PROSPECTUS SUPPLEMENT Filed Pursuant to Rule
(To Prospectus dated May 1, 2001) 424(b)(3) of the Rules and
Regulations Under the
Securities Act of 1933
Registration Statement No.
333-59284
ADVANSTAR COMMUNICATIONS INC.
12% Series B Senior Subordinated Notes Due 2011
----------------------
RECENT DEVELOPMENTS
- -------------------
We have attached to this prospectus supplement, and incorporated by
reference into it, the Form 10-Q Quarterly Report of Advanstar Communications
Inc. for the quarterly period ended September 30, 2001.
----------------------
This prospectus supplement, together with the prospectus, is to be used by
Credit Suisse First Boston Corporation in connection with offers and sales of
the notes in market-making transactions at negotiated prices related to
prevailing market prices at the time of the sale. Credit Suisse First Boston
Corporation may act as principal or agent in such transactions.
November 14, 2001
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: September 30, 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 November 14, 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 September 30, 2001 (unaudited)
and December 31, 2000................................................................ 2
Condensed Consolidated Statements of Operations (unaudited) for the three
months ended September 30, 2001 and 2000............................................. 3
Condensed Consolidated Statements of Operations (unaudited) for the nine
months ended September 30, 2001 and 2000............................................. 4
Condensed Consolidated Statements of Cash Flows (unaudited) for the
nine months ended September 30, 2001 and 2000....................................... 5
Notes to Condensed Consolidated Financial Statements (unaudited)......................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................................................... 20
Item 3. Qualitative and Quantitative Disclosure about Market Risk...................................... 30
PART II Other Information
Item 4. Submissions of Matters to a Vote of Security Holders...................................... 31
Item 6(a). Exhibits.................................................................................. 31
Item 6(b). Reports on Form 8-K....................................................................... 31
Signature................................................................................. 32
Exhibit Index............................................................................. 33
Exhibits..................................................................................
1
ADVANSTAR COMMUNICATIONS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
September 30, December 31,
2001 2000
------------ -----------
(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents ..................................................... $ 17,537 $ 17,675
Accounts receivable, net ...................................................... 28,778 31,158
Prepaid expenses................................................................ 12,331 15,721
Other........................................................................... 1,585 1,832
------------ ----------
Total current assets ........................................................ 60,231 66,386
------------ ----------
Due from parent........................................................................ 5,824 19,769
Property, plant and equipment, net ................................................... 25,819 25,767
Goodwill and intangible assets, net.................................................... 815,767 836,755
Deferred income taxes.................................................................. 7,743 7,743
Other assets........................................................................... 509 785
------------ ----------
Total assets ................................................................ $ 915,893 $ 957,205
============ ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities
Current maturities of long-term debt .......................................... $ 11,950 $ 13,150
Accounts payable .............................................................. 25,048 22,007
Accrued liabilities ........................................................... 30,199 21,350
Deferred revenue .............................................................. 33,348 67,955
------------ ----------
Total current liabilities ................................................... 100,545 124,462
------------ ----------
Long-term debt, net of current maturities ............................................ 558,050 551,850
Other long-term liabilities .......................................................... 4,169 5,448
Minority interests ................................................................... 8,543 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 September 30, 2001 and December 31, 2000 ......... 10 10
Capital in excess of par ...................................................... 286,268 280,842
Accumulated deficit ........................................................... (30,637) (16,745)
Accumulated other comprehensive income (loss) .................................. (11,055) 904
------------ ----------
Total stockholder's equity .................................................. 244,586 265,011
------------ ----------
Total liabilities and stockholder's equity .................................. $ 915,893 $ 957,205
============ ==========
See notes to condensed consolidated financial statements
2
ADVANSTAR COMMUNICATIONS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands- Unaudited)
Successor Predecessor
------------ ------------
Three Months Three Months
Ended Ended
September 30, September 30,
2001 2000
------------ ------------
Net revenue................................................................... $ 80,778 $ 95,838
------------ ------------
Operating expenses:
Costs of production .................................................. 14,042 17,652
Selling, editorial and circulation ................................... 30,522 37,152
General and administrative ........................................... 7,693 7,026
Depreciation and amortization ........................................ 17,276 13,378
------------ ------------
Total operating expenses .......................................... 69,533 75,208
------------ ------------
Operating income ........................................................... 11,245 20,630
Other expense:
Interest expense, net ................................................ (13,488) (12,374)
Other expense, net .................................................... (352) (2,655)
------------ ------------
Income (loss) before income taxes and minority interests .................... (2,595) 5,601
Provision for income taxes ................................................. 1,926 4,333
Minority interests ......................................................... 392 (292)
------------ ------------
Net income (loss)............................................................. $ (4,129) $ 976
============ ============
See notes to condensed consolidated financial statements
3
ADVANSTAR COMMUNICATIONS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands - Unaudited)
Successor Predecessor
------------- -------------
Nine Months Nine Months
Ended Ended
September 30, September 30,
2001 2000
------------- -------------
Net revenue................................................................... $ 284,906 $ 303,305
------------- -------------
Operating expenses:
Costs of production .................................................. 55,046 59,790
Selling, editorial and circulation ................................... 114,364 121,055
General and administrative ........................................... 31,801 30,719
Depreciation and amortization ........................................ 47,722 38,281
------------- -------------
Total operating expenses .......................................... 248,933 249,845
------------- -------------
Operating income ........................................................... 35,973 53,460
Other income (expense):
Interest expense, net ................................................ (41,680) (36,869)
Other income (expense), net .......................................... 1,198 (2,658)
------------- -------------
Income (loss) before income taxes and minority interest ..................... (4,509) 13,933
Provision for income taxes ................................................. 5,901 11,059
Minority interest .......................................................... (374) (1,003)
------------- -------------
Income (loss) before extraordinary item and accounting change................. (10,784) 1,871
Extraordinary item - early extinguishment of debt, net........................ (2,556) --
Cumulative effect of accounting change, net................................... (552) --
------------- -------------
Net income (loss)............................................................. $ (13,892) $ 1,871
============= =============
See notes to condensed consolidated financial statements
4
ADVANSTAR COMMUNICATIONS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands - Unaudited)
Successor Predecessor
------------- -------------
Nine Months Nine Months
Ended Ended
September 30, September 30,
2001 2000
------------- -------------
Operating Activities
Net income (loss) .................................................... $ (13,892) $ 1,871
Adjustments to reconcile net income (loss) to net cash provided by
operating activities, excluding effects of acquisition;
Extraordinary item - early extinguishment of debt.................. 2,538 -
Depreciation and amortization .................................... 47,722 38,281
Non-cash interest ................................................ 1,744 899
Non-cash stock option compensation................................. - (3,008)
Loss on sales of assets and other ................................ 414 952
Changes in operating assets and liabilities........................ (25,784) (4,295)
------------- -------------
Net cash provided by operating activities ..................... 12,742 34,700
------------- -------------
Investing Activities
Additions to property, plant and equipment............................. (6,907) (9,190)
Acquisition of publications and trade shows, net ..................... (14,535) (11,209)
Increase in long-term receivable from affiliate........................ (15,437) (8,965)
Proceeds from sale of assets and other................................. 18 3,826
------------- -------------
Net cash used in investing activities ......................... (36,861) (25,538)
------------- -------------
Financing Activities
Net proceeds from revolving credit facility .......................... 34,000 -
Borrowings of long-term debt........................................... 160,000 -
Payments of long-term debt............................................. (195,000) (9,328)
Long-term debt financing costs......................................... (9,001) -
Capital contributions ................................................ 34,775 -
------------- -------------
Net cash provided by (used in) financing activities ........... 24,774 (9,328)
------------- -------------
Effect of exchange rate changes on cash and cash equivalents.............. (793) (86)
------------- -------------
Net decrease in cash and cash equivalents................................. (138) (252)
Cash and cash equivalents, beginning of period .......................... 17,675 11,237
------------- -------------
Cash and cash equivalents, end of period ................................ $ 17,537 $ 10,985
============= =============
See notes to condensed consolidated financial statements
5
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, or 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. Management believes that the
disclosures are adequate to make the information presented not misleading.
These condensed consolidated financial statements, however, should be read in
conjunction with the audited financial statements and the related notes,
included in the Company's Registration Statement on Form S-1 filed with the
Securities and Exchange Commission on April 20, 2001, as amended pursuant to
Rule 424 (b)(3) of the Securities Act of 1933, as amended, and filed with the
Securities and Exchange Commission on May 2, 2001. The results of operations for
the three and nine month periods ended September 30, 2001, are not necessarily
indicative of the operating results that may be expected for the entire year
ending December 31, 2001.
Recently Issued Accounting Standards
On June 29, 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 141, "Business Combinations," and SFAS
No. 142, "Goodwill and Intangible Assets." These Statements provide that
business combinations initiated after June 30, 2001 must use the purchase method
of accounting. The pooling of interest method of accounting is prohibited except
for transactions consummated before July 1, 2001. Intangible assets acquired in
a business combination must be recorded separately from goodwill and acquired
goodwill and intangible assets with indefinite lives are not amortized, but will
be tested for impairment annually or whenever there is an impairment indicated.
Effective January 1, 2002, existing goodwill will no longer be subject to
amortization. Management is currently reviewing the provisions of these
Statements and their impact on the Company's results of operations.
Derivative Financial Instruments
Effective January 1, 2001, the Company adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" which requires that derivative
instruments be recorded on the balance sheet at fair value. Changes in the fair
value of derivative financial instruments must be recognized currently in
earnings unless specific hedge accounting criteria are met. For those
instruments which meet the criteria, gains and losses may be recognized in other
comprehensive income rather than in current earnings.
The Company's adoption of SFAS No. 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 an approximately $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.
Certain forecasted transactions are exposed to foreign currency risk. 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. Forward contracts
not designated as hedging instruments under SFAS No. 133 are also used to manage
the impact of the variability in exchange rates.
6
ADVANSTAR COMMUNICATIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 29 months to manage its exposure to interest rate movements
on a portion of its variable rate debt obligations.
Other expense includes a charge of approximately $0.9 million for the three and
nine months ended September 30, 2001, which represents the amount of hedge
ineffectiveness and changes in fair value of derivative instruments not
designated as hedging instruments. Other comprehensive income includes net
losses of approximately $4.9 million and $7.5 million, respectively, for the
three and nine months ended September 30, 2001.
4. Debt
On January 9, 2001, 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., 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 on the tender of the Notes of $1.5
million 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 15/th/ and August 15/th/ of each
year commencing on August 15, 2001. The Replacement Notes are fully and
unconditionally guaranteed on a senior subordinated basis by the Company and its
wholly-owned domestic subsidiaries.
Concurrently 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. Advanstar, Inc.
contributed the proceeds from the issuance of the Discount Notes to the Company.
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.
The contribution of the proceeds from the Discount Notes by Advanstar, Inc. to
the Company was treated as a capital contribution. The Company charged-off
deferred financing costs of approximately $1.6 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.
7
ADVANSTAR COMMUNICATIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Long-term debt consists of the following (in thousands):
September 30, December 31,
2001 2000
------------- ------------
Term loan A, interest at LIBOR plus 3.00%, 6.50% at September 30, 2001,
due quarterly through April 11, 2007........................................... $ 89,200 $100,000
Term loan B, interest at LIBOR plus 3.50%, 7.00% at September 30, 2001,
due quarterly through October 11, 2008......................................... 280,800 315,000
Revolving credit facility, interest at LIBOR plus 3.00%, 6.44% at
September 30, 2001, due April 11, 2007......................................... 34,000 --
Senior subordinated notes at 12.00% due 2011.................................... 160,000 --
Senior subordinated notes at 9.25% due 2008..................................... -- 150,000
Acquisition note payable, interest at 5.50%, due monthly through 2004........... 6,000 --
---------- ----------
570,000 565,000
Less- Current maturities........................................................ (11,950) (13,150)
---------- ----------
$558,050 $551,850
========== ==========
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, payments, debt
incurrence, dividends and other restricted payments. The Company was in
compliance with all covenants as of September 30, 2001.
5. Comprehensive Loss
The tables below present comprehensive loss, 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 Ended Months Ended
September 30, September 30,
2001 2000
-------------- ----------------
Net income (loss).............................................. $ (4,129) $ 976
Change in cumulative translation adjustment.................... (1,317) (1,776)
Change in unrealized losses on derivative financial
instruments, net of tax..................................... (4,915) --
-------- ---------
Comprehensive loss............................................. $(10,361) $ (800)
========= =========
8
ADVANSTAR COMMUNICATIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Successor Predecessor
----------- ------------
Nine Months Nine Months
Ended Ended
September 30, September 30,
2001 2000
------------------------------
Net income (loss).............................................. $(13,892) $ 1,871
Change in cumulative translation adjustment.................... (4,496) (3,304)
Change in unrealized losses on derivative financial
instruments, net of tax..................................... (7,464) --
-------- --------
Comprehensive loss ............................................ $(25,852) $(1,433)
======== ========
Segment Information
Trade Shows Corporate
and Trade Marketing and
Conferences Publications Services Other Totals
----------- ------------ --------- --------- -----------
(In thousands)
Three months ended September 30, 2001
(Successor)
Revenues.................................. $ 42,797 $ 33,757 $3,780 $ 444 $ 80,778
Gross profit.............................. 26,473 7,581 1,904 256 36,214
Segment assets............................ 671,109 166,138 1,948 76,698 915,893
- ----------------------------------------------------------------------------------------------------------
Three months ended September 30, 2000
(Predecessor)
Revenues.................................. $ 54,027 $ 37,108 $4,212 $ 491 $ 95,838
Gross profit.............................. 28,401 10,070 2,072 491 41,034
Segment assets............................ 459,015 227,308 2,479 81,197 769,999
Trade Shows Corporate
and Trade Marketing and
Conferences Publications Services Other Totals
----------- ------------ --------- --------- -----------
(In thousands)
Nine months ended September 30, 2001
(Successor)
Revenues.................................. $162,471 $109,130 $12,426 $ 879 $284,906
Gross profit.............................. 81,783 26,921 6,169 623 115,496
Segment assets............................ 671,109 166,138 1,948 76,698 915,893
- ----------------------------------------------------------------------------------------------------------
Nine months ended September 30, 2000
(Predecessor)
Revenues................................. $173,067 $116,018 $13,300 $ 920 $303,305
Gross profit............................. 81,796 33,063 6,681 920 122,460
Segment assets........................... 459,015 227,308 2,479 81,197 769,999
9
ADVANSTAR COMMUNICATIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The reconciliation of total segment gross profit to consolidated pre-tax
income (loss) is as follows (in thousands):
Successor Predecessor
------------ ------------
Three Three
Months Months
Ended Ended
September 30, September 30,
2001 2000
------------ ------------
Total segment gross profit................................... $ 36,214 $ 41,034
General and administrative expense........................... (7,693) (7,026)
Depreciation and amortization ............................... (17,276) (13,378)
Other expense................................................ (13,840) (15,029)
--------- --------
Income (loss) before income taxes and
minority interest..................................... $ (2,595) $ 5,601
========= ========
Successor Predecessor
------------ ------------
Nine Nine
Months Months
Ended Ended
September 30, September 30,
2001 2000
------------ ------------
Total segment gross profit................................... $115,496 $122,460
General and administrative expense........................... (31,801) (30,719)
Depreciation and amortization................................ (47,722) (38,281)
Other expense................................................ (40,482) (39,527)
--------- --------
Income (loss) before income taxes and
minority interest..................................... $ (4,509) $ 13,933
========= ========
7. 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 in connection with the
issuance, and was an initial purchaser of the Replacement Notes and the Discount
Notes. The Company paid customary fees to CSFB as compensation for those
services. DLJ Capital Funding, an affiliate of the DLJ Merchant Banking funds,
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 in 2001 was approximately $7.3 million, plus
out-of-pocket expenses.
10
ADVANSTAR COMMUNICATIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Relationship with Advanstar.com, Inc.
Advanstar.com, Inc. (Advanstar.com), an affiliate of the Company, is operating
the Company's event and publication-related web sites and is developing selected
enhanced web opportunities to serve the Company's customers in selected
industries. The Company provides Advanstar.com with certain administrative
support services and charges for these services based on a general overhead
charge. In addition, selected sales, editorial, marketing and production staff
of the Company are shared with Advanstar.com. 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. The Company has a long-term receivable of
approximately $29.3 million from Advanstar.com as of September 30, 2001.
In the third quarter of 2001 certain events, including the slowdown in the
economy, the changing business environment and continuing Advanstar.com
operating losses caused management of Advanstar, Inc. to consider certain
transactions between its two sister subsidiaries to satisfy the outstanding
advances due to the Company from Advanstar.com. Accordingly, the Company has
accounted for $29.3 million in advances to Advanstar.com as a charge to
additional paid-in capital in the accompanying September 30, 2001 consolidated
balance sheet pending final determination of the disposition of these advances.
8. 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 its 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.
11
ADVANSTAR COMMUNICATIONS INC.
CONDENSED CONSOLIDATING BALANCE SHEETS
SEPTEMBER 30, 2001
(in thousands - unaudited)
Guarantor Non-Guarantor Consolidated
Communications Subsidiaries Subsidiaries Elimination Total
-------------- ------------- ------------- ----------- -------------
ASSETS
Current assets
Cash and cash equivalents $ 7,559 $ -- $ 9,978 $ -- $ 17,537
Accounts receivable, net 25,158 (55) 3,675 -- 28,778
Prepaid expenses 6,546 2,908 2,877 -- 12,331
Intercompany receivable (payable) (119,840) 132,877 (13,037) -- --
Other (2,312) -- 3,897 -- 1,585
--------- --------- --------- --------- ---------
Total current assets (82,889) 135,730 7,390 -- 60,231
Due from affiliate 5,824 5,824
Property, plant and equipment, net 23,779 1,005 1,035 -- 25,819
Investments in subsidiaries 521,114 -- -- (521,114) --
Goodwill and intangible assets, net 397,975 346,623 71,169 -- 815,767
Deferred income taxes 7,743 -- -- -- 7,743
Other assets 509 -- -- -- 509
--------- --------- --------- --------- ---------
874,055 483,358 79,594 (521,114) 915,893
========= ========= ========= ========= =========
LIABILITIES AND SHAREHOLDER'S
EQUITY
Current liabilities
Current maturities of long-term debt $ 11,950 $ -- $ -- $ -- $ 11,950
Accounts payable 14,501 4,907 5,640 -- 25,048
Accrued liabilities 24,278 2,762 3,159 -- 30,199
Deferred revenue 5,117 20,935 7,296 -- 33,348
--------- --------- --------- --------- ---------
Total current liabilities 55,846 28,604 16,095 -- 100,545
Long term debt, net of current
maturities 558,050 -- -- -- 558,050
Other long term liabilities 3,982 -- 187 -- 4,169
Minority interest 7,999 -- 544 -- 8,543
Shareholder's equity
Common stock 10 3 477 (480) 10
Capital in excess of par 286,268 438,117 72,244 (510,361) 286,268
Retained earnings (deficit) (30,637) 16,634 (6,361) (10,273) (30,637)
Accumulated other comprehensive loss (7,463) -- (3,592) -- (11,055)
--------- --------- --------- --------- ---------
Total shareholder's equity 248,178 454,754 62,768 (521,114) 244,586
--------- --------- --------- --------- ---------
$ 874,055 $ 483,358 $ 79,594 $(521,114) $ 915,893
========= ========= ========= ========= =========
12
ADVANSTAR COMMUNICATIONS INC.
CONDENSED CONSOLIDATING BALANCE SHEETS
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
Accrued liabilities 15,120 3,707 2,523 - 21,350
Deferred revenue 37,389 21,526 9,040 - 67,955
-------- -------- -------- --------- --------
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 CONSOLIDATING STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2001
(in thousands - unaudited)
Guarantor Non-Guarantor Consolidated
Communications Subsidiaries Subsidiaries Elimination Total
-------------- ------------ ------------- ----------- ------------
Net revenue $ 39,960 $ 33,643 $ 7,175 $ -- $ 80,778
Operating expenses:
Cost of sales and selling, editorial and
circulation 30,503 7,872 6,189 -- 44,564
General and administrative 6,011 364 1,318 -- 7,693
Depreciation and amortization 9,492 6,666 1,118 -- 17,276
-------- -------- -------- -------- --------
Total operating expenses 46,006 14,902 8,625 -- 69,533
-------- -------- -------- -------- --------
Operating income (loss) (6,046) 18,741 (1,450) -- 11,245
Other income (expense):
Interest expense, net (13,171) -- (317) -- (13,488)
Other income (expense), net (763) -- 411 -- (352)
-------- -------- -------- -------- --------
Loss before income taxes and minority interests (19,980) 18,741 (1,356) -- (2,595)
Provision (benefit) for income tax (8,279) 9,276 929 -- 1,926
Minority interests 116 -- 276 -- 392
Equity in earnings of subsidiaries 7,456 -- -- (7,456)
-------- -------- -------- -------- --------
Net income (loss) $ (4,129) $ 9,465 $ (2,009) $ (7,456) $ (4,129)
======== ======== ======== ======== ========
14
ADVANSTAR COMMUNICATIONS INC.
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000
(in thousands - unaudited)
Guarantor Non-Guarantor Consolidated
Communications Subsidiaries Subsidiaries Elimination Total
-------------- ------------ ------------ ----------- ------------
Net revenue $ 53,445 $ 32,205 $ 10,188 $ - $ 95,838
Operating expenses
Cost of sales and selling, editorial and
circulation 36,711 9,558 8,535 - 54,804
General and administrative 5,292 262 1,472 - 7,026
Depreciation and amortization 9,563 2,758 1,057 - 13,378
-------------- ------------ ------------ ----------- ------------
Total operating expenses 51,566 12,578 11,064 - 75,208
-------------- ------------ ------------ ----------- ------------
Operating income (loss) 1,879 19,627 (876) - 20,630
Other income (expense):
Interest expense, net (11,825) - (549) - (12,374)
Other expense, net (2,454) - (201) - (2,655)
-------------- ------------ ------------ ----------- ------------
Loss before income taxes and minority interests (12,400) 19,627 (1,626) - 5,601
-------------- ------------ ------------ ----------- ------------
Provision (benefit) for income tax 4,430 (8,316) (447) - (4,333)
Minority interest in earnings (292) - - - (292)
Equity in earnings of subsidiaries 9,238 - - (9,238)
-------------- ------------ ------------ ----------- ------------
Net income (loss) $ 976 $ 11,311 $ (2,073) $ (9,238) $ 976
============== ============ ============ =========== ============
15
ADVANSTAR COMMUNICATIONS INC.
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2001
(in thousands - unaudited)
Guarantor Non-Guarantor Consolidated
Communications Subsidiaries Subsidiaries Elimination Total
-------------- ------------ ------------- ------------ ------------
Net revenue $ 182,306 $ 69,443 $ 33,157 $ -- $ 284,906
Operating expenses
Cost of sales and selling, editorial and
circulation 122,673 19,755 26,982 -- 169,410
General and administrative 26,253 927 4,621 -- 31,801
Depreciation and amortization 29,098 14,366 4,258 -- 47,722
--------- --------- --------- --------- ---------
Total operating expenses 178,024 35,048 35,861 -- 248,933
--------- --------- --------- --------- ---------
Operating income (loss) 4,282 34,395 (2,704) -- 35,973
Other income (expense):
Interest expense, net (40,677) -- (1,003) -- (41,680)
Other income (expense), net (188) -- 1,386 -- 1,198
--------- --------- --------- --------- ---------
Income (loss) before income taxes and minority interests (36,583) 34,395 (2,321) -- (4,509)
Provision (benefit) for income tax (14,668) 17,710 2,859 -- 5,901
Minority interests 162 -- (536) -- (374)
Equity in earnings of subsidiaries 10,969 -- -- (10,969)
--------- --------- --------- --------- ---------
Income before extraordinary item and
accounting change (10,784) 16,685 (5,716) (10,969) (10,784)
Extraordinary item (2,556) -- -- -- (2,556)
Cumulative effect of change in
accounting, net (552) -- -- -- (552)
--------- --------- --------- --------- ---------
Net income (loss) $ (13,892) $ 16,685 $ (5,716) $ (10,969) $ (13,892)
========= ========= ========= ========= =========
16
ADVANSTAR COMMUNICATIONS INC.
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2000
(in thousands - unaudited)
Guarantor Non-Guarantor Consolidated
Communications Subsidiaries Subsidiaries Elimination Total
-------------- ------------- ------------- ----------- ------------
Net revenue $ 200,321 $ 63,690 $ 39,294 $ - $ 303,305
Operating expenses
Cost of sales and selling, editorial and
circulation 130,088 19,978 30,779 - 180,845
General and administrative 25,214 703 4,802 - 30,719
Depreciation and amortization 26,311 9,165 2,805 - 38,281
--------- -------- -------- -------- ---------
Total operating expenses 181,613 29,846 38,386 - 249,845
--------- -------- -------- -------- ---------
Operating income 18,708 33,844 908 - 53,460
Other income (expense):
Interest expense, net (35,629) - (1,240) - (36,869)
Other expense, net (952) - (1,706) - (2,658)
--------- -------- -------- -------- ---------
Income (loss) before income taxes and minority interests (17,873) 33,844 (2,038) - 13,933
--------- -------- -------- -------- ---------
Provision (benefit) for income tax 6,336 (15,710) (1,685) - (11,059)
Minority interest in earnings (1,003) - - - (1,003)
Equity in earnings of subsidiaries 14,411 - - (14,411) -
--------- -------- -------- -------- ---------
Net income (loss) $ 1,871 $ 18,134 $ (3,723) $(14,411) $ 1,871
========= ======== ======== ======== =========
17
ADVANSTAR COMMUNICATIONS INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2001
(in thousands - unaudited)
Guarantor Non-Guarantor Consolidated
Communications Subsidiaries Subsidiaries Elimination Total
-------------- ------------ ------------ ----------- ------------
OPERATING ACTIVITIES:
Net income (loss) $ (13,892) $ 16,685 $ (5,716) $ (10,969) $ (13,892)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:
Equity in earnings of subsidiaries (10,969) - - 10,969 -
Extraordinary item 2,538 - - - 2,538
Depreciation and amortization 29,098 14,366 4,258 - 47,722
Non cash Items 1,744 - - - 1,744
Change in working capital items (1,414) (30,168) 6,212 - (25,370)
-------------- ------------ ------------ ----------- ------------
Net cash provided by operating activities 7,105 883 4,754 - 12,742
-------------- ------------ ------------ ----------- ------------
INVESTMENT ACTIVITIES:
Additions to property, plant and equipment (5,792) (884) (231) - (6,907)
Acquisitions of publications and trade shows, net and other (13,827) - (690) - (14,517)
Increase in long-term receivalbe from affiliate (15,437) - - - (15,437)
-------------- ------------ ------------ ----------- ------------
Net cash provided by (used in) investing activities (35,056) (884) (921) - (36,861)
-------------- ------------ ------------ ----------- ------------
FINANCING ACTIVITIES:
Capital contributions 34,775 - - - 34,775
Deferred finance costs (9,001) - - - (9,001)
Borrowings of long-term debt, net (1,000) - - - (1,000)
-------------- ------------ ------------ ----------- ------------
Net cash provided by financing activities 24,774 - - - 24,774
-------------- ------------ ------------ ----------- ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH - - (793) - (793)
-------------- ------------ ------------ ----------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS: (3,177) (1) 3,040 - (138)
-------------- ------------ ------------ ----------- ------------
CASH AND CASH EQUIVALENTS, beginning of period 10,736 1 6,938 - 17,675
-------------- ------------ ------------ ----------- ------------
CASH AND CASH EQUIVALENTS, end of period $ 7,559 $ - $ 9,978 $ - $ 17,537
============== ============ ============ =========== ============
18
ADVANSTAR COMMUNICATIONS INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2000
(in thousands - unaudited)
Guarantor Non-Guarantor Consolidated
Communications Subsidiaries Subsidiaries Elimination Total
-------------- ------------ ------------- ----------- ------------
OPERATING ACTIVITIES:
Net income (loss) $ 1,871 $ 18,134 $ (3,723) $ (14,411) $ 1,871
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:
Equity in earnings of subsidiaries (14,411) - - 14,411 -
Depreciation and amortization 26,311 9,165 2,805 - 38,281
Non cash Items (1,157) - - - (1,157)
Change in working capital items 15,658 (27,503) (1,380) 8,930 (4,295)
------------- ------------ ------------- ----------- -----------
Net cash provided by (used in) operating activities 28,272 (204) (2,298) 8,930 34,700
------------- ------------ ------------- ----------- -----------
INVESTMENT ACTIVITIES:
Investment in subsidiaries (13,915) - - 13,915 -
Additions to property, plant and equipment, net and other (8,418) (325) (447) - (9,190)
Acquisitions of publications and trade shows (300) 500 (11,409) - (11,209)
Proceeds from sale of publishing and other assets 3,826 - - - 3,826
Increase in long-term receivable from affiliate and other (2) - (33) (8,930) (8,965)
------------- ------------ ------------- ----------- -----------
Net cash provided by (used in) investing activities (18,809) 175 (11,889) 4,985 (25,538)
------------- ------------ ------------- ----------- -----------
FINANCING ACTIVITIES:
Proceeds from sale of common stock and
capital contributions and other - - 13,915 (13,915) -
Deferred finance costs - - - - -
Effect of Merger - - - - -
Payments of long-term debt, net (9,328) - - - (9,328)
------------- ------------ ------------- ----------- -----------
Net cash provided by (used in) financing activities (9,328) - 13,915 (13,915) (9,328)
------------- ------------ ------------- ----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (1) - (85) - (86)
------------- ------------ ------------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 134 (29) (357) - (252)
------------- ------------ ------------- ----------- -----------
CASH AND CASH EQUIVALENTS, beginning of period 5,612 33 5,592 - 11,237
------------- ------------ ------------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 5,746 $ 4 $ 5,235 $ - $ 10,985
============= ============ ============= =========== ===========
19
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
are neither promises or guarantees and involve risks and uncertainties that
could cause actual results to differ materially from those indicated by such
forward-looking statements. You should not expect that these forward-looking
statements will be updated or supplemented as a result of changing circumstances
or otherwise, and we disavow and disclaim any obligation to do so. 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 "Risk Factors" in the Company's Registration Statement on Form S-1
filed with the Securities and Exchange Commission on April 20, 2001, as amended
pursuant to Rule 424(b)(3) of the Securities Act of 1933, as amended, and filed
with the Securities and Exchange Commission on May 2, 2001.
General
Advanstar Communications Inc. 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 57% of total
revenue in the nine months ended September 30, 2001 and 2000. Trade publications
accounted for approximately 38% of total revenue in the nine months ended
September 30, 2001 and 2000, while marketing services accounted for
approximately 5% of total revenue in the nine months ended September 30, 2001
and 2000. 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. In return, Advanstar.com provides promotional
support on its web sites for our trade publications and trade shows.
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 our core activities in publishing, tradeshows,
and marketing services. Also, Advanstar.com will reduce the number of internet
products originally scheduled for introduction in 2001.
20
In the third quarter of 2001 certain events, including the slowdown in the
economy, the changing business environment and continuing Advanstar.com
operating losses caused management of Advanstar, Inc. to consider certain
transactions between its two sister subsidiaries to satisfy the outstanding
advances due to the Company from Advanstar.com. Accordingly, the Company has
accounted for the $29.3 million in advances to Advanstar.com as a charge to
additional paid-in capital in the accompanying September 30, 2001 consolidated
balance sheet pending final determination of the disposition of these advances.
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 resulting 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 senior
discount notes. See notes to the condensed consolidated financial statements in
Item 1 for further details.
Stock Option Compensation. We account for stock-based compensation using
the intrinsic value method. As a result, due to the variable features of option
grants under our old option plan, we historically measured compensation cost as
the difference between the exercise price of the options and the fair value of
the shares underlying the options at the end of the period. We then recognized a
non-cash compensation charge or benefit. We no longer have a variable-feature
benefit plan after the acquisition and will therefore not recognize stock option
compensation charges under the plan as currently in effect. Our results in 2000,
including our EBITDA, were positively impacted by non-cash compensation benefits
recognized due to a decrease in the fair value of the shares underlying the
options at the end of the period.
Effect of events of September 11, 2001. We expect the events of September
11th to have a slight impact on our 2001 results. The continued effects of
these events are difficult to forecast at the present time, however, the
fundamental value proposition encompassed in our trade shows and publications
remain unchanged. We have experienced some cancellations in ad pages, primarily
in our travel industry publications, attributable to the events of September
11th. We have also rescheduled two of our events, Femme and New England
Abilities, to the 4th quarter, which were originally scheduled to take place in
the 3rd quarter. In addition to rescheduling these two events we also cancelled
a small conference in Paris as a result of international travel restrictions
instituted by the FDA in early October. Our other 4th quarter events are
expected to take place as scheduled.
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. Paid attendance and conference fees
make up less than 10% of total trade show revenue. 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.
21
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 3% 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.
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.
22
To calculate EBITDA for the three months ended September 30, 2000, we
reduced operating income by $0.6 million, to reflect minority interest. The
adjustment was not significant for the three months ended September 30, 2001. To
calculate EBITDA for the nine months ended September 30, 2001 and 2000, we
reduced operating income by $1.0 million and $2.0 million, respectively, to
reflect minority interest.
Successor Predecessor
---------------------------------------------------------------
Three Months Nine Months Three Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2001 2001 2000 2000
-------- -------- -------- --------
In thousands
Net revenue:
Trade shows and conferences............................ $ 42,797 $162,471 $ 54,027 $173,067
Publications........................................... 33,757 109,130 37,108 116,018
Marketing services and other........................... 4,224 13,305 4,703 14,220
-------- -------- -------- --------
Total net revenues.................................... 80,778 284,906 95,838 303,305
Production, selling and other direct expenses:
Trade shows and conferences............................ 16,324 80,688 25,626 91,271
Publications........................................... 26,176 82,209 27,038 82,955
Marketing services and other........................... 2,064 6,513 2,140 6,619
-------- -------- -------- --------
Total production, selling and other direct expenses... 44,564 169,410 54,804 180,845
General and administrative expenses...................... 9,910 38,553 11,446 38,073
Non-cash stock option compensation....................... -- -- (2,825) (3,008)
Amortization............................................. 15,059 40,970 11,783 33,935
-------- -------- -------- --------
Operating income...................................... 11,245 35,973 20,630 53,460
Other income (expense):
Interest expense, net.................................. (13,488) (41,680) (12,374) (36,869)
Other income (expense)................................. (352) 1,198 (2,655) (2,658)
Provision for income taxes............................... 1,926 5,901 4,333 11,059
Minority interests....................................... 392 (374) (292) (1,003)
-------- -------- -------- --------
Income (loss) before extraordinary item and
accounting change....................................... $ (4,129) $(10,784) $ 976 $ 1,871
-------- ======== ======== ========
EBITDA................................................... $ 28,547 $ 82,669 $ 33,377 $ 89,750
Results of Operations
The following discussion compares our results for the three months and nine
months ended September 30, 2001 to that of our predecessor's results in 2000.
Three Months Ended September 30, 2001 Compared to the Three Months Ended
September 30, 2000
Revenue
Total revenue decreased $15.0 million, or 15.7%, to $80.8 million in the
third quarter of 2001 from $95.8 million for the quarter ended September 30,
2000.
23
Revenue from trade shows and conferences decreased $11.2 million, or 20.8%,
to $42.8 million for the third quarter of 2001 from $54.0 million in the third
quarter of 2000. This decrease was primarily attributable to a shift in the
timing of when events take place and the discontinuation of several events in
the technology, science and call center markets, partially offset by revenue
growth in our core trade shows and new event launches. Revenue for the third
quarter of 2001 was impacted by a net shift in timing of seven trade shows,
including four major trade shows, VSDA, Sensors and two fashion and apparel
events. The Sensors and the fashion and apparel events were held in the third
quarter of 2000, but moved to the fourth quarter this year. VSDA was held in the
third quarter of 2000, but moved to the first quarter this year. Adjusting third
quarter 2000 results for all such movements, third quarter 2001 trade show
revenue decreased by $1.5 million, or 3.3%.
Revenue from publications decreased $3.3 million, or 9.0%, to $33.8 million
for the third quarter of 2001 from $37.1 million in 2000. This decrease was
attributable to the overall slowdown in the economy, particularly in our
technology and travel markets, and the resulting reduction in marketing spending
by our customers as they adjust to slowing growth in their respective industry
sectors. Advertising pages decreased approximately 5.7% across our portfolio
while advertising revenue per page decreased approximately 5.1% in the third
quarter of 2001. The economic outlook in the publishing sector continues to be
challenging, and forward visibility on our advertising revenue and pages is
limited, due to the concerns of our customers related to the overall business
environment. We also discontinued publication of certain magazines published in
2000. These declines were offset by revenue from our acquisitions of Motor Age,
Auto Body Repair News and Centre d'Appels magazines earlier in 2001.
Revenue from marketing services and other revenue was $4.2 million in the
third quarter of 2001 compared to $4.7 million in the comparable period of 2000.
Marketing services revenue is closely linked to our publishing operations and
the decline in revenue is in line with the results of our publishing segment.
Production, Selling and Other Direct Expenses
Production, selling and other direct expenses decreased $10.2 million, or
18.7%, to $44.6 million for the third quarter of 2001 from $54.8 million for the
comparable period of 2000.
Expenses of trade shows and conferences decreased $9.3 million, or 36.3%,
to $16.3 million for the third quarter of 2001 from $25.6 million in the third
quarter of 2000. This decrease was primarily due to costs associated with the
movement of events between quarters and by cost savings associated with
continuing and discontinued events. Adjusting third quarter 2000 results for
these movements, trade show and conference expenses in 2001 decreased by $3.6
million, or 17.9%.
Publication production, selling and other direct expenses decreased $0.8
million, or 3.2%, to $26.2 million in the third quarter of 2001 from $27.0
million in the third quarter of 2000. This decrease was due primarily to savings
attributable to our ongoing cost management reduction program and discontinued
publications, partially offset by our acquisitions described above and a 8%
postage increase effective January, 2001.
Marketing services production, selling and other direct expenses were
unchanged at $2.1 million in the third quarter of 2001 and 2000, respectively.
General and Administrative Expenses
General and administrative expenses decreased $1.5 million, or 13.4%, to
$9.9 million in the third quarter of 2001 from $11.4 million in the third
quarter of 2000. This decrease is primarily attributable to reductions in
employee bonus compensation in line with our operating results, partially offset
by a $0.6 million increase in depreciation related to the development and
expansion of our information technology infrastructure.
24
Our results in 2000, were positively impacted by non-cash compensation
benefits of approximately $2.8 million recognized due to a decrease in the fair
value of the shares underlying the options at the end of the period. We no
longer have a variable-feature benefit plan after the acquisition and no longer
recognize stock option compensation charges under the plan as currently in
effect.
Amortization
Amortization expense increased $3.3 million to $15.1 million in the third
quarter of 2001 from $11.8 million in the third quarter of 2000 primarily due to
increased amortization of intangible assets related to the DLJ Acquisition.
Interest Expense
Net interest expense increased $1.1 million, or 9.0%, to $13.5 million in
the third quarter of 2001 from $12.4 million in the third quarter of 2000 due to
the additional indebtedness necessary to fund the DLJ Acquisition, offset by a
155 basis point decrease in our weighted average interest rate for the period.
In February 2001, we replaced our then outstanding $150.0 million 9.25% senior
subordinated notes with $160.0 million 12.00% senior subordinated notes.
Other Income and Expense
Other expense decreased $2.3 million to $0.4 million in the third quarter
of 2001 from $2.7 million in the third quarter of 2000. We reported a loss on
the sale of our Plastics events in the third quarter of 2000.
Income Taxes
The provision for income taxes decreased $2.4 million in the quarter to
$1.9 million in 2001 from $4.3 million in 2000. This decrease was primarily due
to a decrease in taxable earnings related to reduced operating income and
increased interest expense as more fully described above, partially offset by an
increase in non-deductible amortization resulting from the DLJ Acquisition.
EBITDA
EBITDA decreased $4.9 million, or 14.5%, to $28.5 million in the third
quarter of 2001 from $33.4 million in the third quarter of 2000. The decrease
was primarily due to a general economic downturn in our publishing segment as
more fully discussed above and the effect of a net shift in the timing of seven
trade shows, offset by reductions in general and administrative expense as more
fully described above. Adjusting third quarter 2000 for the movement of trade
shows from one quarter to another, EBITDA in the third quarter of 2001 decreased
by $0.8 million, or 2.8% from the third quarter of 2000.
Nine Months Ended September 30, 2001 Compared to the Nine Months Ended September
30, 2000
Revenue
Total revenue decreased $18.4 million, or 6.1%, to $284.9 million in the
first nine months of 2001 from $303.3 million for the comparable period in 2000.
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Revenue from trade shows and conferences decreased $10.6 million, or 6.1%,
to $162.5 million in the first nine months of 2001 from $173.1 million for the
comparable period in 2000. This decrease was primarily attributable to the
discontinuation of several events in our technology, science, art and European
call center markets, a shift in the timing of when events take place, partially
offset by revenue growth attributable to new event launches. Results for the
nine months ended September 30, 2001 were impacted by a net shift in timing of
six trade shows, including three major trade shows, Sensors and two fashion and
apparel events. These events were held in the third quarter of 2000, but moved
to the fourth quarter this year. Adjusting year to date 2000 results for all
such movements, trade show revenue for the nine months ended September 30,
2001 decreased by $3.5 million, or 2.1%.
Revenue from publications decreased $6.9 million, or 5.9%, to $109.1
million in the first nine months of 2001 from $116.0 million for the comparable
period in 2000. This decrease was primarily attributable to a slowdown in our
existing product portfolio due to a general economic downturn and the
discontinuation of certain magazines published in 2000, partially offset by our
acquisition of Motor Age and Auto Body Repair News magazines and launches in the
first nine months of 2001. Advertising pages decreased approximately 4.8% while
advertising revenue per page decreased 1.9%. The economic outlook in the
publishing sector continues to be challenging, and forward visibility on our
advertising revenue and pages is limited due to the concerns of our customers
related to the overall business environment.
Revenue from marketing services and other revenue was $13.3 million in the
first nine months of 2001 compared to $14.2 million in the comparable period of
2000. Marketing services revenue is closely linked to our publishing operations
and the decline in revenue is in line with the results of our publishing
segment.
Production, Selling and Other Direct Expenses
Production, selling and other direct expenses decreased $11.4 million, or
6.3%, to $169.4 million in the first nine months of 2001 from $180.8 million in
the first nine months of 2000.
Expenses of trade shows and conferences decreased $10.6 million, or 11.6%,
to $80.7 million in the first nine months of 2001 from $91.3 million in the
comparable period in 2000. This decrease was primarily due to cost savings
associated with discontinued events and event timing shifts, partially offset by
costs related to new product launches.
Publication production, selling and other direct expenses decreased $0.8
million, or 0.9%, to $82.2 million in the first nine months of 2001 from $83.0
million in the first nine months of 2000. We have mitigated the effects of the
8% postal rate increase in January and the costs related to our acquisitions
described above through cost savings on our base portfolio related to our
ongoing cost management reduction program.
Marketing services production, selling and other direct expenses was $6.5
million in the first nine months of 2001 and compared to $6.6 million in 2000.
General and Administrative Expenses
General and administrative expenses increased $0.5 million, or 1.3%, to
$38.6 million in the first nine months of 2001 from $38.1 million in 2000. This
increase was primarily due to an increase in depreciation expense of $2.4
million related to the full-period depreciation effect of the development and
expansion of our information technology infrastructure. The increase in
depreciation was partially offset by reductions in employee compensation in line
with our operating results.
26
Our results in 2000, were positively impacted by non-cash compensation
benefits of approximately $3.0 million recognized due to a decrease in the fair
value of the shares underlying the options at the end of the period. We no
longer have a variable-feature benefit plan after the acquisition and no longer
recognize stock option compensation charges under the plan as currently in
effect.
Amortization
Amortization expense increased $7.1 million to $41.0 million in the first
nine months of 2001 from $33.9 million in 2000 primarily due to increased
amortization of intangible assets related to the DLJ Acquisition in October
2000.
Interest Expense
Net interest expense increased $4.8 million, or 13.1%, to $41.7 million in
the first nine months of 2001from $36.9 million in 2000 due to the additional
indebtedness necessary to fund the DLJ Acquisition, partially offset by a 90
basis point decrease in weighted average interest rates. In February 2001, we
replaced our then outstanding $150.0 million 9.25% senior subordinated notes
with $160.0 million 12.00% senior subordinated notes.
Other Income and Expense
Other income for the nine months ended September 30, 2001 was $1.2 million,
compared to other expense of $2.7 million in 2000. In 2001, the Company
recognized foreign currency gains of approximately $0.8 million and income of
approximately $0.4 million related to a non-compete agreement associated with
the sale of our Plastics events in 2000. In 2000, the Company recorded a loss of
$2.4 million related to the sale of these Plastics events.
Income Taxes
The provision for income taxes decreased $5.2 million in the first nine
months of 2001 to $5.9 million from $11.1 million in 2000. This decrease was
primarily due to a decrease in taxable earnings related to reduced operating
income and increased interest expense as more fully described above, partially
offset by an increase in non-deductible amortization resulting from the DLJ
Acquisition.
EBITDA
EBITDA decreased $7.1 million, or 7.9%, to $82.7 million in the first nine
months of 2001 from $89.8 million in 2000. The decrease was primarily due to a
general economic downturn in our publishing segment as more fully discussed
above and the effect of a net shift in the timing of six trade shows. Adjusting
the first nine months of 2000 for the movement of trade shows from one quarter
to another, EBITDA for the first nine months of 2001 decreased by $3.9 million,
or 4.5%, from 2000.
Liquidity and Capital Resources
As of September 30, 2001, we had total indebtedness of $570.0 million and
approximately $42.9 million of borrowings available under our credit facility,
subject to customary conditions.
27
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 an $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 the issuance of our 12.00% senior subordinated
notes.
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 (LIBOR). 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 is
3.50% over LIBOR and 2.25% over the base rate. Our obligations under the credit
facility are guaranteed by Advanstar Holdings, Corp., our ultimate 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 Advanstar, Inc., 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 Advanstar Holdings, Corp. 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. Advanstar, Inc., however, 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 nine months of 2001 were approximately
$6.9 million. We anticipate that we will spend between $7.0 and $8.0 million on
capital expenditures in 2001, 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.
28
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 $15.4 million in the first nine months of 2001 and anticipate that
we will provide an aggregate of $2.1 million of additional funding in 2001. Our
debt instruments limit the total amount we can invest in Advanstar.com. Based on
current estimates, we anticipate that we will be able to make these investments
within those limitations.
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
longstanding strategy, we continue to pursue 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,
including a continued general weakening of the U.S. economy, or additional
terrorist activity.
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 $22.0 million, or 63.3%, to $12.7 million in the first nine months of
2001 from $34.7 million in the comparable period of 2000. The decrease was
primarily due to the decrease in operating results more fully described above,
an increase in working capital items and cash interest expense, partially offset
by a net reduction in cash income taxes.
Cash flows used in investing activities. Net cash used in investing
activities increased $11.4 million for the first nine months of 2001 to $36.9
million, from $25.5 million in 2000. This increase was principally due to an
increase in our funding of Advanstar.com during 2001 and increased investments
in acquisitions during the period, partially offset by a decrease in capital
expenditures and a decrease in cash proceeds related to the sale of properties.
Cash flows from financing activities. Net cash provided by financing
activities increased $34.1 million in the first nine months of 2001 to $24.8
million, from a use of cash of $9.3 million in the comparable period of 2000.
This increase was principally due to the effect of refinancing the Notes (as
more fully discussed above) and additional borrowings under our operating line
of credit.
29
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 September 30, 2001, we had fixed rate debt of $166.0
million and variable rate debt of $404.0 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
$4.0 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 $250.0 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 loss. 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 September 30, 2001, there were open
foreign exchange derivative contracts with a notional amount totaling $4.1
million. The potential loss in fair value resulting from a hypothetical 10%
adverse change in quoted foreign currency exchange rates amounts to
approximately $0.4 million. Actual results may differ.
30
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
Item 6(b). Reports on Form 8-K
The Company filed no reports on Form 8-K during the quarter ended
September 30, 2001.
31
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: November 14, 2001 David W. Montgomery
Vice President - Finance and
Chief Financial Officer
(Authorized Officer and
Principal Financial Officer)
32
Advanstar Communications Inc.
Exhibit Index
Exhibit No.
33