SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of The Securities Exchange
Act of 1934.
For the Quarterly Period Ended: March 31, 2001
Commission File Number: 333-57201
Advanstar Communications Inc.
(Exact name of registrant as specified in its charter)
New York
(State or other jurisdiction of
incorporation or organization)
59-2757389
(I.R.S. Employer
Identification No.)
545 Boylston Street, Boston, Massachusetts
(Address of principal executive offices)
02116
(Zip Code)
Registrant's telephone number, including area code: (617) 267-6500
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
------- -------
As of May 15, 2001, 1,000,000 shares of the Registrant's common stock were
outstanding.
PART I Financial Information
Item 1. Financial Statements:
Page in this
Quarterly
Report
------------
Condensed Consolidated Balance Sheets at March 31, 2001 (unaudited) 2
and December 31, 2000.................................................
Condensed Consolidated Statements of Operations (unaudited) for the three
months ended March 31, 2001 and 2000.................................. 3
Condensed Consolidated Statements of Cash Flows (unaudited) for the
three months ended March 31, 2001 and 2000........................... 4
Notes to Condensed Consolidated Financial Statements (unaudited).......... 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................................. 16
Item 3. Qualitative and Quantitative Disclosure about Market Risk......................... 24
PART II Other Information
Item 4. Submissions of Matters to a Vote of Security Holders...................... 25
Item 6(a). Exhibits.................................................................. 25
Item 6(b). Reports on Form 8-K....................................................... 25
Signature................................................................. 26
Exhibit Index............................................................. 27
Exhibits..................................................................
1
ADVANSTAR COMMUNICATIONS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
March 31, December 31,
2001 2000
----------- ------------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents............................................................ $ 19,270 $ 17,675
Accounts receivable, net............................................................. 30,713 31,158
Prepaid expenses..................................................................... 8,748 15,721
Other................................................................................ 1,972 1,832
-------- --------
Total current assets.............................................................. 60,703 66,386
-------- --------
DUE FROM AFFILIATE..................................................................... 27,260 19,769
PROPERTY, PLANT AND EQUIPMENT, net..................................................... 25,052 25,767
GOODWILL AND INTANGIBLE ASSETS, net.................................................... 831,255 836,755
DEFERRED INCOME TAXES.................................................................. 7,743 7,743
OTHER ASSETS........................................................................... 758 785
-------- --------
Total Assets...................................................................... $952,771 $957,205
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt................................................. $ 2,950 $ 13,150
Accounts payable..................................................................... 30,842 22,007
Accrued liabilities.................................................................. 26,508 21,350
Deferred revenue..................................................................... 37,669 67,955
-------- --------
Total current liabilities......................................................... 97,969 124,462
-------- --------
LONG-TERM DEBT, net of current maturities.............................................. 542,050 551,850
OTHER LONG-TERM LIABILITIES............................................................ 5,121 5,448
MINORITY INTEREST...................................................................... 8,296 10,434
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY
Common stock, $.01 par value; 40,000,000 shares authorized; 1,000,000 shares
issued and outstanding at March 31, 2001 and December 31, 2000..................... 10 10
Capital in excess of par............................................................. 315,617 280,842
Accumulated deficit.................................................................. (14,471) (16,745)
Accumulated other comprehensive income (loss)........................................ (1,821) 904
-------- --------
Total stockholder's equity........................................................ 299,335 265,011
-------- --------
Total liabilities and stockholder's equity........................................ $952,771 $957,205
======== ========
The accompanying notes to financial statements are an integral part of these
consolidated statements.
2
ADVANSTAR COMMUNICATIONS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data - Unaudited)
Successor Predecessor
-----------------------------------
Three Months Three Months
Ended Ended
March 31, March 31,
2001 2000
-----------------------------------
Net revenue................................................................ $128,647 $133,067
======== ========
Operating expenses:
Costs of production...................................................... 25,406 27,589
Selling, editorial and circulation....................................... 45,683 49,347
General and administrative............................................... 12,475 11,410
Depreciation and amortization............................................ 15,788 12,235
-------- --------
Total operating expenses.............................................. 99,352 100,581
-------- --------
Operating income........................................................... 29,295 32,486
Other income (expense):
Interest expense, net.................................................... (14,674) (12,359)
Other income (expense), net........................................ (938) 55
-------- --------
Income before income taxes and minority interest........................... 13,683 20,182
Provision for income taxes................................................. 8,167 8,969
Minority interest in (income) loss of subsidiary........................... (134) (363)
-------- --------
Income before extraordinary item and accounting change..................... 5,382 10,850
Extraordinary item - early extinguishment of debt, net..................... (2,556) --
Cumulative effect of accounting change, net................................ (552) --
-------- --------
Net income................................................................. $ 2,274 $ 10,850
======== ========
The accompanying notes to financial statements are an integral part of these
consolidated statements.
3
ADVANSTAR COMMUNICATIONS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands - Unaudited)
Successor Predecessor
-----------------------------------
Three Months Three Months
Ended Ended
March 31, March 31,
2001 2000
-----------------------------------
OPERATING ACTIVITIES
Net income............................................................. $ 2,274 $ 10,850
Adjustments to reconcile net income to net cash provided by
operating activities
Extraordinary item - early extinguishment of debt..................... 2,538 --
Unrealized losses on derivative financial instruments................. 1,984 --
Depreciation and amortization......................................... 15,788 12,235
Non-cash interest..................................................... 536 299
Non-cash stock option compensation............................... -- 111
Loss on sales of assets and other..................................... 159 863
Changes in operating assets and liabilities........................... (16,200) (7,655)
--------- --------
Net cash provided by operating activities........................... 7,079 16,703
--------- --------
INVESTING ACTIVITIES
Additions to property, plant and equipment.......................... (1,638) (4,178)
Acquisition of publications and trade shows, net....................... (3,784) (8,758)
Increase in long-term receivable from affiliate........................ (7,524) --
Proceeds from sale of assets........................................... 17 17
--------- --------
Net cash used in investing activities................................ (12,929) (12,919)
--------- --------
FINANCING ACTIVITIES
Net proceeds from revolving credit facility........................ 15,000 --
Borrowings of long-term debt........................................... 160,000 --
Payments of long-term debt............................................. (195,000) (1,975)
Long-term debt financing costs......................................... (7,606) --
Capital contributions.................................................. 34,775 --
--------- --------
Net cash provided by (used in) financing activities................ 7,169 (1,975)
--------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH................................. 276 (87)
NET INCREASE IN CASH AND CASH EQUIVALENTS............................... 1,595 1,722
CASH AND CASH EQUIVALENTS, beginning of period.......................... 17,675 11,237
--------- --------
CASH AND CASH EQUIVALENTS, end of period................................ $ 19,270 $ 12,959
========= ========
The accompanying notes to financial statements are an integral part of these
consolidated statements.
4
ADVANSTAR COMMUNICATIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements have been
prepared by Advanstar Communications Inc. ( Communications, the Company) in
accordance with the instructions to Form 10-Q and, therefore, do not include all
the information and footnotes required by generally accepted accounting
principles for complete financial statements. Although management believes that
the disclosures are adequate to make the information presented not misleading,
these condensed consolidated financial statements should be read in conjunction
with the audited financial statements and the related notes, included in the
Company's Form 10-K for the year ended December 31, 2000. The results of
operations for the three month period ended March 31, 2001, are not necessarily
indicative of the operating results that may be expected for the entire year
ending December 31, 2001.
2. Derivative Financial Instruments
Effective January 1, 2001, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities." The statement establishes accounting and reporting standards
requiring that each derivative instrument be recorded in the balance sheet as
either an asset or liability measured at fair value. Changes in the derivative
financial instrument's fair value must be recognized currently in earnings
unless specific hedge accounting criteria are met. For derivative financial
instruments which meet the criteria, gains and losses may be recognized in other
comprehensive income rather than current earnings.
The adoption of SFAS 133 on January 1, 2001, resulted in the pre-tax cumulative
effect of an accounting change of approximately $0.9 million reduction to income
and a $0.2 million reduction to other comprehensive income.
The Company uses derivative instruments to manage exposures to foreign currency
and interest rate risks. The Company's objectives for holding derivatives are
to minimize the risks using the most effective methods to eliminate or reduce
the impacts of these exposures.
Foreign Currency Risk - Certain forecasted transactions are exposed to foreign
currency risk. The Company monitors its foreign currency exposures to maximize
the overall effectiveness of its foreign currency hedge positions. Principal
currencies hedged include the Euro, British Pound and Brazilian Real. Forward
contracts used to hedge forecasted international revenue for up to 15 months in
the future are designated as cash flow hedging instruments. Forwards not
designated as hedging instruments under SFAS 133 are also used to manage the
impact of the variability in exchange rates.
Interest Rate Risk - Variable rate debt instruments are subject to interest rate
risk. The Company has entered into interest rate collar and cap agreements with
remaining maturities of up to 36 months, to manage its exposure to interest rate
movements on a portion of its variable rate debt obligations.
Other expense and other comprehensive income include $1.1 million and $0.4
million, respectively, of net losses for the three months ended March 31, 2001.
This represents the amount of hedge ineffectiveness and changes in fair value of
derivative instruments not designated as hedging instruments.
5
ADVANSTAR COMMUNICATIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. Debt
In connection with the acquisition of the Company's parent,
Advanstar, Inc. by a group of investors, including DLJ Merchant Banking Partners
III L.P., on January 9, 2001, the 9.25% senior subordinated notes due 2008
(Notes) were tendered at an offer price in cash equal to 101% of the aggregate
principal amount, plus accrued interest. The Company financed the repurchase of
the Notes with bridge financing. The premium paid of $1.5 million on the tender
of the Notes is reflected, net of income tax, as an extraordinary item in the
accompanying 2001 condensed consolidated statement of operations.
On February 21, 2001, the Company issued $160.0 million of unsecured, 12% senior
subordinated notes, due 2011(Replacement Notes). Interest on the Replacement
Notes is payable semi-annually on February 15th and August 15th of each year
commencing on August 15, 2001. The Replacement Notes are fully and
unconditionally guaranteed on a senior subordinated basis, jointly and
severally, by the Company and its wholly-owned domestic subsidiaries.
Concurrent with the issuance of the Replacement Notes, Advanstar, Inc. issued
units comprised of 15% senior discount notes (the Discount Notes) with an
aggregate principal amount at maturity of approximately $68.6 million, and
warrants to purchase shares of common stock of its parent, Advanstar Holdings
Corp., for consideration of approximately $34.8 million. The Company used the
proceeds from issuance of the Replacement Notes and the Discount Notes to repay
and terminate the bridge financing and to repay approximately $45.0 million of
term loan borrowings under the credit facility consisting of a $100.0 million
amortizing term loan A maturing April 11,2006 and a $315.0 million amortizing
term loan B maturing October 11, 2008 (the Credit Facility). The contribution of
the proceeds from the Discount Notes by Advanstar, Inc. to the Company was
treated as a capital contribution. Concurrent with the retirement of the bridge
financing, the Company charged-off deferred financing costs of approximately
$1.7 million, net of income taxes, during the first quarter of 2001. This charge
is reflected as an extraordinary item in the accompanying 2001 condensed
consolidated statement of operations.
Long-term debt consists of the following:
March 31, December 31,
2001 2000
-------------- ----------------
Term loan A, interest at LIBOR plus 3.00%, 8.19% at March 31, 2001,
due quarterly through April 11, 2007..................................... $ 89,200 $100,000
Term loan B, interest at LIBOR plus 3.50%, 8.69% at March 31, 2001,
due quarterly through October 11, 2008................................... 280,800 315,000
Revolving credit facility, interest at LIBOR plus 3.00%, 8.08% at
March 31, 2001, due April 11, 2007....................................... 15,000 --
12.00% Senior subordinated notes, due 2011................................. 160,000 --
9.25% Senior subordinated notes, due 2008.................................. -- 150,000
-------- --------
545,000 565,000
Less-Current maturities.................................................... (2,950) (13,150)
-------- --------
$542,050 $551,850
======== ========
6
ADVANSTAR COMMUNICATIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Company's credit facility contains certain financial covenants, including
a minimum fixed charge coverage ratio and a maximum leverage ratio.
Additionally, certain financial covenants under the Replacement Notes include a
maximum leverage ratio, limitations on certain asset dispositions, dividends and
other restricted payments. The Company was in compliance with all covenants as
of March 31, 2001.
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. (In thousands)
Successor Predecessor
---------- -----------
Three Three
Months Months
Ended Ended
March 31, March 31,
2001 2000
---------- ----------
Net income................................................................. $ 2,274 $10,850
Change in cumulative translation adjustment, net of tax.................... (2,198) (938)
Change in unrealized losses on derivative financial instruments,
net of tax............................................................... (574) --
------- -------
$ (498) $ 9,912
Comprehensive (loss) income................................................ ======= =======
5. Segment Information
Trade Shows Corporate
and Trade Marketing and
Conferences Publications Services Other Totals
----------- ------------ --------- --------- -----------
(in thousands)
Three months ended March 31, 2001
(Successor)
Revenues................................... $89,564 $34,640 $4,170 $ 273 $128,647
Gross profit............................... 48,205 7,224 1,856 273 57,558
Segment assets............................. 10,579 28,251 2,233 911,708 952,771
- ----------------------------------------------------------------------------------------------------------
Three months ended March 31, 2000
(Prececessor)
Revenues................................... $93,629 $34,974 $4,294 $ 170 $133,067
Gross profit............................... 47,045 6,994 1,922 170 56,131
Segment assets............................. 16,205 27,104 2,310 594,193 639,812
7
ADVANSTAR COMMUNICATIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The reconciliation of total segment gross profit to consolidated pre-tax
income for the three months ended March 31, 2001 and 2000 is as follows (In
thousands):
Successor Predecessor
-----------------------------
March 31, March 31,
2001 2000
-------------- -------------
Total segment gross profit......................................... $ 57,558 $ 56,131
General and administrative expense................................. (12,475) (11,410)
Depreciation and amortization...................................... (15,788) (12,235)
Other expense...................................................... (15,612) (12,304)
-------- --------
Consolidated income before minority interest, taxes,
extraordinary item and accounting change......................... $ 13,683 $ 20,182
======== ========
6. Related Party Transactions
Financial Advisory Fees and Agreements
Credit Suisse First Boston Corporation (CSFB), an affiliate of the DLJ
Merchant Banking funds, acted as the Company's financial advisor and is an
initial purchaser of the Replacement Notes and the Discount Notes. The Company
agreed to pay customary fees to CSFB as compensation for those services. DLJ
Capital Funding, an affiliate of the DLJ Merchant Banking funds, has received
customary fees and reimbursement of expenses in connection with the bridge
financing. The aggregate amount of all fees paid to the CSFB entities in
connection with these financings during the quarter ended March 31, 2001 was
approximately $7.3 million, plus out-of-pocket expenses.
Relationship with Advanstar.com
Advanstar.com, Inc. (Advanstar.com), an affiliate, is developing vertical
community web sites to serve the Company's industry sectors and is operating the
Company's event and publication-related web sites. The Company provides
Advanstar.com with certain administrative support services in accounting,
finance, legal, human resource management, information technology and business
development. During 2000, the Company began to charge for these services based
on a general overhead charge. In addition, selected staff in editorial and other
functions in the Company are shared with Advanstar.com. Beginning in 2001,
appropriate allocations of staff costs will be made to Advanstar.com. No such
charges have been made during the quarter ended March 31, 2001. The Company also
provides Advanstar.com with marketing and promotional support through
advertising pages in its trade publications and exhibit space in its trade
shows. In return, Advanstar.com provides support on its web sites for the
Company's trade publications and trade shows at rates which reflect incremental
costs. Advanstar.com operates specific web sites in support of the Company's
trade publications and trade shows. Among other functions, these sites provide
essential services, such as trade show and conference registration and
publication subscription and reader services, in support of the Company's
products. Advanstar.com has the right to use the content from the Company's
publications and events, its brands and its customer lists for the purpose of
building and operating the web sites. The Company has a long-term receivable of
approximately $27.3 million from Advanstar.com as of March 31, 2001. There are
no specific repayment terms for this receivable, but the Company anticipates
repayment out of future operating results of Advanstar.com.
8
ADVANSTAR COMMUNICATIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. Supplemental Guarantor Condensed Consolidating Financial Statements
Basis of presentation
The Replacement Notes are fully and unconditionally guaranteed on a senior
subordinated basis, jointly and severally, by the Company and the wholly-owned
domestic subsidiaries. The subsidiary guarantors are Mens Apparel Guild In
California, Inc. (MAGIC) and Applied Business TeleCommunications, Inc.
(ABC). The subsidiary guarantors and the non-guarantor subsidiaries comprise all
of the direct and indirect subsidiaries of the Company. The condensed
consolidated 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 consolidated financial
statements presented are more meaningful in understanding the financial position
of the guarantors and management has determined that such information is not
material to investors.
There are no significant restrictions on the ability of the subsidiary
guarantors to make distributions to the Company.
9
ADVANSTAR COMMUNICATIONS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
At March 31, 2001
(in thousands - Unaudited)
Non-
Guarantor Guarantor Consolidated
Communications Subsidiaries Subsidiaries Eliminations Total
-------------- ------------ ------------ ------------ -------------
ASSETS
Current assets:
Cash and cash equivalents................... $ 10,363 $ 1 $ 8,906 $ -- $ 19,270
Accounts receivable, net.................... 27,446 80 3,187 -- 30,713
Prepaid expenses............................ 4,748 1,466 2,534 -- 8,748
Intercompany receivable (payable)........... (77,693) 109,230 (31,537) -- --
Other....................................... 1,652 -- 320 -- 1,972
-------- -------- -------- --------- --------
Total current assets....................... (33,484) 110,777 (16,590) -- 60,703
Due from affiliate........................... 27,260 -- -- -- 27,260
Property, plant and equipment, net........... 23,204 608 1,240 -- 25,052
Intangible assets, net....................... 708,982 55,695 66,578 -- 831,255
Deferred income taxes and other assets....... 8,501 -- -- -- 8,501
Investment in subsidiaries................... 188,103 -- -- (188,103) --
-------- -------- -------- --------- --------
$922,566 $167,080 $ 51,228 $(188,103) $952,771
======== ======== ======== ========= ========
LIABILITIES AND
STOCKHOLDER'S EQUITY
Current liabilities:
Current maturities of long-term debt........ $ 2,950 $ -- $ -- $ -- $ 2,950
Accounts payable............................ 20,788 2,952 7,102 -- 30,842
Deferred revenue............................ 31,619 3,059 2,991 -- 37,669
Accrued liabilities......................... 11,160 12,467 2,881 -- 26,508
-------- -------- -------- --------- --------
Total current liabilities.................. 66,517 18,478 12,974 -- 97,969
Long term debt, net of current maturities.... 542,050 -- -- -- 542,050
Other long term liabilities.................. 5,121 -- -- -- 5,121
Minority interest............................ 8,296 -- -- -- 8,296
Stockholder's equity
Common stock................................ 10 3 474 (477) 10
Capital in excess of par value.............. 315,617 134,110 39,884 (173,994) 315,617
Accumulated deficit......................... (14,471) 14,489 (857) (13,632) (14,471)
Accumulated other comprehensive income...... (574) -- (1,247) -- (1,821)
-------- -------- -------- --------- --------
Total stockholder's equity................. 300,582 148,602 38,254 (188,103) 299,335
-------- -------- -------- --------- --------
$922,566 $167,080 $ 51,228 $(188,103) $952,771
======== ======== ======== ========= ========
10
ADVANSTAR COMMUNICATIONS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March 31, 2001
(in thousands - Unaudited)
Non-
Guarantor Guarantor Consolidated
Communications Subsidiaries Subsidiaries Eliminations Total
-------------- ------------ ------------ ------------ -------------
Net revenue.................................. $ 77,242 $34,005 $17,400 $ -- $128,647
======== ======= ======= ======== ========
Operating expenses:
Cost of sales and selling, editorial 49,046 9,249 12,794 -- 71,089
And circulation............................
General and administrative.................. 10,471 274 1,730 -- 12,475
Depreciation and amortization............... 13,540 936 1,312 -- 15,788
-------- ------- ------- -------- --------
Total operating expenses................... 73,057 10,459 15,836 -- 99,352
-------- ------- ------- -------- --------
Operating income (loss)...................... 4,185 23,546 1,564 -- 29,295
Other income (expense):
Interest income (expense), net.............. (14,388) -- (286) -- (14,674)
Other income (expense), net................. (985) -- 47 -- (938)
-------- ------- ------- -------- --------
Income (loss) before income taxes............ (11,188) 23,546 1,325 -- 13,683
Provision (benefit) for income tax........... (2,284) 8,918 1,533 -- 8,167
Minority interest in earnings................ (134) -- -- -- (134)
Equity in earnings of subsidiaries........... 14,420 -- -- (14,420) --
-------- ------- ------- -------- --------
Income before extraordinary item
and accounting change....................... 5,382 14,628 (208) (14,420) 5,382
-------- ------- ------- -------- --------
Extraordinary item - early
extinguishment of debt, net................. (2,556) -- -- -- (2,556)
Cumulative effect of accounting
Change, net................................. (552) -- -- -- (552)
-------- ------- ------- -------- --------
Net income (loss)............................ $ 2,274 $14,628 $ (208) $(14,420) $ 2,274
======== ======= ======= ======== ========
11
ADVANSTAR COMMUNICATIONS INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
Three Months Ended March 31, 2001
(in thousands - Unaudited)
Guarantor Non-Guarantor Consolidated
Communications Subsidiaries Subsidiaries Eliminations Total
--------------- ------------- -------------- ------------- -------------
Operating Activities:
Net income (loss)............................... $ 2,274 $ 14,628 $ (208) $ (14,420) $ 2,274
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Undistributed earnings of subsidiaries......... (14,420) -- -- 14,420 --
Extraordinary item - early extinguishment of
debt...................................... 2,538 -- -- -- 2,538
Unrealized loss on derivative financial
instruments............................... 1,984 -- -- -- 1,984
Depreciation and amortization.................. 13,540 936 1,312 -- 15,788
Non cash items................................. 695 -- -- -- 695
Change in operating assets and liabilities..... (911) (15,474) 185 -- (16,200)
-------- -------- ------ ------------ --------
Net cash provided by operating
Activities.................................. 5,700 90 1,289 -- 7,079
-------- -------- ------ ------------ --------
Investment Activities:
Additions to property, and equipment, net....... (1,437) (90) (111) -- (1,638)
Acquisitions of publications and
trade shows and other.......................... (4,281) -- 514 -- (3,767)
Increase in long-term receivable from affiliate. (7,524) -- -- -- (7,524)
-------- -------- ------ ------------ --------
Net cash provided by (used in)
investing activities........................ (13,242) (90) 403 -- (12,929)
-------- -------- ------ ------------ --------
Financing Activities:
Payments of long-term debt, net................. (20,000) -- -- -- (20,000)
Long-term debt financing costs.................. (7,606) -- -- -- (7,606)
Capital contributions........................... 34,775 -- -- -- 34,775
-------- -------- ------ ------------ --------
Net cash provided by (used in)
financing activities........................ 7,169 -- -- -- 7,169
-------- -------- ------ ------------ --------
EFFECT OF EXCHANGE RATE ON CASH.................. -- -- 276 -- 276
NET INCREASE IN CASH AND CASH EQUIVALENTS........ (373) -- 1,968 -- 1,595
CASH AND CASH EQUIVALENTS,
beginning of period............................. 10,736 1 6,938 -- 17,675
-------- -------- ------ ------------ --------
CASH AND CASH EQUIVALENTS,
end of period................................... $ 10,363 $ 1 $8,906 $ -- $ 19,270
======== ======== ====== ============ ========
12
ADVANSTAR COMMUNICATIONS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
At December 31, 2000
(in thousands)
Guarantor Non-Guarantor Consolidated
Communications subsidiaries subsidiaries Eliminations total
-------------- ------------ ------------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents.................... $ 10,736 $ 1 $ 6,938 $ -- $ 17,675
Accounts receivable, net..................... 28,061 329 2,768 -- 31,158
Prepaid expenses............................. 8,223 2,712 4,786 -- 15,721
Intercompany receivable (payable)............ (72,727) 100,811 (28,084) -- --
Other........................................ 1,491 -- 341 -- 1,832
-------- -------- -------- --------- --------
Total current assets.................. (24,216) 103,853 (13,251) -- 66,386
Noncurrent assets:
Due from affiliate........................... 19,769 -- -- -- 19,769
Property, plant and equipment, net........... 23,654 713 1,400 -- 25,767
Intangible assets, net....................... 701,250 56,435 79,070 -- 836,755
Deferred income taxes and other.............. 8,446 -- 82 -- 8,528
Investments in subsidiaries.................. 182,395 -- -- (182,395) --
-------- -------- -------- --------- --------
$911,298 $161,001 $ 67,301 $(182,395) $957,205
======== ======== ======== ========= ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current maturities of long-term debt......... $ 13,150 $ -- $ -- $ -- $ 13,150
Accounts payable............................. 13,800 1,793 6,414 -- 22,007
Deferred revenue............................. 37,389 21,526 9,040 -- 67,955
Accrued liabilities.......................... 15,120 3,707 2,523 -- 21,350
-------- -------- -------- --------- --------
Total current liabilities............. 79,459 27,026 17,977 -- 124,462
Long-term debt, net of current maturities..... 551,850 -- -- -- 551,850
Other long-term liabilities................... 5,448 -- -- -- 5,448
Minority interest............................. 10,434 -- -- -- 10,434
Stockholder's equity:
Common stock................................. 10 3 403 (406) 10
Capital in excess of par value............... 280,842 134,110 49,988 (184,098) 280,842
Accumulated deficit.......................... (16,745) (138) (1,971) 2,109 (16,745)
Accumulated other comprehensive income....... -- -- 904 -- 904
-------- -------- -------- --------- --------
Total stockholder's equity............ 264,107 133,975 49,324 (182,395) 265,011
-------- -------- -------- --------- --------
$911,298 $161,001 $ 67,301 $(182,395) $957,205
======== ======== ======== ========= ========
13
ADVANSTAR COMMUNICATIONS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March 31, 2000
(in thousands - Unaudited)
Non-
Guarantor Guarantor Consolidated
Communications Subsidiaries Subsidiaries Eliminations Total
--------------- ------------ ------------- ------------- -------------
Net revenue............................ $ 85,878 $30,875 $16,314 $ -- $133,067
======== ======= ======= ======== ========
Operating expenses:
Cost of sales and selling, editorial
And circulation...................... 56,063 9,385 11,488 -- 76,936
General and administrative............ 9,605 193 1,612 -- 11,410
Depreciation and amortization......... 8,164 3,225 846 -- 12,235
-------- ------- ------- -------- --------
Total operating expenses............. 73,832 12,803 13,946 -- 100,581
-------- ------- ------- -------- --------
Operating income (loss)................ 12,046 18,072 2,368 -- 32,486
Other income (expense):
Interest income (expense), net........ (12,016) -- (343) -- (12,359)
Other income (expense), net........... 1,075 -- (1,020) -- 55
-------- ------- ------- -------- --------
Income (loss) before income taxes...... 1,105 18,072 1,005 -- 20,182
Provision (benefit) for income tax..... 555 7,670 744 -- 8,969
Minority interest in earnings.......... (363) -- -- -- (363)
Equity in earnings of subsidiaries..... 10,663 -- -- (10,663) --
-------- ------- ------- -------- --------
Net income (loss)...................... $ 10,850 $10,402 $ 261 $(10,663) $ 10,850
======== ======= ======= ======== ========
14
ADVANSTAR COMMUNICATIONS INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
Three Months Ended March 31, 2000
(in thousands - Unaudited)
Guarantor Non-Guarantor Consolidated
Communications Subsidiaries Subsidiaries Eliminations Total
--------------- ------------- -------------- ------------- -------------
Operating Activities:
Net income (loss)............................... $ 10,850 $ 10,402 $ 261 $(10,663) $ 10,850
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Undistributed earnings of subsidiaries......... (10,663) -- -- 10,663 --
Depreciation and amortization.................. 8,170 3,225 840 -- 12,235
Non cash items................................. 1,273 -- -- -- 1,273
Change in operating assets and liabilities..... 10,686 (13,467) (4,874) -- (7,655)
-------- -------- ------- -------- --------
Net cash provided by operating
Activities.................................. 20,316 160 (3,773) -- 16,703
-------- -------- ------- -------- --------
Investment Activities:
Investment in subsidiaries...................... (13,630) -- -- 13,630 --
Additions to property, and equipment, net....... (3,713) (154) (294) -- (4,161)
Acquisitions of publications and
trade shows and other.......................... (679) -- (8,079) -- (8,758)
-------- -------- ------- -------- --------
Net cash provided by (used in)
investing activities........................ (18,022) (154) (8,373) 13,630 (12,919)
-------- -------- ------- -------- --------
Financing Activities:
Payments of long-term debt, net................. (1,975) -- -- -- (1,975)
Capital contributions and other................. -- -- 13,630 (13,630) --
-------- -------- ------- -------- --------
Net cash provided by (used in)
financing activities........................ (1,975) -- 13,630 (13,630) (1,975)
-------- -------- ------- -------- --------
EFFECT OF EXCHANGE RATE ON CASH -- -- (87) -- (87)
NET INCREASE IN CASH AND CASH EQUIVALENTS........ 319 6 1,397 -- 1,722
CASH AND CASH EQUIVALENTS,
beginning of period............................. 5,612 33 5,592 -- 11,237
-------- -------- ------- -------- --------
CASH AND CASH EQUIVALENTS,
end of period................................... $ 5,931 $ 39 $ 6,989 $ -- $ 12,959
======== ======== ======= ======== ========
15
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations:
This quarterly report on Form 10-Q contains forward-looking statements made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Investors are cautioned not to place undue reliance on
these forward-looking statements, including statements about plans and
objectives of management and market growth and opportunity. These forward-
looking statements involve risks and uncertainties that could cause actual
results to differ materially from those indicated by such forward-looking
statements. Important cautionary statements and risk factors that would affect
actual results are discussed in the Company's periodic reports and registration
statements filed with the Securities and Exchange Commission, including those
under the caption entitled "Factors That May Affect Future Results" in
the Company's Annual Report on Form 10-K filed with the Securities and Exchange
Commission on April 16, 2001.
General
Communications is a worldwide provider of integrated, business-to-business
marketing communications products and services for targeted industry sectors,
principally through trade shows and conferences and through controlled
circulation trade, business and professional magazines. We also provide a broad
range of other marketing services products, including classified advertising,
direct mail services, reprints, database marketing, guides, and reference books.
We report our business in three segments:
. trade shows and conferences, which consists primarily of the management of
trade shows and seminars held in convention and conference centers;
. trade publications, which consists primarily of the creation and
distribution of controlled circulation trade, business and professional
magazines; and
. marketing services, which consists primarily of sales of a variety of direct
mail and database products, magazine editorial reprints, and classified
advertising.
Trade shows and conferences accounted for approximately 70% of total revenue
in the three months ended March 31, 2001 and 2000, respectively. Trade
publications accounted for approximately 27% of total revenue in the three
months ended March 31, 2001 and 2000, respectively, while marketing services
accounted for approximately 3% of total revenue in the three months ended March
31, 2001 and 2000, respectively. Our revenue reaches its highest levels during
the first and third quarters of the year due to the timing of the MAGIC trade
shows and our other large trade shows and conferences. Because trade show and
conference revenue is recognized when a particular event is held, we may
experience fluctuations in quarterly revenue based on the movement of annual
trade show dates from one quarter to another.
We provide our affiliate Advanstar.com with administrative support services in
accounting, finance, legal, human resource management, information technology
and business development. We also provide Advanstar.com with marketing and
promotional support through advertising pages in our trade publications and
exhibit space in our trade shows. These services are provided at rates which
fully cover our incremental costs. In return, Advanstar.com provides promotional
support on its web sites for our trade publications and trade shows at rates
which reflect incremental cost. We will pay Advanstar.com a service fee
beginning in 2001 based on cost plus a small administrative charge for these web
site services. Advanstar.com has the right to use the content from our
publications and events, our brands and our customer lists for the purpose of
building and operating the web sites. In return for these rights, Advanstar.com
will pay us beginning in 2001 a royalty based on a percentage of all revenue
derived by Advanstar.com. We expect that the transactions described above will
be on arm's-length terms going forward.
16
In March 2001, our parent, Advanstar, Inc. announced plans to more tightly
focus the activities of Advanstar.com. These plans will have the effect of more
closely integrating many of the sales, marketing, technology and operating
functions of Advanstar.com with us and our core activities in publishing,
tradeshows, and marketing services. As a result, Advanstar.com will reduce the
number of internet products scheduled for introduction in 2001.
The Acquisition
As a result of the acquisition of our company by the DLJ Merchant Banking funds
(the DLJ Acquisition), we have higher indebtedness and interest expense than
reflected in our 2000 historical results of operations. In addition, our
acquisition was accounted for under the purchase method of accounting. Under
purchase accounting, the purchase price is allocated to the tangible and
identifiable intangible assets acquired and liabilities assumed based on their
respective fair values, with the remainder being allocated to goodwill. The
increase in basis of these assets will result in non-cash depreciation and
amortization charges in future periods that will be significantly higher than
that reflected in our 2000 historical financial information.
During the first quarter of 2001, we recorded an extraordinary charge of
approximately $2.6 million, net of a deferred tax benefit of approximately $1.5
million, in connection with the repayment of the 9.25% senior subordinated notes
and the write-off of deferred financing fees related to the bridge facility. The
9.25% senior subordinated notes were refinanced with the proceeds of the 12.00%
senior subordinated notes and the concurrent offering of additional parent
company units. See, notes to condensed consolidated financial statements in Item
1 for further details.
Sources of Revenue
Trade shows and conferences. The trade shows and conferences segment derives
revenue principally from the sale of exhibit space and conference attendance
fees generated at its events. Events are generally held on an annual basis in
major metropolitan or convention areas such as New York City or Las Vegas. At
many of our trade shows, a portion of exhibit space is reserved and partial
payment is received as much as a year in advance. The sale of exhibit space is
affected by the on-going quality and quantity of attendance, venue selection and
availability, industry life cycle and general market conditions. Revenue and
related direct event expenses are recognized in the month in which the event is
held. Cash is collected in advance of an event and is recorded on our balance
sheet as deferred revenue.
Publications. The publications segment derives revenue principally from the
sale of advertising in its business-to-business magazines. Additionally,
certain publications derive revenue from paid subscriptions, custom publishing,
and sponsorship activities. Paid subscriptions comprise less than 5% of total
publishing revenue. Most publications are produced monthly with advertising
sold both on an annual schedule and single insertion basis. The sale of
advertising is affected by new product releases, circulation quality, readership
and general market conditions. Advertising revenue is recognized on the
publication issue date, and subscription revenue, if any, is recognized over the
subscription period, typically one year.
Marketing services. The marketing services segment derives its revenue from
the sale of value-added marketing products such as classified advertising, both
print and internet based, direct mail services, reprints, database marketing,
directories, guides and reference books. These products complement and, in many
cases, utilize the content or databases generated by our trade shows,
conferences and publications. The sale of these products is affected by the
success of the event or publication from which these products are derived, the
quality of the sales team and general market conditions. Revenue is generally
recognized when the applicable product is shipped.
17
Components of Expenses
Trade shows and conferences. Costs incurred by the trade shows and conferences
segment include facility rent, outsourced services such as registration,
security and decorator, and attendee and exhibitor promotion. Exhibitors
generally contract directly with third parties for on-site services such as
electrical, booth set-up and drayage. Staff salaries and related payroll
expenses are treated as monthly period expenses. All other direct costs are
expensed in the month the event occurs.
Publications. Costs incurred by the trade publications segment include
printing, paper and postage; selling and promotion; editorial and prepress; and
circulation acquisition and fulfillment. Additionally, publisher and sales staff
costs, and production, editorial and circulation staff costs, with related
payroll taxes and benefits, are charged to the publications. We outsource the
actual printing of our publications.
Marketing services. Costs of the marketing services segment include printing
and distribution costs, database administration fees and selling and product
development salaries and related payroll taxes and benefits.
General and administrative costs are not allocated to the segments.
Selected Financial Data
The following table sets forth selected statements of operations and other
financial data.
We define "EBITDA" as operating income plus amortization and depreciation.
EBITDA does not represent, and should not be considered to be, an alternative to
net income or cash flow from operations as determined in accordance with GAAP,
and our calculation thereof may not be comparable to that reported by other
companies. We believe that EBITDA provides useful information regarding our
ability to service and/or incur indebtedness and is used by many other
companies. Our key financial covenants under our existing credit facility,
which impact the amount of indebtedness we are permitted to incur, are based, in
part, on our EBITDA. EBITDA does not take into account our working capital
requirements, debt service requirements and other commitments. Accordingly,
EBITDA is not necessarily indicative of amounts that may be available to us for
discretionary uses.
To calculate EBITDA for the three months ended March 31, 2001 and 2000, we
adjusted operating income by $(0.3) million and $(0.9) million, respectively,
to reflect minority interest.
18
Successor Predecessor
---------------------------------
Three Months Three Months
Ended Ended
March 31, March 31,
2001 2000
-------- --------
In thousands
Net revenue:
Trade shows and conferences...................................... $ 89,564 $ 93,629
Publications..................................................... 34,640 34,974
Marketing services and other..................................... 4,443 4,464
-------- --------
Total net revenues............................................ 128,647 133,067
======== ========
Production, selling and other direct expenses:
Trade shows and conferences...................................... 41,359 46,584
Publications..................................................... 27,416 27,980
Marketing services and other..................................... 2,314 2,372
-------- --------
Total production, selling and other direct expenses........... 71,089 76,936
General and administrative expenses................................ 14,750 12,609
Non-cash stock option compensation................................. -- 111
Amortization....................................................... 13,513 10,925
-------- --------
Operating income.............................................. 29,295 32,486
Other income (expense):
Interest expense (net)........................................... (14,674) (12,359)
Other income (expense)........................................... (1,072) (308)
Provision for income taxes........................................ 8,167 8,969
-------- --------
Income before extraordinary item and accounting change............. $ 5,382 $ 10,850
======== ========
EBITDA............................................................. $ 44,802 $ 43,838
Three Months Ended March 31, 2001 Compared to the Three Months Ended March 31,
2000 Revenue
Total revenue decreased $4.5 million or 3.3% from $133.1 million for the
quarter ended March 31, 2000 to $128.6 million for the comparable period in
2001.
Revenue from trade shows and conferences decreased $4.0 million or 4.3% from
$93.6 million in the first quarter of 2000 to $89.6 million for the first
quarter of 2001. This decrease was attributable to the shift in the timing of
when events take place and events which were discontinued or sold. First quarter
2001 results were impacted by a shift in timing of several trade shows,
including two major shows, SeCa and iEB. Both shows were held in the first
quarter of 2000, but moved to the second quarter this year. Adjusting first
quarter 2000 results for all such movements, quarterly revenues in 2001
increased by $3.2 million, or 3.7%.
19
Revenue from publications decreased $0.4 million or 1.0% from $35.0 million in
the first quarter of 2000 to $34.6 million for the comparable period in 2001.
This decrease was primarily attributable to a slowdown in our existing product
portfolio and the sale or discontinuation of certain magazines published in
2000.
Advertising revenue in our existing product portfolio declined due to a general
economic downturn in parts of our portfolio. Advertising pages decreased
approximately 1.1% in the first quarter of 2001. This decrease was partially
offset by a slight increase in advertising revenue per page during the quarter.
The economic outlook in the publishing sector continues to be challenging, and
forward visibility on our advertising revenue and pages is limited.
Revenue from marketing services was $4.4 million in the first quarter of 2001
and 2000. Marketing services revenue is closely linked to our publishing
operations and the results are in line with the results of our publishing
segment.
Production, Selling and Other Direct Expenses
Production, selling and other direct expenses decreased $5.8 million or 7.6%
from $76.9 million for the first quarter of 2000 to $71.1 million for the first
quarter of 2001.
Expenses of trade shows and conferences decreased $5.2 million or 11.2% from
$46.6 million in the first quarter of 2000 to $41.4 million in the comparable
period in 2001. This decrease was primarily due to costs associated with the
movement of events between quarters and sold or discontinued events. Adjusting
first-quarter 2000 for these movements, trade show and conference expenses in
2001 decreased by $1.7 million, or 3.9%.
Publications production, selling and other direct expenses decreased $0.6
million or 2.0% from $28.0 million in the first quarter of 2000 to $27.4 million
in the first quarter of 2000. This decrease was primarily attributable to the
decrease in advertising pages, the effect of sold or discontinued magazines
published in 2000 and other ongoing cost management strategies.
Marketing services production, selling and other direct expenses was $2.3
million and $2.4 million in the first quarter of 2001 and 2000, respectively.
General and Administrative Expenses
General and administrative expenses increased $2.2 million, or 17.0%, from
$12.6 million in the first quarter of 2000 to $14.8 million in the first quarter
of 2001. The increase was primarily due to the full-period depreciation effect
of the development and expansion of our information technology infrastructure;
the consolidation of our New York metropolitan area offices; and the full year
effect of staffing and salary increases in our central service groups, such as
publishing operations, finance and legal administration, in line with our growth
in scale and complexity.
Amortization
Amortization expense increased $2.6 million from $10.9 million for the three
months ended March 31, 2000 to $13.5 million for the three months ended March
31, 2001 primarily due to increased amortization of intangible assets related
to the DLJ Acquisition.
20
Interest Expense
Net interest expense increased $2.3 million or 18.7% from $12.4 million for
the three months ended March 31, 2000 to $14.7 million for the three months
ended March 31, 2001 due to the additional indebtedness necessary to fund the
DLJ Acquisition. In February 2001, we replaced our existing $150.0 million,
9.25% senior subordinated notes with $160.0 million, 12.00% senior subordinated
notes.
Other Expense
Other expense increased $0.8 million from $0.3 million for the three months
ended March 31, 2000 to $1.1 million for the three months ended March 31, 2001.
As a result of the provisions of SFAS 133, the Company recorded a $1.1 million
loss during the quarter, primarily due to a decrease in fair value of our
interest rate protection agreements related to an overall decline in interest
rates. Under SFAS 133, our derivative financial instruments are required to be
marked-to-market each period to reflect the current fair value. See, notes to
condensed consolidated financial statements in Item 1 for further details.
Income Taxes
Provision for income taxes excluding the tax effect of extraordinary items and
accounting changes decreased $0.8 million from $9.0 million for the three months
ended March 31, 2000 to $8.2 million for the three months ended March 31, 2001.
This decrease was primarily due to a decrease in taxable earnings related to
increased interest expense and other expenses as more fully described above,
partially offset by an increase in non-deductible amortization resulting from
the DLJ Acquisition.
EBITDA
EBITDA increased $1.0 million or 2.2% from $43.8 million for the three months
ended March 31, 2000 to $44.8 million for the three months ended March 31, 2001.
The increase was due to the increase in our operating performance and other
changes as described above. Adjusting first-quarter 2000 for the movement of
trade shows from one quarter to another, EBITDA for the three months ended March
31, 2001 increased by $4.7 million, or 11.7%.
Liquidity and Capital Resources
As of March 31, 2001, we had: (a) total indebtedness of $545.0 million; and
(b) approximately $61.8 million of borrowings available under our credit
facility, subject to customary conditions.
Credit facility. The term loan facility under the credit facility consists of
a $100.0 million amortizing term loan A maturing April 11, 2006 and a $315.0
million amortizing term loan B maturing October 11, 2008. The credit facility
also includes a $80.0 million revolving credit facility. The revolving credit
facility will terminate six and one-half years after the closing date. The
credit facility may be increased by up to $50.0 million at our request, with the
consent of the lenders or other financial institutions providing the increase.
In February, 2001, we repaid $10.8 million of term loan A and $34.2 million of
term loan B at the closing of our 12.00% senior subordinated notes.
21
Borrowings under the credit facility generally bear interest based on a margin
over, at our option, the base rate or the reserve-adjusted London-interbank
offered rate, or LIBOR. The applicable margin, until approximately six months
after the closing date, is 3.00% over LIBOR and 1.75% over the base rate for
borrowings under the revolving credit facility and for term loan A, and 3.50%
over LIBOR and 2.25% over the base rate for term loan B. Thereafter, the
applicable margin for revolving credit loans and term loan A will vary based
upon our ratio of consolidated debt to EBITDA, as defined in the credit
facility, and the applicable margin for term loan B will remain 3.50% over LIBOR
and 2.25% over the base rate. Our obligations under the credit facility are
guaranteed by Holdings, our parent company and all our existing and future
domestic subsidiaries and are secured by substantially all of the assets of our
company and the subsidiary guarantors, including a pledge of the capital stock
of all our existing and future domestic subsidiaries, a pledge of no more than
65% of the voting stock of any foreign subsidiary directly owned by our company
or any domestic subsidiary, a pledge of all intercompany indebtedness in favor
of our company and our domestic subsidiaries, a pledge of our company's and
Advanstar IH, Inc.'s capital stock by our parent company and a pledge of our
parent company's capital stock by Holdings. The credit facility contains
customary covenants, including covenants that limit our ability to incur debt,
pay dividends and make investments, and customary events of default.
Notes. The 12.00% senior subordinated notes (Notes) mature in 2011 and are
guaranteed by each of our existing and future domestic restricted subsidiaries.
Interest on the notes is payable semi-annually in cash. The notes contain
customary covenants and events of default, including covenants that limit our
ability to incur debt, pay dividends and make investments.
Parent company notes. As part of the financing for the DLJ Acquisition, our
parent, Advanstar, Inc. issued senior discount notes due October 2011 with a
principal amount at maturity of $103.2 million. Concurrently with the closing of
the offering of the Notes, Advanstar, Inc. sold additional senior discount notes
due October 2011 with an additional aggregate principal amount at maturity of
$68.6 million. These notes will not require cash interest payments until 2006
and contain customary covenants and events of default, including covenants that
limit the ability of Advanstar, Inc. and its subsidiaries, including the
Company, to incur debt, pay dividends and make investments. Neither we nor any
of our subsidiaries guaranteed the notes. However, Advanstar, Inc. is a holding
company and its ability to pay interest on these notes will be dependent upon
the receipt of dividends from its subsidiaries, including our company.
Capital expenditures
Capital expenditures in the first quarter of 2001 were approximately $1.6
million and we anticipate that we will spend approximately $10.0 million on
capital expenditures in each of 2001 and 2002, primarily for expenditures
related to our desktop computers and management information systems. Based on
current estimates, management believes that the amount of capital expenditures
permitted to be made under the credit facility will be adequate to grow our
business according to our business strategy and to maintain the properties and
business of our continuing operations.
Acquisitions and Investments
We have provided funding to Advanstar.com, our affiliate and a subsidiary of
Advanstar, Inc., to support its operations. We provided funding of approximately
$7.5 million in the first quarter of 2001 and anticipate that we will provide an
aggregate of $10.9 million of additional funding in 2001. Our debt instruments
limit the total amount we can invest in Advanstar.com, but, based on current
estimates, we anticipate that we will be able to make these investments within
those limitations.
22
Our business strategy includes the consummation of strategic acquisitions. In
connection with any future acquisitions, we may require additional funding,
which may be provided in the form of additional debt or equity financing or a
combination thereof. There can be no assurance that any additional financing
will be available to us on acceptable terms or in a manner that complies with
the restrictive covenants in our debt instruments. Consistent with our strategy
since 1996, we are engaged in negotiations involving potential acquisitions of
complementary businesses.
Source of funds
We generally operate with negative working capital, excluding cash and current
maturities of long-term debt, due to the impact of deferred revenue from trade
shows, which is billed and collected as deposits up to one year in advance of
the respective trade show. Consequently, our existing operations are expected to
maintain very low or negative working capital balances, excluding cash and
current maturities of long-term debt. We anticipate that our operating cash
flow, together with borrowings under the credit facility, will be sufficient to
meet our anticipated future operating expenses, capital expenditures and debt
service obligations as they become due. However, our ability to make scheduled
payments of principal, to pay interest on or to refinance our indebtedness and
to satisfy our other debt obligations will depend upon our future operating
performance, which will be affected by general economic, financial, competitive,
legislative, regulatory, business and other factors beyond our control.
From time to time we will continue to explore additional financing methods and
other means to lower our cost of capital, which could include stock issuance or
debt financing and the application of the proceeds therefrom to the repayment of
bank debt or other indebtedness.
Historically, our financing requirements have been funded primarily through
cash generated by operating activities and borrowings under our revolving credit
facility. From time to time we have also raised additional funds through sales
of common stock, high yield offerings and term borrowings under our credit
facility for purposes of completing strategic acquisitions.
Cash flows from operating activities. Net cash provided by operations
decreased $9.6 million, or 57.6%, to $7.1 million in the first three months of
2001 from $16.7 million in the comparable period of 2000. The decrease was
primarily due to an increase of approximately $4.1 million in interest payments,
an increase in salary and bonus payments of approximately $2.9 million due to
improved performance in 2000 and increased staffing levels and an increase in
working capital items of approximately $2.6 million.
Cash flows used in investing activities. Net cash used in investing activities
remained unchanged at $12.9 million for the three months ended March 31, 2001
and 2000, respectively. An increase in our funding of Advanstar.com during 2001
served to offset a decrease in acquisitions and fixed asset expenditures, as
more fully discussed below.
Cash flows from financing activities. Net cash provided by financing
activities increased $9.2 million in the first three months of 2001 to $7.2
million, from a use of cash of $2.0 million in the comparable period of 2000.
This increase was principally due to the effect of refinancing the Notes, as
more fully discussed above.
23
Item 3. Qualitative and Quantitative Disclosure about Market Risk
We are exposed to various market risks, which is the potential loss arising
from adverse changes in market rates and prices, such as foreign currency
exchange and interest rates. We do not enter into derivatives or other financial
instruments for trading or speculative purposes. We enter into financial
instruments to manage and reduce the impact of changes in interest rates and
foreign currency exchange rates.
Interest. We rely significantly on variable rate and fixed rate debt in our
capital structure. At March 31, 2001, we had fixed rate debt of $160.0 million
and variable rate debt of $385.0 million. The pre-tax earnings and cash flows
impact for the next year resulting from a 100 basis point increase in interest
rates on variable rate debt would be a reduction of pre-tax earnings of $3.9
million, holding other variables constant and excluding the impact of our
interest rate protection agreements. Under the credit facility, we are required
to enter into interest rate protection agreements that have the effect of
causing at least half of the outstanding term loan borrowings and senior
subordinated notes to be fixed-rate borrowings. We have entered into agreements
to cap the interest rate on $255.5 million of borrowings under our credit
facility, which would have the effect of reducing the impact of interest rate
increases on our earnings and cash flows.
Currencies. Outside of the United States, we maintain assets and operations in
Europe, South America and Asia. The results of operations and financial position
of our foreign operations are principally measured in their respective currency
and translated into U.S. dollars. As a result, exposure to foreign currency
gains and losses exists. The reported income of these subsidiaries will be
higher or lower depending on a weakening or strengthening of the U.S. dollar
against the respective foreign currency. Our subsidiaries and affiliates also
purchase and sell products and services in various currencies. As a result, we
may be exposed to cost increases relative to the local currencies in the markets
in which we sell.
A portion of our assets are based in our foreign locations and are translated
into U.S. dollars at foreign currency exchange rates in effect as of the end of
each period, with the effect of such translation reflected in other
comprehensive income. Accordingly, our consolidated stockholder's equity will
fluctuate depending upon the weakening or strengthening of the U.S. dollar
against the respective foreign currency.
Our strategy for management of currency risk relies primarily upon conducting
our operations in a country's respective currency and may, from time to time,
involve currency derivatives, primarily forward exchange contracts, to reduce
our exposure to currency fluctuations. As of March 31, 2001 there were open
foreign exchange derivative contracts with a notional amount totaling $10.3
million. The potential loss in fair value resulting from a hypothetical 10%
adverse change in quoted foreign currency exchange rates amounts to
approximately $1.2 million. Actual results may differ.
24
PART II Other Information
Item 4. Submissions of Matters to a Vote of Security Holders. None
Item 6. Exhibits and Reports filed on Form 8-K
Item 6(a). Exhibits
99.1 Press release dated March 15, 2001.
Item 6(b). Reports on Form 8-K
Advanstar filed no reports on Form 8-K during the quarter ended
March 31, 2001.
25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Advanstar Communications Inc.
By: /s/ David W. Montgomery
Date: May 15, 2001
David W. Montgomery
Vice President - Finance and
Chief Financial Officer
(Authorized Officer and
Principal Financial Officer)
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Advanstar Communications Inc.
Exhibit Index
Exhibit No. Exhibit
99.1 Press release dated March 15, 2001.
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