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PART I
Item 1. Business
General
Advanstar, Inc. was incorporated in the State of Delaware on April 11, 1996
as AHI Holding Corp. AHI Holding Corp. changed its corporate name to Advanstar
Holdings, Inc. in a merger with its wholly-owned subsidiary Advanstar
Holdings, Inc. on June 10, 1998 and changed its corporate name to Advanstar,
Inc. on March 17, 1999. Advanstar was purchased on May 31, 1996 by HFCP III
(as defined below), a private equity investment fund with committed equity
capital of approximately $1.5 billion. To date, HFCP III has invested $177.0
million of equity in Advanstar. Except where the context otherwise requires,
the terms "Advanstar," "the Company," "our company" and "we," as used in this
Annual Report on Form 10-K (the "Annual Report"), refer collectively to
"Advanstar, Inc.," its direct and indirect subsidiaries and predecessors as a
combined entity, and the term "HFCP III" refers to Hellman & Friedman Capital
Partners III, L.P., H&F Orchard Partners III, L.P. and H&F International
Partners III, L.P., collectively.
The Company
Advanstar provides integrated, business-to-business marketing communications
solutions 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, directories, guides and reference books, and
operate web sites which provide an interactive component to our core products.
As of December 31, 1998, we owned and managed 81 trade shows, and 26
conferences for business, professional and consumer audiences worldwide and
published 71 specialized business magazines and professional journals and 39
directories and other publications. See Part IV, Item 14, "Exhibits, Financial
Statement Schedules and Reports on Form 8-K--Financial Statements--Notes to
Consolidated Financial Statements--note 9."
We serve a number of industry sectors in North America, Latin America,
Europe, Asia and Australia. We market our broad range of products and services
in certain niche markets of the following industry clusters in which we
believe we have developed scale and expertise:
. Retail, Hospitality & Fashion,
. Healthcare, Science & Pharmaceuticals,
. Information Technology & Communications and
. Manufacturing & Processing.
Within each of these clusters, we operate trade shows and publications
targeted at businesses or professionals in specific or niche market segments.
In each of our niche markets, many of the same customers advertise in our
publications, exhibit at our trade shows and use our marketing services to
reach their buyers. We believe this cluster structure allows us to cross-sell
our products and services to capture a larger share of our customers'
marketing budgets.
Trade shows and conferences. In 1998, we held 107 events (an event is a
stand-alone trade show or conference). For example, in our Retail, Hospitality
& Fashion cluster, we produce MAGIC, a trade show for the men's apparel
industry; WWDMAGIC, a women's apparel show in the United States; and
MAGICKids, a children's apparel show. In addition, we produce Artexpo New
York, a mid-market art show in the United States; IBS New York, an exhibition
and educational event on the East Coast for the beauty salon market; and
Dealernews International Powersports Dealer Expo, a U.S. motorcycle
accessories aftermarket trade show. Our trade shows and conferences in other
clusters include Telexpo, a telecommunications trade show in Latin America,
and Incoming Call Center Management Conference & Exhibition, a U.S. trade show
and conference for the call center market.
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Publications. In 1998, we published 110 publications (a publication is a
magazine, newsletter, directory or other publication). Our largest magazines
include Travel Agent, Video Store, Pharmaceutical Technology, Hotel & Motel
MANAGEMENT and CADALYST.
Marketing services. Within each cluster, we offer our customers classified
advertising, direct mail services, reprints, database marketing, directories,
guides and reference books to support their business-to-business marketing
communications programs. Our marketing services, particularly our direct mail
services and directories, reinforce our efforts to cross-sell our events and
publications and, we believe, further our goal of providing our customers
"one-stop shopping" for their business-to-business marketing communications
needs.
Internet. We operate over 100 web sites which provide an interactive
component of our core products. These web sites promote our trade shows,
conferences and publications as well as our marketing services. Over 80% of
our web sites either enable exhibitors and attendees to register on-line for
our trade shows and conferences or permit prospective readers to subscribe on-
line to our controlled circulation publications. In addition, many of our web
sites provide attendees of our trade shows and conferences and readers of our
publications the opportunity to receive additional product information through
links to our customer's web sites.
Since May 31, 1996, Advanstar has completed 24 acquisitions and joint
ventures, 14 of which were completed in 1998. On April 30, 1998, we acquired
Men's Apparel Guild in California, Inc. ("MAGIC") for approximately $231.0
million (the "MAGIC Acquisition"). MAGIC is a wholly-owned subsidiary of
Advanstar and a core asset of our Retail, Hospitality & Fashion cluster. On
August 17, 1998, we acquired certain travel-related publications and trade
show assets ("Travel Agent") from Universal Media, Inc. for cash consideration
of $68.0 million (the "Travel Agent Acquisition"). In addition, in 1998, we
completed 12 other acquisitions or joint ventures (collectively, the "Other
Acquisitions") with purchase prices ranging from approximately $0.6 million to
approximately $20.0 million and aggregating approximately $89.1 million. The
MAGIC Acquisition, the Travel Agent Acquisition and the Other Acquisitions are
collectively referred to in this Annual Report as the "Acquisitions." The
Acquisitions have been accounted for under the purchase method of accounting.
The pro forma financial information for the year ended December 31, 1998
included in this Annual Report includes the historical operations of Advanstar
and gives effect to the Acquisitions and the divestiture of two trade
publications for consideration of approximately $4.3 million, as if they had
occurred on January 1, 1998.
Products and Services
We provide integrated solutions to our consumers' business-to-business
marketing communications needs. Within each cluster, we provide a
comprehensive set of industry-focused marketing communications products,
services and support, which include trade shows, conferences, publications and
marketing services, to facilitate our customers' business-to-business
marketing and communications programs. Our trade shows, conferences,
publications and marketing services position us to better serve our customers'
business-to-business marketing communications needs and to capture a larger
share of their marketing expenditures.
Trade Shows and Conferences. Our trade shows and conferences are an
essential part of our overall portfolio of products and services. In 1998, we
held 107 events. Our trade shows typically include an extensive conference
program, which provides a forum for the exchange and dissemination of
information relevant to a particular event niche. Our conferences typically
have one or more keynote speakers drawn from industry leaders.
The sales cycle for a future trade show typically begins shortly before the
current show, with pricing information, preliminary floor plans and exhibitor
promotion for the future show mailed in advance of the current show so that
selling for the future show can begin at the current show. Typically, this
"upfront" selling includes floor space reservations with exhibitors executing
a contract and making deposits for the future show. At many of our trade
shows, a commitment for a large portion of exhibit space for the next event is
reserved by the end of the current event. For example, at each of the MAGIC,
Dealernews and Call Center trade shows, over 70% of the exhibit space for the
future show is reserved by the end of the current show, and a portion of the
fees is
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collected shortly thereafter. The sales cycle continues with selling to new
exhibitors and collecting the balance of payments due. In general, we require
exhibitor payments in full prior to a trade show as a condition to
participation.
In addition to the sale of exhibit space, we market to exhibitors a wide
range of promotional opportunities to raise their visibility at an event.
These opportunities include directory and preview advertising, banners,
sponsorships of various functions and a wide variety of other products or
services. We also produce related conferences and workshops, which play a
crucial strategic role in trade show development. Conferences, workshops and
other ancillary forums all stimulate interest in the industry and drive
attendance at the trade show. While show attendance is typically free for
qualified attendees, participation in conferences at these shows can be a
significant revenue source.
Event promotion is undertaken through direct mail, using both in-house,
exhibitor-provided and rented lists of pre-qualified industry participants. In
those industry sectors for which we also have complementary publications, our
publications play a key role in event promotion by providing lists from
circulation files and editorial coverage for the upcoming show. Other industry
magazines may also be involved, as the goal of any event is to represent the
entire industry or market. The "show issue" of an industry magazine for a
related event is often the biggest issue of the year, as the advertisers want
to reinforce their show presence.
In operating trade shows and conferences, we function in a capacity similar
to a general contractor. Through our central trade show and conference
operations, we select and manage venues, hotels, and vendors for decorating,
registration, travel and housing, audio-visual services and other services. In
many cases, venue and hotel reservations are made several years in advance,
particularly for primary markets such as New York, Chicago, Las Vegas, Los
Angeles and San Francisco. While the production of a show may involve hundreds
of workers, most workers are employees of our subcontractor vendors. We employ
very few of the workers on-site.
Publications. Our publications generally are controlled circulation,
business-to-business trade magazines which are distributed free-of-charge to
qualified recipients. We build readership and maintain the quality and
quantity of our circulation based on delivering high quality, professional
coverage of relevant industry information. Because we offer our advertisers
access to a highly-targeted, industry-specific subscriber base with potential
buying influence, our advertisers place their ads in our publications to reach
their customers. Most of our magazines are published monthly, while certain
titles publish weekly or semi-monthly.
Recipients of our publications are targeted through market research designed
to determine the market coverage and purchasing authority desired by
prospective advertisers. Based on existing and acquired mail lists, the
targeted recipient is then solicited through promotions offering free
subscriptions to the relevant publications. High-quality circulation is
achieved when a high percentage of the circulation list is recently qualified
(within one or two years) and the publication is delivered at the direct
request of the recipient. Recipients are qualified and requalified on a
regular basis through direct mail, qualification cards included in the
publication and, increasingly, the Internet. We attract recipients and improve
the effectiveness of our advertising by maintaining and continuously improving
the quality of the editorial content of our publications.
Our advertising sales and editorial functions are dispersed throughout North
America, Asia, Europe and Brazil. Advertising sales are predominantly
conducted by our dedicated sales force. Editorial content for our publications
is primarily staff-written, with some editorial contribution by freelance
writers and industry or professional participants in selected markets.
Our advertising materials and editorial content are integrated in our
Duluth, Minnesota and Chester, England production facilities, where layout, ad
insertion and output to film is completed. All printing is outsourced to
vendors in various regions, but printing contracts are negotiated and managed
centrally. We purchase paper centrally through a relationship with one of the
industry's largest paper brokers. Paper is shipped directly from the mills to
the printers at our request. We maintain our own central U.S. fulfillment
operations in Duluth to
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generate mailing labels and mailing instructions for the printers. Our
production workforce is highly experienced and is based in relatively low-cost
locations in Duluth and Chester.
Marketing services. As a value-added supplement to our trade shows,
conferences and publications, we offer our customers a variety of marketing
services to support their business-to-business marketing communications
programs. We believe that our marketing services highlight our commitment to
be a "one-stop" provider of business-to-business marketing communications
solutions. Within each cluster, we provide classified advertising, direct mail
services, reprints, database marketing, directories, guides and reference
books. Our marketing services support our efforts to cross-sell events and
publications and customize our integrated products and services to capture a
larger share of our customers' marketing budgets. Our marketing services
business reuses our existing data content and utilizes a centralized telephone
sales approach.
Internet. In addition to our trade shows, conferences, publications and
marketing services, we are increasingly using the World Wide Web to deliver
our integrated business-to-business marketing communications solutions to our
customers. We operate a centralized web site that serves as a portal to our
event- and publication-related web sites. We also believe that the Internet
can be utilized on a customized basis to serve our customers' business-to-
business marketing communication needs more efficiently and effectively by
offering information 24 hours a day, seven days a week. For example, we are
completing development on a web site, Travel Agent University, to serve as an
on-line information and education resource for travel agents.
The following table summarizes our events, publications, marketing services
and Internet services offered in 1998:
[CHART APPEARS HERE]
RETAIL, HOSPITALITY AND HEALTHCARE, SCIENCE AND INFORMATION TECHNOLOGY MANUFACTURING AND
FASHION PHARMACEUTICALS AND COMMUNICATIONS PROCESSING
------------------------ ----------------------- ----------------------- ------------------------
Events 34 Trade Shows 6 Trade Shows 23 Trade Shows 13 Trade Shows
4 Conferences 9 Conferences 12 Conferences 1 Conference
(e.g., MAGIC, Artexpo (e.g. WORLDPHARM, (e.g. ICCM, Texepo (e.g., SCANTECH,
New York, IBS New York) Abilities Expo and iEC) Plastic Fairs, Sensors)
------------------------ ----------------------- ----------------------- -------------------------
Publications 15 Magazines 23 Magazines 16 Magazines 10 Magazines
13 Directories and Other 3 Directories and Other 4 Directories and Other 8 Directories and Other
Publications Publications Publications Publications
(e.g., Travel Agent, (e.g., Pharmaceutical (e.g., CADALYST, (e.g., Automatic ID
Video Store, Hotel Technology, LCwGC, America's Network) News, Medical Device
and Motel Management) Geriatrics) Technology)
------------------------ ----------------------- ----------------------- -------------------------
| | | |
-------------------------------------------------------------------------------------------------------
Marketing Services Classified Advertising, Direct Mail Services, Reprints, Database Marketing, Directories
Guides and Reference Books
-------------------------------------------------------------------------------------------------------
| | | |
-------------------------------------------------------------------------------------------------------
Internet 101 Web Sites
Advertising Sales, Subscriptions and Event Registration
-------------------------------------------------------------------------------------------------------
In addition to the four clusters above, we have grouped the industry sectors
in which we provide products and services but do not have a significant
industry presence into a Market Development cluster. In this cluster, in 1998,
we produced five trade shows, seven magazines and 11 directories and other
publications, provided marketing services and operated four web sites (which
are included in the number above).
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Our Markets
Our comprehensive business-to-business marketing communications solutions
for our four industry-related clusters--Retail, Hospitality & Fashion;
Healthcare, Science & Pharmaceuticals; Information Technology &
Communications; and Manufacturing & Processing--and our Market Development
cluster are set forth below.
Retail, Hospitality & Fashion
Our Retail, Hospitality & Fashion cluster serves the fashion, art, beauty,
travel and hospitality, entertainment and marketing, and motor vehicle
industry sectors. In 1998, we delivered our business-to-business marketing
communications solutions to our customers in these industry sectors through 34
trade shows, four conferences, 15 magazines, 13 directories and other
publications, 46 marketing services products and 25 related web sites. Our
leading trade shows and publications include:
. MAGIC (a trade show for the men's apparel industry), WWDMAGIC (a trade
show for the women's apparel industry) and MAGICKids (a trade show for
the children's apparel industry);
. Artexpo New York (a mid-market art show in the United States);
. IBS New York (a trade show and educational event on the East Coast for
the beauty salon market) and American Salon (a publication for the
professional beauty and hair care industry);
. Travel Agent (a leading trade periodical for the travel industry) and
Hotel & Motel MANAGEMENT (a publication for the hospitality management
market);
. Licensing International (a trade show for the merchandise licensing
industry); and
. Dealernews International Powersports Dealer Expo (a aftermarket
accessories trade shows in the United States targeted at motorcycle
dealers) and Dealernews (a magazine targeted at retailers in the
powersports market--motorcycles, snowmobiles and personal watercraft).
Healthcare, Science & Pharmaceuticals
Our Healthcare, Science & Pharmaceuticals cluster serves the healthcare,
science and pharmaceuticals industry sectors. In 1998, we delivered our
business-to-business marketing communications solutions to our customers in
these industry sectors through six trade shows, nine conferences, 23
magazines, three directories and other publications, 58 marketing services
products and 22 related web sites. We serve the healthcare sector in areas
such as geriatrics, dermatology, ophthalmology and veterinary medicine, the
science sector in areas such as spectroscopy and liquid and gas chromatography
and the pharmaceutical sector in areas such as research and development,
manufacturing, packaging and marketing. Our leading trade shows, conferences
and publications include:
. Abilities Expo (a consumer-oriented trade show targeting individuals with
disabilities);
. Geriatrics (a magazine for the geriatrics segment of the primary care
market), Formulary (a magazine for the drug selection market) and dvm THE
NEWSMAGAZINE OF VETERINARY MEDICINE (a magazine for veterinarians); and
. Pharmaceutical Technology (a publication targeted at pharmaceutical
scientists, engineers and operation managers) and PHARMACEUTICAL
EXECUTIVE (a magazine for pharmaceutical company product managers and
marketing professionals).
Information Technology & Communications
Our Information Technology & Communications cluster serves the information
technology, telecommunications and call center and computer telephony industry
sectors. In 1998, we operated in these industry sectors through 23 trade
shows, 12 conferences, 16 magazines, four directories and other publications,
31 marketing services products and 32 related web sites. In the information
technology sector, we are a highly targeted niche exhibition organizer and
publisher. The rapidly evolving, newly competitive telecommunications
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sector is one of our most important and fastest growing targeted markets.
Through its global reach and rapid growth, our call center and computer
telephony sector serves as a primary example of our successful market-focused
expansion strategy. Our leading trade shows, conferences and publications
include:
. On Demand Digital Printing & Publishing Conference and Expo (a trade show
and conference for the digital print and publishing market) and CADALYST
(a publication targeted at end users, managers and executives in the
computer-aided design and visualization market);
. the TeleCon shows (trade shows in the United States and Europe for the
video conferencing and long distance learning markets);
. Incoming Call Center Management Conference & Exhibition (a U.S. trade
show and conference for the call center market) and Call Center
Conference & Exposition (a U.S. trade show and conference for the
computer telephony market); and
. iEC, Internet and Electronic Commerce Conference and Exposition (a U.S.
trade show and conference serving the rapidly growing market for
electronic commerce through the Internet, produced in partnership with
The Gartner Group, Inc.).
Manufacturing & Processing
Our Manufacturing & Processing cluster serves certain niche market segments
of the applications technology industry sector and the OEM and processing
sector. In 1998, we delivered our business-to-business marketing
communications solutions to our customers in these industries through 13 trade
shows, one conference, ten magazines, eight directories and other
publications, 28 marketing services products and 17 related web sites. In the
application technology sector, we focus on the automatic data capture,
identification and tracking systems (bar coding, magnetic stripe, smart cards,
biometrics and the associated systems) market and geospacial market (global
positioning systems and geographic information systems). For the OEM and
processing sector, we offer exhibitions and conferences and publications
focused on equipment, materials and intermediate products used in the
manufacturing and processing of a wide range of products. Our leading trade
shows, conferences and publications include:
. SCANTECH and SCANTECH EXPO Europe (a U.S. and European trade show and
conference, respectively, for the automatic data capture, identification
and tracking systems market) and AUTOMATIC ID NEWS (a publication in the
U.S. and Europe for the automatic data capture, identification and
tracking systems market); and
. Medical Device Technology Trade Show & Conference (a European trade show
and conference for the medical device equipment market).
Market Development
We have grouped the balance of our products and services into a Market
Development cluster to focus on growing these products and services through
internal development or acquisitions. The Market Development cluster addresses
large and attractive market sectors in which we provide products and services
but do not have a significant presence. Our Market Development cluster serves
the energy, landscape, pest control, paper and building industry sectors. In
1998, we delivered our business-to-business marketing communications solutions
to our customers in these industry sectors through five trade shows, seven
magazines, 11 directories and other publications, 27 marketing services
products and four related web sites.
Competition
The market for our products and services is intensely competitive. The
competition is highly fragmented, both by product offering and geography. On a
global level, larger international firms operate in many geographic markets
and have broad product offerings in trade shows, conferences, publications and
marketing services. In several industries such as information technology and
healthcare, we compete with large firms with a single-industry focus. Many of
these large international and single-industry firms are better capitalized
than we are and have substantially greater financial and other resources than
we have.
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Within each particular industry sector, we also compete with a large number
of small to medium-sized firms. While most small to medium-sized firms operate
in a single geographic market, in some cases, our competitors operate in
several geographic markets. In the trade show and conference segment, we
compete with trade associations and, in several international markets, with
exposition hall owners and operators. Trade show and conference competition in
each market and country occurs on many levels. The venues and dates of trade
shows drive competition. Historically, successful shows have been held at
desirable locations and on desirable dates. Given the availability of
alternative venues and the ability to define events for particular market
segments, the range of competition for exhibitor dollars, sponsorships,
attendees and conferees is extensive. In the publications segment, we
typically have between two and five direct competitors which target the same
industry sector and many indirect competitors which define industry segments
differently than we do and thus may be alternatives for either readers or
advertisers.
Intellectual Property
We have developed strong brand awareness for our principal products and
services. Accordingly, we consider our trademarks, service marks, copyrights,
trade secrets and similar intellectual property as important to our success,
and we rely on trademark, servicemark, copyright and trade secret laws, as
well as licensing and confidentiality agreements, to protect our intellectual
property rights. We generally register our material trademarks and service
marks in the United States and in certain other key countries in which these
trademarks and service marks are used. Effective trademark, service mark and
trade secret protection may not be available in every country in which our
products and services are available.
Employees
As of December 31, 1998, we had approximately 1,300 full-time equivalent
employees. None of our U.S. employees is represented by a labor union. We
consider our relationships with our employees to be good.
Item 2. Properties
Our finance and administration, circulation, fulfillment, production and
other necessary operational support facilities are located in Duluth (MN). We
have executive marketing, sales and editorial offices in other cities in the
United States, including Boston (MA), Chicago (IL), Cleveland (OH), Coral
Gables (FL), Edison (NJ), Eugene (OR), Honolulu (HI), Los Angeles (CA),
Marrietta (GA), Milford (CT), New York (NY), Orlando (FL), Santa Ana (CA),
Sherman Oaks (CA), Washington (DC), Waterloo (IA) and Woodland Hills (CA). In
addition, we have offices in Sao Paulo and Rio de Janiero, Brazil; Toronto,
Canada; Hong Kong, China; Paris, France; Mexico City, Mexico; and Chester and
London, United Kingdom.
We generally lease our offices from third parties. In addition, we own our
operations offices in Duluth and Cleveland. We believe that our properties are
in good operating condition and that suitable additional or alternative space
will be available on commercially reasonable terms for future expansion.
Item 3. Legal Proceedings
We are not a party to any legal proceedings other than ordinary course,
routine litigation which is not material to our business, financial condition
or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted for a vote of the security holders of Advanstar
during the quarter ended December 31, 1998.
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PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Advanstar has not registered any class of its common equity under the
Securities Exchange Act of 1934, as amended. There is no established public
trading market for any class of Advanstar's common equity. As of March 31,
1999, there was one holder of Advanstar's common stock. Advanstar has never
declared or paid cash dividends to the holder of its common stock. Therefore,
except as set forth below, the information required by this Item 5 is not
applicable.
Recent Sales of Unregistered Securities.
In 1998, Advanstar issued the following securities that were not registered
under the Securities Act of 1933, as amended (the "Securities Act"):
On April 27, 1998, in 1998 Advanstar issued 5,833,333 shares of its common
stock, par value $.01 per share, to AHI Advanstar LLC for a total
consideration of $70,000,000.
In addition, in 1998, Advanstar issued options to purchase an aggregate of
360,162 shares of the Company's common stock under the 1996 Stock Option Plan
at a weighted average exercise price of approximately $12.83 (calculated as of
December 31, 1998). No shares have been issued by the Company pursuant to the
exercise of previously granted stock options.
No underwriters were involved in the foregoing sales of securities. Such
sales were made in reliance upon an exemption from the registration provisions
of the Securities Act set forth in Section 4(2) thereof relative to sales by
an issuer not involving any public offering or the rules and regulations
thereunder, or, in the case of options to purchase common stock, Rule 701 of
the Securities Act. All of the foregoing securities are deemed restricted
securities for the purposes of the Securities Act.
8
Item 6. Selected Financial Data
The selected historical consolidated statement of operations and other
financial data for the years ended December 31, 1994 and 1995 and the five
months ended May 31, 1996 are derived from the audited consolidated financial
statements of the Predecessor for such periods. The consolidated statement of
operations and other financial data of Advanstar for the seven months ended
December 31, 1996 and the years ended December 31, 1997 and 1998 are derived
from the audited consolidated financial statements of Advanstar included
elsewhere herein. The statement of operations and other financial data for the
combined year ended December 31, 1996 have been derived from the audited
consolidated financial statements of the Predecessor and Advanstar and are
unaudited and are not necessarily indicative of the results that can be
expected for future periods or the entire year. The information presented
below should be read in conjunction with Part II, Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the historical consolidated financial statements and the other financial
information appearing elsewhere herein.
Advanstar Predecessor
--------------------------------------------- ------------------------------
Year ended
Year ended December 31, Seven months Five months December 31,
-------------------------------- ended ended ------------------
Combined December 31, May 31,
1998 1997 1996(1) 1996 1996 1995 1994
--------- -------- ----------- ------------ ----------- -------- --------
(unaudited)
(in thousands, except per share data) (in thousands)
Statement of Operations
Data:
Net revenue............. $ 259,825 $187,656 $151,006 $ 82,720 $68,286 $145,300 $141,721
Operating expenses:
Cost of production,
selling and other
direct................ 169,035 126,339 97,395 53,560 43,835 96,942 107,906
General and
administrative........ 36,065 30,478 28,782 17,328 11,454 27,152 27,511
Non-cash stock option
compensation.......... 3,397 -- -- --
Amortization(2)........ 48,752 24,326 14,759 13,171 1,588 4,801 42,808
--------- -------- -------- -------- ------- -------- --------
Operating income
(loss)................. 2,576 6,513 10,070 (1,339) 11,409 16,405 (36,504)
Interest expense, net.. (27,862) (15,117) (14,474) (7,511) (6,963) (19,613) (18,034)
Other income (expense),
net................... (1,886) 292 (465) (488) 23 2,230 (4,363)
Provision for income
taxes................. 1,264 583 1,089 1,076 13 16 21
--------- -------- -------- -------- ------- -------- --------
Net income (loss)....... $ (28,436) $ (8,895) $ (5,958) $(10,414) $ 4,456 $ (994) $(58,922)
========= ======== ======== ======== ======= ======== ========
Net loss per share,
basic and diluted...... $ (1.92) $ (0.82) $ (0.61)
Weighted average shares
outstanding, basic and
diluted................ 14,826 10,884 9,700
Other Financial Data:
EBITDA(3)............... $ 53,828 $ 34,039 $ 28,209 $ 13,781 $14,428 $ 24,611 $ 9,573
EBITDA margin(3)........ 20.7% 18.1% 18.7% 16.7% 21.1% 16.9% 6.7%
Non-cash stock option
compensation........... $ 3,397 $ -- $ -- $ --
Cash flows provided by
(used in):
Operating activities... 32,653 12,592 11,605 12,616 $(1,011) $ 3,907 $ 1,350
Investing activities... (358,261) (33,323) (19,198) (18,924) (274) 4,432 (2,694)
Financing activities... 332,600 25,224 8,171 5,944 2,227 (14,658) 4,949
Depreciation............ 3,071 3,200 3,380 1,949 1,431 3,405 3,269
Amortization(2)......... 48,752 24,326 14,759 13,171 1,588 4,801 42,808
Capital expenditures.... 4,154 2,260 1,145 780 365 1,451 2,530
Balance Sheet Data (at
end of period):
Total assets............ $ 660,226 $298,497 $277,173 $ 79,098 $ 95,593
Long-term debt,
including current
maturities............. 426,868 164,223 151,000 173,058 185,099
- --------
(1) Combines the five months ended May 31, 1996 of the Predecessor with the
seven months ended December 31, 1996 of Advanstar. On May 31, 1996, the
HFCP III Acquisition was consummated. Accordingly, certain information
provided herein for the Predecessor is not comparable to the statement of
operations and other financial data of Advanstar due to the effects of
certain purchase accounting adjustments and the financing
9
of the HFCP III Acquisition. The statement of operations and other
financial data for the Predecessor for the five months ended May 31, 1996
have been combined for presentation purposes with the statement of
operations and other financial data of Advanstar for the seven months ended
December 31, 1996, without giving effect to purchase accounting or the
impact of the financing of the HFCP III Acquisition and is not in
accordance with GAAP.
(2) Amortized assets include identifiable intangibles such as advertiser,
exhibitor and circulation lists, assembled work force and other
intangibles as well as goodwill. Amortization for 1994 reflects the
amortization of reorganization value in excess of identifiable assets as
required as a result of the Predecessor's emergence on January 23, 1992
from its prepackaged Chapter 11 filing. The Predecessor recorded $94.4
million of reorganization value in excess of identifiable tangible and
intangible assets and amortized it over three years. Amortization
increased for the seven months ended December 31, 1996 and the years ended
December 31, 1997 and 1998 as a result of the HFCP III Acquisition
completed in May 1996. Purchase price in excess of fair market value of
tangible and intangible assets acquired is allocated to goodwill.
Intangibles are being amortized over lives ranging from one to 23 years.
(3) "EBITDA" is defined as operating income plus amortization and
depreciation. EBITDA does not represent, and should not be considered, an
alternative to net income or cash flow from operations as determined 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 serve and/or incur indebtedness and
is used by many other companies. Our lenders have indicated that the
amount of indebtedness we will be permitted to incur will be based, in
part, on the Company's EBITDA. EBITDA does not take into account our
working capital requirements, debt service requirements and other
commitments and, accordingly, is not necessarily indicative of amounts
that may be available for discretionary uses. Set forth below is a
reconciliation of Advanstar's operating income, as reported, to EBITDA for
the periods indicated:
Advanstar Predecessor
----------------------------------------- ----------------------------
Year ended
Year ended December 31, Seven months Five months December 31,
---------------------------- ended ended ----------------
Combined December 31, May 31,
1998 1997 1996(1) 1996 1996 1995 1994
------- ------- ----------- ------------ ----------- ------- --------
(unaudited)
(in thousands) (in thousands)
Operating income
(loss)................. $ 2,576 $ 6,513 $10,070 $(1,339) $11,409 $16,405 $(36,504)
Depreciation and
amortization........... 51,823 27,526 18,139 15,120 3,019 8,206 46,077
Minority interest....... (571)
EBITDA.................. $53,828 $34,039 $28,209 $13,781 $14,428 $24,611 $ 9,573
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
This discussion and analysis of Advanstar's financial condition and results
of operations should be read in conjunction with the Combined and Consolidated
Financial Statements and the related notes thereto included elsewhere in this
Annual Report.
The 1996 combined financial data were accumulated from the historical
financial statements of the Predecessor for the period from January 1, 1996 to
May 31, 1996 and of Advanstar for the period from June 1, 1996 to December 31,
1996. See Part II, Item 6, "Selected Financial Data--note 1." The combined
financial data is presented for comparative purposes only, is not in
accordance with GAAP and does not purport to reflect the operating results of
Advanstar as if Advanstar had been controlled by HFCP III for the full year.
Advanstar reports its business in three segments: trade shows and
conferences, which consists primarily of the management of expositions and
seminars held in convention and conference centers; publications, which
consists primarily of the creation and distribution of controlled circulation
trade, business and professional
10
magazines; and marketing services, which consists primarily of sales of a
variety of direct mail and database products, magazine editorial reprints, and
directory and classified advertising.
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. For example, over 70% of
exhibit space at our MAGIC, Dealernews and Call Center shows is reserved prior
to the end of the preceding show. 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. 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, readership studies 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,
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 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. General and administrative costs are
not allocated to the segments.
Publications. Costs incurred by the 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. General and administrative
costs are not allocated to the segments.
Marketing services. Costs of the marketing services segment include printing
and distribution costs, database administration fees and staff salaries and
related payroll taxes and benefits. General and administrative costs are not
allocated to the segments.
11
Selected Financial Data
Year ended December 31,
----------------------------
1998 1997 1996
-------- -------- --------
(in thousands)
Net revenue
Trade shows and conferences.................... $113,066 $ 61,608 $ 36,418
Publications................................... 130,442 111,611 101,774
Marketing services and other................... 16,317 14,437 12,814
-------- -------- --------
Total net revenues........................... 259,825 187,656 151,006
Production, selling and other direct expenses
Trade shows and conferences.................... 68,538 41,809 21,932
Publications................................... 92,727 77,810 69,362
Marketing services and other................... 7,770 6,720 6,101
-------- -------- --------
Total production, selling and other direct
expenses.................................... 169,035 126,339 97,395
General and administrative expenses.............. 36,065 30,478 28,782
Non-cash stock option compensation............... 3,397 -- --
Amortization..................................... 48,752 24,326 14,759
-------- -------- --------
Operating income............................. 2,576 6,513 10,070
Other income (expense):
Interest expense (net)......................... (27,862) (15,117) (14,474)
Other income (expense)......................... (1,886) 292 (465)
Provision for income taxes....................... 1,264 583 1,089
-------- -------- --------
Net income (loss)................................ $(28,436) $ (8,895) $ (5,958)
======== ======== ========
EBITDA(1)........................................ $ 53,828 $ 34,039 $ 28,209
- --------
(1) "EBITDA" is defined as operating income plus amortization and
depreciation. For 1998, operating income was adjusted by $0.6 million
related to minority interest to calculate EBITDA. There was no minority
interest in 1996 and 1997. EBITDA does not represent, and should not be
considered, 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 lenders have
indicated that the amount of indebtedness we will be permitted to incur
will be based, in part, on our EBITDA. EBITDA does not take into account
our working capital requirements, debt service requirements and other
commitments and, accordingly, is not necessarily indicative of amounts
that may be available for discretionary uses.
1998 Compared to 1997
Revenue
Revenue increased $72.1 million or 38.5% from $187.7 million in 1997 to
$259.8 million in 1998.
Revenue from trade shows and conferences increased $51.5 million or 83.5%
from $61.6 million to $113.1 million in 1998. The increase in revenue was
attributable to trade shows and conferences acquired in 1998, new launches
such as Healthcare Information Technology, WORLDPHARM and Call Centre
Solutions and the growth of our existing product portfolio (including revenue
generated by our plastics events which were not held in 1997), offset by the
discontinuation in 1998 of certain trade shows and conferences held in 1997.
In 1998 Advanstar acquired MAGIC, TeleCon, Telexpo, SCANTECH and eight other
trade shows and conferences.
Revenue from publications increased $18.8 million or 16.9% from $111.6
million to $130.4 million in 1998. The increase in revenue was attributable
primarily to acquisitions in 1998 and a modest increase in 1998 of
12
advertising pages and advertising revenue per page, partially offset by the
sale or discontinuation in 1998 of certain magazines published in 1997. In
1998, Advanstar acquired Travel Agent and six other trade publications,
including TeleProfessional and Post. Advanstar also launched several other
publications in 1998, which increased revenue.
Revenue from marketing services increased $1.9 million or 13.0% from $14.4
million to $16.3 million in 1998. Growth in revenue from list rentals,
classified advertising and reprints was primarily responsible for the
increase.
Production, selling and other direct expenses
Production, selling and other direct expenses increased $42.7 million or
33.8% from $126.3 million in 1997 to $169.0 million in 1998.
Trade shows and conferences production, selling and other direct expenses
increased $26.7 million or 63.9% from $41.8 million to $68.5 million in 1998.
This increase was primarily due to increases in operation, promotion and
management costs associated with acquisitions completed in 1998 as well as
costs attributable to new launches and growth of existing events.
Publications production, selling and other direct expenses increased $14.9
million or 19.2% from $77.8 million to $92.7 million in 1998. Direct costs
related to acquisitions of publications in 1998 were primarily responsible for
the increase.
Marketing services production, selling and other direct expenses increased
$1.1 million or 15.6% from $6.7 million to $7.8 million in 1998. This increase
was primarily due to increased selling expenses incurred as a result of
Advanstar's effort to market these products as well as increased costs of
production due to the growth in those respective product lines.
General and administrative expenses
General and administrative expenses increased $9.0 million or 29.5% from
$30.5 million to $39.5 million in 1998. This increase was primarily
attributable to overheads acquired with acquisitions made in 1998 and a $3.4
million non-cash charge related to Advanstar's stock option plan. Advanstar
also incurred incremental expenses relating to the establishment of
Advanstar's Latin American operations and to the expansion of infrastructure
to support the new industry-focused organization.
Amortization
Amortization expense increased $24.5 million from $24.3 million to $48.8
million in 1998 primarily due to increased amortization of intangible assets
related to the acquisitions completed in 1998 and a $12.7 million write-off of
impaired intangible assets related to three discontinued trade shows and two
discontinued publications as well as the replacement of certain software
system applications.
Operating income
Operating income decreased $3.9 million or 60.4% from $6.5 million to $2.6
million in 1998 due primarily to increased amortization and the incurrence of
a $3.4 million charge for non-cash, stock option-related compensation expense,
partially offset by improved operating performance.
Interest expense
Net interest expense increased $12.8 million or 84.3% from $15.1 million to
$27.9 million in 1998, due to the incurrence of additional indebtedness
necessary to fund acquisitions made in 1998. In April 1998, Advanstar issued
the Notes (as defined below) in the amount of $150.0 million at a fixed rate
of 9.25% to fund a portion of the MAGIC Acquisition. Interest on the Notes is
payable semi-annually with the first payment made on November 1, 1998.
13
Net loss
Net loss increased $19.5 million from $8.9 million to $28.4 million in 1998.
In addition to the changes described above, the increase was due to the write-
off of $4.1 million of certain unamortized intangibles relating to the
refinancing of Advanstar's credit facilities as part of the MAGIC Acquisition,
partially offset by a gain on the disposition of certain publishing assets of
$2.2 million.
EBITDA
EBITDA increased $19.8 million or 58.1% from $34.0 million to $53.8 million
in 1998. The increase was due primarily to the increase in revenue and
resulting increase in operating performance as described above.
1997 Compared to Combined 1996
Revenue
Revenue increased $36.7 million or 24.3% from $151.0 million in 1996 to
$187.7 million in 1997.
Revenue from trade shows and conferences increased $25.2 million or 69.2%
from $36.4 million to $61.6 million in 1997. The increase in revenue was
primarily attributable to acquisitions as well as growth in our existing
business and specifically in U.S. and European call center trade shows and
conferences, partially offset by the absence of three events for the plastics
industry in 1997. In 1997, Advanstar acquired the Expocon trade shows and the
Hair Color conference.
Revenue from publications increased $9.8 million or 9.7% from $101.8 million
to $111.6 million in 1997. The increase in revenue resulted from the Premier
Hotels & Resorts and TelePress acquisitions completed during 1997 and the
improved operating performance of Telecom Asia and other telecommunications
and information technology publications. These increases were partially offset
by the discontinuance of a small publication in late 1996.
Revenue from marketing services increased in $1.6 million or 12.7% from
$12.8 million to $14.4 million in 1997. Growth in revenue from database
product marketing and direct mail was primarily responsible for the increase.
Production, selling and other direct expenses
Production, selling and other direct expenses increased $28.9 million or
29.7% from $97.4 million in 1996 to $126.3 million in 1997.
Trade shows and conferences production, selling and other direct expenses
increased $19.9 million or 90.6% from $21.9 million to $41.8 million in 1997.
This increase was primarily due to operation, promotion and management costs
associated with the 1997 acquisitions and increases in direct costs due to
growth in the size and revenue of existing trade shows and conferences.
Publications production, selling and other direct expenses increased $8.4
million or 12.2% from $69.4 million to $77.8 million in 1997. This increase is
primarily a result of increased expenses relating to the operations of
businesses acquired during late 1996 and 1997, and to a lesser extent,
increased investment in circulation, sales staffing and promotion and
marketing.
Marketing services production, selling and other direct expenses increased
$0.6 million or 10.1% from $6.1 million to $6.7 million in 1997. This increase
was primarily due to increased selling expenses incurred as a result of the
Company's effort to market these products.
14
General and administrative expenses
General and administrative expenses increased $1.7 million or 5.9% from
$28.8 million to $30.5 million in 1997. Most of this increase was due to
incremental general and administrative expenses relating to the operations of
acquired businesses and related expansion of infrastructure, primarily in
Brazil and Hong Kong.
Amortization
Amortization expense increased $9.5 million or 64.8% from $14.8 million to
$24.3 million in 1997 primarily due to increased amortization of intangible
assets related to the acquisitions made in 1997.
Operating income
Operating income decreased $3.6 million or 35.3% from $10.1 million to $6.5
million in 1997 primarily due to the $6.8 million increase in non-cash
amortization resulting from the HFCP III Acquisition. Operating income before
amortization increased $6.0 million or 24.2% from $24.8 million to $30.8
million in 1997 due to the revenue and operating performance improvements
discussed above.
Interest expense
Net interest expense increased $0.6 million or 4.4% from $14.5 million to
$15.1 million in 1997 due to the incurrence of additional indebtedness
necessary to partially fund acquisitions completed in late 1996 and early
1997.
Net loss
Net loss increased $2.9 million or 49.3% from $6.0 million to $8.9 million
in 1997 primarily due to increased amortization resulting from the HFCP III
Acquisition, partially offset by improvements in operating income before
amortization.
EBITDA
EBITDA increased $5.8 million or 20.7% from $28.2 million to $34.0 million
in 1997. This increase was primarily due to a $6.0 million increase in
operating income before amortization, partially offset by a decrease of $0.2
million in depreciation.
Liquidity and Capital Resources
Historically, our financing requirements have been funded through cash
generated by operating activities, the sale of additional shares of common
stock to existing stockholders, revolving and term loan borrowings under
revolving credit facilities and, in 1998, term loan borrowings and the
issuance of $150.0 million of the Notes.
Cash flows from operating activities. Net cash provided by operations
increased $20.1 million or 159.3% from $12.6 million to $32.7 million in 1998.
The increase was due to an increase in net loss of $19.5 million as a result
of higher interest expenses associated with financing the MAGIC Acquisition,
adjusted for the gain on sale of assets of $2.2 million, the increase of $12.8
million of depreciation and amortization, a non-cash charge of $11.5 million
related to impaired assets and a decrease in working capital items of $9.7
million relating primarily to higher deferred revenue balances from MAGIC and
other acquisitions. Additionally, in 1998, a non-cash charge of $3.4 million
was taken as compensation expense to reflect the value of certain stock
options held by senior management.
Cash flows from investing activities. Net cash used in investing activities
increased $325.0 million from $33.3 million to $358.3 million in 1998. The
increase is primarily due to cash used for the Acquisitions in 1998, net of
acquired working capital, offset by proceeds of $4.3 million from the sale of
certain publishing properties in 1998, and an increase of $1.9 million in
capital expenditures.
15
Cash flows from financing activities. Net cash provided by financing
activities increased $307.4 million from $25.2 million to $332.6 million in
1998. The increase is due primarily to the refinancing of Advanstar's credit
facility in April 1998 and August 1998 (consisting of $250.0 million of senior
term loans and a $60.0 million revolving credit facility replacing outstanding
senior term and revolver loans of $187.0 million), issuance of $150.0 million
of the Notes, and the sale of additional shares of common stock for $71.0
million to existing stockholders to finance the Acquisitions in 1998.
Capital expenditures. Capital expenditures increased $1.9 million from $2.3
million to $4.2 million in 1998. The increase was due primarily to upgrades
and expansion of certain of Advanstar's computer networks and servers as well
as expenditures for additional exposition wall and lighting systems. Annual
capital expenditures have historically included approximately $1.5 million for
routine replacement or maintenance level requirements primarily for
expenditures related to the Company's desktop computers and management
information systems. Capital expenditures have been financed by Advanstar's
cash flows from operations. Management believes that Advanstar's operating
cash flows will be sufficient to fund anticipated levels of capital
expenditures.
Management expects Advanstar's primary source of liquidity will be cash flow
from operations. Advanstar also has a $60.0 million revolving credit line
under its credit facility available for funding capital expenditures, working
capital needs, acquisitions or for other general corporate purposes. As of
December 31, 1998, Advanstar had $30.4 million of availability under the
revolving credit line. Advanstar generally operates 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.
Interest payments on the Notes and interest and principal payments under
Advanstar's credit facility will represent significant liquidity requirements
for Advanstar. The senior term debt under the credit facility consists of two
tranches, (i) $100.0 million of tranche A term loans amortizing over 5.5 years
and maturing October 31, 2003 and (ii) $150.0 million of tranche B term loans
with modest amortization over the initial 5.5 years of its term maturing with
balloon payments in 2004 and 2005. The $60.0 million revolving credit facility
matures on October 31, 2003. The interest rates under our revolving credit
facility fluctuate and significant increases in LIBOR could adversely impact
Advanstar's liquidity. To mitigate such risk, Advanstar has capped its
interest rate exposure by fixing interest rates on approximately $225.0
million of its total long-term debt by the issuance of the Notes and the
purchase of interest rate cap agreements setting caps ranging from 8.0% to
8.5%.
Management believes that cash flow from operations and borrowings under the
revolving credit facility will provide adequate funds for its working capital
needs, planned capital expenditures, debt service obligations (including the
Notes) and other needs. Management believes such liquidity also will enable
Advanstar to make selective acquisitions to the extent of available free cash
flow and remaining availability under the revolving credit facility. There can
be no assurance that Advanstar's business will generate sufficient revenue
growth, or that future borrowings will be available to enable Advanstar to
service its indebtedness and, or to fund its other liquidity needs. See this
item, "--Factors That May Affect Future Results."
Year 2000
Advanstar has conducted a review of its computer systems and software
infrastructure to identify risks related to processing Year 2000 information,
and has begun implementing its plan to correct any failures to be Year 2000
compliant. Advanstar believes that the implementation will be completed by
September 1999 and that the total cost to implement its plan should be no more
than $4.0 million, of which approximately $0.8 million had been incurred as of
December 31, 1998. Because most of these costs relate to the purchase of
capital equipment, most of these costs will be capitalized. Management
believes that, with modifications or upgrades to existing software, Year 2000
compliance will not pose significant operational issues. Advanstar is also
conducting a review of its key vendors' and suppliers' Year 2000 compliance.
Based on its review and
16
assessment, management does not believe that any Year 2000 issues will have a
material adverse effect on its business, financial condition or results of
operations. If Advanstar is not able to resolve any unforeseen Year 2000
issues, there could be a delay in providing services to subscribers of the
Company's publications, and certain trade show operations could be hindered.
The outcome of Advanstar's Year 2000 readiness review is subject to a number
of risks and uncertainties, some of which are beyond our control.
Market Risk
Advanstar is exposed to various market risks, including changes in foreign
currency exchange rates and interest rates. Market risk is the potential loss
arising from adverse changes in market rates and prices, such as foreign
currency exchange and interest rates. Advanstar does not enter into
derivatives or other financial instruments for trading or speculative
purposes.
Interest. Advanstar relies significantly on long-term variable and fixed-
rate debt in its capital structure. Advanstar uses interest rate caps to
manage a portion of the floating-rate balance of its interest sensitive
liabilities. Advanstar's outstanding interest-sensitive financial instruments
as of December 31, 1998, are reflected in note 4 of the notes to the
Consolidated Financial Statements. In addition, Advanstar has $150.0 million,
face value, of 9 1/4% Senior Subordinated Notes due 2008.
At December 31, 1998, the carrying value of Advanstar's fixed-rate long-term
debt approximated its fair value. Market risk related to Advanstar's fixed-
rate debt is estimated as the potential increase in fair value resulting from
a hypothetical one-half percent decrease in interest rates, and amounts to
approximately $4.9 million. Market risk related to Advanstar's variable-rate
debt is estimated as the potential decrease in pre-tax earnings resulting from
a hypothetical one-half percent increase in interest rates. If interest rates
rise immediately by one-half percent, pre-tax earnings will decrease by $1.4
million in 1999.
Currencies. Advanstar maintains assets and operations in Europe, South
America and Asia. As a result, exposure to foreign currency gains and losses
exists. The subsidiaries and affiliates of Advanstar also purchase and sell
products and services in various currencies. As a result, Advanstar may be
exposed to cost increases relative to the local currencies in the markets in
which it sells. For 1998, a hypothetical 10% strengthening of the U.S. dollar
relative to the currencies of foreign countries in which Advanstar operates
was not material.
Factors That May Affect Future Results
This Annual Report, other reports, and communications to securityholders, as
well as oral statements made by the officers or agents of Advanstar may
contain forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended, made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. These statements may related
to, among other things, Advanstar's future revenues, operating income, EBITDA
and the plans and objectives of management. All forward-looking statements
included herein are made as of the date hereof, based on information available
to Advanstar as of the date thereof, and Advanstar assumes no obligation to
update any forward-looking statement. These forward-looking statements involve
risks and uncertainties, and actual results could differ materially from those
discussed in the forward-looking statements. Factors that may cause such
variation are discussed below, as well as in Advanstar's Registration
Statement on Form S-4 (File No. 333-57201) under the Securities Act of 1933,
as amended, and Advanstar's other reports filed with the Securities and
Exchange Commission.
We have substantial indebtedness that could affect our operations and
results.
As of December 31, 1998, our outstanding indebtedness equaled approximately
$426.9 million and represented approximately 76.0% of our total
capitalization. Our leveraged financial position creates the risks that:
. we will not obtain financing for acquisitions, capital expenditures,
working capital or general corporate purposes when needed in the future;
17
. we will divert funds otherwise available for operations or other purposes
to pay our debt service obligations;
. we will be more vulnerable to changing market conditions than many of our
competitors that are less leveraged than we are; and
. our debt service obligations will increase if interest rates increase
because some of our indebtedness bears variable interest rates.
In the past, we have paid our debt service obligations with cash flow from
operations. In the future, we may not generate cash flow sufficient to pay our
debt service obligations and pursue our present operating and growth
strategies. Our financial and operating performance depends on the economy and
other factors over which we have no control. If we cannot pay our debt service
obligations, we will reconsider our present operating and growth strategies
and may be required to sell material assets or operations to pay our
obligations. In addition, we may sell shares of our capital stock to pay these
obligations, and if we do, our stockholders may experience dilution.
The terms of our indebtedness may restrict our ability to pursue our
operating and growth strategies.
The terms of our indebtedness impose operating restrictions on our ability
to borrow, make investments, capital expenditures and distributions and pursue
other corporate objectives. In addition, our credit facility requires us to
satisfy specified financial covenants. Our ability to comply with such
provisions depends in part on factors over which we have no control. These
operating restrictions could adversely affect our ability to pursue our growth
and expansion strategy. If we breach any of our financial covenants, our
creditors could declare all amounts owed to them to be immediately due and
payable. We may not have available funds sufficient to repay the amounts
declared due and payable and may be required to sell assets to repay in full
such amounts. Our credit facility is secured by substantially all of our
assets. If we cannot repay all amounts that we have borrowed under our credit
facility, our senior lenders could proceed against our assets.
The Notes and the Guarantees are unsecured and subordinated.
The Notes are unsecured. The payment of principal of and interest on, and
any premium or other amounts owing in respect of, the Notes is subordinated to
the prior payment in full of all of our existing and future senior
indebtedness, including all amounts owing under the Amended Credit Facility
which are secured by a lien on substantially all of the assets of Advanstar.
The Notes rank pari passu with any future senior subordinated indebtedness of
our wholly-owned subsidiary, Advanstar Communications Inc. ("Communications"),
and senior to all subordinated obligations of Communications. Consequently, in
the event of a bankruptcy, liquidation, dissolution, reorganization or similar
proceedings with respect to Communications or if an event of default occurs
under the Amended Credit Facility, our assets will be available to pay
obligations on the Notes only after senior indebtedness has been paid in full.
We give no assurance that there will be sufficient assets, after payment in
full of our senior indebtedness, to pay amounts due on all or any of the
Notes.
The Notes are guaranteed (the "Guarantees") by Advanstar, Inc. and certain
of its indirect wholly-owned subsidiaries, Art Expositions International,
Inc., Expocon Management Associates, Inc., MAGIC, Magic Kids, Inc. and Applied
Business TeleCommunications (the "Subsidiary Guarantors" and together with
Advanstar, the "Guarantors"). The Guarantees are unsecured, senior
subordinated obligations of the Guarantors, subordinated in right of payment
to all of the Guarantor's existing and future senior indebtedness including
the guarantees of indebtedness under the Amended Credit Facility.
The indebtedness evidenced by the Notes is subject to fraudulent conveyance
review.
The incurrence of indebtedness (such as the Notes) is subject to review
under relevant federal and state fraudulent conveyance and similar statutes in
a bankruptcy or reorganization case or a lawsuit by or on behalf of creditors
of Advanstar. Under these statutes, a court could void or subordinate the
obligations in question if that
18
court determined that obligations were incurred with the intent of hindering,
delaying or defrauding present or future creditors, that Advanstar received
less than a reasonably equivalent value or fair consideration for those
obligations and, at the time of the incurrence of the obligations the obligor
either (1) was insolvent or rendered insolvent by reason thereof, (2) was
engaged or was about to engage in a business or transaction for which its
remaining unencumbered assets constituted unreasonably small capital or (3)
intended to or believed that it would incur debts beyond its ability to pay
such debts as they matured or became due. The measure of insolvency for
purposes of a fraudulent conveyance claim varies depending upon the law of the
jurisdiction being applied. Generally, however, a company would be considered
insolvent at a particular time if the sum of its debts at that time is greater
than the then fair saleable value of its assets or if the fair saleable value
of its assets at that time is less than the amount that would be required to
pay its probable liability on its existing debts as they become absolute and
mature. Advanstar believes that it is (1) not insolvent, (2) in possession of
sufficient capital to run its business effectively and (3) incurring debts
within its ability to pay as the same mature or become due.
In addition, the Guarantees by the Subsidiary Guarantors may be subject to
review under relevant federal and state fraudulent conveyance and similar
statutes in a bankruptcy or reorganization case or a lawsuit by or on behalf
of creditors of any of the Subsidiary Guarantors. In such a case, the analysis
set forth above would generally apply, except that the Guarantees by the
Subsidiary Guarantors could also be subject to the claim that, since the
Guarantees were incurred for the benefit of Advanstar (and only indirectly for
the benefit of the Subsidiary Guarantors), the obligations of the Subsidiary
Guarantors thereunder were incurred for less than reasonably equivalent value
or fair consideration. A court could void any of the Subsidiary Guarantors'
obligations under such Guarantees, subordinate the Guarantees by the
Subsidiary Guarantors to other indebtedness of the Subsidiary Guarantors or
take other action detrimental to the holders of the Notes.
The Guarantees by the Subsidiary Guarantors may not be enforceable.
We derive certain of our operating income from our direct and indirect
subsidiaries. The holders of the Notes have no direct claim against such
subsidiaries other than a claim created by one or more of the Guarantees by
the Subsidiary Guarantors, which may be subject to legal challenge in a
bankruptcy or reorganization case or a lawsuit by or on behalf of creditors of
a Subsidiary Guarantor. If such a challenge were upheld, the Guarantees by the
Subsidiary Guarantors would be invalid and unenforceable. To the extent that
any Subsidiary Guarantee is not enforceable, the rights of the holders of the
Notes to participate in any distribution of assets of any Subsidiary Guarantor
upon liquidation, bankruptcy, reorganization or otherwise will, as is the case
with other unsecured creditors of Advanstar, be subject to prior claims of
creditors of that Subsidiary Guarantor. We rely in part upon distributions
from our subsidiaries to generate the funds necessary to meet our obligations,
including the payment of principal of and interest on the Notes. The Indenture
contains covenants that restrict the ability of our indirect subsidiaries to
enter into any agreement limiting distributions and transfers, including
dividends. The ability of our indirect subsidiaries to make distributions may
be restricted by among other things, applicable state corporate laws and other
laws and regulations or by terms of agreements to which they are or may become
a party. In addition, we make no assurance that such distributions will be
adequate to fund the interest and principal payments on the Amended Credit
Facility and the Notes when due.
We have a history of net losses.
We had net losses of approximately $8.9 million for the year ended December
31, 1997 and $28.4 million for the year ended December 31, 1998. We cannot
assure you that we will report net income in the future.
We depend on our customers' discretionary marketing and advertising budgets.
For the year ended December 31, 1998, we derived approximately 45.5% of our
total pro forma revenue from trade shows and conferences and approximately
46.5% of our total pro forma revenue from advertising sales. If a general
economic downturn or a recession occurs in the United States, our customers
may reduce their marketing and advertising budgets. Any material decrease in
marketing budgets could reduce the demand for exhibition space, attendance at
our trade shows and conferences or the demand for advertising space in our
19
publications. As a result, our revenue and our cash flow from operations would
decrease significantly. In addition, our integrated marketing strategy could
be materially adversely affected.
We depend on securing desirable dates and locations for our trade shows and
conferences.
The date and location of a trade show or a conference impact its
profitability and prospects. The market for desirable dates and locations is
highly competitive. If we cannot secure desirable dates and locations for our
trade shows and conferences, their profitability and future prospects would
suffer, and our financial condition and results of operations would be
materially adversely affected. In general, we maintain multi-year reservations
for our trade shows and conferences. Consistent with industry practice, we do
not pay for these reservations, and these reservations are not binding on the
facility owners until we execute a contract with the owner. We typically sign
contracts that guarantee the right to certain venues or dates for only one
year. Therefore, our multi-year reservations may not lead to binding contracts
with facility owners. In addition, because trade shows and conferences are
held on pre-scheduled dates at specific locations, the success of a particular
trade show or conference depends upon events outside of our control, such as
natural catastrophes, labor strikes and transportation shutdowns.
A significant portion of our revenue and EBITDA is generated from the MAGIC
trade shows.
For the year ended December 31, 1998, the MAGIC trade shows would have
represented 14.6% of our total pro forma revenue and 35.5% of our total pro
forma EBITDA. We expect that the MAGIC trade shows will continue to represent
a significant portion of our overall revenue and EBITDA in the future.
Therefore, a significant decline in the performance of one or both of the
MAGIC trade shows could have a material adverse effect on our financial
condition and results of operations.
Any significant increase in paper or postage costs would cause our expenses
to increase significantly and materially adversely affect us.
Because of our print products, direct mail solicitations and product
distributions, we incur substantial costs for paper and postage. We do not use
forward contracts to purchase paper, and therefore are not protected against
fluctuations in paper prices. In general, we use the United States Postal
Service to distribute our print products and mailings. United States Postal
Service rates increase periodically. If we cannot pass increased paper and
postage costs through to our customers, our financial condition and results of
operations would be materially adversely affected.
The market for our products and services is intensely competitive.
The competition for our products and services is intense and highly
fragmented, both by product offering and geography. See Part I, Item 1,
"Business--Competition."
We depend in part on new product introductions.
Our future success will depend in part upon our ability to monitor rapidly
changing market trends, to adapt our events and publications to meet the
evolving needs of existing and emerging target audiences and to offer new
events and publications that gain market acceptance by addressing the needs of
specific audience groups within our target markets. The process of researching
and developing, launching and establishing profitability for a new event or
publication is risky and costly. We generally incur initial operating losses
when we introduce new events and publications. Our efforts to introduce new
events or publications may not ultimately be successful or profitable. In
addition, we have invested in, and intend to continue to invest in, the
development of Internet services, which are currently generating losses. The
Internet is still in the early stages of development as a commercial medium,
and these services may not prove to be successful or profitable. We expense as
incurred costs related to the development of new events and publications.
Therefore, our quarterly and annual operating results may be adversely
affected by the number and timing of new product launches.
20
Our growth strategy to identify and consummate acquisitions entails certain
risks.
We intend to continue to grow in part through strategic acquisitions. This
growth strategy entails risks inherent in identifying desirable acquisition
candidates and in integrating the operations of acquired businesses. In
addition, we may not be able to finance the acquisition of a desirable
candidate or to pay as much as our competitors because of our leveraged
financial condition or general economic conditions. Our management will
continue to devote substantial attention to the identification of acquisition
candidates and the integration of acquired businesses. The diversion of our
management's attention and the difficulties that we may encounter in
integrating the operations of acquired businesses could have a material
adverse impact on our results of operations and financial condition. Moreover,
we may not realize any of the anticipated benefits of an acquisition, and
integration costs may exceed anticipated amounts. In addition, we may issue
additional shares of stock as acquisition consideration, and if we do, our
stockholders may experience dilution.
We depend on our senior management team.
We benefit substantially from the leadership and experience of Robert L.
Krakoff, James M. Alic and other members of our senior management team and
depend on their continued services to implement successfully our business
strategy. The loss of any member of our senior management team or other key
employee could materially adversely affect our financial condition and results
of operations. Although we have entered into employment agreements with Mr.
Krakoff and Mr. Alic, we cannot be certain that we will continue to have their
services, or the services of other key personnel, going forward. Moreover, we
may not be able to attract and retain other qualified personnel in the future.
We do not currently maintain key-man life insurance policies on any member of
our senior management team or other key employees.
There are certain risks related to our international operations and
international expansion.
Our growth strategy includes expanding our product and service offerings
internationally. We currently maintain offices in Brazil, Canada, France, Hong
Kong, Mexico and the United Kingdom. International operations accounted for
approximately 13.0% of our pro forma revenue in 1998. International operations
and expansion involve numerous risks, such as:
. the uncertainty of product acceptance by different cultures,
. divergent business expectations or cultural incompatibility in
establishing joint ventures with foreign partners,
. difficulties in staffing and managing multinational operations,
. currency fluctuations,
. state-imposed restrictions on the repatriation of funds and
. potentially adverse tax consequences.
The impact of any these risks could materially adversely affect our future
international operations and our financial condition and results of
operations.
We have some exposure to fluctuations in the exchange rates of international
currencies.
Our consolidated financial statements are prepared in U.S. dollars. A
percentage of the revenues, expenses, assets and liabilities of Advanstar is
denominated in currencies other than the U.S. dollar. Consequently,
fluctuations in exchange rates could result in exchange losses. In 1997 and
1998, there was no material effect on net income due to currency fluctuations.
The impact of future exchange rate fluctuations on our results of operations
cannot be accurately predicted. Moreover, because we intend to continue our
international expansion, the effect of exchange rate fluctuations could be
greater in the future. We may undertake transactions to hedge the risks
associated with fluctuations in exchange rates of other currencies to the
dollar. We do not know if any hedging techniques that we may implement will be
successful or will mitigate the effect, if any, of exchange rate fluctuations
on our financial condition and results of operations.
21
Our business is seasonal due largely to higher trade show revenue in the
first quarter.
Our business is seasonal, with revenue typically reaching its highest levels
during the first and third quarters of each calendar year, largely due to the
timing of the MAGIC trade shows and our other large trade shows and
conferences. In 1998, approximately 30.1% of our pro forma revenue would have
been generated during the first quarter and approximately 25.9% during the
third quarter. The second and fourth quarters would have accounted for
approximately 23.5% and 20.5% of pro forma revenue in 1998, respectively.
Because event revenue is recognized when a particular event is held, we may
also experience fluctuations in quarterly revenue based on the movement of
annual trade show dates from one quarter to another.
We are controlled by HFCP III.
HFCP III beneficially owns, directly or indirectly, substantially all of our
outstanding capital stock (assuming no exercise of all currently vested stock
options). As a result, HFCP III has the right to elect all of our directors
and will exercise substantial control over matters requiring the vote of our
stockholders.
The failure of the computer systems on which we rely to recognize Year 2000
dates could affect our operations.
We are highly dependent on our computer software programs and systems in
operating our business. We also depend on the proper functioning of computer
systems of third parties, such as vendors and clients. The failure of any of
these systems to appropriately interpret the upcoming calendar year 2000 could
have a material adverse effect on our financial condition and results of
operations. We have identified our own applications that are not currently
Year 2000 compliant and are taking steps to determine whether third parties
are doing the same. Our inability to remedy our own Year 2000 problems or the
failure of third parties to do so may cause business interruptions or
shutdown, financial loss, regulatory actions, reputational harm and/or legal
liability. We cannot assure you that our Year 2000 program will be effective
or that our estimates about the timing and cost of completing our program will
be accurate.
Item 8. Financial Statements and Supplementary Data
The Consolidated Financial Statements of Advanstar required by this item are
included in a separate section of this Annual Report. See Part IV, Item 14,
"Exhibits, Financial Statement Schedules and Reports on Form 8-K."
Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
22
PART III
Item 10. Directors and Executive Officers of the Registrant
Directors, Executive Officers and Key Employees
The following table sets forth certain information as of February 28, 1999
regarding our directors, executive officers and key employees.
Name Age Title
---- --- -----
Robert L. Krakoff................ 63 Chairman of the Board and Chief Executive
Officer
James M. Alic.................... 56 Vice Chairman and Director
Martin C. ("Skip") Farber........ 46 Executive Vice President--Business
Development
David W. Montgomery.............. 41 Vice President--Finance, Chief Financial
Officer and Secretary
Eric I. Lisman................... 42 Vice President and General Counsel
William J. Cooke................. 47 Executive Vice President
Alexander S. DeBarr.............. 39 Executive Vice President
Morris R. Levitt................. 58 Executive Vice President
Joseph Loggia.................... 39 President--MAGIC
Kenneth T. Berliner.............. 39 Director
Mitchell R. Cohen................ 35 Director
John M. Pasquesi................. 39 Director
Executive Officers
Robert L. Krakoff has served as our Chairman and Chief Executive Officer
since he joined Advanstar in July 1996. From January 1993 to June 1996, he was
the Chairman and Chief Executive Officer of Reed Publishing USA, a division of
Reed Elsevier Inc. which included Cahners Publishing Company, a trade
publications business, and Reed Exhibition Companies, an exposition and
conference business. From January 1993 to June 1996, he was also a member of
the board of directors of Reed Elsevier PLC.
James M. Alic has served as our Vice Chairman since he joined Advanstar in
July 1996. From June 1995 to June 1996, he was Vice President and Controller
of IBM Corporation, a computer hardware and software manufacturer. From
September 1994 to May 1995, he was Chairman of Reed Exhibition Companies. From
August 1991 to August 1994, he was President of Reed Exhibitions North
America.
Martin C. ("Skip") Farber has served as our Executive Vice President--
Business Development since he joined Advanstar in October 1996. From February
1993 to September 1996, he was Vice President for Business Development of Reed
Publishing USA., which included Cahners Publishing Company and Reed Exhibition
Companies. From July 1995 to September 1996, Mr. Farber also had
responsibility for Cahners Direct Marketing Services, a division of Reed
Elsevier Inc.
David W. Montgomery has served as our Vice President--Finance and Chief
Financial Officer since January 1994. From July 1989 to December 1993, he was
our Director of Corporate Finance. In July 1992, he became our Secretary. From
January 1981 to June 1989, he was a practicing CPA with McGladrey & Pullen in
Minneapolis, St. Paul, Minnesota.
Eric I. Lisman has served as our Vice President and General Counsel since
September 1998. From November 1997 to August 1998, he engaged in a private
legal practice. From August 1996 to July 1997, he was a Senior Vice President
and General Counsel of Cahners Publishing Company. From July 1993 to July
1996, he was a Vice President and General Counsel of Reed Publishing USA.
23
Key Employees
William J. Cooke has served as our Executive Vice President since June 1997
and is responsible for the OEM industry sector, the Market Development cluster
and marketing services. In addition, Mr. Cooke is responsible for corporate
marketing and corporate training. From July 1995 to May 1997, he was Group
Vice President of Advanstar. From July 1993 to June 1995, he was our President
of the Marketing Services Division. From 1988 until June 1993, Mr. Cooke was
Vice President of Strategic Planning and Marketing for Dun & Bradstreet
Corporation.
Alexander S. DeBarr has served as our Executive Vice President since June
1997 and is responsible for the art, beauty, travel and hospitality, motor
vehicle and application technology sectors. From February 1995 to May 1997, he
was a Group Vice President of Advanstar. Mr. DeBarr also served as a Group
Publisher of Advanstar from February 1993 until January 1995.
Morris R. Levitt joined us in March 1999 as our Executive Vice President
with responsibility for the Healthcare, Science & Pharmaceuticals cluster.
From October 1991 to February 1999, he headed the Advanced Technology Division
of PennWell Publishing Company, a publisher of trade publications and an
operator of trade shows.
Joseph Loggia has served as MAGIC's President and Chief Executive Officer
since May 1997, President from August 1996 and Chief Operating Officer
beginning in 1995. From January 1993 to August 1996, he was Chief Financial
Officer of MAGIC. Prior to joining MAGIC, Mr. Loggia, who is a certified
public accountant, was a manager at the accounting firm of Coopers & Lybrand
responsible for Fraud & Financial Investigations.
Directors
Kenneth T. Berliner has served as a director of Advanstar since the HFCP III
Acquisition. Since 1992, Mr. Berliner has been employed by Peter J. Solomon
Company Limited ("PJSC"), an investment banking firm. He is currently a
managing director at PJSC.
Mitchell R. Cohen has served as a director of Advanstar since the HFCP III
Acquisition. Since January 1998, Mr. Cohen has been a Managing Director of
Hellman & Friedman LLC, a private equity investment firm. From January 1993 to
December 1997, Mr. Cohen was a General Partner of Hellman & Friedman. Mr.
Cohen is also a director of Western Wireless Corporation and MobileMedia
Corporation.
John M. Pasquesi has served as a director of Advanstar since the HFCP III
Acquisition. Since January 1998, Mr. Pasquesi has been a Managing Director of
Hellman & Friedman LLC, a private equity investment firm. From January 1989 to
December 1997, Mr. Pasquesi was a General Partner of Hellman & Friedman. Mr.
Pasquesi is also a director of The Covenant Group Inc.
24
Item 11. Executive Compensation
Summary Compensation Table
Annual Compensation
---------------------------- All Other Total
Name and Principal Position Year Salary ($) Bonus ($)(1) Compensation ($) Compensation ($)
- --------------------------- ---- ---------- ------------ ---------------- ----------------
Robert L. Krakoff....... 1998 $415,385 $150,000 $18,138(3) $583,523
Chairman of the Board 1997 400,000 150,000 12,449(2) 562,449
and Chief Executive
Officer
James M. Alic........... 1998 $311,538 $115,000 $ 8,310(3) $434,848
Vice Chairman 1997 300,000 112,500 7,260(3) 419,760
Martin C. ("Skip") 1998 $284,615 $120,000 $ 6,436(3) $411,051
Farber................. 1997 250,000 87,000 2,713(3) 339,713
Executive Vice
President--Business
Development
David W. Montgomery..... 1998 $186,538 $ 74,000 $ 5,918(3) $266,456
Vice President-- 1997 170,000 60,000 5,860(3) 235,860
Finance, Chief
Financial Officer and
Secretary
Eric I. Lisman(4)....... 1998 $ 72,692 $ 25,012 $ 199(2) $ 97,903
Vice President and
General Counsel
- --------
(1) Bonuses are reported in the year earned, even though they were actually
paid in the subsequent year.
(2) Constitutes value of group term life insurance benefits paid for by the
Company.
(3) Constitutes value of group term life insurance benefits paid for by the
Company and contributions made by the Company to a defined contribution
plan.
(4) Mr. Lisman commenced employment on September 8, 1998.
Option Grants in Last Fiscal Year
The following table sets forth each grant of stock options made by Advanstar
during the year ended December 31, 1998 pursuant to the 1996 Plan (as defined
below) to each of the Named Executive Officers. We have not granted any stock
appreciation rights.
Potential Realizable
Value at Assumed
Annual Rates of
Stock Price
Appreciation
Individual Grants for Option Term
-------------------------------------------------- ----------------------
Number of
Securities % of Total
Underlying Options Granted Exercise
Options to Employees In Price Expiration
Name Granted Fiscal Year ($/Share)(1) Date 5% (2) 10%
---- ---------- --------------- ------------ ---------- ----------------------
Robert L. Krakoff....... -- -- -- -- -- --
James M. Alic........... -- -- -- -- -- --
Martin C. ("Skip") Far-
ber.................... 70,162 19.5% $12.83 2008 -- $ 1,279,335
David W. Montgomery..... 10,000 2.8 12.83 2008 -- 182,340
Eric I. Lisman(3)....... 50,000 13.9 12.83 2008 -- 881,872
- --------
(1) The options granted are subject to a five-year vesting schedule pursuant
to which the options vest in 20% increments on each anniversary of the
date of grant. On May 31 of each year, the exercise price per option
increases by 10% over the previous year's exercise price. The exercise
price per option increases by a pro rated amount of such 10% increase in
the case of exercises which do not occur after May 31.
(2) Amounts reported in these columns represent amounts that may be realized
upon exercise of the options immediately prior to the expiration of their
term assuming the specified compounded rates of appreciation of the Common
Stock over the term of the options. The exercise prices of the options
increases 10% per year over the life of the option. These numbers are
calculated based on rules promulgated by the Securities and Exchange
Commission and do not reflect the Company's estimate of future stock price
growth. Actual
25
gains, if any, on stock option exercises and Common Stock holders are
dependent on the timing of such exercises and the future performance of our
common stock. There can be no assurance that the rates of appreciation
assumed in this table can be achieved or that the amounts reflected will be
received by the individuals.
(3) On September 8, 1998, Mr. Lisman was granted a stock option to purchase
50,000 shares of our common stock.
Option Exercises and Holdings
The following table sets forth, for each of the officers named in the
Summary Compensation Table, certain information concerning stock options
exercised during 1998, and the number of shares subject to both exercisable
and unexercisable stock options as of December 31, 1998. Also reported are
values for "in-the-money" options that represent the positive spread between
the respective exercise prices of outstanding stock options and the fair
market value of our common stock as of December 31, 1998.
Aggregated Option Exercises In 1998
and December 31, 1998 Option Values
Number of
Securities Underlying Value of Unexercised
Unexercised Options In-the-Money
Number of at Fiscal Options at Fiscal
Shares Year-End Year-End(1)
Acquired on Value ------------------------- -------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- ----------- -------- ----------- ------------- ----------- -------------
Robert L. Krakoff....... -- -- -- -- -- --
James M. Alic........... -- -- -- -- -- --
Martin C. ("Skip")
Farber................. -- -- 49,820 153,242 $318,848 $980,748
David W. Montgomery..... -- -- 34,000 66,000 217,600 422,400
Eric I. Lisman.......... -- -- -- 50,000 -- 320,000
- --------
(1) Amount based on the fair market value of our common stock on December 31,
1998 as determined by our Board of Directors, less the exercise payable
for such shares.
(2) On September 8, 1998, Mr. Lisman was granted a stock option to purchase
50,000 shares of our common stock.
Certain Plans and Employment Agreements
1996 Stock Option Plan. Advanstar's 1996 Stock Option Plan, as amended (the
"1996 Plan") provides for the issuance of a maximum of 1,500,000 shares of
Common Stock pursuant to the grant of non-qualified stock options to employees
and other individuals who render services to Advanstar. As of December 31,
1998, options to purchase 905,562 shares of our common stock at an average
exercise price of $12.83 were outstanding under the 1996 Plan, and no options
had been exercised.
The 1996 Plan is administered by the Board of Directors. Subject to the
provisions of the 1996 Plan, the Board of Directors has the authority to
determine the terms of options granted, including the authority to: (i)
determine to whom options may be granted; (ii) determine the time or times at
which options shall be granted; (iii) determine the exercise price of shares
subject to each option; (iv) determine the time or times when each option
shall become vested and exercisable and the duration of the exercise period;
(v) extend the period during which outstanding options may be exercised; (vi)
determine whether restrictions such as repurchase options are to be imposed on
shares subject to options and the nature of such restrictions, if any; and
(vii) interpret the 1996 Plan and prescribe and rescind rules and regulations
relating to it. The 1996 Plan provides that the Board of Directors will take
whatever actions it deems necessary, under Section 422 of the Internal Revenue
Code of 1986, as amended, and the regulations promulgated thereunder, to
ensure that options granted under the 1996 Stock Plan are not treated as
"incentive stock options."
26
With the exception of the stock options granted to Mr. Loggia, each stock
option is subject to a five-year vesting schedule pursuant to which the
options vest in increments of approximately 20% on each of the first five
anniversaries of the date of grant. Each outstanding stock option shall become
fully exercisable in the event of a "change of control." A "change of control"
means the acquisition by any person or group of persons (other than an
affiliate or affiliates of HFCP III) of more than 50% of the outstanding
shares of Advanstar common stock or shares of capital stock constituting more
than 50% of our voting capital stock, or of all or substantially all of our
assets. The Board of Directors may, in its discretion and in accordance with
the provisions of the 1996 Plan, accelerate the vesting of any stock option.
401(k) Plan. We have an Employees' 401(k) Plan and Trust (the "401(k)
Plan"). All current and future employees who have completed one year of
service with Advanstar or any other domestic subsidiary of Advanstar and are
at least 21 years-of-age are eligible to participate in the Plan. Participants
in the 401(k) Plan may not contribute more than the lesser of a specified
statutory amount ($10,000 in 1998) or 15% of his or her pre-tax total
compensation. We are required to make a matching contribution to the 401(k)
Plan, which vests in equal installments over five years, in accordance with
the following schedule:
. with respect to the employee's elective contribution in an amount up to
two percent (2%) of the employee's gross compensation, the matching
contribution is required to be equal to 100% of the employee's
contribution;
. with respect to the employee's elective contribution in excess of 2% and
not in excess of 6% of gross compensation, the matching contribution is
required to be equal to 25% of such employee's contribution; and
. with respect to the employee's elective contribution in excess of six
percent (6%) of gross compensation, there shall be no matching
contribution.
Employment Agreements. Mr. Krakoff and Mr. Alic entered into employment
agreements with Advanstar dated as of July 1, 1996. Each agreement provides
for a four year term. Pursuant to the agreements, Mr. Krakoff and Mr. Alic are
entitled to annual base salaries of not less than $400,000 and $300,000,
respectively. Mr. Krakoff and Mr. Alic are entitled to annual bonuses based on
our EBITDA for any year, up to a maximum bonus in any one year of 100% of base
salary. The agreements provide for indemnification of the executives to the
extent permissible under Delaware law. The agreements provide for severance
benefits equal to one year's base salary and benefits (and a pro rated bonus)
upon termination of employment by Advanstar without "cause" or by the
executive for "good reason" (which includes a change of control). Mr. Krakoff
and Mr. Alic also entered into noncompetition and confidentiality agreements
with us. The noncompete period is one year after termination of employment
unless employment is terminated by Advanstar without cause or by the executive
for good reason, in which case the noncompetition period is six months. During
the noncompetition period, the executives may not hire any Advanstar employee
or solicit any trade show or publishing business from a third party which has
a relationship or contract with Advanstar.
27
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding beneficial
ownership of our common stock as of March 31, 1999:
. each person known to us to be the beneficial owner of more than 5% of the
outstanding shares of our common stock,
. our Named Executive Officers,
. our directors and
. all executive officers and directors as a group.
Unless otherwise noted below, the address of each person listed on the table
is c/o Advanstar, Inc., 545 Boylston Street, Boston, Massachusetts 02116.
The applicable percentage of shares beneficially owned is based upon
16,815,000 shares of common stock outstanding as of March 31, 1999.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. For the purposes of calculating the number
of shares and the percentage beneficially owned by a person or entity, shares
of common stock issuable by Advanstar to that person or entity pursuant to
options which may be exercised within 60 days after March 31, 1999 are deemed
to be beneficially owned and outstanding. Except as otherwise indicated, each
stockholder named in the following table has sole voting and investment power
with respect to the shares set forth opposite that stockholder's name.
Shares Percentage of Shares
Name and Address of Beneficial Owner Beneficially Owned Beneficially Owned
------------------------------------ ------------------ --------------------
AHI Advanstar LLC (1)................. 16,815,000 100%
One Maritime Plaza
San Francisco, CA 94111
Robert L. Krakoff (1)................. -- --
James M. Alic (1)..................... -- --
Martin C. ("Skip") Farber............. 49,820(2) *
David W. Montgomery................... 34,000(3) *
Eric I. Lisman........................ -- --
Kenneth T. Berliner (1)(4)............ -- --
Mitchell R. Cohen (1)(5).............. -- --
John M. Pasquesi (1)(6)............... -- --
All directors and executive officers
as a group (8 persons)............... 83,820(7) *
- --------
* Represents less than 1% of the outstanding shares of our common stock.
(1) AHI Advanstar LLC ("AHI Advanstar") is the sole owner of all of the
outstanding shares of Advanstar common stock. Hellman & Friedman Capital
Partners III, L.P., a California limited partnership ("HFCP"), H&F Orchard
Partners III, L.P., a California limited partnership ("HFOP III"), H&F
International Partners III, L.P., a California limited partnership ("HFIP
III"), Mr. Krakoff and Mr. Alic own all of the membership interests of AHI
Advanstar. HFCP III owns approximately 98.3% of the membership interests
of AHI Advanstar. H&F Investors III, a California general partnership
("Investors III"), is the sole general partner of HFCP, HFOP III and HFIP
III. Messrs. Pasquesi and Cohen are Managing Directors of Hellman &
Friedman LLC, an affiliate of Investors III. The managing general partner
of Investors III is Hellman & Friedman Associates III, L.P., a California
limited partnership ("Associates III"), and the general partners of
Associates III are H&F Management III, L.L.C., a California limited
liability company ("Management III LLC"), and H&F Investors III, Inc., a
California corporation ("H&F Inc."). The sole shareholder of H&F Inc. is
the Hellman Family Revocable Trust (the "Trust"). The investment decisions
of H&F Inc. and Management III LLC are made by an executive committee, of
which Mr. Pasquesi is a member. The executive committee indirectly
exercises voting and investment power with respect to the shares of
28
Advanstar common stock held by AHI Advanstar LLC and could be deemed to
beneficially own such shares, but disclaims such beneficial ownership
except to the extent of its individual members' respective indirect
pecuniary interest in such shares. Mr. Krakoff has made a $2.48 million
investment in AHI Advanstar and Mr. Alic has made a $0.5 million investment
in AHI Advanstar. Each of Messrs. Krakoff and Alic and PJSC has a carried
interest in AHI Advanstar. As a result of such capital investment and/or
carried interest, each of Messrs. Krakoff and Alic and PJSC has an indirect
pecuniary interest in the shares of Advanstar common stock held by AHI
Advanstar.
(2) Consists of 49,820 shares of Advanstar common stock issuable pursuant to
presently exercisable stock options.
(3) Consists of 34,000 shares of Advanstar common stock issuable pursuant to
presently exercisable stock options.
(4) Mr. Berliner is a Managing Director of PJSC. Mr. Berliner disclaims
beneficial ownership of all shares of Advanstar common stock held by AHI
Advanstar except to the extent of his indirect pecuniary interest in such
shares.
(5) Mr. Cohen disclaims beneficial ownership of all shares of Advanstar common
stock held by AHI Advanstar except to the extent of his indirect pecuniary
interest in such shares.
(6) Mr. Pasquesi disclaims beneficial ownership of all shares of Advanstar
common stock held by AHI Advanstar except to the extent of his indirect
pecuniary interest in such shares.
(7) Consists of 83,820 shares of our common stock issuable pursuant to
presently exercisable stock options.
Item 13. Certain Relationships and Related Transactions
Not applicable.
29
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Documents filed as a part of this Annual Report:
(1) Financial Statements.
The financial statements listed below are included in this Annual Report on
the pages indicated below:
Page in this
Annual Report
-------------
Report of Independent Public Accountants........................ F-1
Consolidated Balance Sheets as of December 31, 1998 and 1997.... F-2
Consolidated Statements of Operations for the years ended
December 31, 1998 and 1997, the seven months ended December 31,
1996, and the five months ended May 31, 1996................... F-3
Consolidated Statements of Stockholder's Equity for the years
ended December 31, 1998 and 1997, the seven months ended
December 31, 1996, and the five months ended May 31, 1996...... F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1998 and 1997, the seven months ended December 31,
1996, and the five months ended May 31, 1996................... F-5
Notes to Consolidated Financial Statements...................... F-6
(2) Financial Statement Schedules.
The following schedule is included in this Annual Report on the page
indicated:
Page in this
Annual Report
-------------
Schedule II Valuation and Qualifying Accounts................... S-1
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under
the related instructions or are inapplicable, and therefore have been omitted.
(3) List of Exhibits.
Exhibit
Number Description
------- -----------
3.1** Certificate of Incorporation, as amended, of Advanstar, Inc.
3.2* By-Laws of Advanstar, Inc.
4. 1* Indenture, dated as of April 30, 1998, among the Company, the
Guarantors (as defined therein) and the Bank of New York
4.2* Supplemental Indenture, dated as of May 19, 1998, among the Company,
Applied Business teleCommunications and the Bank of New York
4.3* Form of Exchange Note
10.1* 1996 Stock Option Plan
10.2** Amendment No. 1 to 1996 Stock Option Plan
10.3R Amended Credit Agreement (the "Credit Agreement"), dated as of May 31,
1996, as amended and restated as of August 26, 1998, among the
Company, the Guarantors (as defined in the Credit Agreement), the
Lenders (as defined in the Credit Agreement) and the Chase Manhattan
Bank
10.4* Employment Agreement, dated July 1, 1996, between Advanstar, Inc. and
Robert Krakoff
10.5* Employment Agreement, dated July 1, 1996, between Advanstar, Inc. and
James M. Alic
30
Exhibit
Number Description
------- -----------
10.6* Employees' 401(k) Plan and Trust, as amended
10.7* Agreement, dated July 31, 1997, between the Company and Banta
Publications
10.8* Lease Agreement, dated February 2, 1996, between the Las Vegas
Convention and Visitors Authority and Men's Apparel Guild in
California, Inc.
10.9* Lease Agreement dated December 24, 1996, between the Las Vegas
Convention and Visitor's Authority and Men's Apparel Guild in
California, Inc.
10.10* Lease Agreement, dated September 25, 1996, between the Interface
Group--Nevada, Inc. and Men's Apparel Guild in California, Inc.
10.11* Lease Agreement, dated September 5, 1997, between the Interface
Group--Nevada, Inc. and Men's Apparel Guild in California, Inc.
10.12* Lease Agreement, dated September 5, 1997, between the Interface
Group--Nevada, Inc. and Men's Apparel Guild in California, Inc.
10.13* Lease Agreement, dated September 5, 1997, between the Interface
Group--Nevada, Inc. and Men's Apparel Guild in California, Inc.
10.14* Lease Agreement, dated September 5, 1997, between the Interface
Group--Nevada, Inc. and Men's Apparel Guild in California, Inc.
10.15* Convention Agreement, dated March 19, 1998, between Las Vegas Hilton
Corporation and Men's Apparel Guild in California, Inc.
21.1** Subsidiaries of Advanstar, Inc.
24.1** Power of Attorney (included on signature page of Annual Report)
27.1** Financial Data Schedule (EDGAR version only)
- --------
* Previously filed as an exhibit to Registration Statement on Form S-4 (File
No. 333-57201) and incorporated herein by reference.
R Previously filed as Exhibit 10.1 to Advanstar, Inc.'s Quarterly Report on
Form 10-Q for the quarterly period ended September 30, 1998 and filed with
the Securities and Exchange Commission on November 16, 1998, and
incorporated herein by reference.
** Filed herewith.
(b) Reports On Form 8-K
Advanstar filed no reports on Form 8-K during the quarter ended December 31,
1998.
(c) Exhibits.
Advanstar hereby files as part of this Annual Report on Form 10-K the
exhibits listed in Item 14(a)(3) set forth above. We will furnish to any
eligible securityholder, upon written request of such securityholder, a copy of
any exhibit listed above upon the payment of a reasonable fee equal to our
expenses in furnishing such exhibit.
31
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of Advanstar, Inc.:
We have audited the accompanying consolidated balance sheets as of December
31, 1998 and 1997 and the consolidated statements of operations, stockholder's
equity and cash flows of Advanstar, Inc. (formerly Advanstar Holdings, Inc.)
(a Delaware corporation) and subsidiaries and its predecessor for the years
ended December 31, 1998 and 1997, the seven-month period ended December 31,
1996, and the five-month period ended May 31, 1996. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Advanstar,
Inc. and subsidiaries and its predecessor as of December 31, 1998 and 1997 and
the results of their operations and their cash flows for the years ended
December 31, 1998 and 1997, the seven-month period ended December 31, 1996,
and the five-month period ended May 31, 1996, in conformity with generally
accepted accounting principles.
Arthur Andersen LLP
Minneapolis, Minnesota,
February 5, 1999
F-1
ADVANSTAR, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
December 31,
------------------
1998 1997
-------- --------
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................ $ 14,016 $ 7,024
Accounts receivable, net of allowance of $574 and $553 at
December 31, 1998 and 1997, respectively................ 27,976 18,819
Prepaid expenses......................................... 14,784 9,607
Other.................................................... 2,097 2,256
-------- --------
Total current assets................................... 58,873 37,706
-------- --------
PROPERTY, PLANT AND EQUIPMENT
Land and improvements.................................... 2,526 2,514
Buildings................................................ 5,110 5,041
Furniture, machinery and equipment....................... 13,706 9,229
Leasehold improvements................................... 973 517
-------- --------
22,315 17,301
Accumulated depreciation and amortization................ (8,190) (5,155)
-------- --------
Net property, plant and equipment...................... 14,125 12,146
-------- --------
INTANGIBLE ASSETS, net
Goodwill................................................. 495,144 176,103
Other intangibles........................................ 92,084 72,542
-------- --------
Total intangible assets................................ 587,228 248,645
-------- --------
$660,226 $298,497
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt..................... $ 8,253 $ 15,350
Accounts payable......................................... 13,311 10,938
Accrued compensation..................................... 6,146 6,809
Income taxes payable..................................... 1,329 1,552
Other accrued liabilities................................ 11,660 2,312
Deferred revenue......................................... 45,643 21,105
-------- --------
Total current liabilities.............................. 86,342 58,066
-------- --------
LONG-TERM DEBT, net of current maturities.................. 418,615 148,873
OTHER LONG-TERM LIABILITIES................................ 3,227 1,824
MINORITY INTEREST.......................................... 17,282 --
COMMITMENTS AND CONTINGENCIES (Notes 4, 6 and 8)
STOCKHOLDER'S EQUITY
Common stock, $.01 par value; 20,000 shares authorized;
16,733 and 10,900 shares issued and outstanding at
December 31, 1998 and 1997, respectively................ 167 109
Capital in excess of par................................. 183,210 108,891
Accumulated deficit...................................... (47,745) (19,309)
Accumulated other comprehensive income (loss)............ (872) 43
-------- --------
Total stockholder's equity............................. 134,760 89,734
-------- --------
$660,226 $298,497
======== ========
The accompanying notes to financial statements are an integral part of these
consolidated statements.
F-2
ADVANSTAR, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Year Ended
December 31, Seven Predecessor
------------------ Months ------------
Ended Five Months
December 31, Ended
1998 1997 1996 May 31, 1996
-------- -------- ------------ ------------
Net revenue..................... $259,825 $187,656 $ 82,720 $68,286
-------- -------- -------- -------
Operating expenses:
Cost of production............ 54,330 39,096 18,394 15,764
Selling, editorial and
circulation.................. 114,705 87,243 35,166 28,071
General and administrative.... 36,883 27,514 15,446 10,031
Amortization of goodwill and
other intangible assets...... 48,752 24,326 13,171 1,588
Depreciation.................. 2,579 2,964 1,882 1,423
-------- -------- -------- -------
Total operating expenses.... 257,249 181,143 84,059 56,877
-------- -------- -------- -------
Operating income (loss)......... 2,576 6,513 (1,339) 11,409
Other income (expense)
Interest expense, net......... (27,862) (15,117) (7,511) (6,963)
Other income (expense), net... (1,926) 292 (488) 23
-------- -------- -------- -------
Income (loss) before income
taxes and minority interest.... (27,212) (8,312) (9,338) 4,469
Provision for income taxes...... 1,264 583 1,076 13
Minority interest in earnings of
subsidiary..................... 40 -- -- --
-------- -------- -------- -------
Net income (loss)............... $(28,436) $ (8,895) $(10,414) $ 4,456
======== ======== ======== =======
Earnings (loss) per share--basic
and diluted.................... $ (1.92) $ (0.82) $ (1.07) $ 3.86
======== ======== ======== =======
Weighted average shares
outstanding
Basic and diluted............. 14,826 10,884 9,700 1,154
======== ======== ======== =======
The accompanying notes to financial statements are an integral part of these
consolidated statements.
F-3
ADVANSTAR, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
(Dollars in thousands)
Accumulated
Common Capital in Other
----------------- Excess of Comprehensive Accumulated
Shares Amount Par Value Income Deficit Total
---------- ------ ---------- ------------- ----------- ---------
Balance, January 1, 1996
(Predecessor).......... 1,154,444 $ 11 $ 53,214 $ 105 $(181,633) $(128,304)
Comprehensive income:
Net Income.......... -- -- -- -- 4,456
Translation
adjustment......... -- -- -- (105) --
Total comprehensive
income............. -- -- -- -- -- 4,351
---------- ---- -------- ----- --------- ---------
Balance, May 31, 1996
(Predecessor).......... 1,154,444 $ 11 $ 53,214 $ -- $(177,177) $(123,953)
---------- ---- -------- ----- --------- ---------
Balance, May 31, 1996
(Successor)............ 9,700,000 $ 97 $ 96,903 $ -- $ -- $ 97,000
Comprehensive income:
Net loss............ -- -- -- -- (10,414)
Translation
adjustment......... -- -- -- 253 --
Total comprehensive
loss............... -- -- -- -- -- (10,161)
---------- ---- -------- ----- --------- ---------
Balance, December 31,
1996
(Successor)............ 9,700,000 97 96,903 253 (10,414) 86,839
Comprehensive income:
Net loss............ -- -- -- -- (8,895)
Translation
adjustment......... -- -- -- (210) --
Total comprehensive
loss............... -- -- -- -- -- (9,105)
Issuance of common
stock................ 1,200,000 12 11,988 -- -- 12,000
---------- ---- -------- ----- --------- ---------
Balance, December 31,
1997
(Successor)............ 10,900,000 109 108,891 43 (19,309) 89,734
Comprehensive income:
Net loss............ -- -- -- -- (28,436)
Translation
adjustment......... -- -- -- (915) --
Total comprehensive
loss............... -- -- -- -- -- (29,351)
Stock option
compensation......... -- -- 3,397 -- -- 3,397
Issuance of common
stock................ 5,833,333 58 70,922 -- -- 70,980
---------- ---- -------- ----- --------- ---------
Balance, December 31,
1998................... 16,733,333 $167 $183,210 $(872) $ (47,745) $ 134,760
========== ==== ======== ===== ========= =========
The accompanying notes to financial statements are an integral part of these
consolidated statements.
F-4
ADVANSTAR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Year Ended
December 31, Seven Predecessor
------------------- Months ------------
Ended Five Months
December 31, Ended
1998 1997 1996 May 31, 1996
--------- -------- ------------ ------------
OPERATING ACTIVITIES
Net income (loss).............. $ (28,436) $ (8,895) $ (10,414) $ 4,456
Adjustments to reconcile net
income (loss) to net cash
provided by operating
activities
Depreciation and
amortization.................. 39,158 26,371 15,120 3,019
Non-cash interest.............. 960 934 (4) 963
Asset impairment writedowns.... 12,665 1,155 -- --
Non-cash stock compensation.... 3,397 -- -- --
(Gain) loss on sales of assets
and other..................... 1,968 (228) 8 (28)
Changes in operating assets
and liabilities
Accounts receivable, net...... (6,064) (2,098) (2,010) (422)
Inventories................... 657 (317) (45) 257
Prepaid expenses.............. (670) (2,001) (2,206) 2,055
Accounts payable and accrued
liabilities.................. 7,338 (2,591) 6,169 (5,820)
Deferred revenue.............. 3,674 290 5,745 (5,320)
Other......................... (1,994) (28) 253 (171)
--------- -------- --------- -------
Net cash provided by (used
in) operating activities.... 32,653 12,592 12,616 (1,011)
--------- -------- --------- -------
INVESTING ACTIVITIES
Additions to property, plant
and equipment................. (4,154) (2,260) (780) (365)
Change in notes receivable..... (124) (235) 235 34
Acquisition of publications and
trade shows, net.............. (358,315) (31,871) (18,379) --
Proceeds from sale of
publishing and other assets... 4,332 1,043 -- 57
--------- -------- --------- -------
Net cash used in investing
activities.................. (358,261) (33,323) (18,924) (274)
--------- -------- --------- -------
FINANCING ACTIVITIES
Acquisition-related financing
transactions
Redemption of common stock,
options and warrants.......... -- -- (57,002) --
Repayment of long-term debt.... -- -- (171,162) --
Repayment of revolving credit
loan.......................... -- -- (6,898) --
Proceeds from capital
contributions................. -- -- 97,000 --
Proceeds from long-term debt... -- -- 140,000 --
Proceeds from revolving credit
loan.......................... -- -- 4,000 --
Transaction costs and loan
origination fees.............. -- -- (5,699) --
Net proceeds from (payments on)
revolving credit loan......... 27,000 (15,000) 13,000 4,332
Proceeds from long-term debt... 399,613 40,000 -- 245
Payments of long-term debt..... (163,993) (11,776) (6,000) (2,500)
Proceeds from sale of common
stock, capital contributions
and other..................... 70,980 12,000 -- 150
Dividends paid to minority
interest holders.............. (1,000) -- -- --
Purchase of interest rate cap
agreements and
origination/underwriters
fees.......................... -- -- (1,295) --
--------- -------- --------- -------
Net cash provided by
financing activities........ 332,600 25,224 5,944 2,227
--------- -------- --------- -------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS........... 6,992 4,493 (364) 942
CASH AND CASH EQUIVALENTS,
beginning of period............ 7,024 2,531 2,895 1,953
--------- -------- --------- -------
CASH AND CASH EQUIVALENTS, end
of period...................... $ 14,016 $ 7,024 $ 2,531 $ 2,895
========= ======== ========= =======
The accompanying notes to financial statements are an integral part of these
consolidated statements.
F-5
ADVANSTAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Business
The accompanying consolidated financial statements include the accounts of
Advanstar, Inc., formerly Advanstar Holdings, Inc. (Holdings), and its wholly-
owned subsidiary Advanstar Communications Inc. (Communications) and
Communications' majority-owned subsidiaries (collectively, Advanstar or the
Company). All intercompany accounts and transactions between consolidated
entities have been eliminated.
The Company operates and manages trade shows and conferences; publishes
controlled circulation trade and professional periodicals; and markets a broad
range of marketing, direct mail and database products and services.
On May 31, 1996, Holdings acquired for cash all of the outstanding stock of
Communications. Holdings was established expressly for the purpose of
effecting the acquisition of Communications (the HFCP III Acquisition). The
aggregate purchase price for Communications was approximately $267.0 million,
consisting of $97.0 million cash equity, $144.0 million debt and approximately
$26.0 million of assumed liabilities and transaction costs.
Due to the effects of the HFCP III Acquisition on the recorded bases of
goodwill, intangibles, property and shareholders' equity, as discussed below
and in Note 5, the financial statements prior to and subsequent to the HFCP
III Acquisition are not comparable. Periods prior to June 1, 1996 represent
the accounts of the Predecessor.
On June 10, 1998, Holdings merged into its parent holding company, AHI
Holdings Corp. (AHI). AHI had no operations independent of Holdings. In
connection with the merger, AHI Holdings Corp. changed its name to Advanstar
Holdings, Inc. All references to the number of common shares and per share
amounts have been adjusted to reflect the capitalization of the merged entity.
On March 17, 1999, Advanstar Holdings, Inc. changed its name to Advanstar,
Inc.
2. Summary of Significant Accounting Policies
Cash and Cash Equivalents
Cash and cash equivalents include cash on deposit and highly liquid
investments with original maturities of three months or less. Cash equivalents
are stated at cost, which approximates their fair market value. The effect of
foreign currency translation on cash held by foreign operations is immaterial.
Prepaid Expenses and Other Current Assets
Prepaid expenses consist primarily of prepaid trade show and conference
expenses, prepaid publication production costs and miscellaneous deposits.
Event and publication expenses are charged to operations at the time of the
occurrence of the related event and at the time of publication issuance. Other
current assets consist of paper inventories and notes receivable.
Property, Plant and Equipment
Property, plant and equipment additions are recorded at cost. For financial
reporting purposes, depreciation is provided on a straight-line basis over the
following estimated useful lives:
Estimated Useful Lives
----------------------
Land improvements..................................... 10-15 years
Buildings............................................. 20-40 years
Furniture, machinery and equipment.................... 3-10 years
Leasehold improvements................................ Life of lease
F-6
ADVANSTAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For tax reporting purposes, certain assets have different estimated useful
lives.
Goodwill
All acquisitions have been accounted for using the purchase method of
accounting, with the purchase price in excess of the fair values of specific
identifiable tangible and intangible assets acquired allocated to goodwill.
Goodwill, which is being amortized on a straight-line basis over an average
of 23 years, is recorded in the accompanying consolidated balance sheets net
of accumulated amortization of $29.4 million and $11.9 million at December 31,
1998 and 1997, respectively.
Intangible Assets
Intangible assets related to the HFCP III Acquisition consist primarily of
advertiser, paid subscriber and trade show exhibitor lists, computer software,
the value assigned to Advanstar's assembled workforce and fulfillment
agreements. Such intangibles are being amortized on a straight-line basis over
1 to 20 years. Intangible assets associated with acquired businesses consist
primarily of identifiable intangibles and are being amortized on a straight-
line basis over one to eight years. Accumulated amortization was $41.1 million
and $25.6 million at December 31, 1998 and 1997, respectively.
Impairment of Long-Lived Assets
The Company evaluates the carrying value of long-lived assets, including
identifiable intangibles and goodwill, for impairment when events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. If impairment indicators are present and the estimated future
non-discounted cash flows are less than the carrying value of the assets and
any related goodwill, the carrying value is reduced to the estimated fair
value as measured by the discounted cash flows.
During 1998, the Company identified certain properties which, due to changes
in market conditions and portfolio management direction, the Company elected
to discontinue. As a result, a total non-cash charge of $12.7 million was
recorded to write down the carrying value of the related operating assets and
intangibles, and is included in amortization of goodwill and other intangible
assets on the consolidated statements of operations.
Revenue Recognition
Trade show and conference revenue is recognized in the accounting period in
which the event is conducted. Subscription revenue is recognized on a pro rata
basis as publications are issued to fulfill the subscription obligations.
Advertising revenue is recognized as the publication with the respective
advertisement is published. Deferred revenue is recorded when cash is received
in advance of providing the related service.
Deferred revenue consisted of the following at December 31:
1998 1997
------- -------
(in thousands)
Deferred trade show and conference revenue.................. $41,468 $16,529
Deferred advertising and subscription revenue............... 4,175 4,576
------- -------
Total deferred revenue.................................... $45,643 $21,105
======= =======
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
F-7
ADVANSTAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Ultimate results could differ from these estimates. On an
ongoing basis, management reviews its estimates, including those affecting
doubtful accounts, valuation of goodwill and intangible assets, compensation
related to stock options, and income taxes. Changes in facts and circumstances
may result in revised estimates.
Foreign Currency Translation
The Company accounts for translation investments in foreign entities in
accordance with Statement of Financial Accounting Standards (SFAS) No. 52,
"Foreign Currency Translation."
Stock-Based Compensation
The Company accounts for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion (APB) No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations.
Accordingly, due to the variable features of option grants under the Company's
stock option plan, the Company measures compensation cost as the difference
between the exercise price of the options and the fair value of the shares
under option at the end of each period, and recognizes compensation expense to
provide for such difference.
Comprehensive Income
Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." This statement established rules for the reporting of
comprehensive income and its components. Comprehensive income reflects the
change in equity of a business enterprise during a period from transactions
and other events and circumstances from non-owner sources. Comprehensive
income consists of net income and foreign currency translation adjustments and
is presented in the consolidated statement of stockholder's equity. The
adoption of SFAS No. 130 had no impact on total shareholder's equity. Prior
year financial statements have been reclassified to conform to the SFAS No.
130 requirements.
Segments
Effective January 1, 1998, the Company adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information". The Statement
establishes standards for the reporting of information about operating
segments in annual financials statements and requires that those businesses
report selected information about operating segments in interim financial
reports. SFAS No. 131 also establishes standards for related disclosures about
products and services, geographic areas, and major customers. The adoption of
SFAS No. 131 did not affect results of operations or financial position, but
did require additional disclosure.
Reclassifications
Certain reclassifications have been made to amounts reported in prior years
in order to conform to the current year presentation.
Recently Issued Accounting Standards
SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities"
is effective for fiscal years beginning after June 15, 1999. Because of the
Company's minimal use of derivatives, management does not anticipate that the
adoption of the new Statement will have a significant effect on earnings or
the financial position of the Company.
F-8
ADVANSTAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In March 1998, the AICPA issued Statement of Position (SOP) 98-1,
"Accounting For the Costs of Computer Software Developed For or Obtained For
Internal use." The SOP, which was adopted as of the beginning of 1998,
requires capitalization of certain costs incurred in connection with
developing or obtaining internal use software. In the prior year, the Company
expensed such costs as incurred. The effect of adopting the SOP was not
material to the Company's 1998 net income.
3. Acquisitions
On April 30, 1998, the Company acquired Men's Apparel Guild in California,
Inc. (MAGIC), which operates apparel trade shows (the MAGIC Acquisition). The
acquisition was accounted for as a purchase. The purchase price was
approximately $234.3 million in cash and assumed liabilities. Concurrent with
the MAGIC Acquisition, the Company renegotiated its credit agreement (the
Original Credit Facility) to provide additional borrowing capacity (as so
amended, the First Amended Credit Facility) and issued $150.0 million of
senior subordinated notes (Notes). The Company also received an additional
equity contribution of approximately $71.0 million.
On August 17, 1998, the Company acquired certain travel-related publication
and trade show assets of Universal Media Inc. (the Travel Agent Acquisition),
including Travel Agent (collectively, Travel Agent). The acquisition was
accounted for as a purchase. The purchase price was approximately $68.0
million in cash plus approximately $1.0 million in assumed liabilities.
Concurrent with the Travel Agent Acquisition, the Company undertook an
additional amendment to its credit agreement to further increase its borrowing
capacity thereunder by $40.0 million (as so amended, the Second Amended Credit
Facility, and together with the Original Credit Facility and the First Amended
Credit Facility, the Amended Credit Facility), and financed the balance of the
cash purchase price with its available cash and revolving credit facility.
From January 1, 1998 through December 31, 1998, the Company completed 11
other acquisitions of trade shows, conferences and publishing properties, with
a cumulative purchase price totaling approximately $89.1 million. Certain
entities acquired in 1998 have minority ownership interests.
The following are unaudited pro forma operating results as if the
acquisitions had taken place at January 1, 1997 (in thousands, except per
share amounts):
Year ended December 31
------------------------
1998 1997
----------- -----------
Total revenues.................................... $ 306,666 $ 270,039
=========== ===========
Operating income.................................. $ 15,140 $ 14,242
=========== ===========
Net loss.......................................... $ (23,679) $ (17,314)
=========== ===========
Loss per share--basic and diluted................. $ (1.60) $ (1.59)
=========== ===========
The unaudited pro forma financial information is provided for informational
purposes only. It is based on historical information and does not purport to
be indicative of the results that would have occurred had the acquisitions
been made at January 1, 1998, or of future results.
During 1997 and 1996, the Company purchased certain trade shows and
publishing properties for an aggregate purchase price of $39.7 million and
$18.3 million, respectively. The cost of these acquired entities in excess of
the fair market value of net assets acquired has been recorded as goodwill and
intangibles. Due to the timing of these acquisitions the incremental pro forma
affect on the results of operations was not material.
F-9
ADVANSTAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. Debt
Amended Credit Facility
In August 1998, the Company amended its credit facility. The Amended Credit
Facility consists of three components: Tranche A, a 5 1/2-year term loan in an
aggregate principal amount equal to $100.0 million; Tranche B, a 7-year term
loan in an aggregate principal amount equal to $150.0 million; and a 5 1/2-
year revolving credit facility in the maximum amount of $60.0 million. In
addition, the Company has purchased interest rate cap agreements for a
notional amount of $75.0 million to fix its interest rate exposure at 8.0-
8.5%.
The obligations of the Company under the Amended Credit Facility are
guaranteed by the domestic wholly-owned subsidiaries of the Company and are
collateralized by substantially all tangible and intangible assets of the
Company and pledges of the Company and substantially all of its subsidiaries'
capital stock.
The Amended Credit Facility requires the Company to apply certain amounts to
prepay the term loans, including (i) proceeds from certain issuances of equity
or indebtedness by the Company; (ii) the net cash proceeds of certain sales or
other dispositions by the Company of any assets; and (iii) 50% of excess cash
flow (as defined) for each fiscal year starting on January 1, 2000. The
Company will also have the right to optionally prepay the loans, without
premium, in whole or in part. Amounts applied as prepayments of the revolving
credit facility may be reborrowed; amounts prepaid in respect of the term
loans may not.
The Amended Credit Facility contains certain restrictive financial
covenants, including a minimum fixed charge coverage ratio and a maximum
leverage ratio. The Company was in compliance with all covenants as of
December 31, 1998.
Senior Subordinated Notes
The senior subordinated notes (Notes) issued in conjunction with the MAGIC
acquisition are unsecured obligations of Communications, limited to $150.0
million aggregate principal amount, and will mature on May 1, 2008. Each Note
bears interest at 9 1/4%, payable semiannually. The Notes are redeemable at
Communications' option after May 1, 2003 through April 30, 2006 at specified
premiums, and at par thereafter. A portion of the Notes may be redeemed at a
premium prior to May 1, 2001 with proceeds of certain equity offerings made by
the Company, and the Notes may also be redeemed at a premium prior to May 1,
2003 upon a qualifying change of control of Advanstar.
Restrictive financial covenants under the Notes include a minimum fixed
charge coverage ratio and limitations on certain asset dispositions and
dividend, distribution, and other restricted payments. The Company was in
compliance with all covenants as of December 31, 1998.
F-10
ADVANSTAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Long-term debt consists of the following:
At December 31
------------------
1998 1997
-------- --------
(in thousands)
Tranche A term loan, interest at LIBOR plus 2.25%,
7.88% at December 31, 1998, due October 31, 2003...... $ 98,529 $ 51,500
Tranche A2 term loan, interest at LIBOR plus 2.75%..... -- 38,850
Tranche B term loan, interest at LIBOR plus 2.50%,
8.13% at December 31, 1998, due April 30, 2005........ 149,700 71,873
Revolving credit loan, interest at LIBOR plus 2.25%,
7.88% at December 31, 1998, due October 31, 2003...... 29,000 2,000
Senior subordinated notes at 9.25%, due May 31, 2008,
Net of discount....................................... 149,639 --
-------- --------
426,868 164,223
Less--Current maturities............................... (8,253) (15,350)
-------- --------
$418,615 $148,873
======== ========
Based on the borrowing rates currently available to the Company for bank
loans with similar terms and average maturities, the fair value of long-term
debt was substantially the same as its carrying value at December 31, 1998 and
1997. Cash paid during 1998, 1997 and 1996 for interest was $25.3 million,
$15.4 million and $16.2 million, respectively.
Annual maturities of long-term debt for the next five years are as follows
(in thousands):
1999............................................................. $ 8,253
2000............................................................. 15,906
2001............................................................. 20,023
2002............................................................. 22,965
2003............................................................. 66,082
5. Stockholder's Equity
Stock Option Plan
In November 1996, the Company implemented a nonqualified stock option plan
(the Plan) in which certain members of the Company's management are eligible
to participate. The term of the options runs for ten years, with options
vesting 20% in each of the first five years of the option term. The exercise
price for these options increases at a 10% annually compounded rate. Options
become immediately exercisable upon a change of control of the Company, or at
the discretion of the Company's Board of Directors. If the Company does not
complete an initial public offering by January 1, 2001, option holders may
agree with the Company to sell the shares under option to the Company at a
fair market value price to be determined by the Board of Directors. However,
the Company is not obligated to agree to any such repurchase under the terms
of the Plan. In addition, the Company has certain repurchase rights under the
Plan. Under the Plan, up to 1,500,000 options may be granted at the discretion
of the Company's Board of Directors.
The Company accounts for the options using the intrinsic value method
outlined in APB Opinion No. 25, "Accounting for Stock Issued to Employees."
Accordingly, and because of the variable features of the Plan, the Company
measures compensation cost as the difference between the exercise price of the
options and the fair value of the shares under option at the end of each
period, and recognizes compensation expense to provide for
F-11
ADVANSTAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
such difference. As of December 31, 1998, compensation expense of $3.4 million
was recognized under the Plan. No compensation expense was recognized during
1996 or 1997 because the fair value of Holdings' shares was less than the
exercise price of the related options. If the Company had elected to recognize
compensation cost based on the fair value of the options granted as prescribed
by SFAS No. 123, a net loss on a pro forma basis would have been increased to
$28.5 million or $1.93 loss per diluted share for fiscal year 1998. The
Company's net income (loss) on a pro forma basis would have been unchanged
from historical amounts for fiscal years 1997 and 1996.
For purposes of computing compensation cost of stock options granted, the
fair value of each stock option grant was estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions:
1998 1997 1996
------- ------- -------
Expected dividend yield........................... -- -- --
Expected stock price volatility................... 30.6% 32.4% 34.2%
Risk-free interest rate........................... 5.6% 5.8% 6.0%
Expected life of options.......................... 5 years 5 years 5 years
A summary of stock option activity under the Plan is as follows:
Options Weighted Average
Outstanding Exercise Price
----------- ----------------
Outstanding at January 1, 1996.................. -- --
Granted....................................... 623,700 $10.00
Exercised..................................... -- --
Cancelled..................................... -- --
Outstanding at December 31, 1996................ 623,700 10.00
Granted....................................... 111,700 11.00
Exercised..................................... -- --
Cancelled..................................... -- --
Outstanding at December 31, 1997................ 735,400 11.64
Granted....................................... 360,162 12.18
Exercised..................................... -- --
Cancelled..................................... (190,000) 11.73
Outstanding at December 31, 1998................ 905,562 12.83
As of December 31, 1998, the outstanding stock options had a weighted-
average exercise price of $12.83 and a weighted-average remaining contractual
life of 8.7 years. 304,820 options were exercisable with a weighted-average
exercise price of $12.83. The weighted average fair value of grants during
1998, as estimated using the Black-Scholes option pricing model, was $2.40 per
option.
6. Postretirement and Other Employee Benefits
Postretirement Benefits
Prior to June 1, 1995, the Company maintained a plan whereby employees
retiring from the Company on or after attaining age 62 who had rendered at
least 20 years of service were entitled to postretirement medical coverage and
life insurance. On June 1, 1995, as permitted by the provisions of the plan,
the Company terminated the plan for all employees, except current retirees and
active employees who were at least 57 years of age and will have 20 years of
service upon reaching age 62. The accumulated postretirement benefit
obligation for the unfunded plan is not material.
F-12
ADVANSTAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
401(k) Plan
The Company has an Employees' 401(k) Plan and Trust (the "Plan") available
to employees of the Company and its domestic subsidiaries. All current and
future domestic employees who have completed one year of service and are at
least 21 years of age are eligible to participate in the Plan. The Company is
required to make a matching contribution to the Plan and may, at its
discretion, make discretionary contributions to the Plan. Eligible employees
are vested 100% in their own contributions. Contributions made by the Company
vest in equal installments over five years. Total contribution expense was
$1.0 million, $0.9 million and $0.4 million for the years ended December 31,
1998 and 1997 and for the 7 months ended December 31, 1996, respectively.
7. Income Taxes
The Company utilizes the liability method for calculating deferred income
taxes, and deferred tax assets and liabilities are determined based on the
estimated future tax effects of differences between the financial statement
and tax bases of assets and liabilities pursuant to the provisions of enacted
tax laws. Significant components of the Company's deferred tax assets were as
follows (in thousands):
Year ended
December 31,
-----------------
1998 1997
-------- -------
(in thousands)
Deferred tax assets:
Net operating loss carryforwards........................ $ 8,510 $ 4,900
Foreign tax credit carryforwards........................ 1,159 1,042
Charitable contribution carryover....................... 24 9
Amortization of intangible assets....................... 4,620 305
Postretirement benefits other than pension.............. 307 467
Depreciation............................................ 508 572
Stock option compensation............................... 1,290 --
Other, primarily accrued expenses....................... 666 823
-------- -------
Gross deferred tax assets............................. 17,084 8,118
Deferred tax liabilities:
Prepaid expenses........................................ (1,674) (1,736)
-------- -------
Valuation allowance....................................... (15,410) (6,382)
Deferred income taxes..................................... $ -- $ --
A valuation allowance has been provided because of the Company's history of
operating losses. Net operating loss carry-forwards total $22.4 million at
December 31, 1998, of which $1.2 million is subject to certain limitations.
Net operating loss carry-forwards expire through 2012. The foreign tax credit
carry-forwards substantially expire in 2001.
8. Commitments and Contingencies
Leases
The Company has long-term operating leases for office space and office
equipment. The leases generally require the Company to pay maintenance,
insurance, taxes and other expenses in addition to minimum annual rentals.
Building and equipment rent expense was $3.4, $3.0 and $2.6 million for 1998,
1997 and 1996,
F-13
ADVANSTAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
respectively. Future minimum lease commitments under operating leases with
initial terms of one year or more are as follows (in thousands):
1999............................................................. $ 4,490
2000............................................................. 3,674
2001............................................................. 2,845
2002............................................................. 2,281
2003............................................................. 1,710
Thereafter....................................................... 18,510
Employment Agreements
Two senior executives of the Company entered into four-year employment
agreements with Holdings dated as of July 1, 1996. Pursuant to the agreements,
the executives are entitled to annual base salaries and annual bonuses based
on the Company's EBITDA for any year. The agreements also provide for
severance benefits equal to one year's base salary and benefits (and a pro
rated bonus) upon termination of employment by Holdings without "cause" or by
the executive for "good reason". The executives also entered into non-
competition and confidentiality agreements with the Company. The non-compete
period is one year after termination of employment unless employment is
terminated by the Company without cause or by the executive for good reason,
in which case the non-competition period is six months. During the non-
competition period, the executives may not hire any employee of the Company or
solicit any trade show or publishing business from a third party who has a
relationship or contract with the Company. Compensation expense for these
executives is included in general and administrative expense of the Company.
Litigation
The Company is a defendant in legal proceedings arising in the ordinary
course of business. Although the outcome of these proceedings cannot presently
be determined, in the opinion of management, disposition of these proceedings
will not have a material effect on the results of operations or financial
position of the Company.
9. Segments
The Company has three reportable segments: trade shows and conferences,
trade publications, and marketing services. The trade show and conference
segment allows exhibitors a cost effective means to showcase and sell products
and services while developing business relationships with many potential
customers in a short time period. The Company's trade publications segment
provides key new product and educational information to readers and allows
advertisers to reach highly targeted and select business audiences. The
marketing services segment offers customers mailing lists from the Company's
subscriber and attendee databases; editorial and advertising reprints; direct
mail postcards; and classified, recruitment and industry directory
advertising.
F-14
ADVANSTAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company evaluates the performance of and allocates resources to, its
segments based on gross profit. The accounting policies of the reportable
segments are the same as those described in the summary of significant
accounting policies. There are no intersegment sales or transfers. Segment
assets are primarily prepaid expenses and accounts receivables.
Trade Shows Corporate
Trade and Marketing and
Publications Conferences Services Other Totals
------------ ----------- --------- --------- --------
(in thousands)
Year ended December 31,
1998
Revenues................ $130,442 $113,066 $15,647 $ 670 $259,825
Gross profit............ 37,715 44,528 8,102 445 90,790
Segment assets.......... 30,119 10,962 2,254 616,891 660,226
-------- -------- ------- -------- --------
Year ended December 31,
1997
Revenues................ $111,611 $ 61,608 $13,900 $ 537 $187,656
Gross profit............ 33,801 19,799 7,180 537 61,317
Segment assets.......... 21,337 7,761 1,832 267,567 298,497
-------- -------- ------- -------- --------
Seven months ended
December 31, 1996
Revenues................ $ 60,636 $ 13,929 $ 7,929 $ 226 $ 82,720
Gross profit............ 19,649 4,954 4,331 226 29,160
Segment assets.......... 18,827 3,055 1,625 253,666 277,173
======== ======== ======= ======== ========
Intangible assets represent 95.2%, 92.9% and 93.3% of corporate and other
assets at December 31, 1998, 1997 and 1996, respectively.
The reconciliation of total segment gross profit to consolidated pre-tax
income for the years ended December 31, 1998 and 1997 and for the seven months
ended December 31, 1996 are as follows:
1998 1997 1996
-------- -------- --------
(in thousands)
Total segment gross profit.................... $ 90,790 $ 61,317 $ 29,160
General and administrative expense............ (36,883) (27,514) (15,446)
Depreciation and amortization................. (51,331) (27,290) (15,053)
Other expense................................. (29,748) (14,825) (7,999)
-------- -------- --------
Consolidated pre-tax loss..................... $(27,172) $ (8,312) $ (9,338)
======== ======== ========
Financial information relating to the Company's operations by geographic
area for the years ended December 31, 1998 and 1997 and for the seven months
ended December 31, 1996 are as follows:
Revenues
1998 1997 1996
-------- -------- -------
(in thousands)
United States...................................... $225,104 $164,197 $72,066
International...................................... 34,721 23,459 10,654
-------- -------- -------
$259,825 $187,656 $82,720
======== ======== =======
Revenues are primarily attributed to countries based on the location of
customers.
F-15
ADVANSTAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Long-Lived Assets
At December 31,
--------------------------
1998 1997 1996
-------- -------- --------
(in thousands)
United States..................................... $573,734 $257,057 $249,589
International..................................... 27,619 3,734 381
-------- -------- --------
$601,353 $260,791 $249,970
======== ======== ========
10. Supplemental Guarantor Condensed Consolidating Financial Statements
Basis of presentation
The Notes are fully and unconditionally guaranteed on a senior subordinated
basis, jointly and severally, by Communications' wholly-owned domestic
subsidiaries and by Holdings. The subsidiary guarantors are Art Expositions
International, Inc.; MAGIC; Magic Kids, Inc.; Applied Business
TeleCommunications; and Expocon Management Associates, Inc. As of December 31,
1998, On Demand Marketing, Inc. and Technology Events Company, LLC, two former
guarantor subsidiaries, were merged with and into Communications. The
condensed consolidating financial statements of the guarantors are presented
below and should be read in connection with the Consolidated Financial
Statements of the Company. Separate financial statements of the guarantors are
not presented because the guarantors are jointly, severally and
unconditionally liable under the guarantees and the Company believes the
condensed consolidating financial statements presented are more meaningful in
understanding the financial position of the guarantors.
There are no significant restrictions on the ability of the Subsidiary
Guarantors to make distributions to the Company. Condensed consolidating
financial information has not been presented for 1997 and 1996 because the
Company had no non-guarantor subsidiaries in 1997 and 1996.
F-16
ADVANSTAR, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
At December 31, 1998
(in thousands)
Non-
Guarantor Guarantor
Holdings Communications Magic MagicKids ABC Expocon Subsidiaries Subsidiaries Elimination
-------- -------------- -------- --------- ------- ------- ------------ ------------ -----------
ASSETS
Current assets:
Cash and cash
equivalents..... $ -- $ 8,270 $ (108) $ 4 $ 8 $ (372) $ (468) $ 6,214 $ --
Accounts
receivable,
net............. -- 22,620 597 -- 430 1,138 2,165 3,191 --
Prepaid
expenses........ -- 7,818 3,600 54 190 451 4,295 2,671 --
Intercompany
receivable
(payable)....... 124 (22,330) 31,811 3,493 (1,189) (2,181) 31,934 (9,604) (124)
Other........... -- 1,556 -- -- -- -- -- 541 --
-------- -------- -------- ------ ------- ------- -------- ------- ---------
Total current
assets.......... 124 17,934 35,900 3,551 (561) (964) 37,926 3,013 (124)
-------- -------- -------- ------ ------- ------- -------- ------- ---------
Property, plant
and equipment,
net.............. -- 12,173 396 10 84 513 1,003 949
Investments in
subsidiaries..... 134,760 298,689 -- -- -- -- -- -- (433,449)
Net intangible
assets, net...... -- 293,146 209,613 -- 19,009 11,492 240,114 53,968 --
-------- -------- -------- ------ ------- ------- -------- ------- ---------
$134,884 $621,942 $245,909 $3,561 $18,532 $11,041 $279,043 $57,930 $(433,573)
-------- -------- -------- ------ ------- ------- -------- ------- ---------
LIABILITIES AND
SAREHOLDER'SHEQUITY
Current
liabilities:
Current portion
of long-term
debt............ $ -- $ 8,253 $ -- $ -- $ -- $ -- $ -- $ -- $ --
Accounts
payable......... 124 9,109 1,439 27 48 17 1,531 2,671 (124)
Deferred
revenue......... -- 17,672 16,713 805 2,189 1,911 21,618 6,353 --
Accrued
liabilities..... -- 13,024 2,854 182 641 96 3,773 2,338 --
-------- -------- -------- ------ ------- ------- -------- ------- ---------
Total current
liabilities..... 124 48,058 21,006 1,014 2,878 2,024 26,922 11,362 (124)
-------- -------- -------- ------ ------- ------- -------- ------- ---------
Long term debt,
net of current
maturities....... -- 418,615 -- -- -- -- -- -- --
Other long term
liabilities...... -- 3,227 -- -- -- -- -- -- --
Minority
interest......... -- 17,282 -- -- -- -- -- -- --
Shareholder
interest
Common stock.... 167 10 1 -- 2 1 4 332 (346)
Capital in
excess of par
value........... 183,210 183,367 220,627 1,430 15,739 9,593 247,389 44,924 (475,680)
Retained
earnings
(deficit)....... (47,745) (47,745) 4,275 1,117 (87) (577) 4,728 1,312 41,705
Translation
adjustment...... (872) (872) -- -- -- -- -- -- 872
-------- -------- -------- ------ ------- ------- -------- ------- ---------
Total
shareholders'
equity.......... 134,760 134,760 224,903 2,547 15,654 9,017 252,121 46,568 (433,449)
-------- -------- -------- ------ ------- ------- -------- ------- ---------
$134,884 $621,942 $245,909 $3,561 $18,532 $11,041 $279,043 $57,930 $(433,573)
======== ======== ======== ====== ======= ======= ======== ======= =========
Consolidated
Total
------------
ASSETS
Current assets:
Cash and cash
equivalents..... $ 14,016
Accounts
receivable,
net............. 27,976
Prepaid
expenses........ 14,784
Intercompany
receivable
(payable)....... --
Other........... 2,097
------------
Total current
assets.......... 58,873
------------
Property, plant
and equipment,
net.............. 14,125
Investments in
subsidiaries..... --
Net intangible
assets, net...... 587,228
------------
$660,226
------------
LIABILITIES AND
SAREHOLDER'SHEQUITY
Current
liabilities:
Current portion
of long-term
debt............ $ 8,253
Accounts
payable......... 13,311
Deferred
revenue......... 45,643
Accrued
liabilities..... 19,135
------------
Total current
liabilities..... 86,342
------------
Long term debt,
net of current
maturities....... 418,615
Other long term
liabilities...... 3,227
Minority
interest......... 17,282
Shareholder
interest
Common stock.... 167
Capital in
excess of par
value........... 183,210
Retained
earnings
(deficit)....... (47,745)
Translation
adjustment...... (872)
------------
Total
shareholders'
equity.......... 134,760
------------
$660,226
============
F-17
ADVANSTAR, INC.
CONDENSED STATEMENTS OF OPERATIONS
Year ended December 31, 1998
(in thousands)
Non-
Art Guarantor Guarantor
Holdings Communications Expo Magic MagicKids ABC Expocon Subsidiaries Subsidiaries Elimination
-------- -------------- ---- ------- --------- ------ ------- ------------ ------------ -----------
Net revenue...... $ -- $181,709 $-- $22,232 $1,999 $3,304 $8,165 $35,700 $42,416 $ --
-------- -------- ---- ------- ------ ------ ------ ------- ------- -------
Operating
expenses
Cost of sales
and selling,
editorial and
circulation.... -- 123,426 -- 8,162 852 2,395 5,672 17,081 28,528 --
General and
administrative.. -- 27,818 -- 1,520 27 346 865 2,758 6,307 --
Depreciation and
amortization... -- 38,713 -- 8,335 3 641 1,262 10,241 2,377 --
-------- -------- ---- ------- ------ ------ ------ ------- ------- -------
Total operating
expenses....... -- 189,957 -- 18,017 882 3,382 7,799 30,080 37,212 --
-------- -------- ---- ------- ------ ------ ------ ------- ------- -------
Operating income
(loss).......... -- (8,248) -- 4,215 1,117 (78) 366 5,620 5,204 --
Other income
(expense):
Interest income
(expense),
net............ -- (27,602) -- 60 -- -- 60 (320) --
Other income
(expense),
net............ -- 2,812 -- -- 4 (888) (884) (3,854) --
-------- -------- ---- ------- ------ ------ ------ ------- ------- -------
Income (loss)
before income
taxes........... -- (33,038) -- 4,275 1,117 (74) (522) 4,796 1,030 --
Provision for
income tax...... -- 288 -- -- -- 13 13 963 --
Minority interest
in earnings..... -- 40 -- -- -- -- -- -- -- --
Equity in (loss)
of
subsidiaries.... (28,436) 4,850 -- -- -- -- -- -- -- 23,586
-------- -------- ---- ------- ------ ------ ------ ------- ------- -------
Net income
(loss).......... $(28,436) $(28,436) $ -- $ 4,275 $1,117 $ (87) $ (522) $ 4,783 $ 67 $23,586
======== ======== ==== ======= ====== ====== ====== ======= ======= =======
Consolidated
Total
------------
Net revenue...... $259,825
------------
Operating
expenses
Cost of sales
and selling,
editorial and
circulation.... 169,035
General and
administrative.. 36,883
Depreciation and
amortization... 51,331
------------
Total operating
expenses....... 257,249
------------
Operating income
(loss).......... 2,576
Other income
(expense):
Interest income
(expense),
net............ (27,862)
Other income
(expense),
net............ (1,926)
------------
Income (loss)
before income
taxes........... (27,212)
Provision for
income tax...... 1,264
Minority interest
in earnings..... 40
Equity in (loss)
of
subsidiaries.... --
------------
Net income
(loss).......... $(28,436)
============
F-18
ADVANSTAR, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
Year ended December 31, 1998
(in thousands)
Guarantor Non-Guarantor
Holdings Communications Art Expo Magic MagicKids ABC Expocon Subsidiaries Subsidiaries
-------- -------------- -------- --------- --------- -------- ------- ------------ -------------
Operating
Activities:
Net income
(loss).......... $(28,436) $ (28,436) $ -- $ 4,275 $ 1,117 $ (87) $ (522) $ 4,783 $ 67
Adjustments to
reconcile net
income (loss) to
net cash
provided by
operating
activities:
Depreciation and
amortization.... -- 39,205 -- 8,335 3 641 1,262 10,241 2,377
Non cash Items.. -- 6,305 -- -- -- -- 20 20 --
Change in
working capital
items........... -- (248,081) -- 194,992 (1,784) 17,884 3,469 214,561 31,611
-------- --------- ----- --------- ------- -------- ------- --------- --------
Net cash
provided by
(used in)
operating
activities...... (28,436) (231,007) 207,602 (664) 18,438 4,229 229,605 34,055
-------- --------- ----- --------- ------- -------- ------- --------- --------
Investment
Activities:
Net loss in
investment in
subsidiaries.... 28,436 -- -- -- -- -- -- -- --
Additions to
property, plant
and equipment,
net............. -- 1,367 -- (171) (5) (49) (446) (671) (518)
Acquisitions of
publications and
trade shows..... -- (99,093) -- (207,539) 673 (18,381) (3,838) (229,085) (30,261)
-------- --------- ----- --------- ------- -------- ------- --------- --------
Net cash
provided by
(used in)
investing
activities...... 28,436 (97,726) -- (207,710) 668 (18,430) (4,284) (229,756) (30,779)
-------- --------- ----- --------- ------- -------- ------- --------- --------
Financing
Activities:
Proceeds from
sale of common
stock and
capital
contributions
and other....... -- 70,980 -- -- -- -- -- -- --
Dividends paid
to minority
interest
holders......... -- -- -- -- -- -- -- -- (1,000)
Borrowings of
long-term debt,
net............. -- 262,620 -- -- -- -- -- -- --
-------- --------- ----- --------- ------- -------- ------- --------- --------
Net cash
provided by
(used in)
financing
activities...... -- 333,600 -- -- -- -- -- -- (1,000)
======== ========= ===== ========= ======= ======== ======= ========= ========
NET INCREASE
(DECREASE) IN
CASH AND CASH
EQUIVALENTS:..... -- 4,867 -- (108) 4 8 (55) (151) 2,276
CASH AND CASH
EQUIVALENTS,
beginning of
period:.......... -- 3,403 -- -- -- -- (317) (317) 3,938
-------- --------- ----- --------- ------- -------- ------- --------- --------
CASH AND CASH
EQUIVALENTS, end
of period:....... $ -- $ 8,270 $ -- $ (108) $ 4 $ 8 $ (372) $ (468) $ 6,214
======== ========= ===== ========= ======= ======== ======= ========= ========
Consolidated
Elimination Total
----------- ------------
Operating
Activities:
Net income
(loss).......... $23,586 $ (28,436)
Adjustments to
reconcile net
income (loss) to
net cash
provided by
operating
activities:
Depreciation and
amortization.... -- 51,823
Non cash Items.. -- 6,325
Change in
working capital
items........... 4,850 2,941
----------- ------------
Net cash
provided by
(used in)
operating
activities...... 28,436 32,653
----------- ------------
Investment
Activities:
Net loss in
investment in
subsidiaries.... (28,436) --
Additions to
property, plant
and equipment,
net............. -- 178
Acquisitions of
publications and
trade shows..... -- (358,439)
----------- ------------
Net cash
provided by
(used in)
investing
activities...... (28,436) (358,261)
----------- ------------
Financing
Activities:
Proceeds from
sale of common
stock and
capital
contributions
and other....... -- 70,980
Dividends paid
to minority
interest
holders......... -- (1,000)
Borrowings of
long-term debt,
net............. -- 262,620
----------- ------------
Net cash
provided by
(used in)
financing
activities...... -- 332,600
=========== ============
NET INCREASE
(DECREASE) IN
CASH AND CASH
EQUIVALENTS:..... -- 6,992
CASH AND CASH
EQUIVALENTS,
beginning of
period:.......... -- 7,024
----------- ------------
CASH AND CASH
EQUIVALENTS, end
of period:....... $ -- $ 14,016
=========== ============
F-19
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, Inc.
/s/ Robert L. Krakoff
Date: March 31, 1999 By: _________________________________
Robert L. Krakoff
Chairman of the Board and Chief
Executive Officer
POWER OF ATTORNEY AND SIGNATURES
We, the undersigned officers and directors of Advanstar, Inc., hereby
severally constitute and appoint Robert L. Krakoff, James M. Alic and David W.
Montgomery, and each of them singly, our true and lawful attorneys, with the
power to them and each of them singly, to sign for us and in our names in the
capacities indicated below, any amendments to this Report on Form 10-K, and
generally to do all things in our names and on our behalf in such capacities
to enable Advanstar, Inc. to comply with the provisions of the Securities
Exchange Act of 1934, as amended, and all the requirements of the Securities
and Exchange Commission.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant, in the capacities indicated, on the 31st day of March 1999.
Signature Title(s)
--------- --------
/s/ Robert L. Krakoff Chairman of the Board and Chief Executive
___________________________________________ Officer (Principal Executive Officer)
Robert L. Krakoff
/s/ David W. Montgomery Vice President--Finance, Chief Financial
___________________________________________ Officer and Secretary (Principal Financial
David W. Montgomery Officer and Principal Accounting Officer)
/s/ James M. Alic Director
___________________________________________
James M. Alic
/s/ Kenneth T. Berliner Director
___________________________________________
Kenneth T. Berliner
/s/ Mitchell R. Cohen Director
___________________________________________
Mitchell R. Cohen
/s/ John M. Pasquesi Director
___________________________________________
John M. Pasquesi
II-1
Schedule II
ADVANSTAR, INC.
VALUATION AND QUALIFYING ACCOUNTS
Additions
---------------------
Balance at Charged to Charged to
beginning of costs and other Balance at end
period expenses accounts Deductions of period
------------ ---------- ---------- ---------- --------------
Year ended December 31,
1998:
Allowance for doubtful
accounts............. $ 553,000 $1,148,000 $1,126,000(1) $575,000
Year ended December 31,
1997:
Allowance for doubtful
accounts............. $ 541,000 $ 807,000 $ 795,000(1) $553,000
Year ended December 31,
1996:
Allowance for doubtful
accounts............. $1,700,000 $1,059,000(2) $541,000
- --------
(1) Uncollectible accounts written off.
(2) Includes $898,000 of uncollectible accounts written off, and $261,000 as
an adjustment to reduce the balance of the allowance for doubtful
accounts.
S-1