999 and thereafter.
YEAR 2000 ISSUES
The Company has conducted a review of its computer systems and software
infrastructure to identify those areas that are not Year 2000 compliant and
has begun implementing its plan to correct any shortcomings. The Company
believes that the plan will be completed in 1999 and that the total cost to
implement its plan should be no more than $3.0 million. These costs will be
expensed as incurred. Through June 30, 1998, $0.6 million has been incurred.
Management believes that with modifications or upgrades to existing software,
Year 2000 compliance will not pose significant operational issues. The Company
is also conducting a review of its key vendors' and suppliers' Year 2000
compliance. Based on its review and assessment, the Company does not believe
that any Year 2000 issues will have a material adverse effect on its business,
financial condition or results of operations. If the Company is not able to
resolve any unforseen Year 2000 issues, certain publication and exposition
operations could be hindered.
50
ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income." The statement requires an enterprise
classify items of other comprehensive income by their nature in a financial
statement and display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the equity
section of the statement of financial position. Advanstar adopted this
standard in first quarter 1998. Adoption of this standard did not have a
material effect on Advanstar in the first quarter of 1998.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information." The
statement requires that a public business enterprise report financial and
descriptive information about its reportable operating segments such as a
measure of segment profit or loss, certain specific revenue and expense items,
and segment assets. Advanstar will adopt this standard during 1998 and is
currently analyzing the impact it will have on the disclosures in its
financial statements.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS No. 133). SFAS No. 133 establishes accounting
and reporting standards requiring that every derivative financial instrument
(including certain derivative instruments embedded in other contracts) be
recorded in the balance sheet as either an asset or liability measured at its
fair value. SFAS No. 133 requires that changes in the derivative's fair value
be recognized currently in earnings unless specific hedge accounting criteria
are met. Special accounting for qualifying hedges allows a derivative's gains
and losses to offset related results on the hedged item in the income
statement, and requires that a company must formally document, designate, and
assess the effectiveness of transactions that receive hedge accounting. The
Company will be required to adopt SFAS No. 133 no later than January 1, 2000.
The Company has not entered into any derivative financial instruments as of
June 30, 1998. As a result, adoption of SFAS No. 133 would currently have no
impact on the Company. In the future, if the Company were to enter into
derivative financial instruments which are covered by SFAS No. 133, volatility
in earnings and other comprehensive income could be increased.
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISK
This Prospectus contains forward looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), including statements
regarding, among other items, (i) the Company's growth strategies and (ii)
anticipated trends in the Company's business. These forward-looking statements
are based largely on the Company's expectations and are subject to a number of
risks and uncertainties, certain of which are beyond the Company's control.
Actual results could differ materially from these forward-looking statements
as a result of the factors described in "Risk Factors". In light of these
risks and uncertainties, there can be no assurance that the forward-looking
information contained in this Prospectus will in fact transpire.
51
BUSINESS
THE COMPANY
The Company is a leading provider of integrated, business-to-business
marketing communications solutions, principally through controlled circulation
trade, business and professional magazines and trade shows, expositions and
conferences. The Company also provides a broad range of other marketing
services products, including direct mail and database products and services.
The Company publishes 72 specialized business magazines and professional
journals and 31 directories and other publications. Of Advanstar's 55
magazines and journals for which competitive data is available, over 75% rank
either #1 or #2 in their respective markets (based on number of advertising
pages). The Company owns and manages 72 expositions and trade shows, most of
which are the leading events in their respective national or regional markets
(based on net square feet of exhibition space), and 26 conferences for
business, professional and consumer audiences worldwide. After giving effect
to the Pro Forma Adjustments, the Company would have derived 53.9% of its 1997
revenues from publishing, 40.9% from expositions and conferences and 5.2% from
marketing services. After giving effect to the Pro Forma Adjustments, (i) the
Company's 1997 revenue, EBITDA and EBITDA margin would have been $267.9
million, $60.2 million and 22.5%, respectively; and (ii) the Company's
revenue, EBITDA and EBITDA margin for the six months ended June 30, 1998 would
have been $160.1 million, $39.0 million and 24.4%, respectively. "EBITDA" is
operating income plus amortization and depreciation. EBITDA does not represent
and should not be considered an alternative to net income or cash flow from
operations as determined by GAAP, and the Company's calculation thereof may
not be comparable to that reported by other companies. The Company believes
that EBITDA provides useful information regarding the Company's ability to
service and/or incur indebtedness and is used by many other companies. The
Company's lenders have indicated that the amount of indebtedness of the
Company will be permitted to incur will be based, in part, on the Company's
EBITDA. It is also the Company's experience that the merit of potential
acquisitions and divestitures in the Company's industry are evaluated by the
parties involved, in part, based on EBITDA. EBITDA does not take into account
the Company's working capital, debt service and capital expenditure
requirements or other commitments and, accordingly, is not necessarily
indicative of the amounts that may be awarded for discretionary use.
The Company markets its broad range of products and services primarily
through four industry clusters in which it has developed critical mass and
expertise: (i) Retail, Hospitality & Fashion; (ii) Healthcare &
Pharmaceutical; (iii) Information Technology & Communications; and (iv)
Manufacturing & Processing. The Company believes its industry-focused cluster
structure allows it to cross-sell its products effectively, thereby capturing
a larger share of customer marketing expenditures. These four clusters are
further divided into 20 industry sectors. The Company has expanded its product
line within its clusters through new product introductions and strategic
acquisitions. These actions have enhanced the Company's position as a leader
in its industry. In addition, these actions have increased the Company's
EBITDA by leveraging its existing marketing and customer service
infrastructure and industry expertise.
On April 30, 1998, Advanstar acquired MAGIC. MAGIC produces MAGIC, the
world's largest trade show for the men's apparel industry (based on net square
feet of exhibition space); WWDMAGIC, the second largest women's apparel show
in the United States (based on net square feet of exhibition space); and
MAGICKids, a recently introduced children's apparel show. The three shows are
held concurrently in Las Vegas in February and August each year. Based on
registration records, the February 1998 MAGIC trade shows attracted an
audience of over 80,000 attendees from over 100 countries, including retailers
from department stores, sporting goods stores, general merchandising stores
and men's specialty and chain stores. Based on exhibitor sales records,
MAGIC's February 1998 trade shows included over 3,200 exhibitors (such as Levi
Strauss, Calvin Klein, Donna Karan and the Russell Corporation), representing
approximately 5,000 brand names. MAGIC's February 1997 and
52
August 1997 trade shows rank, respectively, as the 13th and 11th largest trade
shows in the United States (based on net square feet of exhibition space).
On August 17, 1998, the Company acquired Travel Agent. Travel Agent
publishes Travel Agent the third largest U.S. trade magazine and #1 travel
periodical (based on number of advertising pages). Travel Agent will be
integrated into the Company's travel/hospitality industry sector of the
Retail, Hospitality & Fashion cluster, which includes Hotel & Motel management
and PREMIER HOTELS & RESORTS.
COMPETITIVE ADVANTAGES
The Company believes that the following factors contribute to its strong
competitive position:
Market Leadership. The Company has achieved a strong market position within
each of its four industry clusters primarily as a result of its ability to
offer customers in each cluster comprehensive and jntegrated marketing
communications solutions, consisting of leading publications, expositions and
marketing services. The Company publishes 72 specialized business magazines
and professional journals and 31 directories and other publications. Of
Advanstar's 55 magazines and journals for which competitive data is available,
over 75% rank either #1 or #2 in their respective markets (based on number of
advertising pages). The Company's largest magazines include Travel Agent,
Video Store, CADALYST, Pharmaceutical Technology and Hotel & Motel Management.
The Company also owns and manages 72 trade shows and expositions, most of
which are the leading events in their respective national or regional markets
(based on net square feet of exhibition space), and 26 conferences. Many of
the Company's expositions have commanding market presence: for example, MAGIC
is the #1 men's apparel trade show in the United States (based on net square
feet of exhibition space); IBS New York is the #1 beauty show on the East
Coast (based on net square feet of exhibition space); Telexpo is the #1
telecommunications trade show in Latin America; Artexpo New York is the #1
mid-market art fair in the United States (based on net square feet of
exhibition space); Dealernews International Powersports Dealer Expo is the #1
trade show for the motorcycle industry (based on net square feet of exhibition
space); Licensing International is the leading North American event for the
international merchandise licensing industry (based on net square feet of
exhibition space); and TeleCon is the leading event for the video conferencing
and long distance learning markets (based on net square feet of exhibition
space).
Industry--Focused Integrated Marketing. In addition to offering a broad
range of products, the Company has developed a business model focused on
industry clusters to better serve its customers marketing communications
needs. This model facilitates the development of long-term relationships
between customers and dedicated Advanstar teams. These teams work with
customers to design and to implement all aspects of customized, business-to-
business marketing and communications programs, increasing cross-selling
opportunities across product and service groups. For example, the Company's
call center group, which is part of the Information Technology &
Communications cluster, recently concluded several multi-year marketing
contracts involving participation in the Company's trade shows and advertising
in the Company's trade publications.
Diverse Customer Base. The Company's diverse customer base provides it with
stable and diverse sources of revenue and cash flow as well as an established
foundation from which to further penetrate existing markets and to develop new
markets. The Company's customer base is geographically diverse and crosses
many disparate industries, mitigating the Company's exposure to downturns in
particular geographic markets or industries. After giving effect to the Pro
Forma Adjustments, in 1997 the Company had over 14,000 advertisers and
exhibitors operating in 20 different industry sectors, with no customer or
industry sector representing more than 0.8% or 12.9% of revenue, respectively.
53
Attractive EBITDA Margins and Modest Ongoing Capital
Requirements. Consistent with other leaders in the controlled circulation
publication and trade show industries, the Company enjoys attractive EBITDA
margins and modest ongoing capital expenditure requirements. The modest
ongoing capital requirements result in part from the Company's outsourcing of
the printing of its trade publications and the physical operation of its
expositions. After giving effect to the Pro Forma Adjustments, in 1997 the
Company's EBITDA would have been $60.2 million or 22.5% of revenue. In 1997,
the Company's capital expenditures were $2.3 million. After giving effect to
the Pro Forma Adjustments, the Company's EBITDA for the six months ended June
30, 1998 would have been $39.0 million, or 24.4% of revenue. The Company's
capital expenditures for the six months ended June 30, 1998 were $1.6 million.
Experienced and Incentivized Management Team. The members of Advanstar's
senior management team have an average of over 15 years of industry
experience, with established track records in delivering revenue and profit
growth, developing new products, penetrating new markets and integrating
acquisitions. The Company's management is led by Robert L. Krakoff, Chairman
and Chief Executive Officer and James M. Alic, Vice Chairman. Messrs. Krakoff
and Alic joined Advanstar in July 1996. Prior to joining Advanstar, Mr.
Krakoff was Chief Executive Officer of Cahners Publishing and a Director of
its parent company, Reed-Elsevier plc. During Mr. Krakoff's 23-year tenure,
Reed-Elsevier's exhibition business became one of the largest worldwide
exhibition management companies. Prior to joining Advanstar, Mr. Alic served
as Vice President and Controller of IBM Corporation, and prior thereto was the
Chairman of Reed Exhibition Companies. Messrs. Krakoff and Alic, collectively,
have invested $2.98 million in the business. Messrs. Krakoff and Alic and
other members of the Company's management, subject to vesting, have direct or
indirect interests in approximately 15% of the Common Stock on a fully diluted
basis.
BUSINESS STRATEGY
The Company's business strategy is to increase its business while
maintaining or increasing its profitability. The Company plans to accomplish
its strategy by solidifying its position as a leading provider of integrated
business-to-business marketing communications solutions. The Company plans to
achieve its strategic objectives by (i) expanding its product and service
offerings within each of its industry sectors obtain a larger share of its
customers' marketing expenditures, (ii) selectively entering new industry
sectors and (iii) benefitting to the maximum extent possible from the
strengths of its centralized administrative and production operations.
Expand Product Offerings. The Company plans to "fill-in" its product and
service offerings within its existing industry sectors through selective
acquisitions and joint ventures, strategic new product launches and
international expansion.
. Selective Acquisitions and Joint Ventures. The Company intends to
continue to engage in strategic acquisitions and joint ventures within
its existing industry sectors. The Company believes it can improve its
competitive position through such acquisitions by (i) applying its
extensive industry experience to enhancing the performance of newly
acquired businesses, (ii) integrating acquisitions and joint ventures
into its efficient infrastructure, (iii) cross-selling new products and
services with existing products and services and (iv) using new products
and services to increase visibility within its markets. Since the HFCP
III Acquisition and excluding the MAGIC Acquisition, Advanstar has
completed 19 acquisitions and joint ventures for purchase prices
aggregating approximately $199.9 million in the information technology,
telecommunications, beauty, travel, entertainment and call center
sectors.
. Strategic New Product Launches. The Company has successfully developed
new products within its existing industry clusters and will continue to
make strategic new product introductions. In 1997, the Company launched
seven magazines and seven expositions and conferences in existing
industry sectors to fill-in its existing product offerings. For example,
in 1997 the
54
Company launched WorldPharm, a pharmaceutical industry exposition to be
held in Philadelphia in 1998, to complement its strong position in
pharmaceutical publishing.
. International Expansion. The Company intends to enhance its position in
international markets by leveraging its widely recognized brands, its
experience in international operations and its current customers' demand
for increased global marketing. The Company currently has operations or
produces events in Canada, Europe, Asia and Brazil and intends to expand
further internationally through the extension of existing products into
new geographic markets, joint ventures with local operating partners and
selective acquisitions. Many of the Company's existing international
products are regional in nature (Pan European, Pan Asian or Pan Latin
American), and future expansion is expected to follow this model. For
example, in mid-1997, building on its existing strength in the U.S. and
Asian telecommunications markets, Advanstar acquired two magazines and 13
conferences serving the Brazilian and Latin American telecommunications
markets and, in early 1998, acquired Telexpo, the largest Latin American
telecommunications trade show.
Selectively Enter New Industry Sectors. The Company will selectively enter
new industry sectors in which it believes it can become a leading participant
and achieve attractive margins. For example, the MAGIC Acquisition presented
Advanstar with an ideal opportunity to enter the U.S. men's apparel market
with critical mass and to increase revenue and reduce expenses by leveraging
Advanstar's extensive trade show experience.
Leverage Cost-Effective Centralized Administrative and Production
Facilities. The Company believes that its organizational structure (i)
provides continuing opportunities to produce attractive margins through
centralized functional cost management, (ii) provides a platform to easily
introduce new titles or expositions based on existing products, and (iii)
facilitates integration and cost reductions with respect to acquired titles
and expositions. The Company has a long established and efficient centralized
publishing infrastructure in both the U.S. and Europe. The Company focuses on
continually improving its systems and processes to provide effective, low cost
operations in circulation, fulfillment, production and print and paper vendor
management. Similar cost-efficient infrastructures are being established in
Asia and in Latin America. In 1997, a centrally managed exhibition operations
function was established in both the U.S. and Europe to provide consistency of
business process and cost effective delivery of these services. Centralized
support also exists in finance and accounting, information technology and
communications, human resources and strategic planning.
INDUSTRY OVERVIEW
Trade Publications. Trade publications provide key new product or
educational information to readers and a periodic medium for advertisers to
reach highly targeted and select business audiences throughout the year. Trade
publications are generally supported by advertising and are often circulated
free-of-charge. The most effective and profitable publications are those with
readership that includes a high proportion of the individuals who influence
purchasing decisions in a market niche, while avoiding the expense and
inefficiency of circulating to individuals who are not clearly within the
target groups. The U.S. trade publication industry is expected to grow at a
compound annual growth rate of 5.9% between 1995 and 2000, increasing from a
total market size of approximately $7.7 billion in 1995 (consisting of
approximately $5.9 billion in advertising and approximately $1.8 billion in
subscriptions) to approximately $10.2 billion in 2000 (consisting of
approximately $8.2 billion in advertising and approximately $2.0 billion in
subscriptions).
Expositions and Trade Shows. Expositions and trade shows allow exhibitors a
cost-effective means to showcase and sell products and services and to develop
business relationships with many potential customers in a short time period,
while providing attendees an opportunity to view a broad range of products as
well as to interact with numerous suppliers at once. A 1996 study noted that
the
55
cost of closing a sale with a trade show prospect is 45% less than the cost of
closing a sale in the field. The number of U.S. expositions grew from
approximately 3,300 events in 1989 to approximately 4,400 events in 1996, a
33.8% increase. The amount of net square feet of U.S. expositions grew 65.9%
between 1989 and 1996, from approximately 270 million net square feet in 1989
to approximately 448 million net square feet in 1996. Attendance at U.S.
expositions has grown from approximately 60 million attendees in 1989 to
approximately 101 million attendees in 1996.
PRODUCTS AND SERVICES
The Company provides its products and services to selected industries, which
are grouped into broader industry-related clusters. The clusters are supported
by one centralized administrative support and production facility within each
region of the world.
Within each cluster, Advanstar provides a comprehensive set of marketing
communications products, services and support geared to the particular
industry's marketing and customer needs. The Company provides advertising,
expositions, conferences, direct mail services, custom publishing and
research, database marketing programs, focus groups, market research,
reference books, internet services and other services to facilitate its
clients' business-to-business marketing and communications programs.
The Company's publications generally are controlled circulation, business-
to-business trade publications which are distributed free-of-charge to
qualified company-related recipients and generate revenues predominantly from
the sale of advertising space. Because Advanstar offers its advertisers access
to a highly targeted and industry-specific subscriber base, it is able to sell
advertising space in its publications at rates that are higher than the
average rates charged by publications aimed at more general audiences. The
Company seeks to increase advertising revenues by introducing current
advertisers to new titles, by attracting new advertisers targeted at the
Company's readership and by developing new reader and advertising categories
in both print and electronic editions.
Another central aspect of the Company's overall product offerings is its
leading expositions and conferences. In 1997, the Company held over 90
expositions and conferences. Events usually include an extensive conference
program, which provides a forum for the exchange and dissemination of
information relevant to the particular event's focus. In addition, each event
typically has one or more keynote speakers drawn from industry leaders.
56
Advanstar's four industry clusters, Retail, Hospitality & Fashion;
Healthcare & Pharmaceutical; Information Technology & Communications; and
Manufacturing & Processing, and its Market Development cluster, as well as
publications and expositions provided for each, are set forth in the following
table:
RETAIL, HOSPITALITY & FASHION
- -------------------------------------------------------------------------------
INDUSTRY SECTORS PUBLICATIONS EXPOSITIONS AND CONFERENCES
- ------------------------------------------------------------------------------------------------------------
FASHION BFiA MAGIC (2x)
BFiA Annual Directory (a) WWDMAGIC (2x)
HOSIERY & bodywear (b) MAGICKids (2x)
- ------------------------------------------------------------------------------------------------------------
ART Art Business News Artexpo New York
Art Business News Buyer's Guide
(a) Artexpo Los Angeles
Artexpo Preview (b) art International New York
- ------------------------------------------------------------------------------------------------------------
BEAUTY American Salon Long Beach International Beauty Expo
American spa IBS New York
The Green Book (a) IBS MIAMI - VIVA la BELLEZA!!
IBS SEATTLE
IBS BOSTON
IBS SAN DIEGO
IBS ATLANTA
IBS DALLAS
haircolor USA (c)
- ------------------------------------------------------------------------------------------------------------
TRAVEL/HOSPITALITY Hotel & Motel management International Hotel & Motel Management
HOSPITALITY PRODUCT NEWS Conference (c)
PREMIER HOTELS & RESORTS Hotel Information Technology Conference (c)
PREMIER'S LUXURY DIGEST (b) Travel Agent
Travel Agent
Travel Agent International
The Official Travel Industry
Directory (a)
- ------------------------------------------------------------------------------------------------------------
ENTERTAINMENT/MARKETING Video Store DIRECT RESPONSE TELEVISION EXPO
Response TV & CONFERENCE
Response TV Buyer's Guide (a) VSDA (d)
Li(C)ense! (d) East Coast Video Show (d)
Wideband (d) Licensing International '98
Sight + Sound (d)
- ------------------------------------------------------------------------------------------------------------
MOTOR VEHICLE AFTERMARKET BUSINESS Dealernews International Powersports Dealer Expo
Dealernews Buyer's Guide (a) Dealernews International Powersports Distributor
Dealernews Expo
International Motorcycle Shows (9x)
- ------------------------------------------------------------------------------------------------------------
HEALTHCARE & PHARMACEUTICAL
- ------------------------------------------------------------------------------------------------------------
INDUSTRY SECTORS PUBLICATIONS EXPOSITIONS AND CONFERENCES
- ------------------------------------------------------------------------------------------------------------
HEALTHCARE Cosmetic Surgery TIMES Abilities Expo (5x)
Dermatology Times
dvm THE NEWSMAGAZINE OF
VETERINARY MEDICINE
Formulary
Geriatrics
Managed Healthcare
Modern Medicine
Ophthalmology Times
Ophthalmology Times
International
Urology Times
57
INDUSTRY SECTORS PUBLICATIONS EXPOSITIONS AND CONFERENCES
- -------------------------------------------------------------------------------------------------------------------
PHARMACEUTICALS PHARMACEUTICAL EXECUTIVE Applied Clinical Trials Conference (c)
Pharmaceutical Technology BioPharm Conference (c)
Pharmaceutical Technology
Europe PHARMACEUTICAL EXECUTIVE
Applied Clinical Trials CONFERENCE (c)
BioPharm PHARM TECH CONFERENCE (c)
Pharmaceutical Technology Asia Pharm Tech Europe Conference (c)
Pharmaceutical Technology Buyer's Guide (a) WORLDPHARM
- -------------------------------------------------------------------------------------------------------------------
INFORMATION TECHNOLOGY & COMMUNICATIONS
- -------------------------------------------------------------------------------------------------------------------
INDUSTRY SECTORS PUBLICATIONS EXPOSITIONS AND CONFERENCES
- -------------------------------------------------------------------------------------------------------------------
INFORMATION TECHNOLOGY CADALYST Internet & Electronic Commerce
PC GRAPHICS & VIDEO Conferences & Expositions (iEC) (d)
New Tekniques On Demand Digital Printing & Publishing
Digital Studio Conferences and Expos (2x)
POST Digital Content Creation (DCC)
Healthcare Information Technology (d)
- -------------------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS America's Network Telexpo
TELECOM ASIA rnt eventos (13x) (c)
Telecom China
rnt Revista Nacional de
Telecomunicacoes
TelePress LATINOAMERICA
wireless Comunicaciones
THE TELECOM SOURCE BOOK (a)
TIA Directory (a)
- -------------------------------------------------------------------------------------------------------------------
CALL CENTERS Voice+ ASAT Advance Speech Application
Voice+Asia Pacific & Technology
Teleprofessional Call Center Conference & Exposition
TPI Call Center Solutions Amsterdam
Call Center Products News Call Centre Solutions Australia
Teleconference Magazine TelEvolution
International Call Center Summit (c)(d)
TeleCon EAST
TeleCon XVIII
TeleCon Europe
The Summit (c)
ICCM
Voice Europe (UK)
Voice Germany
Voice Asia
- -------------------------------------------------------------------------------------------------------------------
MANUFACTURING & PROCESSING
- -------------------------------------------------------------------------------------------------------------------
INDUSTRY SECTORS PUBLICATIONS EXPOSITIONS AND CONFERENCES
- -------------------------------------------------------------------------------------------------------------------
APPLICATION TECHNOLOGY automatic I.D. NEWS SCANTECH EXPO Europe
automatic I.D. NEWS Asia SCANTECH
automatic I.D. NEWS Europe
automatic I.D. NEWS America
Latina
automatic I.D. NEWS Buyer's
Guide (a)
Geo Info Systems
GPS World
gps world SHOWCASE (a)
GPS World Newsletter (b)
ITS World
GEO Convergencia
58
INDUSTRY SECTORS PUBLICATIONS EXPOSITIONS AND CONFERENCES
- ------------------------------------------------------------------------------------------
SCIENCE LC.GC ChemAnalysis Europe (c)
LC.GC International Spectroscopy Conference (c)
LC.GC Asia Pacific
LC.GC Buyer's Guides (a)
Spectroscopy
scientific data management
- ------------------------------------------------------------------------------------------
OEM/PROCESSING DCI Medical Device Conference &
Trade
DCI Buyer's Guide (a) Show (2x)
Medical Device TECHNOLOGY European IVD Conference (c)
Medical Device TECHNOLOGY
Buyer's Motion Control Expo (2x)
Parcel Shipping & Distribution
Guide (a) Expo
PIT & QUARRY Plastics Fairs/WPE (3x)
PIT & QUARRY Handbook (a) Sensors (2x)
PLASTICS & COMPOUNDING Tech Med/MDT (d)
REDBOOK (a)
COSMETIC Insider's Report (b)
- ------------------------------------------------------------------------------------------
MARKET DEVELOPMENT
- ------------------------------------------------------------------------------------------
INDUSTRY SECTORS PUBLICATIONS EXPOSITIONS AND CONFERENCES
- ------------------------------------------------------------------------------------------
ENERGY LP/Gas
LP/Gas BUYER'S GUIDE (a)
Brown's Directory of North
American & International Gas
Companies (a)
- ------------------------------------------------------------------------------------------
ENVIRONMENTAL MANAGEMENT EMAT
EMAT West
- ------------------------------------------------------------------------------------------
LANDSCAPE Landscape management
Landscape management
Handbook (b)
TurfGrass TRENDS
Landscape management GREENBOOK
(a)
- ------------------------------------------------------------------------------------------
PAPER Official Board Markets (b)
PAPERBOARD PACKAGING WORLDWIDE
INTERNATIONAL CONTAINER
DIRECTORY (a)
Official Container Directory
(a)
- ------------------------------------------------------------------------------------------
PEST CONTROL Pest Control
Pest Control REDbook (a)
The Sanitarian (b)
- ------------------------------------------------------------------------------------------
ROOFING RSI
RSI Buyer's Guide (a)
The Roofing Specifier
- ------------------------------------------------------------------------------------------
ADDITIONAL PRODUCTS & SERVICES
- --------------------------------------------------------------------------------
Article and Ad Reprints . Business Networking Forums . Card Decks . Custom
Publishing . Custom Research . Custom Seminars . Custom Videotapes .
Database Marketing Programs . Decision-Maker Print and Electronic Databases
. Direct Mail Services . Directories on CD-ROM . Editorial/Subject Databases
. Electronic Publishing and Product Information . Mailing Lists . Market
Demographic Editions and Information . Reader Service .
Recruitment/Classified Advertising . Reference Books . Tutorials .
Videotapes . Internet "banners", links and sponsorships"
- ---------------------
(a) Directory
(b) Supplement, newsletter or other publication
(c) Stand-alone conference
(d) Joint venture
59
Retail, Hospitality & Fashion
Advanstar's Retail, Hospitality & Fashion industry cluster serves the
fashion, art, beauty, travel and hospitality, entertainment, marketing and
motor vehicle industry sectors with a full range of publications, expositions
and conferences and marketing services.
On April 30, 1998, Advanstar acquired MAGIC, producer of MAGIC, the world's
largest trade shows for the men's apparel industry (based on net square feet
of exhibition space); WWDMAGIC, the second largest women's apparel show in the
United States (based on net square feet of exhibition space); and MAGICKids, a
recently introduced children's apparel show. The three shows are held
concurrently in Las Vegas in February and August each year. The February 1998
shows occupied an aggregate of approximately 505,000 net square feet of
permanent floor space and 285,000 net square feet of temporary floor space at
the Las Vegas Convention Center and the Las Vegas Hilton. Commencing with the
August 1998 shows, the MAGIC trade shows will occupy approximately 700,000 net
square feet of permanent floor space at the Las Vegas Convention Center and
approximately 250,000 net square feet of permanent floor space at the Sands
Convention Center. The addition of the Sands Convention Center will eliminate
the need to use more costly temporary space and will allow MAGIC to partially
meet a long-standing backlog demand of 800 exhibitors. Based on registration
records, the February 1998 MAGIC trade shows attracted an audience of over
80,000 attendees from over 100 countries, including retailers from department
stores, sporting goods stores, general merchandising stores and men's
specialty and chain stores. Based on exhibitor sales records, MAGIC's February
1998 trade shows included over 3,200 exhibitors (such as Levi Strauss, Calvin
Klein, Donna Karan and the Russell Corporation), representing approximately
5,000 brand names. MAGIC's February 1997 and August 1997 trade shows rank,
respectively, as the 13th and 11th largest trade shows in the United States
(based on net square feet of exhibition space). MAGIC's revenue, EBITDA and
EBITDA margin for its fiscal year ended May 31, 1997 were $31.2 million, $12.2
million and 39.3%, respectively. For the nine months ended February 28, 1998,
MAGIC's revenue, EBITDA and EBITDA margin were $38.7 million, $20.7 million
and 53.5%, respectively, representing a revenue increase of 24.8% and an
EBITDA increase of 47.4% over the nine months ended February 28, 1997.
On August 17, 1998, the Company acquired Travel Agent. Travel Agent is the
third largest U.S. trade magazine and #1 travel perodical (based on number of
advertising pages). Travel Agent will be integrated into the Company's
travel/hospitality industry sector of the Retail, Hospitality & Fashion
cluster, which includes Hotel & Motel management and PREMIER HOTELS & RESORTS.
In the art sector, the Company serves buyers and sellers of mid-market
original art and high quality prints and posters. Advertising revenue of Art
Business News is a publication written for the gallery owner and art dealer
with a circulation of approximately 31,000. The Company's Artexpo New York is
the largest mid-market art show in the world (based on net square feet of
exhibition space), with approximately 133,000 net square feet utilized at the
Javits Convention Center in New York for the 1998 show. Total revenue from
this event grew 49.3% in 1998 compared with 1997. The Company intends to grow
by introducing regional Artexpo shows in new cities (Artexpo Los Angeles
already exists), covering additional art market segments in both magazines and
shows (a trade only print and poster segment was added to Artexpo in 1998),
cross-selling between the art shows and the magazine, and attracting
additional international advertisers and exhibitors to the U.S. market.
In the professional beauty and hair care sector, the Company is a leading
provider of marketing communications services to those vendors (e.g.,
Sebastian, Clairol and Nexxus) wishing to reach the salon owner, beautician
and hair care professional. The Company's magazine in this market is American
Salon, the #2 publication in the field as measured by number of advertising
pages. American Salon reaches a circulation of approximately 125,000. The
Company's IBS New York Show is the market leading exhibition and educational
event on the East Coast for the salon audience (based on net square feet of
exhibition space), with over 41,000 attendees and over 400 exhibiting
companies
60
occupying in excess of 100,000 net square feet of exhibit space at the Javits
Convention Center, New York each year in March. The Company has seven
additional IBS shows which, together with IBS New York, occupy approximately
250,000 net square feet of exhibit space and attract approximately 61,000
attendees.
In the travel and hospitality sector, the Company has three main products--
Hotel & Motel management ("HMM"), PREMIER HOTELS AND RESORTS, a twice-a-year
directory for the high-end travel agent market and Travel Agent. HMM has
established a #2 position in number of advertising pages in the hospitality
management market. It is generally published semi-monthly and is distributed
to a circulation of approximately 55,000 hotel managers, owners and
developers. PREMIER HOTELS AND RESORTS was launched in 1996 to provide the
high-end travel agent market in the U.S. with a high quality directory of
worldwide four and five star hotels and resorts. In 1997, PREMIER HOTELS AND
RESORTS generated 628 advertising pages. Travel Agent is the #1 travel
periodical (based on number of advertising pages) and is the Company's largest
magazine.
The major products in the entertainment and marketing sector are in the home
video market and the merchandise licensing market. The Company's largest
revenue magazine is Video Store, a weekly publication circulated to home video
retailers. Video Store is the #2 magazine in the field (based on number of
advertising pages) and generated approximately 1,300 advertising pages in
1997. While the video retailing sector may be mature, the competition for
retail shelf space and the emergence of new formats (such as digital video
disks) are expected to sustain the advertising market for many years. In
February 1998, the Company contributed its East Coast Video Show, a 40,000
square foot regional show for home video retailers, to a 50/50 joint venture,
called Home Video Entertainment Events, with the Video Software Dealers
Association, the operators of a 100,000 net square foot annual event in Las
Vegas. The venture intends to expand to other home video events in North
America and overseas.
In the merchandise licensing sector, the Company produces Licensing
International, the leading exhibition (based on net square feet of exhibition
space) bringing together the owners and developers of intellectual property
and brands with the product developers and merchandisers of licensed products.
Sources of licensing include film and TV, sports leagues and teams, major
consumer product brands, and art and image licenses. The total licensing
market has been estimated at $112 billion in licensed merchandise by the
Licensing Industry Merchandisers Association, the sponsor of the exhibition.
Leveraging this show's strength, the Company recently entered into a joint
venture with Wideband, Inc. which publishes Li(C)ense! to serve this large and
rapidly growing worldwide market.
In the motor vehicle sector, the Company's strength is in the powersports
segment (motorcycles, snowmobiles, and personal watercraft). The Company's
exhibition portfolio includes events for each level of trade in the market--
nine consumer motorcycle shows in major metropolitan U.S. cities, the largest
aftermarket accessories show for motorcycle dealers, and a distributor event
for introduction of new product to the distribution channel. The Company's
position in this market is supported by its market leading controlled
circulation magazine (based on number of advertising pages), Dealernews, which
is targeted at the powersports retailer and supported by aftermarket product
suppliers.
Healthcare & Pharmaceutical
The Company's portfolio in healthcare publishing includes nine high quality,
professionally respected magazines. Within the group, selected titles include
Geriatrics, Formulary, Dermatology Times, Ophthalmology Times and the leading
magazine for veterinarians (based on number of advertising pages), dvm THE
NEWSMAGAZINE OF VETERINARY MEDICINE. Among the relevant segment competitors,
Formulary, dvm THE NEWSMAGAZINE OF VETERINARY MEDICINE and Geriatrics are each
#1 or #2 in terms of number of advertising pages.
61
The Company serves the pharmaceutical sector in areas such as research and
development, manufacturing, packaging and marketing through a series of market
leading publications and conferences. Five of the Company's publications in
this market are #1 or #2 in their respective market segments, based on number
of advertising pages. The Company's leading magazine in this market is
Pharmaceutical Technology, the #1 publication in its field (based on number of
advertising pages). Published monthly and circulated to approximately 32,000
pharmaceutical scientists, engineers and operations managers, Pharmaceutical
Technology generated 1,250 advertising pages in 1997. The Company built on
this success by launching Pharmaceutical Technology Europe, Pharmaceutical
Technology Asia, a related pharmaceutical technology buyer's guide, and a
series of U.S. and European conferences. Based upon this market strength, the
Company launched an exhibition, WorldPharm, to be held for the first time in
Philadelphia during September 1998. Research is underway to extend the
WorldPharm concept to international markets. The Company also publishes
PHARMACEUTICAL EXECUTIVE, the leading magazine for product managers and
marketing professionals within pharmaceutical companies (based on number of
advertising pages). As government regulation of this area becomes more
permissive, these professionals are increasingly targeting advertising and
promotion directly to consumers. Although approximately $1 billion was spent
in 1997 by pharmaceutical companies on direct to consumer marketing efforts,
product managers and marketing professionals have little training or
experience in consumer advertising and marketing, as their efforts have
historically been targeted at the doctor. PHARMACEUTICAL EXECUTIVE intends to
fill this need for education, research and information through a special
edition, starting initially as a supplement to PHARMACEUTICAL EXECUTIVE but
expanding to a stand-alone publication if market response is positive. The
first DTC Times supplement was published in May, 1998.
Information Technology & Communications
Advanstar's Information Technology & Communications industry cluster serves
the global telecommunications, information technology and call center/computer
telephony industries with a wide range of publications, exhibits and
conferences and marketing services.
In the information technology sector, the Company is a highly targeted niche
publisher and exhibition organizer. The Company's largest information
technology publication, CADALYST, serves end users, managers and executives in
the Autodesk design and visualization industry, which includes AutoCAD and
related technologies. In 1997, CADALYST held the #1 market position in its
sector, based on number of advertising pages. Circulation totals slightly over
80,000, 30% of which is paid subscription. Another significant publication in
this group is PC Graphics & Video, a monthly magazine covering PC "platform"
applications involving digital graphics creation and digital video capture and
manipulation. Developers and users involved with graphics creation and
manipulation are shifting to the PC platform for future investments in
hardware and software, and PC Graphics & Video is their information and
marketing vehicle. Advertising pages grew by 21.0% in 1997 to approximately
570 pages. In May 1998, the Company acquired POST, the #2 magazine, based on
number of advertising pages, in the professional video market. The acquisition
of POST compliments the Company's other properties in the digital media and
professional content creation market. A directly related trade show and
conference, Digital Content Creation, has been launched by the Company and is
planned for late 1998 in Los Angeles. The largest existing trade exhibition in
this group is the On Demand Digital Printing and Publishing Conference and
Expo (based on net square feet of exhibition space). This exhibition was built
on the transition of traditional printing to a digital environment and
comprises approximately 80,000 net square feet. Major exhibitors include
Xerox, OCE, Danka and IBM. The event is four years old and continues to expand
rapidly, growing approximately 30% from 1996 to 1997. The other events in the
group, including: iEC (internet & electronic commerce) and Healthcare
Information Technology, which is planned for launch in Boston in late 1998,
are 50/50 partnerships with the Gartner Group, a leading information
technology research and consulting group.
The rapidly evolving, newly competitive telecommunications sector is one of
the Company's most important and fastest growing targeted markets. The largest
and oldest publication in the Company's
62
telecommunications portfolio is America's Network, serving the telephone,
cable TV and wireless telecommunications industries. With a qualified
circulation of approximately 50,000, America's Network is the #2 publication
(based on number of advertising pages) in its niche and generated
approximately 730 advertising pages in 1997. As most of the major vendors
operate globally (Ericcson, Lucent and GTE), the Company's growth strategy has
been focused on increasing coverage of international markets. Advanstar
purchased the remaining interest of its minority partner in TELECOM ASIA and
Telecom China in late 1997, providing a wholly-owned platform to accelerate
growth in this region. In mid-1997, the Company acquired Telepress, a
Brazilian based publisher and conference organizer. In February 1998, the
Company acquired Telexpo, the largest telecom exhibition in Latin America. In
May 1998, the Company acquired the leading expositions (based on net square
feet of exhibition space), conferences, and a magazine for the video
conferencing and long distance learning industries, TeleCon.
Through its global reach and rapid growth, the Company's call center and
computer telephony sector serves as a primary example of the Company's
successful market-focused expansion strategy. The market is driven by the
integration of computers and traditional telephony into products such as
interactive voice response, automated phone answering and intelligent call
distribution. Principal applications are in customer service centers, help
desk operations and telemarketing, generally grouped under the term "call
centers." The Company has two successful publishing properties, Voice+, a pan-
European magazine, and Voice+ Asia Pacific. To provide a more comprehensive
product offering, in March 1998, the Company acquired Teleprofessional, a
rapidly growing U.S. publication in this field. The group also includes a
series of market leading exhibitions and conferences in the U.S., Canada,
Europe, Asia and Australia. Incoming Call Center Management Conference &
Exhibition, the largest U.S. event in this market, attracted approximately
1,400 conferees at the most recent event. The other U.S. event, Call Center
Conference & Exhibition is held annually in February and grew 26.6% from 1997
to 1998. The largest event in the group, Voice Europe (UK), grew 39.6% in 1997
compared to 1996. The Company also has Voice shows in Germany and Singapore
and call center events in Amsterdam, Sydney and Toronto.
Manufacturing & Processing
Within the application technology sector, the Company's strongest and
largest position is in the field of automatic data capture, identification and
tracking systems (bar coding, magnetic stripe, smart cards, biometrics and the
associated systems). automatic ID NEWS is the #2 publication in the U.S. and
in Europe (based on number of advertising pages) and "sister" publications of
the same name are market leaders in Europe, Asia and Latin America. The
Company expects that growth in this market will come from new technologies
(radio frequency applications for mobile applications), deeper penetration
into medium-sized and small firms and from the increasing integration of the
data capture and identification functions into enterprise-wide systems and
supply chain management. The Company also operates the #1 trade show and
conference in the U.S., SCANTECH, and the market leading trade show in Europe,
SCANTECH EXPO Europe (based on net square feet of exhibition space).
The Company serves the scientific instrumentation sector through four
publications LC.GC (liquid and gas chromatography), LC.GC International (a
pan-European magazine), LC.GC Asia Pacific and Spectroscopy. In total, the
science group generated 1,262 advertising pages in 1997, up 9.7% from 1996.
The Company believes that exhibitions and conferences are a growth opportunity
and, as a result, is broadening Pharm Analysis Europe to cover a wider range
of applications and renaming the broadened event ChemAnalysis Europe.
The OEM and processing sector is a grouping of publications, exhibitions and
conferences that focus on equipment, materials and intermediate products used
in the manufacturing and processing of a wide range of products. Magazines in
this market include DCI (cosmetic, toiletry, OTC drugs and personal care
product manufacturing), Medical Device TECHNOLOGY (pan-European) and PIT &
63
QUARRY (aggregates extraction and processing). Exhibitions and conferences
include three regional plastics exhibitions, each running on a two year on and
one year off cycle, market leading Medical Device Technology Trade Show &
Conference events in Europe and two Sensors Expos.
Market Development
The Company has grouped the balance of its products and services into a
Market Development cluster to provide focus on growth through internal
development or acquisition. This group addresses large and attractive markets
(i.e., energy, landscape management, printing, roofing and construction) in
which the Company does not yet have critical mass. For example, in the fashion
and apparel market, the Company's only participation prior to the MAGIC
Acquisition, was in the intimate apparel segment through the market leading
magazine (based on number of advertising pages) BFiA (body fashion/intimate
apparel). This magazine and its related products will join the MAGIC trade
shows in the Retail, Hospitality & Fashion cluster and, management believes,
will grow significantly through its relationship with MAGIC.
COMPANY OPERATIONS
Publications. The Company has an established and efficient publishing
infrastructure in the U.S. and Europe. The Company's publications generally
follow the controlled circulation model. Recipients are targeted through
market research to determine the market coverage and purchasing authority
desired by prospective advertisers. Based on existing and acquired mail lists,
the targeted recipient is then solicited through promotions offering free
subscriptions to the relevant publications. High quality circulation is
achieved when a high percentage of the circulation list is recently qualified
(within one or two years) and the publication is delivered at the direct
request of the recipient. Recipients are qualified and re-qualified on a
regular basis through both direct mail and through qualification cards
included in the publication. The Company maintains highly experienced and
efficient circulation management teams in Duluth, Minnesota, Eugene, Oregon
and Chester, United Kingdom. The Company believes that its circulation lists
for its U.S. and European publications provide the market coverage and buying
power desired by the Company's advertising customers.
Advertising sales and editorial functions are dispersed throughout the U.S.,
Asia, Brazil, Europe and the U.K. Advertising sales are predominantly executed
by the Company's employees. Editorial content for the Company's publications
is primarily staff-written, with some editorial contribution by freelance
writers and industry or professional participants in selected markets.
The Company believes it is highly efficient in all functions related to the
production of its publications. Advertising materials and editorial content
are integrated in the Company's Duluth and Chester production facilities,
where layout, ad insertion and output to film is completed. All printing is
outsourced to vendors in various regions, but printing contracts are
negotiated and managed centrally. The Company purchases paper centrally
through a relationship with one of the industry's largest paper brokers. This
broker ships paper directly from the mills to the printers at the Company's
request. The Company maintains its own central U.S. fulfillment operations in
Duluth to generate mailing labels and mailing instructions for the printers.
The Company's workforce is highly experienced and is based in relatively low-
cost locations in Duluth and Chester. The Company is establishing the same
back-office infrastructure in both Latin America and Asia.
Expositions and Conferences. The operational model for exhibitions and
conferences is quite different from publishing, due to the physical nature of
the product and the time cycle for event planning and execution. Basic
positioning and sales and marketing strategy is decided before each event--as
much as 18 months in the case of new launches and typically more than one year
for recurring events. In many cases, venue and hotel plans must be made
several years in advance, particularly for primary markets such as New York,
Chicago, Las Vegas, Los Angeles and San Francisco.
64
The sales cycle for any recurring show typically begins shortly before the
preceding show, with pricing, preliminary floor plans, and exhibitor promotion
mailed in advance so that active selling can begin in person at the
exposition. Typically, this active selling includes taking booth reservations
and/or contracts and small deposits for the future show. The space selection
process is generally handled on a priority point system, combining exhibiting
history and booth size. Certain of the Company's shows (Dealernews or Call
Center, for example) reserve over 80% of their exhibit space before the
preceding event is over. The sales cycle continues with selling to new
exhibitors, resolving customer service requests and collecting progress
payments. Typically, customer payments are received in full before the show
begins.
In addition to the sale of exhibit space, exhibitors are offered a wide
range of promotional opportunities to raise their visibility at an event.
These can include directory and preview advertising, banners, sponsorships of
various functions, and a wide variety of other products or services.
Conferences linked to exhibitions play a crucial strategic role in
exhibition development. A conference represents the "editorial" for an event,
which can be used to build new segments, raise the profile of particular
segments or technologies and drive attendance. Conference development is led
by Company personnel with the support of editorial staff and industry experts.
Operationally, the Company functions in a capacity similar to a general
contractor. Venues, hotels, and vendors for decorating, registration, travel
and housing, audio-visual services and other services are selected and managed
by Company personnel in central exposition operations. While the production of
a show may ultimately involve hundreds of workers on site, very few of these
are Company employees, thus minimizing overhead and permanent staffing costs.
Attendee and conference promotion is the largest single expense in producing
trade shows, expositions and conferences. Promotion is primarily undertaken
through direct mail, using both in-house and rented lists of pre-qualified
industry participants and the cooperative efforts of exhibitors. Where the
Company also has publications in the field, the magazines play a key role by
providing lists from circulation files and providing editorial coverage for
the upcoming show. Other industry magazines are also involved as the event
goal is to represent the entire industry. Relationships with publications are
normally based on an exchange of show ads and lists for booth space and on-
site visibility. The "show issue" of an industry magazine for a related event
is often the biggest issue of the year, as the advertisers want to reinforce
their show presence by making sure attendees know they will be prominent at
the show. Show attendance is typically free for pre-registered attendees, with
modest fees for on-site registrants. Conference attendance can be a
significant revenue source, with courses or full session pricing ranging from
less than $100 to over $1,000, depending on the content being delivered and
competitive pricing.
COMPETITION
Competition for Advanstar's products and services is highly fragmented, both
by product and geography, and exists at many levels. On a global level, there
are several much larger international firms--such as Reed Elsevier and United
News and Media--which operate in many geographic markets and have broad
product offerings in publishing, expositions and conferences and marketing
services. Many of these competitors are better capitalized and have
substantially greater financial and other resources than the Company. In a few
cases, these firms operate in the same market as the Company. In general,
these large firms are organized and market their products and services by
product and geographic location, not on an integrated basis.
Within each particular industry sector, the Company generally has a large
number of direct and indirect competitors. In some cases, these competitors
operate in several geographic areas. In other cases, they operate in only one
geographic market. In most cases, these competitors are small to
65
medium-sized corporations. However, in several industries markets such as
information technology and healthcare, there are large competitors focused on
a single industry. In expositions and conferences in particular, there are
many not-for-profit association competitors and, in several countries, the
exposition hall owner and operator may also be a competitor.
In any given publishing marketplace in a particular country, there are
typically two to five direct competitors for both readers and advertisers.
Additionally, there are usually many indirect competitors who define market
segments differently and thus may be alternatives for either the reader or the
advertiser.
Exposition and conference competition in each market and country occurs on
many levels. There is seldom any truly direct competitor for a particular
event, given the uniqueness of venue and date. However, given the availability
of alternative venues and the ability to define events for particular market
segments and/or with different strategic positioning, the range of competition
for exposition dollars, sponsorships and show attendees and conferees is
extensive. Because there are few barriers to entry, the Company anticipates
that, as the trade publications and expositions industries evolve, additional
competitors with greater resources than the Company may enter the markets, or
particular segments of the markets, thereby intensifying competition.
INTELLECTUAL PROPERTY
The Company has developed strong brand awareness for its principal products
and services. Accordingly, the Company considers its trademarks, servicemarks,
copyrights, trade secrets and similar intellectual property as important to
its success and relies on trademark, servicemark, copyright and trade secret
laws, as well as licensing and confidentiality agreements, to protect its
intellectual property rights. The Company generally registers its material
trademarks and servicemarks in the United States and in certain other key
countries in which these marks are used. Effective trademark, servicemark and
trade secret protection may not be available in every country in which the
Company's products and services are available.
EMPLOYEES
As of June 30, 1998, the Company had approximately 1,200 full-time
employees. None of the Company's U.S. employees is represented by a labor
union. The Company considers its relationships with its employees to be good.
FACILITIES
The Company's finance and administration, circulation, fulfillment,
production and other necessary operational support facilities are located in
Duluth, MN. The Company has executive marketing, sales and editorial offices
in other cities in the United States, including Boston (MA), Cleveland (OH),
New York (NY), Edison (NJ), Eugene (OR), Fairfield (CT), Chicago (IL), Santa
Ana (CA), Waterloo (IA), Woodland Hills (CA) and Brentwood (CA). In addition,
the Company has offices in Sao Paulo and Rio de Janiero, Brazil; Hong Kong,
China; and Chester, United Kingdom.
The Company generally leases its offices from third parties. In addition,
the Company owns its operations offices in Duluth, Minnesota and Cleveland,
Ohio. The Company believes that its properties are in good operating condition
and that suitable additional or alternative space will be available on
commercially reasonable terms for future expansion.
LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings other than ordinary
course, routine litigation which is not material to the business, financial
condition, or results of operations of the Company.
66
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table sets forth certain information regarding the directors,
executive officers and key employees of Advanstar.
NAME AGE TITLE
- ---- --- -----
Robert L. Krakoff....... 62 Chairman of the Board and Chief Executive Officer
James M. Alic........... 55 Vice Chairman and Director
Martin C. ("Skip")
Farber................. 45 Executive Vice President--Business Development
David W. Montgomery..... 40 Vice President--Finance, Chief Financial Officer and
Secretary
William J. Cooke........ 46 Executive Vice President
Alexander S. DeBarr..... 38 Executive Vice President
Glenn A. Rogers......... 46 Executive Vice President
Joseph Loggia........... 39 President--MAGIC
Kenneth T. Berliner..... 38 Director
Mitchell R. Cohen....... 34 Director
John M. Pasquesi........ 38 Director
Messrs. Krakoff, Alic and Farber are employees of Holdings. Mr. Montgomery
is an employee of the Company. All key employees are employees of the Company.
The directors of the Company are also the directors of Holdings.
Executive Officers
Robert L. Krakoff has served as the Company's Chairman and Chief Executive
Officer since he joined the Company in July 1996. From January 1993 to June
1996, he was Chairman and Chief Executive Officer of Reed Publishing USA, a
division of Reed Elsevier Inc. which included Cahners Publishing Company, a
trade publications business, and Reed Exhibition Companies, an exposition and
conference business. From January 1993 to June 1996, he was also a member of
the board of directors of Reed Elsevier PLC.
James M. Alic has served as the Company's Vice Chairman since he joined the
Company in July 1996. From June 1995 to June 1996, he was Vice President and
Controller of IBM Corporation, a computer hardware and software manufacturer.
From September 1994 to May 1995, he was Chairman of Reed Exhibition Companies.
From August 1991 to August 1994, he was President of Reed Exhibitions North
America.
Martin C. ("Skip") Farber has served as the Company's Executive Vice
President--Business Development since he joined the Company in October 1996.
From February 1993 to September 1996, he was Vice President for Business
Development of Reed Publishing USA., which included Cahners Publishing Company
and Reed Exhibition Companies. From July 1995 to September 1996, Mr. Farber
also had responsibility for Cahners Direct Marketing Services, a division of
Reed Elsevier Inc.
David W. Montgomery has served as the Company's Vice President--Finance and
Chief Financial Officer since January 1994. From July 1989 to December 1993,
he was the Company's Director of Corporate Finance. In July 1992, he became
the Company's Secretary. From January 1981 to June 1989, he was a practicing
CPA with McGladrey Pullen in Minneapolis, St. Paul, Minnesota.
Key Employees
William J. Cooke has served as the Company's Executive Vice President with
responsibility for the pharmaceutical and OEM industry sectors, the Market
Development cluster and the market services group since June 1997. In
addition, Mr. Cooke is responsible for corporate marketing and corporate
67
training. From July 1995 to May 1997, he was Group Vice President of the
Company. From July 1993 to June 1995, he was President of the marketing
services division of the Company. From 1988 until June 1993, Mr. Cooke was
Vice President of Strategic Planning and Marketing for Dun & Bradstreet
Corporation.
Alexander S. DeBarr has served as the Company's Executive Vice President
with responsibility for the beauty, art, hotel/travel, motor vehicle and
applied technology industry sectors since June 1997. From February 1995 to May
1997, he was Group Vice President of the Company. Mr. DeBarr also served as a
Group Publisher of the Company from February 1993 until January 1995.
Glenn A. Rogers has served as the Company's Executive Vice President with
responsibility for the information technology and communications industry
sectors and for the entertainment industry sector since June 1997. From April
1995 to May 1997, he was Group Vice President of the Company. From June 1991
to March 1995, he was President of Island Publishers, a private Canadian
publisher of community newspapers.
Joseph Loggia has served as MAGIC's President and Chief Executive Officer
since May 1997, President from August 1996 and Chief Operating Officer
beginning in 1995. From January 1993 to August 1996, he was Chief Financial
Officer of MAGIC. Prior to joining MAGIC, Mr. Loggia, who is a certified
public accountant, was a manager at the accounting firm of Coopers & Lybrand
responsible for Fraud & Financial Investigations.
Directors
Kenneth T. Berliner has served as a director of the Company since the HFCP
III Acquisition. Since 1992, Mr. Berliner has been employed by Peter J.
Solomon Company Limited ("PJSC"), an investment banking firm. He is currently
a managing director at PJSC.
Mitchell R. Cohen has served as a director of the Company since the HFCP III
Acquisition. Since January 1998, Mr. Cohen has been a Managing Director of
Hellman & Friedman LLC, a private equity investment firm. From January 1993 to
December 1997, Mr. Cohen was a General Partner of Hellman & Friedman. Mr.
Cohen is also a director of Western Wireless Corporation and MobileMedia
Corporation.
John M. Pasquesi has served as a director of the Company since the HFCP III
Acquisition. Since January 1998, Mr. Pasquesi has been a Managing Director of
Hellman & Friedman LLC, a private equity investment firm. From January 1989 to
December 1997, Mr. Pasquesi was a General Partner of Hellman & Friedman. Mr.
Pasquesi is also a director of The Covenant Group Inc.
DIRECTOR COMPENSATION
Directors are reimbursed by the Company for out-of-pocket expenses incurred
in attending meetings of the Board of Directors. Directors are not compensated
for serving on the Board of Directors of Holdings or the Company.
Directors of the Company are entitled to indemnification by the Company in
accordance with the Company's Restated Certificate of Incorporation and by-
laws to the fullest extent permitted under New York law. Directors of Holdings
are entitled to indemnification by Holdings in accordance with Holdings'
Certificate of Incorporation and by-laws to the fullest extent permitted under
Delaware law.
EXECUTIVE COMPENSATION
The compensation of executive officers determined by the Company's Board of
Directors, except for the salary and bonus of Mr. Krakoff and Mr. Alic, each
of whom has an employment agreement
68
with Holdings. See "--Certain Plans and Employment Agreements". The following
table sets forth certain information concerning compensation received by the
Chief Executive Officer of the Company and the other executive officers of the
Company (the "Named Executive Officers") for services rendered to Advanstar
for the year ended December 31, 1997.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
-------------------------- ALL OTHER TOTAL
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($)(1) COMPENSATION($) COMPENSATION($)
- --------------------------- ---- --------- ----------- --------------- ---------------
Robert L. Krakoff........ 1997 400,000 150,000 12,449(2) 562,449
Chairman of the Board
and Chief Executive
Officer
James M. Alic............ 1997 300,000 112,500 7,260(3) 419,760
Vice Chairman
Martin C. ("Skip") 1997
Farber.................. 250,000 87,000 2,713(3) 339,713
Executive Vice
President--Business
Development
David W. Montgomery...... 1997 170,000 60,000 5,860(3) 235,860
Vice President--Finance,
Chief Financial Officer
and Secretary
- --------
(1) Bonuses for 1997 are reported in the year earned, even though they were
actually paid in 1998.
(2) Constitutes value of group term life insurance benefits paid for by the
Company.
(3) Constitutes value of group term life insurance benefits paid for by the
Company and contributions made by the Company to a defined contribution
plan.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth each grant of stock options made by Holdings
during the year ended December 31, 1997 pursuant to the 1996 Plan (as defined)
to each of the Named Executive Officers. Advanstar has not granted any stock
options. Neither Holdings nor Advanstar has granted any stock appreciation
rights.
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
STOCK PRICE
APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM(2)
------------------------------------------------ ---------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO EXERCISE
OPTIONS EMPLOYEES IN PRICE(1) EXPIRATION
NAME GRANTED (#) FISCAL YEAR (%) ($/SHARE) DATE 5% ($) 10% ($)
---- ----------- --------------- --------- ---------- ---------- ----------
Robert L. Krakoff....... -- -- -- -- -- --
James M. Alic........... -- -- -- -- -- --
Martin C. ("Skip")
Farber(3).............. 16,700 15.0 11.00 2007 $ 313,081 $ 793,408
David W. Montgomery(4).. 10,000 9.0 11.00 2007 187,473 475,095
- --------
(1) The options granted are subject to a five-year vesting schedule pursuant
to which the options vest in 20% increments on each anniversary of the
date of grant. On May 31 of each year, the exercise price per option
increases by 10% over the previous year's exercise price. The exercise
price per option increases by a pro rated amount of such 10% increase in
the case of exercises which do not occur on May 31.
(2) Amounts reported in these columns represent amounts that may be realized
upon exercise of the options immediately prior to the expiration of their
term assuming the specified compounded rates of appreciation of the Common
Stock over the term of the options. The exercise prices of the options
increases 10% per year over the life of the option. These numbers are
calculated based on rules promulgated by the Securities and Exchange
Commission (the "Commission") and do not reflect the Company's estimate of
future stock price growth. Actual gains, if any, on stock option exercises
and Common Stock holders are dependent on the timing of such exercises and
the future performance of the Common Stock. There can be no assurance that
the rates of appreciation assumed in this table can be achieved or that
the amounts reflected will be received by the individuals.
(3) On July 1, 1998, Mr. Farber was granted an additional option to purchase
70,162 shares of Common Stock at the then exercise price of $12.20 per
share.
(4) On July 1, 1998, Mr. Montgomery was granted an additional option to
purchase 10,000 shares of Common Stock at the then exercise price of
$12.20 per share.
69
OPTION EXERCISES AND HOLDINGS
The following table sets forth, for each of the officers named in the
Summary Compensation Table, certain information concerning stock options
exercised during fiscal 1997, and the number of shares subject to both
exercisable and unexercisable stock options as of December 31, 1997. Also
reported are values for "in-the-money" options that represent the positive
spread between the respective exercise prices of outstanding stock options and
the fair market value of Holdings's Common Stock as of December 31, 1997.
AGGREGATED OPTION EXERCISES IN 1997
AND DECEMBER 31, 1997 OPTION VALUES
VALUE OF UNEXERCISED IN-
NUMBER OF SECURITIES UNDERLYING THE-
UNEXERCISED OPTIONS AT FISCAL MONEY OPTIONS AT FISCAL
SHARES YEAR-END (#) YEAR-END ($) (1)
ACQUIRED ON VALUE ----------------------------------- -------------------------
NAME EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ------------ ------------ --------------- ---------------- ----------- -------------
Robert L. Krakoff....... -- -- -- -- -- --
James M. Alic........... -- -- -- -- -- --
Martin C. ("Skip") Far-
ber(2)................. -- -- 23,300 109,600 -- --
David W. Montgomery(3).. -- -- 16,000 74,000 -- --
(1) On May 31 of each year, the exercise price per option increases by 10%
over the previous year's exercise price. The exercise price per option
increases by a pro rated amount of such 10% increase in the case of
exercises which do not occur on May 31. Given these increases, the
exercise price per option was equal to the fair market value of Holdings'
Common Stock on December 31, 1997.
(2) On July 1, 1998, Mr. Farber was granted an additional option to purchase
70,162 shares of Common Stock at the then exercise price of $12.20 per
share.
(3) On July 1, 1998, Mr. Montgomery was granted an additional option to
purchase 10,000 shares of Common Stock at the then exercise price of
$12.20 per share.
CERTAIN PLANS AND EMPLOYMENT AGREEMENTS
Stock Option Plan. Holdings' 1996 Stock Option Plan (the "1996 Plan")
provides for the issuance of a maximum of 745,200 shares of Common Stock
pursuant to the grant of non-qualified stock options to employees and other
individuals who render services to Holdings or the Company.
The 1996 Plan is administered by the Board of Directors. Subject to the
provisions of the 1996 Plan, the Board of Directors has the authority to
determine the terms of options granted, including the authority to: (i)
determine to whom options may be granted; (ii) determine the time or times at
which options shall be granted; (iii) determine the exercise price of shares
subject to each option; (iv) determine the time or times when each option
shall become vested and exercisable and the duration of the exercise period;
(v) extend the period during which outstanding options may be exercised; (vi)
determine whether restrictions such as repurchase options are to be imposed on
shares subject to options and the nature of such restrictions, if any; and
(vii) interpret the 1996 Plan and prescribe and rescind rules and regulations
relating to it. The 1996 Plan provides that the Board of Directors will take
whatever actions it deems necessary, under Section 422 of the Internal Revenue
Code of 1986, as amended, and the regulations promulgated thereunder, to
ensure that options granted under the 1996 Stock Plan are not treated as
"incentive stock options".
With the exception of the options granted to Mr. Loggia, each option granted
as of May 31, 1998 is subject to a five-year vesting schedule pursuant to
which the options vest in increments of approximately 20% on each of the first
five anniversaries of the date of grant. Prior to an initial public offering
of Holdings, each outstanding option shall become fully exercisable in the
event of a "change of control." A "change of control" means the acquisition by
any person or group of persons (other than an affiliate or affiliates of HFCP
III) of more than 50% of the outstanding shares of Common Stock or shares of
capital stock constituting more than 50% of Holdings' voting capital stock, or
of all or substantially all of Holdings' assets. The Board of Directors may,
in its discretion and in accordance with the provisions of the 1996 Plan,
accelerate the vesting of any option.
70
In addition, each share to be acquired upon exercise of an option is subject
to Holdings' right to repurchase all but not less than all of such shares.
Holdings may exercise its right of repurchase upon the occurrence of any of
the following: (i) the termination of the optionee's relationship with
Holdings for any reason; (ii) the receivership, bankruptcy or other creditor's
proceeding regarding the optionee or the taking of shares acquired upon
exercise of an option by legal process; (iii) distribution of shares acquired
upon exercise of an option to the optionee's spouse pursuant to a decree of
dissolution, operation of law, divorce or any other reason, except as may be
permitted by the Holdings; or (iv) a breach of the optionee's duty not to
compete or solicit any employee of Holdings or its affiliates within one year
of the termination of the optionee's relationship with Holdings. Upon the
occurrence of a repurchase event, Holdings may exercise its repurchase right
within sixty days following the later of the date of the exercise of options
or the date Holdings receives actual knowledge of a repurchase event. Subject
to certain exceptions, the repurchase price of the shares (if terminated other
than for cause), is fair market value as determined pursuant to the 1996 Plan.
As of August 31, 1998, options to purchase 955,562 shares of Common Stock at
an average exercise price of $12.10 were outstanding under the 1996 Plan, and
no options had been exercised.
401(k) Plan. Holdings has an Employees' 401(k) Plan and Trust (the "401(k)
Plan"). All current and future employees who have completed one year of
service with Holdings, the Company or any other domestic subsidiary of
Holdings and are at least 21 years of age are eligible to participate in the
Plan. Participants in the 401(k) Plan may not contribute more than the lesser
of a specified statutory amount ($9,500 in 1997) or 15% of his or her pre-tax
total compensation. Holdings is required to cause to be made a matching
contribution to the 401(k) Plan in accordance with the following schedule: (1)
with respect to the employee's elective contribution in an amount up to two
percent (2%) of the employee's gross compensation, the matching contribution
is required to be equal to 100% of the employee's contribution; (2) with
respect to the employee's elective contribution in excess of 2% and not in
excess of 6% of gross compensation, the matching contribution is required to
be equal to 25% of such employee's contribution; and (3) with respect to the
employee's elective contribution in excess of six percent (6%) of gross
compensation, there shall be no matching contribution. The 401(k) Plan
permits, but does not require, discretionary contributions to the 401(k) Plan
by Holdings' Eligible employees are vested 100% in their own contributions.
Contributions made by Holdings vest in equal installments over five years.
Employment Agreements. Mr. Krakoff and Mr. Alic entered into employment
agreements with Holdings dated as of July 1, 1996. Each agreement provides for
a four year term. Pursuant to the agreements, Mr. Krakoff and Mr. Alic are
entitled to annual base salaries of not less than $400,000 and $300,000,
respectively. Mr. Krakoff and Mr. Alic are entitled to annual bonuses based on
the Company's EBITDA for any year, up to a maximum bonus in any one year of
100% of base salary. The agreements provide for indemnification of the
executives to the extent permissible under Delaware law. Pursuant to Mr.
Krakoff's agreement, Holdings agreed to establish a stock option plan for
employees of the Company and to make additional options available for grant in
the event of additional equity capital contributions to Holdings (subject to a
maximum of $200 million of contributed equity capital). The agreements provide
for severance benefits equal to one year's base salary and benefits (and a pro
rated bonus) upon termination of employment by Holdings without "cause" or by
the executive for "good reason" (which includes a change of control). Mr.
Krakoff and Mr. Alic also entered into noncompetition and confidentiality
agreements with Holdings. The noncompete period is one year after termination
of employment unless employment is terminated by Holdings without cause or by
the executive for good reason, in which case the noncompetition period is six
months. During the noncompetition period, the executives may not hire any
Company employee or solicit any trade show or publishing business from a third
party which has a relationship or contract with the Company.
71
PRINCIPAL STOCKHOLDERS
All of the Company's issued and outstanding capital stock is indirectly
owned by Holdings. As of August 31, 1998, the outstanding equity securities of
Holdings consisted of 16,733,333 shares of Common Stock. The following table
sets forth certain information as of August 31, 1998 regarding the beneficial
ownership of (i) each person who is known to Holdings to beneficially own more
than 5% of the outstanding shares of the Common Stock; (ii) each director of
Holdings; (iii) each Named Executive Officer; and (iv) all directors and
executive officers as a group.
PERCENTAGE OF
SHARES SHARES
BENEFICIALLY BENEFICIALLY
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED (1) OWNED (1)
- ------------------------------------ ------------ -------------
AHI Advanstar LLC (2)............................... 16,733,333 100%
One Maritime Plaza
San Francisco, CA 94111
Robert L. Krakoff** (2)............................. -- --
James M. Alic** (2)................................. -- --
Martin C. ("Skip") Farber** (3)..................... 23,300 *
David W. Montgomery** (4)........................... 16,000 *
Kenneth T. Berliner** (2)(5)........................ -- --
Mitchell R. Cohen** (2)............................. -- --
John M. Pasquesi** (2).............................. -- --
All directors and executive officers as a group
(7 persons) (6).................................... 39,300 *
- --------
* Represents less than 1% of the outstanding Common Stock.
** c/o Advanstar Communications Inc., 7500 Old Oak Boulevard, Cleveland, Ohio
44130-3369.
(1) Applicable percentage of ownership as of August 31, 1998 is based upon
16,733,333 shares of Common Stock outstanding. Beneficial ownership is
determined in accordance with the rules of the Commission, and includes
voting and investment power with respect to shares. Unless otherwise
indicated below, to the knowledge of Holdings, all persons listed below
have sole voting and investment power with respect to their shares of
Common Stock, except to the extent authority is shared by spouses under
applicable law. Pursuant to the rules of the Commission, the number of
shares of Common Stock deemed outstanding includes shares issuable
pursuant to options held by the respective person or group which may be
exercised within 60 days of May 31, 1998 ("presently exercisable stock
options").
(2) AHI Advanstar LLC ("AHI Advanstar") is the sole owner of all of the
outstanding shares of Common Stock of Holdings. Hellman & Friedman Capital
Partners III, LP, a California limited partnership ("HFCP"), H&F Orchard
Partners III, L.P., a California limited partnership ("HFOP III"), H&F
International Partners III, L.P., a California limited partnership ("HFIP
III", and, together with HFCP and HFOP III, "HFCP III"), Mr. Krakoff and
Mr. Alic own all of the membership interests of AHI Advanstar. HFCP III
owns approximately 98% of the membership interest of AHI Advanstar. H&F
Investors III, a California general partnership ("HFI III"), is the
general partner of each of HFCP, HFOP III and HFIP III. The managing
general partner of HFI III is Hellman & Friedman Associates III, L.P., a
California limited partnership whose managing general partner is H&F
Investors III, Inc., a California corporation ("HFI III, Inc.") which is
wholly owned by the Hellman Family Revocable Trust. The investment
decisions of HFI III, Inc. are made by an executive committee, of which
Mr. Pasquesi is a member. The executive committee indirectly exercises
sole voting and investment power with respect to the shares of Holdings
owned by AHI Advanstar. Mr. Pasquesi and Mr. Cohen disclaim beneficial
ownership of such shares. Mr. Krakoff has made a $2.48 million investment
in AHI Advanstar and Mr. Alic has made a $0.5 million investment in AHI
Advanstar. Each of PJSC, Mr. Krakoff and Mr. Alic has a carried interest
in AHI Advanstar.
72
(3) Consists of 23,300 shares of Common Stock issuable pursuant to presently
exercisable stock options.
(4) Consists of 16,000 shares of Common Stock issuable pursuant to presently
exercisable stock options.
(5) Mr. Berliner is a managing director of PJSC.
(6) Consists of 39,300 shares of Common Stock issuable pursuant to presently
exercisable stock options.
73
THE EXCHANGE OFFER
PURPOSES AND EFFECTS OF THE EXCHANGE OFFER
The Original Notes were sold by the Company on April 30, 1998 (the "Issue
Date") to the Initial Purchasers pursuant to a Purchase Agreement dated as of
April 27, 1998 (the "Purchase Agreement"). As a condition to the sale of the
Original Notes, the Company and the Initial Purchasers entered into the
Registration Rights Agreement on the Issue Date. Pursuant to the Registration
Rights Agreement, the Company agreed that, unless the Exchange Offer is not
permitted by applicable law or Commission policy, it would (i) file with the
Commission a Registration Statement under the Securities Act with respect to
the Exchange Notes within 60 days after the Issue Date, (ii) use its
reasonable best efforts to cause such Registration Statement to become
effective under the Securities Act within 150 days after the Issue Date and
(iii) upon effectiveness of the Registration Statement, commence the Exchange
Offer, keep the Exchange Offer open for at least 30 days (or a longer period
if required by law) and deliver to the Exchange Agent Exchange Notes in the
same aggregate principal amount at maturity as the Original Notes that were
tendered by holders thereof pursuant to the Exchange Offer.
Under existing Commission interpretations, the Exchange Notes would in
general be freely transferable after the Exchange Offer without further
registration under the Securities Act; provided, that in the case of broker-
dealers, a prospectus meeting the requirements of the Securities Act will be
delivered as required. The Company has agreed to make available a prospectus
meeting the requirements of the Securities Act to any broker-dealer for use in
connection with any resale of any such Exchange Notes acquired as described
below for such period of 90 days after the Expiration Date. A broker-dealer
that delivers such a prospectus to purchasers in connection with such resales
will be subject to certain of the civil liability provisions under the
Securities Act, and will be bound by the Registration Rights Agreement
(including certain indemnification rights and obligations). A copy of the
Registration Rights Agreement has been filed as an exhibit to the Registration
Statement of which this Prospectus is a part. The Registration Statement of
which this Prospectus is a part is intended to satisfy certain of the
Company's obligations under the Registration Rights Agreement and the Purchase
Agreement.
The Company is generally not required to file any registration statement to
register any outstanding Original Notes. Holders of Original Notes who do not
tender their Original Notes or whose Original Notes are tendered but not
accepted will have to rely on exemptions to registration requirements under
the securities laws, including the Securities Act, if they wish to sell their
Original Notes.
With respect to the Exchange Notes, based upon an interpretation by the
staff of the Commission set forth in certain no-action letters issued to third
parties, the Company believes that a holder (other than (i) a broker-dealer
who purchases such Exchange Notes directly from the Company to resell pursuant
to Rule 144A or any other available exemption under the Securities Act or (ii)
any such holder which is an "affiliate" of the Company within the meaning of
Rule 405 under the Securities Act) who exchanges Original Notes for Exchange
Notes in the ordinary course of business and who is not participating, does
not intend to participate, and has no arrangement with any person to
participate, in the distribution of the Exchange Notes, will be allowed to
resell the Exchange Notes to the public without further registration under the
Securities Act and without delivering to the purchasers of the Exchange Notes
a prospectus that satisfies the requirements of Section 10 of the Securities
Act. However, if any holder acquires the Exchange Notes in the Exchange Offer
for the purpose of distributing or participating in the distribution of the
Exchange Notes or is a broker-dealer, such holder cannot rely on the position
of the staff of the Commission enumerated in certain no-action letters issued
to third parties and must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale transaction,
unless an exemption from registration is otherwise available. Each broker-
dealer that receives Exchange Notes for its own account in exchange
74
for Original Notes, where such Original Notes were acquired by such broker-
dealer as a result of market-making activities or other trading activities,
may be a statutory underwriter and must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. The
prospectus may be the Prospectus for the Exchange Offer, so long as it
contains a plan of distribution with respect to such resale transaction. The
Letter of Transmittal states that by so acknowledging and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
This Prospectus, as it may be amended or supplemented from time to time, may
be used by a broker-dealer in connection with resales of Exchange Notes
received in exchange for Original Notes where such Original Notes were
acquired by such broker-dealer as a result of market-making or other trading
activities, however, this Prospectus may not be used for resales of Notes
acquired directly from the Company. Pursuant to the Registration Rights
Agreement, the Company has agreed to make this Prospectus, as it may be
amended or supplemented from time to time, available to broker-dealers for use
in connection with any resale for a period of 180 days after the Expiration
Date. See "Plan of Distribution."
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the accompanying Letter of Transmittal, the Company will accept any and
all Original Notes validly tendered and not withdrawn prior to the Expiration
Date. The Company will issue $1,000 principal amount of Exchange Notes in
exchange for each $1,000 principal amount of outstanding Original Notes
surrendered pursuant to the Exchange Offer. Holders may tender some or all of
their Original Notes pursuant to the Exchange Offer; provided, however, that
Original Notes may be tendered only in integral multiples of $1,000. The
Exchange Offer is not conditioned upon any minimum aggregate principal amount
of Original Notes being tendered for exchange.
The form and terms of the Exchange Notes are the same as the form and terms
of the Original Notes except that (i) the Exchange Notes will be registered
under the Securities Act and, therefore, will not bear legends restricting
their transfer and (ii) holders of the Exchange Notes will not be entitled to
the certain rights of holders of Original Notes under the Registration Rights
Agreement, which rights will terminate upon the consummation of the Exchange
Offer. The Exchange Notes will evidence the same debt as the Original Notes
(which they replace) and will be issued under, and be entitled to the benefits
of, the Indenture, which also authorized the issuance of the Original Notes,
such that all outstanding Notes will be treated as a single class of debt
securities under the Indenture.
Interest on the Exchange Notes will accrue from the most recent date to
which interest has been paid on the Original Notes or, if no interest has been
paid, from November 1, 1998. Accordingly, registered holders of Exchange Notes
on the relevant record date for the first interest payment date following the
consummation of the Exchange Offer will receive interest accruing from the
most recent date to which interest has been paid or, if no interest has been
paid, from November 1, 1998. Original Notes accepted for exchange will cease
to accrue interest from and after the date of the consummation of the Exchange
Offer. Holders whose Original Notes are accepted for exchange will not receive
any payment in respect of interest on such Original Notes otherwise payable on
any interest payment date, the record date for which occurs on or after
consummation of the Exchange Offer.
As of the date of this Prospectus, $150 million aggregate principal amount
of the Original Notes are outstanding. Only a registered holder of the
Original Notes (or such holder's legal representative or attorney-in-fact) as
reflected on the records of the Trustee under the Indenture may participate in
the Exchange Offer. There will be no fixed record date for determining
registered holders of the Original Notes entitled to participate in the
Exchange Offer.
75
Holders of the Original Notes do not have any appraisal or dissenters'
rights under the Indenture in connection with the Exchange Offer. The Company
intends to conduct the Exchange Offer in accordance with the provisions of the
Registration Rights Agreement and the applicable requirements of the
Securities Act, the Exchange Act and the rules and regulations of the
Commission thereunder. The Company shall be deemed to have accepted validly
tendered Original Notes when, as and if the Company has given oral or written
notice thereof to the Exchange Agent. The Exchange Agent will act as agent for
the tendering holders of Original Notes for the purposes of receiving the
Exchange Notes from the Company.
If any tendered Original Notes are not accepted for exchange because of an
invalid tender, or due to the occurrence of certain other events set forth
herein or otherwise, certificates for any such unaccepted Original Notes will
be returned without expense to the tendering holders thereof (or in the case
of Original Notes tendered by book-entry transfer, such Original Notes will be
credited to the account of such holder maintained at the Depository), as
promptly as practicable after the expiration or termination of the Exchange
Offer.
Holders who tender Original Notes in the Exchange Offer will not be required
to pay brokerage commissions or fees or, subject to the instructions in the
Letter of Transmittal, transfer taxes with respect to the exchange of Notes
pursuant to the Exchange Offer. The Company will pay all charges and expenses,
other than certain applicable taxes described below, in connection with the
Exchange Offer. See "The Exchange Offer--Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; TERMINATION
The term "Expiration Date" shall mean 5:00 p.m., New York City time on
unless the Company, in its sole discretion, extends the Exchange
Offer, in which case the term "Expiration Date" shall mean the latest date and
time to which the Exchange Offer is extended. In order to extend the Exchange
Offer the Company will notify the Exchange Agent of any extension by oral
(promptly confirmed in writing) or written notice and will make a public
announcement thereof, each prior to 9:00 a.m., New York City time, on the next
business day after the previously scheduled expiration date of the Exchange
Offer. Without limiting the manner in which the Company may choose to make a
public announcement of any delay, extension, amendment or termination of the
Exchange Offer, the Company shall have no obligation to publish, advertise or
otherwise communicate any such public announcement, other than by making a
timely release to an appropriate news agency.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Original Notes, (ii) to extend the Exchange Offer, (iii) if any
conditions set forth below under "--Certain Conditions to the Exchange Offer"
shall not have been satisfied, to terminate the Exchange Offer by giving oral
or written notice of such delay, extension or termination to the Exchange
Agent or (iv) to amend the terms of the Exchange Offer in any manner. Any such
delay in acceptance, extension, termination or amendment will be followed as
promptly as practicable by oral or written notice thereof to the registered
holders. If the Exchange Offer is amended in a manner determined by the
Company to constitute a material change, the Company will promptly disclose
such amendment by means of a prospectus supplement that will be distributed to
the registered holders of Original Notes, and the Company will extend the
Exchange Offer for a period of five to ten business days, depending upon the
significance of the amendment and the manner of disclosure to such registered
holders, if the Exchange Offer would otherwise expire during such five to ten
business day period. The rights reserved by the Company in this paragraph are
in addition to the Company's rights set forth below under the caption "--
Certain Conditions of the Exchange Offer."
If the Company extends the period of time during which the Exchange Offer is
open, or if it is delayed in accepting for exchange of, or in issuing and
exchanging the Exchange Notes for, any Original Notes, or is unable to accept
for exchange of, or issue Exchange Notes for, any Original Notes
76
pursuant to the Exchange Offer for any reason, then, without prejudice to the
Company's rights under the Exchange Offer, the Exchange Agent may, on behalf
of the Company, retain all Original Notes tendered, and such Original Notes
may not be withdrawn except as otherwise provided below in "--Withdrawal of
Tenders." The adoption by the Company of the right to delay acceptance for
exchange of, or the issuance and the exchange of the Exchange Notes, for any
Original Notes is subject to applicable law, including Rule 14e-1(c) under the
Exchange Act, which requires that the Company pay the consideration offered or
return the Original Notes deposited by or on behalf of the holders thereof
promptly after the termination or withdrawal of the Exchange Offer.
PROCEDURES FOR TENDERING
Only a registered holder of Original Notes may tender such Original Notes in
the Exchange Offer. To tender in the Exchange Offer, a holder must complete,
sign and date the Letter of Transmittal and any other documents referenced
therein, or facsimile thereof, have the signature thereon guaranteed if
required by the Letter of Transmittal and mail or otherwise deliver such
Letter of Transmittal or such facsimile to the Exchange Agent at the address
set forth below under "-- Exchange Agent" for receipt prior to the Expiration
Date. In addition, either (i) certificates for such Notes must be received by
the Exchange Agent along with the Letter of Transmittal, or (ii) a timely
confirmation of a book-entry transfer of such Notes, if such procedure is
available, into the Exchange Agent's account at the Depository Trust Company
("DTC" or the "Depository") pursuant to the procedure for book-entry transfer
described below, must be received by the Exchange Agent prior to the
Expiration Date, or (iii) the holder must comply with the guaranteed delivery
procedures described below.
Any financial institution that is a participant in the Depository's Book-
Entry Transfer Facility system may make book-entry delivery of the Original
Notes by causing the Depository to transfer such Original Notes into the
Exchange Agent's account in accordance with the Depository's procedure for
such transfer. Although delivery of Original Notes may be effected through
book-entry transfer into the Exchange Agent's account at the Depository, the
Letter of Transmittal (or facsimile thereof), with any required signature
guarantees and any other required documents, must, in any case, be transmitted
to and received or confirmed by the Exchange Agent at its addresses set forth
under "--Exchange Agent" below prior to 5:00 p.m., New York City time, on the
Expiration Date. DELIVERY OF DOCUMENTS TO THE DEPOSITORY IN ACCORDANCE WITH
ITS PROCEDURES DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT. The tender
by a holder which is not withdrawn prior to the Expiration Date will
constitute a binding agreement between such holder and the Company in
accordance with the terms and subject to the conditions set forth herein and
in the Letter of Transmittal.
THE METHOD OF DELIVERY OF NOTES AND THE LETTER OF TRANSMITTAL AND ALL OTHER
REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF THE
HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE AN
OVERNIGHT OR HAND DELIVERY SERVICE, PROPERLY INSURED. IF DELIVERY IS BY MAIL,
REGISTERED MAIL WITH RETURN RECEIPT REQUESTED, PROPERLY INSURED, IS
RECOMMENDED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE
DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE. NO LETTER OF
TRANSMITTAL OR NOTES SHOULD BE SENT TO THE COMPANY. HOLDERS MAY REQUEST THEIR
RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES TO
EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS.
Any beneficial owner of the Original Notes whose Original Notes are
registered in the name of a broker, dealer, commercial bank, trust company or
other nominee and who wishes to tender should contact the registered holder
promptly and instruct such registered holder to tender on such beneficial
owner's behalf. If such beneficial owner wishes to tender on such owner's own
behalf, such owner must, prior to completing and executing the Letter of
Transmittal and delivering such owner's Original
77
Notes, either make appropriate arrangements to register ownership of the Notes
in such owner's name (to the extent permitted by the Indenture) or obtain a
properly completed assignment from the registered holder. The transfer of
registered ownership may take considerable time.
If the Letter of Transmittal is signed by a person other than the registered
holder of any Original Notes (which term includes any participants in DTC
whose name appears on a security position listing as the owner of the Original
Notes) or if delivery of the Exchange Notes is to be made to a person other
than the registered holder, such Original Notes must be endorsed or
accompanied by a properly completed bond power, in either case signed by such
registered holder as such registered holder's name appears on such Original
Notes with the signature on the Original Notes or the bond power guaranteed by
an Eligible Institution (as defined below).
Signatures on a Letter of Transmittal or a notice of withdrawal described
below (see "--Withdrawal of Tenders"), as the case may be, must be guaranteed
by an Eligible Institution unless the Original Notes tendered pursuant thereto
are tendered (i) by a registered holder who has not completed the box entitled
"Special Delivery Instructions" on the Letter of Transmittal or (ii) for the
account of an Eligible Institution. In the event that signatures on a Letter
of Transmittal or a notice of withdrawal, as the case may be, are required to
be guaranteed, such guarantee must be made by a member firm of a registered
national securities exchange or of the National Association of Securities
Dealers, Inc., a commercial bank or trust company having an office or
correspondent in the United States, or another "Eligible Guarantor
Institution" within the meaning of Rule 17Ad-15 under the Exchange Act (any of
the foregoing, an "Eligible Institution").
If the Letter of Transmittal or any Original Notes or assignments are signed
by trustees, executors, administrators, guardians, attorneys-in-fact, officers
of corporations or others acting in a fiduciary or representative capacity,
such persons should so indicate when signing, and unless waived by the
Company, evidence satisfactory to the Company of their authority to so act
must be submitted with the Letter of Transmittal.
The Exchange Agent and the Depository have confirmed that any financial
institution that is a participant in the Depository's system may utilize the
Depository's Automated Tender Offer Program to tender Original Notes.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of tendered Original Notes will be
determined by the Company in its sole discretion, which determination will be
final and binding. The Company reserves the absolute right to reject any and
all Original Notes not properly tendered or any Original Notes, the Company's
acceptance of which would, in the opinion of counsel for the Company, be
unlawful. The Company also reserves the right to waive any defects,
irregularities or conditions of tender as to particular Notes. The Company's
interpretation of the terms and conditions of the Exchange Offer (including
the instructions in the Letter of Transmittal) will be final and binding on
all parties. Unless waived, any defects or irregularities in connection with
tenders of Original Notes must be cured within such time as the Company shall
determine. Although the Company intends to request the Exchange Agent to
notify holders of defects or irregularities with respect to tenders of
Original Notes, neither the Company, the Exchange Agent nor any other person
shall incur any liability for failure to give such notification. Tenders of
Original Notes will not be deemed to have been made until such defects or
irregularities have been cured or waived.
While the Company has no present plan to acquire any Original Notes which
are not tendered in the Exchange Offer or to file a registration statement to
permit resales of any Original Notes which are not tendered pursuant to the
Exchange Offer, the Company reserves the right in its sole discretion to
purchase or make offers for any Original Notes that remain outstanding
subsequent to the Expiration Date or, as set forth below under "--Certain
Conditions to the Exchange Offer," to terminate the
78
Exchange Offer and, to the extent permitted by applicable law, purchase
Original Notes in the open market, in privately negotiated transactions or
otherwise. The terms of any such purchases or offers could differ from the
terms of the Exchange Offer.
By tendering, each holder will represent to the Company that, among other
things, (i) the Exchange Notes to be acquired by the holder of the Original
Notes in connection with the Exchange Offer are being acquired by the holder
in the ordinary course of business of the holder, (ii) the holder has no
arrangement or understanding with any person to participate in the
distribution of Exchange Notes, (iii) the holder acknowledges and agrees that
any person who is a broker-dealer registered under the Exchange Act or is
participating in the Exchange Offer for the purpose of distributing the
Exchange Notes must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction of the Exchange Notes acquired by such person and cannot rely on
the position of the staff of the Commission set forth in certain no-action
letters, (iv) the holder understands that a secondary resale transaction
described in clause (iii) above and any resales of Exchange Notes obtained by
such holder in exchange for Original Notes acquired by such holder directly
from the Company should be covered by an effective registration statement
containing the selling securityholder information required by Item 507 or Item
508, as applicable, of Regulation S-K of the Commission, and (v) the holder is
not an "affiliate," as defined in Rule 405 of the Securities Act, of the
Company. If the holder is a broker-dealer that will receive Exchange Notes for
its own account in exchange for Original Notes that were acquired as a result
of market-making activities or other trading activities, the holder is
required to acknowledge in the Letter of Transmittal that it will deliver a
prospectus in connection with any resale of such Exchange Notes; however, by
so acknowledging and by delivering a prospectus, the holder will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
See "Plan of Distribution."
RETURN OF NOTES
If any tendered Original Notes are not accepted for any reason set forth in
the terms and conditions of the Exchange Offer or if Original Notes are
withdrawn or are submitted for a greater principal amount than the holders
desire to exchange, such unaccepted, withdrawn or non-exchanged Original Notes
will be returned without expense to the tendering holder thereof (or, in the
case of Original Notes tendered by book-entry transfer into the Exchange
Agent's account at the Depository pursuant to the book-entry transfer
procedures described below, such Original Notes will be credited to an account
maintained with the Depository) as promptly as practicable upon termination of
the Exchange Offer.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Original Notes at the Depository for purposes of the Exchange Offer
within two business days after the date of this Prospectus, and any financial
institution that is a participant in the Depository's system may make book-
entry delivery of Original Notes by causing the Depository to transfer such
Original Notes into the Exchange Agent's account at the Depository in
accordance with the Depository's procedures for transfer. However, although
delivery of Original Notes may be effected through book-entry transfer at the
Depository, the Letter of Transmittal or facsimile thereof, with any required
signature guarantees and any other required documents, must, in any case, be
transmitted to and received by the Exchange Agent at the address set forth
below under "--Exchange Agent" on or prior to the Expiration Date or pursuant
to the guaranteed delivery procedures described below.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Original Notes and (i) whose Original Notes
are not immediately available or (ii) who cannot deliver their Original Notes
(or complete the procedures for book-entry
79
transfer), the Letter of Transmittal or any other required documents to the
Exchange Agent prior to the Expiration Date, may effect a tender if: (a) the
tender is made through an Eligible Institution; (b) prior to the Expiration
Date, the Exchange Agent receives from such Eligible Institution a properly
completed and duly executed Notice of Guaranteed Delivery substantially in the
form provided by the Company (by facsimile transmission, mail or hand
delivery) setting forth the name and address of the holder, the certificate
number(s) of such Original Notes (if available) and the principal amount of
Original Notes tendered, stating that the tender is being made thereby and
guaranteeing that, within five New York Stock Exchange trading days after the
Expiration Date, the Letter of Transmittal (or a facsimile thereof) together
with the certificate(s) representing the Original Notes in proper form for
transfer (or a confirmation of a book-entry transfer into the Exchange Agent's
account at the Depository of Original Notes delivered electronically), and any
other documents required by the Letter of Transmittal will be deposited by the
Eligible Institution with the Exchange Agent; and (c) such properly executed
Letter of Transmittal (or facsimile thereof), as well as the certificate(s)
representing all tendered Original Notes in proper form for transfer (or a
confirmation of a book-entry transfer into the Exchange Agent's account at the
Depository of Original Notes delivered electronically), and all other
documents required by the Letter of Transmittal are received by the Exchange
Agent within five New York Stock Exchange trading days after the Expiration
Date. Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will
be sent to holders who wish to tender their Original Notes according to the
guaranteed delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Original Notes may be
withdrawn at any time prior to the Expiration Date. To withdraw a tender of
Original Notes in the Exchange Offer, a written or facsimile transmission
notice of withdrawal must be received by the Exchange Agent at its address set
forth herein prior to the Expiration Date. Any such notice of withdrawal must
(i) specify the name of the person having deposited the Original Notes to be
withdrawn (the "Depositor") and the name of the record holder of the Original
Notes to be withdrawn, if different than the Depositor, (ii) identify the
Original Notes to be withdrawn (including the certificate number or numbers
(if applicable) and principal amount of such Original Notes), and (iii) be
signed by the holder in the same manner as the original signature on the
Letter of Transmittal by which such Original Notes were tendered (including
any required signature guarantees). If Original Notes have been tendered
pursuant to the procedures for book-entry transfer, the notice of withdrawal
must specify the name and number of the account at DTC to be credited with the
withdrawal of the Original Notes. All questions as to the validity, form and
eligibility (including time of receipt) of such notices will be determined by
the Company in its sole discretion, whose determination shall be final and
binding on all parties. Any Original Notes so withdrawn will be deemed not to
have been validly tendered for purposes of the Exchange Offer and no Exchange
Notes will be issued with respect thereto unless the Original Notes so
withdrawn are validly retendered. Properly withdrawn Notes may be retendered
by following one of the procedures described above under "--Procedures for
Tendering" at any time prior to the Expiration Date.
CERTAIN CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other term of the Exchange Offer, the Company shall not
be required to accept for exchange, or exchange the Exchange Notes for, any
Original Notes not theretofore accepted for exchange, and may terminate or
amend the Exchange Offer as provided herein before the acceptance of such
Original Notes, if any of the following conditions exist: (a) any action or
proceeding is instituted or threatened in any court or by or before any
governmental agency with respect to the Exchange Offer which, in the
reasonable judgment of the Company, might impair the ability of the Company to
proceed with the Exchange Offer or have a material adverse effect on the
contemplated benefits of the Exchange Offer to the Company or there shall have
occurred any material adverse development in any existing action or proceeding
with respect to the Company or any of its
80
subsidiaries; or (b) there shall have been any material change, or development
involving a prospective change, in the business or financial affairs of the
Company or any of its subsidiaries which, in the reasonable judgment of the
Company, could reasonably be expected to materially impair the ability of the
Company to proceed with the Exchange Offer or materially impair the
contemplated benefits of the Exchange Offer to the Company; or (c) there shall
have been proposed, adopted or enacted any law, statute, rule or regulation
which, in the judgment of the Company, could reasonably be expected to
materially impair the ability of the Company to proceed with the Exchange
Offer or materially impair the contemplated benefits of the Exchange Offer to
the Company; or (d) any governmental approval which the Company shall, in its
reasonable discretion, deem necessary for the consummation of the Exchange
Offer as contemplated hereby shall have not been obtained. If the Company
determines in its reasonable discretion that any of these conditions are not
satisfied, the Company may (i) refuse to accept any Original Notes and return
all tendered Original Notes to the tendering holders, (ii) extend the Exchange
Offer and retain all Original Notes tendered prior to the expiration of the
Exchange Offer, subject, however, to the rights of holders to withdraw such
Original Notes (see "The Exchange Offer--Withdrawal of Tenders") or (iii)
waive such unsatisfied conditions with respect to the Exchange Offer and
accept all properly tendered Original Notes which have not been withdrawn. If
such waiver constitutes a material change to the Exchange Offer, the Company
will promptly disclose such waiver by means of a prospectus supplement that
will be distributed to the registered holders of the Original Notes, and the
Company will extend the Exchange Offer for a period of five to ten business
days, depending upon the significance of the waiver and the manner of
disclosure to the registered holders, if the Exchange Offer would otherwise
expire during such five to ten business day period.
Holders may have certain rights and remedies against the Company under the
Registration Rights Agreement should the Company fail to consummate the
Exchange Offer, notwithstanding a failure of the conditions stated above. Such
conditions are not intended to modify those rights or remedies in any respect.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to such
condition or may be waived by the Company in whole or in part at any time and
from time to time in the Company's reasonable discretion. The failure by the
Company at any time to exercise the foregoing rights shall not be deemed a
waiver of any such right and each such right shall be deemed an ongoing right
which may be asserted at any time and from time to time.
TERMINATION OF CERTAIN RIGHTS
All rights under Registration Rights Agreement (including registration
rights) of holders of the Original Notes eligible to participate in this
Exchange Offer will terminate upon consummation of the Exchange Offer except
with respect to the Company's continuing obligations (i) to indemnify the
holders (including any broker-dealers) and certain parties related to the
holders against certain liabilities (including liabilities under the
Securities Act), (ii) to provide, upon the request of any holder of a
transfer-restricted Original Note, the information required by Rule 144A(d)(4)
under the Securities Act in order to permit resales of such Original Notes
pursuant to Rule 144A, (iii) to use its best efforts to keep the Registration
Statement effective to the extent necessary to ensure that it is available for
resales of transfer-restricted Notes by broker-dealers for a period of 180
days from the date on which the Registration Statement is declared effective
and (iv) to provide copies of the latest version of the Prospectus to broker-
dealers upon their request for a period of 180 days from the date on which the
Registration Statement is declared effective. Insofar as indemnification for
liabilities arising under the Securities Act may be permitted pursuant to the
foregoing provisions, the Company has been informed that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is therefore unenforceable.
EXCHANGE AGENT
United States Trust Company of New York has been appointed as Exchange Agent
for the Exchange Offer. All questions and requests for assistance as well as
all correspondence in connection
81
with the Exchange Offer and the Letter of Transmittal should be addressed to
the Exchange Agent, as follows:
By Facsimile (eligible institutions only):
(212) 571-3080
By Overnight Courier or by Hand:
The Bank of New York
101 Barclay Street
Corporate Trust Services Window
Ground Level
New York, NY 10286
Attn: Reorganization Section
By Mail:
The Bank of New York
101 Barclay Street, 7E
New York, NY 10286
Attention: Reorganization Section
To confirm by telephone, or for information, call the Exchange Agent at
(212) 805-6333. Requests for additional copies of this Prospectus, the Letter
of Transmittal or the Notice of Guaranteed Delivery should be directed to the
Exchange Agent.
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, telephone or in person by officers and regular
employees of the Company and its affiliates. The Company has not retained any
dealer-manager or other soliciting agent in connection with the Exchange Offer
and will not make any payments to brokers, dealers or others soliciting
acceptance of the Exchange Offer. The Company, however, will pay the Exchange
Agent reasonable and customary fees for its services and will reimburse it for
its reasonable out-of-pocket expenses in connection therewith. The cash
expenses to be incurred in connection with the Exchange Offer will be paid by
the Company and are estimated in the aggregate to be approximately $250,000.
Such expenses include fees and expenses of the Exchange Agent and Trustee,
accounting and legal fees and printing costs, among others.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Original Notes pursuant to the Exchange Offer. If, however, certificates
representing Exchange Notes, or Original Notes for principal amounts not
tendered or acceptable for exchange, are to be delivered to, or are to be
issued in the name of, any person other than the registered holders of the
Original Notes tendered, or if tendered Original Notes are registered in the
name of any person other than the person signing the Letter of Transmittal, or
if a transfer tax is imposed for any reason other than the exchange of
Original Notes pursuant to the Exchange Offer, then the amount of any such
transfer taxes (whether imposed on the registered holder or any other persons)
will be payable by the tendering holder. If satisfactory evidence of payment
of such taxes or exemption therefrom is not submitted with the Letter of
Transmittal, the amount of such transfer taxes will be billed directly to such
tendering holder of Original Notes.
ACCOUNTING TREATMENT
The Exchange Notes will be recorded at the same carrying value as the
Original Notes as reflected in the Company's accounting records on the date of
the exchange. Accordingly, no gain or loss for accounting purposes will be
recognized. The expenses of the Exchange Offer will be amortized over the term
of the Exchange Notes.
82
CONSEQUENCE OF FAILURE TO EXCHANGE
Participation in the Exchange Offer is voluntary. Holders of the Original
Notes are urged to consult their financial and tax advisors in making their
own decisions on what action to take. The Original Notes which are not
exchanged for the Exchange Notes pursuant to the Exchange Offer will remain
restricted securities. Accordingly, such Original Notes may be resold only (i)
to a person whom the seller reasonably believes is a qualified institutional
buyer (as defined in Rule 144A under the Securities Act) in a transaction
meeting the requirements of Rule 144A, (ii) in a transaction meeting the
requirements of Rule 144 under the Securities Act, (iii) outside the United
States to a foreign person in a transaction meeting the requirements of Rule
904 under the Securities Act, (iv) in accordance with another exemption from
the registration requirements of the Securities Act (and based upon an opinion
of counsel if the Company so requests), (v) to the Company or (vi) pursuant to
an effective registration statement and, in each case, in accordance with any
applicable securities laws of any state of the United States or any other
applicable jurisdiction.
83
DESCRIPTION OF AMENDED CREDIT FACILITY
The summary of the Amended Credit Facility set forth below does not purport
to be complete and is qualified in its entirety by reference to all the
provisions of the credit agreement and related documents governing the Amended
Credit Facility, copies of which are filed as an exhibit to the Registration
Statement of which this Prospectus is a part.
The Amended Credit Facility will consist of three components: a 5 1/2-year
term loan facility in an aggregate principal amount equal to $100 million (the
"Tranche A Term Loan Facility"), increased from $85 million under the First
Amended Credit Facility (such increase, the "Incremental Tranche A Term Loan
Facility"); a 7-year term loan facility in an aggregate principal amount equal
to $150 million (the "Tranche B Term Loan Facility"), increased from $125
million under the First Amended Credit Facility (such increase, the
"Incremental Tranche B Term Loan Facility" and, together with the Incremental
Tranche A Term Loan Facility, the "Incremental Term Loan Facilities"); and a 5
1/2-year revolving credit facility in the maximum amount of $60 million (the
"Revolving Credit Facility"). Loans made under the Tranche A Term Loan
Facility ("Tranche A Term Loans") and the Tranche B Term Loan Facility
("Tranche B Term Loans") are sometimes collectively referred to herein as
"Term Loans." Advances under the Revolving Credit Facility are sometimes
referred to herein as "Revolving Loans."
The obligations of the Company under the Amended Credit Facility and any
related interest rate protection agreements will be guaranteed by Holdings and
by substantially all of the domestic subsidiaries of the Company (including,
without limitation, MAGIC). The Company's obligations in connection with the
Amended Credit Facility and the obligations of the guarantors will be secured
by liens on substantially all of their respective tangible and intangible
assets, including, but not limited to, mortgages on unencumbered real
property, blanket security interests in personal property and pledges of the
capital stock of the Company and substantially all of the Company's
subsidiaries (including, without limitation, MAGIC).
The Company drew $85 million in Tranche A Term Loans and $125 million in
Tranche B Term Loans on the closing date of the MAGIC Acquisition to finance a
portion of the MAGIC Acquisition, to replace or refinance indebtedness under
the Original Credit Facility, to pay related fees and expenses and for general
corporate purposes. The Incremental Tranche A Term Loan Facility and the
Incremental Tranche B Term Loan Facility were drawn in full on the effective
date of the Second Amended Credit Facility, and will be applied to repay
Revolving Loans used to fund recent acquisitions. Subject to compliance with
customary conditions precedent, the Revolving Credit Facility (which will
include sublimits for the issuances of letters of credit) will be available to
be drawn from time to time by the Company for working capital and general
corporate purposes (including permitted acquisitions).
The Term Loans will be amortized in quarterly installments totalling
approximately $1.77 million in 1998, $8.26 million in 1999, $15.91 million in
2000, $20.02 million in 2001, $22.96 million in 2002, $37.08 million in 2003,
$72.30 million in 2004 and $71.70 in 2005. Principal amounts outstanding under
the Revolving Credit Facility will be due and payable in full at maturity,
approximately 5 1/2 years after the closing date of the First Amended Credit
Facility.
Interest on outstanding borrowings will accrue, at the option of the
Company, at the customary Alternate Base Rate (the "ABR") of The Chase
Manhattan Bank ("Chase") or at a reserve adjusted Eurodollar Rate (the
"Eurodollar Rate") plus, in each case, the Applicable Margin (as hereinafter
defined). The term "Applicable Margin" means a percentage that will vary in
accordance with a pricing matrix based upon operating performance targets and
step-downs to be agreed upon. The maximum Applicable Margin for Revolving
Loans and Tranche A Term Loans will equal 1.25% for loans based on ABR ("ABR
Loans") and 2.25% for loans based on the Eurodollar Rate ("Eurodollar Loans");
and for Tranche B Term Loans, 1.50% in the case of ABR Loans and 2.50% in the
case of Eurodollar Loans.
84
In addition to paying interest on outstanding principal under the Amended
Credit Facility, the Company will be required to pay a commitment fee to the
lenders under the Revolving Credit Facility in respect of the unutilized
commitments thereunder at a rate equal to a percentage that will vary in
accordance with a pricing matrix based upon operating performance targets and
step-downs set forth in the pricing matrix. The maximum commitment fee rate
will be 0.50% per annum. Additionally, the Company will pay to each Lender
providing a portion of the Incremental Term Loan Facilities under the Second
Amended Credit Facility a fee of 0.25% and 0.10% respectively, of its
allocated commitment in respect of the Incremental Tranche A Term Loan
Facility and the Incremental Tranche B Term Loan Facility. The Company will
also pay letter of credit commissions on the outstanding stated amount of all
letters of credit issued under the Revolving Credit Facility at a rate equal
to the Applicable Margin for Eurodollar Loans under the Revolving Credit
Facility (subject to adjustments based on the pricing matrix), plus a fronting
fee to the bank issuing such letters of credit at 0.25% per annum, and the
customary administrative, issuance, drawing, payment, negotiation and
amendment charges of the issuing bank.
Subject in each case to certain exceptions, the following amounts are
required to be applied, as mandatory prepayments, to prepay the Term Loans:
(i) 50% of the net cash proceeds of certain issuances of equity by Holdings or
its subsidiaries; (ii) 100% of the net cash proceeds of the incurrence of
certain indebtedness by Holdings (or any successor corporation) or any of its
subsidiaries; (iii) 100% of the net cash proceeds of any sale or other
disposition by the Company or any of its subsidiaries of any assets (excluding
sales in the ordinary course of business, and subject to a limited exception
for reinvestment of such proceeds within 270 days); and (iv) 50% of excess
cash flow for each fiscal year. Mandatory prepayments will be applied pro rata
to the unpaid installments of the Tranche A Term Loans and the Tranche B Term
Loans, provided, that as long as any Tranche A Term Loans remain outstanding,
each holder of a Tranche B Term Loan will have the right to refuse any such
mandatory prepayment otherwise allocable to it, in which case the amount so
refused will be applied as an additional prepayment of the Tranche A Term
Loans. The Company will also have the right to optionally prepay the loans
under the Amended Credit Facility, without premium, in whole or in part.
Amounts applied as prepayments of the Revolving Credit Facility may be
reborrowed; amounts prepaid in respect of the Term Loans may not.
Subject to customary exceptions, covenants include (but will not necessarily
be limited to) restrictions on fundamental changes; liens; indebtedness;
investments; dividend payments; lines of business; transactions with
affiliates; use of proceeds; certain matters respecting ownership of
subsidiaries; negative pledge clauses and clauses restricting subsidiary
distributions; modifications of certain documents (including the Indenture);
prepayments of the Notes; and activities of holding companies. Financial
covenants include a minimum fixed charge coverage ratio and a maximum leverage
ratio.
Events of default include nonpayment of principal when due; nonpayment of
interest, fees or other amounts after a three-day grace period; material
inaccuracy of representations and warranties; violation of covenants (subject,
in the case of certain covenants, to a 30-day grace period after notice);
cross-default; bankruptcy events; certain ERISA events; material judgments;
material environmental claims; actual or asserted invalidity of any guarantee,
security interest or subordination provisions; and a change of control.
85
DESCRIPTION OF NOTES
GENERAL
The Exchange Notes are to be issued under an Indenture, to be dated as of
April 30, 1998 (the "Indenture"), among the Company, the Guarantors and The
Bank of New York, as Trustee (the "Trustee"), a copy of which is filed as an
exhibit to the Registration Statement of which this Prospectus is a part. The
Indenture also governs the Original Notes. For purposes of the following
description, the Exchange Notes and Original Notes are at times collectively
referred to as the "Notes." The Exchange Notes and any Original Notes that
remain outstanding after consummation of the Exchange Offer will be treated as
a single class of securities under the Indenture.
The Indenture is limited in aggregate principal amount to $250.0 million, of
which $150.0 million aggregate principal amount was issued in the Offering.
Additional notes may be issued in one or more series from time to time,
subject to the limitations set forth under "Certain Covenants--Limitation on
Indebtedness," which may vote as a class with the Notes. The following summary
of certain provisions of the Indenture and the Notes does not purport to be
complete and is subject to, and is qualified in its entirety by reference to,
all the provisions of the Indenture (including the definitions of certain
terms therein and those terms made a part thereof by the Trust Indenture Act
of 1939, as amended) and the Notes.
The Notes will be unsecured, senior subordinated obligations of the Company,
limited to $150.0 million aggregate principal amount, and will mature on May
1, 2008. Each Note will bear interest at the rate per annum shown on the front
cover of this Prospectus from the date of issuance, or from the most recent
date to which interest has been paid or provided for, payable semi-annually on
May 1 and November 1 of each year commencing on November 1, 1998 to holders of
record at the close of business on the April 15 or October 15 immediately
preceding the interest payment date.
Interest will be computed on the basis of a 360 day year comprised of twelve
30 day months. Principal of, premium, if any, and interest on the Notes will
be payable, and the Notes may be exchanged or transferred, at the office or
agency of the Company in the Borough of Manhattan, The City of New York (which
initially will be the corporate trust office of the Trustee in New York, New
York), except that, at the option of the Company, payment of interest may be
made by check mailed to the address of the holders as such address appears in
the Note Register. No service charge will be made for any registration of
transfer or exchange of Notes, but the Company may require payment of a sum
sufficient to cover any transfer tax or other similar governmental charge
payable in connection therewith.
The Notes will be issued in fully registered form without interest coupons,
in denominations of $1,000 and any integral multiple of $1,000. The Notes will
be represented by one or more registered notes in global form and in certain
circumstances may be represented by Notes in definitive form. See "Book-Entry;
Delivery and Form."
86
OPTIONAL REDEMPTION
Except as set forth below, the Notes will not be redeemable at the option of
the Company prior to May 1, 2003. On and after such date, the Notes will be
redeemable, at the Company's option, in whole or in part, at any time upon not
less than 30 nor more than 60 days prior notice mailed by first-class mail to
each holder's registered address, at the following redemption prices
(expressed in percentages of principal amount), plus accrued and unpaid
interest to the redemption date (subject to the right of holders of record on
the relevant record date to receive interest due on the relevant interest
payment date):
If redeemed during the 12-month period commencing on May 1 of the years set
forth below:
REDEMPTION
PERIOD PRICE
------ ----------
2003........................................ 104.625%
2004........................................ 103.083%
2005........................................ 101.542%
2006 and thereafter......................... 100.000%
In addition, at any time and from time to time prior to May 1, 2001, the
Company may redeem in the aggregate up to 35% of the original principal amount
of the Notes with the proceeds of one or more Equity Offerings received by, or
invested in, the Company so long as there is a Public Market at the time of
such redemption, at a redemption price (expressed as a percentage of principal
amount) of 109.250% plus accrued and unpaid interest, if any, to the
redemption date (subject to the right of holders of record on the relevant
record date to receive interest due on the relevant interest payment date);
provided, however, that at least 65% of the original principal amount of the
Notes must remain outstanding after each such redemption; provided further,
that each such redemption occurs within 90 days of the date of closing of such
Equity Offering.
At any time on or prior to May 1, 2003, the Notes may also be redeemed as a
whole at the option of the Company upon the occurrence of a Change of Control,
upon not less than 30 nor more than 60 days prior notice (but in no event more
than 30 days after the occurrence of such Change of Control) mailed by first-
class mail to each holder's registered address, at a redemption price equal to
100% of the principal amount thereof plus the Applicable Premium as of, and
accrued and unpaid interest, if any, to, the date of redemption (the
"Redemption Date") (subject to the right of Holders of record on the relevant
record date to receive interest due on the relevant interest payment date).
"Applicable Premium" means, with respect to a Note at any Redemption Date,
the greater of (i) 1.0% of the principal amount of such Note and (ii) the
excess of (A) the present value at such time of (1) the redemption price of
such Note at May 1, 2003 (such redemption price being described under
"Optional Redemption") plus (2) all required interest payments due on such
Note through May 1, 2003, computed using a discount rate equal to the Treasury
Rate plus 50 basis points, over (B) the principal amount of such Note.
"Treasury Rate" means the yield to maturity at the time of computation of
United States Treasury securities with a constant maturity (as compiled and
published in the most recent Federal Reserve Statistical Release H.15 (519)
which has become publicly available at least two business days prior to the
Redemption Date (or, if such Statistical Release is no longer published, any
publicly available source of similar market data)) most nearly equal to the
period from the Redemption Date to May 1, 2003; provided, however, that if the
period from the Redemption Date to May 1, 2003 is not equal to the constant
maturity of a United States Treasury security for which a weekly average yield
is given, the Treasury Rate shall be obtained by linear interpolation
(calculated to the nearest one-twelfth of a year) from the weekly average
yields of United States Treasury securities for which such yields are given,
except that if the period from the Redemption Date to May 1, 2003 is less than
one year, the weekly average yield on actually traded United States Treasury
securities adjusted to a constant maturity of one year shall be used.
87
In the case of any partial redemption, selection of the Notes for redemption
will be made by the Trustee on a pro rata basis, by lot or by such other
method as the Trustee in its sole discretion will deem to be fair and
appropriate, although no Note of $1,000 in original principal amount or less
will be redeemed in part. If any Note is to be redeemed in part only, the
notice of redemption relating to such Note will state the portion of the
principal amount thereof to be redeemed. A new Note in principal amount equal
to the unredeemed portion thereof will be issued in the name of the holder
thereof upon cancellation of the original Note.
RANKING AND SUBORDINATION
The payment of the principal of, premium, if any, and interest on the Notes
is subordinated in right of payment, as set forth in the Indenture, to the
prior payment in full in cash or Cash Equivalents when due of all Senior
Indebtedness of the Company. However, payment from the money or the proceeds
of U.S. Government Obligations held in any defeasance trust described under
"Defeasance" below is not subordinate to any Senior Indebtedness or subject to
the restrictions described herein. As of June 30, 1998, after giving effect to
the Pro Forma Adjustments, the outstanding Senior Indebtedness of the Company
would have been $250.0 million (exclusive of unused commitments). Although the
Indenture contains limitations on the amount of additional Indebtedness that
the Company may Incur, under certain circumstances the amount of such
Indebtedness could be substantial and, in any case, such Indebtedness may be
Senior Indebtedness. See "Certain Covenants--Limitation on Indebtedness"
below.
"Senior Indebtedness" is defined, whether outstanding on the Issue Date or
thereafter issued, created, Incurred or assumed, as the Bank Indebtedness and
all other Indebtedness of the Company, including accrued and unpaid interest
thereon (including interest accruing on or after the filing of any petition in
bankruptcy or for reorganization relating to the Company at the rate specified
in the documentation with respect thereto whether or not a claim for post
filing interest is allowed in such proceeding) and fees relating thereto,
unless, in the instrument creating or evidencing the same or pursuant to which
the same is outstanding, it is provided that the obligations in respect of
such Indebtedness are not superior in right of, or are subordinate to, payment
to the Notes; provided, however, that Senior Indebtedness will not include (i)
any obligation of the Company to any Subsidiary, (ii) any liability for
Federal, state, foreign, local or other taxes owed or owing by the Company,
(iii) any accounts payable or other liability to trade creditors arising in
the ordinary course of business (including Guarantees thereof or instruments
evidencing such liabilities), (iv) any Indebtedness, Guarantee or obligation
of the Company that is expressly subordinate or junior in right of payment to
any other Indebtedness, Guarantee or obligation of the Company, including any
Senior Subordinated Indebtedness and any Subordinated Obligations or (v) any
Capital Stock.
Only Indebtedness of the Company that is Senior Indebtedness will rank
senior to the Notes in accordance with the provisions of the Indenture. The
Notes will in all respects rank pari passu with all other Senior Subordinated
Indebtedness of the Company. The Company has agreed in the Indenture that it
will not Incur, directly or indirectly, any Indebtedness that is subordinate
or junior in ranking in any respect to Senior Indebtedness unless such
Indebtedness is Senior Subordinated Indebtedness or is expressly subordinated
in right of payment to Senior Subordinated Indebtedness. In addition, a
Subsidiary Guarantor may not Incur any Indebtedness if such Indebtedness is
subordinate or junior in ranking in any respect to any Guarantor Senior
Indebtedness of such Subsidiary Guarantor unless such Indebtedness is
Guarantor Senior Subordinated Indebtedness of such Subsidiary Guarantor or is
expressly subordinated in right of payment to Guarantor Senior Subordinated
Indebtedness of such Subsidiary Guarantor. Unsecured Indebtedness is not
deemed to be subordinate or junior to secured indebtedness merely because it
is unsecured.
The Company may not pay principal of, premium, if any, or interest on, the
Notes or make any deposit pursuant to the provisions described under
"Defeasance" below and may not otherwise
88
purchase, redeem or retire any Notes (collectively, "pay the Notes") if (i)
any Senior Indebtedness is not paid when due in cash or Cash Equivalents or
(ii) any other default on Senior Indebtedness occurs and the maturity of such
Senior Indebtedness is accelerated in accordance with its terms unless, in
either case, the default has been cured or waived and any such acceleration
has been rescinded or such Senior Indebtedness has been paid in full in cash
or Cash Equivalents. However, the Company may pay the Notes without regard to
the foregoing if the Company and the Trustee receive written notice approving
such payment from the Representative of the Senior Indebtedness with respect
to which either of the events set forth in clause (i) or (ii) of the
immediately preceding sentence has occurred and is continuing. During the
continuance of any default (other than a default described in clause (i) or
(ii) of the second preceding sentence) with respect to any Designated Senior
Indebtedness pursuant to which the maturity thereof may be accelerated
immediately without further notice (except such notice as may be required to
effect such acceleration) or the expiration of any applicable grace periods,
the Company may not pay the Notes for a period (a "Payment Blockage Period")
commencing upon the receipt by the Trustee (with a copy to the Company) of
written notice (a "Blockage Notice") of such default from the Representative
of the holders of such Designated Senior Indebtedness specifying an election
to effect a Payment Blockage Period and ending 179 days thereafter (or earlier
if such Payment Blockage Period is terminated (i) by written notice to the
Trustee and the Company from the Person or Persons who gave such Blockage
Notice, (ii) because the default giving rise to such Blockage Notice is no
longer continuing or (iii) because such Designated Senior Indebtedness has
been repaid in full). Notwithstanding the provisions described in the
immediately preceding sentence, unless the holders of such Designated Senior
Indebtedness or the Representative of such holders have accelerated the
maturity of such Designated Senior Indebtedness, the Company may resume
payments on the Notes after the end of such Payment Blockage Period. Not more
than one Blockage Notice may be given in any consecutive 360-day period,
irrespective of the number of defaults with respect to Designated Senior
Indebtedness during such period.
Upon any payment or distribution of the assets or securities of the Company
upon a total or partial liquidation, dissolution, reorganization or bankruptcy
of or similar proceeding relating to the Company or its property, the holders
of Senior Indebtedness will be entitled to receive payment in full in cash or
Cash Equivalents of the Senior Indebtedness (including interest accruing
after, or which would accrue but for, the commencement of any proceeding at
the rate specified in the applicable Senior Indebtedness, whether or not a
claim for such interest would be allowed) before the holders of the Notes are
entitled to receive any payment or distribution, and until the Senior
Indebtedness is paid in full in cash or Cash Equivalents, any payment or
distribution to which holders of the Notes would be entitled but for the
subordination provisions of the Indenture will be made to holders of the
Senior Indebtedness as their interests may appear. If a payment or
distribution is made to holders of the Notes that, due to the subordination
provisions, should not have been made to them, such holders are required to
hold it in trust for the holders of Senior Indebtedness and pay it over to
them as their interests may appear.
If payment of the Notes is accelerated because of an Event of Default, the
Company or the Trustee will promptly notify the holders of the Designated
Senior Indebtedness or the Representative of such holders of the acceleration.
The Company may not pay the Notes until five Business Days after such holders
or the Representative of the Designated Senior Indebtedness receive notice of
such acceleration and, thereafter, may pay the Notes only if the subordination
provisions of the Indenture otherwise permit payment at that time.
By reason of such subordination provisions contained in the Indenture, in
the event of insolvency, creditors of the Company who are holders of Senior
Indebtedness may recover more, ratably, than the Noteholders.
89
GUARANTEES
Holdings and each Subsidiary Guarantor will unconditionally guarantee,
jointly and severally, to each holder and the Trustee, on a senior
subordinated basis, the full and prompt payment of principal of, premium, if
any, and interest on the Notes, and of all other obligations under the
Indenture.
The Indebtedness evidenced by each Note Guarantee (including the payment of
principal of, premium, if any, and interest on the Notes) will be subordinated
to all Guarantor Senior Indebtedness of such Guarantor on the same basis as
the Notes are subordinated to Senior Indebtedness of the Company. As of June
30, 1998, after giving effect to the Pro Forma Adjustments, there would have
been approximately $250.0 million of Guarantor Senior Indebtedness (all of
which would have represented Guarantees of borrowings under the Senior Credit
Agreement). Although the Indenture contains limitations on the amount of
additional Indebtedness that the Company's Restricted Subsidiaries may Incur,
under certain circumstances the amount of such Indebtedness could be
substantial and, in any case, such Indebtedness may be Guarantor Senior
Indebtedness. See "Certain Covenants--Limitation on Indebtedness" below. See
"--Ranking and Subordination" above.
The obligations of each Guarantor will be limited to the maximum amount as
will, after giving effect to all other contingent and fixed liabilities of
such Guarantor (including, without limitation, any Guarantees under the Senior
Credit Agreement) and after giving effect to any collections from or payments
made by or on behalf of any other Guarantor in respect of the obligations of
such other Guarantor under its Note Guarantee or pursuant to its contribution
obligations under the Indenture, result in the obligations of such Guarantor
under its Note Guarantee not constituting a fraudulent conveyance or
fraudulent transfer under federal or state law.
Each Subsidiary Guarantor may consolidate with or merge into or sell its
assets to the Company or another Wholly-Owned Subsidiary Guarantor without
limitation. Each Subsidiary Guarantor may consolidate with or merge into or
sell all or substantially all its assets to a corporation, partnership, trust,
limited partnership, limited liability company or other similar entity other
than the Company or a Wholly-Owned Subsidiary Guarantor (whether or not
affiliated with the Subsidiary Guarantor) except that if the surviving
corporation of any such merger or consolidation is a Subsidiary of the
Company, such Subsidiary shall not be a Foreign Subsidiary. Upon the sale or
disposition of a Subsidiary Guarantor (by merger, consolidation, the sale of
its Capital Stock or the sale of all or substantially all of its assets) to a
Person (whether or not an Affiliate of the Subsidiary Guarantor) which is not
a Subsidiary of the Company, which sale or disposition is otherwise in
compliance with the Indenture (including the covenant described under "Certain
Covenants--Limitation on Sales of Assets and Subsidiary Stock"), such
Subsidiary Guarantor will be deemed released from all its obligations under
the Indenture and its Subsidiary Guarantee and such Subsidiary Guarantee will
terminate; provided, however, that any such termination will occur only to the
extent that all obligations of such Subsidiary Guarantor under the Senior
Credit Agreement and all of its Guarantees of, and under all of its pledges of
assets or other security interests which secure, any other Indebtedness of the
Company will also terminate upon such release, sale or transfer.
CHANGE OF CONTROL
Upon the occurrence of any of the following events (each a "Change of
Control"), unless the Company shall have exercised its right to redeem the
Notes as described under "--Optional Redemption", each holder will have the
right to require the Company to repurchase all or any part of such holder's
Notes at a purchase price in cash equal to 101% of the principal amount
thereof plus accrued and unpaid interest, if any, to the date of purchase
(subject to the right of holders of record on the relevant record date to
receive interest due on the relevant interest payment date):
(i) (A) any "person" (as such term is used in Sections 13(d) and 14(d) of
the Exchange Act), other than one or more Permitted Holders, is or becomes
the beneficial owner (as defined in Rules
90
13d-3 and 13d-5 under the Exchange Act, except that such person shall be
deemed to have "beneficial ownership" of all shares that any such person
has the right to acquire, whether such right is exercisable immediately or
only after the passage of time), directly or indirectly, of more than 35%
(or, if there is a Public Market at the time such person is or is deemed to
have beneficial ownership, more than 50%) of the total voting power of the
Voting Stock of the Company or Holdings (or its successor by merger,
consolidation or other business combination) (for the purposes of this
clause, such person shall be deemed to beneficially own any Voting Stock of
the Company or Holdings held by a parent corporation, if such person
"beneficially owns" (as defined above), directly or indirectly, more than
35% of the voting power of the Voting Stock of such parent corporation);
and (B) if there is no Public Market, the Permitted Holders "beneficially
own" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act), directly
or indirectly, in the aggregate a lesser percentage of the total voting
power of the Voting Stock of the Company or Holdings (or its successor by
merger, consolidation or purchase of all or substantially all of its
assets) than such other person and do not have the right or ability by
voting power, contract or otherwise to elect or designate for election a
majority of the board of directors of the Company or such successor (for
the purposes of this clause, such other person shall be deemed to
beneficially own any Voting Stock of a specified corporation held by a
parent corporation, if such other person "beneficially owns" (as defined in
clause (A) above), directly or indirectly, more than 35% of the voting
power of the Voting Stock of such parent corporation and the Permitted
Holders "beneficially own" (as defined in this clause (B)), directly or
indirectly, in the aggregate a lesser percentage of the voting power of the
Voting Stock of such parent corporation and do not have the right or
ability by voting power, contract or otherwise to elect or designate for
election a majority of the board of directors of such parent corporation);
or
(ii) during any period of two consecutive years, individuals who at the
beginning of such period constituted the Board of Directors of the Company
or Holdings (together with any new directors whose election by such Board
of Directors or whose nomination for election by the shareholders of the
Company or Holdings, as the case may be, was approved by a vote of at least
a majority of the directors of the Company or Holdings then still in office
who were either directors at the beginning of such period or whose election
or nomination for election was previously so approved or is a designee of
the Permitted Holders or was nominated or elected by such Permitted Holders
or any of their designees) cease for any reason to constitute a majority of
the Board of Directors of the Company or Holdings then in office; or
(iii) the sale, lease, transfer, conveyance or other disposition (other
than by way of merger or consolidation), in one or a series of related
transactions, of all or substantially all of the assets of the Company and
its Restricted Subsidiaries taken as a whole to any "person" (as such term
is used in Sections 13(d) and 14(d) of the Exchange Act) other than a
Permitted Holder; or
(iv) the adoption by the stockholders of a plan for the liquidation or
dissolution of the Company.
Within 30 days following any Change of Control, unless the Company has
mailed a redemption notice with respect to all the outstanding Notes in
connection with such Change of Control as described under "--Optional
Redemption", the Company will mail a notice to each holder with a copy to the
Trustee stating: (i) that a Change of Control has occurred and that such
holder has the right to require the Company to purchase such holder's Notes at
a purchase price in cash equal to 101% of the principal amount thereof plus
accrued and unpaid interest, if any, to the date of purchase (subject to the
right of holders of record on a record date to receive interest on the
relevant interest payment date); (ii) the repurchase date (which shall be no
earlier than 30 days nor later than 60 days from the date such notice is
mailed); and (iii) the procedures determined by the Company, consistent with
the Indenture, that a holder must follow in order to have its Notes purchased.
The Company will comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
in connection with the repurchase of Notes
91
pursuant to this covenant. To the extent that the provisions of any securities
laws or regulations conflict with provisions of the Indenture, the Company
will comply with the applicable securities laws and regulations and will not
be deemed to have breached its obligations described in the Indenture by
virtue thereof.
The occurrence of certain of the events that would constitute a Change of
Control would constitute a default under the Senior Credit Agreement. Future
Senior Indebtedness of Holdings, the Company and its Subsidiaries may also
contain prohibitions of certain events that would constitute a Change of
Control or require such Senior Indebtedness to be repurchased upon a Change of
Control. Moreover, the exercise by the holders of their right to require the
Company to repurchase the Notes could cause a default under such Senior
Indebtedness, even if the Change of Control itself does not, due to the
financial effect of such repurchase on the Company. Finally, the Company's
ability to pay cash to the holders upon a repurchase may be limited by the
Company's then existing financial resources. There can be no assurance that
sufficient funds will be available when necessary to make any required
repurchases. Even if sufficient funds were otherwise available, the terms of
the Senior Credit Agreement will (and other Senior Indebtedness may) prohibit
the Company's prepayment of Notes prior to their scheduled maturity.
Consequently, if the Company is not able to prepay the Bank Indebtedness and
any other Senior Indebtedness containing similar restrictions or obtain
requisite consents, as described above, the Company will be unable to fulfill
its repurchase obligations if holders of Notes exercise their repurchase
rights following a Change of Control, thereby resulting in a default under the
Indenture.
The Change of Control provisions described above may deter certain mergers,
tender offers and other takeover attempts involving the Company by increasing
the capital required to effectuate such transactions. The definition of
"Change of Control" includes a disposition of all or substantially all of the
property and assets of the Company and its Restricted Subsidiaries. With
respect to the disposition of property or assets, the phrase "all or
substantially all" as used in the Indenture varies according to the facts and
circumstances of the subject transaction, has no clearly established meaning
under New York law (which is the choice of law under the Indenture) and is
subject to judicial interpretation. Accordingly, in certain circumstances
there may be a degree of uncertainty in ascertaining whether a particular
transaction would involve a disposition of "all or substantially all" of the
property or assets of a Person, and therefore it may be unclear as to whether
a Change of Control has occurred and whether the Company is required to make
an offer to repurchase the Notes as described above.
CERTAIN COVENANTS
The Indenture contains certain covenants including, among others, the
following:
Limitation on Indebtedness. (a) The Company will not, and will not permit
any of its Restricted Subsidiaries to, Incur any Indebtedness; provided,
however, that the Company and its Restricted Subsidiaries which are Subsidiary
Guarantors may Incur Indebtedness if on the date thereof, after giving pro
forma effect to the incurrence of such Indebtedness, the Leverage Ratio for
the Company and its Restricted Subsidiaries is less than (i) 6.50 to 1.00, if
such Indebtedness is Incurred on or prior to the second anniversary of the
Issue Date, and (ii) 6.00 to 1.00, if such Indebtedness is Incurred
thereafter.
(b) Notwithstanding the foregoing paragraph (a), the Company and its
Restricted Subsidiaries may Incur the following Indebtedness: (i) Indebtedness
Incurred pursuant to the Senior Credit Agreement of (x) up to $210.0 million
in term loan borrowings outstanding at any time and (y) up to $60.0 million in
revolving credit borrowings outstanding at any time; (ii) the Subsidiary
Guarantees and Guarantees of Indebtedness Incurred pursuant to paragraph (a)
or clause (i) of this paragraph (b); (iii) Indebtedness of the Company owing
to and held by any Wholly-Owned Subsidiary or Indebtedness of a Restricted
Subsidiary owing to and held by the Company or any Wholly-Owned Subsidiary;
provided,
92
however, that any subsequent issuance or transfer of any Capital Stock or any
other event which results in any such Wholly-Owned Subsidiary ceasing to be a
Wholly-Owned Subsidiary or any subsequent transfer of any such Indebtedness
(except to the Company or a Wholly-Owned Subsidiary) will be deemed, in each
case, to constitute the Incurrence of such Indebtedness by the issuer thereof;
(iv) Indebtedness represented by (x) $150.0 million aggregate principal amount
of the Notes, (y) any Indebtedness (other than the Indebtedness described in
clauses (i), (ii) and (iii)) outstanding on the Issue Date and (z) any
Refinancing Indebtedness Incurred in respect of any Indebtedness described in
this clause (iv) or clause (v) or Incurred pursuant to paragraph (a) above;
(v) Indebtedness of a Restricted Subsidiary Incurred and outstanding on the
date on which such Restricted Subsidiary was acquired by the Company;
provided, however, that at the time such Restricted Subsidiary is acquired by
the Company, the Company would have been able to Incur $1.00 of additional
Indebtedness pursuant to paragraph (a) above after giving effect to the
Incurrence of such Indebtedness pursuant to this clause (v); (vi) Indebtedness
under Currency Agreements and Interest Rate Agreements; provided, however,
that in the case of Currency Agreements and Interest Rate Agreements, such
Currency Agreements and Interest Rate Agreements are entered into for bona
fide hedging purposes of the Company or its Restricted Subsidiaries (as
determined in good faith by the Board of Directors or senior management of the
Company) and correspond in terms of notional amount, duration, currencies and
interest rates, as applicable, to Indebtedness of the Company or its
Restricted Subsidiaries Incurred without violation of the Indenture or to
business transactions of the Company or its Restricted Subsidiaries on
customary terms entered into in the ordinary course of business; and (vii)
Indebtedness (other than Indebtedness described in clauses (i)-(vi)) in a
principal amount which, when taken together with the principal amount of all
other Indebtedness Incurred pursuant to this clause (vii) and then
outstanding, will not exceed $20.0 million.
(c) Neither the Company nor any Restricted Subsidiary will Incur any
Indebtedness under paragraph (b) above if the proceeds thereof are used,
directly or indirectly, to refinance any Subordinated Obligations of the
Company unless such Indebtedness will be subordinated to the Notes to at least
the same extent as such Subordinated Obligations. No Subsidiary Guarantor will
Incur any Indebtedness under paragraph (b) above if the proceeds thereof are
used, directly or indirectly, to refinance any Guarantor Subordinated
Obligations of such Subsidiary Guarantor unless such Indebtedness will be
subordinated to the obligations of such Subsidiary Guarantor under its
Subsidiary Guarantee to at least the same extent as such Guarantor
Subordinated Obligations.
(d) For purposes of determining compliance with, and the outstanding
principal amount of any particular Indebtedness Incurred pursuant to and in
compliance with, this covenant, in the event that Indebtedness meets the
criteria of more than one of the types of Indebtedness described in paragraph
(b) above, the Company, in its sole discretion, will classify such item of
Indebtedness and only be required to include the amount and type of such
Indebtedness in one of such clauses.
(e) The Company will not permit any Unrestricted Subsidiary to Incur any
Indebtedness other than Non-Recourse Debt.
Limitation on Layering. The Company will not Incur any Indebtedness if such
Indebtedness is subordinate or junior in ranking in any respect to any Senior
Indebtedness unless such Indebtedness is Senior Subordinated Indebtedness or
is contractually subordinated in right of payment to Senior Subordinated
Indebtedness. No Subsidiary Guarantor will Incur any Indebtedness if such
Indebtedness is contractually subordinate or junior in ranking in any respect
to any Guarantor Senior Indebtedness of such Subsidiary Guarantor unless such
Indebtedness is Guarantor Senior Subordinated Indebtedness of such Subsidiary
Guarantor or is contractually subordinated in right of payment to Guarantor
Senior Subordinated Indebtedness of such Subsidiary Guarantor.
Limitation on Restricted Payments. (a) The Company will not, and will not
permit any of its Restricted Subsidiaries, directly or indirectly, to (i)
declare or pay any dividend or make any distribution
93
on or in respect of its Capital Stock (including any payment in connection
with any merger or consolidation involving the Company or any of its
Restricted Subsidiaries) except (A) dividends or distributions payable in its
Capital Stock (other than Disqualified Stock) or in options, warrants or other
rights to purchase such Capital Stock and (B) dividends or distributions
payable to the Company or a Restricted Subsidiary of the Company (and if such
Restricted Subsidiary is not a Wholly-Owned Subsidiary, to its other holders
of Capital Stock on a pro rata basis), (ii) purchase, redeem, retire or
otherwise acquire for value any Capital Stock of the Company held by Persons
other than a Restricted Subsidiary of the Company or any Capital Stock of a
Restricted Subsidiary of the Company held by any Affiliate of the Company,
other than another Restricted Subsidiary (in either case, other than in
exchange for its Capital Stock (other than Disqualified Stock)), (iii)
purchase, repurchase, redeem, defease or otherwise acquire or retire for
value, prior to scheduled maturity, scheduled repayment or scheduled sinking
fund payment, any Subordinated Obligations (other than the purchase,
repurchase or other acquisition of Subordinated Obligations purchased in
anticipation of satisfying a sinking fund obligation, principal installment or
final maturity, in each case due within one year of the date of purchase,
repurchase or acquisition) or (iv) make any Investment (other than a Permitted
Investment) in any Person (any such dividend, distribution, purchase,
redemption, repurchase, defeasance, other acquisition, retirement or
Investment being herein referred to in clauses (i) through (iv) as a
"Restricted Payment"), if at the time the Company or such Restricted
Subsidiary makes such Restricted Payment: (1) a Default shall have occurred
and be continuing (or would result therefrom); or (2) the Company is not able
to Incur an additional $1.00 of Indebtedness pursuant to paragraph (a) under
"Limitation on Indebtedness"; or (3) the aggregate amount of such Restricted
Payment and all other Restricted Payments declared or made subsequent to the
Issue Date would exceed the sum of: (A) (i) Consolidated EBITDA accrued during
the period (treated as one accounting period) from the Issue Date to the end
of the most recent fiscal quarter ending prior to the date of such Restricted
Payment as to which financial results are available (or, in case such
Consolidated EBITDA is a deficit, minus 100% of such deficit) less (ii) 150%
of Consolidated Interest Expense for such period; (B) the aggregate Net Cash
Proceeds received by the Company from the issue or sale of its Capital Stock
(other than Disqualified Stock) or other capital contributions subsequent to
the Issue Date (other than net proceeds to the extent (x) used to redeem Notes
or (y) received from an issuance or sale of such Capital Stock to a Subsidiary
of the Company or an employee stock ownership plan or similar trust to the
extent such sale to an employee stock ownership plan or similar trust is
financed by loans from or guaranteed by the Company or any Restricted
Subsidiary unless such loans have been repaid with cash on or prior to the
date of determination); (C) the amount by which Indebtedness of the Company is
reduced on the Company's balance sheet upon the conversion or exchange (other
than by a Subsidiary of the Company) subsequent to the Issue Date of any
Indebtedness of the Company convertible or exchangeable for Capital Stock of
the Company (less the amount of any cash, or other property, distributed by
the Company upon such conversion or exchange); and (D) the amount equal to the
net reduction in Investments (other than Permitted Investments) made by the
Company or any of its Restricted Subsidiaries in any Person resulting from (i)
repurchases or redemptions of such Investments by such Person, proceeds
realized upon the sale of such Investment to an unaffiliated purchaser,
repayments of loans or advances or other transfers of assets as a return of
capital or similar payment (excluding by way of dividend or distribution) by
such Person to the Company or any Restricted Subsidiary of the Company or (ii)
the redesignation of Unrestricted Subsidiaries as Restricted Subsidiaries
(valued in each case as provided in the definition of "Investment") not to
exceed, in the case of any Unrestricted Subsidiary, the amount of Investments
(excluding Permitted Investments) previously made by the Company or any
Restricted Subsidiary in such Unrestricted Subsidiary, which amount was
included in the calculation of the amount of Restricted Payments; provided,
however, that no amount will be included under this clause (D) to the extent
it is already included in Consolidated Net Income.
(b) The provisions of paragraph (a) will not prohibit: (i) any purchase or
redemption of Capital Stock or Subordinated Obligations of the Company made by
exchange for, or out of the proceeds of
94
the substantially concurrent sale of, Capital Stock of the Company (other than
Disqualified Stock and other than Capital Stock issued or sold to a Subsidiary
or an employee stock ownership plan or similar trust to the extent such sale
to an employee stock ownership plan or similar trust is financed by loans from
or guaranteed by the Company or any Restricted Subsidiary unless such loans
have been repaid with cash on or prior to the date of determination);
provided, however, that (A) such purchase or redemption will be excluded in
subsequent calculations of the amount of Restricted Payments and (B) the Net
Cash Proceeds from such sale will be excluded from clause (3) (B) of paragraph
(a); (ii) any purchase or redemption of Subordinated Obligations of the
Company made by exchange for, or out of the proceeds of the substantially
concurrent sale of, Subordinated Obligations of the Company; provided,
however, that such purchase or redemption will be excluded in subsequent
calculations of the amount of Restricted Payments; (iii) any purchase or
redemption of Subordinated Obligations from Net Available Cash to the extent
permitted under "Limitation on Sales of Assets and Subsidiary Stock" below;
provided, however, that such purchase or redemption will be excluded in
subsequent calculations of the amount of Restricted Payments; (iv) dividends
paid within 60 days after the date of declaration if at such date of
declaration such dividend would have complied with this provision; provided,
however, that such dividends will be included in subsequent calculations of
the amount of Restricted Payments; (v) cash dividends to Holdings for the
purpose of, and in amounts equal to, amounts required to permit Holdings (A)
to redeem or repurchase Capital Stock of Holdings (or pay dividends to AHI
Advanstar for the purpose of redeeming or repurchasing membership interests in
AHI Advanstar pursuant to the operating agreement of AHI Advanstar) from
existing or former employees or management of Holdings, the Company or any
Subsidiary or their assigns, estates or heirs, in each case in connection with
the repurchase provisions under employee stock option or stock purchase
agreements or other agreements to compensate management employees provided,
however, that such dividends will be included in subsequent calculations of
the amount of Restricted Payments; (B) to make loans or advances to employees
or directors of the Company or any Subsidiary the proceeds of which are used
to purchase Capital Stock of Holdings or membership interests in AHI Advanstar
LLC; provided, however, that such dividends will be included in subsequent
calculations of the amount of Restricted Payments; (C) to pay any Federal,
state or local income taxes to the extent that such income taxes are
attributable to the income of the Company and its Subsidiaries, pay franchise
taxes and other fees required to maintain its legal existence, corporate
overhead expenses Incurred in the ordinary course of business, and salaries or
other compensation of employees who perform services for both Holdings and the
Company; provided, however, that such dividends will be excluded in subsequent
calculations of the amount of Restricted Payments and (D) so long as no
Default or Event of Default shall have occurred and be continuing, in an
amount not to exceed $100,000 in any fiscal year to enable Holdings to make
payments to holders of its Capital Stock in lieu of the issuance of fractional
shares of its Capital Stock; provided, however, that such dividends will be
excluded in subsequent calculations of the amount of Restricted Payments;
provided further, however, that the aggregate amount of dividends paid to
Holdings pursuant to this clause (v) shall not exceed $3.0 million in any
fiscal year; and (vi) repurchases of Capital Stock deemed to occur upon the
exercise of stock options if such Capital Stock represents a portion of the
exercise price hereof; provided, however, that such repurchases will be
excluded from subsequent calculations of the amount of Restricted Payments.
Limitation on Liens. The Company will not, and will not permit any of its
Restricted Subsidiaries to, directly or indirectly, create, Incur or suffer to
exist any Lien (other than Permitted Liens and Liens securing Senior
Indebtedness and Guarantor Senior Indebtedness) upon any of its property or
assets (including Capital Stock), whether owned on the date of the Indenture
or thereafter acquired, securing any Indebtedness, unless contemporaneously
therewith effective provision is made to secure the Indebtedness due under the
Indenture and the Notes or, in respect of Liens on any Restricted Subsidiary's
property or assets, any Subsidiary Guarantee of such Restricted Subsidiary,
equally and ratably with (or prior to in the case of Liens with respect to
Subordinated Obligations) the Indebtedness secured by such Lien for so long as
such Indebtedness is so secured.
95
Limitation on Restrictions on Distributions from Restricted
Subsidiaries. The Company will not, and will not permit any Restricted
Subsidiary to, create or otherwise cause or permit to exist or become
effective any consensual encumbrance or consensual restriction on the ability
of any Restricted Subsidiary to (i) pay dividends or make any other
distributions on its Capital Stock or pay any Indebtedness or other
obligations owed to the Company, (ii) make any loans or advances to the
Company or (iii) transfer any of its property or assets to the Company, except
(a) any encumbrance or restriction pursuant to an agreement in effect at or
entered into on the date of the Indenture (including, without limitation, the
Senior Credit Agreement); (b) any encumbrance or restriction with respect to a
Restricted Subsidiary pursuant to an agreement relating to any Indebtedness
Incurred by a Restricted Subsidiary on or prior to the date on which such
Restricted Subsidiary was acquired by the Company (other than Indebtedness
Incurred as consideration in, or to provide all or any portion of the funds
utilized to consummate, the transaction or series of related transactions
pursuant to which such Restricted Subsidiary became a Restricted Subsidiary or
was acquired by the Company) and outstanding on such date; (c) any encumbrance
or restriction with respect to a Restricted Subsidiary pursuant to an
agreement effecting a refinancing of Indebtedness Incurred pursuant to an
agreement referred to in clause (a) or (b) of this covenant or this clause (c)
or contained in any amendment to an agreement referred to in clause (a) or (b)
of this covenant or this clause (c); provided, however, that the encumbrances
and restrictions with respect to such Restricted Subsidiary contained in any
such agreement or amendment are no less favorable to the Holders of the Notes
than encumbrances and restrictions contained in such agreements; (d) in the
case of clause (iii) above, any encumbrance or restriction (A) that restricts
in a customary manner the subletting, assignment or transfer of any property
or asset that is subject to a lease, license or similar contract, or the
assignment or transfer of any such lease, license or other contract, (B) by
virtue of any transfer of, agreement to transfer, option or right with respect
to, or Lien on, any property or assets of the Company or any Restricted
Subsidiary not otherwise prohibited by the Indenture, (C) contained in
mortgages, pledges or other security agreements securing Indebtedness of a
Restricted Subsidiary to the extent such encumbrance or restrictions restrict
the transfer of the property subject to such mortgages, pledges or other
security agreements or (D) pursuant to customary provisions restricting
dispositions of real property interests set forth in any reciprocal easement
agreements of the Company or any Restricted Subsidiary; (e) any restriction
with respect to a Restricted Subsidiary (or any of its property or assets)
imposed pursuant to an agreement entered into for the direct or indirect sale
or disposition of all or substantially all the Capital Stock or assets of such
Restricted Subsidiary (or the property or assets that are subject to such
restriction) pending the closing of such sale or disposition; and (f)
encumbrances or restrictions arising or existing by reason of applicable law.
Limitation on Sales of Assets and Subsidiary Stock. (a) The Company will
not, and will not permit any of its Restricted Subsidiaries to, make any Asset
Disposition unless (i) the Company or such Restricted Subsidiary receives
consideration at the time of such Asset Disposition at least equal to the fair
market value, as determined in good faith by the Board of Directors (including
as to the value of all non-cash consideration), of the shares and assets
subject to such Asset Disposition and (ii) at least 85% of the consideration
thereof received by the Company or such Restricted Subsidiary is in the form
of cash or Cash Equivalents.
With respect to any Asset Disposition occurring on or after the Issue Date
from which the Company or any Restricted Subsidiary receives Net Available
Cash, the Company or such Restricted Subsidiary shall apply an amount equal to
100% of the Net Available Cash from such Asset Disposition at its election, to
either (i) prepay, repay or purchase Senior Indebtedness or Indebtedness
(other than any Preferred Stock) of a Wholly Owned Subsidiary (in each case
other than Indebtedness owed to the Company or an Affiliate of the Company)
within 365 days from the later of the date of such Asset Disposition or the
receipt of such Net Available Cash; (ii) invest in Additional Assets within
365 days from the later of the date of such Asset Disposition or the receipt
of such Net Available Cash; or (iii) make an offer pursuant to paragraph (b)
to purchase the Notes and other Senior Subordinated
96
Indebtedness outstanding with similar provisions requiring the Company to make
an offer to purchase such Indebtedness with the proceeds from any Asset
Disposition ("Pari Passu Notes") at 100% of the principal amount thereof (or
100% of the accreted value of such Pari Passu Notes so tendered if such Pari
Passu Notes were issued at a discount) plus accrued and unpaid interest, if
any, to the date of purchase; provided, however, that, in connection with any
prepayment, repayment or purchase of Indebtedness pursuant to clause (i)
above, the Company or such Restricted Subsidiary will retire such Indebtedness
and will cause the related loan commitment (if any), unless such commitment is
for the provision of a revolving credit facility, to be permanently reduced in
an amount equal to the principal amount so prepaid, repaid or purchased.
Notwithstanding the foregoing provisions, the Company and its Restricted
Subsidiaries will not be required to apply any Net Available Cash in
accordance herewith except to the extent that the aggregate Net Available Cash
from all Asset Dispositions which are not applied in accordance with this
covenant exceed $1.0 million. Any Net Available Cash from an Asset Disposition
that is not invested or applied as provided and within the time period set
forth in clauses (i) and (ii) of the first sentence of this paragraph will be
deemed to constitute "Excess Proceeds."
For the purposes of this covenant and for no other purpose, the following
will be deemed to be cash: (x) the assumption by the transferee of Senior
Indebtedness of the Company or Indebtedness of any Restricted Subsidiary of
the Company and the release of the Company or such Restricted Subsidiary from
all liability on such Senior Indebtedness or Indebtedness in connection with
such Asset Disposition (in which case the Company will, without further
action, be deemed to have applied such assumed Indebtedness in accordance with
clause (i) of the preceding paragraph); (y) securities received by the Company
or any Restricted Subsidiary of the Company from the transferee that are
promptly converted by the Company or such Restricted Subsidiary into cash; and
(z) the fair market value, as determined by the Board of Directors of the
Company in good faith, of any Designated Noncash Consideration received by the
Company or any of its Restricted Subsidiaries in any Asset Disposition, taken
together with the fair market value, as determined by the Board of Directors
of the Company in good faith, of all other Designated Noncash Consideration
received pursuant to this clause (z) that is at that time outstanding, not to
exceed $25.0 million at the time of the receipt of such Designated Noncash
Consideration (with the fair market value of each item of Designated Noncash
Consideration being measured at the time received and without giving effect to
subsequent changes in value), in which case such Designated Noncash
Consideration shall not constitute Net Available Cash.
(b) When the aggregate amount of Excess Proceeds exceeds $5.0 million (with
lesser amounts to be carried forward for purposes of determining whether an
Offer (as defined) is required with respect to the Excess Proceeds from any
subsequent Asset Disposition), the Company will be required to apply such
Excess Proceeds to the repayment of the Notes and any Pari Passu Notes as
follows: (A) the Company will make an offer to purchase (an "Offer") within
ten days of such time from all holders of the Notes in accordance with the
procedures set forth in the Indenture in the maximum principal amount
(expressed as a multiple of $1,000) of Notes that may be purchased out of an
amount (the "Note Amount") equal to the product of such Excess Proceeds
multiplied by a fraction, the numerator of which is the outstanding principal
amount of the Notes and the denominator of which is the sum of the outstanding
principal amount of the Notes and the outstanding principal amount (or
accreted value, as the case may be) of the Pari Passu Notes at a purchase
price of 100% of the principal amount thereof plus accrued and unpaid
interest, if any, to the date of purchase and (B) the Company will make an
offer to purchase any Pari Passu Notes (a "Pari Passu Offer") in an amount
equal to the excess of the Excess Proceeds over the Note Amount at a purchase
price of 100% of the principal amount (or accreted value, as the case may be)
thereof plus accrued and unpaid interest, if any, to the date of purchase in
accordance with the procedures (including prorating in the event of
oversubscription) set forth in the documentation governing such Pari Passu
Notes with respect to the Pari Passu Offer. If the aggregate purchase price of
the Notes and Pari Passu Notes tendered pursuant to the Offer and the Pari
Passu Offer is less than the Excess Proceeds, the remaining Excess Proceeds
will be available to the Company to fund other corporate purposes not
otherwise prohibited by the Indenture.
97
(c) The Company will comply, to the extent applicable, with the requirements
of Section 14(e) of the Exchange Act and any other securities laws or
regulations in connection with the repurchase of Notes pursuant to the
Indenture. To the extent that the provisions of any securities laws or
regulations conflict with provisions of this covenant, the Company will comply
with the applicable securities laws and regulations and will not be deemed to
have breached its obligations under the Indenture by virtue thereof.
Limitation on Asset Swaps. The Company will not, and will not permit any
Restricted Subsidiary to, engage in any Asset Swaps, unless: (i) at the time
of entering into such Asset Swap and immediately after giving effect to such
Asset Swap, no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof; (ii) in the event such
Asset Swap involves the transfer by the Company or any Restricted Subsidiary
of assets having an aggregate fair market value, as determined by the Board of
Directors of the Company in good faith, in excess of $1.0 million, the terms
of such Asset Swap have been approved by a majority of the members of the
Board of Directors of the Company and (iii) in the event such Asset Swap
involves an aggregate amount in excess of $10.0 million, the Company has
received a written opinion from an independent investment banking firm of
nationally recognized standing that such Asset Swap is fair to the Company or
such Restricted Subsidiary, as the case may be, from a financial point of
view.
Limitation on Affiliate Transactions. (a) The Company will not, and will not
permit any of its Restricted Subsidiaries to, directly or indirectly, enter
into or conduct any transaction (including the purchase, sale, lease or
exchange of any property or the rendering of any service) with any Affiliate
of the Company (an "Affiliate Transaction") unless: (i) the terms of such
Affiliate Transaction are no less favorable to the Company or such Restricted
Subsidiary, as the case may be, than those that could be obtained at the time
of such transaction in arm's-length dealings with a Person who is not such an
Affiliate; (ii) in the event such Affiliate Transaction involves an aggregate
amount in excess of $1.0 million, the terms of such transaction have been
approved by a majority of the members of the Board of Directors of the Company
and by a majority of the members of such Board having no personal stake in
such transaction, if any (and such majority or majorities, as the case may be,
determines that such Affiliate Transaction satisfies the criteria in (i)
above); and (iii) in the event such Affiliate Transaction involves an
aggregate amount in excess of $5.0 million, the Company has received a written
opinion from an independent investment banking firm of nationally recognized
standing that such Affiliate Transaction is not materially less favorable than
those that might reasonably have been obtained in a comparable transaction at
such time on an arm's-length basis from a Person that is not an Affiliate;
provided, however, that this clause (iii) will not apply to any Affiliate
Transaction with any joint venture or similar entity in which the Permitted
Holders do not have any direct or indirect interests other than the interests
of the Company and its Restricted Subsidiaries in such joint venture or
similar entity.
(b) The foregoing paragraph (a) will not apply to (i) any Restricted Payment
permitted to be made pursuant to the covenant described under "Limitation on
Restricted Payments," (ii) any issuance of (A) securities to any of the
Permitted Holders or (B) securities, or other payments, awards or grants in
cash, securities or otherwise pursuant to, or the funding of, employment
arrangements, stock options and stock ownership plans approved by the Board of
Directors of the Company, (iii) loans or advances to employees in the ordinary
course of business of the Company or any of its Restricted Subsidiaries or
(iv) any transaction between the Company and a Wholly-Owned Subsidiary or
between Wholly-Owned Subsidiaries.
Limitation on Dispositions of Capital Stock of Restricted Subsidiaries. The
Company (i) will not, and will not permit any Restricted Subsidiary of the
Company to, transfer, convey, sell, lease or otherwise dispose of any Capital
Stock of any Restricted Subsidiary to any Person (other than the Company or a
Wholly Owned Subsidiary), unless (A) such transfer, conveyance, sale, lease or
other disposition is a sale of the common stock of such Restricted Subsidiary
and, after giving effect to the consummation thereof, the Company owns (x)
more than 50% of the outstanding common stock of
98
such Restricted Subsidiary or (y) none of the outstanding common stock of such
Restricted Subsidiary and (B) the cash net proceeds from such transfer,
conveyance, sale, lease or other disposition are applied in accordance with
the covenant described above under "Limitation on Sales of Assets and
Subsidiary Stock"; and (ii) will not permit any Restricted Subsidiary to issue
any of its Capital Stock (other than, if necessary, shares of its Capital
Stock constituting directors' qualifying shares) to any Person other than to
the Company or a Wholly-Owned Subsidiary, unless such issuance is an issuance
of the common stock of such Restricted Subsidiary and, after giving effect to
the consummation thereof, the Company owns (x) more than 50% of the
outstanding common stock of such Restricted Subsidiary or (y) none of the
outstanding common stock of such Restricted Subsidiary.
SEC Reports. Notwithstanding that the Company may not be subject to the
reporting requirements of Section 13 or 15(d) of the Exchange Act, to the
extent permitted by the Exchange Act, the Company will file with the
Commission, and provide, within 15 days after the Company is required to file
the same with the Commission, the Trustee and the holders of the Notes with
the annual reports and the information, documents and other reports (or copies
of such portions of any of the foregoing as the Commission may by rules and
regulations prescribe) that are specified in Sections 13 and 15(d) of the
Exchange Act. In the event that the Company is not permitted to file such
reports, documents and information with the Commission pursuant to the
Exchange Act, the Company will nevertheless deliver such Exchange Act
information to the Trustee and the holders of the Notes as if the Company were
subject to the reporting requirements of Section 13 or 15(d) of the Exchange
Act.
Merger and Consolidation. The Company will not consolidate with or merge
with or into, or convey, transfer or lease all or substantially all its assets
to, any Person, unless: (i) the resulting, surviving or transferee Person (the
"Successor Company") will be a corporation, partnership, trust, limited
liability company or other similar entity organized and existing under the
laws of the United States of America, any State thereof or the District of
Columbia and the Successor Company (if not the Company) will expressly assume,
by supplemental indenture, executed and delivered to the Trustee, in form
satisfactory to the Trustee, all the obligations of the Company under the
Notes and the Indenture; (ii) immediately after giving effect to such
transaction (and treating any Indebtedness that becomes an obligation of the
Successor Company or any Subsidiary of the Successor Company as a result of
such transaction as having been Incurred by the Successor Company or such
Subsidiary at the time of such transaction), no Default or Event of Default
shall have occurred and be continuing; (iii) immediately after giving effect
to such transaction, the Successor Company would be able to Incur at least an
additional $1.00 of Indebtedness pursuant to paragraph (a) of "Limitation on
Indebtedness"; and (iv) the Company has delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that such consolidation,
merger or transfer and such supplemental indenture (if any) comply with the
Indenture.
The Successor Company will succeed to, and be substituted for, and may
exercise every right and power of, the Company under the Indenture, but, in
the case of a lease of all or substantially all its assets, the Company will
not be released from the obligation to pay the principal of and interest on
the Notes.
Notwithstanding the foregoing clauses (ii) and (iii), (i) any Restricted
Subsidiary of the Company may consolidate with, merge into or transfer all or
part of its properties and assets to the Company and (ii) the Company may
merge with an Affiliate incorporated solely for the purpose of reincorporating
the Company in another jurisdiction to realize tax or other benefits.
Future Subsidiary Guarantors. After the Issue Date, the Company will cause
each Restricted Subsidiary (other than a Foreign Subsidiary) created or
acquired by the Company to execute and deliver to the Trustee a Subsidiary
Guarantee pursuant to which such Subsidiary Guarantor will unconditionally
Guarantee, on a joint and several basis, the full and prompt payment of the
principal of, premium, if any and interest on the Notes on a senior
subordinated basis.
99
Limitation on Lines of Business. The Company will not, nor will it permit
any of its Subsidiaries to, engage in any line of business, other than a
Related Business.
EVENTS OF DEFAULT
Each of the following constitutes an Event of Default under the Indenture:
(i) a default in any payment of interest on any Note when due, continued for
30 days, whether or not such payment is prohibited by the provisions described
under "Ranking and Subordination" above, (ii) a default in the payment of
principal of any Note when due at its Stated Maturity, upon optional
redemption, upon required repurchase, upon declaration or otherwise, whether
or not such payment is prohibited by the provisions described under "Ranking
and Subordination" above, (iii) the failure by the Company to comply with its
obligations under "Certain Covenants--Merger and Consolidation" above, (iv)
failure by the Company to comply for 30 days after notice with any of its
obligations under the covenants described under "Change of Control" above or
under covenants described under "Certain Covenants" above (in each case, other
than a failure to purchase Notes which will constitute an Event of Default
under clause (ii) above), (v) the failure by the Company to comply for 60 days
after notice with its other agreements contained in the Indenture, (vi)
Indebtedness of the Company or any Restricted Subsidiary is not paid within
any applicable grace period after final maturity or is accelerated by the
holders thereof because of a default and the total amount of such Indebtedness
unpaid or accelerated exceeds $5.0 million (the "cross acceleration
provision"), (vii) certain events of bankruptcy, insolvency or reorganization
of the Company or a Significant Subsidiary (the "bankruptcy provisions"),
(viii) any judgment or decree for the payment of money in excess of $5.0
million is rendered against the Company or a Significant Subsidiary and such
judgment or decree remains undischarged or unstayed for a period of 60 days
after such judgment becomes final and non-appealable (the "judgment default
provision") or (ix) any Note Guarantee ceases to be in full force and effect
(except as contemplated by the terms of the Indenture) or any Guarantor denies
or disaffirms its obligations under the Indenture or its Note Guarantee.
However, a default under clauses (iv) and (v) will not constitute an Event of
Default until the Trustee or the holders of 25% in principal amount of the
outstanding Notes notify the Company of the default and the Company does not
cure such default within the time specified in clauses (iv) and (v) hereof
after receipt of such notice.
If an Event of Default occurs and is continuing, the Trustee or the holders
of at least 25% in principal amount of the outstanding Notes by notice to the
Company and the Trustee may declare the principal of and accrued and unpaid
interest, if any, on all the Notes to be due and payable. Upon such a
declaration, such principal and accrued and unpaid interest will be due and
payable immediately. If an Event of Default relating to certain events of
bankruptcy, insolvency or reorganization of the Company occurs and is
continuing, the principal of and accrued and unpaid interest on all the Notes
will become and be immediately due and payable without any declaration or
other act on the part of the Trustee or any holders. Under certain
circumstances, the holders of a majority in principal amount of the
outstanding Notes may rescind any such acceleration with respect to the Notes
and its consequences.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, if an Event of Default occurs and is continuing, the Trustee will be
under no obligation to exercise any of the rights or powers under the
Indenture at the request or direction of any of the holders unless such
holders have offered to the Trustee reasonable indemnity or security against
any loss, liability or expense. Except to enforce the right to receive payment
of principal, premium, if any, or interest when due, no holder may pursue any
remedy with respect to the Indenture or the Notes unless (i) such holder has
previously given the Trustee notice that an Event of Default is continuing,
(ii) holders of at least 25% in principal amount of the outstanding Notes have
requested the Trustee to pursue the remedy, (iii) such holders have offered
the Trustee reasonable security or indemnity against any loss, liability or
expense, (iv) the Trustee has not complied with such request within 60 days
after the receipt of the
100
request and the offer of security or indemnity and (v) the holders of a
majority in principal amount of the outstanding Notes have not given the
Trustee a direction that, in the opinion of the Trustee, is inconsistent with
such request within such 60-day period. Subject to certain restrictions, the
holders of a majority in principal amount of the outstanding Notes are given
the right to direct the time, method and place of conducting any proceeding
for any remedy available to the Trustee or of exercising any trust or power
conferred on the Trustee. The Trustee, however, may refuse to follow any
direction that conflicts with law or the Indenture or that the Trustee
determines is unduly prejudicial to the rights of any other holder or that
would involve the Trustee in personal liability. Prior to taking any action
under the Indenture, the Trustee will be entitled to indemnification
satisfactory to it in its sole discretion against all losses and expenses
caused by taking or not taking such action.
The Indenture provides that if a Default occurs and is continuing and is
known to the Trustee, the Trustee must mail to each holder notice of the
Default within 90 days after it occurs. Except in the case of a Default in the
payment of principal of, premium, if any, or interest on any Note, the Trustee
may withhold notice if and so long as a committee of its Trust officers in
good faith determines that withholding notice is in the interests of the
Noteholders. In addition, the Company is required to deliver to the Trustee,
within 120 days after the end of each fiscal year, a certificate indicating
whether the signers thereof know of any Default that occurred during the
previous year. The Company also is required to deliver to the Trustee, within
30 days after the occurrence thereof, written notice of any events which would
constitute certain Defaults, their status and what action the Company is
taking or proposes to take in respect thereof.
AMENDMENTS AND WAIVERS
Subject to certain exceptions, the Indenture may be amended with the consent
of the holders of a majority in principal amount of the Notes then outstanding
and any past default or compliance with any provisions may be waived with the
consent of the holders of a majority in principal amount of the Notes then
outstanding. However, without the consent of each holder of an outstanding
Note affected, no amendment may, among other things, (i) reduce the amount of
Notes whose holders must consent to an amendment, (ii) reduce the stated rate
of or extend the stated time for payment of interest on any Note, (iii) reduce
the principal of or extend the Stated Maturity of any Note, (iv) reduce the
premium payable upon the redemption or repurchase of any Note or change the
time at which any Note may be redeemed as described under "Optional
Redemption" above, (v) make any Note payable in money other than that stated
in the Note, (vi) impair the right of any holder to receive payment of
principal of and interest on such holder's Notes on or after the due dates
therefor or to institute suit for the enforcement of any payment on or with
respect to such holder's Notes or (vii) make any change in the amendment
provisions which require each holder's consent or in the waiver provisions.
Without the consent of any holder, the Company, the Guarantors and the
Trustee may amend the Indenture to cure any ambiguity, omission, defect or
inconsistency, to provide for the assumption by a successor corporation,
partnership, trust or limited liability company of the obligations of the
Company under the Indenture, to provide for uncertificated Notes in addition
to or in place of certificated Notes (provided that the uncertificated Notes
are issued in registered form for purposes of Section 163(f) of the Code, or
in a manner such that the uncertificated Notes are described in Section 163(f)
(2) (B) of the Code), to add Guarantees with respect to the Notes, to secure
the Notes, to add to the covenants of the Company for the benefit of the
holders or to surrender any right or power conferred upon the Company, to make
any change that does not adversely affect the rights of any holder or to
comply with any requirement of the Commission in connection with the
qualification of the Indenture under the Trust Indenture Act. However, no
amendment may be made to the subordination provisions of the Indenture that
adversely affects the rights of any holder of Senior Indebtedness then
outstanding unless the holders of such Senior Indebtedness (or any group or
representative thereof authorized to give a consent) consent to such change.
101
The consent of the holders is not necessary under the Indenture to approve
the particular form of any proposed amendment. It is sufficient if such
consent approves the substance of the proposed amendment. After an amendment
under the Indenture becomes effective, the Company is required to mail to the
holders a notice briefly describing such amendment. However, the failure to
give such notice to all the holders, or any defect therein, will not impair or
affect the validity of the amendment.
DEFEASANCE
The Company at any time may terminate all its obligations under the Notes
and the Indenture ("legal defeasance"), except for certain obligations,
including those respecting the defeasance trust and obligations to register
the transfer or exchange of the Notes, to replace mutilated, destroyed, lost
or stolen Notes and to maintain a registrar and paying agent in respect of the
Notes, and after giving effect to such legal defeasance, any omission to
comply with such obligations shall no longer constitute a Default or Event of
Default with respect to the Notes. If the Company exercises its legal
defeasance option, the Note Guarantees in effect at such time will terminate.
The Company at any time may terminate its obligations under covenants
described under "Certain Covenants" (other than "Merger and Consolidation"),
the operation of the cross acceleration provision, the bankruptcy provisions
with respect to Significant Subsidiaries, the judgment default provision and
the Note Guarantee provision described under "Events of Default" above and the
limitations contained in clauses (iii) and (iv) under "Certain Covenants--
Merger and Consolidation" above ("covenant defeasance") and thereafter any
omission to comply with such obligations shall no longer constitute a Default
or Event of Default with respect to the Notes.
The Company may exercise its legal defeasance option notwithstanding its
prior exercise of its covenant defeasance option. If the Company exercises its
legal defeasance option, payment of the Notes may not be accelerated because
of any event that, in the absence of such legal defeasance, would have
constituted an Event of Default with respect thereto. If the Company exercises
its covenant defeasance option, the events specified in clause (iv), (vi),
(vii) (with respect only to Significant Subsidiaries), (viii) or (ix) under
"Events of Default" above will no longer constitute an Event of Default, and
payment of the Notes may not be accelerated because of the occurrence of any
such event or because of the failure of the Company to comply with clause
(iii) or (iv) under "Certain Covenants--Merger and Consolidation" above.
In order to exercise either defeasance option, the Company must irrevocably
deposit in trust (the "defeasance trust") with the Trustee money or U.S.
Government Obligations for the payment of principal, premium, if any, and
interest on the Notes to redemption or maturity, as the case may be, and must
comply with certain other conditions, including delivery to the Trustee of an
Opinion of Counsel to the effect that holders of the Notes will not recognize
income, gain or loss for Federal income tax purposes as a result of such
deposit and defeasance and will be subject to Federal income tax on the same
amount and in the same manner and at the same times as would have been the
case if such deposit and defeasance had not occurred (and, in the case of
legal defeasance only, such Opinion of Counsel must be based on a ruling of
the Internal Revenue Service or other change in applicable Federal income tax
law).
CONCERNING THE TRUSTEE
The Bank of New York is the Trustee under the Indenture and has been
appointed by the Company as Registrar and Paying Agent with regard to the
Notes.
GOVERNING LAW
The Indenture provides that it, the Notes and the Note Guarantees will be
governed by, and construed in accordance with, the laws of the State of New
York without giving effect to applicable principles of conflicts of law to the
extent that the application of the law of another jurisdiction would be
required thereby.
102
CERTAIN DEFINITIONS
"Acquisitions" has the meaning set forth in this Offering Memorandum.
"Additional Assets" means (i) any property or assets (other than
Indebtedness and Capital Stock) to be used by the Company or a Restricted
Subsidiary in a Related Business; (ii) the Capital Stock of a Person that
becomes a Restricted Subsidiary as a result of the acquisition of such Capital
Stock by the Company or a Restricted Subsidiary of the Company; or (iii)
Capital Stock constituting a minority interest in any Person that at such time
is a Restricted Subsidiary of the Company; provided, however, that, in the
case of clauses (ii) and (iii), such Restricted Subsidiary is primarily
engaged in a Related Business.
"Affiliate" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether
through the ownership of voting securities, by contract or otherwise; and the
terms "controlling" and "controlled" have meanings correlative to the
foregoing.
"Asset Disposition" means any sale, lease, transfer, issuance or other
disposition (or series of related sales, leases, transfers, issuances or
dispositions that are part of a common plan) of shares of Capital Stock of a
Restricted Subsidiary (other than directors' qualifying shares), property or
other assets (each referred to for the purposes of this definition as a
"disposition") by the Company or any of its Restricted Subsidiaries (including
any disposition by means of a merger, consolidation or similar transaction)
other than (i) a disposition by a Restricted Subsidiary to the Company or by
the Company or a Restricted Subsidiary to a Wholly-Owned Subsidiary Guarantor,
(ii) the sale of Cash Equivalents in the ordinary course of business, (iii) a
disposition of inventory in the ordinary course of business, (iv) a
disposition of obsolete or worn out equipment or equipment that is no longer
useful in the conduct of the business of the Company and its Restricted
Subsidiaries and that is disposed of in each case in the ordinary course of
business, (v) transactions permitted under "Certain Covenants--Merger and
Consolidation" above, (vi) an Asset Swap effected in compliance with the
"Limitation on Asset Swaps" covenant and (vii) for purposes of "Limitation on
Sales of Assets and Subsidiary Stock" only, a disposition subject to
"Limitation on Restricted Payments."
"Asset Swap" means the execution of a definitive agreement, subject only to
customary closing conditions that the Company in good faith believes will be
satisfied, for a concurrent purchase and sale or exchange of Related Business
Assets, between the Company or any of its Restricted Subsidiaries and another
Person, and the consummation of such purchase and sale or exchange; provided
that any amendment to or waiver of any closing condition which individually or
in the aggregate is material to any Asset Swap shall be deemed to be a new
Asset Swap that must comply with the "Limitation on Asset Swaps" covenant.
"Attributable Indebtedness" in respect of a Sale/Leaseback Transaction
means, as at the time of determination, the present value (discounted at the
interest rate borne by the Notes, compounded semi-annually) of the total
obligations of the lessee for rental payments during the remaining term of the
lease included in such Sale/Leaseback Transaction (including any period for
which such lease has been extended).
"Bank Indebtedness" means any and all amounts, whether outstanding on the
Issue Date or thereafter Incurred, payable by the Company under or in respect
of the Senior Credit Agreement and any related notes, collateral documents,
letters of credit and guarantees and any Interest Rate Agreement entered into
with a Lender (as defined in the Senior Credit Agreement) in connection with
the Senior Credit Agreement, including principal, premium, if any, interest
(including interest accruing
103
on or after the filing of any petition in bankruptcy or for reorganization
relating to the Company at the rate specified therein whether or not a claim
for post filing interest is allowed in such proceedings), fees, charges,
expenses, reimbursement obligations, guarantees and all other amounts payable
thereunder or in respect thereof.
"Board of Directors" means, as to any Person, the board of directors of such
Person or any duly authorized committee thereof.
"Capital Stock" of any Person means any and all shares, interests, rights to
purchase, warrants, options, participations or other equivalents of or
interests in (however designated) equity of such Person, including any
Preferred Stock, but excluding any debt securities convertible into such
equity.
"Capitalized Lease Obligation" means an obligation that is required to be
classified and accounted for as a capitalized lease for financial reporting
purposes in accordance with GAAP, and the amount of Indebtedness represented
by such obligation will be the capitalized amount of such obligation
determined in accordance with GAAP, and the Stated Maturity thereof will be
the date of the last payment of rent or any other amount due under such lease
prior to the first date such lease may be terminated without penalty.
"Cash Equivalents" means (i) securities issued or directly and fully
guaranteed or insured by the United States Government or any agency or
instrumentality thereof, having maturities of not more than one year from the
date of acquisition; (ii) marketable general obligations issued by any state
of the United States of America or any political subdivision of any such state
or any public instrumentality thereof maturing within one year from the date
of acquisition thereof and, at the time of acquisition thereof, having a
credit rating of "A" or better from either Standard & Poor's Ratings Group or
Moody's Investors Service, Inc.; (iii) certificates of deposit, time deposits,
eurodollar time deposits, overnight bank deposits or bankers' acceptances
having maturities of not more than one year from the date of acquisition
thereof issued by any commercial bank the long-term debt of which is rated at
the time of acquisition thereof at least "A" or the equivalent thereof by
Standard & Poor's Rating Group, or "A" or the equivalent thereof by Moody's
Investors Service, Inc., and having capital and surplus in excess of $500
million; (iv) repurchase obligations with a term of not more than seven days
for underlying securities of the types described in clauses (i), (ii) and
(iii) entered into with any bank meeting the qualifications specified in
clause (iii) above; (v) commercial paper rated at the time of acquisition
thereof at least "A-2" or the equivalent thereof by Standard & Poor's Rating
Group or "P-2" or the equivalent thereof by Moody's Investors Service, Inc.,
or carrying an equivalent rating by a nationally recognized rating agency, if
both of the two named rating agencies cease publishing ratings of investments,
and in either case maturing within 270 days after the date of acquisition
thereof; and (vi) interests in any investment company which invests solely in
instruments of the type specified in clauses (i) through (v) above.
"Code" means the Internal Revenue Code of 1986, as amended.
"Consolidated EBITDA" for any period means the Consolidated Net Income for
such period, plus the following to the extent deducted in calculating such
Consolidated Net Income: (i) income tax expense, plus (ii) Consolidated
Interest Expense, plus (iii) depreciation expense, plus (iv) amortization of
intangibles, plus (v) other non-cash charges, including without limitation,
any non-cash charge reflecting compensation expense relating to employee stock
option or similar plans, reducing Consolidated Net Income (excluding any such
non-cash charge to the extent it represents an accrual of or reserve for cash
charges in any future period or amortization of a prepaid cash expense that
was paid in a prior period not included in the calculation), less (vi) non-
cash items increasing Consolidated Net Income (excluding any non-cash item to
the extent it represents the reversal of an accrual of, or a cash reserve for,
anticipated cash charges in any prior period). Notwithstanding the foregoing,
the provision for taxes based on the income or profits of, and the interest,
depreciation and amortization
104
of, a Restricted Subsidiary of a Person will be added to Consolidated Net
Income to compute Consolidated EBITDA of such Person only to the extent (and
in the same proportion) that the net income of such Subsidiary was included in
calculating the Consolidated Net Income of such Person.
"Consolidated Interest Expense" means, for any period, the total interest
expense of the Company and its consolidated Subsidiaries, plus, to the extent
not included in such interest expense, (i) interest expense attributable to
Capitalized Lease Obligations and the interest portion of rent expense
associated with Attributable Indebtedness in respect of the relevant lease
giving rise thereto, determined as if such lease were a capitalized lease in
accordance with GAAP, (ii) amortization of debt discount and debt issuance
cost, (iii) capitalized interest and accrued interest, (iv) non-cash interest
expense, (v) commissions, discounts and other fees and charges owed with
respect to letters of credit and bankers' acceptance financing, (vi) interest
actually paid by the Company or any such Subsidiary under any Guarantee of
Indebtedness or other obligation of any other Person, (vii) net costs
associated with Hedging Obligations (including amortization of fees), (viii)
dividends in respect of all Disqualified Stock of the Company and all
Preferred Stock of Subsidiaries, in each case, held by Persons other than the
Company or a Wholly Owned Subsidiary and (ix) the cash contributions to any
employee stock ownership plan or similar trust to the extent such
contributions are used by such plan or trust to pay interest or fees to any
Person (other than the Company) in connection with Indebtedness Incurred by
such plan or trust; provided, however, that there will be excluded therefrom
any such interest expense of any Unrestricted Subsidiary to the extent the
related Indebtedness is not Guaranteed or paid by the Company or any
Restricted Subsidiary. For purposes of the foregoing, total interest expense
will be determined after giving effect to any net payments made or received by
the Company and its Subsidiaries with respect to Interest Rate Agreements.
Notwithstanding the foregoing, the Consolidated Interest Expense with respect
to any Restricted Subsidiary of the Company that was not a Wholly-Owned
Subsidiary will be included only to the extent (and in the same proportion)
that the net income of such Restricted Subsidiary was included in calculating
Consolidated Net Income.
"Consolidated Net Income" means, for any period, the net income (loss) of
the Company and its consolidated Subsidiaries; provided, however, that there
will be excluded for purposes of calculating Consolidated Net Income: (i) any
net income (loss) of any Person if such Person is not a Restricted Subsidiary,
except that (A) subject to the limitations contained in (iv) below, the
Company's equity in the net income of any such Person for such period will be
included in such Consolidated Net Income up to the aggregate amount of cash
actually distributed by such Person during such period to the Company or a
Restricted Subsidiary as a dividend or other distribution (subject, in the
case of a dividend or other distribution to a Restricted Subsidiary, to the
limitations contained in clause (iii) below) and (B) the Company's equity in a
net loss of any such Person (other than an Unrestricted Subsidiary) for such
period will be included in determining such Consolidated Net Income to the
extent such loss has been funded with cash from the Company or a Restricted
Subsidiary; (ii) any net income (loss) of any Person acquired by the Company
or a Subsidiary in a pooling of interests transaction for any period prior to
the date of such acquisition; (iii) any net income of any Restricted
Subsidiary if such Subsidiary is subject to restrictions, directly or
indirectly, on the payment of dividends or the making of distributions by such
Restricted Subsidiary, directly or indirectly, to the Company, except that (A)
subject to the limitations contained in (iv) below the Company's equity in the
net income of any such Restricted Subsidiary for such period will be included
in such Consolidated Net Income up to the aggregate amount of cash that could
have been distributed by such Restricted Subsidiary during such period to the
Company or another Restricted Subsidiary as a dividend (subject, in the case
of a dividend to another Restricted Subsidiary, to the limitation contained in
this clause) and (B) the Company's equity in a net loss of any such Restricted
Subsidiary for such period will be included in determining such Consolidated
Net Income; (iv) any gain (loss) realized upon the sale or other disposition
of any property, plant or equipment of the Company or its consolidated
Subsidiaries (including pursuant to any Sale/Leaseback Transaction) which is
not sold or otherwise disposed of in the ordinary course of business and any
gain (loss) realized upon the sale or other disposition of any
105
Capital Stock of any Person; (v) any extraordinary gain or loss and (vi) the
cumulative effect of a change in accounting principles.
"Consolidated Tangible Assets" means, as of any date of determination, the
total assets, less goodwill, deferred financing costs and other intangibles
(in each case net of accumulated amortization) shown on the balance sheet of
the Company and its Restricted Subsidiaries as of the most recent date for
which such balance sheet is available, determined on a consolidated basis in
accordance with GAAP.
"Currency Agreement" means in respect of a Person any foreign exchange
contract, currency swap agreement or other similar agreement as to which such
Person is a party or a beneficiary.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Designated Noncash Consideration" means noncash consideration received by
the Company or a Restricted Subsidiary in connection with an Asset Disposition
that is so designated as Designated Noncash Consideration pursuant to an
Officers' Certificate, setting forth the basis of determining the fair market
value thereof, executed by the principal executive officer and the principal
financial officer of the Company; provided, that in determining the aggregate
fair market value of Designated Noncash Consideration that is outstanding from
time to time, there shall be subtracted the aggregate amount of cash or Cash
Equivalents received in connection with a sale of any Designated Noncash
Consideration (which sale shall be deemed an Asset Disposition, and which cash
or Cash Equivalents must be applied in accordance with the "Limitation on
Sales of Assets and Subsidiary Stock" covenant).
"Designated Senior Indebtedness" means (i) the Bank Indebtedness in the case
of the Company and (ii) any other Senior Indebtedness which, at the date of
determination, has an aggregate principal amount outstanding of, or under
which, at the date of determination, the holders thereof are committed to lend
up to, at least $25.0 million and is specifically designated in the instrument
evidencing or governing such Senior Indebtedness as "Designated Senior
Indebtedness" for purposes of the Indenture.
"Disqualified Stock" means, with respect to any Person, any Capital Stock of
such Person which by its terms (or by the terms of any security into which it
is convertible or for which it is exchangeable) or upon the happening of any
event (i) matures or is mandatorily redeemable pursuant to a sinking fund
obligation or otherwise, (ii) is convertible or exchangeable for Indebtedness
or Disqualified Stock (excluding capital stock which is convertible or
exchangeable solely at the option of the Company or a Restricted Subsidiary)
or (iii) is redeemable at the option of the holder thereof, in whole or in
part, in each case on or prior to the Stated Maturity of the Notes, provided,
that only the portion of Capital Stock which so matures or is mandatorily
redeemable, is so convertible or exchangeable or is so redeemable at the
option of the holder thereof prior to such Stated Maturity will be deemed to
be Disqualified Stock.
"Equity Offering" means an offering for cash by the Company, Holdings or AHI
of its respective common stock, or options, warrants or rights with respect to
its common stock.
"Foreign Subsidiary" means any Restricted Subsidiary that is not organized
under the laws of the United States of America or any state thereof or the
District of Columbia.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the date of the Indenture, including those set
forth in the opinions and pronouncements of the Accounting Principles Board of
the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
106
statements by such other entity as approved by a significant segment of the
accounting profession. All ratios and computations based on GAAP contained in
the Indenture will be computed in conformity with GAAP.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any other Person and
any obligation, direct or indirect, contingent or otherwise, of such Person
(i) to purchase or pay (or advance or supply funds for the purchase or payment
of) such Indebtedness of such other Person (whether arising by virtue of
partnership arrangements, or by agreement to keep-well, to purchase assets,
goods, securities or services, to take-or-pay, or to maintain financial
statement conditions or otherwise) or (ii) entered into for purposes of
assuring in any other manner the obligee of such Indebtedness of the payment
thereof or to protect such obligee against loss in respect thereof (in whole
or in part); provided, however, that the term "Guarantee" will not include
endorsements for collection or deposit and indemnities given by the Company or
any of its Subsidiaries in connection with exhibitions, in each case, in the
ordinary course of business. The term "Guarantee" used as a verb has a
corresponding meaning.
"Guarantor" means Holdings and each Subsidiary Guarantor.
"Guarantor Senior Indebtedness" means, with respect to a Guarantor, the
following obligations, whether outstanding on the date of the Indenture or
thereafter issued, without duplication: (i) any Guarantee of the Bank
Indebtedness by such Guarantor and all other Guarantees by such Guarantor of
Senior Indebtedness of the Company or Guarantor Senior Indebtedness for any
other Guarantor; and (ii) all obligations consisting of the principal of and
premium, if any, and accrued and unpaid interest (including interest accruing
on or after the filing of any petition in bankruptcy or for reorganization
relating to the Guarantor regardless of whether postfiling interest is allowed
in such proceeding) on, and fees and other amounts owing in respect of, all
other Indebtedness of the Guarantor, unless, in the instrument creating or
evidencing the same or pursuant to which the same is outstanding, it is
expressly provided that the obligations in respect of such Indebtedness are
not senior in right of payment to the obligations of such Guarantor under the
Note Guarantee; provided, however, that Guarantor Senior Indebtedness will not
include (1) any obligations of a Subsidiary Guarantor to another Subsidiary
Guarantor, (2) any liability for Federal, state, local, foreign or other taxes
owed or owing by a Guarantor, (3) any accounts payable or other liability to
trade creditors arising in the ordinary course of business (including
Guarantees thereof or instruments evidencing such liabilities), (4) any
Indebtedness of a Subsidiary Guarantor that is expressly subordinate in right
of payment to any of the Indebtedness of such Guarantor, including any
Guarantor Senior Subordinated Indebtedness and Guarantor Subordinated
Obligations of such Guarantor or (5) any Capital Stock.
"Guarantor Senior Subordinated Indebtedness" means with respect to a
Guarantor, the obligations of such Guarantor under the Note Guarantee and any
other Indebtedness of such Guarantor that specifically provides that such
Indebtedness is to rank pari passu in right of payment with the obligations of
such Guarantor under the Note Guarantee and is not expressly subordinated by
its terms in right of payment to any Indebtedness of such Guarantor which is
not Guarantor Senior Indebtedness of such Guarantor.
"Guarantor Subordinated Obligation" means, with respect to a Guarantor, any
Indebtedness of such Guarantor (whether outstanding on the Issue Date or
thereafter Incurred) which is expressly subordinate in right of payment to the
obligations of such Guarantor under its Note Guarantee pursuant to a written
agreement.
"Hedging Obligations" of any Person means the obligations of such Person
pursuant to any Interest Rate Agreement or Currency Agreement.
107
"Holdings" means Advanstar Holdings, Inc., a Delaware corporation.
"Incur" means issue, assume, Guarantee, incur or otherwise become liable
for; provided, however, that any Indebtedness or Capital Stock of a Person
existing at the time such person becomes a Restricted Subsidiary (whether by
merger, consolidation, acquisition or otherwise) will be deemed to be incurred
by such Restricted Subsidiary at the time it becomes a Restricted Subsidiary.
"Indebtedness" means, with respect to any Person on any date of
determination (without duplication), (i) the principal of and premium (if any)
in respect of indebtedness of such Person for borrowed money; (ii) the
principal of and premium (if any) in respect of obligations of such Person
evidenced by bonds, debentures, notes or other similar instruments; (iii) all
obligations of such Person in respect of letters of credit or other similar
instruments (including reimbursement obligations with respect thereto), other
than (except for purposes of the cross-acceleration provisions described under
"Events of Default") obligations in respect of the undrawn face amount of
letters of credit that are the functional equivalents of surety or performance
bonds or that support self-insurance programs to the extent that the aggregate
amount of all such obligations does not exceed $3.0 million; (iv) all
obligations of such Person to pay the deferred and unpaid purchase price of
property or services other than trade payables arising and accrued expenses
Incurred in the ordinary course of business, which purchase price is due more
than six months after the date of placing such property in service or taking
delivery and title thereto or the completion of such services (if and to the
extent any such obligation would appear as a liability upon a balance sheet of
such Person prepared in accordance with GAAP); (v) all Capitalized Lease
Obligations and all Attributable Indebtedness of such Person; (vi) the amount
of all obligations of such Person with respect to the redemption, repayment or
other repurchase of any Disqualified Stock or, with respect to any Subsidiary,
any Preferred Stock (but excluding, in each case, any accrued dividends);
(vii) all Indebtedness of other Persons secured by a Lien on any asset of such
Person, whether or not such Indebtedness is assumed by such Person; provided,
however, that the amount of such Indebtedness will be the lesser of (A) the
fair market value of such asset at such date of determination and (B) the
amount of such Indebtedness of such other Persons; (viii) all Indebtedness of
other Persons to the extent Guaranteed by such Person; and (ix) to the extent
not otherwise included in this definition, net obligations of such Person
under Currency Agreements and Interest Rate Agreements (the amount of any such
obligations to be equal at any time to the termination value of such agreement
or arrangement giving rise to such obligation that would be payable by such
Person at such time). The amount of Indebtedness of any Person at any date
will be the outstanding balance at such date of all unconditional obligations
as described above and the maximum liability, upon the occurrence of the
contingency giving rise to the obligation, of any contingent obligations at
such date; provided that the amount outstanding at any one time of any
Indebtedness issued with original issue discount is the principal amount of
such Indebtedness less the remaining unamortized portion of the original issue
discount of such Indebtedness at such time as determined in conformity with
GAAP. Notwithstanding the foregoing, Indebtedness shall exclude (i)
obligations created, issued or incurred by any Person with respect to customer
subscription payments or customer deposits for trade shows and exhibitions and
(ii) any indemnification obligation of the Company to third parties in respect
of customary representations and warranties contained in stock purchase, asset
purchase or similar acquisition agreements to which the Company is a party, if
such indemnification obligation would not appear as a liability upon a balance
sheet of the Company prepared in accordance with GAAP.
"Interest Rate Agreement" means with respect to any Person any interest rate
protection agreement, interest rate future agreement, interest rate option
agreement, interest rate swap agreement, interest rate cap agreement, interest
rate collar agreement, interest rate hedge agreement or other similar
agreement or arrangement as to which such Person is party or a beneficiary.
"Investment" in any Person means any direct or indirect advance, loan (other
than advances to customers in the ordinary course of business) or other
extension of credit (including by way of
108
Guarantee or similar arrangement, but excluding any debt or extension of
credit represented by a bank deposit other than a time deposit) or capital
contribution to (by means of any transfer of cash or other property to others
or any payment for property or services for the account or use of others), or
any purchase or acquisition of Capital Stock, Indebtedness or other similar
instruments issued by, such Person. For purposes of the "Limitation on
Restricted Payments" covenant, (i) "Investment" will include the portion
(proportionate to the Company's equity interest in a Restricted Subsidiary to
be designated as an Unrestricted Subsidiary) of the fair market value of the
net assets of such Restricted Subsidiary of the Company at the time that such
Restricted Subsidiary is designated an Unrestricted Subsidiary; provided,
however, that upon a redesignation of such Subsidiary as a Restricted
Subsidiary, the Company will be deemed to continue to have a permanent
"Investment" in an Unrestricted Subsidiary in an amount (if positive) equal to
(x) the Company's "Investment" in such Subsidiary at the time of such
redesignation less (y) the portion (proportionate to the Company's equity
interest in such Subsidiary) of the fair market value of the net assets of
such Subsidiary at the time that such Subsidiary is so re-designated a
Restricted Subsidiary; and (ii) any property transferred to or from an
Unrestricted Subsidiary will be valued at its fair market value at the time of
such transfer, in each case as determined in good faith by the Board of
Directors of the Company.
"Issue Date" means the date on which the Notes are originally issued.
"Leverage Ratio": as of any date of determination means, with respect to any
Person, the ratio of (i) the sum of the aggregate outstanding Indebtedness of
such Person and its Subsidiaries as of the date of calculation on a
consolidated basis in accordance with GAAP to (ii) the aggregate amount of
Consolidated EBITDA of such Person for the period of the most recent four
consecutive fiscal quarters ending prior to the date of such determination;
provided, however, that (1) if since the beginning of such period the Company
or any Restricted Subsidiary will have made any Asset Disposition or if the
transaction giving rise to the need to calculate the Leverage Ratio is an
Asset Disposition, the Consolidated EBITDA for such period will be reduced by
an amount equal to the Consolidated EBITDA (if positive) directly attributable
to the assets which are the subject of such Asset Disposition for such period
or increased by an amount equal to the Consolidated EBITDA (if negative)
directly attributable thereto for such period, (2) if since the beginning of
such period the Company or any Restricted Subsidiary (by merger or otherwise)
will have made an Investment in any Restricted Subsidiary (or any Person which
becomes a Restricted Subsidiary or is merged with or into the Company) or an
acquisition of assets, including any acquisition of assets occurring in
connection with a transaction causing a calculation to be made hereunder,
which constitutes all or substantially all of an operating unit of a business,
Consolidated EBITDA for such period will be calculated after giving pro forma
effect thereto (including the Incurrence of any Indebtedness and including the
pro forma expenses and cost reductions calculated in accordance with
Regulation S-X promulgated by the SEC) as if such Investment or acquisition
occurred on the first day of such period and (3) if since the beginning of
such period any Person (that subsequently became a Restricted Subsidiary or
was merged with or into the Company or any Restricted Subsidiary since the
beginning of such period) will have made any Asset Disposition or any
Investment or acquisition of assets that would have required an adjustment
pursuant to clause (1) or (2) above if made by the Company or a Restricted
Subsidiary during such period, Consolidated EBITDA for such period will be
calculated after giving pro forma effect thereto (including the Incurrence of
any Indebtedness and including the pro forma expenses and cost reductions
calculated in accordance with Regulation S-X promulgated by the SEC) as if
such Asset Disposition or Investment occurred on the first day of such period.
For purposes of this definition, whenever pro forma effect is to be given to
an acquisition of assets, the amount of income or earnings relating thereto,
the pro forma calculations will be determined in good faith by a responsible
financial or accounting officer of the Company. Notwithstanding anything
herein to the contrary, if at the time the calculation of the Leverage Ratio
is to be made, the Company does not have available consolidated financial
statements reflecting the consummation of the Acquisitions for a period of at
least four full fiscal quarters, all calculations required by the Leverage
Ratio shall be prepared on a pro forma basis in accordance with
109
Regulation S-X promulgated by the SEC, as though each of the Acquisitions (to
the extent not otherwise reflected in the consolidated financial statements of
the Company) had occurred on the first day of the period of four fiscal
quarters for which such calculation is being made.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).
"Net Available Cash" from an Asset Disposition means cash payments received
(including any cash payments received by way of deferred payment of principal
pursuant to a note or installment receivable or otherwise, but only as and
when received, but excluding any other consideration received in the form of
assumption by the acquiring person of Indebtedness or other obligations
relating to the properties or assets that are the subject of such Asset
Disposition or received in any other noncash form, whether or not constituting
Designated Noncash Consideration) therefrom, in each case net of (i) all
legal, accounting, investment banking, title and recording tax expenses,
commissions and other fees and expenses Incurred, and all Federal, state,
provincial, foreign and local taxes required to be paid or accrued as a
liability under GAAP, as a consequence of such Asset Disposition, (ii) all
payments made on any Indebtedness which is secured by any assets subject to
such Asset Disposition, in accordance with the terms of any Lien upon such
assets, or which must by its terms, or in order to obtain a necessary consent
to such Asset Disposition, or by applicable law be repaid out of the proceeds
from such Asset Disposition, (iii) all distributions and other payments
required to be made to minority interest holders in Subsidiaries or joint
ventures as a result of such Asset Disposition and (iv) the deduction of
appropriate amounts to be provided by the seller as a reserve, in accordance
with GAAP, against any liabilities associated with the assets disposed of in
such Asset Disposition and retained by the Company or any Restricted
Subsidiary after such Asset Disposition.
"Net Cash Proceeds", with respect to any issuance or sale of Capital Stock,
means the cash proceeds of such issuance or sale net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees actually Incurred in
connection with such issuance or sale and net of taxes paid or payable as a
result of such issuance or sale.
"Non-Recourse Debt" means Indebtedness (i) as to which neither the Company
nor any Restricted Subsidiary (a) provides any guarantee or credit support of
any kind (including any undertaking, guarantee, indemnity, agreement or
instrument that would constitute Indebtedness) or (b) is directly or
indirectly liable (as a guarantor or otherwise) and (ii) no default with
respect to which (including any rights that the holders thereof may have to
take enforcement action against an Unrestricted Subsidiary) would permit (upon
notice, lapse of time or both) any holder of any other Indebtedness of the
Company or any Restricted Subsidiary to declare a default under such other
Indebtedness or cause the payment thereof to be accelerated or payable prior
to its stated maturity.
"Note Guarantee" means, individually, any Subsidiary Guarantee and the
Guarantee of payment of the Notes by Holdings and AHI (or, if they are merged,
the surviving entity of such merger) pursuant to the terms of the Indenture,
and, collectively, all such Guarantees. Each such Note Guarantee will be in
the form prescribed in the Indenture.
"Officer" means the Chairman of the Board, the President, Chief Financial
Officer, any Vice President, the Treasurer or the Secretary of the Company.
"Officers' Certificate" means a certificate signed by two Officers.
"Opinion of Counsel" means a written opinion from legal counsel who is
acceptable to the Trustee. The counsel may be an employee of or counsel to the
Company or the Trustee.
"Permitted Holders" means (i) AHI Advanstar LLC, a Delaware limited
liability company, and partnerships in which the ultimate managing general
partner is controlled by, or (ii) other entities
110
controlled by, members of Hellman & Friedman LLC, a Delaware limited liability
company, or any successor entity, and shall in any event include Hellman and
Friedman Capital Partners III, L.P., H&F International Partners III, L.P., and
H&F Orchard Partners III, L.P.
"Permitted Investment" means an Investment by the Company or any Restricted
Subsidiary in (i) a Restricted Subsidiary or a Person which will, upon the
making of such Investment, become a Restricted Subsidiary; provided, however,
that the primary business of such Restricted Subsidiary is a Related Business;
(ii) another Person if as a result of such Investment such other Person is
merged or consolidated with or into, or transfers or conveys all or
substantially all its assets to, the Company or a Restricted Subsidiary;
provided, however, that such Person's primary business is a Related Business;
(iii) cash and Cash Equivalents; (iv) receivables owing to the Company or any
Restricted Subsidiary created or acquired in the ordinary course of business
and payable or dischargeable in accordance with customary trade terms;
provided, however, that such trade terms may include such concessionary trade
terms as the Company or any such Restricted Subsidiary deems reasonable under
the circumstances; (v) payroll, travel and similar advances to cover matters
that are expected at the time of such advances ultimately to be treated as
expenses for accounting purposes and that are made in the ordinary course of
business; (vi) loans or advances to employees made in the ordinary course of
business not exceeding in the aggregate, at any time, $1.0 million; (vii)
stock, obligations or securities received in settlement of debts created in
the ordinary course of business and owing to the Company or any Restricted
Subsidiary or in satisfaction of judgments; (viii) any Asset Swap made in
accordance with the "Limitation on Asset Swaps" covenant or any Investment in
securities or other assets received in connection with an Asset Disposition
made in accordance with the provisions of the "Limitation on Sales of Assets
and Subsidiary Stock" covenant; (ix) Investments made after the Issue Date in
a Related Business in the form of joint ventures, operating agreements,
partnership agreements or other similar or customary agreements, interests or
arrangements with unaffiliated third parties, the aggregate outstanding amount
of which does not exceed $25.0 million (which aggregate amount outstanding
will be reduced by returns of capital received by the Company or any
Restricted Subsidiary in respect of such Investments) at any time; (x)
Currency Agreements, Interest Rate Agreements and related Hedging Obligations,
which transactions or obligations are Incurred in compliance with the
"Limitation on Indebtedness" covenant; and (xi) other Investments in an
aggregate amount outstanding at any time not to exceed $5.0 million.
"Permitted Liens" means, with respect to any Person, (a) pledges or deposits
by such Person under workmen's compensation laws, unemployment insurance laws
or similar legislation, or good faith deposits in connection with bids,
tenders, contracts (other than for the payment of Indebtedness) or leases to
which such Person is a party, or deposits to secure public or statutory
obligations of such Person or deposits or cash or United States government
bonds to secure surety or appeal bonds to which such Person is a party, or
deposits as security for contested taxes or import duties or for the payment
of rent, in each case Incurred in the ordinary course of business; (b) Liens
imposed by law, including carriers', warehousemen's and mechanics' Liens, in
each case for sums not yet due or being contested in good faith by appropriate
proceedings; or other Liens arising out of judgments or awards against such
Person with respect to which such Person is then proceeding with an appeal or
other proceedings for review; (c) Liens for taxes, assessments or other
governmental charges not yet subject to penalties for non-payment or which are
being contested in good faith by appropriate proceedings provided appropriate
reserves have been taken on the books of the Company; (d) Liens in favor of
issuers of surety bonds or letters of credit issued pursuant to the request of
and for the account of such Person in the ordinary course of its business;
provided, however, that such letters of credit do not constitute Indebtedness;
(e) encumbrances, easements or reservations of, or rights of others for,
licenses, rights of way, sewers, electric lines, telegraph and telephone lines
and other similar purposes, or zoning or other restrictions as to the use of
real properties or liens incidental to the conduct of the business of such
Person or to the ownership of its properties which do not in the aggregate
materially adversely affect the value of said properties or materially impair
their use in the operation of the
111
business of such Person; (f) Liens securing an Interest Rate Protection
Agreement so long as the related Indebtedness is, and is permitted to be under
the Indenture, secured by a Lien on the same property securing the Interest
Rate Protection Agreement; and (g) leases and subleases of real property which
do not materially interfere with the ordinary conduct of the business of the
Company or any of its Restricted Subsidiaries; (h) judgement Liens not giving
rise to an Event of Default so long as such Lien is adequately bonded and any
appropriate legal proceedings which may have been duly initiated for the
review of such judgment have not been finally terminated or the period within
which such proceedings may be initiated has not expired; (i) Liens for the
purpose of securing the payment (or the refinancing of the payment) of all or
a part of the purchase price of, or Capitalized Lease Obligations with respect
to, assets or property acquired or constructed in the ordinary course of
business provided that (x) the aggregate principal amount of Indebtedness
secured by such Liens is otherwise permitted to be Incurred under the
Indenture and does not exceed the cost of the assets or property so acquired
or constructed and (y) such Liens are created within 180 days of construction
or acquisition of such assets or property and do not encumber any other assets
or property of the Company or any Restricted Subsidiary other than such assets
or property and assets affixed or appurtenant thereto; (j) Liens arising
solely by virtue of any statutory or common law provision relating to banker's
Liens, rights of set-off or similar rights and remedies as to deposit accounts
or other funds maintained with a creditor expository institution; provided
that (x) such deposit account is not a dedicated cash collateral account and
is not subject to restrictions against access by the Company in excess of
those set forth by regulations promulgated by the Federal Reserve Board, and
(y) such deposit account is not intended by the Company or any Restricted
Subsidiary to provide collateral to the depository institution; (k) Liens
arising from Uniform Commercial Code financing statement filings regarding
operating leases entered into by the Company and its Restricted Subsidiaries
in the ordinary course of business (l) Liens existing on the Issue Date; (m)
Liens on property or shares of stock of a Person at the time such Person
becomes a Subsidiary; provided, however, that such Liens are not created,
Incurred or assumed in connection with, or in contemplation of, such other
Person becoming a Subsidiary; provided further, however, that any such Lien
may not extend to any other property owned by the Company or any Restricted
Subsidiary; (n) Liens on property at the time the Company or a Subsidiary
acquired the property, including any acquisition by means of a merger or
consolidation with or into the Company or any Restricted Subsidiary; provided,
however, that such Liens are not created, Incurred or assumed in connection
with, or in contemplation of, such acquisition; provided further, however,
that such Liens may not extend to any other property owned by the Company or
any Restricted Subsidiary; (o) Liens securing Indebtedness or other
obligations of a Subsidiary owing to the Company or a Wholly Owned Subsidiary;
and (p) Liens securing Refinancing Indebtedness Incurred to Refinance
Indebtedness that was previously so secured, provided that any such Lien is
limited to all or part of the same property or assets (plus improvements,
accessions, proceeds or dividends or distributions in respect thereof) that
secured (or, under the written arrangements under which the original Lien
arose, could secure) the obligations to which such Liens relate.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization,
government or any agency or political subdivision hereof or any other entity.
"Preferred Stock", as applied to the Capital Stock of any corporation, means
Capital Stock of any class or classes (however designated) which is preferred
as to the payment of dividends, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such corporation, over
shares of Capital Stock of any other class of such corporation.
A "Public Market" exists at any time with respect to the common stock of the
Company, Holdings or AHI, as the case may be, if (i) the common stock of the
Company, Holdings or AHI, as the case may be, is then registered with the
Securities Exchange Commission pursuant to Section 12(b) or 12(g) of Exchange
Act and traded either on a national securities exchange or in the National
112
Association of Securities Dealers Automated Quotation System and (ii) at least
15% of the total issued and outstanding common stock of the Company, Holdings
or AHI, as the case may be, has been distributed prior to such time by means
of an effective registration statement under the Securities Act 1933.
"Refinancing Indebtedness" means Indebtedness that is Incurred to refund,
refinance, replace, renew, repay or extend (including pursuant to any
defeasance or discharge mechanism) (collectively, "refinance", "refinances,"
and "refinanced" shall have a correlative meaning) any Indebtedness existing
on the date of the Indenture or Incurred in compliance with the Indenture
(including Indebtedness of the Company that refinances Indebtedness of any
Restricted Subsidiary and Indebtedness of any Restricted Subsidiary that
refinances Indebtedness of another Restricted Subsidiary) including
Indebtedness that refinances Refinancing Indebtedness, provided, however, that
(i) (x) if the Stated Maturity of the Indebtedness being refinanced is earlier
than the Stated Maturity of the Notes, the Refinancing Indebtedness has a
Stated Maturity no earlier than the Stated Maturity of the Indebtedness being
refinanced or (y) if the Stated Maturity of the Indebtedness being refinanced
is later than the Stated Maturity of the Notes, the Refinancing Indebtedness
has a Stated Maturity later than the Notes, (ii) the Refinancing Indebtedness
has an Average Life at the time such Refinancing Indebtedness is Incurred that
is equal to or greater than the Average Life of the Indebtedness being
refinanced, and (iii) such Refinancing Indebtedness is Incurred in an
aggregate principal amount (or if issued with original issue discount, an
aggregate issue price) that is equal to or less than the sum of the aggregate
principal amount (or if issued with original issue discount, the aggregate
accreted value) then outstanding (plus fees and expenses, including any
premium and defeasance costs) of the Indebtedness being refinanced.
"Related Business" means any business related, ancillary or complementary to
the businesses of the Company and the Restricted Subsidiaries on the Issue
Date.
"Related Business Assets" means assets used or useful in a Related Business.
"Representative" means any trustee, agent or representative (if any) of an
issue of Senior Indebtedness.
"Restricted Subsidiary" means any Subsidiary of the Company other than an
Unrestricted Subsidiary.
"Sale/Leaseback Transaction" means an arrangement relating to property now
owned or hereafter acquired whereby the Company or a Restricted Subsidiary
transfers such property to a Person and the Company or a Subsidiary leases it
from such Person.
"Senior Credit Agreement" means (i) the amended and restated Senior Secured
Credit Agreement to be entered into on the Issue Date among the Company, the
guarantors parties thereto, The Chase Manhattan Bank, as Administrative Agent,
and the lenders parties thereto from time to time, as the same may be amended,
supplemented or otherwise modified from time to time and any guarantees issued
thereunder and (ii) any renewal, extension, refunding, restructuring,
replacement or refinancing thereof (whether with the original Administrative
Agent and lenders or another administrative agent or agents or other lenders,
whether provided under the original Senior Credit Agreement or any other
credit or other agreement or indenture and whether entered into concurrently
with or subsequent to the termination of the prior Senior Credit Agreement).
"Senior Subordinated Indebtedness" means the Notes and any other
Indebtedness of the Company that specifically provides that such Indebtedness
is to rank pari passu with the Notes in right of payment and is not
subordinated by its terms in right of payment to any Indebtedness or other
obligation of the Company which is not Senior Indebtedness.
113
"Significant Subsidiary" means any Subsidiary that would be a "Significant
Subsidiary" of the Company within the meaning of Rule 1-02 under Regulation S-
X promulgated by the SEC.
"Stated Maturity" means, with respect to any security, the date specified in
such security as the fixed date on which the payment of principal of such
security is due and payable, including pursuant to any mandatory redemption
provision.
"Subordinated Obligation" means any Indebtedness of the Company (whether
outstanding on the Issue Date or thereafter Incurred) which is subordinate or
junior in right of payment to the Notes pursuant to a written agreement.
"Subsidiary" of any Person means any corporation, association, partnership
or other business entity of which more than 50% of the total voting power of
shares of Capital Stock or other interests (including partnership interests)
entitled (without regard to the occurrence of any contingency) to vote in the
election of directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by (i) such Person, (ii) such Person and
one or more Subsidiaries of such Person or (iii) one or more Subsidiaries of
such Person. Unless otherwise specified herein, each reference to a Subsidiary
will refer to a Subsidiary of the Company.
"Subsidiary Guarantee" means, individually, any Guarantee of payment of the
Notes by a Subsidiary Guarantor pursuant to the terms of the Indenture, and,
collectively, all such Guarantees. Each such Subsidiary Guarantee will be in
the form prescribed in the Indenture.
"Subsidiary Guarantor" means each Subsidiary of the Company (other than a
Foreign Subsidiary) in existence on the Issue Date and any Restricted
Subsidiary (other than a Foreign Subsidiary) created or acquired by the
Company after the Issue Date.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at
the time of determination shall be designated an Unrestricted Subsidiary by
the Board of Directors in the manner provided below and (ii) any Subsidiary of
an Unrestricted Subsidiary. The Board of Directors may designate any
Subsidiary of the Company (including any newly acquired or newly formed
Subsidiary of the Company) to be an Unrestricted Subsidiary unless such
Subsidiary or any of its Subsidiaries owns any Capital Stock or Indebtedness
of, or owns or holds any Lien on any property of, the Company or any
Restricted Subsidiary of the Company that is not a Subsidiary of the
Subsidiary to be so designated; provided, however, that either (A) the
Subsidiary to be so designated has total consolidated assets of $10,000 or
less or (B) if such Subsidiary has consolidated assets greater than $10,000,
then such designation would be permitted under "Limitation on Restricted
Payments." The Board of Directors may designate any Unrestricted Subsidiary to
be a Restricted Subsidiary; provided, however, that immediately after giving
effect to such designation (x) the Company could Incur $1.00 of additional
Indebtedness pursuant to paragraph (a) under "Limitation on Indebtedness" and
(y) no Default shall have occurred and be continuing. Any such designation by
the Board of Directors shall be evidenced to the Trustee by promptly filing
with the Trustee a copy of the Board Resolution giving effect to such
designation and an Officers' Certificate certifying that such designation
complied with the foregoing provisions.
"Voting Stock" of a corporation means all classes of Capital Stock of such
corporation then outstanding and normally entitled to vote in the election of
directors.
"Wholly-Owned Subsidiary" means a Restricted Subsidiary of the Company, all
of the Capital Stock of which (other than directors' qualifying shares) is
owned by the Company or another Wholly-Owned Subsidiary.
"Wholly-Owned Subsidiary Guarantor" means a Wholly-Owned Subsidiary which is
a Subsidiary Guarantor.
114
EXCHANGE AND REGISTRATION RIGHTS AGREEMENT
The Company, the Guarantors and the Initial Purchasers entered into the
Registration Rights Agreement concurrently with the issuance of the Original
Notes. Pursuant to the Registration Rights Agreement, the Company agreed to
(i) file with the Commission on or prior to 60 days after the date of issuance
of the Original Notes (the "Issue Date") a registration statement on Form S-1
or Form S-4, if the use of such form is then available (the "Exchange Offer
Registration Statement") relating to the Exchange Offer and (ii) use its
reasonable best efforts to cause the Exchange Offer Registration Statement to
be declared effective under the Securities Act within 150 days after the Issue
Date. As soon as practicable after the effectiveness of the Exchange Offer
Registration Statement, the Company will offer to the holders of Transfer
Restricted Securities (as defined below) who are not prohibited by any law or
policy of the Commission from participating in the Exchange Offer the
opportunity to exchange their Transfer Restricted Securities for the Exchange
Notes that are identical in all material respects to the Original Notes
(except that the Exchange Notes will not contain terms with respect to
transfer restrictions) and that would be registered under the Securities Act.
The Company will keep the Exchange Offer open for not less than 30 days (or
longer, if required by applicable law) after the date on which notice of the
Exchange Offer is mailed to the holders of the Original Notes.
If (i) because of any change in law or applicable interpretations thereof by
the staff of the Commission, the Company is not permitted to effect the
Exchange Offer as contemplated hereby, (ii) any Securities validly tendered
pursuant to the Exchange Offer are not exchanged for Exchange Securities
within 185 days after the Issue Date, (iii) any Initial Purchaser so requests
with respect to Original Notes not eligible to be exchanged for Exchange Notes
in the Exchange Offer, (iv) any Holder so requests because any applicable law
or interpretations do not permit such holder of Original Notes to participate
in the Exchange Offer, (v) any holder of Notes so requests because such Holder
participated in the Exchange Offer and did not receive freely transferable
Exchange Notes in exchange for tendered Original Notes, or (vi) the Company so
elects, then the Company will file with the Commission a shelf registration
statement (the "Shelf Registration Statement") to cover resales of Transfer
Restricted Securities by such holders who satisfy certain conditions relating
to the provision of information in connection with the Shelf Registration
Statement. For purposes of the foregoing, "Transfer Restricted Securities"
means each Original Note until (i) the date on which such Note has been
exchanged for a freely transferable Exchange Note in the Exchange Offer; (ii)
the date on which such Original Note has been effectively registered under the
Securities Act and disposed of in accordance with the Shelf Registration
Statement or (iii) the date on which such Original Note is distributed to the
public pursuant to Rule 144 under the Securities Act or is salable pursuant to
Rule 144(k) under the Securities Act.
The Company will use its reasonable best efforts to have the Exchange Offer
Registration Statement or, if applicable, the Shelf Registration Statement
(each, a "Registration Statement") declared effective by the Commission as
promptly as practicable after the filing thereof. Unless the Exchange Offer
would not be permitted by a policy of the Commission, the Company will
commence the Exchange Offer and will use its reasonable best efforts to
consummate the Exchange Offer as promptly as practicable, but in any event
prior to 185 days after the Issue Date. If applicable, the Company will use
its reasonable best efforts to keep the Shelf Registration Statement effective
for a period of two years after the Issue Date.
Subject to certain conditions and limitations set forth in the Registration
Rights Agreement, if (i) the applicable Registration Statement is not filed
with the Commission on or prior to 60 days after the Issue Date; (ii) the
Exchange Offer Registration Statement or the Shelf Registration Statement, as
the case may be, is not declared effective within 150 days after the Issue
Date; (iii) the Exchange Offer is not consummated on or prior to 185 days
after the Issue Date or (iv) the Shelf Registration Statement is filed and
declared effective within 150 days after the Issue Date but shall thereafter
cease to be effective (at any time that the Company is obligated to maintain
the effectiveness thereof) without being
115
succeeded within 45 days by an additional Registration Statement filed and
declared effective (each such event referred to in clauses (i) through (iv), a
"Registration Default"), the Company will be obligated to pay liquidated
damages to each holder of Transfer Restricted Securities, during the period of
one or more such Registration Defaults, in an amount equal to $0.192 per week
per $1,000 principal amount of the Original Notes constituting Transfer
Restricted Securities held by such holder until the applicable Registration
Statement is filed, the Exchange Offer Registration Statement is declared
effective and the Exchange Offer is consummated or the Shelf Registration
Statement is declared effective or again becomes effective, as the case may
be. All accrued liquidated damages shall be paid to holders in the same manner
as interest payments on the Original Notes on semi-annual payment dates which
correspond to interest payment dates for the Original Notes. Following the
cure of all Registration Defaults, the accrual of liquidated damages will
cease. Notwithstanding the foregoing, the Company may issue a notice (a
"Suspension Notice") to the Holders stating that a Shelf Registration
Statement may not be used; a Suspension Notice may be given by the Company
pending the announcement of material information by the Company which the
Board of Directors of the Company has determined, based upon an opinion of
counsel, would be required to be disclosed in such Registration Statement in
order to make the statements therein not misleading, and may issue any
Suspension Notice suspending use of the Shelf Registration Statement required
under applicable securities laws to be issued (a "Suspension"). In the event
that the aggregate number of days in any consecutive twelve-month period for
which all such Suspension Notices are issued and effective exceeds 45 days in
the aggregate, then the Company will be obligated to pay liquidated damages to
each Holder of Transfer Restricted Securities, during the period of one or
more such Suspension, in an amount equal to $0.192 per week per $1,000
principal amount of Transfer Restricted Securities held by such Holder.
The Exchange and Registration Rights Agreement also will provide that the
Company (i) shall make available for a period of 180 days after the
consummation of the Exchange Offer a prospectus meeting the requirements of
the Securities Act to any broker-dealer for use in connection with any resale
of any such Exchange Notes and (ii) shall pay all expenses incident to the
Exchange Offer (including the expense of one counsel to the holders of the
Notes) and will indemnify certain holders of the Original Notes (including any
broker-dealer) against certain liabilities, including liabilities under the
Securities Act. A broker-dealer which delivers such a prospectus to purchasers
in connection with such resales will be subject to certain of the civil
liability provisions under the Securities Act and will be bound by the
provisions of the Registration Rights Agreement (including certain
indemnification rights and obligations).
Each holder of Original Notes who wishes to exchange such Notes for Exchange
Notes in the Exchange Offer will be required to make certain representations,
including representations that (i) any Exchange Notes to be received by it
will be acquired in the ordinary course of its business; (ii) it has no
arrangement or understanding with any person to participate in the
distribution of the Exchange Notes and (iii) it is not an "affiliate" (as
defined in Rule 405 under the Securities Act) of the Company, or if it is an
affiliate, that it will comply with the registration and prospectus delivery
requirements of the Securities Act to the extent applicable.
If the holder is not a broker-dealer, it will be required to represent that
it is not engaged in, and does not intend to engage in, the distribution of
the Exchange Notes. If the holder is a broker-dealer that will receive
Exchange Notes for its own account in exchange for Original Notes that were
acquired as a result of market-making activities or other trading activities
(an "Exchanging Dealer"), it will be required to acknowledge that it will
deliver a prospectus in connection with any resale of such Exchange Notes.
Holders of the Original Notes will be required to make certain
representations to the Company (as described above) in order to participate in
the Exchange Offer and will be required to deliver information to be used in
connection with the Shelf Registration Statement in order to have their
116
Original Notes included in the Shelf Registration Statement and benefit from
the provisions regarding liquidated damages set forth in the preceding
paragraphs. A holder who sells Original Notes pursuant to the Shelf
Registration Statement generally will be required to be named as a selling
securityholder in the related prospectus and to deliver a prospectus to
purchasers, will be subject to certain of the civil liability provisions under
the Securities Act in connection with such sales and will be bound by the
provisions of the Registration Rights Agreement which are applicable to such a
holder (including certain indemnification obligations).
For so long as the Original Notes are outstanding, the Company will continue
to provide to holders of the Original Notes and to prospective purchasers of
the Original Notes the information required by Rule 144A(d)(4) under the
Securities Act.
Each Guarantor will agree to be bound by the terms and provisions of the
Registration Rights Agreement with respect to registration of the Note
Guarantees.
The foregoing description of the Registration Rights Agreement is a summary
only, does not purport to be complete and is qualified in its entirety by
reference to all provisions of the Registration Rights Agreement. A copy of
the Registration Rights Agreement is filed as an exhibit to the Registration
Statement of which this Prospectus is a part.
117
BOOK-ENTRY; DELIVERY AND FORM
THE GLOBAL NOTES
Exchange Notes will be issued in the form of one or more registered notes in
global form, without interest coupons (collectively, the "Global Notes"). The
Global Notes will be deposited on the date of the closing of the Exchange
Offer (the "Closing Date") with, or on behalf of, The Depository Trust Company
("DTC") and registered in the name of Cede & Co., as nominee of DTC, or will
remain in the custody of the Trustee pursuant to the FAST Balance Certificate
Agreement between DTC and the Trustee.
Except as set forth below, the Global Notes, may be transferred, in whole
and not in part, solely to another nominee of DTC or to a successor of DTC or
its nominee. Beneficial interests in the Global Notes may not be exchanged for
Notes in physical, certificated form ("Certificated Notes") except in the
limited circumstances described below.
All interests in the Global Notes may be subject to the procedures and
requirements of DTC.
CERTAIN BOOK-ENTRY PROCEDURES FOR THE GLOBAL NOTES
The descriptions of the operations and procedures of DTC set forth below are
provided solely as a matter of convenience. These operations and procedures
are solely within the control of DTC and are subject to change by it from time
to time. The Company takes no responsibility for these operations or
procedures, and investors are urged to contact DTC or its participants
directly to discuss these matters.
DTC has advised the Company that it is (i) a limited purpose trust company
organized under the laws of the State of New York, (ii) a "banking
organization" within the meaning of the New York Banking Law, (iii) a member
of the Federal Reserve System, (iv) a "clearing corporation" within the
meaning of the Uniform Commercial Code, as amended, and (v) a "clearing
agency" registered pursuant to Section 17A of the Exchange Act. DTC was
created to hold securities for its participants (collectively, the
"Participants") and facilitates the clearance and settlement of securities
transactions between Participants through electronic book-entry changes to the
accounts of its Participants, thereby eliminating the need for physical
transfer and delivery of certificates. DTC's Participants include securities
brokers and dealers, banks and trust companies, clearing corporations and
certain other organizations. Indirect access to DTC's system is also available
to other entities such as banks, brokers, dealers and trust companies
(collectively, the "Indirect Participants") that clear through or maintain a
custodial relationship with a Participant, either directly or indirectly.
Investors who are not Participants may beneficially own securities held by or
on behalf of DTC only through Participants or Indirect Participants.
The Company expects that pursuant to procedures established by DTC (i) upon
deposit of the Global Notes, DTC will credit the accounts of Participants with
an interest in the Global Notes and (ii) ownership of the Notes will be shown
on, and the transfer of ownership thereof will be effected only through,
records maintained by DTC (with respect to the interests of Participants) and
the records of Participants and the Indirect Participants (with respect to the
interests of persons other than Participants).
The laws of some jurisdictions may require that certain purchasers of
securities take physical delivery of such securities in definitive form.
Accordingly, the ability to transfer interests in the Notes represented by the
Global Notes to such persons may be limited. In addition, because DTC can act
only on behalf of its Participants, who in turn act on behalf of persons who
hold interests through Participants, the ability of a person having an
interest in Notes represented by the Global Notes to pledge or transfer such
interest to persons or entities that do not participate in DTC's system, or to
otherwise take actions in respect of such interest, may be affected by the
lack of a physical definitive security in respect of such interest.
118
So long as DTC or its nominee is the registered owner of the Global Notes,
DTC or such nominee, as the case may be, will be considered the sole owner or
holder of the Notes represented by the Global Notes for all purposes under the
Indenture. Except as provided below, owners of beneficial interests in the
Global Notes will not be entitled to have Notes represented by such Global
Notes registered in their names, will not receive or be entitled to receive
physical delivery of Certificated Notes, and will not be considered the owners
or holders thereof under the Indenture for any purpose, including with respect
to the giving of any direction, instruction or approval to the Trustee
thereunder. Accordingly, each holder owning a beneficial interest in the
Global Notes must rely on the procedures of DTC and, if such holder is not a
Participant or an Indirect Participant, on the procedures of the Participant
through which such holder owns its interest, to exercise any rights of a
holder of Notes under the Indenture or such Global Notes. The Company
understands that under existing industry practice, in the event that the
Company requests any action of holders of Notes, or a holder that is an owner
of a beneficial interest in the Global Notes desires to take any action that
DTC, as the holder of such Global Notes, is entitled to take, DTC would
authorize the Participants to take such action and the Participants would
authorize holders owning through such Participants to take such action or
would otherwise act upon the instruction of such holders. Neither the Company
nor the Trustee will have any responsibility or liability for any aspect of
the records relating to or payments made on account of Notes by DTC, or for
maintaining, supervising or reviewing any records of DTC relating to such
Notes.
Payments with respect to the principal of, and premium, if any, Liquidated
Damages, if any, and interest on, any Notes represented by the Global Notes
registered in the name of DTC or its nominee on the applicable record date
will be payable by the Trustee to or at the direction of DTC or its nominee in
its capacity as the registered holder of the Global Notes representing such
Notes under the Indenture. Under the terms of the Indenture, the Company and
the Trustee may treat the persons in whose names the Notes, including the
Global Notes, are registered as the owners thereof for the purpose of
receiving payment thereon and for any and all other purposes whatsoever.
Accordingly, neither the Company nor the Trustee has or will have any
responsibility or liability for the payment of such amounts to owners of
beneficial interests in the Global Notes (including principal, premium, if
any, Liquidated Damages, if any, and interest). Payments by the Participants
and the Indirect Participants to the owners of beneficial interests in the
Global Notes will be governed by standing instructions and customary industry
practice and will be the responsibility of the Participants or the Indirect
Participants and DTC.
Transfers between Participants in DTC will be effected in accordance with
DTC's procedures, and will be settled in same-day funds.
CERTIFICATED NOTES
If (i) the Company notifies the Trustee in writing that DTC is no longer
willing or able to act as a depositary or DTC ceases to be registered as a
clearing agency under the Exchange Act and a successor depositary is not
appointed within 90 days of such notice or cessation, (ii) the Company, at its
option, notifies the Trustee in writing that it elects to cause the issuance
of Notes in definitive form under the Indenture or (iii) upon the occurrence
of certain other events as provided in the Indenture, then, upon surrender by
DTC of the Global Notes, Certificated Notes will be issued to each person that
DTC identifies as the beneficial owner of the Notes represented by the Global
Notes. Upon any such issuance, the Trustee is required to register such
Certificated Notes in the name of such person or persons (or the nominee of
any thereof) and cause the same to be delivered thereto.
Neither the Company nor the Trustee shall be liable for any delay by DTC or
any Participant or Indirect Participant in identifying the beneficial owners
of the related Notes and each such person may conclusively rely on, and shall
be protected in relying on, instructions from DTC for all purposes (including
with respect to the registration and delivery, and the respective principal
amounts, of the Notes to be issued).
119
CERTAIN UNITED STATES FEDERAL TAX CONSEQUENCES
The following is a summary of certain United States federal tax consequences
to holders of the Original Notes of (i) the exchange of the Original Notes for
the Exchange Notes and (ii) the ownership and disposition of the Exchange
Notes. Except where noted, the summary deals only with Exchange Notes held as
capital assets within the meaning of Section 1221 of the Internal Revenue Code
of 1986, as amended (the "Code"). As used herein, the term "Non-U.S. Holder"
means any person or entity that is not a United States holder ("U.S. Holder").
A U.S. Holder is any beneficial owner of an Exchange Note that is (i) an
individual who is a citizen or resident of the United States, (ii) a
corporation or partnership created or organized in or under the laws of the
United States or any state or political subdivision thereof, (iii) an estate
the income of which is subject to United States federal income taxation
regardless of its source, and (iv) a trust which is subject to the supervision
of a court within the United States and the control of a United States person
as described in Section 7701(a)(30) of the Code.
The following summary is based upon the provisions of the Code, and on
regulations, rulings and judicial decisions thereunder as of the date hereof,
and does not address any state, local or foreign tax consequences. This
summary does not discuss all aspects of United States federal taxation which
may be important to particular holders in light of their individual investment
circumstances, such as Exchange Notes held by investors subject to special tax
rules (e.g. financial institutions, insurance companies, broker-dealers, tax-
exempt organizations and private foundations) or to persons that will hold the
Exchange Notes as part of a straddle, hedge, or synthetic security transaction
for United States federal income tax purposes, all of whom may be subject to
tax rules that differ significantly from those summarized below. Special rules
may also apply to certain Non-U.S. Holders, such as "controlled foreign
corporations," "passive foreign investment companies" and "foreign personal
holding companies." Finally, prospective holders of Exchange Notes should be
aware that tax laws frequently change. When these changes occur, the statutes,
regulations, rulings and judicial decisions giving rise to such changes may
have a retroactive effect. Accordingly, there can be no assurance that future
changes in such tax laws will not cause the consequences of the exchange of
the Original Notes for the Exchange Notes or the ownership and disposition of
the Exchange Notes to differ significantly from the consequences summarized
below. HOLDERS OF EXCHANGE NOTES SHOULD CONSULT THEIR OWN TAX ADVISORS
CONCERNING THE UNITED STATES FEDERAL TAX CONSEQUENCES IN LIGHT OF THEIR
PARTICULAR SITUATIONS AS WELL AS ANY CONSEQUENCES ARISING UNDER ANY STATE,
LOCAL, FOREIGN OR OTHER LAWS OR ANY APPLICABLE TAX TREATIES, WHICH MAY PROVIDE
FOR A LOWER RATE OF WITHHOLDING TAX, EXEMPTION FROM OR REDUCTION OF BRANCH
PROFITS TAX, OR OTHER RULES DIFFERENT FROM THOSE DESCRIBED BELOW.
EXCHANGE OFFER
The exchange of Original Notes for Exchange Notes pursuant to the Exchange
Offer should be treated as a continuation of the corresponding Original Notes
because the terms of the Exchange Notes are not materially different from the
terms of the Original Notes. Accordingly, such exchange should not constitute
a taxable event and, therefore, (i) no gain or loss should be realized upon
receipt of an Exchange Note, (ii) the holding period of the Exchange Notes
should include the holding period of the Original Note exchanged therefor and
(iii) the adjusted tax basis of the Exchange Note should be the same as the
adjusted tax basis of the Original Note exchanged therefor immediately before
the exchange.
120
NON-U.S. HOLDERS
United States Withholding Tax
Under present United States federal income and estate tax law, and subject
to the discussion below concerning backup withholding:
(a) no withholding of United States federal income tax will be required
with respect to the payment by the Company or any paying agent of principal
or interest on an Exchange Note owned by a Non-U.S. Holder, provided that
(i) the beneficial owner does not actually or constructively own 10% or
more of the total combined voting power of all classes of stock of the
Company entitled to vote within the meaning of section 871(h)(3) of the
Code and the regulations thereunder, (ii) the beneficial owner is not a
controlled foreign corporation that is related to the Company through stock
ownership, (iii) the beneficial owner is not a bank whose receipt of
interest on an Exchange Note is described in section 881(c)(3)(A) of the
Code and (iv) the beneficial owner satisfies the ownership statement
requirement (described generally below) set forth in section 871(h) and
section 881(c) of the Code and the regulations thereunder;
(b) no withholding of United States federal income tax will be required
with respect to any gain or income realized by a Non-U.S. Holder upon the
sale, exchange, retirement or other disposition of an Exchange Note; and
(c) an Exchange Note beneficially owned by an individual who at the time
of death is a Non-U.S. Holder will not be subject to United States federal
estate tax as a result of such individual's death, provided that such
individual does not actually or constructively own 10% or more of the total
combined voting power of all classes of stock of the Company entitled to
vote within the meaning of section 871(h)(3) of the Code and provided that
the interest payments with respect to such Exchange Note would not have
been, if received at the time of such individual's death, effectively
connected with the conduct of a United States trade or business by such
individual.
To satisfy the requirement referred to in (a)(iv) above, the beneficial
owner of such Exchange Note, or a financial institution holding the Exchange
Note on behalf of such owner, must provide, in accordance with specified
procedures, a paying agent of the Company with a statement to the effect that
the beneficial owner is not a United States person. Currently, these
requirements will be met if (1) the beneficial owner provides his name and
address, and certifies, under penalties of perjury, that he is not a United
States person (which certification may be made on an Internal Revenue Service
("IRS") Form W-8 (or successor form)) or (2) a financial institution holding
the Exchange Note on behalf of the beneficial owner certifies, under penalties
of perjury, that such statement has been received by it and furnishes a paying
agent with a copy thereof.
If a Non-U.S. Holder cannot satisfy the requirements of the "portfolio
interest" exception described in (a) above, payments of interest made to such
Non-U.S. Holder will be subject to a 30% withholding tax unless the beneficial
owner of the Exchange Note provides the Company or its paying agent, as the
case may be, with a properly executed (1) IRS Form 1001 (or successor form)
claiming an exemption from (or a reduction in) withholding under the benefit
of an applicable tax treaty or (2) IRS Form 4224 (or successor form) stating
that interest paid on the Exchange Note is not subject to withholding tax
because it is effectively connected with the beneficial owner's conduct of a
trade or business in the United States. Under recently finalized Treasury
Regulations, the benefit of an applicable tax treaty may, in certain
circumstances, and subject to significant limitations under the Code, be
claimed by the foreign partners of a foreign partnership that holds the
Exchange Notes. Foreign partners are urged to consult their own tax advisors
to determine whether they are eligible to claim such benefits.
121
If a Non-U.S. Holder is engaged in a trade or business in the United States
and interest on the Exchange Note is effectively connected with the conduct of
such trade or business, the Non-U.S. Holder, although exempt from the
withholding tax discussed above, will be subject to United States federal
income tax on such interest on a net income basis in the same manner as if it
were a U.S. Holder. In addition, if such holder is a foreign corporation, it
may be subject to a branch profits tax equal to 30% (or lower applicable
treaty rate) of its effectively connected earnings and profits for the taxable
year, subject to adjustments. For this purpose, interest on an Exchange Note
will be included in such foreign corporation's earnings and profits.
Any gain or income realized upon the sale, exchange, retirement or other
disposition of an Exchange Note generally will not be subject to United States
federal income tax unless (i) such gain or income is effectively connected
with a trade or business in the United States of the Non-U.S. Holder, (ii) in
the case of a Non-U.S. Holder who is an individual, such individual is present
in the United States for 183 days or more in the taxable year of such sale,
exchange, retirement or other disposition, and certain other conditions are
met, or (iii) the Non-U.S. Holder is subject to tax pursuant to the provisions
of U.S. tax law applicable to certain U.S. expatriates.
INFORMATION, REPORTING AND BACKUP WITHHOLDING
In general, no information reporting or backup withholding will be required
with respect to payments made by the Company or any paying agent to Non-U.S.
Holders if a statement described in (a)(iv) above has been received (and the
payor does not have actual knowledge that the beneficial owner is a United
States person).
In addition, backup withholding and information reporting may apply to the
proceeds of the sale of an Exchange Note within the United States or conducted
through certain U.S. related financial intermediaries unless the statement
described in (a)(iv) above has been received (and the payor does not have
actual knowledge that the beneficial owner is a United States person) or the
holder otherwise establishes an exemption.
Any amounts withheld under the backup withholding rules will be allowed as a
refund or a credit against such holder's United States federal income tax
liability provided the required information is furnished to the IRS and
certain procedures are followed.
PROSPECTIVE FINAL REGULATIONS
On October 6, 1997, new Treasury Regulations ("New Regulations") were issued
that modify the requirements imposed on a Non-U.S. Holder and certain
intermediaries for establishing the recipient's status as a Non-U.S. Holder
eligible for exemption from or reduction in United States withholding tax and
backup withholding described above. In general, the New Regulations do not
significantly alter the substantive withholding and information reporting
requirements but rather unify current certification procedures and forms and
clarify reliance standards. The New Regulations are generally effective for
payments made after December 31, 1999, subject to certain transition rules. In
addition, the New Regulations impose different conditions on the ability of
financial intermediaries acting for a Non-U.S. Holder to provide
certifications on behalf of the Non-U.S. Holder, which may include entering
into an agreement with the IRS to audit certain documentation with respect to
such certifications. Non-U.S. Holders should consult their own tax advisors to
determine the effects of the application of the New Regulations to their
particular circumstances.
122
PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Notes for its own account pursuant
to the Exchange Offers may be, depending on facts and circumstances, a
statutory underwriter and must acknowledge that it will deliver a prospectus
in connection with any resale of such Exchange Notes that describe such
resales in the plan of distribution. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of Exchange Notes received in exchange for Original Notes where
such Original Notes were acquired as a result of market-making activities or
other trading activities; however, this Prospectus may not be used by the
Initial Purchasers for resales of Notes acquired by them directly from the
Company. The Company has agreed that for a period of 180 days after the
Expiration Date, it will make this Prospectus, as amended or supplemented,
available to any broker-dealer for use in connection with any such resale. In
addition, for 90 days after the date of this Prospectus, all dealers effecting
transactions in the Exchange Notes may be required to deliver a prospectus.
The Company will not receive any proceeds from any sale of Exchange Notes by
broker-dealers. Exchange Notes received by broker-dealers for their own
account pursuant to the Exchange Offers may be sold from time to time in one
or more transactions in the over-the-counter market, in negotiated
transactions, through the writing of options on the Exchange Notes or a
combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such broker-dealer and/or purchasers of any such Exchange
Notes. Any broker-dealer that resells Exchange Notes that were received by it
for its own account pursuant to the Exchange Offers and any broker or dealer
that participates in a distribution of such Exchange Notes may be deemed to be
an "underwriter" within the meaning of the Securities Act and any profit on
any such resale of Exchange Notes and any commissions or concessions received
by any such persons may be deemed to be underwriting compensation under the
Securities Act. The Letter of Transmittal states that by acknowledging that it
will deliver and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the
Securities Act.
For a period of 180 days after the Expiration Date the Company will promptly
send additional copies of this Prospectus and any amendment or supplement to
this Prospectus to any broker-dealer that requests such documents in the
Letter of Transmittal. The Company has agreed to pay all expenses incident to
the Exchange Offer (including the expenses of one counsel for the holders of
the Original Notes), other than commissions or concessions of any broker-
dealers, and will indemnify the holders of the Notes (including any broker-
dealers) against certain liabilities, including liabilities under the
Securities Act.
LEGAL MATTERS
The validity of the Exchange Notes offered hereby will be passed upon for
the Company by Testa, Hurwitz & Thibeault, LLP, Boston, Massachusetts.
EXPERTS
The audited financial statements included in this Prospectus and elsewhere
in the Registration Statement, to the extent and for the periods indicated in
their reports, have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in
giving said reports.
123
The consolidated balance sheets of MAGIC as of May 31, 1996 and 1997 and the
consolidated statements of income, shareholders' equity and cash flows for
each of the years in the three year period ended May 31, 1997 included in this
Prospectus, have been included herein in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given upon their
authority as experts in accounting and auditing, appearing herein.
The financial statements of Universal Media, Inc., as of December 31, 1997
and for the year then ended, included in this Prospectus and elsewhere in the
Registration Statement, have been audited by Mahoney Cohen & Company, CPA,
P.C., independent certified public accountants, as indicated in their report
with respect thereto and are included herein in reliance upon the authority of
said firm as experts in accounting and auditing in giving said report.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-4 under the Securities Act with respect to the Exchange Notes offered
hereby. As permitted by the rules and regulations of the Commission, this
Prospectus omits certain information, exhibits and undertakings contained in
the Registration Statement. For further information with respect to the
Company and the Exchange Notes offered hereby, reference is made to the
Registration Statement, including the exhibits thereto and the financial
statements, notes and schedules filed as a part thereof. The Registration
Statement (and the exhibits and schedules thereto), as well as the periodic
reports and other information filed by the Company with the Commission, may be
inspected and copied at the Public Reference Section of the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at
the regional offices of the Commission located at Room 1400, 75 Park Place,
New York, New York 10007 and Suite 1400, Northwestern Atrium Center, 500 West
Madison Street, Chicago, Illinois 60661. Copies of such materials may be
obtained from the Public Reference Section of the Commission, Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and its
public reference facilities in New York, New York and Chicago, Illinois at
prescribed rates. Such information can also be reviewed through the
Commission's Electronic Data Gathering, Analysis and Retrieval System which is
publicly available through the Commission's Web Site (http: www.sec.gov).
Statements contained in this Prospectus as to the contents of any contract
or other document are not necessarily complete, and in each instance reference
is made to the copy of such contract or document filed as an exhibit to the
Registration Statement, each such statement being qualified by such reference.
Pursuant to the Indenture, the Company has agreed to furnish to the Trustee
and to registered holders of the Notes, without cost to the Trustee or such
registered holders, copies of all reports and other information that would be
required to be filed by the Company with the Commission under the Exchange
Act, whether or not the Company is then required to file reports with the
Commission. As a result of the Exchange Offer, the Company will become subject
to the periodic reporting and other informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Company
has agreed that, whether or not the Company is subject to filing requirements
under Section 13 or 15(d) of the Exchange Act, and so long as any Notes remain
outstanding, it will file with the Commission (but only if the Commission at
such time is accepting such voluntary filings) and will send the Trustee
copies of the financial information, documents and reports that would have
been required to be filed with the Commission pursuant to the Exchange Act.
124
INDEX TO FINANCIAL STATEMENTS
PAGE
----
ADVANSTAR COMMUNICATIONS INC. AND SUBSIDIARIES (AND PREDECESSOR)
Report of Independent Public Accountants................................ F-3
Consolidated Balance Sheets as of December 31, 1996 and 1997............ F-4
Consolidated Statements of Operations for the year ended December 31,
1995, five months ended May 31, 1996, seven months ended December 31,
1996 and year ended December 31, 1997.................................. F-5
Consolidated Statements of Shareholder's Equity for the periods ended
December 31, 1994, 1995, 1996 and 1997 and May 31, 1996................ F-6
Consolidated Statements of Cash Flows for the year ended December 31,
1995, five months ended May 31, 1996, seven months ended December 31,
1996 and year ended December 31, 1997.................................. F-7
Notes to Consolidated Financial Statements.............................. F-8
Condensed Consolidated Balance Sheet as of December 31, 1997 and June
30, 1998 (unaudited)................................................... F-21
Condensed Consolidated Statement of Operations for the six month periods
ended
June 30, 1997 and 1998 (unaudited)..................................... F-22
Condensed Consolidated Statements of Cash Flows for the six month peri-
ods ended June 30, 1997 and 1998 (unaudited)........................... F-23
Notes to Condensed Consolidated Financial Statements (unaudited)........ F-24
MEN'S APPAREL GUILD IN CALIFORNIA, INC.
Report of Independent Public Accountants................................ F-32
Report of Independent Accountants....................................... F-33
Consolidated Balance Sheets as of May 31, 1996 and 1997 and February 28,
1998................................................................... F-34
Consolidated Statements of Income for the fiscal years ended May 31,
1995, 1996 and 1997 and the nine months ended February 28, 1998........ F-35
Consolidated Statements of Cash Flows for the fiscal years ended May 31,
1995, 1996 and 1997 and the nine months ended February 28, 1998........ F-36
Consolidated Statements of Shareholders' Equity for the fiscal years
ended May 31, 1995, 1996 and 1997 and the nine months ended February
28, 1998............................................................... F-37
Notes to Consolidated Financial Statements.............................. F-38
UNIVERSAL MEDIA, INC.
Report of Independent Auditors.......................................... F-43
Balance Sheet as of December 31, 1997................................... F-44
Statement of Operations for the year ended December 31, 1997............ F-45
Statement of Stockholder's Deficiency for the year ended December 31,
1997................................................................... F-46
Statement of Cash Flows for the year ended December 31, 1997............ F-47
Notes to Financial Statements........................................... F-48
Condensed Balance Sheet as of June 30, 1998 (unaudited)................. F-52
Condensed Statement of Income for the six month periods ended June 30,
1997 and 1998 (unaudited).............................................. F-53
Condensed Statement of Cash Flows for the six month periods ended June
30, 1997 and 1998 (unaudited).......................................... F-54
Notes to Condensed Financial Statements (unaudited)..................... F-55
F-1
PAGE
----
VIDEO SOFTWARE DEALERS ASSOCIATION CONVENTION AND EXHIBITION
Report of Independent Public Accountants................................ F-59
Statement of Net Liabilities to be Contributed as of December 31, 1997.. F-60
Statement of Operations for the year ended December 31, 1997............ F-61
Statement of Cash Flows for the year ended December 31, 1997............ F-62
Notes to Financial Statements........................................... F-63
TELEPROFESSIONAL, INC.
Report of Independent Public Accountants................................ F-65
Balance Sheet as of December 31, 1997................................... F-66
Statement of Operations for the year ended December 31, 1997............ F-67
Statement of Shareholders' Equity as of December 31, 1997............... F-68
Statement of Cash Flows for the year ended December 31, 1997............ F-69
Notes to Financial Statements........................................... F-70
SCANTECH
Report of Independent Public Accountants................................ F-73
Statement of Net Liabilities to be Assumed as of December 31, 1997 and
March 31, 1998......................................................... F-74
Statement of Operations for the year ended December 31, 1997 and the
three months ended March 31, 1997 and 1998 (unaudited)................. F-75
Statement of Cash Flows for the year ended December 31, 1997 and the
three months ended March 31, 1997 and 1998 (unaudited)................. F-76
Notes to Financial Statements........................................... F-77
F-2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of Advanstar Communications Inc.:
We have audited the accompanying consolidated balance sheets as of December
31, 1996 and 1997 and the consolidated statements of operations, shareholder's
equity and cash flows of Advanstar Communications Inc. (a New York Corporation
and wholly-owned subsidiary of Advanstar Holdings, Inc.) and subsidiaries and
its predecessor for the year ended December 31, 1995, the five-month period
ended May 31, 1996, the seven-month period ended December 31, 1996 and the
year ended December 31, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Advanstar
Communications Inc. and subsidiaries and its predecessor as of December 31,
1996 and 1997, and the results of their operations and their cash flows for
the year ended December 31, 1995, the five-month period ended May 31, 1996,
the seven-month period ended December 31, 1996, and the year ended December
31, 1997, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Minneapolis, Minnesota,
February 6, 1998
F-3
ADVANSTAR COMMUNICATIONS INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
--------------------
1996 1997
--------- ---------
(IN THOUSANDS,
EXCEPT SHARE AND
PER SHARE AMOUNTS)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.............................. $ 2,531 $ 7,024
Accounts receivable, net of allowance for doubtful
accounts of $541 at December 31, 1996 and $553 at
December 31, 1997..................................... 16,530 18,819
Prepaid expenses....................................... 6,437 9,607
Other.................................................. 1,705 2,256
--------- ---------
Total current assets................................. 27,203 37,706
--------- ---------
PROPERTY, PLANT AND EQUIPMENT:
Land and improvements.................................. 3,034 2,514
Buildings.............................................. 5,007 5,041
Furniture, machinery and equipment..................... 7,023 9,229
Leasehold improvements................................. 490 517
Accumulated depreciation and amortization.............. (1,954) (5,155)
--------- ---------
Net property, plant and equipment.................... 13,600 12,146
--------- ---------
INTANGIBLE ASSETS, net:
Goodwill............................................... 161,199 176,103
Other intangibles...................................... 74,871 72,542
--------- ---------
Total intangible assets.............................. 236,070 248,645
--------- ---------
OTHER ASSETS, net........................................ 300 --
--------- ---------
$ 277,173 $ 298,497
========= =========
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt................... $ 9,500 $ 15,350
Accounts payable....................................... 5,303 10,938
Accrued compensation................................... 6,535 6,809
Income taxes payable................................... 2,961 1,552
Other accrued liabilities.............................. 4,763 2,312
Deferred revenue....................................... 16,682 21,105
--------- ---------
Total current liabilities............................ 45,744 58,066
--------- ---------
LONG-TERM DEBT, net of current maturities:
Senior term loans...................................... 124,500 146,873
Revolving credit loan.................................. 17,000 2,000
--------- ---------
Total long-term debt................................. 141,500 148,873
--------- ---------
OTHER LONG-TERM LIABILITIES.............................. 3,090 1,824
--------- ---------
COMMITMENTS AND CONTINGENCIES (Notes 3, 4, 5 and 7)
SHAREHOLDER'S EQUITY:
Common stock, $.01 par value; 1,500,000 shares
authorized, 1,000,000 shares outstanding at December
31, 1996 and December 31, 1997........................ 10 10
Capital in excess of par value......................... 96,990 108,990
Accumulated deficit.................................... (10,414) (19,309)
Translation adjustment................................. 253 43
--------- ---------
Total shareholder's equity........................... 86,839 89,734
--------- ---------
$ 277,173 $ 298,497
========= =========
The accompanying notes to financial statements are an integral part of these
consolidated balance sheets.
F-4
ADVANSTAR COMMUNICATIONS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
PREDECESSOR
-------------------------
SEVEN MONTHS
YEAR ENDED FIVE MONTHS ENDED YEAR ENDED
DECEMBER 31, ENDED DECEMBER 31, DECEMBER 31,
1995 MAY 31, 1996 1996 1997
------------ ------------ ------------ ------------
Net revenue............... $145,300 $68,286 $ 82,720 $ 187,656
-------- ------- ---------- ----------
Operating expenses:
Cost of sales........... 34,729 15,764 18,394 39,096
Selling, editorial and
circulation............ 62,213 28,063 35,099 87,007
General and administra-
tive................... 23,747 10,031 15,446 27,514
Amortization of goodwill
and other intangible
assets................. 4,801 1,588 13,171 24,326
Depreciation............ 3,405 1,431 1,949 3,200
-------- ------- ---------- ----------
Total operating ex-
penses............... 128,895 56,877 84,059 181,143
-------- ------- ---------- ----------
Operating income (loss)... 16,405 11,409 (1,339) 6,513
Other income (expense):
Interest expense, net... (19,613) (6,963) (7,511) (15,117)
Other income (expense),
net.................... 2,230 23 (488) 292
-------- ------- ---------- ----------
Income (loss) before in-
come taxes............... (978) 4,469 (9,338) (8,312)
Provision for income tax-
es....................... (16) (13) (1,076) (583)
-------- ------- ---------- ----------
Net income (loss)......... $ (994) $ 4,456 $ (10,414) $ (8,895)
======== ======= ========== ==========
Net income (loss) per
share, basic and
diluted.................. $ (10.41) $ (8.90)
========== ==========
Weighted average common
stock outstanding, basic
and diluted.............. 1,000,000 1,000,000
The accompanying notes to financial statements are an integral part of these
consolidated statements.
F-5
ADVANSTAR COMMUNICATIONS INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
COMMON CAPITAL IN
NUMBER OF STOCK $.01 EXCESS OF TRANSLATION ACCUMULATED
SHARES PAR VALUE PAR VALUE ADJUSTMENT DEFICIT TOTAL
--------- ---------- ---------- ----------- ----------- ---------
Balance, December 31,
1994 (Predecessor)..... 1,000,000 $10 $ 53,089 $119 $(180,639) $(127,421)
Net loss.............. -- -- -- -- (994) (994)
Stock proceeds........ 0 -- 125 -- -- 125
Translation adjust-
ment................. -- -- -- (14) -- (14)
--------- --- -------- ---- --------- ---------
Balance, December 31,
1995 (Predecessor)..... 1,000,000 10 53,214 105 (181,633) (128,304)
Net income............ -- -- -- -- 4,456 4,456
Translation adjust-
ment................. -- -- -- (105) -- (105)
--------- --- -------- ---- --------- ---------
Balance, May 31, 1996
(Predecessor).......... 1,000,000 $10 $ 53,214 $-- $(177,177) $(123,953)
========= === ======== ==== ========= =========
Balance, May 31, 1996
(Successor)............ 1,000,000 10 96,990 -- -- 97,000
Net loss.............. -- -- -- -- (10,414) (10,414)
Translation adjust-
ment................. -- -- -- 253 -- 253
--------- --- -------- ---- --------- ---------
Balance, December 31,
1996 (Successor)....... 1,000,000 10 96,990 253 (10,414) 86,839
Net loss.............. -- -- -- -- (8,895) (8,895)
Translation adjust-
ment................. -- -- -- (210) -- (210)
Capital contribution.. -- -- 12,000 -- -- 12,000
--------- --- -------- ---- --------- ---------
Balance, December 31,
1997 (Successor)....... 1,000,000 $10 $108,990 $ 43 $ (19,309) $ 89,734
========= === ======== ==== ========= =========
The accompanying notes to financial statements are an integral part of these
consolidated statements.
F-6
ADVANSTAR COMMUNICATIONS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
PREDECESSOR
--------------------
FIVE SEVEN
MONTHS MONTHS YEAR
YEAR ENDED ENDED ENDED ENDED
DECEMBER 31, MAY 31, DECEMBER 31, DECEMBER 31,
1995 1996 1996 1997
------------ ------- ------------ ------------
OPERATING ACTIVITIES:
Net income (loss)............. $ (994) $ 4,456 $ (10,414) $ (8,895)
Adjustments to reconcile net
income (loss) to net cash
provided by operating activi-
ties:
Depreciation and amortiza-
tion......................... 8,206 3,019 15,120 27,526
Noncash interest.............. 3,443 963 (4) 934
(Gain) loss on sales of as-
sets and other............... (1,929) (28) 8 (228)
Changes in operating assets
and liabilities:
Accounts receivable, net..... (373) (422) (2,010) (2,098)
Inventories.................. (553) 257 (45) (317)
Prepaid expenses............. 861 2,055 (2,206) (2,001)
Accounts payable and accrued
liabilities................. (3,570) (5,820) 6,169 (2,591)
Deferred revenue............. 692 (5,320) 5,745 290
Other........................ (1,876) (171) 253 (28)
------- ------- --------- --------
Net cash provided by (used
in) operating activities... 3,907 (1,011) 12,616 12,592
------- ------- --------- --------
INVESTING ACTIVITIES:
Additions to property, plant
and equipment................ (1,451) (365) (780) (2,260)
Change in notes receivable.... 119 34 235 (235)
Acquisition of publications
and trade shows.............. (468) -- (18,379) (31,871)
Proceeds from sale of fixed
assets....................... 6,232 57 -- 1,043
------- ------- --------- --------
Net cash provided by (used
in) investing activities... 4,432 (274) (18,924) (33,323)
------- ------- --------- --------
FINANCING ACTIVITIES:
Acquisition-related financing
transactions:
Redemption of common stock,
options and warrants......... -- -- (57,002) --
Repayment of long-term debt... -- -- (171,162) --
Repayment of revolving credit
loan......................... -- -- (6,898) --
Proceeds from capital
contributions................ -- -- 97,000 --
Proceeds from long-term
debt......................... -- -- 140,000 --
Proceeds from revolving
credit loan.................. -- -- 4,000 --
Transaction costs and loan
origination fees............. -- -- (5,699) --
Repayments of:
Revolving credit loan......... (21,602) (7,950) (1,000) (15,000)
Long-term debt................ (7,452) (2,500) (6,000) (11,776)
Borrowings of:
Revolving credit loan......... 13,166 12,282 14,000 --
Long-term debt................ 922 245 -- 40,000
Proceeds from sale of common
stock and capital contribu-
tions and other.............. 308 150 -- 12,000
Purchase of interest rate cap
agreements and
origination/underwriters
fees......................... -- -- (1,295) --
------- ------- --------- --------
Net cash provided by (used
in) financing activities... (14,658) 2,227 5,944 25,224
------- ------- --------- --------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS.......... (6,319) 942 (364) 4,493
CASH AND CASH EQUIVALENTS, be-
ginning of period............. 8,272 1,953 2,895 2,531
------- ------- --------- --------
CASH AND CASH EQUIVALENTS, end
of period..................... $ 1,953 $ 2,895 $ 2,531 $ 7,024
======= ======= ========= ========
Supplemental disclosures of
cash flow information:
Cash paid during the period
for:
Interest.................... $15,600 $ 9,839 $ 6,343 $ 15,437
Income taxes................ 17 0 908 2,877
The accompanying notes to financial statements
are an integral part of these consolidated statements.
F-7
ADVANSTAR COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
1. DESCRIPTION OF BUSINESS AND ACQUISITION:
Description of Business
The accompanying consolidated financial statements include the accounts of
Advanstar Communications Inc. (a New York corporation) and its wholly owned
subsidiaries, collectively referred to as the Company. All intercompany
transactions have been eliminated in consolidation. The Company is a wholly
owned subsidiary of Advanstar Holdings, Inc. (Holdings). Holdings has limited
operations and all of its activities are performed solely on behalf of the
Company. Accordingly, all financial transactions and results of Holdings are
reflected in the financial statements of the Company via intercompany charges
(see Note 9).
The Company publishes controlled circulation trade and professional
periodicals; operates and manages expositions, trade shows and conferences;
and markets a broad range of marketing, direct mail and database products and
services.
Acquisition of the Company
On May 31, 1996, Holdings acquired in a cash merger the stock and became the
sole shareholder of the Company. Holdings was established expressly for the
purpose of effecting the acquisition of the Company (the HFCP III Acquisition)
and is wholly owned by AHI Advanstar. The aggregate purchase price for the
Company was approximately $267.0 million, consisting of $97.0 million cash
equity, $144.0 million debt and approximately $26.0 million of assumed
liabilities and transaction costs.
Due to the effects of the HFCP III Acquisition on the recorded bases of
goodwill, intangibles, property and shareholder's equity, as discussed below
and in Note 4, the financial statements prior to and subsequent to the HFCP
III Acquisition are not comparable. Periods prior to June 1, 1996 represent
the accounts of the Predecessor.
Other Acquired Entities
During 1995, 1996 and 1997, the Company purchased certain publication and
exposition properties for an aggregate purchase price of $0.5 million, $18.3
million and $39.7, respectively. The cost of these acquired entities in excess
of the fair market value of net assets acquired has been recorded as goodwill
and intangibles. The pro forma affect of these acquisitions on the results of
operations was not material.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash and Cash Equivalents
Cash and cash equivalents include cash on deposit and highly liquid
investments with original maturities of three months or less. Cash equivalents
are stated at cost, which approximates their fair market value. The effect of
foreign currency translation on cash held by foreign operations is immaterial.
Prepaid Expenses and Other Current Assets
Prepaid expenses consist primarily of prepaid exposition expenses, prepaid
publication production costs and miscellaneous deposits. Exposition and
publication expenses are charged to operations at the time of the occurrence
of the related exposition and at the time of publication issuance. Other
current assets consist of paper inventories and notes receivable.
F-8
ADVANSTAR COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996 AND 1997
Property, Plant and Equipment
Property, plant and equipment additions are recorded at cost. For financial
reporting purposes, depreciation is provided on a straight-line basis over the
following estimated useful lives:
ESTIMATED
USEFUL LIVES
-------------
Land improvements.............................................. 10-15 years
Buildings...................................................... 20-40 years
Furniture, machinery and equipment............................. 3-10 years
Leasehold improvements......................................... Life of lease
For tax reporting purposes, certain assets have different estimated useful
lives.
Goodwill
All acquisitions have been accounted for using the purchase method of
accounting, with the purchase price in excess of the fair values of specific
identifiable tangible and intangible assets acquired allocated to goodwill.
Goodwill, which is being amortized on a straight-line basis over an average
life of 23 years, is recorded in the accompanying consolidated balance sheet
net of accumulated amortization of $3.9 million and $11.9 million at December
31, 1996 and 1997, respectively.
Intangible Assets
Intangible assets related to the HFCP III Acquisition consist primarily of
advertiser, paid subscriber and trade show exhibitor lists, computer software,
the value assigned to the Company's assembled workforce and fulfillment
agreements. Such intangibles are being amortized on a straight-line basis over
3 months to 20 years. Intangible assets associated with acquired businesses
consist primarily of identifiable intangibles and are being amortized on a
straight-line basis over one to eight years. Accumulated amortization was $9.6
million and $25.6 million at December 31, 1996 and 1997, respectively.
Impairment of Long-Lived Assets
The Company evaluates the carrying value of long-lived assets in accordance
with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" to determine whether certain
circumstances may affect the estimated useful lives or the recoverability of
such assets. A number of factors, including estimated future undiscounted cash
flows associated with the long-lived asset, are considered in this
determination. The accompanying financial statements reflect no adjustments
relative to this evaluation.
Revenue Recognition
Exposition revenue is recognized in the accounting period in which the
exposition is conducted. Subscription revenue is recognized on a pro rata
basis as publications are issued to fulfill the subscription obligations.
Advertising revenue is recognized as the publication with the respective
advertisement is published and issued. Deferred revenue is recorded when cash
is received in advance of providing the related service.
F-9
ADVANSTAR COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996 AND 1997
Deferred revenue consisted of the following at December 31 (in thousands):
1996 1997
------- -------
Deferred exposition revenue................................. $10,777 $16,529
Deferred advertising and subscription revenue............... 5,905 4,576
------- -------
Total deferred revenue...................................... $16,682 $21,105
======= =======
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Ultimate results could differ from these estimates.
Foreign Currency Translation
The Company accounts for translation investments in foreign entities in
accordance with SFAS No. 52, "Foreign Currency Translation."
Reclassifications
Certain amounts previously reported in the 1995 and 1996 financial
statements have been reclassified to conform to the 1997 presentation.
Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income." The statement requires an enterprise to
classify items of other comprehensive income by their nature in a financial
statement and display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the equity
section of the statement of financial position. The Company will adopt this
standard during 1998. Adoption of this standard is not expected to have a
material effect on the Company.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information." The
statement requires that a public business enterprise report financial and
descriptive information about its reportable operating segments such as a
measure of segment profit or loss, certain specific revenue and expense items,
and segment assets. The Company will adopt this standard during 1998 and is
currently analyzing the impact it will have on the disclosures in its
financial statements.
3. DEBT:
In connection with the HFCP III Acquisition, all existing debt at May 31,
1996 was paid in full, and the Company entered into a credit agreement
securing new debt in the form of two tranche term loan notes and a revolving
credit loan. During 1997, the Company obtained an amendment to its credit
facility which provided $40 million of a new tranche term loan. The Company
also expanded its revolving credit loan capacity during 1997 from $25.0
million to $35.0 million. The credit facility was used to finance acquisitions
completed late in 1996 and early 1997.
F-10
ADVANSTAR COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996 AND 1997
Debt consisted of the following (in thousands):
DECEMBER 31
------------------
1996 1997
-------- --------
Tranche A term loan, interest at LIBOR plus 2.25%, 8.19%
at December 31, 1997, due June 30, 2001.................. $ 60,000 $ 51,500
Tranche A2 term loan, interest at LIBOR plus 2.75%, 8.69%
at December 31, 1997, due December 31, 2002.............. -- 38,850
Tranche B term loan, interest at LIBOR plus 3.0%, 8.94% at
December 31, 1997, due December 31, 2003................. 74,000 71,873
Revolving credit loan, interest at LIBOR plus 2.25%, 8.19%
at December 31, 1997, due June 30, 2001.................. 17,000 2,000
-------- --------
151,000 164,223
Less--Current maturities.................................. (9,500) (15,350)
-------- --------
$141,500 $148,873
======== ========
Based on the borrowing rates currently available to the Company for bank
loans with similar terms and average maturities, the fair value of long-term
debt was substantially the same as its carrying value at December 31, 1996 and
1997.
The Tranche A , A2 and B term loan notes require annual scheduled principal
payments as follows (in thousands):
1998................................................................. $15,350
1999................................................................. 18,874
2000................................................................. 23,000
2001................................................................. 29,000
2002................................................................. 43,000
The Company has a revolving credit loan with a commitment of $35.0 million
against which an outstanding letter of credit of approximately $0.5 million
was utilized at December 31, 1997. As of December 31, 1997, $32.5 million of
borrowing capacity remains available under the revolving credit loan. The
revolving credit loan expires June 30, 2001.
In connection with the tranche term notes and revolving credit loan, the
Company has granted a security interest in substantially all real and
intellectual property of the Company.
The Company has also agreed, among other matters, to maintain certain
defined ratios of total leverage (debt to EBITDA) and total fixed charges
(EBITDA to fixed charges). The Company was in compliance with all such
covenants as of December 31, 1997.
4. SHAREHOLDER'S EQUITY:
The amounts recorded in the Company's shareholder's equity accounts as of
May 31, 1996 have been adjusted to reflect a $97.0 million capital
contribution from the new shareholder. During 1997, the Company received an
additional capital contribution from its shareholder of $12.0 million at the
time of the credit facility amendment discussed in Note 3.
F-11
ADVANSTAR COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996 AND 1997
Stock Option Plan
In November 1996, Holdings implemented a nonqualified stock option plan (the
Plan) under which certain members of the Company's management were granted
options to purchase shares of Holdings' common stock. The exercise price for
these options was $10 per share initially, and increases at a 10% annually
compounded rate. The term of the options runs for ten years, with options
vesting 20% in each of the first five years of the option term. Options become
immediately exercisable upon a change of control of Holdings, as defined, or
at the discretion of Holdings' Board of Directors. If the Company does not
complete an initial public offering by January 1, 2001, option holders may
agree with the Company to sell the shares under option to the Company at a
fair market value price to be determined by the Board of Directors. However,
the Company is not obligated to agree to any such repurchase under the terms
of the Plan. In addition, the Company has certain repurchase rights under the
Plan. Under the Plan, up to 745,200 options may be granted at the discretion
of the Holdings' Board of Directors.
Because of the variable features of the Plan, the Company measures the
difference between the exercise price of the options and the fair value of the
shares under option at the end of each fiscal period, and recognizes
compensation expense to provide for such difference. As of December 31, 1996
and 1997 no compensation expense was required to be recognized.
A summary of stock option activity under the Plan is as follows:
1996 1997
---------------- ----------------
SHARES SHARES
UNDER EXERCISE UNDER EXERCISE
OPTION PRICE OPTION PRICE
------- -------- ------- --------
Outstanding at beginning of year.............. -- 623,700
Granted..................................... 623,700 $10.00 111,700 $11.00
Exercised................................... -- --
Forfeited................................... -- --
------- -------
Outstanding at end of year.................... 623,700 735,400
======= =======
Exercisable at end of year.................... -- 124,740
======= =======
The Company accounts for the Plan under the provisions of "Accounting for
Stock-Based Compensation" (SFAS No. 123). As of December 31, 1997, the
outstanding stock options granted in 1996 had a remaining contractual life of
approximately 9 years and the outstanding stock options granted in 1997 had a
remaining contractual life of approximately 10 years. The assumed expected
life for option grants is five years, and the risk-free interest rate is 6.6%
in 1996 and 6.4% in 1997.
5. POSTRETIREMENT AND OTHER EMPLOYEE BENEFITS:
Postretirement Benefits
Prior to June 1, 1995, the Company maintained a plan whereby employees
retiring from the Company on or after attaining age 62 who had rendered at
least 20 years of service were entitled to postretirement medical coverage and
life insurance. These benefits were subject to deductibles, copayment
provisions and other limitations.
F-12
ADVANSTAR COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996 AND 1997
As permitted by the provisions of the plan, on June 1, 1995, the Company
terminated the plan for all employees, except current retirees and active
employees who were at least 57 years of age and will have 20 years of service
at age 62.
The components of net postretirement benefit cost for 1997 were as follows
(in thousands):
FULLY OTHER
CURRENT ELIGIBLE ACTIVE PLAN
RETIREES PARTICIPANTS PARTICIPANTS TOTAL
-------- ------------ ------------ -----
Service cost...................... $-- $-- $ 8 $ 8
Interest on accumulated benefit
obligations...................... 46 5 10 61
---- ---- --- ---
Net periodic postretirement bene-
fit cost......................... $ 46 $ 5 $18 $69
==== ==== === ===
The accumulated postretirement benefit obligation at December 31, 1997
included in the accompanying consolidated balance sheet was as follows (in
thousands):
Retirees............................................................. $ 677
Fully eligible active plan participants.............................. 70
Other fully active plan participants................................. 155
------
Total accumulated postretirement benefit obligation.................. 902
Unrecognized actuarial loss.......................................... 326
------
Accrued postretirement benefit cost.................................. $1,228
======
The actuarial determinations were based on various assumptions as follows:
Annual increase in cost of covered healthcare benefits:
Participants under age 65...................................... 8.5%
Participants over age 65....................................... 7.5%
Assumed annual reduction in rate for ten years:
Participants under age 65...................................... 0.25%-0.50%
Participants over age 65....................................... 0.25%-0.50%
Discount rate.................................................. 7.00%
401(k) Plan
Holdings has an Employees' 401(k) Plan and Trust (the "Plan") available to
employees of Holdings, the Company and its domestic subsidiaries. All current
and future domestic employees who have completed one year of service and are
at least 21 years of age are eligible to participate in the Plan. Holdings is
required to make a matching contribution to the Plan and may, at its
discretion, make discretionary contributions to the Plan. Eligible employees
are vested 100% in their own contributions. Contributions made by the Company
vest in equal installments over five years. The Company expensed $0.4 million
in the seven months ended December 31, 1996 and $0.9 million for the year
ended December 31, 1997.
F-13
ADVANSTAR COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996 AND 1997
6. INCOME TAXES:
The Company utilizes the liability method for calculating deferred income
taxes, and deferred tax assets and liabilities are determined based on the
estimated future tax effects of differences between the financial statement
and tax bases of assets and liabilities pursuant to the provisions of enacted
tax laws. Significant components of the Company's deferred tax assets were as
follows (in thousands):
DECEMBER 31,
----------------
1996 1997
------- -------
Deferred tax assets:
Net operating loss carryforwards......................... $ 1,200 $ 4,900
Foreign tax credit carryforwards......................... 1,025 1,042
Charitable contribution carryover........................ -- 9
Amortization of intangible assets........................ 556 305
Postretirement benefits other than pension............... 467 467
Allowance for bad debts.................................. 55 --
Depreciation............................................. 495 572
Other, primarily accrued expenses........................ 950 823
------- -------
Gross deferred tax assets.............................. 4,748 8,118
Deferred tax liabilities:
Prepaid expenses......................................... -- (1,736)
Valuation allowance...................................... (4,748) (6,382)
------- -------
Deferred income taxes...................................... $ -- $ --
======= =======
A valuation allowance has been provided because of the Company's history of
operating losses. Net operating loss carryforwards totalling $1,200 expire in
2011 and the remainder ($3,700) expire in 2012. The foreign tax credit
carryforwards substantially expire in 2001.
7. COMMITMENTS AND CONTINGENCIES:
Leases
The Company has long-term operating leases for office space and office
equipment. The leases generally require the Company to pay maintenance,
insurance, taxes and other expenses in addition to minimum annual rentals.
Building and equipment rent expense was $2.7, $2.6 and $3.0 million for 1995,
1996 and 1997, respectively. Future minimum lease commitments under operating
leases with initial terms of one year or more are as follows (in thousands):
1998................................................................... 2,874
1999................................................................... 2,266
2000................................................................... 1,686
2001................................................................... 1,525
2002................................................................... 1,369
Thereafter............................................................. 2,313
F-14
ADVANSTAR COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996 AND 1997
Employment Agreements
Two senior executives of the Company entered into employment agreements with
Holdings dated as of July 1, 1996. Each agreement provides for a four year
term. Pursuant to the agreements, the executives are entitled to annual base
salaries and annual bonuses based on the Company's EBITDA for any year. The
agreements also provide for severance benefits equal to one year's base salary
and benefits (and a pro rated bonus) upon termination of employment by
Holdings without "cause" or by the executive for "good reason". The executives
also entered into noncompetition and confidentiality agreements with Holdings.
The noncompete period is one year after termination of employment unless
employment is terminated by Holdings without cause or by the executive for
good reason, in which case the noncompetition period is six months. During the
noncompetition period, the executives may not hire any Company employee or
solicit any trade show or publishing business from a third party which has a
relationship or contract with the Company. Compensation expense for these
executives is included in general and administrative expenses of the Company.
Litigation
The Company is a defendant in legal proceedings arising in the ordinary
course of business. Although the outcome of these proceedings cannot presently
be determined, in the opinion of management, disposition of these proceedings
will not have a material effect on the results of operations or financial
position of the Company.
8. EVENTS SUBSEQUENT TO THE DATE OF REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
(UNAUDITED):
MAGIC Acquisition
On April 30, 1998, the Company acquired Men's Apparel Guild in California,
Inc. (MAGIC), which operates apparel expositions. The purchase price was
approximately $230.2 million in cash. Concurrent with the MAGIC Acquisition,
the Company renegotiated its credit agreement to provide additional borrowing
capacity, issued $150.0 million in senior subordinated notes and received an
additional equity contribution from Holdings of approximately $70.0 million.
Travel Agent Acquisition
On August 17, 1998, the Company acquired certain travel related publication
and trade show assets of Universal Media, Inc., including Travel Agent
(collectively, Travel Agent). The purchase price was approximately $68.0
million in cash plus approximately $1.0 million in assumed liabilities.
Concurrent with the Travel Agent Acquisition, the Company undertook the Second
Credit Facility Amendment to borrow an additional $40.0 million, and financed
the balance of the cash purchase price with its revolving credit loan.
Other 1998 Acquisitions
From January 1, 1998 through August 31, 1998, the Company completed nine
other acquisitions of exposition and publishing properties, with a cumulative
purchase price totaling approximately $43.1 million.
F-15
ADVANSTAR COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996 AND 1997
Pro Forma Financial Information
The aforementioned acquisitions will be accounted for as purchases and,
accordingly, the acquired entities' assets and liabilities will be recorded at
fair values as of the acquisition dates. Following is an unaudited pro forma
balance sheet of the Company, based on preliminary estimates of the allocation
of the purchase price, as if the acquisitions and the financing transactions
described above had been completed as of December 31, 1997 (in thousands):
ASSETS
Current assets..................................................... $ 39,039
Property, plant and equipment, net................................. 13,331
Other assets, net.................................................. 602,342
--------
$654,712
========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities................................................ $ 80,045
Long-term debt, net of current maturities.......................... 266,000
Subordinated Notes (net of discount)............................... 149,619
Other noncurrent liabilities....................................... 4,039
Shareholder's equity............................................... 155,009
--------
$654,712
========
Following are unaudited pro forma results of operations for the year ended
December 31, 1997 as if the aforementioned Acquisitions and the financing
transactions described above had been completed at the beginning of the year
(in thousands, expect per share data):
Revenues.......................................................... $267,927
========
Operating income.................................................. $ 18,008
========
Net loss.......................................................... $(13,548)
========
Net loss per share, basic and diluted............................. $ (13.55)
========
The unaudited pro forma financial information does not purport to represent
what the Company's financial position or results of operations would actually
have been if these transactions had occurred at such dates or to project the
Company's future results of operations.
9. SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS:
Basis of presentation
The Notes will be fully and unconditionally guaranteed on a senior
subordinated basis, jointly and severally, by the Company's wholly-owned
domestic subsidiaries (the Subsidiary Guarantors) and by Holdings. As
discussed in Note 1, the Company is a wholly-owned subsidiary of Holdings. The
limited activities of Holdings are performed solely for the benefit of the
Company. Accordingly, the financial transactions and results of Holdings are
"passed through" to the Company, without markup or discount, via intercompany
charges. Separate consolidated financial statements of Holdings are not
F-16
ADVANSTAR COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996 AND 1997
presented herein as they are not materially different from those presented for
the Company. Summarized, consolidating financial statements of Holdings are
provided as supplemental information.
The Subsidiary Guarantors are Art Expositions International, Inc.; Expocon
Management Associates, Inc.; On Demand Marketing, Inc.; Men's Apparel Guild in
California, Inc.; Magic Kids, Inc.; Technology Events Company, LLC and Applied
Business teleCommunications. The condensed consolidating financial statements
of the Guarantors are presented below and should be read in connection with
the Consolidated Financial Statements of the Company. Separate financial
statements of the Guarantors are not presented because the Guarantors are
jointly, severally and unconditionally liable under the guarantees and the
Company believes the condensed consolidating financial statements presented
are more meaningful in understanding the financial position of the Guarantors.
There are no significant restrictions on the ability of the Subsidiary
Guarantors to make distributions to the Company. Condensed consolidating
financial information has not been presented for 1996 and 1995 because the
Company had no non-guarantor subsidiaries in 1996 and 1995.
F-17
ADVANSTAR COMMUNICATIONS INC.
CONDENSED CONSOLIDATING BALANCE SHEET
(IN THOUSANDS)
AS OF DECEMBER 31, 1997
----------------------------------------------------------------------------------------------------
ADVANSTAR NON- THE COMPANY HOLDINGS
COMMUNICATIONS GUARANTOR GUARANTOR CONSOLIDATED CONSOLIDATED
INC. SUBSIDIARIES SUBSIDIARIES ELIMINATION TOTAL HOLDINGS ELIMINATION TOTAL
-------------- ------------ ------------ ----------- ------------ -------- ----------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash
equivalents........ $ 3,403 $ (317) $3,938 $ -- $ 7,024 $ -- $ -- $ 7,024
Accounts receivable,
net................ 16,545 (77) 2,351 -- 18,819 -- -- 18,819
Prepaid expenses.... 6,887 2,107 613 -- 9,607 -- -- 9,607
Intercompany
receivable/(payable).. 4,488 (1,420) (3,068) -- -- 740 (740) --
Other............... 1,894 -- 362 -- 2,256 -- -- 2,256
-------- ------- ------ -------- -------- -------- --------- --------
Total current
assets............. 33,217 293 4,196 -- 37,706 740 (740) 37,706
-------- ------- ------ -------- -------- -------- --------- --------
PROPERTY PLANT AND
EQUIPMENT, net: ... 11,453 207 486 -- 12,146 -- -- 12,146
INVESTMENTS IN
SUBSIDIARIES....... 29,194 -- -- (29,194) -- 107,496 (107,496) --
INTANGIBLE ASSETS,
net:............... 216,540 28,856 3,249 -- 248,645 -- -- 248,645
-------- ------- ------ -------- -------- -------- --------- --------
$290,404 $29,356 $7,931 $(29,194) $298,497 $108,236 $(108,236) $298,497
======== ======= ====== ======== ======== ======== ========= ========
LIABILITIES AND
SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Current maturities
of long-term debt.. $ 15,350 $ -- $ -- $ -- $ 15,350 $ -- $ -- $ 15,350
Accounts payable.... 8,806 799 1,333 -- 10,938 189 (189) 10,938
Deferred revenue.... 17,122 2,681 1,302 -- 21,105 -- -- 21,105
Accrued
liabilities........ 8,695 230 1,748 -- 10,673 551 (551) 10,673
-------- ------- ------ -------- -------- -------- --------- --------
Total current
liabilities....... 49,973 3,710 4,383 -- 58,066 740 (740) 58,066
-------- ------- ------ -------- -------- -------- --------- --------
LONG-TERM DEBT, net
of
current
maturities: ........ 148,873 -- -- -- 148,873 -- -- 148,873
OTHER LONG TERM
LIABILITIES: ....... 1,824 -- -- -- 1,824 -- -- 1,824
SHAREHOLDER'S EQUITY:
Common stock........ 10 2 332 (334) 10 -- -- 10
Paid-in Capital .... 108,990 26,959 1,863 (28,822) 108,990 109,000 (109,000) 108,990
Accumulated earnings
(deficit).......... (19,309) (1,315) 1,353 (38) (19,309) (1,504) 1,504 (19,309)
Translation
adjustment......... 43 -- -- -- 43 -- -- 43
-------- ------- ------ -------- -------- -------- --------- --------
Total
shareholder's
equity............ 89,734 25,646 3,548 (29,194) 89,734 107,496 (107,496) 89,734
-------- ------- ------ -------- -------- -------- --------- --------
$290,404 $29,356 $7,931 $(29,194) $298,497 $108,236 $(108,236) $298,497
======== ======= ====== ======== ======== ======== ========= ========
F-18
ADVANSTAR COMMUNICATIONS INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
(IN THOUSANDS)
FOR THE YEAR ENDED DECEMBER 31, 1997
----------------------------------------------------------------------------------------------------
ADVANSTAR NON- THE COMPANY HOLDINGS
COMMUNICATIONS GUARANTOR GUARANTOR CONSOLIDATED CONSOLIDATED
INC. SUBSIDIARIES SUBSIDIARIES ELIMINATION TOTAL HOLDINGS ELIMINATION TOTAL
-------------- ------------ ------------ ----------- ------------ -------- ----------- ------------
Net revenue......... $146,349 $17,848 $23,459 $ -- $187,656 $ -- $ -- $187,656
Operating expenses:
Cost of sales and
selling, editorial
and circulation... 96,852 13,991 15,260 -- 126,103 -- -- 126,103
General and
administrative.... 24,242 703 2,569 -- 27,514 2,902 (2,902) 27,514
Amortization of
goodwill and other
intangible
assets............ 21,777 2,499 50 -- 24,326 -- -- 24,326
Depreciation....... 2,855 93 252 -- 3,200 -- -- 3,200
-------- ------- ------- ----- -------- ------- ------ --------
Total operating
expenses......... 145,726 17,286 18,131 -- 181,143 2,902 (2,902) 181,143
Operating income
(loss)............. 623 562 5,328 -- 6,513 (2,902) 2,902 6,513
Other income
(expense):
Interest expense,
net............... (15,173) 5 51 -- (15,117) -- -- (15,117)
Other income
(expense), net.... 5,714 (1,759) (3,663) -- 292 2,902 (2,902) 292
-------- ------- ------- ----- -------- ------- ------ --------
Income (loss) before
income taxes....... (8,836) (1,192) 1,716 -- (8,312) -- -- (8,312)
Provision for income
taxes.............. 14 (125) (472) -- (583) -- -- (583)
Equity in income
(loss) of
subsidiaries....... (73) -- -- 73 -- (8,895) 8,895 --
-------- ------- ------- ----- -------- ------- ------ --------
Net income (loss)... $ (8,895) $(1,317) $ 1,244 $ 73 $ (8,895) $(8,895) $8,895 $ (8,895)
======== ======= ======= ===== ======== ======= ====== ========
F-19
ADVANSTAR COMMUNICATIONS INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS)
----------------------------------------------------------------------------------------------------
ADVANSTAR NON- THE COMPANY HOLDINGS
COMMUNICATIONS GUARANTOR GUARANTOR CONSOLIDATED CONSOLIDATED
INC. SUBSIDIARIES SUBSIDIARIES ELIMINATION TOTAL HOLDINGS ELIMINATION TOTAL
-------------- ------------ ------------ ----------- ------------ -------- ----------- ------------
OPERATING ACTIVITIES:
Net income (loss)... $ (8,895) $ (1,317) $1,244 $ 73 $ (8,895) $(8,895) $ 8,895 $ (8,895)
Adjustments to
reconcile net
income (loss) to
net cash provided
by operating
activities:
Depreciation and am-
ortization......... 24,632 2,592 302 -- 27,526 -- -- 27,526
Non cash interest... 934 -- -- -- 934 -- -- 934
(Gain) loss on sales
of assets and oth-
er................. (228) -- -- -- (228) -- -- (228)
Translation adjust-
ment............... 5 -- (5) -- -- -- -- --
Changes in operating
assets and liabili-
ties............... (36,715) 27,273 2,770 (73) (6,745) 8,895 (8,895) (6,745)
-------- -------- ------- ----- -------- ------- ------- --------
Net cash provided
by (used in) oper-
ating activities.. (20,267) 28,548 4,311 -- 12,592 -- -- 12,592
-------- -------- ------- ----- -------- ------- ------- --------
INVESTING ACTIVITIES:
Additions to proper-
ty, plant and
equipment.......... (1,609) (299) (352) -- (2,260) -- -- (2,260)
Changes in notes
receivable......... 65 -- (300) -- (235) -- -- (235)
Acquisition of pub-
lications and trade
shows.............. (3,183) (28,566) (122) -- (31,871) -- -- (31,871)
Proceeds from sale
of fixed assets.... 1,043 -- -- -- 1,043 -- -- 1,043
-------- -------- ------- ----- -------- ------- ------- --------
Net cash provided
by (used in) in-
vesting activi-
ties.............. (3,684) (28,865) (774) -- (33,323) -- -- (33,323)
-------- -------- ------- ----- -------- ------- ------- --------
FINANCING ACTIVITIES:
Proceeds from sale
of common stock and
capital
contributions and
other.............. 12,000 -- -- -- 12,000 -- -- 12,000
Borrowings of long-
term debt.......... 40,000 -- -- -- 40,000 -- -- 40,000
Repayments of long-
term debt.......... (26,776) -- -- -- (26,776) -- -- (26,776)
-------- -------- ------- ----- -------- ------- ------- --------
Net cash provided
by (used in) fi-
nancing activi-
ties.............. 25,224 -- -- -- 25,224 -- -- 25,224
-------- -------- ------- ----- -------- ------- ------- --------
NET INCREASE
(DECREASE) IN CASH
AND CASH
EQUIVALENTS: 1,273 (317) 3,537 -- 4,493 -- -- 4,493
CASH AND CASH
EQUIVALENTS,
BEGINNING OF
PERIOD:............. 2,130 -- 401 -- 2,531 -- -- 2,531
-------- -------- ------- ----- -------- ------- ------- --------
CASH AND CASH
EQUIVALENTS, END OF
PERIOD:............. $ 3,403 $ (317) $3,938 $ -- $ 7,024 $ -- $ -- $ 7,024
======== ======== ======= ===== ======== ======= ======= ========
F-20
ADVANSTAR COMMUNICATIONS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
DECEMBER 31, JUNE 30,
1997 1998
------------ -----------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................ $ 7,024 $ 21,974
Receivables, net..................................... 18,819 22,679
Prepaids............................................. 9,607 11,715
Other................................................ 2,256 2,041
-------- --------
Total current assets............................... 37,706 58,409
-------- --------
PROPERTY, PLANT AND EQUIPMENT, NET..................... 12,146 13,031
Goodwill and intangibles, net.......................... 248,645 528,018
-------- --------
$298,497 $599,458
======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt................. $ 15,350 $ 3,000
Accounts payable..................................... 10,938 12,888
Accrued liabilities.................................. 10,673 15,449
Deferred revenue..................................... 21,105 36,109
-------- --------
Total current liabilities.......................... 58,066 67,446
-------- --------
LONG-TERM DEBT, net of current portion................. 148,873 362,619
OTHER LONG-TERM LIABILITIES............................ 1,824 1,478
MINORITY INTEREST...................................... -- 13,764
SHAREHOLDER'S EQUITY:
Common stock......................................... 10 10
Paid-in-capital...................................... 108,990 178,990
Accumulated earnings (deficit)....................... (19,309) (24,479)
Translation adjustment............................... 43 (370)
-------- --------
Total shareholder's equity......................... 89,734 154,151
-------- --------
$298,497 $599,458
======== ========
F-21
ADVANSTAR COMMUNICATIONS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS--UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
----------------------
1997 1998
---------- ----------
Net revenue........................................... $ 100,054 $ 121,212
Operating expenses
Cost of sales....................................... 20,207 25,379
Selling, editorial and circulation.................. 45,482 55,375
General and administrative.......................... 13,768 17,164
Depreciation and amortization....................... 12,461 15,850
---------- ----------
Operating income...................................... 8,136 7,444
Interest expense, net................................. 7,435 10,491
Other, net............................................ 38 (1,894)
Provision for income taxes............................ 936 229
---------- ----------
Net income (loss)..................................... $ (197) $ (5,170)
========== ==========
Net income (loss) per share, basic and diluted........ $ (0.20) $ (5.17)
========== ==========
Weighted average common stock outstanding, basic and
diluted.............................................. 1,000,000 1,000,000
F-22
ADVANSTAR COMMUNICATIONS INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(AMOUNTS IN THOUSANDS--UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
-------------------
1997 1998
-------- ---------
OPERATING ACTIVITIES:
Net income (loss)....................................... $ (197) $ (5,170)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities--
Depreciation and amortization......................... 12,461 15,850
Other non cash items.................................. 456 (1,701)
Changes in operating items............................ (7,190) 658
-------- ---------
Net cash provided by operating activities............... 5,530 9,637
-------- ---------
INVESTING ACTIVITIES:
Additions to property, plant and equipment, net......... (1,112) 2,343
Additions to intangible assets and acquisition working
capital................................................ (31,162) (272,903)
Change in notes receivable.............................. 37 14
-------- ---------
Net cash used in investing activities..................... (32,237) (270,546)
-------- ---------
FINANCING ACTIVITIES:
Borrowings (payments) of long-term debt, net............ 32,474 199,859
Stock purchase proceeds................................. 12,000 70,000
Revolver borrowings, net................................ (13,000) 6,000
-------- ---------
Net cash provided by financing activities................. 31,474 275,859
-------- ---------
Net increase (decrease) in cash and cash equivalents...... 4,767 14,950
Cash and cash equivalents beginning of period............. 2,531 7,024
-------- ---------
Cash and cash equivalents end of period................... $ 7,298 $ 21,974
======== =========
F-23
ADVANSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION:
The accompanying condensed consolidated financial statements have been
prepared by Advanstar Communications Inc. (the Company), without audit,
pursuant to the rules and regulations of the Securities and Exchange
Commission. The information furnished in the condensed consolidated financial
statements includes normal recurring adjustments and reflects all adjustments
which are, in the opinion of management, necessary for a fair presentation of
such financial statements. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. Although the Company believes that the disclosures are
adequate to make the information presented not misleading, it is suggested that
these condensed consolidated financial statements be read in conjunction with
the audited financial statements and the notes thereto included in the
Company's Registration Statement on Form S-4, relating to the Company's
exchange offer for its outstanding 9 1/4% Senior Subordinated Notes.
Revenues and operating results for the six months ended June 30, 1998 and
1997 are not necessarily indicative of the results to be expected for the full
year.
2. ACQUISITIONS AND FINANCING TRANSACTIONS:
MAGIC Acquisition
On April 30, 1998, the Company acquired Men's Apparel Guild in California,
Inc. (MAGIC), which operates apparel expositions. The purchase price was
approximately $230.2 million in cash. Concurrent with the MAGIC Acquisition,
the Company renegotiated its credit agreement to provide additional borrowing
capacity and issued $150.0 million of 9 1/4% Senior Subordinated Notes (see
Note 3). On the Closing Date, the Company also received an additional equity
contribution from its parent of approximately $70.0 million.
Travel Agent Acquisition
On August 17, 1998, the Company acquired certain travel related publication
and trade show assets of Universal Media Inc., including Travel Agent
(collectively, Travel Agent). The purchase price was approximately $68.0
million in cash plus approximately $1.0 million in assumed liabilities.
Concurrent with the Travel Agent Acquisition, the Company undertook the Second
Credit Facility Amendment to borrow an additional $40.0 million, and financed
the balance of the cash purchase price with its revolving credit loan.
Other 1998 Acquisitions
From January 1, 1998 through August 31, 1998, the Company completed nine
other acquisitions of exposition and publishing properties, with a cumulative
purchase price totaling approximately $43.1 million.
Pro Forma Financial Information
The aforementioned acquisitions have been or will be accounted for as
purchases and, accordingly, the acquired entities' assets and liabilities have
been or will be recorded at fair values as of the acquisition dates.
F-24
ADVANSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
Following is an unaudited pro forma balance sheet of the Company, based on
preliminary estimates of the allocation of the purchase price, as if the
acquisitions and the financing transactions described herein had been
completed as of June 30, 1998 (in thousands):
ASSETS
Current assets....................................................... $ 53,172
--------
Property, plant and equipment, net................................... 13,250
--------
Goodwill, intangibles and other assets, net.......................... 596,403
--------
$662,825
========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities.................................................. $ 69,675
--------
Long-term debt, net of current maturities............................ 272,000
--------
Subordinated Notes (net of discount)................................. 149,619
--------
Other noncurrent liabilities......................................... 17,380
--------
Shareholder's equity................................................. 154,151
--------
$662,825
========
Following are unaudited pro forma results of operations for the six months
ended June 30, 1998 as if the aforementioned Acquisitions and the financing
transactions described above had been completed at the beginning of the year
(in thousands, except per share data):
Revenues............................................................. $160,137
========
Operating income..................................................... $ 17,669
========
Net income (loss).................................................... $ (2,488)
========
Net income per share, basic and diluted ............................. $ (2.49)
========
The unaudited pro forma financial information does not purport to represent
what the Company's financial position or results of operations would actually
have been if these transactions had occurred at such dates or to project the
Company's future results of operations.
3. DEBT AND AMENDED CREDIT FACILITY:
In order to facilitate the acquisition of MAGIC and to provide greater
flexibility in pursuing its growth strategy, on April 30, 1998, the Company
issued $150 million of its 9 1/4% Senior Subordinated Notes (the Notes) and
amended its existing senior credit facility (the "Original Credit Facility"
and, as amended, the "Amended Credit Facility") with a syndicate of banks, by
increasing its borrowing capacity thereunder from $215.0 million under the
Original Credit Facility to $270.0 million under the Amended Credit Facility.
F-25
ADVANSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
Description of Amended Credit Facility
The Amended Credit Facility will consist of three components: a 5 1/2-year
term loan in an aggregate principal amount equal to $85 million, a 7-year term
loan in an aggregate principal amount equal to $125 million, and a 5 1/2-year
revolving credit facility in the maximum available amount of $60 million.
The obligations of the Company under the Amended Credit Facility will be
guaranteed by the parent and will be collateralized by substantially all
tangible and intangible assets and pledges of the capital stock of the Company
and substantially all of the Company's subsidiaries (including MAGIC).
The term loans will be amortized in quarterly installments totaling
approximately $1.5 million in 1998, $7.0 million in 1999, $13.5 million in
2000 and $17.0 million in 2001, $19.5 million 2002, $31.5 million in 2003,
$60.25 million in 2004 and $59.75 in 2005. Principal amounts outstanding under
the revolving credit facility will be due and payable in full at maturity,
approximately 5 1/2 years after April 30, 1998. Interest on outstanding
borrowings will accrue, at floating variable rates, as defined, approximating
a blended average rate of 8.1% on April 30, 1998. In addition, the Company
will be required to pay a commitment fee under the revolving credit facility
in respect of the unutilized commitments thereunder at a rate that will vary
based upon operating performance targets and step-downs set forth in the
agreement, subject to a maximum commitment fee rate of 0.50% per annum.
The Company will be required to apply certain amounts to prepay the term
loans, including (i) proceeds from certain issuances of equity or indebtedness
by the Company, its parent, or its subsidiaries; (ii) the net cash proceeds of
certain sales or other dispositions by the Company or any of its subsidiaries
of any assets; and (iii) 50% of excess cash flow (as defined) for each fiscal
year. The Company will also have the right to optionally prepay the loans
under the Amended Credit Facility, without premium, in whole or in part.
Amounts applied as prepayments of the revolving credit facility may be
reborrowed; amounts prepaid in respect of the term loans may not.
Under the Amended Credit Facility, restrictive financial covenants include a
minimum fixed charge coverage ratio and a maximum leverage ratio.
Description of Notes
The Notes are unsecured, senior subordinated obligations of the Company,
limited to $150.0 million aggregate principal amount, and will mature on May
1, 2008. Each Note will bear interest at the 9 1/4%, payable semi-annually.
The Notes will be redeemable at the Company's option after May 1, 2003 through
April 30, 2006 at specified premiums, and at par thereafter. A portion of the
Notes may be redeemed at a premium prior to May 1, 2001 with proceeds of
certain equity offerings made by the Company, and the Notes may also be
redeemed at par prior to May 1, 2003 upon a qualifying change of control of
the Company.
Restrictive financial covenants under the Notes include a minimum fixed
charge coverage ratio and limitations on certain asset dispositions and
dividend, distribution, and other restricted payments.
F-26
ADVANSTAR COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
4. COMPREHENSIVE INCOME:
The table below presents comprehensive income, defined as changes in the
equity of the Company excluding changes resulting from investments by and
distributions to shareholders, for the three month periods ended June 30, 1997
and 1998 (in thousands):
1997 1998
----- -------
Net Income (loss)........................................ $(197) $(5,170)
Change in translation adjustment......................... 14 (413)
----- -------
Comprehensive income (loss).............................. $(183) $(5,583)
===== =======
5. COMMITMENTS AND CONTINGENCIES:
Litigation
The Company is a defendant in legal proceedings arising in the ordinary
course of business. Although the outcome of these proceedings cannot presently
be determined, in the opinion of management, disposition of these proceedings
will not have a material effect on the results of operations or financial
position of the Company.
6. SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS:
Basis of presentation
The Notes will be fully and unconditionally guaranteed on a senior
subordinated basis, jointly and severally, by the Company's wholly-owned
domestic subsidiaries (the Subsidiary Guarantors) and by Holdings. The Company
is a wholly-owned subsidiary of Holdings. The limited activities of Holdings
are performed solely for the benefit of the Company. Accordingly, the
financial transactions and results of Holdings are "passed-through" to the
Company, without markup or discount, via intercompany charges. Separate
consolidated financial statements of Holdings are not presented herein as they
are not materially different from those presented for the Company.
The Subsidiary Guarantors are Art Expositions International, Inc.; Expocon
Management Associates, Inc.; On Demand Marketing, Inc.; Men's Apparel Guild in
California, Inc.; Magic Kids, Inc.; Technology Events Company, LLC and Applied
Business teleCommunications. The condensed consolidating financial statements
of the Guarantors are presented above and should be read in connection with
the Consolidated Financial Statements of the Company. Separate financial
statements of the Guarantors are not presented because the Guarantors are
jointly, severally and unconditionally liable under the guarantees and the
Company believes the condensed consolidating financial statements presented
are more meaningful in understanding the financial position of the Guarantors.
There are no significant restrictions on the ability of the Subsidiary
Guarantors to make distributions to the Company.
F-27
ADVANSTAR COMMUNICATIONS INC.
CONDENSED CONSOLIDATING BALANCE SHEET
(UNAUDITED)
(IN THOUSANDS)
AS OF JUNE 30, 1998
-----------------------------------------------------------------------------------------------------
ADVANSTAR THE COMPANY HOLDINGS
COMMUNICATIONS GUARANTOR NON-GUARANTOR CONSOLIDATED CONSOLIDATED
INC. SUBSIDIARIES SUBSIDIARIES ELIMINATION TOTAL HOLDINGS ELIMINATION TOTAL
-------------- ------------ ------------- ----------- ------------ -------- ----------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash
equivalents....... $ 11,761 $ 4,072 $ 6,141 $ -- $ 21,974 $ -- $ -- $ 21,974
Accounts
receivable, net... 16,175 2,446 4,058 -- 22,679 -- -- 22,679
Prepaid expenses... 4,472 6,044 1,199 -- 11,715 -- -- 11,715
Intercompany
receivable
(payable)......... (11,525) 15,339 (3,814) -- -- 470 (470) --
Other.............. 1,593 70 378 -- 2,041 -- -- 2,041
-------- -------- ------- --------- -------- -------- --------- --------
Total current
assets........... 22,476 27,971 7,962 -- 58,409 470 (470) 58,409
-------- -------- ------- --------- -------- -------- --------- --------
PROPERTY, PLANT AND
EQUIPMENT, net:.... 11,771 611 649 -- 13,031 -- -- 13,031
INVESTMENTS IN
SUBSIDIARIES:...... 302,144 -- -- (302,144) -- 172,326 (172,326) --
INTANGIBLE ASSETS,
net:............... 225,173 290,637 12,208 -- 528,018 -- -- 528,018
-------- -------- ------- --------- -------- -------- --------- --------
$561,564 $319,219 $20,819 $(302,144) $599,458 $172,796 $(172,796) $599,458
======== ======== ======= ========= ======== ======== ========= ========
LIABILITIES AND
SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Current maturities
of long-term
debt.............. $ 3,000 $ -- $ -- $ -- $ 3,000 $ -- $ -- $ 3,000
Accounts payable... 6,330 4,487 2,071 -- 12,888 129 (129) 12,888
Deferred revenue... 10,549 21,579 3,981 -- 36,109 -- -- 36,109
Accrued
liabilities....... 9,663 3,583 2,203 -- 15,449 341 (341) 15,449
-------- -------- ------- --------- -------- -------- --------- --------
Total current
liabilities...... 29,542 29,649 8,255 -- 67,446 470 (470) 67,446
-------- -------- ------- --------- -------- -------- --------- --------
LONG-TERM DEBT, net
of current
maturities:........ 362,619 -- -- -- 362,619 -- -- 362,619
OTHER LONG TERM
LIABILITIES:....... 1,478 -- -- -- 1,478 -- -- 1,478
MINORITY INTEREST:.. 13,764 -- -- -- 13,764 -- -- 13,764
SHAREHOLDER'S
EQUITY:
Common stock....... 10 5 332 (337) 10 -- -- 10
Paid-in Capital ... 179,000 293,629 9,101 (302,740) 178,990 179,000 (179,000) 178,990
Accumulated
earnings
(deficit)......... (24,479) (4,064) 3,131 933 (24,479) (6,674) 6,674 (24,479)
Translation
adjustment........ (370) -- -- -- (370) -- -- (370)
-------- -------- ------- --------- -------- -------- --------- --------
Total
shareholder's
equity........... 154,161 289,570 12,564 (302,144) 154,151 172,326 (172,326) 154,151
-------- -------- ------- --------- -------- -------- --------- --------
$561,564 $319,219 $20,819 $(302,144) $599,458 $172,796 $(172,796) $599,458
======== ======== ======= ========= ======== ======== ========= ========
F-28
ADVANSTAR COMMUNICATIONS INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS)
FOR THE SIX MONTHS ENDED JUNE 30, 1998
------------------------------------------------------------------------------------------------------
ADVANSTAR THE COMPANY HOLDINGS
COMMUNICATIONS GUARANTOR NON-GUARANTOR CONSOLIDATED CONSOLIDATED
INC. SUBSIDIARIES SUBSIDIARIES ELIMINATION TOTAL HOLDINGS ELIMINATION TOTAL
-------------- ------------ ------------- ----------- ------------ -------- ----------- ------------
Net revenue........ $87,886 $13,098 $20,228 $-- $121,212 $ -- $ -- $121,212
Operating expenses:
Cost of sales and
selling,
editorial and
circulation...... 56,669 10,888 13,197 -- 80,754 -- -- 80,754
General and
administrative... 13,337 1,093 2,734 -- 17,164 1,527 (1,527) 17,164
Amortization and
Depreciation..... 12,945 2,678 227 -- 15,850 -- -- 15,850
------- ------- ------- ----- -------- -------- ------- --------
Operating income
(loss)............ 4,935 (1,561) 4,070 -- 7,444 (1,527) 1,527 7,444
Other income
(expense):
Interest expense,
net.............. 10,308 (6) 189 -- 10,491 -- -- 10,491
Other income
(expense), net... 1,105 (1,176) (1,823) -- (1,894) 1,527 (1,527) (1,894)
------- ------- ------- ----- -------- -------- ------- --------
Income (loss)
before
income taxes...... (4,268) (2,731) 2,058 -- (4,941) -- -- (4,941)
Provision for
income taxes...... 40 18 171 -- 229 -- -- 229
Equity in income
(loss) of
subsidiaries...... (862) -- -- 862 -- (5,170) 5,170 --
------- ------- ------- ----- -------- -------- ------- --------
Net income (loss).. (5,170) (2,749) 1,887 862 (5,170) (5,170) 5,170 (5,170)
======= ======= ======= ===== ======== ======== ======= ========
F-29
ADVANSTAR COMMUNICATIONS INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
(IN THOUSANDS)
----------------------------------------------------------------------------------------------------
ADVANSTAR NON- THE COMPANY HOLDINGS
COMMUNICATIONS GUARANTOR GUARANTOR CONSOLIDATED CONSOLIDATED
INC. SUBSIDIARIES SUBSIDIARIES ELIMINATION TOTAL HOLDINGS ELIMINATION TOTAL
-------------- ------------ ------------ ----------- ------------ -------- ----------- ------------
OPERATING ACTIVITIES:
Net income (loss)... $ (5,170) $ (2,749) $ 1,887 $862 $ (5,170) $(5,170) $ 5,170 $ (5,170)
Adjustments to
reconcile net
income (loss) to
net cash provided
by operating
activities:
Depreciation and
amortization....... 12,945 2,678 227 -- 15,850 -- -- 15,850
Other non cash
items.............. (1,721) 20 -- -- (1,701) -- -- (1,701)
Changes in operating
assets and
liabilities........ (264,902) 260,264 6,158 (862) 658 5,170 (5,170) 658
--------- --------- ------- ---- --------- ------- ------- ---------
Net cash provided
by (used in)
operating
activities........ (258,848) 260,213 8,272 -- 9,637 -- -- 9,637
--------- --------- ------- ---- --------- ------- ------- ---------
INVESTING ACTIVITIES:
Additions to
property, plant and
equipment, net..... 2,507 (66) (98) -- 2,343 -- -- 2,343
Changes in notes
receivable......... 2 -- 12 -- 14 -- -- 14
Additions to
intangible assets
and acquisition
working capital.... (11,162) (255,758) (5,983) -- (272,903) -- -- (272,903)
--------- --------- ------- ---- --------- ------- ------- ---------
Net cash provided
by (used in)
investing
activities........ (8,653) (255,824) (6,069) -- (270,546) -- -- (270,546)
--------- --------- ------- ---- --------- ------- ------- ---------
FINANCING ACTIVITIES:
Proceeds from sale
of common stock and
capital
contributions and
other.............. 70,000 -- -- 70,000 -- -- 70,000
Borrowings
(payments) of long-
term debt.......... 199,859 -- -- 199,859 -- -- 199,859
Revolver borrowings,
net................ 6,000 -- -- 6,000 -- -- 6,000
--------- --------- ------- ---- --------- ------- ------- ---------
Net cash provided
by financing
activities........ 275,859 -- -- -- 275,859 -- -- 275,859
--------- --------- ------- ---- --------- ------- ------- ---------
NET INCREASE
(DECREASE) IN CASH
AND CASH
EQUIVALENTS:........ 8,358 4,389 2,203 -- 14,950 -- -- 14,950
CASH AND CASH
EQUIVALENTS,
BEGINNING OF
PERIOD:............. 3,403 (317) 3,938 -- 7,024 -- -- 7,024
--------- --------- ------- ---- --------- ------- ------- ---------
CASH AND CASH
EQUIVALENTS, END OF
PERIOD:............. 11,761 4,072 6,141 -- 21,974 -- -- 21,974
========= ========= ======= ==== ========= ======= ======= =========
F-30
7. NEW ACCOUNTING PRONOUNCEMENT:
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS No. 133). SFAS No. 133 establishes accounting
and reporting standards requiring that every derivative financial instrument
(including certain derivative instruments embedded in other contracts) be
recorded in the balance sheet as either an asset or liability measured at its
fair value. SFAS No. 133 requires that changes in the derivative's fair value
be recognized currently in earnings unless specific hedge accounting criteria
are met. Special accounting for qualifying hedges allows a derivative's gains
and losses to offset related results on the hedged item in the income
statement, and requires that a company must formally document, designate, and
assess the effectiveness of transactions that receive hedge accounting. The
Company will be required to adopt SFAS No. 133 no later than January 1, 2000.
The Company has not entered into any derivative financial instruments as of
June 30, 1998. As a result, adoption of SFAS No. 133 would currently have no
impact on the Company. In the future, if the Company were to enter into
derivative financial instruments which are covered by SFAS No. 133, volatility
in earnings and other comprehensive income could be increased.
F-31
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Men's Apparel Guild in California, Inc.:
We have audited the accompanying consolidated balance sheets of Men's
Apparel Guild in California, Inc. and subsidiary as of February 28, 1998, and
the related consolidated statements of income, shareholder's equity and cash
flows for the nine-month period ended February 28, 1998. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Men's Apparel Guild in California, Inc. and subsidiary as of February 28,
1998, and the consolidated results of their operations and their cash flows
for the nine-month period ended February 28, 1998 in conformity with generally
accepted accounting principles.
Arthur Andersen LLP
Minneapolis, Minnesota,
March 20, 1998
F-32
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Men's Apparel Guild in California, Inc.:
We have audited the accompanying consolidated balance sheets of Men's
Apparel Guild in California, Inc. and subsidiary as of May 31, 1997 and 1996,
and the related consolidated statements of income, shareholders' equity and
cash flows for each of the years in the three year period ended May 31, 1997.
These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Men's Apparel Guild in California, Inc. and subsidiary as of May 31, 1997
and 1996, and the consolidated results of their operations and their cash
flows for each of the years in the three year period ended May 31, 1997 in
conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Los Angeles, California
June 24, 1997
F-33
MEN'S APPAREL GUILD IN CALIFORNIA, INC.
CONSOLIDATED BALANCE SHEETS
FEBRUARY 28,
MAY 31, 1998
------------------------ ------------
1996 1997
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents............. $ 8,773,384 $ 9,386,181 $19,707,338
Short-term investments................ 6,830,325 9,743,512 --
Other current assets.................. 1,691,956 1,688,580 3,370,926
----------- ----------- -----------
Total current assets................ 17,295,665 20,818,273 23,078,264
Property and equipment, net............. 201,768 343,788 292,336
Long-term investments................... 7,502,131 7,909,644 --
Intangible and other assets............. 14,098 911,243 989,963
----------- ----------- -----------
Total assets........................ $25,013,662 $29,982,948 $24,360,563
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued ex-
penses............................... $ 3,572,234 $ 1,648,838 $ 8,687,916
Deferred revenue...................... 8,140,750 8,064,014 890,025
Exhibitors' security deposits......... 1,875,576 1,909,760 1,909,497
----------- ----------- -----------
Total current liabilities........... 13,588,560 11,622,612 11,487,438
Commitments and contingencies (Notes 7,
8)
Shareholders' equity:
Common stock (no par value; 100,000
shares authorized 42,000, 40,000 and
33,523 shares issued and outstanding
at May 31, 1996 and 1997 and February
28, 1998, respectively).............. 161,204 153,528 128,668
Retained earnings..................... 11,342,077 18,241,367 12,744,457
Shareholders' note receivable......... (16,211) -- --
Unrealized loss on investments........ (61,968) (34,559) --
----------- ----------- -----------
Total shareholders' equity.......... 11,425,102 18,360,336 12,873,125
----------- ----------- -----------
Total liabilities and shareholders'
equity............................. $25,013,662 $29,982,948 $24,360,563
=========== =========== ===========
The accompanying notes to consolidated financial statements are an integral
part of these balance sheets.
F-34
MEN'S APPAREL GUILD IN CALIFORNIA, INC.
CONSOLIDATED STATEMENTS OF INCOME
NINE MONTHS
YEARS ENDED MAY 31, ENDED
----------------------------------- FEBRUARY 28,
1995 1996 1997 1998
----------- ----------- ----------- ------------
Booth revenue................. $19,802,379 $24,716,709 $28,460,935 $35,692,946
Other operating revenue....... 1,931,848 1,890,940 2,691,582 3,001,601
----------- ----------- ----------- -----------
Total revenue............... 21,734,227 26,607,649 31,152,517 38,694,547
Direct costs.................. 10,067,269 13,036,535 14,491,101 14,562,032
----------- ----------- ----------- -----------
Gross profit................ 11,666,958 13,571,114 16,661,416 24,132,515
General and administrative
expenses..................... 3,423,456 3,109,448 4,303,749 3,262,179
Profit participation.......... 289,123 574,279 354,624 364,640
----------- ----------- ----------- -----------
Income from operations...... 7,954,379 9,887,387 12,003,043 20,505,696
Interest and investment in-
come......................... 677,381 986,603 1,194,568 653,738
----------- ----------- ----------- -----------
Income before provision for
income taxes............... 8,631,760 10,873,990 13,197,611 21,159,434
Provision for income taxes.... 3,089,209 3,965,213 4,805,997 7,696,565
----------- ----------- ----------- -----------
Net income.................. $ 5,542,551 $ 6,908,777 $ 8,391,614 $13,462,869
=========== =========== =========== ===========
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-35
MEN'S APPAREL GUILD IN CALIFORNIA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE
MONTHS
YEARS ENDED MAY 31, ENDED
---------------------------------- FEBRUARY 28,
1995 1996 1997 1998
---------- ---------- ---------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................... $5,542,551 $6,908,777 $8,391,614 $13,462,869
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and
amortization............... 459,391 282,778 243,905 211,974
Deferred income taxes....... (85,791) 121,395 (91,401) 166,781
Loss on disposal of fixed
assets..................... 65,635 -- -- --
Realized loss on sale of
investments................ -- -- -- 34,559
Changes in operating assets
and liabilities:
Prepaid expenses and other
current assets............. (342,175) (138,448) (223,593) (844,945)
Prepaid income taxes........ (8,397) (509,194) 318,364 (1,132,002)
Other assets................ (100,000) 112,087 2,855 16,159
Accounts payable and accrued
expenses................... 468,185 (534,205) 911,604 7,039,078
Deferred revenue............ 1,366,910 924,116 (76,736) (7,173,989)
Exhibitors' security
deposits................... 266,715 370,861 34,184 (263)
Accrued loss on leasehold... 250,470 (455,949) -- --
---------- ---------- ---------- -----------
Net cash provided by
operating activities...... 7,883,494 7,082,218 9,510,796 11,780,221
---------- ---------- ---------- -----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Net change in short-term
investments................. (4,023,766) (2,806,559) (2,913,187) 9,743,512
Proceeds from sale of long-
term investments............ 3,416,011 4,150,613 3,596,778 7,875,085
Purchases of investments..... (3,592,471) (4,575,474) (3,976,902) --
Investment in subsidiary..... -- -- (900,000) --
Purchases of fixed assets.... (335,932) (119,962) (385,899) (93,022)
---------- ---------- ---------- -----------
Net cash used in investing
activities................ (4,536,158) (3,351,382) (4,579,210) 17,525,575
---------- ---------- ---------- -----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Payment of dividends......... -- (2,835,000) (2,835,000) (2,835,000)
Repayments of shareholders'
notes receivable............ 85,660 60,933 16,211 --
Repurchases of common stock.. (2,000) -- (1,500,000) (16,149,639)
---------- ---------- ---------- -----------
Net cash used in financing
activities................ 83,660 (2,774,067) (4,318,789) (18,984,639)
---------- ---------- ---------- -----------
Net increase in cash and
cash equivalents.......... 3,430,996 956,769 612,797 10,321,157
CASH AND CASH EQUIVALENTS,
beginning of year............ 4,385,619 7,816,615 8,773,384 9,386,181
---------- ---------- ---------- -----------
CASH AND CASH EQUIVALENTS, end
of year...................... $7,816,615 $8,773,384 $9,386,181 $19,707,338
========== ========== ========== ===========
SUPPLEMENTARY INFORMATION:
Cash paid for income taxes... $3,138,397 $4,353,500 $4,583,000 $ 4,305,000
========== ========== ========== ===========
NONCASH INVESTING AND
FINANCING ACTIVITIES:
The Company's Board of Directors declared a dividend of $67.50 per common
share on May 31, 1996. Payment of these dividends, totaling $2,835,000 was
made on June 14, 1996.
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-36
MEN'S APPAREL GUILD IN CALIFORNIA, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED MAY 31, 1995, 1996 AND 1997
AND FOR THE NINE MONTHS ENDED FEBRUARY 28, 1998
UNREALIZED
COMMON STOCK SHAREHOLDERS' GAIN (LOSS)
---------------- RETAINED NOTES ON
SHARES AMOUNT EARNINGS RECEIVABLE INVESTMENTS TOTAL
------ -------- ------------ ------------- ----------- ------------
Balance, May 31, 1994... 43,000 $163,204 $ 4,560,749 $(162,804) $ (58,897) $ 4,502,252
Change in unrealized
gain (loss) on
investments........... -- -- -- -- 113,868 113,868
Dividends declared on
common stock ($67.50
per share)............ -- -- (2,835,000) -- -- (2,835,000)
Repurchase of common
stock................. (1,000) (2,000) -- -- -- (2,000)
Repayments of notes
receivable from
shareholders.......... -- -- -- 85,660 -- 85,660
Net income............. -- -- 5,542,551 -- -- 5,542,551
------ -------- ------------ --------- --------- ------------
Balance, May 31, 1995... 42,000 161,204 7,268,300 (77,144) 54,971 7,407,331
Change in unrealized
gain (loss) on
investments........... -- -- -- -- (116,939) (116,939)
Dividends declared on
common stock ($67.50
per share)............ -- -- (2,835,000) -- -- (2,835,000)
Repayments of notes
receivable from
shareholders.......... -- -- -- 60,933 -- 60,933
Net income............. -- -- 6,908,777 -- -- 6,908,777
------ -------- ------------ --------- --------- ------------
Balance, May 31, 1996... 42,000 161,204 11,342,077 (16,211) (61,968) 11,425,102
Change in unrealized
gain (loss) on
investments........... -- -- -- -- 27,409 27,409
Repurchase of common
stock................. (2,000) (7,676) (1,492,324) -- -- (1,500,000)
Repayments of notes
receivable from
shareholders.......... -- -- -- 16,211 -- 16,211
Net income............. -- -- 8,391,614 -- -- 8,391,614
------ -------- ------------ --------- --------- ------------
Balance, May 31, 1997... 40,000 153,528 18,241,367 -- (34,559) 18,360,336
Change in unrealized
gain (loss) on
investments........... -- -- -- -- 34,559 34,559
Dividends declared on
common stock ($84.57
per share)............ -- -- (2,835,000) -- -- (2,835,000)
Repurchase of common
stock................. (6,477) (24,860) (16,124,779) -- -- (16,149,639)
Net income............. -- -- 13,462,869 -- -- 13,462,869
------ -------- ------------ --------- --------- ------------
Balance, February 28,
1998................... 33,523 $128,668 $ 12,744,457 $ -- $ -- $ 12,873,125
====== ======== ============ ========= ========= ============
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-37
MEN'S APPAREL GUILD IN CALIFORNIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MAY 31, 1995, 1996 AND 1997
AND FOR THE NINE MONTHS ENDED FEBRUARY 28, 1998
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION:
The accompanying consolidated financial statements include the accounts of
Men's Apparel Guild in California (MAGIC) and its wholly owned subsidiary,
MAGIC KIDS, INC. (MAGIC Kids), collectively referred to as the Company. All
intercompany transactions have been eliminated in consolidation.
Nature of Operations
The Company has produced trade shows for the men's apparel industry for over
sixty years. For each of the periods presented in the accompanying statements
of operations, including the nine months ended February 28, 1998, two trade
shows have occurred (in February and August).
Basis of Presentation
During fiscal 1994, as a result of a private placement offering circular,
the Company converted from a nonprofit mutual benefit corporation to a for-
profit corporation status and issued common stock to its "charter" members. In
addition, the Company issued common stock to four individuals for notes
receivable (Note 6).
Joint Participation Agreement
During fiscal 1995, the Company entered into a joint participation agreement
to co-sponsor a women's apparel trade show with Fairchild Publications under
the name "WWD/Magic." In accordance with the cosponsor agreement, 30% of show
net income and 50% of publication net income related to the WWD/Magic show has
been allocated to the cosponsor of the show as profit participation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash Equivalents and Short-Term Investments
The Company considers all highly liquid investments with an initial maturity
of three months or less to be cash equivalents and are stated at cost, which
approximates their fair market value. Short-term investments principally
include United States Treasury bills with original maturities greater than
three months and are stated at fair value. The Company places its cash, cash
equivalents and short-term investments with high-credit quality financial
institutions. At times, bank balances may be in excess of the federally
insured limit. Bank balances were in excess of federally insured limits in the
amounts of $11,395,338 for the nine-month period ended February 28, 1998 and
$5,813,723 and $7,055,031 at May 31, 1997 and 1996, respectively.
Other Current Assets
Other current assets consist primarily of prepaid expenses, which consists
of prepaid show costs and prepaid taxes.
Property and Equipment
The Company's property and equipment are recorded at cost. For financial
reporting purposes depreciation and amortization of property and equipment are
provided on the straight-line method based on the estimated useful lives of
the respective assets. Leasehold improvements are amortized over the lesser of
the useful life or the term of the lease. Maintenance and repair costs are
expensed
F-38
MEN'S APPAREL GUILD IN CALIFORNIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED MAY 31, 1995, 1996 AND 1997 AND FOR THE NINE MONTHS ENDED
FEBRUARY 28, 1998
as incurred; renewals and betterments are capitalized. Upon the sale or
retirement of fixed assets, any resulting profit or loss is included in
operations. Estimated useful lives are as follows:
ESTIMATED
USEFUL LIVES
------------
Show equipment.................................................. 2-5 years
Computer equipment.............................................. 5 years
Office furniture, fixtures and equipment........................ 5 years
Leasehold improvements.......................................... 3-10 years
Intangible Assets and Other Assets
Intangible assets, consisting primarily of goodwill, are stated at cost less
accumulated amortization, and are amortized on a straight-line basis over
their estimated useful lives of approximately 10 years.
The Company periodically evaluates the realizability of its long-lived and
intangible assets. Based on its most recent analysis, no impairment exists at
May 31, 1997 or February 28, 1998.
Revenue Recognition
Revenue is recorded in the period in which the applicable shows are held.
Deferred revenue is recorded when cash is received in advance of the
applicable show.
Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes," which requires recognition of deferred tax
liabilities and assets for the expected future tax consequences of events that
have been included in the financial statements or tax returns. Under this
method, deferred tax liabilities and assets are determined based on the
difference between the financial statement and the tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. If required, valuation allowances would
be established to reduce deferred tax assets to the amount expected to be
realized.
Long-Term Investments
The Company accounts for its long-term investments in accordance with SFAS
No. 115, "Accounting for Certain Investments in Debt and Equity Securities."
For the years ended May 31, 1996 and 1997, all of the Company's investments
have been classified as available-for-sale. The Company utilizes specific
identification in computing realized and unrealized gains and losses on
investments. At May 31, 1996 and 1997, the Company had unrealized losses on
investments of $61,968 and $34,559, respectively, which is included as a
separate component of equity. The long-term investments had a fair market
value of $7,502,131 and a cost basis of $7,564,099 as of May 31, 1996 and a
fair market value of $7,909,644 and a cost basis of $7,944,203 as of May 31,
1997. The Company's available-for-sale investments at May 31, 1997 consist
primarily of tax advantaged municipal bonds (54%), United States Treasury
Notes (36%), money market funds (6%) and corporate bonds (4%). Of the
investments, other than money market funds, 23% will mature in one year or
less, 38% in two years, 30% in three years and 9% mature in four or more
years.
During February 1998, the Company liquidated its investment portfolio which
approximated book value. At February 28, 1998, the Company is invested in
highly liquid investments with maturities of less than 60 days.
F-39
MEN'S APPAREL GUILD IN CALIFORNIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED MAY 31, 1995, 1996 AND 1997
AND FOR THE NINE MONTHS ENDED FEBRUARY 28, 1998
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements,
and the reported amounts of revenues and expenses during the reporting period.
Ultimate results could differ from the estimates.
Recently Issued Accounting Standard
In March 1997, the Financial Accounting Standards Board issued SFAS No. 129,
"Disclosure of Information About Capital Structure." The accounting or
disclosure requirements of this statement are effective for the Company's
fiscal year 1998. The Company is reviewing the potential impact of adopting
the new accounting standard.
During June 1997, the Financial Accounting Standards Board released
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income," effective for fiscal years beginning after December 15,
1997. SFAS No. 130 establishes standards for the reporting and display in the
financial statements of total net income and the components of all other
nonowner changes in equity, referred to as comprehensive income. The Company
will adopt SFAS No. 130 in 1998 and has not yet determined the impact it will
have on the disclosures in its financial statements.
During June 1997, the Financial Accounting Standards Board released
Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures about
Segments of an Enterprise and Related Information," effective for fiscal years
beginning after December 15, 1997. SFAS No. 131 requires disclosure of
business and geographic segments in the consolidated financial statements of
the Company. The Company will adopt SFAS No. 131 in 1998 and is currently
analyzing the impact it will have on the disclosures in its financial
statements.
3. INCOME TAXES:
The provision for income taxes consists of the following:
NINE
MONTHS
YEARS ENDED MAY 31, ENDED
--------------------------------- FEBRUARY 28,
1995 1996 1997 1998
---------- ---------- ---------- ------------
Federal:
Current.................... $2,920,000 $3,641,859 $4,722,243 $7,045,407
Deferred................... (78,928) 121,395 (91,401) 157,766
---------- ---------- ---------- ----------
2,841,072 3,763,254 4,630,842 7,203,173
---------- ---------- ---------- ----------
State:
Current.................... 255,000 201,959 175,155 484,377
Deferred................... (6,863) -- -- 9,015
---------- ---------- ---------- ----------
248,137 201,959 175,155 493,392
---------- ---------- ---------- ----------
$3,089,209 $3,965,213 $4,805,997 $7,696,565
========== ========== ========== ==========
F-40
MEN'S APPAREL GUILD IN CALIFORNIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED MAY 31, 1995, 1996 AND 1997 AND FOR THE NINE MONTHS ENDED
FEBRUARY 28, 1998
The provision for income taxes differs from the amount obtained by applying
the federal statutory income tax rate primarily due to tax-exempt interest and
state income taxes.
The tax effected amounts of temporary differences which give rise to the
Company's net deferred tax asset are as follows:
NINE
MONTHS
YEARS ENDED MAY 31, ENDED
---------------------------- FEBRUARY 28,
1995 1996 1997 1998
-------- -------- -------- ------------
Accrued loss on contingency and
other............................. $ -- $111,099 $ 99,106 $ 96,498
Accrued loss on leasehold.......... 168,593 -- -- --
Accrued compensation............... 63,045 29,689 129,900 76,535
Accrued pension liability.......... 38,973 -- -- --
Depreciation....................... (14,611) (6,183) (3,000) (26,813)
-------- -------- -------- --------
Net deferred tax asset............. $256,000 $134,605 $226,006 $146,220
======== ======== ======== ========
No valuation allowance has been established since net deferred tax assets
are expected to be realized through either expected future taxable income or
taxable income in prior carryback years. At February 28, 1998, approximately
$4.2 million is included in accrued liabilities for income taxes payable.
4. BENEFIT PLANS:
During fiscal 1994, the Company implemented a defined contribution plan
covering all full-time employees. The Company's contributions to this plan for
the years ended May 31, 1995, 1996 and 1997 and for the nine-month period
ended February 28, 1998 were $55,988, $40,365, $97,531 and $63,800,
respectively.
In addition, the Company had a noncontributory defined benefit pension plan
(the Plan) which covered all full-time employees through May 31, 1993.
Effective May 31, 1993, the Company terminated this Plan. Upon formal approval
from the Internal Revenue Service, the Company distributed the assets of the
Plan during the year ended May 31, 1996.
5. SHAREHOLDERS' EQUITY:
In July 1997, the Company's Board of Directors approved a stock redemption
plan under which a total amount not to exceed $50.0 million may be
repurchased. These repurchases are made through a "dutch auction" program at a
price range of $2,080 to $2,500 per share subject to certain restrictions.
Total shares repurchased during the nine month period ended February 28, 1998
were 6,477 for approximately $16.1 million including certain transaction
costs.
6. RELATED-PARTY TRANSACTIONS:
During fiscal year 1994, the Company issued 2,000 shares of common stock to
four board members who were not charter members in exchange for notes
receivable which were due in three equal annual installments. Payments made
during fiscal years 1995, 1996 and 1997 on these notes receivable totaled
$85,660, $60,933 and $16,211, respectively.
F-41
MEN'S APPAREL GUILD IN CALIFORNIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED MAY 31, 1996, 1996 AND 1997 AND FOR THE NINE MONTHS ENDED
FEBRUARY 28, 1998
7. EXECUTIVE EMPLOYMENT AGREEMENT:
On July 16, 1996, the Company entered into an Executive Employment Agreement
(the Agreement) with an officer of the Company that effectively granted the
officer stock appreciation rights (SARs) with respect to 1,000 shares of the
Company's common stock. The SARs granted by the Agreement become vested in and
exercisable by the officer in five equal installments each May 31 beginning
May 31, 1996. The SARs become fully vested and exercisable by the officer only
in the event of a change of control or if the officer's employment is
terminated. The Agreement was amended in July 1997 to provide for additional
grants of SARs based on the Company's future performance. The future
compensation expense related to this Agreement (assuming change in control at
May 31, 1998) is estimated at $6.5 million. Due to the contingent nature of
the SARs, no compensation expense was recognized as of May 31, 1996 and 1997
or February 28, 1998. No SARs have been exercised as of February 28, 1998.
8. COMMITMENTS AND CONTINGENCIES:
LEASE COMMITMENTS:
The Company leases facilities and various equipment under operating leases.
Leases that expire are expected to be renewed or replaced by leases on other
properties.
Future minimum rental payments as of May 31, 1997 for operating leases
having initial or remaining noncancellable lease terms in excess of one year
are as follows:
1998.............................................................. $154,477
1999.............................................................. 139,777
2000.............................................................. 10,566
2001.............................................................. 5,728
2002.............................................................. 5,728
Thereafter........................................................ --
Rent expense amounted to $112,244, $114,896, $244,403 and $217,856 for the
nine months ended February 28, 1998 and for the years ended May 31, 1997, 1996
and 1995, respectively.
The Company was obligated under a noncancellable operating lease for its
premises which would have expired on August 31, 2000. On April 11, 1996, the
Company entered into a lease termination agreement with its landlord to vacate
its premises prior to the scheduled expiration date of August 31, 2000. The
Company paid $275,000 to relinquish it from all obligations under the lease
after September 30, 1996. Rental payments with respect to this lease were made
through September 30, 1996.
9. ACQUISITION BY ADVANSTAR COMMUNICATIONS INC.:
On March 6, 1998, Advanstar Communications Inc. signed a merger agreement to
acquire the Company. The aggregate purchase price will consist of
approximately $230.2 million in cash subject to adjustment based on the
shareholders' equity of the Company on the closing date.
F-42
INDEPENDENT AUDITORS' REPORT
Advanstar Communications Inc.
We have audited the accompanying balance sheet of Universal Media, Inc. as
of December 31, 1997, and the related statements of operations, stockholder's
deficiency and cash flows for the year then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and preform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Universal Media, Inc. as
of December 31, 1997 and the results of its operations and its cash flows for
the year then ended, in conformity with generally accepted accounting
principles.
March 6, 1998, except for
Note 13, as to which the
date is August 17, 1998
F-43
UNIVERSAL MEDIA, INC.
BALANCE SHEET
DECEMBER 31, 1997
ASSETS (NOTE 5)
Current assets:
Cash............................................................ $ 515,734
Cash--restricted (Note 5)....................................... 50,000
Accounts receivable, net of allowance for doubtful accounts of
$270,000 (Notes 5 and 9)....................................... 3,330,255
Inventory (Note 5).............................................. 208,023
Prepaid expenses and other current assets....................... 286,386
-----------
Total current assets........................................ 4,390,398
Property and equipment, net (Note 3).............................. 206,500
Other assets:
Intangible assets, net (Note 4)................................. 493,468
Security deposits and other..................................... 64,141
-----------
Total other assets.......................................... 557,609
-----------
$ 5,154,507
===========
LIABILITIES AND STOCKHOLDER'S DEFICIENCY
Current liabilities:
Note payable--bank (Note 5)..................................... $ 505,000
Deferred subscription income.................................... 15,440
Current portion of long-term debt (Note 6)...................... 158,532
Accounts payable................................................ 704,825
Due to affiliates (Note 8)...................................... 2,988,061
Accrued expenses and other current liabilities (Note 12)........ 1,055,599
-----------
Total current liabilities................................... 5,427,457
Long-term debt (Note 6)........................................... 1,350,682
Subordinated notes payable--related party (Notes 6 and 7)......... 819,317
Deferred lease obligations........................................ 51,425
Commitments and contingencies (Note 11)
Stockholder's deficiency:
Common stock, no par value:
Authorized--1,500 shares
Issued and outstanding--100 shares............................ 600,000
Accumulated deficit............................................... (1,192,027)
Net advances to Affiliate (Note 8)................................ (1,902,347)
-----------
Total stockholder's deficiency.............................. (2,494,374)
-----------
$ 5,154,507
===========
See accompanying notes.
F-44
UNIVERSAL MEDIA, INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
Net revenues...................................................... $24,152,162
Operating expenses:
Production and mechanical....................................... 6,723,817
Selling, editorial and circulation.............................. 10,171,958
General and administrative...................................... 6,918,664
Depreciation expense............................................ 74,830
Amortization of intangible assets............................... 524,725
-----------
Total operating expenses...................................... 24,413,994
-----------
Loss from operations.............................................. (261,832)
Interest expense, net............................................. 206,021
-----------
Loss before income taxes.......................................... (467,853)
Income taxes...................................................... 59,883
-----------
Net loss.......................................................... $ (527,736)
===========
See accompanying notes.
F-45
UNIVERSAL MEDIA, INC.
STATEMENT OF STOCKHOLDER'S DEFICIENCY
FOR THE YEAR ENDED DECEMBER 31, 1997
NUMBER NET ADVANCES TOTAL
OF COMMON ACCUMULATED TO STOCKHOLDER'S
SHARES STOCK DEFICIT AFFILIATE DEFICIENCY
------ -------- ----------- ------------ -------------
Balance, January 1,
1997................... 100 $600,000 $ (664,291) $(2,468,612) $(2,532,903)
Net change in advances
to Affiliate........... -- -- -- 566,265 566,265
Net loss................ -- -- (527,736) -- (527,736)
--- -------- ----------- ----------- -----------
Balance, December 31,
1997................... 100 $600,000 $(1,192,027) $(1,902,347) $(2,494,374)
=== ======== =========== =========== ===========
See accompanying notes.
F-46
UNIVERSAL MEDIA, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997
Cash flows from operating activities:
Net loss........................................................... $(527,736)
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation of property and equipment............................ 74,830
Amortization of intangible assets................................. 524,725
Deferred lease obligations........................................ 3,075
Bad debt expense.................................................. 95,671
Change in assets and liabilities:
Accounts receivable.............................................. (425,259)
Inventory........................................................ 12,882
Prepaid expenses and other current assets........................ 5,923
Deferred subscription income..................................... 629
Accounts payable................................................. (165,186)
Accrued expenses and other current liabilities................... 345,340
---------
Net cash used in operating activities........................... (55,106)
---------
Cash flows from investing activities:
Purchase of property and equipment................................. (105,406)
Security deposits and other assets................................. 263
---------
Net cash used in investing activities........................... (105,143)
---------
Cash flows from financing activities:
Repayment of revolver loan......................................... (700,000)
Proceeds from revolver loan........................................ 505,000
Increase in advances from affiliates............................... 90,655
Repayment of advances to Affiliate................................. 566,265
Repayment of severance agreement................................... (47,991)
Repayment of restrictive covenant.................................. (95,982)
---------
Net cash provided by financing activities....................... 317,947
---------
Net increase in cash................................................ 157,698
Cash, beginning of year............................................. 408,036
---------
Cash, end of year................................................... $ 565,734
=========
Supplemental Disclosures of Cash Flow Information
Cash paid during the year for:
Interest........................................................... $ 211,157
Taxes.............................................................. $ 110,947
See accompanying notes.
F-47
UNIVERSAL MEDIA, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1--THE COMPANY
Universal Media, Inc. (the "Company") publishes and distributes primarily
Travel Agent, a trade national newsweekly magazine serving travel agencies and
the travel services industry. The Company is related by common ownership with
several uncombined entities with which it has significant transactions and
financial relationships. See Note 8 for further discussion.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reported period. Actual results could differ from those estimates.
Revenue Recognition
Advertising and subscription revenue, net of estimated returns and
allowances, are recorded as magazines are shipped. Reprint income is recorded
when the reprints are mailed.
Inventory
Inventory is stated at the lower of cost (first-in, first-out method) or
market and consists of paper stock.
Property and Equipment
Property and equipment is recorded at cost. Expenditures for major additions
and betterments are capitalized. Maintenance and repairs are charged to
operations as incurred. Depreciation of property and equipment is computed by
both straight-line and accelerated methods over the assets' estimated lives
ranging from five to seven years. Leasehold improvements are amortized over
the lesser of the lease terms or the assets' useful lives. Upon sale or
retirement of property and equipment, the related cost and accumulated
depreciation are removed from the accounts and any gain or loss is reflected
in operations.
Intangible Assets
Intangible assets are being amortized by the straight-line method over the
following useful lives:
Subscriber list..................................................... 8 years
Trademarks.......................................................... 40 years
Goodwill............................................................ 40 years
Loan acquisition costs and related legal fees are deferred and amortized
using the straight-line method over the term of the related debt.
Deferred Subscription Income
The Company's magazine is sold on a subscription basis for periods up to one
year. Subscription funds received in advance of magazines being shipped is
recorded as deferred subscription income. Costs in connection with the
procurement of subscriptions are charged to expense as incurred.
F-48
UNIVERSAL MEDIA, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Income Taxes
The Company elected treatment as a small business corporation under
Subchapter S of the Internal Revenue Code and the related provisions of the
New York State Franchise Tax law. Under the aforementioned provisions,
corporate income or loss and any tax credits earned are included in the
stockholder's individual federal and state income tax returns. Accordingly, no
provision has been made for federal income taxes for in the accompanying
financial statements. The Company is subject to New York State S corporation
and New York City corporate income taxes.
NOTE 3--PROPERTY AND EQUIPMENT
Property and equipment consists of:
Computer equipment................................................. $305,546
Furniture and equipment............................................ 239,152
Leasehold improvements............................................. 64,232
--------
608,930
Less: Accumulated depreciation and amortization.................... 402,430
--------
$206,500
========
NOTE 4--INTANGIBLE ASSETS
Intangible assets consist of:
Restrictive covenant............................................. $3,299,372
Subscriber list.................................................. 1,600,000
Trademarks and copyrights........................................ 450,000
Goodwill......................................................... 82,542
Loan acquisition and sundry...................................... 97,607
----------
5,529,521
Less: Accumulated amortization................................... 5,036,053
----------
$ 493,468
==========
NOTE 5--NOTE PAYABLE--BANK
On June 18, 1997, the Company and an affiliated company under common control
("Affiliate") entered into a $2,000,000 secured revolving line of credit which
expires on April 30, 1998. Interest is payable monthly at 1% above the bank's
prime rate (9.5% at December 31, 1997).
The revolving credit note is collateralized by a first priority lien and
security interest in the accounts receivable and inventory of the Company and
Affiliate. The loan agreement contains covenants which, among other matters,
require the Company and Affiliate to maintain certain levels of combined
operating income and compensating balances. At December 31, 1997, the Company
and Affiliate were in compliance with these covenants on a combined basis. The
principal stockholder has personally guaranteed the revolving credit note.
The Company and Affiliate, which are affiliated through common ownership,
each guarantee the bank indebtedness of the other. At December 31, 1997,
Affiliate had outstanding bank indebtedness of $50,000.
F-49
UNIVERSAL MEDIA, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 6--LONG-TERM DEBT
Long-term debt consists of:
Deferred compensation payable to a former employee in forty
quarterly installments of $25,000 without interest through
October 2004(a)................................................. $ 503,071
Non-compete agreement payable to a former employee in forty
quarterly installments of $50,000 without interest through
October 2004(a) ................................................ 1,006,143
----------
1,509,214
Less: Current portion of long-term debt.......................... 158,532
----------
$1,350,682
==========
(a) The financial statements include the present value of all future
payments at an imputed interest rate of 9.75% per annum.
At December 31, 1997, long-term debt matures as follows:
FOR THE YEAR
ENDING
DECEMBER 31,
------------
1998........................................................... $ 158,532
1999........................................................... 174,563
2000........................................................... 192,215
2001........................................................... 211,653
2002........................................................... 233,056
Thereafter..................................................... 539,195
----------
$1,509,214
==========
NOTE 7--SUBORDINATED NOTE PAYABLE--RELATED PARTY
Subordinated debt at December 31, 1997 consists of a note payable to an
entity related through common ownership in the amount of $819,317. The note is
subordinated to bank borrowings (see Notes 5 and 6) and is non-interest
bearing.
NOTE 8--RELATED PARTY TRANSACTIONS
Management Advisory and General and Administrative Services
Certain management advisory and general and administrative services
including certain accounting, marketing, information systems support and other
services are received from entities under common ownership and control. For
the year ended December 31, 1997, $978,500 has been reflected as general and
administrative expenses in the statement of operations. This amount was
determined based on an estimate of time and related costs to perform such
services. Management believes that the allocation is reasonable.
Due to affiliates
The Company has received advances (in the form of cash or as liquidation of
Company obligations) from entities affiliated with the Company by common
ownership. Such advances are non-interest bearing and are due on demand.
Net Advances to Affiliate
The Company has advanced funds to Affiliate and has received repayment of
certain amounts advanced. Such transactions, which do not have any effect on
the accompanying statement of income, have been treated as equity transactions
since ultimate repayment of the net advances to Affiliate is not assured.
F-50
UNIVERSAL MEDIA, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 9--CONCENTRATION OF CREDIT RISK
The Company performs ongoing credit evaluations of its customers' financial
condition and generally does not require collateral. Credit losses have been
within management's expectations.
The Company maintains cash balances at several banks. Accounts at each
institution are insured by the Federal Deposit Insurance Corporation up to
$100,000.
NOTE 10--401(K) PLAN
The Company maintains a 401(k) plan for the benefit of its eligible
employees. Contributions to the plan are accrued and funded on a current basis
at amounts determined by the board of directors. 401(k) matching contributions
amounted to approximately $60,100 for the year ended December 31, 1997.
NOTE 11--COMMITMENTS AND CONTINGENCIES
Leases
The Company leases office space under operating leases expiring in various
years through December 31, 2005.
Minimum annual rentals under non-cancellable operating leases, excluding
escalations based upon increases in real estate taxes and operating expenses,
are due as follows:
FOR THE YEAR
ENDING
DECEMBER 31,
------------
1998............................................................. $367,873
1999............................................................. 345,971
2000............................................................. 345,924
2001............................................................. 252,833
2002............................................................. 193,452
Thereafter....................................................... 580,356
Rent expense charged to operations for the year ended December 31, 1997
amounted to approximately $404,000.
NOTE 12--ACCRUED EXPENSES AND OTHER ACCRUED LIABILITIES
Accrued expenses and other accrued liabilities consist of the following:
Accrued salaries................................................ $ 264,065
Accrued commissions............................................. 365,079
Other........................................................... 426,455
----------
$1,055,599
NOTE 13--SUBSEQUENT EVENT
On August 17, 1998, the Company entered into an Asset Purchase Agreement
with Advanstar Communications Inc. (the "Buyer"), wherein the Company sold its
primary business, Travel Agent, and certain other of its assets to the Buyer
for total consideration of approximately $69,000,000.
F-51
UNIVERSAL MEDIA, INC.
BALANCE SHEET
JUNE 30,
1998
-----------
(UNAUDITED)
ASSETS (NOTE 6)
Current assets:
Cash............................................................ $ 374,706
Cash--restricted (Note 6)....................................... 50,000
Accounts receivables, net of allowance for doubtful accounts of
$270,000 (Notes 6 and 10)...................................... 3,871,302
Inventory (Note 6).............................................. 312,159
Prepaid expenses and other current assets....................... 154,703
-----------
Total current assets........................................ 4,762,870
Property and equipment, net (Note 4).............................. 219,236
Other assets:
Intangible assets, net (Note 5)................................. 457,537
Security deposits and other..................................... 61,510
-----------
Total other assets.......................................... 519,047
-----------
$ 5,501,153
===========
LIABILITIES AND STOCKHOLDER'S DEFICIENCY
Current liabilities:
Note payable--bank (Note 6)..................................... $ 655,000
Deferred subscription income.................................... 23,396
Current portion of long-term debt (Note 7)...................... 166,354
Accounts payable................................................ 742,532
Due to affiliates............................................... 1,502,793
Accrued expenses and other current liabilities.................. 606,851
-----------
Total current liabilities................................... 3,696,926
Long-term debt (Note 7)........................................... 1,265,502
Subordinated notes payable--related party (Notes 8 and 9)......... 819,317
Deferred lease obligations........................................ 52,962
Commitments and contingencies (Note 11)...........................
Stockholder's deficiency:
Common stock, no par value:
Authorized--1,500 shares......................................
Issued and outstanding--100 shares............................ 600,000
Retained earnings............................................... 1,074,523
Net advances to Affiliate....................................... (2,008,077)
-----------
Total stockholder's deficiency.............................. (333,554)
-----------
$ 5,501,153
===========
See accompanying notes.
F-52
UNIVERSAL MEDIA, INC.
STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
1997 1998
----------- -----------
(UNAUDITED)
Revenues............................................... $12,506,068 $14,507,139
Operating expenses:
Production and mechanical............................ 3,486,668 3,949,622
Selling, editorial and circulation................... 4,973,211 5,395,945
General and administrative........................... 1,454,888 2,636,446
Depreciation expense................................. 32,439 42,192
Amortization of intangible assets.................... 262,364 36,931
----------- -----------
Total operating expenses........................... 10,209,570 12,061,136
----------- -----------
Income from operations................................. 2,296,498 2,446,003
Interest expenses, net................................. 110,407 101,996
----------- -----------
Income before income taxes............................. 2,186,091 2,344,007
Income taxes........................................... 63,300 77,657
----------- -----------
Net income............................................. $ 2,122,791 $ 2,266,350
=========== ===========
See accompanying notes.
F-53
UNIVERSAL MEDIA, INC.
STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30,
1997 1998
---------- ----------
(UNAUDITED)
Cash flows from operating activities:
Net income........................................... $2,122,791 $2,266,350
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation of property and equipment............. 32,439 42,192
Amortization of intangible assets.................. 262,364 36,931
Deferred lease obligations......................... 1,576 1,537
Bad debt expense................................... 89,952 104,360
Change in assets and liabilities:
Accounts receivable............................... (685,517) (645,407)
Inventory......................................... (36,819) (104,136)
Prepaid expenses and other current assets......... 54,693 131,883
Deferred subscription income...................... 6,102 7,956
Accounts payable.................................. (231,126) 36,707
Accrued expenses and other current liabilities.... 1,646 (448,748)
---------- ----------
Net cash provided by operating activities........ 1,618,101 1,429,625
---------- ----------
Cash flows from investing activities:
Purchase of property and equipment................... (19,760) (54,928)
Security deposits and other assets................... 1,732 2,631
---------- ----------
Net cash used in investing activities............ (18,028) (52,297)
---------- ----------
Cash flows from financing activities:
Net proceeds/(repayment) of revolver loan............ 180,000 150,000
Decrease in advances from affiliates................. (1,592,702) (1,485,268)
Repayment of advances to (proceeds to) Affiliate .... 158,121 (105,730)
Net repayment of long-term debt...................... (70,253) (77,358)
---------- ----------
Net cash used in financing activities............ (1,324,834) (1,518,356)
---------- ----------
Net increase (decrease) in cash........................ 275,239 (141,028)
Cash, beginning of period.............................. 408,036 565,734
---------- ----------
Cash, end of period.................................... $ 683,275 $ 424,706
========== ==========
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for:
Interest............................................. $ 109,806 $ 103,751
Taxes................................................ $ 54,083 $ 22,725
See accompanying notes.
F-54
UNIVERSAL MEDIA, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1--BASIS OF PRESENTATION
The accompanying condensed financial statements have been prepared by
management, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. The information furnished in the condensed
consolidated financial statements includes normal recurring adjustments and
reflects all adjustments which are, in the opinion of management, necessary
for a fair presentation of such financial statements. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed
or omitted pursuant to such rules and regulations. Although management
believes that the disclosures are adequate to make the information presented
not misleading, it is suggested that these condensed consolidated financial
statements be read in conjunction with the audited financial statements and
the notes thereto included elsewhere in the Advanstar Communications Inc.
(Advanstar) Registration Statement on Form S-4, relating to Advanstar's
exchange offer for its outstanding 9 1/4% Senior Subordinated Notes.
Revenues and operating results for the six months ended June 30, 1998 and
1997 are not necessarily indicative of the results to be expected for the full
year.
NOTE 2--THE COMPANY
Universal Media, Inc. (the "Company") publishes and distributes primarily
Travel Agent, a trade national newsweekly magazine serving travel agencies and
the travel services industry. The Company is related by Common ownership with
several uncombined entities with which it has significant transactions and
financial relationships. See Notes 6 and 9. On August 17, 1998, the Company
sold Travel Agent to Advanstar for total consideration of approximately
$69,000,000.
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition
Advertising and subscription revenue, net of estimated returns and
allowances, are recorded as magazines are shipped. Reprint income is recorded
when the reprints are mailed.
Inventory
Inventory is stated at the lower of cost (first-in, first-out method) or
market and consists of paper stock.
Property and Equipment
Property and equipment is recorded at cost. Expenditures for major additions
and betterments are capitalized. Maintenance and repairs are charged to
operations as incurred. Depreciation of property and equipment is computed by
both straight-line and accelerated methods over the assets' estimated lives
ranging from five to seven years. Leasehold improvements are amortized over
the lesser of the lease terms or the assets' useful lives. Upon sale or
retirement of property and equipment, the related cost and accumulated
depreciation are removed from the accounts and any gain or loss is reflected
in operations.
F-55
UNIVERSAL MEDIA, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
Intangible Assets
Intangible assets are being amortized by the straight-line method over the
following useful lives:
Subscriber list..................................................... 8 years
Trademarks.......................................................... 40 years
Goodwill............................................................ 40 years
Loan acquisition costs and related legal fees are deferred and amortized
using the straight-line method over the term of the related debt.
Deferred Subscription Income
The Company's magazine is sold on a subscription basis for periods up to one
year. Subscription funds received in advance of shipment of the magazine is
recorded as deferred subscription income. Costs in connection with the
procurement of subscriptions are charged to expense as incurred.
Income Taxes
The Company elected treatment as a small business corporation under
Subchapter S of the Internal Revenue Code and the related provisions of the
New York State Franchise Tax law. Under the aforementioned provision,
corporate income or loss and any tax credits earned are included in the
stockholder's individual federal and state income tax returns. Accordingly, no
provision has been made for federal income taxes for in the accompanying
financial statements. The Company is subject to New York State S corporation
and New York City corporate income taxes.
NOTE 3--PROPERTY AND EQUIPMENT
Property and equipment consists of:
Computer equipment.................................................. $349,505
Furniture and equipment............................................. 242,667
Leasehold improvements.............................................. 71,667
--------
663,859
Less: Accumulated depreciation and amortization..................... 444,623
--------
$219,236
========
NOTE 5--INTANGIBLE ASSETS
Intangible assets consist of:
Restrictive covenant............................................. $3,299,372
Subscriber list.................................................. 1,600,000
Trademarks....................................................... 450,000
Goodwill......................................................... 82,542
Loan acquisition and sundry...................................... 97,607
----------
5,529,521
Less: Accumulated amortization................................... 5,071,984
----------
$ 457,537
==========
F-56
UNIVERSAL MEDIA, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
NOTE 6--NOTE PAYABLE--BANK
On June 18, 1997, the Company and an affiliated company under common control
("Affiliate") entered into a $2,000,000 secured revolving line of credit which
expires on April 30, 1998. Interest is payable monthly at 1% above the bank's
prime rate (9.5% at June 30, 1998).
The revolving credit note is collateralized by a first priority lien and
security interest in the accounts receivable and inventory of the Company and
Affiliate. The loan agreement contains covenants which, among other matters,
require the Company and Affiliate to maintain certain levels of operating
income and compensating balances. At June 30, 1998, the Company and Affiliate
were in compliance with these covenants. The principal stockholder has
personally guaranteed the revolving credit note.
The Company and Affiliate, which are affiliated through common ownership,
each guarantee the indebtedness of the other. At June 30, 1998, Affiliate had
outstanding bank indebtedness of $50,000.
NOTE 7--LONG-TERM DEBT
Long-term debt consists of:
Deferred compensation payable to a former employee in forty
quarterly installments of $25,000 without interest through
October 2004(a)................................................. $ 477,285
Non-compete agreement payable to a former employee in forty
quarterly installments of $50,000 without interest through
October 2004(a)................................................. 954,571
----------
1,431,856
Less: Current portion of long-term debt.......................... 166,354
----------
$1,265,502
==========
(a) The financial statements include the present value of all future
payments at an imputed interest rate of 9.75% per annum.
At June 30, 1998, long-term debt matures as follows:
FOR THE YEAR
ENDING
DECEMBER 31,
------------
1998--Remainder................................................ $ 81,174
1999........................................................... 174,563
2000........................................................... 192,215
2001........................................................... 211,653
2002........................................................... 233,056
2003........................................................... 256,623
2004........................................................... 282,572
----------
$1,431,856
==========
F-57
UNIVERSAL MEDIA, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
NOTE 8--SUBORDINATED NOTE PAYABLE--RELATED PARTY
Subordinated debt at June 30, 1998 consists of a note payable to an entity
related through common ownership in the amount of $819,317. The note is
subordinated to bank borrowings (see Note 5 and 6) and is non-interest
bearing.
NOTE 9--RELATED PARTY TRANSACTIONS
Management advisory and general and administrative services, including
certain accounting, marketing, information systems support and other services,
are received from entities under common ownership and control. The value of
such services for the six months ended June 30, 1997 and 1998 was $475,000 and
$489,250, respectively and are included in general and administrative expenses
in the statement of income. These amounts were determined based on an estimate
of time and related costs to perform such services. Management believes the
allocations are reasonable.
NOTE 10--CONCENTRATION OF CREDIT RISK
The Company performs ongoing credit evaluations of its customers' financial
condition and generally does not require collateral. Credit losses have been
within management's expectations.
The Company maintains cash balances at several banks. Accounts at each
institution are insured by the Federal Deposit Insurance Corporation up to
$100,000.
NOTE 11--COMMITMENTS AND CONTINGENCIES
Leases
The Company leases office space under operating leases expiring in various
years through December 31, 2005.
Minimum annual rentals under non-cancellable operating leases, excluding
calculations based upon increases in real estate taxes and operating expenses,
are payable as follows:
FOR THE YEAR ENDING DECEMBER 31,
--------------------------------
1998--Remainder.................................................. $183,900
1999............................................................. 345,971
2000............................................................. 345,924
2001............................................................. 252,833
2002............................................................. 193,452
2003............................................................. 193,452
Thereafter....................................................... 386,904
Rent expenses charged to operations for each of the six months ended June
30, 1997 and 1998 amounted to approximately $205,000.
NOTE 12--NET ADVANCES TO AFFILIATE
The Company has advanced funds to Affiliate and has received repayment of
certain amounts advanced. Such transactions have been treated as a reduction
of stockholder's equity since ultimate repayment of such net amount is not
assured.
F-58
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Advanstar Communications Inc.:
We have audited the accompanying statement of net liabilities to be
contributed of the Video Software Dealers Association Convention and
Exhibition as of December 31, 1997, and the related statements of operations
and cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the statement of net liabilities to be contributed
of the Video Software Dealers Association Convention and Exhibition as of
December 31, 1997, and the results of its operations and its cash flows for
the year then ended, in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Minneapolis, Minnesota,
June 11, 1998
F-59
VIDEO SOFTWARE DEALERS ASSOCIATION CONVENTION AND EXHIBITION
STATEMENT OF NET LIABILITIES TO BE CONTRIBUTED
AS OF DECEMBER 31, 1997
ASSETS
PREPAID CONVENTION EXPENSES.......................................... $ 101,174
---------
LIABILITIES
COMMITMENTS AND CONTINGENCIES (Note 4)
DEFERRED REVENUE..................................................... 372,650
---------
Net liabilities to be contributed.................................. $(271,476)
=========
The accompanying notes are an integral part of this statement.
F-60
VIDEO SOFTWARE DEALERS ASSOCIATION CONVENTION AND EXHIBITION
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
REVENUE:
Exhibit booths.................................................... $2,673,186
Registrations..................................................... 2,365,193
Other............................................................. 289,791
----------
Total convention revenues....................................... 5,328,170
CONVENTION AND EXHIBITION EXPENSES.................................. 1,839,334
----------
Gross profit...................................................... 3,488,836
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES........................ 275,766
----------
Net income........................................................ $3,213,070
==========
The accompanying notes are an integral part of this financial statement.
F-61
VIDEO SOFTWARE DEALERS ASSOCIATION CONVENTION AND EXHIBITION
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income....................................................... $3,213,070
Adjustments to reconcile net income to net cash provided by oper-
ating activities--
Decrease in prepaid expenses................................... (32,179)
Increase in deferred revenue................................... 242,261
----------
Net cash provided by operating activities.................... 3,423,152
----------
CASH RETAINED BY PARENT............................................ (3,423,152)
----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............... --
CASH AND CASH EQUIVALENTS, beginning of year....................... --
----------
CASH AND CASH EQUIVALENTS, end of year............................. $ --
==========
The accompanying notes are an integral part of this financial statement.
F-62
VIDEO SOFTWARE DEALERS ASSOCIATION CONVENTION AND EXHIBITION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. DESCRIPTION OF THE BUSINESS:
The accompanying financial statements include the accounts of the Video
Software Dealers Association Convention and Exhibition (the VSDA Convention
and Exhibition).
Nature of Operations
The VSDA Convention and Exhibition is an annual trade show organized to
promote the home video entertainment industry. The 1997 convention and
exhibition was owned and operated by The Video Software Dealers Association
(the Association) which is a not-for-profit international trade association
that represents the home video industry. The convention and trade show are the
Association's primary source of revenue. The convention brings together
retailers, studios, distributors and suppliers of home video products in order
to promote and expand the home video industry.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Prepaid Convention Expenses
Prepaid convention expenses consist of costs incurred in advance of the
show. Costs are charged to operations at the time of the occurrence of the
related exhibition, to be refunded in the event that the show is cancelled.
Revenue Recognition
Revenue is recognized in the period in which the show is held. Deferred
revenue is recorded when cash is received in advance of the applicable show.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and reported amounts of revenues and expenses
during the reporting period. Ultimate results could differ from those
estimates.
3. INCOME TAXES:
The Association is exempt from federal income taxes under section 501c(6) of
the Internal Revenue Code. The 1997 convention was owned and operated by the
Association and, as such, was also exempt from taxes.
4. COMMITMENTS AND CONTINGENCIES:
Litigation
The VSDA Convention and Exhibition is subject to asserted and unasserted
claims encountered in the normal course of business. In the opinion of
management, disposition of these matters will not have a material effect on
the VSDA Convention and Exhibition's financial condition or results of its
operations.
F-63
VIDEO SOFTWARE DEALERS ASSOCIATION CONVENTION AND EXHIBITION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
5. SUBSEQUENT EVENTS:
On February 9, 1998, the Association entered into a 50/50 joint venture
partnership agreement with Advanstar Communications Inc. (Advanstar) to form
Home Entertainment Events (the Partnership). The Association contributed the
VSDA Convention and Exhibition to the Partnership in consideration for its 50%
ownership interest. Advanstar contributed its East Coast Video Show and cash
in consideration for its 50% partnership interest.
F-64
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To TeleProfessional, Inc.:
We have audited the accompanying balance sheet of TeleProfessional, Inc. (an
Iowa corporation) as of December 31, 1997, and the related statements of
operations, shareholders' equity and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of TeleProfessional, Inc. as
of December 31, 1997, and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Minneapolis, Minnesota,
June 11, 1998
F-65
TELEPROFESSIONAL, INC.
BALANCE SHEET
AS OF DECEMBER 31, 1997
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................................ $ 38,918
Accounts receivable, net of allowance of $15,000................. 1,002,280
Prepaid expenses................................................. 4,227
----------
Total current assets........................................... 1,045,425
----------
PROPERTY AND EQUIPMENT:
Furniture and equipment.......................................... 127,108
Leasehold improvements........................................... 3,175
Accumulated depreciation......................................... (65,200)
----------
Net property and equipment..................................... 65,083
OTHER ASSETS, net.................................................. 11,481
----------
$1,121,989
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt............................. $ 558,393
Accounts payable................................................. 220,398
Accrued expenses, net............................................ 257,714
Deferred revenue................................................. 18,994
----------
Total current liabilities...................................... 1,055,499
----------
LONG-TERM DEBT, net of current maturities.......................... 29,327
COMMITMENTS AND CONTINGENCIES (Note 6)
SHAREHOLDERS' EQUITY:
Common stock, no par value, 100,000 shares authorized; 10,000
shares
issued and outstanding.......................................... 22,001
Retained earnings................................................ 15,162
----------
Total shareholders' equity..................................... 37,163
----------
$1,121,989
==========
The accompanying notes are an integral part of this balance sheet.
F-66
TELEPROFESSIONAL, INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
NET SALES........................................................... $3,933,230
COST OF SALES....................................................... 2,153,089
----------
Gross profit...................................................... 1,780,141
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES........................ 967,130
----------
Operating income.................................................. 813,011
INTEREST EXPENSE, net............................................... (7,645)
OTHER INCOME, net................................................... 597
----------
NET INCOME.......................................................... $ 805,963
==========
The accompanying notes are an integral part of this financial statement.
F-67
TELEPROFESSIONAL, INC.
STATEMENT OF SHAREHOLDERS' EQUITY
RETAINED
EARNINGS TOTAL
NUMBER COMMON (ACCUMULATED SHAREHOLDERS'
OF SHARES STOCK DEFICIT) EQUITY
--------- -------- ------------ -------------
BALANCE, January 1, 1997........ 10,000 $522,001 $(590,801) $(68,800)
Net income.................... -- -- 805,963 805,963
Distribution paid to share-
holders...................... -- (500,000) (200,000) (700,000)
------ -------- --------- --------
BALANCE, December 31, 1997...... 10,000 $ 22,001 $ 15,162 $ 37,163
====== ======== ========= ========
The accompanying notes are an integral part of this financial statement.
F-68
TELEPROFESSIONAL, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997
OPERATING ACTIVITIES:
Net income.......................................................... $805,963
Adjustments to reconcile net income to net cash provided by--
Depreciation and amortization..................................... 19,849
Changes in operating assets and liabilities:
Accounts receivable, net.......................................... (683,479)
Prepaid expenses.................................................. 7,530
Accounts payable and accrued liabilities.......................... 275,402
Deferred revenue.................................................. (131,845)
--------
Net cash provided by operating activities....................... 293,420
--------
INVESTING ACTIVITIES:
Purchase of property, plant and equipment........................... (32,586)
--------
Net cash used in investing activities........................... (32,586)
--------
FINANCING ACTIVITIES:
Distribution to shareholders........................................ (700,000)
Repayment of long-term debt......................................... (375,921)
Proceeds from long-term debt........................................ 706,189
--------
Net cash used in financing activities........................... (369,732)
--------
NET DECREASE IN CASH AND CASH EQUIVALENTS............................. (108,898)
CASH AND CASH EQUIVALENTS, beginning of year.......................... 147,816
--------
CASH AND CASH EQUIVALENTS, end of year................................ $ 38,918
========
CASH PAID FOR:
Interest............................................................ $114,864
========
Income taxes........................................................ $ --
========
The accompanying notes are an integral part of this financial statement.
F-69
TELEPROFESSIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. DESCRIPTION OF BUSINESS:
The accompanying financial statements include the accounts TeleProfessional,
Inc. (an Iowa Corporation), referred to herein as the Company. The Company
publishes trade periodicals providing information on new and evolving call
center strategies, tactics and technologies.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash and Cash Equivalents
Cash and cash equivalents include cash and highly liquid investments with
original maturities of three months or less.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. For financial reporting
purposes, depreciation is provided on a straight-line basis over the estimated
useful lives of 3 to 7 years for furniture and equipment and 39 years for
leasehold improvements.
Other Assets
Other assets consist of publishing rights, trademarks and lease deposits and
are amortized using the straight-line method over the periods of 5 to 17
years. Accumulated amortization as of December 31, 1997 was $11,610.
The Company periodically evaluates whether events and circumstances have
occurred that may affect the estimated useful lives or recoverability of its
long-lived assets. If such events or circumstances were to indicate that the
carrying amount of these assets would not be recoverable, an impairment loss
would be recognized. No such impairment has been recognized for the year ended
December 31, 1997.
Revenue Recognition
Advertising revenue is recognized as due and payable upon the publication's
mail date. Subscription revenue is recognized on a pro rata basis as
publications are issued to fulfill the subscription obligations. Deferred
revenue is recorded when cash is received in advance of providing the related
service.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Ultimate results could differ from those estimates.
Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income." SFAS No. 130 requires
F-70
TELEPROFESSIONAL, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997
an enterprise to classify items of other comprehensive income by their nature
in a financial statement and display the accumulated balance of their
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of the statement of financial position. The
Company will adopt this standard during fiscal 1998. Adoption of this standard
is not expected to have a material effect on the Company.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information." SFAS
No. 131 requires that a public business enterprise report financial and
descriptive information about its reportable operating segments such as a
measure of segment profit or loss, certain specific revenue and expense items
and segment assets. The Company will adopt this standard during 1998 and is
currently analyzing the impact it will have on the disclosures in its
financial statements.
3. LONG-TERM DEBT:
Long-term debt consists of the following as of December 31, 1997:
Shareholder notes payable, interest at rates of 9% to 10%........... $567,103
Capital lease payables, interest rate of 15.5% to 23.4%............. 20,617
--------
Total debt........................................................ 587,720
Less-- Current maturities........................................... (558,393)
--------
Total long-term debt.............................................. $ 29,327
========
Scheduled maturities of long-term debt at December 31, 1997 are as follows:
1998................................................................ $558,393
1999................................................................ 21,951
2000................................................................ 7,376
--------
$587,720
========
4. INCOME TAXES:
The Company maintains an S corporation status for income tax purposes under
Subchapter S of the Internal Revenue Code and relevant state income tax
regulations. Accordingly, the Company's income and any available tax credits
are included in the income tax return of its shareholders.
5. SHAREHOLDERS' EQUITY:
Dividend Distribution
During 1997, the Company declared a $700,000 cash dividend. The dividend was
charged to retained earnings in the amount of $200,000, and the remainder was
charged to common stock.
6. COMMITMENTS AND CONTINGENCIES:
Litigation
The Company is subject to asserted and unasserted claims encountered in the
normal course of business. In the opinion of management and its legal counsel,
disposition of these matters will not have a material effect on the Company's
financial condition or results of operations.
F-71
TELEPROFESSIONAL, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997
Operating Leases
The Company leases office space and equipment with various expiration dates
through February 28, 2002. Total rent expense was $35,700 in 1997. Future
minimum lease payments under operating lease commitments as of December 31,
1997 are $40,900 in 1998, $41,400 in 1999, $42,400 in 2000, $42,700 in 2001
and $42,700 in 2002.
7. EVENT SUBSEQUENT TO DECEMBER 31, 1997:
Acquisition
On March 26, 1998, the Company entered into an Asset Purchase Agreement (the
Agreement) with Advanstar Communications Inc. (the Buyer), wherein the Company
agreed to sell substantially all of its assets to the Buyer for approximately
$6.2 million.
F-72
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Advanstar Communications Inc.:
We have audited the accompanying statement of net liabilities to be assumed
of ScanTech as of December 31, 1997, and the related statements of operations
and cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the statement of net liabilities to be acquired of
ScanTech as of December 31, 1997, and the results of its operations and its
cash flows for the year then ended in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Minneapolis, Minnesota,
August 5, 1998
F-73
SCANTECH
STATEMENTS OF NET LIABILITIES TO BE ASSUMED
DECEMBER 31, MARCH 31,
1997 1998
------------ -----------
(UNAUDITED)
ASSETS
PREPAID EXPENSES..................................... $ 27,167 $ 107,161
--------- -----------
LIABILITIES
COMMITMENTS AND CONTINGENCIES (Note 4)............... -- --
DEFERRED REVENUE..................................... 149,368 2,096,594
--------- -----------
Net liabilities to be assumed...................... $(122,201) $(1,989,433)
========= ===========
The accompanying notes are an integral part of these financial statements.
F-74
SCANTECH
STATEMENTS OF OPERATIONS
FOR THE THREE
FOR THE YEAR MONTHS ENDED
ENDED MARCH 31,
DECEMBER 31, ------------------
1997 1997 1998
----------- -------- --------
(UNAUDITED)
NET SALES................................ $2,892,122 $ -- $ --
COST OF SALES............................ 1,180,489 -- --
---------- -------- --------
Gross profit........................... 1,711,633 -- --
SELLING, GENERAL AND ADMINISTRATIVE EX-
PENSES.................................. 307,058 92,580 88,053
---------- -------- --------
Operating income (loss)................ 1,404,575 (92,580) (88,053)
OTHER EXPENSE, net....................... 136,014 -- --
---------- -------- --------
Income before income taxes............. 1,268,561 (92,580) (88,053)
INCOME TAX PROVISION (BENEFIT)........... 507,424 (37,032) (35,221)
---------- -------- --------
Net income (loss)....................... $ 761,137 $(55,548) $(52,832)
========== ======== ========
The accompanying notes are an integral part of these financial statements.
F-75
SCANTECH
STATEMENTS OF CASH FLOWS
FOR THE YEAR FOR THE THREE MONTHS
ENDED ENDED MARCH 31,
DECEMBER 31, -----------------------
1997 1997 1998
------------ --------- ------------
(UNAUDITED)
OPERATING ACTIVITIES:
Net income (loss)..................................... $ 761,137 $ (55,548) $ (813,969)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities-
Changes in operating assets and liabilities:
(Decrease) in prepaid expenses...................... (850) (95,456) (79,994)
Increase (decrease) in deferred revenue............. (40,651) 793,781 1,947,226
--------- --------- -----------
Net cash provided by operating activities.......... 719,636 642,777 1,053,263
--------- --------- -----------
FINANCING ACTIVITIES:
Cash retained by REI.................................. (719,636) (642,777) (1,053,263)
--------- --------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS........................................... -- -- --
CASH AND CASH EQUIVALENTS, beginning of period......... -- -- --
--------- --------- -----------
CASH AND CASH EQUIVALENTS, end of period............... $ -- $ -- $ --
========= ========= ===========
The accompanying notes are an integral part of these financial statements.
F-76
SCANTECH
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
1. DESCRIPTION OF THE BUSINESS:
The accompanying financial statements include the accounts of ScanTech, a
technology exposition owned and organized by Reed Elsevier Inc. (REI, a
Massachusetts corporation), herein referred to as the Show.
The Show is an annual trade show and conference held in the fall exhibiting
automatic data capture, identification and tracking systems (bar coding,
magnetic strips, smart cards, biometrics and the associated systems).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Prepaid Expenses
Prepaid expenses relate to costs incurred in advance of the Show. Costs are
charged to operations at the time of the occurrence of the Show.
Revenue Recognition
Revenue is recorded in the period in which the Show is held. Deferred
revenue is recorded when cash is received in advance of the Show. In the event
that the Show is cancelled, REI would refund any deferred revenue recorded by
the Show.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Ultimate results could differ from the estimates.
3. INCOME TAXES:
The Show is taxed at REI's effective tax rate of 40%.
4. COMMITMENTS AND CONTINGENCIES:
Litigation
The Show is subject to asserted and unasserted claims encountered in the
normal course of business. In the opinion of management, disposition of these
matters will not have a material effect on the Show's financial condition or
results of operations.
5. SUBSEQUENT EVENT:
Acquisition
On April 20, 1998, REI entered into an Asset Purchase Agreement, (the
Agreement) with Advanstar Communications Inc. (the Buyer), wherein REI agreed
to sell substantially all of its net assets (liabilities) to the buyer. The
purchase price for the transaction was approximately $7.5 million.
F-77
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR ANY OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY OFFER OR SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE
HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS
DATE.
- -------------------------------------------------------------------------------
TABLE OF CONTENTS
Summary................................................................... 1
Risk Factors.............................................................. 21
The Acquisitions and Refinancing.......................................... 28
Use of Proceeds........................................................... 29
Capitalization............................................................ 30
Unaudited Pro Forma Combined Financial Information........................ 31
Selected Historical Consolidated Financial and Other Data of Advanstar and
the Predecessor.......................................................... 38
Selected Historical Consolidated Financial and Other Data of MAGIC........ 40
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 41
Business.................................................................. 52
Management................................................................ 67
Principal Stockholders.................................................... 72
The Exchange Offer ....................................................... 74
Description of Amended Credit Facility.................................... 84
Description of Notes...................................................... 86
Exchange and Registration Rights Agreement................................ 115
Book-Entry; Delivery and Form............................................. 118
Certain United States Federal Tax Consequences ........................... 120
Plan of Distribution...................................................... 123
Legal Matters............................................................. 123
Experts................................................................... 123
Available Information..................................................... 124
Index to Financial Statements............................................. F-1
- -------------------------------------------------------------------------------
UNTIL 90 DAYS AFTER THE DATE OF THIS PROSPECTUS, ALL DEALERS EFFECTING
TRANSACTIONS IN THE EXCHANGE NOTES, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN SELLING EXCHANGE NOTES
RECEIVED IN EXCHANGE FOR ORIGINAL NOTES HELD FOR THEIR ACCOUNT. SEE "PLAN OF
DISTRIBUTION."
ADVANSTAR COMMUNICATIONS INC.
OFFER TO EXCHANGE ITS 9 1/4% SENIOR SUBORDINATED NOTES DUE 2008, WHICH HAVE
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, FOR ANY AND ALL
OF ITS OUTSTANDING 9 1/4% SENIOR SUBORDINATED NOTES DUE 2008, WHICH HAVE NOT
BEEN SO REGISTERED
[LOGO OF ADVANSTAR COMMUNICATIONS APPEARS HERE]
---------------
PROSPECTUS
---------------
, 1998
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Andvanstar Communications Inc. (the "Company") is a New York Corporation.
Section 402(b) of the New York Business Corporation (" NYBCL") statute
generally provides that a company's certificate of incorporation may set forth
a provision eliminating or limiting the personal liability of its directors
for damages for any breach of duty in such capacity, provided that no such
provision shall eliminate or limit: the liability of any director if a
judgment or other final adjudication adverse to him establishes (i) that his
acts or omissions were in bad faith or involved intentional misconduct or a
knowing violation of law; or (ii) that he personally gained in fact a
financial profit or other advantage to which he was not legally entitled; or
(iii) that his acts violated section 719 of the NYBCL.
In addition, section 722(a) of the NYBCL generally provides that a
corporation may indemnify officers made, or threatened to be made, a party to
an action or proceeding, other than one by or in the right of the corporation
to procure a judgment in its favor, including an action by or in the right of
any other corporation, or other enterprise, which any director or officer of
the corporation served in any capacity at the request of the corporation, by
reason of the fact that he was a director or officer of the corporation, or
served such other corporation, or other enterprise in any capacity, against
judgments, fines, amounts paid in settlement and reasonable expenses,
including attorneys fees, if such director or officer acted in good faith.
Section 722(c), in general, further provides that a corporation may
indemnify any person made, or threatened to be made, a party to an action by
or in the right of the corporation to procure a judgment in its favor by
reason of the fact that he is or was a director or officer of the corporation,
or is or was serving at the request of the corporation as a director or
officer of any other corporation, or other enterprise, against amounts paid in
settlement and reasonable expenses, including attorneys fees in connection
with the defense or settlement of such action if such director or officer
acted in good faith.
Generally, the Company's certificate of incorporation eliminates the
personal liability of its directors to the fullest extent permitted by the
provisions of paragraph (b) of Section 402 of the NYBCL. In addition, the
Company's bylaws indemnify its directors and officers in connection with any
proceeding, including an action by or in the right of the corporation, by
reason of the fact that such person is or was a director or officer of the
Company, or is or was serving at the request of the Company as a director,
officer, trustee, employee or agent of another corporation or other
enterprise, except in relation to matters as to which a director or officer is
adjudged to have breached his duty of care or to have acted in bad faith.
Advanstar Holdings, Inc. ("Holdings") and Art Expositions International
("Art Expositions") are each Delaware corporations. The Delaware General
Corporation Law (the "DCCL") permits the indemnification by a Delaware
corporation of its directors and officers for liabilities and expenses that
they may incur in such capacities. In general, directors and officers are
indemnified with respect to actions taken in good faith in a manner reasonably
believed to be in, or not opposed to, the best interests of the Registrant,
and with respect to any criminal action proceeding, actions that the
indemnified party has no reasonable cause to believe were unlawful.
Holdings' certificate of incorporation states that no director shall be
personally liable for monetary damages for breaches of fiduciary duty as a
director, except for liability (i) for any breach of the director's duty of
loyalty (ii) acts or omission not in good faith or which involve intentional
misconduct or a know violation of law (iii) under section 174 of the DGCL or
(iv) for any transaction for which the director derived any improper personal
benefit. If the DGCL is amended then liability of the director shall be
eliminated or limited to the fullest extent permitted. In general, Holdings'
bylaws indemnify any
II-1
person, made a party to an action, suit or proceeding by or in the right of
Holdings to procure a judgment in its favor by reason of the fact that he is
or was a director or officer against the reasonable expenses, including
attorneys' fees incurred by him in connection with the defense of such action,
except in relation to matters as to which a director or officer is adjudged to
have breached his duty of care or have acted in bad faith.
Art Expositions' certificate incorporation generally provides that no
director shall be personally liable for monetary damages for breach of
fiduciary duty, except for liability (i) for breach of the duty of loyalty
(ii) acts omissions not in good faith involving intentional misconduct or
knowing violation of law (iii) under Section 174 of the DGCL (iv) for any
transaction from which the director derived any improper personal benefit. Art
Exposition's bylaws provide that directors and officers made a party to an
action, suit or proceeding by or in the right of Art Expositions to procure a
judgment in its favor by reason of the fact that he is or was a director or
officer shall be indemnified against the reasonable expenses, including
attorneys' fees, incurred in connection with the defense of such action to the
fullest extent permitted by the DGCL.
Men's Apparel Guild in California, Inc. ("MAGIC"), Magic Kids, Inc. ("Magic
Kids") and Applied Business teleCommunications ("ABC") are each California
corporations. Section 204 of the California Corporations Code (the "CCC")
generally provides that articles of incorporation may set forth provisions
eliminating or limiting the personal liability of a director for monetary
damages in an action brought by or in the right of the corporation for breach
or a director's duties to the corporation and its shareholders as set forth in
Section 309 of the CCC, provided, however, that (A) such provision may not
eliminate or limit the liability of directors (i) for acts or omissions that
involve intentional misconduct or a knowing and culpable violation of law,
(ii) for acts or omissions that a director believes to be contrary to the best
interests of the corporation or its shareholders or that involve the absence
of good faith on the part of the director, (iii) for any transaction from
which a director derived an improper personal benefit, (iv) for acts or
omissions that show a reckless disregard for the director's duty of the
corporation or its shareholders in circumstances in which the director was
aware, or should have been aware, in the ordinary course of performing a
director's duties, or a risk of serious injury to the corporation or its
shareholders, (v) for acts or omissions that constitute an unexcused pattern
of inattention that amounts to an abdication of the director's duty to the
corporation or its shareholders, (vi) under Section 310 of the CCC; and (B) no
such provision shall eliminate or limit the liability of an officer for any
act or omission as an offer not withstanding that the officer is also a
director or that his actions, if negligent or improper, have been ratified by
the directors.
MAGIC's articles of incorporation and bylaws generally authorize that, to
the fullest extent permissible under California law and in excess of that
which is expressly permitted by Section 317 of the CCC, MAGIC shall indemnify
its directors and officers against all expenses, judgments, fines, settlements
and other amounts actually and reasonably incurred by them in connection with
any proceeding, including an action by or in the right of the corporation, by
reason of the fact that such person is or was a director or officer of the
corporation, or is or was serving at the request of the corporation as a
director, officer, trustee, employee or agent of another corporation or other
enterprise.
Magic Kids' articles of incorporation provide for indemnification of its
agents (as defined in Section 317 of the CCC) through bylaw provisions,
agreements with agents, a vote of shareholders or disinterested directors or
otherwise, in excess of the indemnification otherwise permitted by Section 317
of the California Corporations Code, subject only to the applicable limits set
forth in Section 204 of the CCC with respect to actions for breach of duty to
Magic Kids and its shareholders. The liability of the directors of Magic Kids
for monetary damages shall be eliminated to the fullest extent permissible
under California law. Magic Kids' bylaws indemnify directors and officers to
the maximum extent permitted by the CCC.
The articles of incorporation of ABC are silent on the topic of director and
officer indemnification. The bylaws of ABC provide for the indemnification of
its agents against expenses, judgments, fines,
II-2
settlements and other amounts, actually and reasonably incurred by reason such
person's having been made or having been threatened to be party to a
proceeding to the fullest extent permissible under the CCC.
On Demand Marketing Inc. ("On Demand") and Expocon Management Associates
("Expocon") are each Connecticut corporations. Section 33-636 of the
Connecticut Business Corporation Act ("CBCA") provides that a corporation's
certificate of incorporation may set forth: a provision limiting the personal
liability of a director to the corporation or its shareholders for monetary
damages for breach of duty as a director to an amount that is not less than
the compensation received by the director for serving the corporation during
the year of the violation if such breach did not (i) involve a knowing and
culpable violation of law by the director, (ii) enable the director or an
associate, as defined in section 33-840, to receive an improper personal
economic gain, (iii) show a lack of good faith and a conscious disregard for
the duty of the director to the corporation under circumstances in which the
director was aware that his conduct or omission created an unjustifiable risk
of serious injury to the corporation, (iv) constitute a sustained and
unexcused pattern of inattention that amounted to an abdication of the
director's duty to the corporation, or (v) create liability under section 33-
757. Furthermore, section 33-771 generally gives a corporation a right to
indemnify a director if (1) he acted in good faith; and (2) he reasonably
believed his conduct, when acting in his official capacity, was in the best
interest of the corporation and that his conduct, other than in an official
capacity, was not opposed to the best interest of the corporation; and (3) in
the case of a criminal proceeding, he had no reasonable cause to believe his
conduct was unlawful. Section 33-772 states that a corporation must indemnify
a director who was wholly successful, on the merits or otherwise in the
defense of any action or proceeding to which he was a party because he was of
director. Finally, section 33-776 states that a corporation may indemnify and
advance expenses to an officer who is party to a proceeding because he is an
officer to the same extent as a director, or to such further extent consistent
with public policy as provided in the certificate of incorporation, bylaws or
by contract.
The certificate of incorporation of On Demand provides that the personal
liability of a director to On Demand or its stockholders for any monetary
damages for breach of duty as a director shall be limited to an amount that is
equal to the compensation received by the director for serving On Demand
during the year of the violation, if such breach did not (i) involve a knowing
and culpable violation or law by the director, (ii) enable the director or an
associate, as defined in subdivision (3) of section 33-374d of the Act, to
receive an improper personal economic gain, (iii) show a lack of good faith
and a conscious disregard for the duty of the director to On Demand under
circumstances in which the director was aware that his conduct or omission
created an unjustifiable risk of serious injury to the corporation, (iv)
constitute a sustained and unexcused pattern of inattention that amounted to
an abdication of the director's duty to the corporation or (v) create a
liability under section 33-321 of the Act. In general, the bylaws of On Demand
state that the On Demand shall be bound by and comply with the provisions the
CBCA pertaining to indemnification of officers and directors.
The articles of incorporation and the bylaws of Expocon are silent on the
topic of director and officer indemnification.
Technology Events Company, LLC ("Technology Events") is a Connecticut
limited liability company. Section 34-143 of the Connecticut Limited Liability
Corporation Act ("the CLLC") provides that the operating agreement of a
limited liability corporation may: (1) eliminate or limit the personal
liability of a member or manager for monetary damages for breach of any duty
provided for in Section 34-141 of the CLLC; and (2) provide for
indemnification of a member or manager for judgments, settlements, penalties,
fines or expenses incurred in a proceeding to which an individual is a party
because such individual is or was a member or manager. The articles of
organization of Technology Events are silent on the topic of director and
officer indemnification.
Reference is made to each Registrant's charter and bylaws, filed herewith.
II-3
ITEM 21. EXHIBITS AND FINANCIAL STATEMENTS
EXHIBIT
NUMBER DESCRIPTION
------- ----------------------------------------------------------------------
3.1 The Company's Amended and Restated Certificate of Incorporation
3.2 The Company's Bylaws
3.3 Advanstar Holdings, Inc. Amended Certificate of Incorporation
3.4 Advanstar Holdings, Inc. Amended and Restated Bylaws
Art Expositions International, Inc. Amended Certificate of
3.5 Incorporation
3.6 Art Expositions International, Inc. Bylaws
3.7 Expocon Management Associates, Inc. Certificate of Incorporation
3.8 Expocon Management Associates, Inc. Bylaws
3.9 On Demand Marketing, Inc. Certificate of Incorporation
3.10 On Demand Marketing, Inc. Amended and Restated Bylaws
3.11 Technology Events Company, LLC Articles of Organization
3.12 Men's Apparel Guild in California, Inc. Articles of Incorporation
3.13 Men's Apparel Guild in California, Inc. Amended and Restated Bylaws
3.14 Magic Kids, Inc. Articles of Incorporation
3.15 Magic Kids, Inc. Bylaws
3.16 Applied Business teleCommunications Amended Articles of Incorporation
3.17 Applied Business teleCommunications Bylaws
4.1 Indenture, dated as of April 30, 1998, among the Company, the
Guarantors (as defined therein) and the Bank of New York
4.2 Supplemental Indenture, dated as of May 19, 1998, among the Company,
Applied Business teleCommunications and the Bank of New York
4.3 Form of Rule 144A Global Note
4.4 Form of Regulation S Global Note
4.5 Form of Accredited Investor Global Note
4.6 Form of Exchange Note
5.1 Opinion of Testa, Hurwitz & Thibeault LLP regarding the legality of
the securities being issued
10.1 Purchase Agreement, dated April 27, 1998, among the Company, the
Guarantors (as defined therein), Chase Securities Inc. and Lehman
Brothers Inc.
10.2 Exchange and Registration Rights Agreement, dated April 30, 1998,
among the Company, the Guarantors (as defined therein), Chase
Securities Inc. and Lehman Brothers Inc.
10.3 Amended Credit Agreement (the "Credit Agreement"), dated as of May 31,
1996, as amended and restated as of April 30, 1998, among the Company,
the Guarantors (as defined in the Credit Agreement), the Lenders (as
defined in the Credit Agreement) and the Chase Manhattan Bank
10.4 Employment Agreement, dated July 1, 1996, between Advanstar Holdings,
Inc. and Robert Krakoff
10.5 Employment Agreement, dated July 1, 1996, between Advanstar Holdings,
Inc. and James M. Alic
II-4
EXHIBIT
NUMBER DESCRIPTION
------- ---------------------------------------------------------------------
10.6 Advanstar Holdings, Inc. 1996 Stock Option Plan
10.7 Advanstar Holdings, Inc. Employees' 401(k) Plan and Trust, as amended
10.8 Agreement, dated July 31, 1997, between the Company and Banta
Publications
10.9 Lease Agreement, dated February 2, 1996, between the Las Vegas
Convention and Visitors Authority and Men's Apparel Guild in
California, Inc.
10.10 Lease Agreement dated December 24, 1996, between the Las Vegas
Convention and Visitor's Authority and Men's Apparel Guild in
California, Inc.
10.11 Lease Agreement, dated September 25, 1996, between the Interface
Group--Nevada, Inc. and Men's Apparel Guild in California, Inc.
10.12 Lease Agreement, dated September 5, 1997, between the Interface
Group--Nevada, Inc. and Men's Apparel Guild in California, Inc.
10.13 Lease Agreement, dated September 5, 1997, between the Interface
Group--Nevada, Inc. and Men's Apparel Guild in California, Inc.
10.14 Lease Agreement, dated September 5, 1997, between the Interface
Group--Nevada, Inc. and Men's Apparel Guild in California, Inc.
10.15 Lease Agreement, dated September 5, 1997, between the Interface
Group--Nevada, Inc. and Men's Apparel Guild in California, Inc.
10.16 Convention Agreement, dated March 19, 1998, between Las Vegas Hilton
Corporation and Men's Apparel Guild in California, Inc.
12.1+ Statement re Computation of Ratios
21.1 Subsidiaries of the Registrant
23.1+ Consent of Arthur Andersen LLP
23.2+ Consent of PricewaterhouseCoopers LLP
23.3+ Consent of Mahoney Cohen & Company, CPA, P.C.
23.4 Consent of Testa, Hurwitz & Thibeault, LLP (included in Exhibit 5.1)
24.1 Power of Attorney (included on signature pages of Registration
Statement)
25.1 Statement of Eligibility of Trustee
27.1+ Financial Data Schedule (EDGAR version only)
99.1 Form of Letter of Transmittal
99.2 Form of Notice of Guaranteed Delivery
99.3 Form of Instructions to Registered Holder
- --------
+Filed herewith.
ITEM 22. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
1. To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
i. To include any prospectus required by section 10(a)3 of the
Securities Act of 1933;
ii. To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the
information set forth in the registration statement.
Notwithstanding the foregoing, any increase
II-5
or decrease in volume of securities offered (if the total dollar
value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more
than 20% change in the maximum aggregate offering price set forth
in the "Calculation of Registration Fee" table in the effective
registration statement.
iii. To include any material information with respect to the plan of
distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
2. That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
3. To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other
than the payment by the registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, the registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
(c) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant
to Items 4, 10(b), 11 or 13 of this Form, within one business day of
receipt of such request, and to send the incorporated documents by first
class mail or other equally prompt means. This includes information
contained in documents filed subsequent to the effective date of the
registration statement through the date of responding to the request.
(d) The undersigned registrant hereby undertakes to supply by means of a post-
effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it becomes effective.
II-6
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT HAS DULY CAUSED AMENDMENT NO. 1 TO THIS REGISTRATION STATEMENT TO
BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN
BOSTON, MASSACHUSETTS, ON THE 2ND DAY OF SEPTEMBER, 1998.
ADVANSTAR COMMUNICATIONS INC.
By: /s/ Robert L. Krakoff
-----------------------------------
Robert L. Krakoff, Chairman of the
Board and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
Amendment No. 1 to this Registration Statement has been signed by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated:
SIGNATURE TITLE
DATE
/s/ Robert L. Krakoff Chairman of the September 2,
- ------------------------------------- Board and Chief 1998
Robert L. Krakoff Executive Officer
(Principal Executive
Officer)
* Vice President- September 2,
- ------------------------------------- Finance, Chief 1998
David W. Montgomery Financial Officer
and Secretary
(Principal Financial
and Accounting
Officer)
* Vice Chairman and September 2,
- ------------------------------------- Director 1998
James M. Alic
* Director September 2,
- ------------------------------------- 1998
Kenneth T. Berliner
* Director September 2,
- ------------------------------------- 1998
Mitchell R. Cohen
* Director September 2,
- ------------------------------------- 1998
John M. Pasquesi
*By: /s/ Robert L. Krakoff
--------------------------------
Robert L. Krakoff
Attorney-in-Fact
II-7
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT LISTED BELOW HAVE DULY CAUSED AMENDMENT NO. 1 TO THIS REGISTRATION
STATEMENT TO BE SIGNED ON ITS BEHALF, BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, IN BOSTON, MASSACHUSETTS, ON THE 2ND DAY OF SEPTEMBER, 1998.
ADVANSTAR HOLDINGS, INC.
By: /s/ Robert L. Krakoff
-----------------------------------
Robert L. Krakoff, Chairman of the
Board and Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED,
AMENDMENT NO. 1 TO THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE
FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE
DATES INDICATED:
SIGNATURE TITLE
DATE
/s/ Robert L. Krakoff Chairman of the September 2 ,
- ------------------------------------- Board and Chief 1998
Robert L. Krakoff Executive Officer
(Principal Executive
Officer)
* Vice President- September 2,
- ------------------------------------- Finance, Chief 1998
David W. Montgomery Financial Officer
and Secretary
(Principal Financial
and Accounting
Officer)
* Vice Chairman and September 2,
- ------------------------------------- Director 1998
James M. Alic
* Director September 2 ,
- ------------------------------------- 1998
Kenneth T. Berliner
* Director September 2,
- ------------------------------------- 1998
Mitchell R. Cohen
* Director September 2,
- ------------------------------------- 1998
John M. Pasquesi
*By: /s/ Robert L. Krakoff
--------------------------------
Robert L. Krakoff
Attorney-in-Fact
II-8
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANTS LISTED BELOW HAVE DULY CAUSED AMENDMENT NO. 1 TO THIS REGISTRATION
STATEMENT TO BE SIGNED ON THEIR BEHALF, RESPECTIVELY, BY THE UNDERSIGNED,
THEREUNTO DULY AUTHORIZED, IN BOSTON, MASSACHUSETTS, ON THE 2ND DAY OF
SEPTEMBER, 1998.
ART EXPOSITIONS INTERNATIONAL, INC.
EXPOCON MANAGEMENT ASSOCIATES, INC.
ON DEMAND MARKETING, INC.
MEN'S APPAREL GUILD IN CALIFORNIA,
INC.
MAGIC KIDS, INC.
APPLIED BUSINESS TELECOMMUNICATIONS
By: /s/ Robert L. Krakoff
-----------------------------------
Robert L. Krakoff, Chairman of the
Board and Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED,
AMENDMENT NO. 1 TO THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE
FOLLOWING PERSONS ON BEHALF OF EACH OF THE REGISTRANTS LISTED ABOVE AND IN THE
CAPACITIES FOR EACH SUCH REGISTRANT AND ON THE DATES INDICATED:
SIGNATURE TITLE
DATE
/s/ Robert L. Krakoff Chairman of the September 2,
- ------------------------------------- Board and Chief 1998
Robert L. Krakoff Executive Officer
(Principal Executive
Officer)
* Vice President- September 2,
- ------------------------------------- Finance, Chief 1998
David W. Montgomery Financial Officer
and Secretary
(Principal Financial
and Accounting
Officer)
* Vice Chairman and September 2,
- ------------------------------------- Director 1998
James M. Alic
*By: /s/ Robert L. Krakoff
--------------------------------
Robert L. Krakoff
Attorney-in-Fact
II-9
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT LISTED BELOW HAS DULY CAUSED AMENDMENT NO. 1 TO THIS REGISTRATION
STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, IN BOSTON, MASSACHUSETTS, ON THE 2ND DAY OF SEPTEMBER, 1998.
TECHNOLOGY EVENTS COMPANY, LLC
By: /s/ Robert L. Krakoff
----------------------------------
Robert L. Krakoff, Chief Executive
Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED,
AMENDMENT NO. 1 TO THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING
PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES
INDICATED:
SIGNATURE TITLE
DATE
/s/ Robert L. Krakoff Chief Executive September 2,
- ------------------------------------ Officer and Manager 1998
Robert L. Krakoff (Principal
Executive Officer)
* Chief Financial September 2,
- ------------------------------------ Officer (Principal 1998
David W. Montgomery Financial and
Accounting Officer)
* Manager September 2,
- ------------------------------------ 1998
James M. Alic
ADVANSTAR COMMUNICATIONS INC.
Member September 2,
1998
/s/ Robert L. Krakoff
- ------------------------------------
By: Robert L. Krakoff
Chairman and Chief Executive Officer
ART EXPOSITIONS INTERNATIONAL, INC. Member September 2,
1998
/s/ Robert L. Krakoff
- ------------------------------------
By: Robert L. Krakoff
Chairman and Chief Executive Officer
*By: /s/ Robert L. Krakoff
-------------------------------
Robert L. Krakoff
Attorney-in-Fact
II-10
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- ----------------------------------------------------------------------
3.1 The Company's Amended and Restated Certificate of Incorporation
3.2 The Company's Bylaws
3.3 Advanstar Holdings, Inc. Amended Certificate of Incorporation
3.4 Advanstar Holdings, Inc. Amended and Restated Bylaws
Art Expositions International, Inc. Amended Certificate of
3.5 Incorporation
3.6 Art Expositions International, Inc. Bylaws
3.7 Expocon Management Associates, Inc. Certificate of Incorporation
3.8 Expocon Management Associates, Inc. Bylaws
3.9 On Demand Marketing, Inc. Certificate of Incorporation
3.10 On Demand Marketing, Inc. Amended and Restated Bylaws
3.11 Technology Events Company, LLC Articles of Organization
3.12 Men's Apparel Guild in California, Inc. Articles of Incorporation
3.13 Men's Apparel Guild in California, Inc. Amended and Restated Bylaws
3.14 Magic Kids, Inc. Articles of Incorporation
3.15 Magic Kids, Inc. Bylaws
3.16 Applied Business teleCommunications Amended Articles of Incorporation
3.17 Applied Business teleCommunications Bylaws
4.1 Indenture, dated as of April 30, 1998, among the Company, the
Guarantors (as defined therein) and the Bank of New York
4.2 Supplemental Indenture, dated as of May 19, 1998, among the Company,
Applied Business teleCommunications and the Bank of New York
4.3 Form of Rule 144A Global Note
4.4 Form of Regulation S Global Note
4.5 Form of Accredited Investor Global Note
4.6 Form of Exchange Note
5.1 Opinion of Testa, Hurwitz & Thibeault LLP regarding the legality of
the securities being issued
10.1 Purchase Agreement, dated April 27, 1998, among the Company, the
Guarantors (as defined therein), Chase Securities Inc. and Lehman
Brothers Inc.
10.2 Exchange and Registration Rights Agreement, dated April 30, 1998,
among the Company, the Guarantors (as defined therein), Chase
Securities Inc. and Lehman Brothers Inc.
10.3 Amended Credit Agreement (the "Credit Agreement"), dated as of May 31,
1996, as amended and restated as of April 30, 1998, among the Company,
the Guarantors (as defined in the Credit Agreement), the Lenders (as
defined in the Credit Agreement) and the Chase Manhattan Bank
10.4 Employment Agreement, dated July 1, 1996, between Advanstar Holdings,
Inc. and Robert Krakoff
10.5 Employment Agreement, dated July 1, 1996, between Advanstar Holdings,
Inc. and James M. Alic
EXHIBIT
NUMBER DESCRIPTION
------- ---------------------------------------------------------------------
10.6 Advanstar Holdings, Inc. 1996 Stock Option Plan
10.7 Advanstar Holdings, Inc. Employees' 401(k) Plan and Trust, as amended
10.8 Agreement, dated July 31, 1997, between the Company and Banta
Publications
10.9 Lease Agreement, dated February 2, 1996, between the Las Vegas
Convention and Visitors Authority and Men's Apparel Guild in
California, Inc.
10.10 Lease Agreement dated December 24, 1996, between the Las Vegas
Convention and Visitor's Authority and Men's Apparel Guild in
California, Inc.
10.11 Lease Agreement, dated September 25, 1996, between the Interface
Group--Nevada, Inc. and Men's Apparel Guild in California, Inc.
10.12 Lease Agreement, dated September 5, 1997, between the Interface
Group--Nevada, Inc. and Men's Apparel Guild in California, Inc.
10.13 Lease Agreement, dated September 5, 1997, between the Interface
Group--Nevada, Inc. and Men's Apparel Guild in California, Inc.
10.14 Lease Agreement, dated September 5, 1997, between the Interface
Group--Nevada, Inc. and Men's Apparel Guild in California, Inc.
10.15 Lease Agreement, dated September 5, 1997, between the Interface
Group--Nevada, Inc. and Men's Apparel Guild in California, Inc.
10.16 Convention Agreement, dated March 19, 1998, between Las Vegas Hilton
Corporation and Men's Apparel Guild in California, Inc.
12.1+ Statement re Computation of Ratios
21.1 Subsidiaries of the Registrant
23.1+ Consent of Arthur Andersen LLP
23.2+ Consent of PricewaterhouseCoopers LLP
23.3+ Consent of Mahoney Cohen & Company, CPA, P.C.
23.4 Consent of Testa, Hurwitz & Thibeault, LLP (included in Exhibit 5.1)
24.1 Power of Attorney (included on signature pages of Registration
Statement)
25.1 Statement of Eligibility of Trustee
27.1+ Financial Data Schedule (EDGAR version only)
99.1 Form of Letter of Transmittal
99.2 Form of Notice of Guaranteed Delivery
99.3 Form of Instructions to Registered Holder
- --------
+ Filed herewith.